Insider caught up with Houston billboard litigation and transaction attorney Richard Rothfelder during the IBOUSA conference in Jacksonville, FL. We asked Richard about the case of Catalyst Outdoor Advertising vs Douglas, in which a billboard company sued a former employee for violations of a non-competition agreement. We discovered that Rothfelder originally began representing outdoor advertisers when he took the case for a couple of employees who started up their own sign company in competition with their former employer. 

What is a “covenant not to compete”?

 Covenants not to compete, often also referred to as non-competition or restrictive employment agreements, are contractual provisions designed to prohibit completely or partially agreed upon competitive employment activities.

How are they used, especially in the out of home industry?

Covenants not to compete are generally used in two different types of contractual relations.

• First, an employer which trades in proprietary and secretive information, and/or in highly competitive industries dependent on customer relationships, may attempt to protect this information and these relationships by prohibiting former employees from unfairly competing by exploiting the access they had to information and customers during their employment. Employers in the billboard industry, for example, depend on the personal relationships established with their advertisers and lessors by their salesmen and land men, who have access to the employer’s customer lists, lease and contract rates, and other sensitive information.
• The second area where non-competition agreements are often used is in the sale of assets or stock. For example, when a billboard company sells all or selected signs, leases, and permits, the buyer typically attempts to include in the asset purchase agreement a clause prohibiting the principals of the seller from competing with the buyer for some agreed upon time after the sale.

A contract is a contract, but don’t people have a right to work in this country?

Well put, Insider, and the courts and legislators across the country have grappled with the same struggle when dealing with the enforceability of covenants not to compete. Our system of commerce depends on the predictability and sanctity of contracts, so that one party can be assured the other party will keep his promises when making a deal. On the other hand, commerce also values hard work and entrepreneurship, and we don’t want to stifle the competition that often leads to better products and services in our system.

In attempting to create a balance, the courts and legislatures usually require the employer or buyer attempting to enforce a covenant not to compete to demonstrate more than a mere breach of the contractual clause by the former employee or seller. Instead, they usually have to also prove that the employment restraints to be imposed by the covenant are reasonable, and that they are necessary to protect the goodwill or other legitimate business interests of the plaintiff.

Texas, and many other jurisdictions across the country, require for enforcement of covenants not to compete (1) an underlying enforceable contract, such as an employment agreement or asset purchase agreement, (2) along with a separate clause, contract, or other promise supported by independent consideration to restrict employment activities, (3) which contains reasonable limitations on the time, geographic area, and scope of such activities, and (4) go only so far as necessary to protect the goodwill or other legitimate business interests of the former employer or buyer.

Practically speaking, how should the outdoor advertiser use these covenants not to compete?

 Sparingly, carefully, and with the advice of competent legal counsel. In Texas, under Section 15.51(c), of the Business & Commerce Code, the employer who “knew at the time of the execution of the agreement that the covenant did not contain limitations as to time, geographic area, and scope of activity to be restrained that were reasonable and the limitations imposed a greater restraint than necessary to protect the goodwill or other business interest of the [employer],” can be held liable for the attorney’s fees and court costs incurred by the former employee “in defending the action to enforce the covenant.” This statutory threat of attorney’s fees exists where the underlying contract is to render personal services, such as in the employment of a billboard salesman or lease representative, and not in the context of an asset purchase agreement.

It follows, therefore, that especially the employer in drafting and enforcing employment agreements must be judicious in defining reasonable post-employment restrictions. While each situation is different, depending on the access of the employee to confidential information and the competitiveness of the industry, typical limits are six months to two years, within a radius of 50 miles to throughout the state, in the specialty practiced by the former employee. In short, restrictions are reasonable and don’t go too far when, where faithfully observed by the former employee or seller, the business of the employer or buyer is protected from the unfair competition and damage they might otherwise suffer.

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