Folks starting a new business are often doing so after working for an employer or after departing a previous venture with other partners. Frequently these entrepreneurs have a non-compete provision tucked into some agreement from the previous relationship that they either did not know about or have not considered. Look closely through all of your agreements and often enough you will find one buried in a confidentiality agreement, non-disclosure agreement, company agreement or shareholder agreement restricting the activity of individuals that leave the company.
If you find one, here is what you should know about that non-compete provision:
What is the scope of the restricted activity and how long am I prohibited from engaging in it?
This is the threshold issue because it answers the single most important question for your new business: what activity(ies) am I prohibited from engaging in and for how long? Your former partners or employers likely drafted a very broad scope of activity into the non-compete provision. The key here is what activity would a court actually restrict you from engaging in. For example, perhaps you worked in procurement for your former company but want to start a company that, while no doubt competing with your former company, would actually focus on the sales side. If your non-compete includes a general prohibition from competition, would this include moving into a completely different role as a competitor?
What is the geographic area in which you are restricted from competing?
This is one common area where companies tend to overreach. For example, if you only worked in one county in Texas but the agreement prohibits you from competing across the entire state then a court could view that geographic restriction as overly broad. On the other hand, certain industries and businesses don’t lend themselves well to geographic restrictions so courts will look to other reasonable limitations such as specific clients.
What is the legitimate business interest that the provision is designed to protect?
Texas has a history of close scrutiny when it comes to enforcing non-competition provisions. By law, these provisions can only be enforced to the extent necessary to protect the goodwill or other legitimate business interest of the company. Identifying the interest your former employer is attempting to protect is a key inquiry in determining whether the restrictions contained in the agreement are reasonable and whether a court would ever enforce them.
What is “competing?”
This is something that is often overlooked. Often these provisions include language such as “directly or indirectly competing with.” That is a much broader restriction than most people realize when it comes to competition. What is the difference? Direct competition would be offering a similar product or service. Indirect competition means fulfilling a customer or client’s same need as the previous company did, even if you are not offering a similar product or service. Similarly, the language in the agreement is important because it may go further than simply restricting competition and actually define how you are restricted from competing.