Most recently, the Texas Supreme Court ruled in Marsh USA v. Cook (Tex. Sup. Ct. J. 1234 (Tex. 2011)) that an employer’s grant of stock options in an employment agreement to an executive employee was sufficient consideration to support the non-solicitation of customer provision when he left to work for a competitor.
The shift began back in 2006 when the courts began focusing on practical enforcement of non-compete agreements, such as reasonableness of the covenants geographical, temporal, and scope of activity restrictions contained in the non-compete agreement. Thus, allowing businesses to protect their company’s goodwill, confidential information, and trade secret information.
While naked restraints of trade are unlawful, employers and employees are permitted to agree on reasonable restrictions that are a part of an otherwise enforceable agreement having a primary purpose that is unrelated to restraining competition. Tex. Bus. & Com. Code § 15.50-52.
The non-compete agreement cannot stand alone, but the courts have loosened the requirements for the relationship between the non-compete and the other consideration. Now, the consideration for an enforceable non-compete agreement (i.e. stock options) must only be (i) reasonably related to the employer’s interest in (ii) protecting a legitimate interest (i.e. goodwill). In addition to an otherwise enforceable agreement, the non-compete agreement but be reasonable in time, scope, and geography.
The Marsh ruling did not answer many practical questions regarding the enforceability of non-compete agreements, such as whether stock options or long term incentive benefits are sufficient consideration for employees who are not “key” employees. However, it did further shift the Court’s stance towards the enforceability of non-compete agreements in a wider range of situations.