By Andrew Wooley
The Supreme Court of Texas’ recent decision in Marsh USA Inc. v. Cook, 54 Tex. Sup. Ct. J. 1234, 2011 WL 2517019, 2011 Tex. LEXIS 465 (Tex. June 24, 2011), will make it easier for employers to enforce a Texas employee’s post-termination covenant not to compete. The decision was not unanimous, however, and it leaves some questions still to be answered.
One of the requirements for an enforceable covenant not to compete in Texas has long been that it be “ancillary to or part of an otherwise enforceable agreement at the time the agreement is made….” Justin Belt Co. v. Yost, 502 S.W.2d 681, 685 (Tex. 1973); Tex. Bus. & Com. Code Ann. § 15.50 (Vernon 2011) (“Covenants Not to Compete Act”). Commercial real estate leases and agreements to employ someone, to settle a dispute, and to sell a business have been recognized as “otherwise enforceable agreements” to which a covenant not to compete can be ancillary. In a decision 17 years ago though, the state supreme court added two requirements for enforcement of an employee’s non-compete that are not found in the Covenants Not to Compete Act itself:
(1) the consideration given by the employer in the otherwise enforceable agreement must give rise to the employer’s interest in restraining the employee from competing; and (2) the covenant [not to compete] must be designed to enforce the employee’s consideration or return promise in the otherwise enforceable agreement.
Light v. Centel Cellular Co. of Texas, 883 S.W.2d 643, 647 (Tex. 1994). Since Light was decided in 1994, the only combination of employer consideration and employee return promise that has been generally recognized to satisfy Light’s additional requirements for enforcement of an employee’s post-termination noncompete is an employer’s fulfilled promise to disclose confidential information to the employee and the employee’s return promise not to disclose or use such information other than for the employer’s benefit.
In Marsh, the court of appeals had affirmed the trial court’s summary judgment that an employee’s agreement not to compete in consideration of a grant of stock options was unenforceable as a matter of law for failure to satisfy the first part of the Light two-prong test. The supreme court reversed, holding that (i) a grant of stock options in consideration of the recipient’s covenant not to compete after termination of employment was reasonably related to the employer’s interest in protecting its goodwill, and (ii) the employee’s covenant not to compete was therefore not per se unenforceable for failure to satisfy the first part of the Light test. As is discussed below, Marsh did not undo entirely Light’s additional requirements for an enforceable employee non-compete. The court only held that the restrictive covenant in Marshwas not per se unenforceable (not that it was enforceable) and remanded the case to the trial court for further proceedings. Nevertheless, the holding in Marsh is favorable to employers, because it increases the likelihood that a Texas employee’s post-termination covenant not to compete will be enforced and sharply reduces the probability of a summary disposition in favor of the employee based on the nature of the consideration for the noncompete.
There are three opinions in Marsh. A five-justice majority overruled Light’s requirement that the consideration for a covenant not to compete must give rise to the employer’s interest in restraining an employee from competing and held that (i) the consideration for an employee’s noncompete need only be reasonably related to an interest of the employer worthy of protection, (ii) good will is an interest worthy of protection, and (iii) the stock options that Marsh granted its employee in consideration for his agreement not to compete agreement were reasonably related to Marsh’s interest in protecting its goodwill. Marsh, 2011 WL 2517019, at *9,11-12 & 14, 2011 Tex. LEXIS 465, at *28-30, 32 & 41-42.
Justice Willett concurred only in the judgment to remand, stating his view that the record was underdeveloped and the trial court should “take first crack at assessing whether today’s noncompetition covenant ‘contains limitations as to time, geographical area, and scope of activity…that are reasonable and do not impose a greater restraint than is necessary.’” Marsh, 2011 WL 2517019, at *14, 2011 Tex. LEXIS 465, at *42. And it is clear from his opinion that he shares the dissent’s view that pure financial incentives, such as bonuses or salary increases, will not justify a restraint of trade. Marsh, 2011 WL 2517019, at *16, 2011 Tex. LEXIS 465, at *56-57.
Justice Green wrote the opinion for the three dissenting justices and expressed their view that the judgments of the courts below should be affirmed because Light’s holding regarding the kind of consideration that is required for an enforceable covenant not to compete is a correct statement of the law. Marsh, 2011 WL 2517019, at *19, 2011 Tex. LEXIS 465, at *67-69.
The majority’s holding that the covenant not to compete at issue in Marsh is not per se unenforceable extended only to the first part of the Light test for enforceability. On remand, the trial court will have to decide whether the covenant satisfies the second part of Light’s test for enforceability, and it will also have to take into account the requirements in the Covenants Not to Compete Act and the considerations raised by Justice Willett in his concurring opinion in Marsh. Whatever the trial court decides, a further appeal is likely, unless the parties reach a settlement. It is also likely that the law concerning employee noncompetes in Texas will remain somewhat confused until a broader consensus emerges among the nine justices on the court.
In addition to the citations above to the Texas Supreme Court Journal, Westlaw®, and LEXIS®, copies of the majority, concurring, and dissenting opinions in Marsh are available on the web site for the Supreme Court of Texas: