Protecting the Client Base

One of a business’s most valuable assets is its client base.
This is particularly true of service-oriented and sales-oriented businesses. And
a perennial problem for any business is the risk that trusted employees will
depart, set up a competing business, and begin poaching clients. Covenants not
to compete have been one method businesses have used to address this issue.
Covenants not to compete can be very effective when they
prohibit solicitation of a business’s customers. Covenants not to compete have
to meet strict requirements under Texas law to be enforceable, however, and a
changing business environment can pose problems crafting such covenants so that
they will remain enforceable in the face of changes. For example, the Internet
has changed the playing field; even the smallest company can now compete
“worldwide,” with a scattering of customers across several states or even
national boundaries. A small business located in Texas may easily have a
handful of clients in each of several other states or countries. The
possibility that an employee who deals with those clients on a regular basis
may depart and compete against the business for those customers is a real risk.
A covenant not to compete reduces the risk significantly, but a poorly drafted
one, especially with regard to its geographic restrictions, does not.
Under Texas’ Covenant Not to Compete Act, a fundamental
requirement for an enforceable covenant is that it must contain limitations as
to time, geographic area, and scope of activity to be restrained that are
reasonable and do not impose a greater restraint than necessary to protect the
employer’s goodwill or other business interest. Texas Courts have routinely
struck down covenants not to compete that contain nationwide, worldwide, or, in
a few circumstances, statewide geographic restrictions. How then, does a small
business with small numbers of clients in different states or nations address
the problem of properly limiting the geographic reach of a covenant not to
compete without running afoul the Covenants Not to Compete Act’s strict
requirements?
There are options. Several Texas courts have held that
covenants not to compete limited to an employee’s clients or customers is a
reasonable alternative to a geographical limit. These holdings grow out of
earlier case law where Texas appellate courts upheld injunctions that enjoined
defendants from doing business with their former employer’s customers. In the
place of geographic limitations, those courts attached lists identifying
specific customers defendants were not allowed to solicit or otherwise contact
for business purposes. The rationale behind the cases is that by identifying
specific clients or customers, a geographic limitation may be implied wherever
that customer or client may be located. As one court expressed the problem, it
is a matter of “how a reasonable geographic limitation is achieved.”
Thus, when drafting a Covenant Not To Compete, businesses
may want to consider redefining or linking geographic limitations to
identifiable clients or customers. Drafters may include a list identifying
clients or customers by name and address, or may use a broader definition such
as all clients or customers with whom the employee had dealt as of the date of
the employee’s termination of employment. The advantage of agreements that
substitute identifiable customers for a geographic restriction is that the
circumscribed activity is limited and easily identifiable. The disadvantage is
that, unless additional protections are incorporated into the covenant, the
competing employee could quite literally set up shop next door to his former
employer, so long as he did not solicit customer with whom he had dealt while
working for his former employer.
Finally, covenants not to compete such as those described
above are sometimes termed “non-solicitation agreements,” but the law does not
distinguish between the two. A non-solicitation agreement is a covenant not to
compete.