The Texas Supreme Court’s Latest On Post-Employment Non-Competition Agreements
by Andrew M. Gould
In June 2011, the Texas Supreme Court published its latest decision about post-employment non-competition agreements. The decision, Marsh USA Inc. v. Cook, No. 09-0558, --- S.W.3d ---, 2011 WL 2517019 (Tex. 2011), is important and will likely impact the enforcement and enforceability of employee non-competition agreements across the state.
Marsh & McLennan Companies, Inc. sued its former managing director, Rex Cook, to enforce a restrictive covenant against him. In exchange for Cook’s promise not to compete post-employment, he received stock options. Never before had the Texas Supreme Court, or just about any Texas appellate court, held that non-compete agreements could be supported by a financial incentive like stock options. The Texas Supreme Court, however, reversed the Court of Appeals by a narrow majority, finding that the non-compete may be enforced.
The Court declared that as long as the consideration provided by the employer (here, stock options) is reasonably related to the protection of a company’s goodwill, it will be worthy of protection under the Covenants Not to Compete Act, Tex. Bus. & Com. Code § 15.50. The Supreme Court also made clear what the heart of the issue is when it comes to non-competes:
“The [] core inquiry is whether the covenant contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary…”.
Since 1990, Texas non-competition law has been governed by statute (the Covenants Not To Compete Act) and, for the most part, the Texas Supreme Court’s 1994 decision in Light v. Centel Cellular Co. of Texas, 883 S.W.2d 643. Without delving too much into the weeds, the Supreme Court in Light added technical requirements for drafting enforceable restrictions, and courts since then have spent an inordinate amount of time parsing Light’s meaning.
Since 2007, the Texas Supreme Court has moved away from the rigidity of its Light decision. First, Alex Sheshunoff Mgt. v. Johnson, 883 S.W.3d 642 (Tex. 2007), reversed the principle that the contemporaneous exchange of confidential information at the time of execution was a requirement of the law. Next came Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844 (Tex. 2009), which reversed the principle that confidential information had to be expressly promised by the employer to enforce a non-compete. Marsh further erodes Light by recognizing that even financial rewards in the form of stock options can support a non-compete.
All three cases address the conditions that Light placed on non-competes and, ultimately, conclude that the law was not intended to be what it had become. The cases likely reflect what our courts have always known: that any analysis of non-competes must involve a balancing of two interests—the right of companies to protect themselves from employees, and the right of employees to work in a profession or position of their choosing. Two cases long predating Light, for instance, illustrate these principles: Bettinger v. N. Fort Worth Ice Co., 278 S.W. 466 (Tex. Ct. App. 1925); Justin Belt v. Yost, 502 S.W.3d 681 (Tex. 1973).
There is no question that the Sheshunuff-Mann Frankfort-Marsh trilogy is significant and that now it may be easier to advise clients and litigants regarding non-competition agreements. Courts may even be more receptive to upholding them. Ultimately, however, the validity of a non-compete agreement will turn on the need for the agreement and its reasonableness, a principle that has been around for nearly 100 years, if not longer.
Andrew M. Gould is a Partner with Wick Phillip Gould & Martin, a full-service business law firm in Dallas, Texas. He can be reached at andrew.gould@wickphillips.com.
