Courts Examine the Toll of Noncompete Agreements

Noncompete provisions are common in employment contracts. Such agreements (NCAs) usually state that an employee agrees not to compete with the employer in the same industry for a specified period of time after the employee leaves the company. Many employers include a tolling clause in their NCAs, which states that the restrictions can be extended by the time period during which the employee broke the contract. If, for example, the employee had a one-year noncomplete and breached it for six months, the restriction could be extended by six months.

Tolling has been under scrutiny in court on a state-by-state basis. In Georgia, the courts historically have refused to extend NCAs if the agreement does not have an enforceable tolling provision. A recent case, Bearoff v Craton, the defendants sold a retail store in 2009 and, as part of the sale, signed an agreement not to compete with the buyers for 81 months from the sale date. A promissory note that was part of the sale was renewed in 2009 without modification of the NCA. In 2015, the sellers planned to open a competing retail store and were met with a cease-and-desist order and lawsuit. The buyers asked the court to extend (toll) the noncompete until the promissory note had been paid. The trial court, then the appeals court, declined, noting that no amendment to the NCA was made when the maturity date of the promissory note was adjusted.

A Florida appellate court overturned a trial court’s ruling in Vela v. Kendall, which addressed an alleged violation of a noncompete provision between a delivery service and an independent contractor, Robert Vela, which restricted Vela from making deliveries for “no less than two years” from the date of termination. In 2001, Vela was terminated and five months later was sued for violating the NCA. The judgment, three years later, granted damages to the plaintiff and extended the noncompete period for another two years. Vera appealed, saying that the plaintiff was granted double recovery. The appellate court ruled that the original damages were fair, but that the trial court erred in its extension of the injunction.

Texas courts have thus far considered the duration of NCAs on a case-by-case basis. While unlimited restrictions are unenforceable, the reasonable time limit depends on the industry, the employee’s role in the company, the market, and other factors. For example, if the agreement protects confidential information, the provision should not extend beyond the date when the information ceases to be valuable. The guiding principle for Texas courts is that the agreement should be no more restrictive than necessary to protect an employer’s legitimate business interests.

In drafting NCAs, employers must take care to ensure that the duration, including tolling provisions, are fair and reasonable. Since the same terms could be considered reasonable under some circumstances and not others, consultation with an attorney familiar with the body of case law and the language of a strong NDA is invaluable. As always, we are happy to help.

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