Supreme Court Favors Employer over Employee

Photo of Jay Jackson

In a recent opinion, the Texas Supreme Court ruled in favor of an employer which was trying to prevent a former employer from working for a competitor.

The case was Marsh USA, Inc. v. Cook, ___ S.W.3d ___ (Tex. 2011)(6/24/11). In it, when an executive exercised stock options, he was required to sign a covenant not to compete. The supreme court ruled that the agreement was enforceable to protect the "goodwill" of the company. The "consideration for the noncompete agreement (stock options) is reasonably related to the company's interest in protecting its goodwill, a business interest the Act recognizes as worthy of protection."

"The Texas Constitution protects the freedom to contract. Entering a noncompete is a matter of consent; it is a voluntary act for both parties. However, the Legislature may impose reasonable restrictions on the freedom to contract consistent with public policy. It has done so with . . . Tex. Bus. & Com. Code 15.50-.52" "'A person's right to use his own labor in any lawful employment is . . . one of the first and highest of civil rights.'" This is "protected by sections 15.05 and 15.50(a) . . . and is not offended by enforcing covenants not to compete that comply with section 15.50(a)."

"The purpose of Chapter 15 is 'to maintain and promote economic competition in trade and commerce' . . . [and] [u]nreasonable limitations on employees' abilities to change employers or solicit clients . . . could hinder legitimate competition. . . ." But "valid noncompetes constitute reasonable restraints on commerce agreed to by the parties and may increase efficiency in industry by encouraging employers to entrust confidential information and important client relationships to key employees." They "also incentivize employers to develop goodwill by making them less reluctant to invest significant resources in developing goodwill that an employee could otherwise immediately take and use against them in business."

The Act was "crafted . . . to prohibit naked restrictions on employee mobility" while allowing "reasonable restrictions . . . that are ancillary to or part of a valid contract . . . unrelated to restraining competition. . . ." Section "15.05(a) . . . [is] a policy limitation on the freedom between employers and employees to contract . . . 'in restraint of trade' . . . [when the purpose] 'is merely to restrain competition. . . .'" The covenant must be "ancillary to a valid contract" the "primary purpose" of which "is unrelated to restraining competition."

If ancillary to an otherwise enforceable agreement, a "noncompetition agreement is enforceable if it is reasonable in time, scope and geography. . . ." Reasonable non-competes are not contrary to public policy as a restraint of trade. There is a two-step analysis: first, is the agreement to which it is ancillary enforceable, and second, is the covenant not to compete ancillary to or part of the agreement. The first "is satisfied when the covenant is 'part of an agreement that contained mutual non-illusory promises.'" Here the issue is the second requirement: is it "'ancillary to or part of' the otherwise enforceable agreement." The test looks at whether the transaction "'gives rise to an interest worthy of protection.'" Goodwill, trade secrets, and confidential information are "protectable business interest[s]."

"The hallmark of enforcement is whether or not the covenant is reasonable." Here, the employee's "exercise of the stock options to purchase MMC stock at a discounted price provided a reasonable nexus between the noncompete and the company's interest in protecting its goodwill." "There is no requirement . . . that the employee receive consideration for the noncompete agreement prior to the time the employer's interest in protecting its goodwill arises."

The bottom line: if the employer requires the employee to sign a noncompete when he exercises the stock options he earned, he is restricted from working elsewhere.

No Comments

Leave a comment
Comment Information

Awards & Recognition

  • 2016-2017 Equal Access to Justice Champion

    The Equal Access to Justice Champions Program was started by the Houston Bar Association in 2006, to help ensure placement of Houston Volunteer Lawyers cases with pro bono volunteers. Originally, firms were tiered according to size, and firms within each tier committed to accept a certain number of pro bono cases from HVL each year for five years.

  • The National Trial Lawyers | Top 100 Trial Lawyers

    The National Trial Lawyers: Top 100 is an invitation-only organization composed of the premier trial lawyers from each state or region who meet stringent qualifications as civil plaintiff and/or criminal defense trial lawyers. Selection is based on a thorough multi-phase objective and uniformly applied process which includes peer nominations combined with third-party research.

  • Million Dollar Advocates Forum

    Established in 1993, the Million Dollar Advocates Forum (which includes the Multi-Million Dollar Advocates Forum) is one of the most prestigious groups of trial lawyers in the United States. Membership is limited to attorneys who have won million and multi-million dollar verdicts and settlements. There are over 4000 members throughout the country. Fewer than 1% of U.S. lawyers are members.

  • Recognized by Best Lawyers America | Abraham, Watkins, Nichols, Sorrels, Agosto & Aziz | 2017

    Recognition by Best Lawyers is based entirely on peer review. Their methodology is designed to capture, as accurately as possible, the consensus opinion of leading lawyers about the professional abilities of their colleagues within the same geographical area and legal practice area.

  • Lead Counsel Rated

    In order to earn the Lead Counsel Rating, an attorney must not only demonstrate significant legal experience, but must also receive multiple peer recommendations advocating his or her ability. This is a key component in the screening process.

  • Texas Super Lawyers | Texas Monthly

    Each year, Super Lawyers recognizes the top lawyers in Texas via a patented multiphase selection process involving peer nomination, independent research and peer evaluation. The Texas lawyers who receive the highest point totals during this selection process are further recognized in Texas Super Lawyers Top Lists.

Get Your Free Case Review 713.587.9668

Let Us Help You Today! Request a Free Consultation

Bold labels are required.

Contact Information

The use of the Internet or this form for communication with the firm or any individual member of the firm does not establish an attorney-client relationship. Confidential or time-sensitive information should not be sent through this form.


Privacy Policy

  • $50+ Million Personal Injury Fire and Explosion

    The firm successfully represented nearly 100 victims who suffered personal injuries and damages to property from a large fire and explosion resulting in a settlement of more than $50 million. The firm served as lead lawyers on the steering committee in this litigation.

  • $80 Million Personal Injury Large Plant Explosion

    The firm successfully represented 270 plaintiffs', taking a lead role in the plaintiffs' steering committee, who suffered injuries in a large plant explosion resulting in a settlement of nearly $80 million.

  • $50+ Million Personal Injury Plant Fire and Explosion

    The firm successfully represented 45 personal injury victims in a plant fire and explosion, serving on the plaintiffs' steering committee, concluding with a settlement of more than $50 million.

  • $22+ Million Personal Injury Work Site Accident

    The firm prevailed in a personal injury trial for a worksite injury client with the jury returning a verdict and resulting in a judgment of over $22 million for the firm's client.

  • $12 Million Auto Accident 18-Wheeler Collision

    The firm successfully achieved a $12 million settlement for the family of a man who died in an 18 wheeler collision.

  • $30 Million Personal Injury Burn Victims

    The firm prevailed on behalf of three burn victims with settlements totaling nearly $30 million.

Our Record Of Success.

When you are hurt and you choose a law firm to represent you in court or at the negotiation table, you need to carefully consider the firm's record.

More Success Stories