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February 03, 2023

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Texas Supreme Court Makes Enforcement of Noncompete Agreements Easier for Employers

On June 24, the Texas Supreme Court issued a long-awaited decision clarifying the standards for enforcement of noncompete agreements under the Texas Business and Commerce Code. In Marsh USA Inc. and Marsh & McLennan Cos. v. Rex Cook, the court considered whether an employee's receipt of stock options could sustain an agreement that prohibited the employee from soliciting or accepting business from certain customers of Marsh McLennan (Marsh).

Noncompete agreements, which include prohibitions on working for a competitor and limitations on an employee's ability to solicit customers, are governed in Texas by the Texas Business and Commerce Code. Under that statute, such agreements may be enforced only if they contain reasonable limitations with respect to geography, time, and scope of activity to be prohibited and only if they are "ancillary to or part of an otherwise enforceable agreement." Texas courts, as well as practitioners and employers, have struggled with this latter requirement. The Cook case represents a significant change in Texas law and a departure from the Texas Supreme Court's previous analysis of noncompete agreements.

Under previous court decisions, the analytical focus was on the type of consideration provided by the employer in exchange for the employee's promise to refrain from competing. Specifically, a Texas employer seeking to enforce a noncompete agreement must have been able to show that the consideration it provided to the employee "gave rise to an interest" in restraining competition. For example, an employer's promise of trade secrets or confidential information was deemed sufficient consideration to support a noncompete agreement whereas simple cash consideration was not.

In Cook, the Texas Supreme Court considered whether an employer's grant of stock options satisfied the "ancillary" prong of the Texas Business and Commerce Code. Cook joined Marsh in 1983 and signed an agreement under which he could exercise certain stock options in exchange for signing an agreement limiting his ability to solicit or accept business from clients of Marsh with whom he had business dealings during his employment. Cook thus signed the noncompete agreement not when he was provided the original grant of stock options, but rather when he chose to exercise the options.

After his separation from employment with Marsh, Cook went to work for a competitor. He thereafter was sued by Marsh for breach of his contract and for breach of fiduciary duty. Cook filed a motion for summary judgment in the district court on the grounds that the agreement was unenforceable under the Texas Business and Commerce Code. The trial court granted Cook's motion and an appellate court affirmed that ruling.

The Texas Supreme Court, in a 6-3 opinion, disagreed with the lower courts and reversed the grant of summary judgment. Significantly, the court overruled previous authority that focused on the type of consideration provided by the employer and the assessment of whether or not that consideration "gives rise" to an interest in restraining competition. Rather, the court construed the Texas Business and Commerce Code as requiring simply that there be a nexus between the noncompete agreement and the employer's interests, holding that the noncompete agreement "must be reasonably related to the [employer's] interest worthy of protection." The court emphasized Cook's high-level executive position with the company and found that, by providing an ownership interest in the company, the stock options provided to Cook were "reasonably related to the company's interest in protecting its goodwill, a business interest the [Texas Business and Commerce Code] recognizes as worthy of protection." The noncompete was thus enforceable on that basis.

As a practical matter, Cook should make enforcement of noncompete agreements easier in Texas. The decision represents a shift from the previous, more technical focus on the type of consideration provided in the noncompete agreement to a more generalized assessment of the employer's interests in restraining competition. Cook follows a trend of other recent Texas Supreme Court cases that have found that the enforcement of noncompete agreements should be decided in the context of the overall purpose of the Texas Business and Commerce Code, which is to provide for reasonable restrictions that protect legitimate business interests.

Copyright © 2023 by Morgan, Lewis & Bockius LLP. All Rights Reserved.National Law Review, Volume I, Number 180
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About this Author

Nancy Patterson, Morgan Lewis, intellectual property lawyer
Partner

Nancy L. Patterson litigates employment, commercial, intellectual property, personal injury, and benefits issues in US state and federal courts. She has tried more than 30 cases and has arbitrated more than 20 cases (FINRA and AAA) with numerous victories, including individual plaintiff, collective action, and multiplaintiff actions for various national and multinational companies. Her work has involved matters in a wide variety of industries, including the healthcare, energy, financial services, computer/technology, transportation, construction, chemical manufacturing,...

713.890.5195
Paulo McKeeby, Morgan Lewis, labor and employment attorney
Partner

Paulo B. McKeeby has experience in all areas of employment law, including litigation involving Title VII, the Fair Labor Standards Act (FLSA), the Family and Medical Leave Act (FMLA), the Employee Retirement Income Security Act (ERISA), and US state wage and labor statutes. He has broad experience handling individual, collective, and class actions in state and federal court. As co-chair of Morgan Lewis’s noncompete and trade secrets practice, Paulo handles employment cases related to noncompetition and trade secret disputes.

214.466.4126
Allyson Ho, litigation lawyer, Morgan Lewis
Partner

Allyson N. Ho represents clients in high-stakes litigation in US state and federal trial and appellate courts nationwide, including the US Supreme Court, where she has argued multiple times as lead counsel. Co-chair of the firm’s appellate practice, Allyson has litigated cases in every federal court of appeals and in the highest courts of multiple states. She has won cases for Fortune 500 companies, represented former high-ranking US and foreign government officials in federal court, and counseled US senators and presidential candidates.

713-890-5720
Stefanie Moll, Morgan Lewis, labor and employment lawyer
Partner

Stefanie Moll litigates employment disputes on behalf of employers in US federal and state courts and in arbitration. She represents management in wage and hour, retaliation, noncompetition, sexual harassment, and employment discrimination disputes. Her experience covers companies that provide oil and gas services, maritime services, retail, staffing, and healthcare, in addition to financial and electric services. Stefanie is the Managing Partner of Morgan Lewis’s Houston office and the labor and employment practice leader for the office.

713.890.5780
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