Thursday, July 7, 2011

Supreme Court of Texas Revamps Non-Compete Test...Again (Marsh USA v. Cook)

The Supreme Court of Texas continued a trend we've seen in 2011 - substantial change by states to substantive non-compete law. Earlier this year, Georgia reformed its state law by enacting a new statute designed to allow for easier enforcement of non-compete contracts, particularly in the employment context.

Recently, Colorado has made it easier for employers to enforce non-compete agreements against at-will employees. And Illinois will have its Supreme Court decide, finally, the appropriate test for determining the enforceability of a non-compete agreement in the employment context.

While state supreme court opinions on non-compete issues are few and far between each year, that's not the case in Texas. Over the past several years, the Supreme Court of Texas has made several significant rulings and has chipped away at a 1994 decision that was perceived, correctly so, as creating a difficult enforcement landscape.

The latest ruling in Marsh USA v. Cook returns Texas back to the fold in determining the enforceability of a covenant under the "reasonableness" standard. Prior to this time, courts struggled over a technical, confusing inquiry concerning "ancillarity." Put simply, the Supreme Court of Texas had grafted onto its statute the requirement that promises made by an employer to an employee must "give rise" to a legitimate interest in restraining competition. Essentially, this meant that the employer had to promise to provide an employee with confidential business information. Otherwise, no promise made by the employer bore any rational nexus to enforcing the non-compete.

The Cook decision eliminates this judicially created rule and interprets Texas' Covenants Not to Compete Act according to the letter. As long as there is another agreement supporting the non-compete, trial courts must proceed to a reasonableness analysis. In Cook, the other agreement was providing stock options to a key employee - not providing him confidential information. The lower courts had held that this was not the type of consideration (money) that "gives rise to" an interest in preventing competition. Basically, the lower courts said an employer could not buy a non-compete. The Supreme Court of Texas found that an employer's interest in building goodwill and incenting employees' performance was a legitimate interest worthy of protection.

The interesting part of this ruling is Justice Willett's concurring opinion, which basically makes one important point as it relates to the Court's holding: it is not enough to mouth goodwill. An employer has to demonstrate it through a clear record. The Court makes the valid point that any type of employment incentive - a raise, a bonus, a promotion, or "a better parking space" - can motivate an employee to strengthen client relationships and contribute towards goodwill.

The concurring opinion also contains a very scholarly and interesting discussion of non-compete law in the knowledge-based economy. It reads like a summary of law review articles and provides many compelling arguments for strong judicial oversight of employment contracts in the 21st century. There are some great quotes in this opinion for lawyers to use.


Court: Supreme Court of Texas
Opinion Date: 6/24/11
Cite: Marsh USA Inc v. Cook, 2011 Tex. LEXIS 465 (Tex. June 24, 2011)
Favors: Employer
Law: Texas

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