In 2006 and again in 2009, the Texas Supreme Court significantly departed from its 1994 decision in Light v. Centel Cellular Co., which confounded employers, practitioners, and courts for years with its highly technical and largely impractical interpretations of the Texas Covenant Not To Compete Act.  On June 24, 2011, the Texas Supreme Court further departed from Light by doing away with the requirement that consideration for a covenant not to compete must “give rise” to the employer’s interest in restraining the employee from competing.  In doing so, the court ruled by a 6-3 majority that stock options granted to a valuable employee are sufficient consideration to support a post-employment restrictive covenant because they are “reasonably related” to the company’s interest in protecting its goodwill.  As it did in 2006, the court again sent a strong signal to lower courts that the focus is whether or not the covenant is reasonable, not whether the agreement passes muster under a highly technical analysis not contemplated by the Texas Legislature. 

In Marsh USA Inc. v. Cook, the Texas Supreme Court takes yet another aggressive step towards eliminating technical “all or nothing” arguments against the enforcement of covenants not to compete in Texas.  The court goes back to its basic theme from Alex Sheshunoff Management Services, L.P. v. Johnson, finding that the first step in the two-step statutory construction is there to avoid naked, stand-alone noncompete obligations, and not to serve some other more complicated and convoluted construction obligation.  There is still need for some connection between the consideration given by the employer and an interest worthy of protection – so, is the “give rise” test truly dead?  Only time will tell, but it would appear that it has been modified to be a much looser requirement for some kind of reasonable relationship between a protectable interest and the consideration given. 

Although the Texas Supreme Court’s decision in Marsh should be viewed as a further breath of fresh air for employers seeking to use noncompete agreements in Texas, several questions are raised by the court’s opinion. 

• Employee Non-Solicitations:  The majority opinion lumps employee non-solicitation covenants, which have not previously been analyzed under the Act, with customer non-solicitation agreements, which have always been required to meet the Act’s limitations.  So, did the majority knowingly issue a sweeping change in the law, or was it unintentional?  Only time will tell. 
• Reasonable Relationship / Nexus Test:  How broad or narrow will the standard for a nexus (reasonable relationship) between an item of consideration and a legitimate protectable interest turn out to be? 
• Other Financial Benefits:  In Marsh, the financial benefit at issue was stock options.  So, could other financial benefits meet this same analysis?  To be sure, the next few years will see employers making this argument in Texas. 
• Reasonableness Test:  As the majority again made clear in Marsh, the lower courts’ analysis should be focused on whether or not the purported restrictive covenant is reasonable in terms of time, scope of activity, and geographical area.  As has always been the case in the context of the rendering of personal services, the burden will remain on the employer to make this showing. 
• The Second Prong of Light:  The second prong of Light requires that when evaluating the reasonableness of the restriction the covenant must be designed to enforce the employee’s consideration or return promise in the otherwise enforceable agreement.  It is unclear whether, and to what degree, the “designed to enforce” standard for evaluating reasonableness in the second-prong of Light continues in effect or might apply now.  Again, only time will tell. 

For more on Marsh, continue reading at Littler’s ASAP: The Door Continues to Close on Light:  Texas Supreme Court Holds Stock Options Award to Valuable Employee Provides Necessary “Nexus” to Protection of Company’s Goodwill