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Texas Supreme Court Upholds Non-Compete Agreement Made by Existing Employee

  • July 7, 2011

The Texas Supreme Court has determined that, under the Texas Covenants Not to Compete Act, a covenant not to compete signed by a current employee in consideration for stock options is not unenforceable as a matter of law.  The Court found the consideration is reasonably related to the company’s interest in protecting its goodwill, a business interest the Act recognizes as worthy of protection.  Marsh USA v. Cook, No. 09-0558 (Tex. June 24, 2011).

With this latest decision, Texas employers have hit the trifecta in Texas Supreme Court decisions relating to non-compete agreements.  In 2006, the Court found that non-compete agreements can be enforceable with at-will employees.  Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson, 209 S.W.3d 644 (Tex. 2006). In 2009, closing a loophole created by agreements that did not contain a “promise” to provide the employee with confidential information, the Court found that even though the agreement only contained a one-sided promise by the employee not to use or disclose the information, there was an “implied promise” by the employer to provide the information.  Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844 (Tex. 2009).

Sheshunoff and Mann Frankfort had made clear that employers could have new employees sign non-compete agreements as part of a confidentiality/non-disclosure agreement.  However, employers continued to struggle with enforcing non-compete agreements signed by current employees (who claimed they had already seen the confidential information) as to whether some other type of consideration given to a current employee, such as stock options, would support a covenant not to compete.  Marsh USA answers that question in the affirmative, at least in connection with stock options granted to key employees with carefully drafted agreements.  This opinion may open debate over whether other types of consideration with current employees will support a covenant not to compete.
For more information about this case or assistance in drafting and defending non-competes, please contact the Jackson Lewis attorney with whom you regularly work.

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