Employment Law Update: Texas Supreme Court Gives Employers a Boost in Protecting Customer Relationships Through Noncompete Agreements

On June 24, 2011, the Texas Supreme Court broadened noncompete enforceability in its decision in Marsh USA, Inc. v. Cook. The Court held that a covenant not to compete executed in connection with an employee stock option agreement is valid under Texas’ Covenants Not to Compete Act (the Act) when the stock options are reasonably related to the employer’s interest in protecting its goodwill.

Marsh USA offered the defendant employee stock options pursuant to a program designed to “provide valuable select employees with the opportunity to become part owners of the company”. In order to exercise the stock option, the employee was required to sign a noncompete agreement that prohibited the employee from working for Marsh’s competitors or soliciting its employees in the event the employee no longer worked for Marsh. Less than three years later, the employee resigned and began working for a direct competitor of Marsh. Marsh filed suit alleging breach of contract.

The Texas Supreme Court’s decision turned on whether a company’s goodwill can support a noncompete agreement under the Act. The Court first determined that the contract at issue was “an otherwise enforceable agreement between the parties” and next turned to the issue of whether the covenant not to compete was “ancillary to or part of that agreement.” “Requiring that a covenant not to compete be ancillary to an otherwise enforceable agreement or relationship ensures that noncompete agreements that are naked restraints of trade will not be enforceable under the Act.” The Court noted that “Texas law has long recognized that goodwill, although intangible, is property and is an integral part of the business just as its physical assets are determined that the employer sought the non compete covenant at issue in order “to protect its goodwill namely, the relationships it developed with customers and employees and their identities.” The Court held that the noncompete provision was ancillary to an enforceable agreement and was, therefore, valid and enforceable when “the business interest being protected (goodwill) is reasonably related to the consideration given (stock options).”