The Texas Covenant Not to Compete Act requires that the time, geographic area, and scope of activity limitations of a covenant not to compete be reasonable. By reasonable, it is meant that the restriction must not impose a restraint on the former employee that is greater than is necessary to protect the goodwill or other business interest of the former employer. Ordinarily, a covenant not to compete with a broad or no geographic area limitation is unenforceable, but the Waco Court of Appeals recently held that the lack of a geographical restriction was not a problem and agreed with the trial court that the covenant not to compete was enforceable.
In Salas v. Chris Christensen Systems, Inc., Christensen, a renowned manufacturer and distributor of “high quality dog grooming products” sued Salas, its former sales representative, for breaching his non-compete agreement after he went to work for a competitor. Salas argued that his non-compete provision was unenforceable because there was no geographic limitation; instead the non-compete provision stated that Salas was prohibited from “endeavor[ing] to entice away from [Christensen] any client or account with whom [Salas} had direct contact . . . for any . . . entity, whatsoever, which is or tends to be engaged in providing or manufacturing pet supplies and related products . . .” The Waco Court of Appeals acknowledged that the lack of a specific geographic limitation typically makes a non-compete provision unenforceable, but found that limiting the applicability of the non-compete to a particular client base, in this case the clients with whom Salas had direct contact, is an acceptable substitute for a geographic limitation in a non-compete agreement. The appellate court also held that the 5 year restraint on Salas competing was reasonable. In reaching these conclusions, the court noted that Salas had obtained trade secrets and confidential information from Christensen, including customer lists that were used to induce customers to discontinue business with Christensen.
Significance: The Texas Covenant Not to Compete Act requires that a non-compete provision contain a limitation as to geographic area to be enforceable, but Texas courts are consistently finding that a geographic area limitation is not required if the non-compete provision is limited to a specific customer base, such as the customers called on by the former employee. The rationale is that these types of prohibitions are not an unlawful restraint on trade because they do not prohibit a former employee from creating a competing business that develops its own customers (i.e., any customer other than those of the former employer).