On Friday June 24, 2011, the Texas Supreme Court issued its opinion in Marsh USA Inc. and Marsh & McLennan Companies, Inc. v. Cook, holding that an employer’s grant of stock options to an employee was adequate consideration to support a covenant not to compete. This opinion provides employers with welcome clarification that employers may use stock options (and potentially other forms of equity awards) as consideration for an enforceable non-compete.
As a managing director of Marsh USA, Cook received a grant of stock options to purchase stock of Marsh USA’s parent, Marsh & McLennan Companies (Marsh). In order to exercise his options, Cook signed a non-compete agreement (Agreement) prohibiting him from competing with Marsh or soliciting Marsh’s employees if he left the company within the next three years. The trial court granted Cook’s motion for partial summary judgment that the Agreement was unenforceable as a matter of law, and the Dallas Court of Appeals affirmed, holding that the transfer of stock did not give rise to Marsh’s interest in preventing Cook from competing. The Texas Supreme Court reversed, and remanded the case to the trial court.
For a non-compete to be enforceable under Section 15.50, it must be “ancillary to or part of an otherwise enforceable agreement at the time the agreement is made...” and contain reasonable limitations as to time, geographic limitations and scope. TEX. BUS. & COM. CODE § 15.50. Previously, only promises to provide confidential information or specialized training provided adequate consideration for a covenant not to compete, but Marsh argued that the transfer of stock under the award agreement, linking the interests of a key employee with Marsh’s long-term business interests, gave rise to Marsh’s interest in restraining Cook from competing.
The Court agreed, holding that the award of stock options to Cook was reasonably related to Marsh’s interest in protecting its goodwill, a business interest that Section 15.50 recognizes as worthy of protection. Thus, the Court found that the Agreement was not void for the reasons given by the court of appeals and remanded the case for further proceedings consistent with its opinion.
Now an employer can establish an enforceable non-compete if the employer provides consideration for a non-compete that is reasonably related to an interest worthy of protection, such as trade secrets, confidential information or goodwill. The Court left open the question of whether other types of compensation arrangements qualify as adequate consideration. And once again signaling its desire to move disputes away from enforceability questions, the Court remarked that the “hallmark of enforcement is whether or not the covenant is reasonable,” rather than overly technical disputes over whether a covenant is ancillary to an agreement.