One option we’ve never spent much time discussing here as it relates to non-competes is the buyout option – on both sides. Buying out a non-compete is neither new nor novel. Physician non-competes in Texas require that the non-compete provision include a buyout option. The statute provides:
the covenant must provide for a buy out of the covenant by the physician at a reasonable price or, at the option of either party, as determined by a mutually agreed upon arbitrator or, in the case of an inability to agree, an arbitrator of the court whose decision shall be binding on the parties
Sometimes there are fights over what the amount should be, but that can be resolved through negotiation or when all else fails, arbitration. I have seen some formulas used to arrive at the number such as a percentage of income or gross production. The parties are only limited by their imagination and negotiating skills in terms of structuring a deal.
There is not a buyout provision in Texas for non-doctors, but that doesn’t prevent parties from using them. In my career I’ve seen one employer that offered a buyout provision and that was in the context of a placement professional. It can make sense in certain situations. In sales related employment the departing employee will likely have strong personal relationships with customers that the employer may not be able to replicate. The reality is a departing employee will eventually take that business with him/her when the customer decides they want to move the business. So why not consider letting the departing employee buy their way out of the non-solicitation or non-compete agreement? The employer could actually tie the amount to production the departing employee achieves in their new job. Of course there could simply be an agreed upon amount paid over time – again no limits on how the deal is structured.
The flip side is the the employee that has departed and may be violating a non-compete and non-solicit. Why not approach the former employer about a buyout? The reality is that discussion probably won’t happen until the former employer threatens to sue or sues the former employee. (A former employee is unlikely to initiate buyout discussions without some threat of a lawsuit.) Of course the former employee will have better leverage when a lawsuit is pending but the former employee will always be able to attack the validity of the non-compete or non-solicit. The employer also has to consider that it may not be able to hold onto the business in the long run and will lose the income stream anyway.
So how is it done? The buyout is a contract that could be included as part of a settlement agreement or release. If you’re the employer be thinking about how you are going to enforce the agreement if the employee fails to pay. The buyout won’t make sense in every situation but it is something to consider.