The Texas Supreme Court has ruled that stock options will indeed support a non-compete agreement. See last week’s Texas Supreme Court opinion in Marsh USA Inc. v. Cook.
I previously wrote about this case here and here. The Dallas appeals court had found in 2009 that stock options would not support a covenant not to compete. There must be some binding promise by the employer, such as to provide trade secrets to support a covenant not to compete, said the appellate court. The Marsh USA decision now overrules this Dallas appellate court opinion.
Our state difffers from many states which simply require compensation or money to make a non-compete agreement binding. The law in Texas has been more restrictive, requiring that a promise regarding proprietary information to the employee would be necessary to make a non-compete binding.
Non-compete agreements have historically been seen as a restraint on free trade. If an employee could leave a job and take proprietary information, then that employee could start a new business with such information. Employers needed a way to provide confidential information to employees without fearing they were creating new competition. So, the Texas Covenants Not to Compete Act was passed. The CNCA imposes limits on how such agreements can be enforced.
With this latest decision, the Supreme Court has continued its gradual trend toward making non-compete agreements easier to enforce. Stock options are now sufficient consideration for a non-compete agreement. Stock options, said the court, reasonably relate to an employer’s good will and encourage an employee to continue in his/her employment. The Texas Supreme Court has taken another step toward making non-compete agreements less restrictive. The majority opinion notes and welcomes this shift. As the dissent points out, if stock options can encourage an employer’s goodwill (a requirement under the Covenants Not to Compete Act), then simple compensation may also provide the necessary consideration.
Three justices dissented, while a fourth issued a concurring decision. It was a close vote. But, with this decision, Texas becomes more and more a corporate world and less and less an entrepreneurial world.