What You Need to Know About Covenants Not to Compete
When you put a lot of time and money into a business—developing the product and packaging, building a customer base, and formulating the most effective marketing strategy—you don’t want an employee, vendor, or trusted partner/associate opening a competing enterprise or taking the results of your work to a competitor. A noncompete agreement, or “covenant not to compete,” can prevent that.
A Noncompete Agreement Is a Contract
A covenant not to compete must meet all the requirements of a legally binding contract:
- There must be offer and acceptance by two or more parties—In some instances, offer and acceptance must be in writing.
- Each party must give consideration—Both parties must either give something of value or promise to refrain from doing something they have a legal right to do. If you try to add a noncompete clause to an existing employment contract without giving the employee something in return, the provision may not be supported by consideration and may be unenforceable.
- The contract must be entered voluntarily—You may not use duress, undue influence, or misrepresentation to secure agreement not to compete.
- All parties must have the legal capacity—Common reasons a party lacks capacity to enter a contract include age (minors have special rules that apply) and mental impairment. Mental impairment can be due to intoxication or mental illness.
- The subject matter of the contract must be legal—Courts will not enforce an agreement to commit an illegal act.
A Noncompete Agreement Must Be Fair and Reasonable
You generally cannot prevent a person from ever working again in a particular industry, as courts are disinclined to enforce agreements that keep someone from being gainfully employed. Accordingly, a noncompete agreement must be reasonable in terms of:
- Geographic scope—If your business is primarily local, the courts will typically enforce only agreements that limit the scope of competition to the local area, as competition on the other side of the country won’t affect your business.
- Time length—While there’s no hard and fast rule, the shorter the term of the agreement, the more likely a court will enforce it. A limitation for a year or two will generally pass muster, but longer agreements become problematic.
- How the agreement defines “competition”—The noncompete agreements most likely to be upheld specifically list the competitors with whom the employee may not work or state that the employee may not open a new business that directly competes with the employer.
Contact MCIS Law
At MCIS Law, PLLC, in Stafford, we provide comprehensive counsel to startup and existing businesses in southeast Texas. For a confidential consultation with an experienced and knowledgeable lawyer, email us or call our office at (346) 297-0121. We accept all major credit cards.