When it comes to non-compete and non-solicitation agreements, it’s important to know whether “blue pencil” rules apply to the agreements.
What does that mean?
If a non-compete or non-solicitation agreement is found to be overly broad, several things could happen depending on state rules. Some states do not have a rule to modify the document and, thus, it is simply “red penciled” or “thrown out” if it’s deemed too restrictive. Other states are “blue pencil” states that allow a court to cross out language within the document that cause the non-compete to be too broad, but make no other modifications. Still other states allow “equitable reformation” and can go as far as rewriting certain parts of a non-compete or non-solicitation agreement to make it legally enforceable.
Texas is among the “equitable reformation” states. If a non-compete or non-solicitation agreement is overly broad, the party seeking to enforce the agreement can seek reformation of the agreement from the Court to make it enforceable. (For more on what the state of Texas considers enforceable, read this post.)
If you’re a Texas employer, then, what’s your motivation for drafting a reasonable non-compete or non-solicitation agreement when a court is willing to rewrite it for you? The answer is time and money.
In 2013, a precedent was set with Sentinel Integrity Solutions, Inc. v. Mistras Group, Inc. in which the employer (also the plaintiff) was found to have attempted enforcement of what it knew to be an unreasonable non-compete agreement. After a full trial by jury, that employer was also slapped with a bill for $750,000 – the cost of its former employee’s attorneys’ fees. The mistakes the employer made were to:
- Know at the time the agreement was executed that it did not include reasonable limitations (again, for a refresher of those limitations in Texas, read this post).
- Seek enforcement of the agreement to a greater extent than necessary to protect goodwill or business interests.
Additionally, if you’re in a city or industry that employs a high amount of relocators from out of state (Texas-based technology companies, take note), it’s important to understand how your state’s non-compete and non-solicitation laws compare to others. For instance, while Texas follows “equitable reformation” rules, California doesn’t permit post-termination non-competition or non-solicitation agreements, except in very limited contexts (sale of business, etc.) Other states have similar rules to California, meaning that one-size-does-not-fit-all in the world of non-compete and non-solicit agreements. Employers with out-of-state employees should proceed with care.
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The BTD Blog is a legal resource about issues important to Texas employers. The blog is written by Amy Beckstead, Jana Terry, Connie Ditto, and Sara Garcia, who are all attorneys at Beckstead Terry Ditto PLLC.