Marsh USA Inc. and Marsh & McLennan Companies, Inc. v. Rex Cook
July 10, 2009
Supreme Court of Texas
The Texas Supreme Court held that stock options can act as appropriate consideration to bind an employee to a non-competition agreement under Texas law.
The dispute arose between an insurance company, Marsh USA, Inc., and its former managing director, Rex Cook, over whether or not stock options were enough to bind Cook to his non-competition agreement. Cook had started to work for Marsh’s direct competitor and sought to invalidate his non-competition agreement on the grounds that it was unenforceable.
Texas has a statute which dictates that restrictive covenants, such as non-competition agreements, must be ancillary to otherwise enforceable agreements. Prior to the decision in this case, this meant that an otherwise enforceable agreement must “give rise” to the employer’s interest in enforcing a non-competition agreement. The parties disagreed not only on whether or not stock options met the "ancillary to an otherwise enforceable agreement" language, but also on whether or not mere consideration consisting of stock options could "give rise" to or create the interest in restraining competition.
In eliminating the “give rise” requirement and holding that the consideration only need be “reasonably related to an interest worthy of protection, such as trade secrets, confidential information or goodwill,” the court significantly loosened standards for Texas entities seeking to enforce non-competition agreements. The court noted that Marsh satisfied this standard, as the stock options, the value of which is clearly tied to the long-term success of the company, were reasonably related to the company’s interest in its former employee not working for a competitor and in maintaining industry goodwill.
Dale Wainwright, David Medina, Debra Lehrmann, Don R. Willett, Eva Guzman, Nathan L. Hecht, Paul W. Green, Phil Johnson, Wallace B. Jefferson
Marsh & McLennan Companies, Inc., Marsh USA, Inc.
Filings from this case
Petition For Review | 2009-07-10
Response to Petition | 2009-10-02
Reply To Cook's Response To Petition For Review | 2009-10-19
Petitioners' Brief On The Merits | 2010-01-11
Respondent's Brief On The Merits | 2010-02-19
Reply In Support Of Petitioner's Brief On The Merits | 2010-03-09
Respondent's Post-Submission Brief | 2010-10-28
Petitioner's Post-Submission Brief | 2010-11-09
Final Judicial Opinion | 2011-12-16
In the matter of Marsh USA Inc. and Marsh & McLennan Companies, Inc. v. Rex Cook, docket number 09-0558, an dispute existed about how to apply the language of Section 15.50(a) of the Texas Business and Commerce Code, also known as the Covenants Not to Compete Act (the “Act”). The pertinent part of the section states that “a covenant not to compete is enforceable if it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made.” In interpreting the “ancillary to or part of an otherwise enforceable agreement” part of the Act, the Supreme Court of Texas had previously concluded that consideration given by the employer in the agreement must "give rise" to or create the interest in restraining competition, and that the covenant must be designed to enforce the employee's return promise. The parties in this matter, however, disagreed on whether the consideration must be paid or promised before the employee must restrain his behavior and whether the stock options given to Defendant Rex Cook (“Cook”) are proper consideration that can “give rise” to an employer’s interest in restraining competition.
Cook was considered a valuable employee during his term with Plaintiff Marsh USA, Inc. (“Marsh”), a company that provides insurance and consulting services countrywide. Marsh strongly believed that the customer contacts and relations developed by its employees constituted trade secrets within the insurance industry and sought to protect its developed goodwill through non-solicitation agreements. After Cook had cultivated significant customer relationships, Marsh approached him with a non-solicitation agreement to prevent him from luring customers to a rival insurance company for a period of two years following Cook's termination of employment with the company. As consideration for the agreement, Marsh offered Cook three thousand shares of stock of the company priced at their 1996 level that Cook could exercise when he consented to the agreement. After signing the agreement and exercising the stock options on February 3, 2005, Cook resigned from Marsh on November 15, 2007 and went to work for a rival insurance company. Marsh alleged that Cook breached the non-solicitation agreement by soliciting and servicing clients and prospective clients of Marsh within the two-year window prohibited by the non-solicitation agreement.
Marsh sued Cook in the 68th Judicial District Court of Dallas County for breach of contract and breach of fiduciary duty. Cook filed a motion for partial summary judgment claiming that the non-solicitation agreement was unenforceable and the trial court granted his motion. The trial court concluded that the “give rise” requirement of the Act may be met only if the consideration given by the company creates the interest in restraining competition, and that this will occur only where the interest in restraining competition did not exist before the consideration was given. Marsh appealed to the Fifth District Court of Appeals in Texas, but the Court agreed with the trial court’s reasoning in concluding that Marsh’s interest in restraining Cook from competing did not change or arise at the time that it transferred stock to Cook. Subsequently, on July 10, 2009, Marsh filed a Petition for Review before the Supreme Court of Texas; the Court accepted the case in April 2010.
The Supreme Court of Texas set forth a test for interpreting the meaning of the “ancillary to or part of” requirement of the Act in Light v. Centel Cellular Co. of Texas, 883 S.W.2d 642 (Tex. 1994). The Supreme Court of Texas concluded in that case that consideration offered to bind an employee to a non-competition agreement must "give rise" to or create the employer's interest in restraining competition and that the covenant must be designed to enforce the employee's return promise. Marsh argued in its Petition for Review and subsequent briefs that the Court diverged from this test in a later case, Alex Sheshunoff Management Servs., L.P. v. Johnson, 209 S.W.3d 644 (Tex. 2006). Marsh asserted that Sheshunoff established that the “ancillary to or part of” requirement of the Act does not mean that the agreement must be immediately enforceable at the time it is made. Marsh also contended that the Sheshunoff opinion eliminated the “timing requirement” in Light that prevents employers from protecting goodwill or confidential information if either exists before the employer provides consideration for a non-competition agreement. Additionally, Marsh reasoned that applying the logic of Light could severely handicap the ability of businesses in Texas to protect unforeseen goodwill that their employees might develop. As such, Marsh believed that Cook was appropriately bound to the non-solicitation agreement because the stock options provided him an incentive to grow the amount and quality of the customer relationships for the company.
Cook disagreed with several elements of Marsh’s arguments in his Response and subsequent briefs, in particular Marsh’s emphasis on the reasoning of Sheshunoff and the application of the Light test. Cook argued that the Light test was appropriately and consistently applied not only by the trial and appeals courts in this matter, but also in the Sheshunoff opinion that Marsh cites. Cook argued that Marsh mischaracterized the “timing requirement” of Light, because under Texas Law, the consideration itself must be what "gives rise" to that interest. Therefore, in order for the consideration to have given rise to the interest, the employer's consideration has to exist before the employer's interest in restraining competition arises. Additionally, Cook argued that mere “financial benefits” do not give rise to an interest worthy of protection by a covenant not to compete and equates the stock options to a simple financial benefit, as Marsh could have theoretically paid the difference in price between the 1996 stock options and the company’s current price on the open market to try and unfairly bind Cook to a non-solicitation agreement.
Court’s Decision and Conclusion
Both Marsh and Cook presented compelling interpretations of the Act, but the Court ultimately agreed with Marsh. The Court eliminated the “give rise” requirement and held that consideration need only be “reasonably related to an interest worthy of protection, such as trade secrets, confidential information or goodwill.” In doing so, the court significantly loosened standards for Texas entities seeking to enforce non-competition agreements. The court noted that Marsh cleared the threshold for enforceability, as the stock options, the value of which is clearly tied to the long-term success of the company, were reasonably related to the company’s interest in its former employee not working for a competitor and in maintaining industry goodwill.