In a significant shift from prior rulings, the Texas Supreme Court ruled that the issuance of stock options which are exercised by an employee can support a non-competition agreement. This ruling presents employers with an additional opportunity to obtain non-compete agreements from employees in certain situations.
Roy Cook, a Managing Director of Marsh McLennan (“Marsh”), was awarded stock options. Under the terms of the stock option grant, Cook would be required to execute a non-competition agreement when he exercised the options. Cook subsequently exercised the options and signed a non-competition agreement. A few years later, Cook resigned from Marsh and began working for a competitor. Marsh sued Cook and his new employer to enforce the non-compete agreement.
In a 6-3 decision, the Texas Supreme Court ruled that the non-competition agreement was enforceable if it was reasonable in its scope of restricted activity. Breaking from its previous decisions, the Court ruled that the consideration given in exchange for a non-compete agreement need not “give rise” to the interest in restraining competition. Instead, the Court ruled, there need only be a nexus between the consideration and the employer’s interest worthy of protection by the non-compete agreement. Announcing a new standard for enforceability of non-compete agreements in Texas, the Court declared that the interest the employer is protecting by the non-compete, in this case, the company’s goodwill, must only be “reasonably related” to the consideration, or the stock options, provided by the company. Notably, the Court emphasized Cook’s key executive-level position with the company and that the options were only offered to select employees, and carefully explained the stock options resulted in Cook’s ownership of the company, which reasonably related to the company’s interest in protecting the company’s goodwill.
The decision in Cook has left many open questions. For example, what other types of consideration will suffice in exchange for an employee’s promise not to compete? The next battleground is likely to be whether other types of compensation, including incentive bonuses, retention bonuses, or other incentives tied to the health, reputation or goodwill of the company will be sufficient consideration. Whether this reasoning will apply to lower level employees or only to key executives of a company likewise remains an open issue. Finally, the opinion suggests that there may be more business interests protectable through a non-compete agreement than previously announced by the court in its previous rulings.
Gardere’s Labor and Employment attorneys have extensive experience helping employers draft and enforce non-compete agreements. If you would like to discuss the impact of this ruling on your company’s current non-competition agreements, or if you would like to explore ways to increase the use of non-competes in your business, please contact the Gardere Labor and Employment Group.