Texas Supreme Court Wades Again into Murky Waters of Covenants Not to Compete
By Gary Fowler
On April 9, 2010, the Texas Supreme Court announced that it had granted review in Marsh USA Inc. v. Cook, 287 S.W.3d 378, 381-82 (Tex. App.- Dallas 2009). On the surface, the case presents the question of whether a covenant not to compete contained in a stock option grant is enforceable. But the outcome of the case will have far greater implications for Texas employers.
Until 2006, popular wisdom held that covenants not to compete in Texas were not enforceable. While not strictly true, a string of Texas Supreme Court cases gave support to the idea. In each of those decisions, culminating in the "Light" case in 1994, the Texas Supreme Court found some reason to invalidate each covenant not to compete it considered. Light v. Centel Cellular Co. of Texas, 883 S.W.2d 642 (Tex. 1994). It seemed to some observers that the Legislature and the Court were locked in a battle over the issue because several of these cases followed legislative enactments designed to make it easier to enforce a covenant not to compete in Texas.
After twelve years of silence on the issue, the Texas Supreme Court signaled a new era for noncompetes in Texas with its decision in Alex Sheshunoff Management Services, L.P. v. Johnson, 209 S.W.3d 644 (Tex. 2006). In that case, the Court held that a promise to provide confidential information could support a covenant not to compete, and unlike some earlier opinions from Texas Courts of Appeals, held that the employer did not have to perform that promise immediately upon the execution of the agreement.
The trend of "pro-enforcement" continued last year in Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844 (Tex. 2009). Taking up a question unanswered in Sheshunoff-- whether a covenant not to compete would be enforceable without an explicit promise by the employer to give the employee confidential information—the Court again signaled that it would enforce non-competition agreements as written in holding that the employer did not have to promise in the agreement to provide confidential information. The Court held that it was sufficient to enforce the non-competition covenant that the employer actually provided confidential information and that the employee promised not to use or disclose it.
Now, the question before the Court is not whether the employer has to provide any confidential information at all but, instead, whether it is sufficient that the employer provided some monetary benefit like stock options. Under Light, such consideration could not support a covenant not to compete because, unlike confidential information, training, or goodwill, money or granting stock options have not been regarded as giving rise to the employer's interest in restraining the employee from competing. Indeed, this was the opinion of the Dallas Court of Appeals in its opinion in Marsh.
Because the Supreme Court has granted review of this question in Marsh, there is a good chance that the Court will continue its trend of enforcing covenants not to compete. Of course, that will be decided by the Court only after full argument and consideration.
In the meantime, what are the lessons for Texas employers? First, if you have not reviewed your confidentiality agreements and covenants not to compete, now is a good time to do so. Second, and perhaps even more importantly, Texas employers should be particularly careful when hiring individuals from competing firms who may have covenants not to compete. The "popular wisdom" that Texas courts don't uphold noncompetes is no longer wise, and landing your company in a lawsuit over a new hire's noncompete will not make you popular.
If you have any questions about this e-Alert, please contact Gary Fowler at 214.953.5922 or firstname.lastname@example.org.