Texas Supreme Court Reverses Appellate Court Ruling on Noncompete Enforcement

On December 16, 2011, the Texas Supreme Court ruled on an appeal of Marsh USA Inc., and Marsh & McLennan Companies v. Rex Cook, reversing the ruling of the Court of Appeals for the Fifth District of Texas. In this case, the petitioners, Marsh USA Inc. et al, argued that a covenant not to compete that was signed by Mr. Cook was in fact enforceable, as the stock options which were provided to Mr. Cook reasonably related to the company’s interest in protecting its business interests.

The court concluded that “the covenant not to compete is ‘ancillary to or part of’ an otherwise enforceable agreement because of the business interest being protected” – in this case, the goodwill of the company – “is reasonably related to the consideration given.” The court referred to Section 15.50 of the Texas Business and Commercial Code, which requires that there be a connection between the noncompete covenant and the interest being protected. Since the court felt that this requirement was satisfied by the relationship between the covenant and the respondent’s stock options, the court reversed the judgment of the court of appeals and remanded the case back to the trial court for further proceedings.

Noncompete agreements between an employer and employee, therefore, could be deemed enforceable where an employee is given an ownership in the employing company. By exercising his stock options, Mr. Cook became an owner in the company. By violating the terms of the noncompete covenant, Mr. Cook would, in effect, be harming the goodwill of the company for which he is now an owner. This “nexus,” or connection, between the covenant and the interests of the company became the primary basis for the majority ruling of the court.

In the ruling’s dissent, Justices Green, Jefferson and Lehrmann argue that the intent of the Legislature was being thwarted. Furthermore, the dissenting justices expressed their concern about noncompete covenants that are “not tied specifically to trade secrets, confidential information or special training,” but are instead are only to protect the less specific “goodwill” of the company.