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AUSTIN, Texas—Companies can offer employees stock options in exchange for signing noncompete agreements, said the Texas Supreme Court on Friday, in a significant ruling involving Marsh Inc.
According to the decision in Marsh USA Inc. and Marsh & McLennan Cos. Inc. vs. Rex Cook, in 2005 Mr. Cook, who joined New York-based Marsh in 1983, signed an agreement under which he would exercise stock options in exchange for signing a nonsolicitation agreement.
The agreement provided that if he left the company within three years after exercising the stock options, then for a period of two years after termination he would not solicit any business of the type offered by MMC nor any MMC employee for the purposes of competing with the firm.
Less than three years later, Mr. Cook resigned from Marsh and began to work for Kansas City, Mo.-based Lockton Cos. MMC filed suit against Mr. Cook and Lockton for breach of contract and breach of fiduciary duty. Mr. Cook filed a motion for partial summary judgment on the grounds the agreement was unenforceable, and a trial court and an appellate court ruled in his favor.
Stock options 'reasonably related' to good will
The state Supreme Court overruled the lower courts in its 6-3 opinion. The court said under Texas' Covenants Not to Compete Act, “the consideration for the noncompeting agreement (stock options) is reasonably related to the company's interest in protecting its good will, a business interest the Act recognizes as worthy of protection. The noncompeting is thus not unenforceable on that basis.”
The case was remanded to the trial court for further proceedings.
Russell D. Cawyer, a partner with law firm Kelly, Hart & Hallman L.L.P. in Fort Worth, Texas, said, “It's a significant victory for Marsh.”
“The law before this was, you could not have a valid noncompete that was protected by the payment of money alone,” and the contention was the noncompete agreement could not be enforced because stock options are “more akin to money than anything else.”
This case is important “because it shows the connection between stock options of the employer and preserving its good will, and so the Supreme Court found you could support it on this basis,” said Mr. Cawyer.
Case adds to Texas' enforcement of noncompetes
Mr. Cawyer said the decision also is significant because it is the “third opinion in a row that has made it okay to enforce noncompetes in Texas,” which means the state “goes from one of the more difficult, to one of the easier states to enforce (noncompetes) all over the span of eight or nine years.”
In a statement, Marsh said it “is pleased with the Texas Supreme Court’s ruling, which confirms that employers can use reasonable covenants to protect their business interests and goodwill. We see this decision as a victory for Marsh and other employers in Texas.”