Wednesday, June 3, 2009
Grant of Stock Options Not Sufficient Consideration for Non-Compete Agreement (Marsh USA v. Cook)
The best way to predict the outcome of a Texas non-compete dispute is to take every instinct you have as an attorney and do the opposite.
Texas is notoriously employer-friendly, and courts hand out injunctions like garage band flyers. But the Texas Supreme Court has interpreted one aspect of the Covenants Not to Compete Act fairly narrowly. That provision requires a covenant to be ancillary to an otherwise enforceable agreement. The Court has interpreted that phrase to mean that the covenant must "give rise to the employer's interest in restraining the employee from competing." Generally, employers are able to satisfy this requirement by agreeing to provide employees with confidential or proprietary business information. According to Texas courts, this is intrinsically related to the restraint, because the covenant protects potential use or disclosure of confidential information.
The odd part of this rule, however, is that financial consideration does not "give rise to" the interest in preventing competition. In Marsh USA v. Cook, the Court of Appeals held that an employer's covenant not to compete was invalid when the employee's consideration was a grant of stock options.
Most states would hold the opposite - that financial consideration is indeed valuable enough to support a non-compete. Even employee-friendly states such as Illinois would not invalidate a covenant on grounds of inadequate consideration if the employee was given stock options. In fact, giving an employee an equity stake in exchange for a non-compete is generally viewed as far less problematic when assessing the reasonableness of the covenant.
But, alas, Texas goes its own way again. At least we haven't heard all that secession talk of late.
Court: Court of Appeals of Texas, Fifth District, Dallas
Opinion Date: 5/26/09
Cite: Marsh USA, Inc. v. Cook, 287 S.W.3d 378 (Tex. Ct. App. 2009)