Be Careful What You Ask For: How a “Right to Reform” Clause in a Non-Compete Agreement Can Come Back to Bite You
August 11, 2014
When an employer seeks to enforce a non-compete agreement against a former employee, the Texas Business and Commerce Code allows a court to reform the terms of the agreement if the court determines the non-compete is not reasonably limited as to time, geographical area, or scope of activity. In some cases, employers have decided to incorporate this “right to reform” language into the non-compete itself.
However, the Texas Business and Commerce Code also allows a court to award attorneys’ fees and costs to an employee if the court determines that the employer knew at the time of the execution of the agreement that the restrictive covenant did not contain reasonable limitations as to time, geographical area, and scope of activity to be restrained.
Recently, in Sentinel Integrity Solutions, Inc. v. Mistras Group, Inc., 414 S.W. 3d 911 (Tex. App.—Houston [1st Dist.] 2013, pet. filed), the court found that such a “right to reform” provision served as evidence that the employer knew the covenant was overly broad at the time it was written and allowed the award of attorneys’ fees to the former employee.
In that case, and as noted by the First Court of Appeals, the jury found, and the trial court impliedly agreed, that the employer knew at the time the employment agreement was signed that it did not contain reasonable limitations and that the employer sought to enforce the limitations to a greater extent than necessary to protect its business interests.
The evidence to support such a finding included the employer’s testimony that he purposely made the geographical area covered by the non-compete provision broad “to cover pretty much all of the general areas that we think or anticipate would be covered” and the employer’s testimony that he relied on a provision allowing a trial court to reform the agreement if necessary.
The former employee argued this evidence supported a conclusion that the employer did not attempt to tailor the non-compete provisions, even though the terms of the agreement itself showed the employer knew such specificity could be required by a court reforming the agreement.
The Court of Appeals agreed and concluded the evidence was sufficient to support the award of attorneys’ fees pursuant to the Texas Business and Commerce Code.
The lesson for employers is that such “right to reform” provisions in non-compete agreements are not only unnecessary because the Texas Business and Commerce Code already provides for such relief, but are also ill-advised given that such a clause can be used against the employer as evidence of an attempt to enforce an overbroad covenant.