V&E Labor and Employment Updates E-communication, June 28, 2011
In a much-anticipated decision, the Texas Supreme Court has significantly changed the landscape for employee non-compete and non-solicit agreements in the state. In Marsh USA Inc. and Marsh & McLennan Companies, Inc. v. Cook, the court departed from almost 17 years of precedent and held that, contrary to the principles articulated in its 1994 opinion of Light v. Centel Cellular Co. of Texas, the consideration that a company must give in order to support an enforceable non-compete does not have to give rise to the employer’s interest in restraining the employee from competing. In so doing, it found a non-compete supported by a financial incentive, stock options, to be enforceable — an outcome that previously was contrary to Texas law.
The court held that to satisfy the statutory requirement of being ancillary to or part of an otherwise enforceable agreement between the parties, a non-compete must be supported by consideration that is “reasonably related” to the employer’s interest that is worthy of protection. The court then found the requisite reasonable relationship between an employer’s stock option plan for key employees, which required a non-compete in exchange for the exercise of stock options at a discounted strike price, and the business goodwill that the company sought to protect.
Under this new standard, the incentive received by an employee for a non-compete no longer has to be something such as confidential information, trade secrets, or specialized training that directly makes an employer competitively vulnerable. The dissent challenges the majority’s decision as opening the door to the enforcement of non-competes supported solely by financial consideration. A dissenting Justice described the new rule as one in which "any financial incentive given to an employee could justify a covenant not to compete" and noted that the decision "favors the enforcement of covenants not to compete based on financial incentives (something we've repeatedly held is unacceptable) . . . "
The Marsh court also held that the employer’s interest in restraining the employee can exist before the consideration for the non-compete is given. In other words, a contract entered into during, or at the end of, the employment relationship may be sufficient to support a Texas non-compete.
The Marsh decision completes a trilogy of cases issued by the Texas Supreme Court since 2006 through which the court has made the enforcement of non-competes easier in Texas. The implications of this latest case are potentially significant for Texas businesses and should make it possible to include enforceable non-competition and non-solicitation agreements as part of option agreements, incentive plans and, potentially, other employment-related contracts that are governed by Texas law.
In light of this new landscape, Texas employers may wish to examine their non-compete and non-solicit practices and consider whether to take additional steps to protect their investments in their employees.
For more information, please contact Vinson & Elkins lawyers Sean Becker or Tara Porterfield. Visit our website to learn more about V&E's Labor and Employment practice, or e-mail one of the practice contacts.