In a significant ruling for employers, the Texas Supreme Court held on Friday that stock options could serve as valid consideration to enforce a covenant not to compete. This is a pretty big decision as Texas has long been viewed as one of the more difficult jurisdictions to enforce a non-compete.
In Marsh USA Inc. and Marsh & McLennan Cos. Inc. v. Rex Cook, Case No. 90-0558 (June 24, 2011), Rex Cook, a long-time employee of over 20 years, signed an agreement with Marsh permitting him to exercise stock options in exchange for two-year non-solicitation agreement. Under the terms of the agreement, Cook agreed to be bound to that two-year non-solicitation period if he left the company within three years after exercising the stock options. When Cook left the firm less than two years later and joined a competitor, Marsh sued to enforce the non-solicitation agreement.
After both the trial and appellate court levels refused to enforce the non-solicitation agreement, the Texas Supreme Court reversed in a 6-3 opinion. The Supreme Court found that under Texas’ Covenants Not to Compete Act, “the consideration for the noncompeting agreement (stock options) is reasonably related to the company’s interest in protecting its good will, a business interest the Act recognizes as worthy of protection. The noncompete is thus not unenforceable on that basis.” The case has been remanded to the trial court for further proceedings.
The Texas Supreme Court’s opinion is not yet available online, but the parties’ briefs can be found here. I will get a post out on that opinion once it becomes available.
John’s December 30, 2011 Edit: From the “better late than never” file, I realized that I had not followed up with a post on this decision so I have now attached a PDF of the Texas Supreme Court’s decision below.