EMPLOYERS WIN ANOTHER NON-COMPETITION BATTLE
The Texas Supreme Court has issued another opinion favoring the employer where the issue is the enforceability of an agreement that restricts an employee’s ability to compete after employment has terminated. This opinion is the latest in what appears to be a trend toward finding a rationale to support covenants that restrict post-employment activities.
In Marsh USA, Inc. v. Cook, Rex Cook was a managing director of Marsh & McLennan Companies, Inc. In 1996 Cook was awarded stock options. To exercise the options he was required to, among other things, sign a Non-Solicitation Agreement, which would prevent him from competing for 2 years if he left the company within 3 years of exercising the options. The agreement also required Cook to maintain confidentiality of Marsh’s confidential information and trade secrets.
In 2005, Cook exercised the options and signed the Non-Solicitation Agreement. Then, less than 3 years after exercising the options, Cook resigned and went to work for one of Marsh’s direct competitors. Marsh sued, claiming that Cook had violated the Non-Solicitation Agreement by soliciting its clients. But, the trial court granted a summary judgment in Cook’s favor, finding that the agreement was unenforceable as a matter of law. The court of appeals, relying on a prior Texas Supreme Court opinion that has been frequently cited, agreed, holding that the transfer of stock did not justify Marsh being able to prevent Cook from competing.
The Texas Supreme Court, in a divided opinion, rejected the rationale of the prior Supreme Court opinion, and concluded that the business interest being protected, which was identified as the company’s goodwill, was sufficiently related to the consideration given to Cook, which was the stock options, to justify restricting Cook’s post-employment activities.
Before Marsh, Texas courts had repeatedly concluded that financial incentives alone did not justify enforcement of covenants not to compete. The significance of the Marsh decision was addressed in the dissenting opinion, which offered that equating stock options with goodwill opens the door to any financial incentive given to an employee justifying enforcement of a covenant not to compete. That may be exactly where this Texas Supreme Court is headed.