Non-Compete

We’ve talked about the Texas Supreme Court’s opinion in Marsh USA v. Cook and its legal niceties, but what does it mean for employers and what should they be doing in light of the ruling?  The fact of the matter is we won’t know until lower courts address the opinions, but here are a couple of suggestions for employers:

1. Non-competes are getting easier and easier to enforce in Texas – All employers should consider including post-employment covenants in their employment agreements if warranted;
2. Employers should consider using financial consideration to form the basis for a non-compete or non-solicit;
3. Financial consideration could include stock options (the consideration in the Marsh case) and other items such as signing bonuses or agreed to severance – frankly these options may be limitless;
4. It will take some time for lower courts to determine what Marsh means but include financial consideration in some form in the agreement; and
5. Even if a non-compete is unenforceable it may still make an employee think twice before leaving.

Next time we’ll address what employees should be considering.

Analysis from last Friday’s Texas Supreme Court opinion in Marsh USA v. Cook will continue this week as lawyers, employers, and employees struggle with what the non-compete playing field is today. Quite simply put, Marsh USA is a game changer.

The ramifications of the case are best set forth Justice Green’s dissent, which was joined by Chief Justice Jefferson and Justice Lehrmann.  Some highlights from his opinion:

The Court today abandons our previous application of the “ancillary to or part of” requirement codified in Texas Business and Commerce Code § 15.50(a) and instead defines the phrase as “reasonably related to.”  Under the Court’s reasoning, a raise, a bonus, or even a salary could support an enforceable covenant.  The true issue is that Texas courts have stated time and again that an employer cannot buy a covenant not to compete, and the Court’s decision allows Marsh and other employers to do exactly that.

Justice Green hits the nail squarely on the head. The effect of the Court’s ruling is to abandon the “ancillary to an otherwise enforceable agreement” standard in favor of what appears to be a reasonably related standard. Granted, the ancillary to language is confusing and the reasonably related standard is what numerous other states have adopted. The problem for the Court is that the Texas legislature drafted the non-compete statute and included the ancillary to language.  We will have two wait until 2013 to see if the Texas legislature will react to the ruling.  Of course time will tell what the effect of the opinion will be as lower appellate courts address the standard.

In our next entry we’ll address the practical effect of the ruling on employer and employees, but for now we’ll give Justice Green the last word:

Allowing employers to obtain covenants not to compete by providing such financial incentives without actually giving the employee anything that gives rise to an interest in restraining trade is bad policy for Texas, and will make covenants not to compete much more commonplace in instances where there is little risk of unfair competition.