Non-Competition Agreements in Texas – New Court Decision

Lawyers like predictability.

Witnesses who don’t change their testimony,  statutes that aren’t  amended every two years,   Supreme Court decisions that aren’t tossed out on a whim….these  are the  little things that make lawyers happy.

Which is why the Texas Supreme Court’s decision on December 16, 2011 in Marsh USA Inc  v. Cook  sent shock waves in the lawyer world from the Gulf to the Red

Marsh concerns the enforceability of non-competition agreements – those one or two page contracts, signed in the flurry of paperwork,  that keep people out of the marketplace when they lose their  job.

The enforceability of non-competes is crucial to businesses and their employees.  A valid non-compete can keep a knowledgeable ex-employee out of the marketplace for a crucial time period.    Conversely, a valid non-complete can bar an ex-employee from plying his trade, accessing his contacts, or setting up a competitive business – basically restricting his earning ability for years.

The guidelines for an enforceable non-compete  are based on a statute, but over the years the Supreme Court has  expounded, extrapolated, interlined,  parsed and perverted  its requirements.    Building from its first interpretive decision, the Court, on the principal of stare decisis,  has constructed a bit more of a wall with each subsequent case. And, like a wall, when you pull out the central brick, you risk having the entire façade tumble down.

The controversy is about a simple truth – a Texas employer can’t just buy a non-compete for $10.  It has to be “ancillary to or part of an otherwise enforceable agreement” with the Texas employee.  So there has to be more to the agreement than a token cash payment –  the question is, how much more?

Enter the Texas Supreme Court.   In 1994, in  Light v. Centel Cellular Co. of Texas , the court  proclaimed that the “otherwise enforceable contract”  had to be supported by consideration that “gives rise to” the employer’s interest in restraining the employee from competing.   In Texas, it wasn’t enough just to hire an employee and promise to pay him.  No, you had to look much deeper – what action was being restrained and how was it related to what the employee received in return?  The Texas Supreme Court opined that if an employer didn’t want an ex- employee to call its clients,  then it  had to have given the employee access to its secret customer list.   Ditto trade secrets.

When Light was announced, businesses and lawyers shrugged their shoulders and started drafting to meet  that requirement.  For 18 long years.  There are thousands   of non-competes out there that are structured on  the Light decision.  For 18 long
years,  the Courts have interpreted non-competes based on Light.  It has been cited in cases and treatises 1,258 times.  It would not be an exaggeration to say that a million businesses and employees have been affected.

Then the Supreme Court effectively tweeted “Light. jk.”  To put it in more explicit
terms “Stare decisis did not compel perpetuating an interpretation of a statute that the entire Supreme Court agreed could not be discerned from the text of the statute.”   As in –  we changed our mind.  We are tossing Light and starting over.

If the old Light rule is wrong, then what is the new rule?

We have exactly one Texas business case to answer that question – the Court’s decision in Marsh. It involved an employee, Rex Cook, who had been employed by Marsh since 1983.  In 1996, Marsh gave Cook a stock option  that was combined with a non-compete.  In 2005, Cook exercised his stock option and signed the non-compete.  Three years
later, Cook resigned his employment  and went to work with a competitor.

TheTexas Supreme Court held that Marsh was bound by the non-compete.  It did, helpfully, point out that the non-compete was not enforceable by the Light standards, but handled that sticky point by over-turning Light.  The Court held that in awarding stock options, the employer linked Cook’s interests with the company’s long-term business interests.

Most Texas non-competes aren’t bundled with stock options.  They are drafted to comply with Light.

What are businesses and employees and lawyers supposed to do now that the settled Texas law has been upended?   Same as they’ve always done – draft, litigate and wait for someone , anyone, to make sense out of it.