A battle between Capital One and two of its former senior executives brings us “new” insight into the thorny issue of NON COMPETE AGREEMENTS and their enforceability. As a Texas employment law practitioner, I am sometimes faced with clients who have determined that their fully signed Non Compete Agreement cannot be enforceable based on the advice of friends and family in other states. If they acted on that advice without checking further, these same clients may be bringing us a letter from their former employer stating that they are in violation of that Non Compete Agreement. The Agreement may contain several restrictions for the former employee – including such categories as non-competition restrictions, non-interference provisions, confidentiality provisions, protection of trade secret provisions and non-solicitation provisions (with respect to former customers, former clients and former co-workers).
Generally, these types of agreements are governed by state law. Employers should make sure that they understand the rules applicable to these documents and that they carefully review their particular document prior to distributing it for signature by employees. Likewise, employees should make sure that they understand the rules applicable to these documents and should carefully review their particular document prior to signing that they agree to the terms.
Texas non-compete Act
Texas non-compete agreements are governed by Texas Business and Commerce Code Section 15.50. Generally, Texas law recognizes the validity of a non-compete agreement provided that the contracts ”are reasonable in time, area and line of business” and the agreement is in writing and is executed by the individual against whom it is being enforced.
A Texas employer (in the effort to enforce the terms of their Non-Compete Agreement) must be prepared to prove that the restrictions protect a legitimate business interest. What is a “legitimate business interest?” This is defined in Texas Statute as including but not limited to a trade secret, “valuable confidential business information,” and relationships with “specific prospective or existing customers, patients or clients.” A valid Texas non-competition agreement should be geographically limited and/or restricted with regard to a defined marketing or trade category. In addition, an agreement should be limited in duration (generally up to two years is found to be acceptable in Texas as to employees, but up to three years against a person who signed the agreement in connection with the sale of any interest in the business). Overall, the agreement restrictions should be “reasonably necessary to protect the legitimate business interest” of the employer.
So what’s ”new” for Texas employers and employees in connection with the Capital One case against its former executives – - especially since the Capital One case was brought in Capital One’s home state, Virginia, a state where non-compete agreements are generally thought to be unenforceable?
The two Capital One former executives had entered into a Severance Agreement in 2007 containing a non-compete agreement and providing for the former executives’ acquisition of $24 Million and $18 Million in Capital One stock. The former executives agreed to not compete with their former employer in Connecticut, New York or New Jersey through August 2012. When the former executive’s Florida-based BankUnited acquired interests in a New York Bank in June 2011, a lawsuit was brought by Capital One to enforce the non-compete agreement in the US District Court in the Eastern District of Virgina. The US District Court Judge ruled that the agreement would be considered enforceable (in spite of Virginia’s rules to the contrary), stating “The Court will not void such a reasonable and limited covenant , agreed to by sophisticated parties for ample consideration.” The Court looked at the facts and circumstances of the original deal and the sophistication of the actual deal-makers. It made a decision not only based on the letter of the law, but also considered equitable matters — the reasonableness of the restriction’s time period and geographic limitation were balanced against the value of the Settlement dollars provided by Capital One and the mutual business sophistication by both parties to the deal. Undoubtedly the Court’ determination of enforceability led to the pre-trial resolution of the dispute with a payment of $20 Million by the two executives to Capital One.