Stock Options Now Valid Consideration For Noncompete Agreements In Texas

On June 24, 2011, the Texas Supreme Court in Marsh USA, Inc. v. Cook further restricted the ability of employees seeking to dodge noncompete restrictions in agreements with their employers by allowing stock options to serve as the consideration supporting the agreement. No. 09-0558, 2011 WL 2517019, at *11 (Tex. June 24, 2011). The Court also opened the door for the potential for other types of financial consideration to be used in noncompete agreements and furthered its expansive view on the enforceability of such provisions.

Rex Cook, a managing director at Marsh USA, Inc. ("Marsh"), a risk management and insurance business, claimed that the noncompete agreement he entered into during his employment was unenforceable. Cook's theory was that Marsh did not provide him adequate consideration at the time he signed his noncompete agreement because all he received was stock options instead of some other type of consideration often provided as a part of such agreements (e.g., confidential information). The basis for this claim was that stock options did not "give rise" to the interest Marsh was seeking to protect by entering into a noncompete agreement with him, a common law, but not statutory, requirement for enforceability.

In response, Marsh contended the stock options given to Cook were adequate consideration because they sought to align his personal financial interests with the interests of the company to develop and maintain customer goodwill. The Court agreed with Marsh that the options "enhance[d] the relationships between Marsh and its customers by helping the company retain highly motivated employees with an interest in the long-term success of the company, which, in turn enhances the goodwill of Marsh." Id. at *10.

Under the Texas Covenants Not to Compete Act, a noncompete is enforceable only if: (1) "it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made," and (2) "it contains reasonable limitations on time, geographical area, and scope of activity that do not impose a greater restraint than necessary to protect the goodwill or other business interest of the promisee." Tex. Bus. & Comm. Code § 15.50.

In the seminal case interpreting the Texas statute, Light v. Centel Cellular Company, the Texas Supreme Court held that for a noncompete agreement to be "ancillary to or part of" an "otherwise enforceable agreement" under the first prong, the consideration given by the employer in the other...