Increasing use of non-compete agreements draws scrutiny

The Federal Trade Commission and Department of Labor may soon investigate employers’ use of non-compete agreements following the outcry among House Democrats upon learning of the sandwich chain, Jimmy John’s, reported widespread use of such agreements among its rank and file employees. Lawsuits nationwide and in Texas are filed daily questioning the enforceability of non-compete agreements.

Employment agreements may contain any number of provisions, including the terms of compensation, a description of job duties, the waiver of one's right to a jury trial, and a requirement to arbitrate disputes. However, the law in most states restricts the rights to enforce against former employees agreements not to compete, commonly known as non-compete agreements.

American law values the freedom to contract, but it also values unrestrained trade and a mobile workforce. These values are at odds in the non-compete agreement. As a general rule, in the United States, restraints on trade are unenforceable. This is because we recognize that competition benefits the consumer through better products and services at lower prices. However, there are limited circumstances where the law recognizes a non-compete agreement may be necessary. The most common lawful business reason for a non-compete agreement is the protection of confidential information and trade secrets.

Accordingly, many states have enacted statutes or developed law in their courts that permit non-compete agreements if they are designed to protect company confidential information and impose reasonable restraints on employees that are limited in scope, time, and geography.

It is no surprise that most employers are in business to make money and would prefer to have as little competition as possible. Nor should it come as a surprise that most employers can come up with some confidential information upon which to base a non-compete agreement.

Many employers are beginning to push the envelope when it comes to non-compete agreements. Preventing an executive with high-level knowledge of trade and business secrets from using that knowledge for the benefit of a competitor is one thing; preventing, for example, entry-level fast food employees from working for a competitor is another.

Texas law evolving on non-compete agreements

The proliferation of non-compete agreements in Texas means courts are routinely asked to define the parameters of what restrictions are reasonable and enforceable by law. These cases delineate an evolving definition of what constitutes a reasonable and, therefore enforceable, non-compete agreement. This summer, for example, the Texas Supreme Court held that there is a difference between a covenant not to compete and a forfeiture provision in a non-contributory profit-sharing plan conditioned on the departing employee's loyalty ( Exxon Mobil Corp. v. Drennen).

Rising prevalence of non-compete agreements bring concern

In October of 2014, members of the U.S. Congress asked the Federal Trade Commission ("FTC") and the Department of Labor ("DOL") to investigate employers' increased use of non-compete agreements nationwide. In the letter to the FTC and DOL, representatives wrote that while non-compete agreements for some high-level executives may be appropriate, "applying them to an entire workforce looks more like bullying under color of law, as well as a violation of labor rights." The letter asked the FTC and DOL to research the effects of non-compete agreements on workers' rights and open competition.

Enforcing and contesting a non-compete agreement

Whether a non-compete agreement is enforceable depends on a delicate interplay between the breadth of the restrictions, the purported legitimate business interests advanced by the restrictions, and the individual circumstances. Houston employers who seek to litigate or enforce covenants not to compete and employees who feel their non-compete agreement is unenforceable should contact board certified employment law attorney G. Scott Fiddler. The Fiddler & Associates, P.C. represents employers and employees in litigation involving non-compete agreements, and understands the nuances of this area of the law.

Keywords: Non-compete agreements, restrictive covenants, employment agreements.