The New Noncompete World: Marsh USA Inc. v. Cook

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The New Noncompete World: Marsh USA Inc. v. Cook[1]
By Andrea M. Johnson[2]

On December 16, 2011, the Texas Supreme Court issued an "earth-shattering" noncompetition decision in Marsh USA Inc. v. Cook.[3] The Cook case has taken Texas noncompetition law to a place it has never been, although from the reasoning of the Texas high court suggests that this is where the law should have always been. It is as if we were Dorothy in "The Wizard of Oz," and had not realized that we were always "home" from day one.

The basic ruling in Cook may not sound, on its face, as any big deal. Cook holds, generally speaking, that an employee’s agreement to a stock option agreement may be sufficient consideration for the enforcement of a noncompetition agreement.[4] While the decision seems simple, in some respects, it is also quite unique from past noncompetition law and sets the stage for much broader interpretations of these agreements, as well as much more certainty in their enforcement.

To understand the considerable shock waves that Cook has produced, we have to consider that our Texas courts have long had deep antipathy toward noncompetes and the law was rather confused for decades, leading attorneys, at times, to question the usefulness of the covenants all. For example, in 1987, the court issued Hill v. Mobile Auto Trim,[5] which held noncompetes unenforceable if they prohibited employees from their "common calling." This kind of argument is one often still alluded to by non-lawyers when talking about noncompetes, though it has long been superseded. After Hill, and on the basis of Texas Business and Commerce Code Section 15.50, which was enacted in 1989 in response to Hill, the Texas Supreme Court issued the Light v. Centel Cellular Co.[6] decision. Section 15.50 put in place a concrete rule for analyzing noncompetition clauses, which Light in 1994 analyzed. Light determined that a two-part test would be followed to determine if the noncompetition agreement was "ancillary to or part of" an otherwise enforceable agreement, a requirement of Section 15.50. The test mandated that (A) the "consideration" for the enforceable agreement "must give rise to the employer’s interest" in the competitive restraint, and that (B) the promise not to compete must be designed to enforce the employee’s consideration or return promise to the employer.[7]

Since Light, the Texas courts had closely scrutinized these agreements and largely relegated their enforcement to situations where there were clear nondisclosure provisions with corresponding and well-articulated promises by the employer to disclose confidences to the employee. The issues of "ancillary"-ness and "proper" consideration seem to take on heightened review with high standards for enforcement, and there was not unanimity in the courts. For example, in many decisions, noncompetes were deemed to be directly related to these particular promises of confidentiality only, essentially exclusively (thus, other promises of cash or other compensation did not seem to support a noncompete). Moreover, the failure to include an obvious employer promise to supply the employee proprietary data or the employer’s failure to provide confidential data virtually at the moment the agreement is signed could, in some cases, lead to the voiding of the noncompetition agreement.[8] And, all of that close scrutiny came well before a court might even get to the issue of whether the agreement was reasonable as to time, place, and subject matter. Thus, in cases following Light, the "reasonableness" issue seemed to play second fiddle to the issue of whether the agreement was at all a contract and possibly enforceable.

All of this hyper-technical scrutiny began to change in 2006. In that year, the court announced in Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson[9] that a promise to provide confidential data could still be enforceable even if the consideration (the confidences) were provided months after the agreement not to compete was signed. The court signaled a switch in analysis specifically holding that it did not want to focus on "overly technical disputes," but instead on whether the agreement was reasonable or not.[10] Then three years later, in Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding,[11] the court took the analysis a step further by concluding that an employer’s explicit promise of providing confidential data is not necessary, as long it could be reasonably implied from the agreement.

Cook goes even further because the agreement there was based on the provision of the stock options, not the provision of confidential data, in return for the noncompete. The Cook court overwrote, essentially, a number of past decisions, including Light, finding that they had gotten the law wrong by injecting the "give rise to" standard into the interpretation of Section 15.50, which nowhere uses that language. Justice Wainwright, who wrote the majority opinion, noted that all the statute required was "a nexus – that the noncompete be ‘ancillary to’ or ‘part of’ the otherwise enforceable agreement between the parties."[12] The court, thus, rejected "more stringent requirements on top of those in the Act," finding that the Act’s language sufficiently prevents "naked restraints on trade and would thwart the Legislature’s attempt to enforce reasonable covenants."[13] And with that one thought, the court eliminated at least two decades of angst in the Texas noncompete law.

The enforcement of the particular clause in Cook is not a certainty, as the court returned the case to the trial court for a review of the reasonableness standards of "time, scope of activity, and geographical area."[14] Nevertheless, the holding is monumental given past history.

How far will Cook take us in the next generation of noncompete cases? Time will tell, as they say. It may be important to consider that Mr. Cook was Marsh’s "managing director," so obviously a very key player at the company with key contacts and clients, facts highlighted by the court.[15] Thus, the issue of protecting company goodwill through Mr. Cook’s cooperation and noncompetion are not hard to envision, even given past law. Query, however, would this kind of agreement bar noncompetition of much lower level managers and supervisors or even hourly employees? What other kinds of consideration will the court accept for the enforcement of this restraint of trade? Will cash, bonuses, or the corner office suffice? The court also focused on the concept of "freedom to contract" as reason for enforcement of the agreement against Mr. Cook – and, given his position and what he was offered and accepted by the company, that "freedom" is not hard to justify.[16] But what about the lowly first-line supervisor or others in an organization who may feel that turning their back on offered compensation (stock, etc.) may be viewed as not showing the expected support for the company, perhaps raising loyalty or other questions? In other words, how voluntary is "voluntary" in the at will employment world where some feel that employers may have the upper hand, particularly given this economy? Ultimately, how far do we as a society want to encourage and permit restricting persons who want to seek work elsewhere? What is reasonable?

The next cases down the line will tell us the answers. For now, employers can generally breathe some relief that noncompetes will be easier to enforce, as long as they meet the basic reasonableness standards. We do know also, as Dorothy did, that Section 15.50 has always been our home, whether we understood that or not. [1] 2001 Tex. Lexis 930 (Tex. Dec. 16, 2011). [1] Ms. Johnson is the partner-in-charge of employment law (management representation) at Burleson LLP. [1] Id. [1] The clause was actually a nonsolicitation agreement but the same standards apply. Id. at *5-8 ("Covenants that place limits on former employees’ professional mobility or restrict their solicitation of the former employers’ customers and employees are restraints on trade and are governed by the Act." Id. at *6). [1] 725 S.W.2d 168 (Tex. 1987). [1] 883 S.W.2d 642 (Tex. 1994). [1] Id. at 647 (emphasis added). [1] See, e.g., TMC Worldwide, L.P. v. Gray, 178 S.W.3D 29, 37-38 (Tex.App.-Houston [1st Dist.] 2005, no pet.) (confidential data given a year later; unenforceable); Trilogy Software, Inc. v. Callidus Software, Inc., 143 S.W.3d 452 (Tex.App.-Houston [1st Dist.] 2005, no pet.) (data given later the same day as agreement signed; held unenforceable). [1] 209 S.W.3d 644 (Tex. 2006). [1] Id. at 655. [1] 289 S.W.3d 844 (Tex. 2009). [1] 2011 Tex. LEXIS 930, *27. [1] Id. at *30. [1] Id. at *36. [1] Id. at *32-34. [1] Id. at *7-8 ("The Texas Constitution protects the freedom to contract. . . Entering a noncompete is a matter of consent; it is voluntary.").