One of the trickiest areas for executives who are looking to move to a new job or considering the sale of a business is the covenant not to compete. Whether an executive has signed one of these contracts with a current employer or a potential employer, or if a buyer is requiring one, extensive scrutiny and careful navigation are a must.
That’s not to say these agreements are an altogether bad thing. An employer who provides an executive with confidential information (which is practically a given) or specialized training has every reason — and legal standing — to prohibit the executive from taking that information or training across town to a competitor so long as that prohibition is within certain limits.
See, a covenant not to compete isn’t like other contracts. If I have a car to sell, then I can sell it for whatever amount agreed to by the buyer and me, whether it’s $1,000, a baseball card collection, or 500 chickens. It’s a private agreement between the buyer and me.
But if I want to hire someone as my CEO, I can’t simply offer them $5,000 (or even $5 million) in exchange for a covenant not to compete. That’s because the state of Texas, like most states, considers covenants not to compete a restraint of trade and, therefore, anti-competitive and bad for business.
But, under certain circumstances (such as when the employer provides the aforementioned confidential information and/or specialized training), a covenant not to compete is perfectly enforceable. That is, if the agreement is reasonable. (It should be noted that what constitutes “confidential information” is frequently the subject of protracted litigation.)
A covenant not to compete must be limited in terms of geography, scope, and time, which means it can’t prevent someone from working in a given profession anywhere on the planet in perpetuity. But exactly what constitutes a reasonable geographic or time-and-scope limit, as you might expect, is often a matter of debate.
Clearly, signing a covenant not to compete is not a do-it-yourself project. Before signing any document that could impact future employment possibilities, it is imperative to secure the counsel of a lawyer with expertise in the field, not one provided by your employer.