TX Court Allows for Stock Options Offer in Noncompete Agreement

June 27, 2011 (PLANSPONSOR.com) – The Texas Supreme Court has ruled that companies can offer employees stock options in exchange for signing noncompete agreements.

According to Business Insurance, in overturning decisions of lower courts, the state high 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 opinion in Marsh USA Inc. and Marsh & McLennan Cos. Inc. vs. Rex Cook, says in 2005 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. Business Insurance reports that 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, Cook resigned from Marsh and began to work for Lockton Cos. MMC filed suit against Cook and Lockton for breach of contract and breach of fiduciary duty. 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.   

According to Business Insurance, 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.”