ARTICLE
26 April 2013

Thinking Of A Non-Compete? Think Location, Location, Location

A discussion on the enforcement of a non-compete agreement.
United States Employment and HR

So your business is in Texas and your Texas lawyer drafted a non-compete agreement that all employees with access to confidential information are required to sign. You are pleased with this agreement because the few who attempted to jump ship and compete were stopped in their tracks when your lawyer took them to court. The word is out – you mean business and will go to court to enforce your non-compete agreements.

But now your business has grown and you have employees working in other states, all of whom are required to sign your "airtight" non-compete. That raises an issue you may not have considered - will your non-compete agreement stop these out of state employees from leaving, competing and taking your customers with them? Maybe - maybe not.

One of the biggest concerns is figuring out which law applies to the enforcement of your non-compete agreement. Of course your non-compete agreement has a choice of law provision which states that the agreement will be interpreted and enforced pursuant to Texas law. However, that provision may not hold up in another state since some states will only enforce non-compete agreements under their own laws, regardless of your agreement's choice of law provision. In other words, the enforceability of your non-compete agreement may hinge on where the employee works rather than the employer's headquarters or the choice of law provision.

A good example of why this matters is in the situation in which you terminate an employee without cause. While your non-compete will likely be enforceable in Texas, other states will not enforce non-compete provisions against an employee who was terminated by the employer. Still other states may require an examination of whether the termination was conducted arbitrarily or in bad faith. Then there are a few states that have legislation prohibiting non-compete agreements altogether.

The bottom line is that a "one size fits all" non-compete agreement is ill advised in a national and/or global market. While the law varies from jurisdiction to jurisdiction, a separate non-compete agreement for each state is not necessary, but it is extremely important to know the jurisdictional differences and to customize your non-compete to address those differences both in the contractual language and how and when it is presented to the employee. Therefore, getting sound legal advice on the enforceability of your non-compete agreement – before you present it to the employee – will likely save you time and money in the end.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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