The importance of a noncompete agreement

The importance of a noncompete agreement

A noncompete agreement is a contract between employer and employee that disallows the employee from entering into competition with the company during or after employment. The underlying purpose of such a contract is to ensure confidentiality and prevent the unfair peddling of vital information by former employees that could seriously damage a company’s ability to compete.

A noncompete clause protects the business from leaks to competitors of trade secrets or classified information unique to the business, such as client lists, targeted customers, formulas or inventions, methods, practices, or future marketing strategies. Because the courts often take a wary view of noncompete clauses as a hindrance to an employee’s right to earn a living, there are certain legal requirements that a valid contract must have for it to be enforceable.

Legal specifications of a valid noncompete agreement

A valid noncompete agreement must include several elements:

  • specific consideration to the employee in exchange for agreeing to the terms of the contract
  • a legitimate reason for the agreement that is a business interest of the employer
  • reasonable parameters of scope, geography and time

The employee should receive something of value in exchange for signing the agreement above and beyond the employment opportunity itself. A company has a legitimate business interest if it seeks to circumvent competition by a former employee, or has taken demonstrated measures to protect trade secrets that a former employee could then use unfairly.

The scope of time must be reasonable and within the time frame that the information has value. The courts may strike down a noncompete that does not include a reasonable scope of time, or if its restrictions regarding geography are too broad and include an area beyond the company’s market reach.

Noncompete agreements in Texas

Although Texas courts generally take a dim view of noncompete agreements as unduly restrictive of employer mobility, Texas law outlines an enforceable covenant not to compete if it conforms to the guidelines stated above.

For Houston-area businesses facing challenges with the enforcement or proper implementation of employment contracts, it can help to find out more about what legal considerations will guarantee the enforceability of noncompete clauses.