On June 24, 2011, the Texas Supreme Court wrote the next chapter concerning the enforceability of non-compete agreements in Texas. A company’s provision of stock options to employees was deemed satisfactory consideration for a non-compete agreement in Marsh USA Inc. and Marsh & McLennan Companies, Inc. v. Cook, — S.W.3d —-, 2011 WL 2517019 (Tex., 2011). The Court declared that stock options are reasonably related to the protection of a company’s goodwill, a business interest worthy of protection under the Covenants Not to Compete Act (CNCA). Although goodwill is intangible, Texas law has long recognized that it is “a property and integral part of [a] business just as its physical assets are.” Marsh USA, Inc., 2011 WL 2517019 * 11.
This issue landed before the Texas Supreme Court after Marsh & McLennan Companies, Inc. (MMC) filed suit against a former managing director, Rex Cook (Cook), who resigned from its subsidiary, Marsh USA, Inc. (Marsh). Cook resigned from Marsh about three (3) years after he executed a non-solicitation agreement that contained confidentiality requirements as well as a restrictive covenant. Marsh granted Cook the option to purchase stock if he signed the non-solicitation agreement. The stock option program was designed to give certain choice employees the opportunity to become part owners of Marsh as well as motivate them to contribute to the company and benefit from the company’s long-term success.
The trial court granted Cook’s motion for partial summary judgment ruling that the non-solicitation agreement was an unenforceable contract under Light v. Centel Cellular Co. of Texas, 883 S.W.2d 643, 647 (Tex. 1994), a case in which the Texas Supreme Court held that consideration for a non-compete agreement must give rise to “the employer’s interest in restraining the employee from competing.” Marsh USA, Inc., 2011 WL 2517019 * 2, 7. The Texas Court of Appeals agreed with the trial court, specifically “holding that the transfer of stock did not give rise to Marsh’s interest in restraining Cook from competing.” Id. at 2. The Supreme Court reversed the judgment of the Court of Appeals and remanded the dispute to the trial court for further proceedings. Id. at 11.
Even though the CNCA was enacted to strike a balance between healthy competition in the market and reasonable covenants, judicial interpretations of the CNCA have not always fostered this goal. Id. at 18. For over a decade, courts have wrestled with the restrictive interpretation of the CNCA in Light. Diverging from Light, the Marsh court ruled that goodwill is a protectable interest according to the express language of the CNCA and determined that Marsh “linked the interests of a key employee with the company’s long-term business interests” when it awarded Cook stock options. Id. at 14.
The ruling in Marsh demonstrates an interest in enforcing the terms of the CNCA and its purpose, which was to “expand rather than restrict the enforceability of” non-compete agreements. Id. at 9. The significance of the Marsh ruling is that stock options can satisfy the CNCA’s requirement that there be a nexus between a restrictive covenant and a protectable interest, including but not limited to, the goodwill of a business.