Non-compete agreements now more enforceable

Posted on Jul 25, 2011

The Texas Supreme Court’s recent ruling in Marsh USA, Inc., et al. v. Cook makes agreements not to compete more enforceable in Texas. The Court held that, under the terms of the Covenants Not to Compete Act, the consideration for the non-compete agreement (stock options in this case) is reasonably related to the company’s interest in protecting its good will, a business interest the Act recognizes for the protection.

The general rule in Texas under the Act is that covenants in restraint of trade are unenforceable. However, a covenant not to compete is enforceable if it is ancillary to or part of another otherwise enforceable agreement at the time the agreement is made to the extent that it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the good will or other business interest of the promissee. Texas Business & Commerce Code §15.50.

The decision in Marsh overrules the Court’s prior decision in Light v. Central Cellular Co. of Texas. Light imposed a stricter requirement that the consideration give rise to the employer’s interest in restraining the employee from competing. The “give rise” condition in Light effectively meant that no consideration other than a promise not to disclose trade secrets and confidential information would satisfy the requirements of Light. In Marsh, the court ruled that the “give rise” condition on enforceability of noncompetes in Light was more restrictive than the common law rule the legislature intended to resurrect by its adoption of the Act. In Marsh, the employer linked the interests of the key employee with the company’s long-term business interest by awarding the employee stock options. Thus, the covenant not to compete was ancillary to an otherwise enforceable agreement, which is all that is required under the Act after overruling Light.

Contact us today if you have questions about your company’s employment contracts including non-competition agreements, non-disclosure and enforcement or other business legal needs.