Overbroad Geographic Restriction Dooms Covenant Not to Compete
Texas law allows for the enforcement of covenants not to compete that impose reasonable restrictions on competition. Texas courts frequently enforce geographic and other restrictions on a former employee’s ability to compete with his or her prior employer. A recent decision highlights the requirement that any such restrictions, including geographic restrictions, must be reasonable to be enforceable.
In Fomine v. Barrett, the First Court of Appeals in Houston evaluated a noncompete agreement between an employer and its former employee. In this case, Alexei Fomine had hired Rosa Barrett to work as a case manager in his chiropractic clinic. Barrett signed an employment offer letter that contained a covenant not to compete that barred her from “owning, managing, operating, consulting, or being employed in a business substantially similar to or competitive with [the chiropractic clinic] (i) for two years after any termination or expiration of her employment and (ii) within a 500 mile radius of the clinic’s location.” Fomine later terminated Barrett for poor performance. Barrett subsequently opened and operated two medical clinics competing with her former employer’s clinic: one within seven miles and one within 22 miles. One of these clinics had been a major referral source for her former employer, amounting to “approximately $10,000 to $30,000 in revenue per month.”
Fomine sued to enforce the covenant not to compete. Barrett moved for summary judgment, arguing that the convenant was unenforceable for several reasons, including that the geographical restraint imposed was “unreasonable.” The trial court granted summary judgment.
On appeal, the court focused on Fomine’s claim that “Barrett’s state-wide marketing and business development efforts rendered the 500-mile geographic restriction reasonable to protect [his] interests.” The court noted that any post-employment restriction should be “reasonable” and not “impose a greater restraint than is necessary to protect the goodwill or other business interest of the [company].” Fomine claimed that Barrett was instructed to develop business opportunities throughout Texas. However, a 500-mile radius from Fomine’s Houston clinic “does not only include most of Texas, but also all of Louisiana and significant portions of Alabama, Arkansas, Mississippi, Oklahoma, and Mexico. This area is “significantly broader than the geographic scope” of Barrett’s actual employment activities on behalf of the clinic. It is therefore “broader than is reasonably necessary” to protect the employer’s business interests. As a result, the court found the covenant unenforceable.
This decision highlights some relevant points an employer may want to consider when drafting an enforceable covenant not to compete. Regarding geographic restrictions, an employer must first analyze the actual scope of the employee’s duties and the geographic area in which he or she will be performing those duties. Ideally, this assessment will be driven by data and facts, not guesses as to the employee’s duties and geographic area of work. The reach of the geographic restriction in the convenant should extend only as far as the employee’s geographic activities extend.
Second, an employer may want to maintain the analysis of an employee’s duties and the data used to develop the geographic restriction. This information will be crucial in any litigation concerning the covenant, as the employer may need to prove the steps taken to craft the geographic restrictions and that such restrictions coincide with the employee’s duties and extend no farther than necessary to protect the employer’s interest.
Finally, an employer may want to include in the covenant itself a clause reflecting that if a court determines that a restriction is unreasonable, then that restriction can be reformed by the court. Even though it was not an issue in this case, the facts reflect how reformation can benefit an employer when a former employee opens a competitive business within a short distance of the employer’s business. Employers may want to keep these steps in mind when crafting noncompete agreements.