*1 INC., Marsh MARSH USA Companies, McLennan
&
Inc., Petitioners, COOK, Respondent.
Rex
No. 09-0558. Court of Texas.
Supreme Sept. 2010.
Argued Dec.
Decided *2 WAINWRIGHT delivered
Justice Court, in which opinion of the Justice *3 MEDINA, HECHT, Justice Justice JOHNSON, joined. GUZMAN Justice Rex motion for rehear- denyWe Cook’s ing. opinion withdraw our of June We following in its substitute the 2011 and place. case, a cove- we decide whether
In this signed by a valued nant not to op- in consideration for stock a tions, designed give company’s perform- stake in the ance, a of law unenforceable as matter is did rise options because the stock restraining competition. to an interest that, the terms of the Cove- We hold under (Act), the con- Compete Not to Act nants noncompete agreement sideration for the (stock reasonably to the related options) good- its protecting company’s interest will, recognizes the Act a business interest protection. basis. not unenforceable on that thus appeals’ judgment We reverse the court of and remand to trial court for further proceedings.
I. BACKGROUND employed by had Marsh Rex Cook been (Marsh) 1983 and rose USA Inc. since Marsh & managing director. become (MMC) Inc. Companies, McLennan manage- parent company for various risk businesses, including ment and insurance 21,1996, granted MMC Marsh. On March option purchase 500 shares Cook to its 1992 pursuant common stock MMC (Plan). and Stock Award Plan Incentive Case, Beverly Whitley, A. Thomas L. provide “valu- developed The Plan was & Fugitt, Nunnaly John R.W. Bell Martin able,” employees opportu- “select” with the LLP, Dallas, for Petitioners. nity compa- to become owners to and Latin, ny Stephanie Monica Doo- with incentive contribute Wiseman Nelson, Shumway, long-term growth and ley benefit from the Jesse Keith Car- Plan, Under rington profitability Sloman & Blumenthal MMC. Coleman twenty- Dallas, would LLP, Respondent. option stock awards vest (b) year, any employee five increments each becom- solicit percent who [MMC] directly reported after a or indi- ing fully [Cook] vested and exercisable rectly to terminate his period To stock years. of four exercise with for the purpose [MMC] com- terms, option employees under the Plan’s peting [MMC]. provide must MMC with a Notice Exer- Letter, signed addition, cise of Option Non-Solici- In the Agreement provided that Agreement (Agreement), pay- tation keep Cook would MMC’s confidential in- ment for the stock the discounted strike formation trade secrets confidential *4 after price. during of and his with option employment The term the was ten Marsh. years. option was set to on expire Cook’s 20,
March years Less than three signing after the Agreement exercising and the stock op- 2005, In the February signed Cook tions, resigned from and Cook Marsh im- Agreement stating a notice form and mediately began employment in Dallas he wanted to the stock options exercise with Companies, Dallas Series of Lockton acquire 8000 shares1 of common MMC (Lockton), a competitor LLC direct of price. stock at Agreement the strike resigna- MMC. Within week after Cook’s signed Cook that if left the provided he tion, MMC sent including Cook a letter company years three within after exercis- allegations Agreement he violated the ing the then for a of options, period two through his efforts to Marsh solicit clients years after termination Cook not: would and employees. (a) accept type solicit or business of the against filed suit and Lock- MMC Cook during offered [MMC] [Cook’s] ton for breach of contract breach of [MMC], term of or duty, fiduciary claiming, among other supervise perform perform- or things, that Cook had and accept solicited any ance of services such related to ed from prospects clients and (I) business, type of from for or directly by Marsh who were serviced Cook prospects
clients or or or its [MMC] supervised, directly or where Cook or indi or ser- [Cook] affiliates who solicited rectly, solicitation activities related to directly ... or viced where [Cook] potential or the client client. Cook filed a directly, indirectly, supervised, partial on summary judgment motion for part, whole or in or solicitation ground Agreement constituted activities such servicing related to unenforceable contract because was (II) any for- prospects; clients or or ancillary to or otherwise of an mer client of [MMC] its affiliates Light v. enforceable under Cen (2) years who such within was two Texas, 642, tel Cellular Co. prior to termination of em- (Tex.1994). [Cook’s] granted The trial court ployment and who was solicited or partial summary judg Cook’s motion for directly by claim, serviced where [Cook] or breach of con ment on the contract supervised directly or indi- Agreement [Cook] in the order that cluding rectly, part, in whole or in solici- was as a matter of law. unenforceable servicing tation related and ap activities Marsh non-suited its other claims clients; partial summary judgment. such former pealed [to] splits. 1. The sub- increase in number of shares MMCstock ject option apparently due to Cook’s Provenzale, penter & v. 334 F.3d appeals the court of Co. Relying Light, on (5th Cir.2003) law judgment, (applying hold- Texas the trial court’s 464-65 affirmed stating stock did not that non-solicitation covenants ing that the transfer restraining competition trade and are rise Marsh’s restrain Act); Consulting Marsh USA Inc. v. competing. governed by the Rimkus Cook Cook, (Tex.App.-Dal- Cammarata, Grp., Inc. v. F.R.D. appealed. (S.D.Tex.2008) pet. granted). Marsh (holding las a restraint “nonsolicitation covenant petition Marsh’s granted We and must meet trade enforceability review to address 15.50 of Texas the criteria section de novo at issue. We review en Business and Commerce Code to be statutory appli construction issues (citations omitted)). Agree forceable” undisputed law to facts in cation not to trade secrets and ments disclose summary McIntyre Ra judgments. expressly information are not confidential (Tex.2003); mirez, 741, 745 *5 See, governed by e.g., the Act. CRC-Evans & Ins. v. Provident Accident Co. Life Int’l, Pipeline Myers, v. 927 S.W.2d Inc. 211, (Tex.2003). Knott, 128 S.W.3d 215 259, (Tex.App.-Houston Dist.] 265 [1st writ); Harthcock, 1996, Mfg. Co. v. Zep no II. OF ENFORCEABILITY 654, 1992, (Tex.App.-Dallas 663 NOT THE COVENANT writ); Compass no see v. also Olander TO COMPETE 846, (S.D.Tex. Bank, F.Supp.2d 172 852 generally prohibits Agreement The 2001). parties Agree The concur soliciting accepting from or Cook Act. governed by ment in this case is type by offered and which of MMC Agreement To extent be extends clients, prospec- was involved from Cook yond the non-disclosure Marsh’s trade clients, former or tive and clients MMC information, and we secrets confidential were within the two its affiliates who such enforceability Act. address its under the years prior termination. It also to Cook’s may any that Cook not solicit provides A. Rationale directly who employee reported
MMC Enforcement of Compete Not to Covenants indirectly and to Cook includes nondis- keep requirement closure confidential protects Texas Constitution during trade secrets and after his MMC’s See freedom contract. Tex. Const. with Marsh. I, 16; Stephens art. Ins. Co. v. Fairfield LP, 653, Paving, 663- Martin S.W.3d limits for place Covenants on (Tex.2008); also In re Prudential employees’ professional mobility mer see Am., 124, Ins. 128-29 restrict their solicitation of the former em Co. S.W.3d (Tex.2004). Entering a is a ployers’ employees and are re customers consent; voluntary on and it is a act for governed by straints trade the matter of However, the Corp., parties. Legislature Act. See DeSantis v. Wackenhut 793 both (Tex.1990); 670, may impose 681-82 Miller Pa reasonable restrictions on the S.W.2d Co., Paper v. per public Co. Roberts 901 S.W.2d freedom to contract consistent with 593, 1995, Co., (Tex.App.-Amarillo policy. no See Ins. Fairfield writ) It Texas that non-solicitation cove 664-65. has done so with the (stating 1983, prevent employee soliciting Enterprise nants and Antitrust Act of Free employer effectively customers Tex. Bus. & ch. which includes Com.Code Act, Guy §§ competition); restrict see also Tex. Bus. & Com.Code 15.50-.52. Car Chapter inequity allowing 15 is “to main purpose a former promote competition compete against economic an employer using tain occurring employer’s goodwill and commerce” in Texas. him against trade when the § 15.04. Unreason agreed compete had not to Tex. Bus. Com.Code & employees’ limitations on abilities to able the employer). differently, Stated valid change employers solicit clients or for not to compete covenants ensure that the ie., against co-employees, mer costs incurred to develop capital human legit their former could hinder employers, who, are protected against competitors imate between businesses having expenditures, not made such might id.; mobility employees. of skilled appropriate the employer’s investment. State, Potomac Fire Ins. Co. Lembrick, Greg T. Garden Leave: A Pos 934 (Tex.Civ.App.-Austin writ sible Solution to the Uncertain Enforce 'd) ref a contract two (holding that between ability Restrictive Employment Cove companies compensation insurance to limit nants, 102 Colum. L.Rev. competitors’ not hire their companies (2002) (noting high the employers’ cost of as it was unenforceable was intended to human developing capital, including exten competition”). “crush and destroy On training, sive revelation of confidential in hand, noncompetes other valid constitute key customers); and exposure formation agreed reasonable restraints commerce Blake, Employee see M. Agree Harlan by the effi parties may increase Compete, ments Not to Harv. L.Rev. *6 ciency employ in industry encouraging 625, (1960), 652 cited in Alex Sheshunoff ers to entrust confidential and information Servs., Johnson, Mgmt. L.P. v. 209 S.W.3d important em- relationships key client 644, (Tex.2006) (Jefferson, C.J., 660 con Trim, v. ployees. See Hill Mobile Auto curring). Inc., 168, (Tex.1987) 725 176-77 S.W.2d The House Business and Commerce (Gonzalez, J., dissenting) (citing Restate- purpose Committee echoed this of the Act: § (Second) 188 cmt. c ment of Contracts covenants, It generally held that these (1981)), statute, superseded by Bus. & Tex. circumstances, in appropriate encourage 15.50(a). § Legitimate cove- Com.Code development investment in the nants not to em- incentivize goodwill employee of trade secrets and ployers develop by making contracting training, providing parties significant them less reluctant invest effectively with a means to and efficient- developing goodwill resources in an that risks, ly allocate various allow the freer immediately otherwise could interests, of property transfer and and them in against take use business. circumstances, the provide only certain Posner, generally See Richard A. Econom- remedy protection effective for the of Analysis (2d ed.1977), 3.1 cited of ic Law good trade and [sic]. secrets will Hill, (Gonzalez, J., 725 at 176 S.W.2d Crabb, Commerce, dissenting); v. S.W. on Bill Patterson 51 House Comm. Bus. & 870, dism’d) 946, 871 (Tex.Civ.App.1899, Analysis, Leg., writ Tex. S.B. 71st R.S. (1989).2 (recognizing the under common law the English large public common law benefit of reasoned: is for the they public should be enforced.... [T]he partial Contracts for the restraint trade of advantage security in the upheld, they [a derives are not because are advanta- geous reasonable affords covenant] to the con- individual whom the made, pro tract that the master will not withhold from the and sacrifice tanto rights community, of the but instruction in secrets of because servant his
770 Id. recogniz- recognize unlawful.” Our cases Legislature, presumably conflict, crafted ing interests could these restraints on trade are unlaw such naked prohibit naked restrictions Act See, & Stein e.g., Mann Frankfort ful. mobility impede competition Advisors, Lipp Fielding, Inc. v. 289 employees and allowing employers while Belt 844, (Tex.2009); Justin mobili- restrictions on agree to reasonable (Tex.1973) Yost, 681, v. Co. a valid ty ancillary to or (citations omitted); Tool Oil Weatherford that is having primary purpose contract 310, Campbell, v. Co. 161 Tex. restraining be- competition unrelated (1960). 950, object of both Where & Com. parties.3 tween the Bus. mere parties making such a contract “is 15.05(a), .50(a). so, By doing §§ Code competition, ly restrain enhance objective its Legislature facilitates stated primary maintain there is no prices,” in com- promoting economic relationship justi lawful “to purpose Id. merce. 15.04. fy or excuse the restraint.” United States 15.05(a) In section Business Co., & 271, Addyston Pipe v. Steel 85 F. Code, Legislature included Commerce (6th Cir.1898), 211, 282-83 U.S. aff'd between policy limitation on freedom 96, (1899), cited 20 S.Ct. L.Ed. 136 employers employees to contract: Corp. Sharp Corp., Bus. v. Elecs. Elecs. contract, combination, “Every conspira- 738, cy in restraint trade commerce is U.S. 108 S.Ct. trade, noncompetition communication of his own consensual covenants experience, from fear of limited on trade. Such skill and tile his constitute restraints having protection a rival in busi- restraints "afford a afterwards the same reasonable fair party ness. interests in favour May, given, large & whom and not so as to Malian 11 Mees. W. it is (Ex. 1843). Supreme public.” of P. The Massachusetts interfere with interests of the Graves, (C.P.1831); *7 recognized nearly ago: Bing. Court two centuries Horner 7 743 v. inju- Addyston discouragements Pipe will no also States & Steel [S]mall have see United v. Co., 271, (6th Cir.1898), checking degree in rious effect in some a 85 F. 282-83 aff'd 96, 211, spirit competition. agreement An with a 175 20 44 136 U.S. S.Ct. L.Ed. Carucci, (1899); promisor’s all & tradesman him McClain Co. v. No. 3:10- 1706810, business, terms, cv-00065, upon fair 2011 at *4-5 custom WL 4, (W.D.Va. 2011) encourage May (quoting rival v. a tradesman his Merriman Cover, Leonard, 428, injury, hardly Drayton a re- & 104 Va. 51 can be considered as 817, (1905)); Pasquale Certainly S.E. of trade. it such 819 v. straint is not a Gafnea 1366, Co., (Ala. injurious pub- 454 So.2d restraint as would be to the Food 1368-69 1984); Inc., lic, Hiller, v. 102 proportion discourages Freeman Brown as it one for 749, 76, (2008); Ark.App. 281 encourages S.W.3d 754-55 party it another. 488, Stebbins, 188, 188, Espey, Freudenthal v. 45 Colo. 102 P. v. 20 Mass. Palmer 3 Pick. 280, (1909); Welding (1825). 284 v. Scott Gen. Iron & Valuing "honesty and fideli- 192-93 Co., 132, 111, (1976); A.2d 114 171 Conn. 368 ty” among businesspeople in the consider- 620, 891, covenants, Legg, 160 Hood v. Ga. 128 S.E. Georgia ation restrictive Su- Gavin, 377, (1925); 896-97 Hursen v. 162 Ill. preme explained Court that it would be a 735, (1896); Big 44 735 v. N.E. Hammons uphold “scandal” if law is forced to a Serv., Inc., 313, Sandy Claims 567 S.W.2d denying "dishonest act” as in enforcement of (Ky.Ct.App.1978); Montgomery Getty, 315 v. person contract terms with a "in violation of 313, (Mo.Ct.App.1955); El 317 engagement.” Legg, his solemn Hood v. 160 Johnston, 239, 379, dridge 891, v. 195 Or. 245 P.2d 620, (1925) (inter- Ga. S.E. 128 896-97 Abbott, (1952); 250-51 Turner v. 116 Tenn. omitted). quotation nal 64, 718, (1906); 94 S.W. Kradwell Thiesen, 233, 97, espoused prac- 3. a 234 Numerous courts similar 131 Wis. 111 N.W. (1907). enforcing tical common law rationale for
771
(1988)
J.,
(Stevens,
dissent-
L.Ed.2d
the interest
trade that certain cove-
Co.,
also
ing); see
Potomac Fire Ins.
nants in restraint of trade should be en-
at 934.
for the
This is the basis
S.W.2d
Addyston
Co.,
Pipe
forced.”
& Steel
85 F.
ancillary
requirement
the covenant be
280;
Co.,
at
see also Cline v.
Dairy
Frink
having
valid contract or
to a
transaction
461,
274 U.S.
47 S.Ct.
71 L.Ed.
primary purpose that is unrelated to re-
(1927);
Co.,
Belt
Justin
S.W.2d
straining competition
parties.
between the
rule
685. And the
became well-established
in Texas
reasonable
that,
Legislature
recognized
clauses
contracts pertaining
employ
though may
even
trade to a
restrain
ment are not considered to be
degree,
contrary
limited
valid covenant
public policy as
compete
constituting
facilitates economic
an invalid re
DeSantis,
is not a
straint of
naked restraint
trade.
trade.
793 S.W.2d at
Chenault,
681;
A noncom-
15.04.
S.W.2d
381. Texas
Tex. Bus. & Com.Code
agreement
if
petition
is enforceable
it is
courts have enforced reasonable covenants
time,
scope
geography
reasonable
not to compete dating back at least
and,
matter,
aas
threshold
“if it is ancil-
Patterson,
to Enforceability Crawford, Refocusing Light: Alex Sheshu *8 Services, Management L.P. v. John At gener one time the law common noff son Moves Back to the Basics Cove trade, ally prohibited all Ad restraints on Mary’s Compete, nants Not to 38 St. L.J. Co., 279-80,4 dyston Pipe & Steel at 85 F. (2007). 727, 1973, In 731 we articulated jurisprudence Texas and once held cove the require for the first time common law nants not to compete to be unenforceable by recognized appeals ment courts of in they in because were restraint trade and Texas and other states that a covenant not contrary public policy. v. Chenault Otis (Tex. be Corp., 377, compete “ancillary” must Eng’g 423 another S.W.2d 381-82 contract, Civ.App.-Corpus 1967, relationship. writ transaction or Christi ref'd Jus n.r.e.) (citations omitted). Co., 683-84; 502 “people But and tin Belt S.W.2d at see Co., the courts” came to “it recognize was also Potomac Fire Ins. 18 S.W.2d at Blake, through Employee 4. In thirteenth cen- sixteenth freedom and therefore void. turies, English generally common law re- Agreements Compete, Not to 73 Harv. L.Rev. at garded all restraints in contracts 631-32. departures principle from the economic 772 382; Chenault, Novelty (Second)
934; Restatement of Con- (citing 682 (1981)). Shevrin, 342 Mass. tracts cmt. b Binding v. Bias Co. (1961). 374,
714,
gen
See
175 N.E.2d
pending
was
before
While DeSantis
Keller,
Corp. v.
erally Bond Elec.
Act,
Court,
Legislature passed the
(N.J.Ch.1933).
341,
195, 166
15,
A.
N.J.Eq.
Monopolies, Trusts
adding
Chapter
Trade, of
in Restraint of
Conspiracies
and
v. Mo
opinion
the short-lived
Hill
In
Code.
the Texas Business
Commerce
adopted
the Court
Auto Trim in
bile
23, 1989,
71st
(citing
May
Id. at
Act
precept that cove
common law
the Utah
S.,
1,§
Tex. Gen.
Leg., R.
ch.
unenforceable if
compete
not to
nants
4852).
15.50(a) of the new
Laws
Section
obtaining
employees
they prohibit
provided:
Act
calling”
a “common
jobs
share
of this
Notwithstanding section 15.05
725 S.W.2d at
employment.
their current
code,
subject
any applicable
essentially
noncompete
This
barred
(b), a covenant
provision of Subsection
even reasonable
agreements
protected
if it is
compete
is enforceable
employer.
an
business interests of
en-
ancillary
to or
an otherwise
Servs.,
Mgmt.
L.P.
Alex
the time
agreement
forceable
Sheshunoff
(Tex.
Johnson,
made to
extent
2006)
Ctr.,
(citing
time,
Bill Anal
geo-
Sen. Research
it
limitations as to
contains
(1989)).
area,
activity to
Leg.,
graphical
ysis,
scope
Tex. S.B.
71st
R.S.
be
that are reasonable
restrained
Corp., a cove-
In DeSantis v. Wackenhut
than
impose
do
restraint
held to
unrea-
compete
nant not to
was
be
necessary
protect
the em-
sonable and unenforceable because
promisee.
other business interest of the
had not shown that
needed
ployer
15.50(a).
The Act
& Com.Code
Bus.
afford.
protection
would
appar
reverse
was intended to
the Court’s
case,
inter-
ment
not
considered
[were]
we first
a two-pronged ap-
considered
contrary
public policy
constituting
an proach to determine whether the covenant
Chenault,
restraint of trade.”
invalid
“ancillary
part
is
to or
of’ the otherwise
at
S.W.2d
agreement,
enforceable
requiring that:
two-step
inquiry
In
threshold
(1)
given
consideration
the em-
determine if
covenant
to compete
ployer
in the otherwise enforceable
Act,
is enforceable under
we determine
agreement
employ-
must
rise to the
there
an
whether
“otherwise enforceable
er’s interest in restraining
and,
so,
if
agreement”
parties,
(2)
between the
from
competing;
determine whether the covenant is “an
we
must be
designed
employ-
enforce the
cillary
part
agreement.
to or
of’ that
ee’s
promise
consideration
return
Frankfort,
(quot
Mann
774 at Sheshunoff, 209 653 imposed a the S.W.3d Light state.” protection,” of Org., Analy the (quoting that consider House Research Bill requirement:
stricter
(1989));
employer’s
sis,
to “the
give
Leg.,
ation
rise
R.S.
Tex. S.B.
71st
compet
restraining
the
Marwick,
in
818
at 388.
see
Peat
S.W.2d
(emphasis
at 647
ing.”
Light,
Light which
two instances after
in
In the
added).
condition on
“give rise”
Light's
Act, Light’s
the
interpreted
this Court
enforceability
noncompetes
of
was
the
was not at
issue.
“give rise” standard
law rule
than the common
more restrictive
However,
of
we
from some
retreated
to resurrect. Al
Legislature
the
intended
a
Light’s
precepts.
Light,
Under
other
multiple
though
recognized
we have
(formed
when one
unilateral contract
along with trade
goodwill,
occasions
illusory)
sup
was
not
could
promises
proprie
secrets and other confidential
port
compete
covenant
because
not
information, is a
tary
protectable
“
agree
‘an
enforceable
was not
otherwise
interest,
nar
“give
language
's
Light
rise”
agreement
[was]
ment at
time
protect,
Act would
rowed the interests the
”
n.
S.W.2d
645
6
protecta
Light,
made.’
at
as
excluding much
15.50).
id.; DeSantis,
In
(quoting
interest.
Tex. Bus. & Com.Code
ble business
682;
Services,
Sheshunoff,
Management
at
see also
S.W.2d
Alex Sheshunoff
Olander,
649;
Johnson,
meaning
at
S.W.3d
L.P. v.
we revisited the
&
F.Supp.2d
(noting
at 855
n.
“at
time the
phrase
agreement
of the
protect
con
Light recognized covenants
made,”
that Light was
and determined
otherwise enforce
fidential information as
We
overly restrictive.
Turning to the “give
question,
rise”
subsidiary
to”
employment
rela-
requirement
did not
Legislature
include a
rise to
tionship giving
worthy
the interest
Act
in the
that the
for the
consideration
DeSantis,
of protection.
noncompete
must
rise to the interest
Furthermore,
there is
compelling
no
restraining competition
with the em
logic
Light’s
conclusion that consider-
Instead, the
ployer.
Legislature required
ation for
otherwise
enforceable agree-
a nexus—that
be
noncompete
“ancil
gives
ment
to the
rise
interest in restrain-
“part
to” or
of’
lary
the otherwise enforce
ing the
competing. See
agreement
able
between the parties. (Wain-
Sheshunoff,
S.W.3d at 664-65
15.50(a).
&Bus.
There is
Com.Code
J.,
wright,
concurring). Consideration for
nothing in the statute
that “an
indicating
reasonably
that is
related
“part”
cillary”
anything
should mean
protection,
an
interest
such as
other
than their
common definitions.
secrets,
trade
confidential
information
“[A]ncillary
‘supplementary’
means
nexus;
goodwill,
statutory
satisfies
means ‘one of
several
... units of
”
there
excluding
is no textual basis for
something
which
is composed.’ Sheshu
protection
goodwill
much of
from the
noff,
(Wainwright,
209 S.W.3d at
may
business
that a noncompete
interests
J., concurring) (quoting
Ninth
Webster’s
protect.
requirement
contrary
Light’s
Collegiate
Dictionary
(9th
New
Act;
language
to the
thwarts the
ed.1990)).
Act,
purpose of the
which was
expand
case,
In this
court
the trial
rather
than restrict
enforceability
appeals
court
held that the
covenants;
such
and contradicts the Act’s
ancillary
was not
an other
intent
Texas law on
to return
the enforce-
enforceable agreement
wise
under
ability
noncompete agreements
to the
test. 287
Light
S.W.3d at 381-82. The
Sheshunoff,
prior
common law
to Hill. See
appeals
court
concluded that “the fact
naked
of trade
restraints
Sally
an owner.
options
stock
and became
Act. See Restatement
under the
forceable
Dillenback,
(1981).
the head
Dallas of-
of Marsh’s
§ 187 cmt. b-
(Second)
of Contracts
fice, explained in her uncontested affidavit:
there
law
requirement
The common
valid
The
was
purpose
between the otherwise
Incentive Plan
nexus
pro-
to advance the
and its
the interest
interests MMC
transaction and
by providing a means to
ancillary
stockholders
requirement.
tection bolsters the
attract, retain, and
employees
motivate
DeSantis,
at 681-82. The stat-
affiliates,
including
its
of MMC and
and
of the Act is
“maintain
purpose
ed
Marsh,
mutuality
the
strengthen
and to
in trade and
economic
promote
employees
interest between
and
commerce,”
en-
and it countenances the
MMC’s
The Incentive
stockholders.
not to
forcement of reasonable covenants
that a
designed
Plan was
so
valuable
15.04,
§§
compete. Tex. Bus. & Com.Code
ultimately
could
benefit from
.50(a).
competition and reasonable
Robust
in the
an increase
value of
to compete
covenants not
can co-exist.
whereas,
profits,
and
as an employee
requirements
Adding
stringent
more
options,
without
limited
stock
Cook was
unnecessary to
top of
in the Act is
those
only
provided
any
those benefits
on trade and
prevent naked restraints
employee of the
The
firm.
Incentive
attempt
Legislature’s
would thwart
provides
employees
Plan
select
-with an
enforce reasonable covenants under
stay
Marsh long-term;
incentive
Frankfort,
Act.
Mann
See
namely,
in the
ownership
interest
(Hecht, J., concurring).
This,
turn,
in
company.
gives employ-
ensuring
ees an
com-
interest
Compete
D.
Not to
MMC’s Covenant
pany performs well and that
stock
its
person’s right
“A
to use his
(thereby increasing
rises
value
...
any
own
labor
lawful
their
Incentive
options). The
Plan
rights.”
one of
first
of civil
highest
and
relationships
serves to enhance the
be-
&
Printing
Int'l
Pressmen Assistants’ Un
by help-
tween Marsh and its customers
Smith,
198
ion N. Am.
Tex.
ing the company
highly-motivated
retain
Cooley’s
(1947)
(citing
employees
long-
with an
(3d ed.1906)).
This
which,
company,
term
success
Law of Torts
by
value
sections 15.05 and
turn enhances the
of Marsh.
protected
15.50(a)
compete
Enterprise
provision
of the Texas Free
Agreement pre-
Non-Solicitation
Act of
and is
offended
Antritrust
using
vents employees
good-
by enforcing
not to
covenants
will,
ie.,
15.50(a).
relationship
between
comply
with section
Marsh,
customer,
employee,
15.05, .50(a);
§§
Bus. &
Michael
Com.Code
to attract the customer to a competitor.
Crase, The
Rea
Newman & Shane
Rule of
Drafting Noncompete
son in
Agreements,
Marsh,
managing
Cook was a
director of
.2007,
.-Apr
(discussing
Mar
at 21
Law.,
Dillenback,
affirmed
he was a
Fed.
how noncompete agreements can benefit
successfully
“valuable
had
employee who
employee);
both
employer
gen
see
performed
position
at his
Marsh
III, Note,
erally
Monning,
B. Prater
Em
attracting
and had been successful with
ployee
Not
Compete:
retaining
Covenants
business for Marsh.” She
Doctrine,
Bootstrap
L.J.
further
in the
explained
Justin
28 Sw.
insurance
(1974).
brokerage industry, “long-term, personal
*13
enforceability
The
employee
contact between the
and custom-
of the covenant should
not be
important
similarity
“overly
er
due to
decided on
especially
is
technical dis-
by competitors.
putes”
defining
in
offered
of
whether
covenant
product
the
the
is
acquired through
ancillary
agreement.
the em-
to
advantage
Sheshunojf,
The
an
“Rather,
ployee’s
relationship and contact
S.W.3d at 655.
the statute’s
long-term
part
good-
inquiry
with
is
of MMC’s
core
is whether the
‘con-
customers
covenant
reasons,
time,
will.”
awarded
tains
as to
geographical
For those
he was
limitations
area,
Awarding
activity
to
options.
scope
the stock
Cook
to be restrained
are
options
purchase
impose
stock
to
MMC stock at a
that
reasonable and do not
provided
required
necessary
discounted
the
than
price
pro-
restraint
the
or
statutory
goodwill
nexus between the
tect
other business interest
”
the
protecting
promisee.’
and the
interest
Id.
company’s
(quoting
Tex.
&
Bus.
15.50(a)).
§
goodwill. Exercising
options
its
the
stock
Com.Code
purchase
stock
the re-
triggered
MMC
sought
agreement
Marsh
noncompete.
straints in the
compete
protect
from Cook to
the com
By awarding
options,
Cook stock
Marsh
pany’s goodwill namely, the relationships
—
key employee
linked the interests of a
company
developed
has
its
with
cus
in-
company’s long-term
business
identities,
employees
tomers and
and their
who,
terests. Stockholders are “owners”
performance
due
to Cook’s
as a
beyond
from
employees, benefit
employee.
valued
provides
Act
that
growth
development
company.
“goodwill” is a
protectable interest.
Tex.
Owners’
interests
furthered
foster-
15.50(a);
§
Bus. & Com.Code
see also Mann
ing
goodwill
employer
between the
Frankfort,
(quoting
al court determines
overbroad,
provision is unreasonable
argues
opin
that our
The dissent
authority to reform
the trial court has the
legislative
the
intent.
354
ion thwarts
by injunction
Agreement
the
and enforce
(Green, J., dissenting). Legis
764
S.W.3d
limitations. Tex. Bus. &
with reasonable
lative intent is
from the words
discerned
15.51(c);
340
Campbell,
Com.Code
As
the
language
used.
determined from
if the rela-
S.W.2d at 952. We hold that
statute,
opinion
that the
requires
the
our
tionship between the otherwise enforceable
ancillary
covenant not to
be-
legitimate
and the
interest
agree
of an otherwise enforceable
reasonable,
ing
the covenant is
protected
judicial requirement
ment. The former
that ground.
void on
by
the
em
given
“consideration
the
ployer
agree
the otherwise enforceable
REQUIREMENT
III. TIMING
rise
the
employer’s
ment must
restraining
employee Marsh
also contends
in the
appeals imposed
timing
competing”
a new
is not anchored
text
court of
inter
Act.
at 647.
requirement,
employer’s
Light,
See
We
where
attempt
Legislature’s
ex
est in
cannot
to construe the
restraining
Behrens,
words.
Eric
A
To
employer’s
ist before the
consideration is
Trend
given.
Enforceability:
at 382.
a re ward
Not
Such
Covenants
quirement
ruling Compete
Rela
Employment
is inconsistent with our
in At-Will
tionships Following
Sheshunoff,
employ
Sheshunoff and Mann
In
Sheshunoff.
(Oct.2010)
Franfort,
Tex. B.J.
agreed
provide
er
confidential informa
(stating
interpretations
tion
exchange
employee’s agree
for the
Court’s
15.50(a) “show a
en
keep
ment to
the information confidential
section
trend toward
compete,
forceability
non-compete
clauses that is
covenant not to
however the
legislative
intent
already
had
received confidential
true
behind
Compete
Not to
Act and the
employer.
information from the
Covenants
amendments”).
S.W.3d at 647. We concluded
(citations omitted); DeSantis,
to over-
Legislature passed the Act
v. Mobile
opinion
turn this Court’s
Hill
at 682.
Reinforcing this
House
point,
Trim.
Further, stare
decisis does
Organization
that the
Research
indicated
compel
perpetuating
interpretation of
antipa-
was to reverse the
purpose
Court’s
section
that the entire
15.50
Court agrees
such
House Re-
thy toward
covenants.
cannot be discerned from the text
Org.,
Analysis,
Bill
Tex. S.B.
search
(Green, J.,
statute. See
S.W.3d 764
(1989).
Leg., R.S.
are somewhat
71st
We
dissenting). Construing statutes as writ
antipathy
befuddled
continued
necessary
ten is
to predictability in statu
non-
reliance
consensual and reasonable
tory interpretation and to validating the
as one
competes
encourage
means “to
public’s
in and
trust
reliance on the words
*15
development”
investment in the
of
greater
it
Certainly,
reads
the statute books.
goodwill. Id. The
frowns
business
dissent
of
doctrine
stare decisis is essential to
noncompetes
reasonably related
law,
stability
which is the reason
goodwill that are not tied
specifically
departures
Here,
from it are rare.
secrets,
trade
confidential information or
doctrine has little force as we have ques
(Green,
training.
special
will. views such hav- ground of erroneous decision importance of goodwill, issue ing previously been rendered. expressly pro- has been resolved. The Act (Tex.2008) (internal goodwill vides that is an omitted, quotation marks protection, and the before alterations common law agreed. original). brethren have Our reasoned Bus. & Com.Code 15.50(a); Frankfort, compel Mann 289 S.W.3d that stare decisis does not them to 858; past 649 follow a decision when its rationale Sheshunoff WILLETT, in the analysis.” concurring Justice “careful not withstand does judgment only. Gant, Arizona v. U.S. 129 S.Ct. (citation (2009)
1710, 1722, 173 L.Ed.2d take agree I the trial court should first omitted). agreed twice before today’s non- assessing Court crack at whether “contains limitations competition covenant compels a modifica analysis careful time, area, scope of geographical as to 15.50, our section tion of construction activity are reasonable and do not modify Light here it is appropriate restraint is neces- impose than as well. sary.”1 inquiry essentially, That “Are — too restrictive?” —received the restrictions V. CONCLUSION below, rec- rendering the scant attention ease, In this the covenant not underdeveloped. before us affida- ord “ancillary (Marsh) of’ an otherwise to or as- by Marsh vit submitted USA the busi- aimed plan because that the stock-incentive enforceable serts goodwill by giving a stake in boost Cook being protected (goodwill) ness interest long-term Growing Marsh’s success.2 reasonably to the consideration related good, is all well and but affi- (stock 15.50 re- given options). Section *16 noncompete then this: says davit The that there be a nexus between quires good- from “prevents employees using that not the interest to to to a will attract customer com- being protected. Bus. & Com.Code surface, just On the this seems petitor.” 15.50(a). requirement This is satisfied way saying noncompete’s another We relationship that exists here. competition, per- is to stifle but purpose ap- court of judgment reverse paint a fuller on haps record remand will court for peals and remand to trial protectionist picture. less with this proceedings further consistent remand, sepa- I agree So to but I write opinion. rately admittedly obvi- underscore point: mobil- ous Restrictions opinion Justice WILLETT delivered an only squelch competition ity that exist concurring judgment. Texas, good se for per illegal are dynamism reason. in the 21st Economic dissenting Justice GREEN delivered century requires speed, knowledge, and in which Justice opinion, Chief imperatives that must inform innovation — JEFFERSON and Justice LEHRMANN judicial review of efforts sideline skilled critically must joined. talent.3 Courts examine ally harm innovation rather than foster it 15.50(a). Tex. Bus. & 1. Com.Code they irrationally impede job-hopping. when Though styled Agree- a “Non-Solicitation See, Bishara, e.g., D. Covenants Not Norman ment,” operates as a Compete KnowledgeEconomy: in a Balanc- noncompetition agreement. kitchen-sink Be- ing Mobility Employee Innovation From stating may not sides Cook "solicit” business Capital Against Legal Protection Human for prospects, says it also Marsh's clients Investment, J. Berkeley Emp. L. & Lab. may "perform,” "accept,” or "su- Cook "Bishara, (2006) 306-07 Cove- [hereinafter involving pervise” them. Knowledge Compete nants Not in a Econo- "]; Gilson, my Legal Ronald J. employee mo- efficacy 3. The of restrictions on Infrastruc- High Technology ture Industrial Districts: among bility spirited is a matter of debate economists, Valley, Silicon Route and Covenants Not A lawyers, legal scholars. Compete, N.Y.U. growing body scholarship contends of nascent L.Rev. (1999); James noncompete agreements actu- Charles Tait Graves and A. that overbroad California) light noncompetes notably, of our contemporary, champion freedom of knowledge-based economy that in- prizes competition virtually and void all noncom- genuity and talent. much intellectual This courts, most, petes; Texas like enforce is clear: cannot countenance cove- Courts necessary protect “reasonable” ones le- nants contemptuous competition. too gitimate interests.7 This multiplicity of across
standards states —dubbed “fifty ways your to leave employer”8 for —makes increasing fluidity, Amid labor there is unsteady legal landscape, particularly no shortage pro- surrounding debate far-flung employers operate priety enforcing restrictive covenants throughout the country. skills, ideas, tie up knowledge, case, it, Today’s like before many in- expertise. fault line runs between volves a familiar tension company between first ver- principles contract —freedom employee, both self-protec- intent on sus freedom of judicial —and tion. protect, The interest Marsh aims to been, well, noncompetes treatment of has though, is less familiar. Marsh does jurisdictions eclectic.4 Some free- favor argue that was (enforcing noncompete dom of needed contract it) here protect costly because employee signed spe- and fret investments training little about cialized company’s whether to ensure its trade (most is legitimate;5 jurisdictions other other secrets or confidential information9 DiBoise, unconscionable.”) illegal Do Strict Trade Secret and Non-Com- neither nor Innovation?, (footnote omitted). petition Laws Obstruct Entre- preneurial (2006) Bus. L.J. [hereinaf- *17 DiBoise, ter "Graves and Strict Trade Secret & Viva R. Mof 6. 16600; Cal. Bus. Prof.Code ”]; Hyde, and Non-Competition fat, Laws Alan Wrong Tool IP The the Job: The Prob Regulation Enforced?, Noncompetes Should Be Noncompetition Agreements, lem With 52 Wm. (Cato Inst.), Hyde, 2010-11, 6; 873, Winter at Alan 877 n. 5 Mary [hereinaf (2010) & L.Rev. "Moffat, The Wealth Silicon Shared Wrong ter The Tool ”]. Information: Market, Valley's High-Velocity Endoge- Labor Growth, nous and the Trade Economic Law Moffat, Tool, Wrong 7. at 880. 1998), http://andromeda.rutgers. (Sept. Secrets edu/~hyde/WEALTH.htm. Bishara, Compete 8. Covenants Not to in a Economy, Knowledge at 317. 4. persists As noted in a half- 1960—and century precedent later —court "has reflected noncompete prohibit fact that The mere technology the evolution industrial disclosing ed Cook from trade secrets or con methods, business as well as the flow ebb and proprietary fidential information is imma contract, of such as social values freedom of anything given terial absence of freedom, personal eth- economic showing that received record Cook ever such ics. But the which fundamental interests Resp. information. Plaintiffs’ to Defen basically come have into conflict not ("Cook’s dant’s Summ. J. at reliance Mot. Blake, changed.” Agree- Employee M. Harlan particularly misplaced. is Sheshunoff Compete, ments Not To 73 Harv. L.Rev. information, involved confidential Sheshunoff "Blake, Employee (1960) [hereinafter 626-27 stock.”) (citation omitted); not Pet. Br. at 11 Agreements"]. ("[C]onfidential was n. 10 information not at issue.”); Long, Employer Argument Protecting Transcript 5. See Brandon S. of Oral Cook, Training: Noncompetes Investment in Re- Inc. vs. Marsh USA v. (2011) (No. 09-0558) ("This payment Agreements, a Duke LJ. not a confi is 1302- instance, (2005) ("For case....”). some have As we ex courts dential information Servs., sup- plained found principles Mgmt. that freedom contract in Alex L.P. Sheshunoff employer Johnson, port enforcing point all contracts made must some between competent parties, long agreement, provide so as those contracts consideration for the such exception One obvious is Covenants Marsh up wind on WikiLeaks.10
do not Act,14 permits which a goodwill, Compete and Not to safeguarding its speaks of clause, only “to extent utter- but interest. But protectable ais time, geo- mag- not it contains limitations as goodwill enough; ing the word auto-enforceability. area, activity to be graphical scope not boast ic words do that are reasonable and do it is restrained Marsh must demonstrate no- a than is neces- impose a less restraint goodwill camouflage invoking sary protect goodwill or other busi- competition future escaping ble interest: promisee.”15 This ex- ness interest from Cook.11 exception ception just that —an —with examination, begins its As trial court favoring competition. the rule robust points: I two add these As for who whether limitations First, protectable decides while (1) reasonable, (2) are more severe interest, too far to protectionism going— (8) necessary, legiti- ver- relate to a may than protect protectable what —is interest, Not probe must noncom- mate business the Covenants boten. Texas courts Compete expressly duty Act vests that pro-free-market in that pete covenants Judges must divine when Enterprise Free and Antitrust with courts.16 spirit. The policy competition competition of Texas: becomes public Act declares unfair combination, contract, conspira- and when a restraint an unrea- becomes “Every re- unnecessarily or commerce is sonable or restrictive cy restraint of trade sure, paramount pur- straint. To be the standard has Act’s unlawful.”12 eye-of-the-beholder flavor—a promote to maintain and economic certain pose “is vagueness inexorably produces trade and commerce compe- case-by-case unpredictability that haunts the benefits provide this area of law.17 tition to consumers in state.”13 information, bottom, rewards, will.” these like order for At none of confidential "merely money promising pay to be a sum enforceable. (Tex.2006). purchase employee,” can be used *18 noncompete only purpose whose is to elimi- Light 10. v. Co. Tex. dem As Centel Cellular Sheshunoff, competition. nate 209 S.W.3d at onstrates, however, alleged these inter even reason, legitimate 650. some other Absent automatically not render the cove ests would a on is such restraint trade unenforceable. 642, (Tex. nant valid. See S.W.2d 883 1994) (holding to com invalid a covenant not 15.05(a). § Bus. & Com.Code 12. training, specialized pete pertained to though proprietary infor even confidential § Id. 15.04. 13. involved). mation was 15.50(a) ("Notwithstanding § 14. See id. Sec- significance no fact that 11. There is tion 15.05 of this code ... a covenant not to paid options cove- Cook was for the stock enforceable...."). compete is compete. goal re- nant Where the is stricting competition, payment the manner of added). (emphasis Id. 15. options permit If such a irrelevant. stock because, states, they the affidavit as Id. align 15.50-.51. §§ employee with 16. the interests of the "the which, long-term company, success sense, inquiry goodwill employer, a turn enhances the of” the In "reasonableness” 17. raise, oversight long any job reward well resembles the exercised then for a done—a bonus, applying promotion, pension justify the rule of under a courts when reason —could noncompete grounds aligns employ- anal- antitrust laws. While "reasonableness” "good- ysis er/employee of rea- interests and thus bolsters cases "rule
783 “reasonableness,” Alongside the statute whether the latter simply blended into requires Many that the former. implicitly “not im- courts sub- sume everything under an greater pose overarching restraint than is neces- reasonableness,20 banner of while others sary.” have never squarely We ad- treat them separate prongs.21 Either dressed whether the Act envisions two way, it is not an issue we reach today. (1) separate inquiries: that the time/geog- “reasonable,” raphy/scope limitations be So while Texas law allows limited non- (2) and also the restraint not reach competes, it does not protectionism allow beyond trump that which is “necessary” pro- individual or societal interests in dynamic company’s protectable marketplace. tect interests. And even assum- ing a company trying guard suggests The latter more a bona exacting scrutiny interest, fide business Texas than courts must mere “reasonableness.” sep- The Act strike down restrictions that are unreason- arates the latter from the former with the able or more severe than necessary. “and,” conjunction suggesting separate- ness, pre-1993 while the version of the Act The underpinnings principle of this long fused the explicitly.19 two None of our (or America) predate Texas and draw from cases declare whether “reasonable” and the recognition that bustling markets best “necessary” are two separate inquiries or spur and ingenuity.22 reward The Lone analysis (amended son” 1993) antitrust cases are not identi- 1989 Tex. Gen. Laws 4852 cal, inquiries (current both envision a front-and-center version at Tex Bus. & Com.Code judicial scrutinizing agreements 15.50(a)) role in added). § (emphasis The current competition. curb reads, version "contains limitations as to time, area, geographical scope activity analysis Rule of reason under antitrust to be restrained are reasonable and do laws must not be confused with reasonable- impose restraint than is neces- analysis ness under the common law. Rule sary protect or other business analysis of reason tests the effect of a re- promisee.” interest of the Tex Bus. & Com. competition. By straint of trade on trast, con- 15.50(a); 29, 1993, May Act of 73d Code noncompetition agreement whether a 965, 1, Leg., ch. 1993 Tex. Gen. Laws 4201 depends upon is reasonable its effect on the added). (emphasis parties, competitors, as it were. The directly two standards are not related. See, Harthcock, e.g., Zep Mfg. 20. Co. v. Corp.,
DeSantis Wackenhut
S.W.2d
(Tex.
1990).
(Tex.App.-Dallas
portion
While this
of our
no
writ).
analysis
upon
draws
the instant contract’s
competition,
effect on
analysis
stems
from an initial consideration of the
See,
contract’s
Advisors,
e.g.,
Express
Am.
Fin.
Inc. v.
parties,
effect on the
who are—at bottom— Scott,
(N.D.Tex.1996).
F.Supp.
*19
competitive
actors in a broader
scheme. This
slight distinction demonstrates that while the
22. Adam's Smith ode to laissez-faire econom-
related,
may
directly
two standards
not be
ics,
Nations,
The Wealth
remains
of
of
practice they
indirectly
are
related.
study today:
It
sovereign
is the interest of
[the]
...
to
15.05(a).
Tex. Bus. & Com.Code
open
pro-
the most extensive market for the
country,
duce of
per-
his
to allow the
version,
most
pre-1993
19. Under the
noncompete
a
commerce,
fect freedom of
in order to in-
was enforceable to the extent it "contains
time,
possible
crease as much as
the number and
reasonable
geographi-
limitations as to
area,
buyers;
upon
of
scope
activity
cal
and
and
this
of
to be restrained
abolish,
impose greater
only monopolies,
that do not
a
account to
not
all
restraint than is
necessary
protect
goodwill
upon
transportation
but all
or other
restraints
of
promisee.”
produce
business interest of the
Act of
home
from one
23, 1989,
R.S.,
May
Leg.,
country
71st
ch.
to another.... He is in this manner
can be
interests that
dynamism.
legitimate
economic
business
State lauds
Star
a restrictive covenant.
prof-
protected through
for a
it
natural
perhaps
And while
col-
to bend toward
company
it-maximizing
is a
point,
“goodwill”
to the
while
More
restriction,23 Texas
monopolistic
lusive
Act,
fide
interest under
bona
im-
noncompetitive
to such
law is hostile
merely
mutter
enough
it is not
be doubted that some
Nor can it
pulses.
simply buy
You
a covenant
word.
cannot
field via
playing
tilt
companies try to
a
compete.
uphold
A court cannot
covenants,
fa-
even
noncompete
dubious
a
grounds absent
noncompete
goodwill
ones,
knowing
cially unenforceable
the limitations
record
demonstrates
action will
specter of enforcement
even the
are reasonable and as nonburdensome
(and
em-
potential
their
employees
chill
Every company has customer
possible.
capitulation.24
preemptive
into
ployers)
relationships
goodwill
attendant
employ-
foundation,
by incentivizing
broad
to cultivate
courts’
wants
Given
firm
stay,
merely asserting goodwill
scrutinizing noncompetes,
ees
but
discretion
Marsh contends “Cook
clearly
opposition
enough.
is not
Legislature’s
stated
relationships
unduly
competi-
take the customer
restrain
could
to contracts that
tion,
noncom-
as a result of the stock incentive
grown
I
that a
would underscore
Marsh,”25
per
alone is
and use them to
with
pete
protectionism
rooted in
insuffi-
Not
but
that unadorned assertion is
invalid under the Covenants
se
assuming
Act’s
And
the incentive
surely offends the
cient.
even
Compete Act and
grow
Marsh’s
spurred
Texans the benefits
Cook
purpose
giving
(which
slippery
fierce
fair.
me as a curious and
yet
strikes
competition that
much,
prove
not a
too
lest
proposition),
for its own sake is
does
Restraint
trade
bonus,
raise, a
any workplace
Sec-
benefit—a
a
interest” under
protectable “business
15.50,
parking
a
promotion,
space
more than violations
better
any
tion
—suffice
hour,
justify
because it theoret-
safety laws
wage,
quantity
40 and
text. Some
likely
increase both the
24. See
note
related
most
infra
legal
mar-
consequent-
are unsubtle in their
produce,
value
commentators
of that
it,
agree-
objections to
ket-based
non-solicitation
ly of his
or of his own
own share
specifically:
ments
revenue.
Book II
Smith,
Of
customers,
Adam
The Wealth
Nations:
toAs
the non-solicitation of
(P.F.
1902) (1776).
& Son
Collier
monopolistic
covenants are
and over-
such
Similarly,
result
effect that would
the domino
reaching.
pre-
What if the
would
customer
permitting
to remain
from
such restraints
employ-
with the
fer to do business
former
("[A
See id. at 371
cannot
understated.
ee,
competing price quote,
least seek
hinders,
times,
only
monopoly]
at all
employ-
but does not know that
former
maintaining
capital
great
quantity
so
from
resigned
ee has
and started a new business?
productive
as it
otherwise
labor
would
Something
consenting
when
busi-
is amiss
maintain,
increasing
hinders it
so
but it
from
together,
nesses cannot transact business
increase,
con-
fast as it
otherwise
would
merely
got there
because another business
sequently
maintaining
a still
non-competition
As
covenants
first.
labor.”).
quantity
productive
generally,
appear
contracts
to restrict
such
*20
might
competitive
lower
activities that
("Their
id.
mercantile habits
23.See
provide
prices,
for custom-
better services
manner,
nec-
draw
in this
almost
[merchants]
ers,
togeth-
partner
and allow businesses to
essarily, though perhaps insensibly,
prefer
might
productive.
er where that
be most
ordinary
and
upon all
occasions the little
DiBoise,
and
Strict
and
Graves
Trade Secret
transitory profit
great
monopolist to the
of the
Laws,
Non-Competition
at 334.
permanent
revenue of
the sover-
and
Br.
eign....”).
25. Pet.
at 31.
an
ically
strengthen
motivates
[Fourteenth] Amendment
to secure.”27
relationships?
evidentiary
client
rec- The Court made a similar point around
special
ord must demonstrate
circum-
time in
arising
a case
from Texas:
beyond
ordinary
the bruises of
stances
In so far
a man
deprived
as
is
of the
that,
covenant,
competition such
absent
labor,
right
restricted,
liberty
his
is
unfair
possess
grossly
Cook would
com-
capacity
his
earn wages
acquire
and
petitive advantage.
then the
And even
property
lessened,
is
is
and he
denied
imposed
light
restrictions
must be as
protection
which the law affords
possible
mobility
and not restrict Cook’s
those
permitted
who are
to work. Lib-
legitimate
an extent
than
Marsh’s
erty
more than
means
freedom from
need.
servitude,
guaran-
and
constitutional
Second,
of trade
naked restraints
are
ty is an assurance that the citizen shall
because,
particularly onerous
besides sti-
be protected in the right
to use his
fling
they
competition,
beneficial
also med-
powers
body
any
of mind and
lawful
dle
people’s right
to earn
honest
calling.28
years
we
living. Sixty-five
ago,
declared
Such
right
eloquence
spanned
labor in
has
any
use one’s “own
centuries.
Aquinas
Saint
lawful
the first
Thomas
the con
employment
one of
addressed
highest
nection
work
rights.”26
right
of civil
between
itself:
existence
pursue a
occupation
“[I]t
chosen
career
is natural to a man to love his own
cherished,
(thus
path
highly
but
indeed
it is work
it
to be
that poets
observed
many
also highly
people,
vulnerable. For
love their own poems); and the reason is
inextricably
live,
their
livelihood
tied to a
that we love to be and to
and these
pursuit
happiness,
losing
certain
especially
made manifest
in our act
liberty
regard-
Emerson,
never
lightly
Ralph
typically
should
ion.”29
Waldo
Fittingly,
recognized
ed.
courts have
high prize
called it “the
transcendentalism
life,
right
dimension,
crowning
to work
constitutional
fortune
man ...
of a
pursuit,
least
cases where state action was
to be born with a bias to some
alleged. Nearly a
century ago,
United which finds him in
happi
ness,
baskets,
States Supreme
explained
Court
that “the
it be to make
or
—whether
broadswords,
canals,
statues,
right to work for a
in the
living
common
utilitarian,
occupations
community
songs.”30
of the
is of the
Voltaire took the
al
very
narrow,
personal
keeps
essence
freedom and
off
“[O]ur
beit
view:
labour
said,
evils,”
opportunity
purpose
that was the
from us three
“idle-
great
he
Printing
pursuing
26.
Int'l
liberty
Pressmen & Assistants’ Union
tected
interest in
a chosen
Smith,
399,
(citations omitted).
occupation.”)
N. Am. v.
145 Tex.
729,
(Brewster, J.,
(1946)
dissenting).
Texas,
630, 636, 34
28. Smith v.
233 U.S.
S.Ct.
681, 58
1129 (1914).
Raich,
41,
7,
33,
L.Ed.
27. Truax v.
239 U.S.
36 S.Ct.
(citations
(1915)
omitted).
capital spillover to find its and best use accrues from technological It augment mobility. job thus economic and remains the of courts to especially be for growth.40 vigilant practices This seems notable that tend to servil- technological today’s dizzying ity, deprive era public that desired ser- vices, change, quash when lifetime tenure is and that via implicit rivals forced re- job-hopping obsolete is ordi- striction rather than frequent competition.42 and forceful (unless nary has been forced to someone * * * her
sign away right compete).41 his or costless, recognize Restrictive covenants are not I that a market free is not mutually acceptable innately utopian, and even a noncom- with edges frictionless impose deadweight can a loss on that never “If pete sanding. need men were society. angels, government Courts should con- no broader would be neces- noncompete’s impact employ- sary,”43 fuse a on the much less antitrust laws to curb A impact competition. monopolistic impulses. law, ee with its on re- Under Texas may agreeable straint both perfectly dutifully be we must enforce noncompetes today harm to- parties impose but still consumers reasonable limitations that are Moreover, economy as our be- no necessary morrow. more restrictive than in or- comes even technologically legitimate more advanced der to advance business inter- knowledge-based (key duty and contributors ests. But this requires circumspec- market), tion, high-velocity a so-called labor lest the Compete “Covenants Not to overreaching up exception restrictions lock human Act” swallow the “Free Enter- capital knowl- prise and decelerate beneficial and Antitrust Act” rule. The latter Estlund, Cynthia Noncompetes Rights struggling 40. See L. Between and also shelter com- Agreements Contract: Non- Arbitration and panies facing are of recession headwinds Compete Hybrid Covenants as Form Em industry employee or turmoil. An at-will 379, Law, ployment 155 U. Pa. L.Rev. might company dire times ahead for the see (2006) (“An non-compete overbroad —one but is unable to find new if the long or that lasts too covers activities prospect litigation spooks employee employer’s legitimate do not in threaten the result, potential employer. new "As a quit may employee deter from terests — may opportunities lose individual advance ting competing right and even when she has compensation, her and and the career em- so, may competitor to do deter a from ployer may be able to insulate itself at least hiring employee.”). effect in terrorem temporarily more vi- Texas, magnified jurisdictions like where enterprises productive employees.” brant for judges simply pencil” overbroad non- "blue O'Neill, Stay “Should I I Kate Should competes them to make enforceable. Compete Go?"—Covenants Not to in a Down 15.51(c); e.g., Bus. & Action Prod. Com.Code Proposal Advocacy Economy: A Better Int’l, Mero, F.Supp.2d Inc. v. Hastings Opinions, Better Judicial Bus. L.J. (S.D.Ind.2003) ("A may current be (Winter 2010). job by unreasonably frozen in his or her broad Even covenant. if the be broad, mobility espe- may 42. Burdens inter-firm lieves the covenant is too she through proposition only cially fast-paced able to ex in a test that acute tumultuous pensive risky litigation.”); Richard P. 21st-century economy. mobility Greater Int’l, Kot, would, curb, Rita Pers. Servs. Inc. v. 229 Ga. suspects, pace spur, not one (1972) ("If 191 S.E.2d severance is high-tech advances and the dissemination generally employers truly applied, can fashion knowledge. ideas they ominous covenants confidence pared will be down enforced when Madison). (James 43. The Federalist No. 51 particular facts of a case are not unreason able.”). *23 directly is at odds 780. This decision virtues of economic liber- with the sides holding Light v. you what with our in Centel Cellu right pursue to ty basic —the (Tex.1994), choose, Co., which choose, among lar you 883 S.W.2d where unduly the vice of an you required employer’s choose—not that consideration whom people compete the rewards their must denying skilled for a covenant not to society injuring by de- in trade. restraining earned success rise to an interest tal- public say of someone’s it is priving the wider Yet refuses to that the Court while free enter- enterprise. So I Light. agree ents overruling While actually prise recognizes demands, worthy goodwill protec is an interest —that — pursue doggedly will self- economic actors to Act Compete tion—the Covenants Not interest, recognizes law noncompete Texas refers as expressly goodwill protecta- to between constructive self- the difference enforceability of this ble interest1 —the destructive selfishness. interest hinge upon does that deter covenant masquer- of trade a naked restraint Where hinges upon It consideration— mination. compete, as not to we ades a covenant options employ given whether stock an always. must strike it justify ee a restraint of trade. The can down— nothing options, Act about stock mentions Summing up: Post-employment restric- and equating options stock and, such, on trade tions restraints any in by a rule financial creates which particular- legal scrutiny, rigorous deserve given employee justify centive to an could today’s pace warp-speed eco- ly given to compete. prior a covenant not Our law change. Noncompetes nomic tailored since, applied has the rule Light, their protectable business interests have compete must be covenants not they place, spar- lawful but should be used ancillary exchange to an of valuable con narrowly. employ- And ingly and drafted justifies sideration that or necessitates special facts that ers must demonstrate See, e.g., restraint of trade. Mann Frank agreement. legitimize Advisors, Lipp& v. Field Stein Inc. competition for its own is Squelching sake fort (hold (Tex.2009) ing, unworthy protection. an Com- interest ing by given that unless the consideration employee may a former well petition by an gives rise to employer employer, companies rile an but do not to, contract, restraining and the covenant an have free rein indenture employee’s “to con designed enforce everyday competition dampen promise^] sideration return Texas and Texans. benefits is a restraint of trade and naked GREEN, joined by Chief Justice Justice unenforceable”); Yost, Belt Co. v. Justin LEHRMANN, and Justice JEFFERSON (Tex.1973) (holding dissenting. “ancillary of trade must be a restraint contract”). today support of another decides a non- Court re today’s an decision nullifies that solicitation extracted from Because exchange quirement, stock and favors the enforcement options finan solely can be because the em covenants not based on enforceable cial we’ve purportedly (something repeatedly which bene incentives ployer’s goodwill, unacceptable), respectfully in held I dis gift options, fits from the stock an protection. terest sent. 15.50(a) "goodwill (referring inter- protect
1. Tex.
&Com.Code
or other business
Bus.
est[s]”).
one that is
enforceable covenant as
created
today
previous
be designed
abandons our
must
to enforce
employ-
Court
“ancillary
to or
of’
application of the
ee’s consideration or return
promise
*24
in
requirement codified
Texas Business
agreement.”
otherwise enforceable
883
15.50(a)
§
and
Code
and in
Commerce
added).
(emphasis
S.W.2d at 647
The
phrase
“reasonably
stead defines the
today
“Light
Court
holds that
diverged
related to.”
must
15.50(a)
prong
§of
to ensure that cove-
tion,
Light,
and in
we held
DeSantis
nants which are “unreasonable” will not be
transaction itself needs to create
express
enforced. Under the
language of
protection
an interest
and in
statute,
only
prong
the first
con-
—the
trade,
restraining
or else
sideration
prong
whether
—determines
an unenforceable naked restraint of trade.
enforceable,
covenants are
while reason-
647; DeSantis,
Light,
883 S.W.2d at
only
ableness defines
the extent to which
(referring
“unreason-
they are enforceable. Tex. Bus. & Com.
able” restraints
as those
15.51(c)
15.50(a),
§§
Code
(stating that
“part
subsidiary
are not
to an
the covenant
found to
“[i]f
be ancillary
or relationship
otherwise valid transaction
*26
to
part
or
of an otherwise enforceable
gives
worthy
which
rise to an interest
of
agreement
... but contains limitations ...
To
protection”).
argue
Cook created
that are not
impose
reasonable
for
he
goodwill Marsh that
would not have
greater
restraint
is necessary,”
than
then
absent
options
only
created
stock
is not
covenant”).
the court “shall reform the
incapable
being
of
but blurs
proven,
Therefore,
the only
by
method
which a
issue. The
is that
true
true issue
Texas
is
have
unenforceable as a matter
again
courts
stated time and
that an
of
law is when
employer
buy
ancillary
part
cannot
a covenant not
to
it is not
to or
of
compete,
an
and the
decision allows
agreement.
Court’s
otherwise enforceable
De-
protect good-
fy
to
of
is enforceable
the sort of
of trade
restraint
that Texas law
inwill
the context
sale of a
prohibits.”);
Software,
of the
Trilogy
Inc. v. Callidus
post-employment
context of
restric-
Inc.,
452,
(Tex.
Software,
S.W.3d
143
463
15.50,
applies
§
tion
unaddressed
which
denied)
2004,
(“[F]inancial
App.-Austin
pet.
both
to
contexts. But
Hill v. Mobile
see
Auto
give
worthy
benefits do not
rise to an ‘interest
Trim, Inc.,
168,
(Tex.1987)
177
protection’ by
of
the covenant not to com
(Gonzalez, J., dissenting) (noting that Texas
Medtronic, Inc.,
pete.”);
v.
Strickland
97
compete
courts "scrutinize covenants not to
835,
2003,
(Tex.App.-Dallas
pet.
S.W.3d
839
relationships
closely
more
w.o.j) (holding
employer’s
dism’d
than covenants not
to
associated
promise
compensate
"in the
business”). Regardless,
with the sale of a
an
hardship resulting
event of economic
from the
employer’s
assertion of
as the inter-
non-compete agreement”
give
did not
rise to
being protected
inquiry,
end
est
does not
also,
protection);
an
interest
of
see
prong
even under the consideration
of the
Res.,
e.g.,
Weekley-Cess
Global
Inc. v.
Oxford
protects
good-
employer
statute. How that
its
nun,
3:04-CV-0330,
No. Civ.A.
2005 WL
will,
gives
and what it
its
in ex-
350580,
8,
(N.D.Tex.
2005) (mem.
*4 n. 8
Feb.
change
compete,
for a
covenant not
are
(”[S]tock
op.)
options
do not
rise to an
Here,
giv-
what matters.
Marsh's reasons for
employer’s
restraining competition
interest in
irrelevant;
ing
options
options
stock
stock
solicitation.”);
Compass
or
Olander v.
Bank &
justify
do not
a restraint
trade.
Bancshares, Inc.,
Compass
F.Supp.2d
172
See, e.g., Sheshunoff,
792 “ancillary ing meaning phrase rea- of the defining dicta of
spite the
Sheshunoff
application
of’
part
in that
since our
inquiry
core
as the
sonableness
26, 1999,
76th
Light.
May
Act
case,
prong
phrase
remains
the consideration
R.S.,
1574,
1,
Act,
1999 Tex. Gen.
Leg.,
ch.
inquiry
crucial
under
equally
(b)
5408,
(adding
by Laws
subsection
meaningless
rendered
application
its
new,
concerning physicians and covenants
to concoct a
decision
the Court’s
22, 2001,
Leg.,
77th
“ancillary
compete);
May
of’ as
Act of
part
broad definition
14.729,
R.S.,
1420, §
ch.
2001 Tex. Gen.
“reasonably
to.”
related
4210,
(amending
Laws
subsection
al
Legislature has not clarified or
26, 2009,
R.S.,
(b));
May
Leg.,
Act of
81st
“ancillary”
the term
meaning
tered
ch.
Gen. Laws
seven
Light
the Court defined
since
(b)).
(amending
subsection
ago.
applies
Stare decisis
years
teen
“firmly
statutory
statutory
this
established
force to
construction
Under
rule,”
presume
we
very
Sw. Bell Tel. Co.
construction
must
reason.
(Tex.2008)
Mitchell,
Legislature
adopted
previous
has
our
defi
(“
construction,
statutory
“ancillary
part
to or
under the
nition
of’
area of
‘[I]n
Inc.,
Excavation,
great
Grapevine
Act. See
doctrine of stare decisis has its
concocting
at 5.
Legislature
By
can rec S.W.3d
instead
more
est force’ because
mistake,
“ancillary
to or
Legisla
expansive
and if the
definition
tify a court’s
*27
so,
dictio
there
little reason
of’ based on Black’s and Webster’s
ture does not do
naries,
ignores
its
the
will of
the
whether
Court
the
the
for
court
to reconsider
prin
v.
the well
(quoting
Legislature
was
Marmon
established
decision
correct.”
Inc.,
182,
Aviation,
ciples
generally
of stare decisis. See
Sw.
Mustang
430 S.W.2d
(“General
(Tex.1968))).
Co.,
intent
Tel.
at 447
Legislative
If
Bell
276 S.W.3d
186
the doctrine of stare decisis dictates
by
Light,
ly,
were
our decision in
thwarted
claims,
Supreme
could
once the
Court announces a
Legislature
the
that
Court
law,
“ancillary to
is consid
meaning
proposition
clarified
decision
have
its
(internal quota
past
binding precedent.”
ered
point during
of’ at some
Excavation,
omitted)); Grapevine
years.7
firmly
“It is
estab
tion
seventeen
Inc.,
Despite
once
35
at 5.
the Court’s
statutory
lished
construction rule that
S.W.3d
disap
consistently
and the
assertion that we have
appellate courts construe
statute
holding
in
our
Legislature
proved
Light,
or codifies that stat
cases
re-enacts
compete
Light
change,
pre
ute without
we
on covenants not
since
substantial
merely
Light’s holding
have
liberalized
so
Legislature
adopted
sume
has
given
Grapevine
timing
Exca
of consideration
judicial interpretation.”
vation,
1,
compete
longer
5 a covenant
is no
Lloyds,
Inc. v. Md.
35 S.W.3d
(“Stare
(Tex.2000)
Frankfort,
greatest
technical concern. See Mann
decisis has its
cases.”).
prom
that a
statutory
(holding
in
construction
at
mat
given
actually
has never
the em-
giving
was
without
consideration
centives
Trade
given.
was
so much as what
tered
gives
to an inter-
anything that
rise
ployee
information,
secrets,
spe
confidential
restraining
policy
trade
bad
for
est in
training are all forms of consideration
cial
Texas,
and will make covenants
to
recognized may give rise
we have
in in-
compete
commonplace
much more
trade.
See
restraining
an
there is
risk of unfair
stances where
little
(confi
at
Frankfort, 289 S.W.3d
Mann
“give
requirement
competition. The
rise”
information);
Sheshunoff,
dential
seeking to
employer
that an
re-
ensures
(confidential
information
S.W.3d
given
has
consideration
strain
training);
Light,
specialized
fairly
necessitates a
for
(trade secrets). They
n. 14
S.W.2d
trade,
respecting
while
restraint
for one reason:
given
employee
are
an
tenet that at-will
fundamental
perform
job
his
employee
to allow
put
permits employees
otherwise
their
more
They
make
better.
fair,
elsewhere.
competitive
talents
use
valu
company,
to the
and more
valuable
(Jeffer-
at 659
Sheshunoff,
they
why
which is
companies,
to other
able
C.J.,
son,
concurring) (explaining
only
An em
compete.8
not to
justify covenants
a
protects
“legitimate busi-
a covenant that
compensa
deferred
ployee who receives
ness
is enforceable because
interest”
better
or similar
is not
a
tion
benefits
consequently “not
direct
restraint
against
employer
his
position
public policy”);
see
trade
violation
received
who has not
than
(explain-
15.04
Bus. &Com.Code
options
Stock
are
such benefits.
15 is
ing
purpose
Chapter
ever
has
form of consideration
Court
competi-
promote
“maintain
economic
Al
may
support
held
such
covenant.9
commerce”).
obtain
tion in trade
lowing employers to
covenants not
by,
giving
employee "spe-
example,
In this case there was no transfer to Cook of
ue
job
anything
perform
knowledge
[the
him to
his
cial
and skills” that "increase
that allowed
Marsh;
competitive against
employee’s]
compensation”).
or be more
value and
"The
better
admits,
covenant,
turn,
brokerage
"in the insurance
the costs
as Marsh
ensures that
in-
business,
products
protect-
develop
capital
human
are
because
services
curred
same,
who,
largely
against
having
competitors
offered
brokers
ed
not made
*29
ability
quality
develop
might
relation
expenditures,
higher
customer
such
offer
salaries
truly
apart
ships”
sets one
thereby
is what
firm
employees
appropriate
em-
address,
does
how
options
another. What Marsh
not
ployer’s
Id.
do
investment.”
Stock
ever,
situation, non-compete
in this
capital
that
develop the kind of
human
cheaper
agreements may simply be a
alterna
competitors,
they
by
nor do
can
taken
paying
higher salary
tive to
or bonus.
develop "special knowledge and skills.”
recognizes
clearly
Court
that Texas
disfavors
an
options
While stock
could motivate
em-
agreements
non-compete
for such a
increasing
the use of
goodwill,
ployee
create
thus
(citing
Poto
purpose.
worthy
they
protection,
value of the interest
State,
v.
mac Fire Ins. Co.
don’t themselves create an interest
ref’d)
(Tex.Civ.App.-Austin
(holding
employee
writ
protection. The fact that
makes
two
com
grow
contract between
insurance
employer’s
his
net worth
does
alone
panies
compensation
to limit
was unenforcea
employ-
justify a
of trade
restraint
absent
destroy
ble as was intended
"crush
making
er's investment in
more
competition”)).
competitors.
is no
valuable to
competitors
he receives
more valuable to
after
way
options
he would be
Sheshunoff,
(explain-
stock
in the
9. See
of stare we must least trial guidance
courts some the enforcement compete,
of covenants not to lest we face
the multitude of issues raised our new
definition of to or of’ in “ancillary years.10
coming only
The Court’s new rule not thwarts 15.50, legislative intent behind but strong policy goals
also contradicts the protect
inherent in which Chapter and a competitive
interests free trade
market. See Tex. Bus. Com.Code & 15.04
(“The Act purpose of this is maintain promote competition economic in trade provide
and commerce ... ben-
efits to consumers in provisions state. The of this Act shall accomplish
be construed this pur- ”). reason, ....
pose For I dissent. CLINTON, Appellant,
Katherine
The STATE Texas.
No. PD-0119-11. Appeals
Court of Criminal Texas.
Dec.
longer ‘right’
predictability
10. Stare
believe that
decisis “results
decision is no
would
*30
law,
people
rationally
which
inevitably
willingness
allows
reflect a
to reconsider
Grapevine
order their
affairs.”
conduct and
willingness
others. And that
could itself
Excavation, Inc.,
at 5. "[I]n
most
confusion,
disruption,
threaten to substitute
important
applica
matters it is more
that the
necessary legal
uncertainty
stability.”
ble rule of law be
than that it be
settled
settled
decisions,
Id.
our own
“[I]f we did not follow
right.” John R.
& Gravel Co. v.
Sand
United
no issue could ever be considered resolved.
States,
130, 139,
552 U.S.
S.Ct.
potential
speculative relitiga
volume (2008) (quoting
L.Ed.2d 591
Burnet v. Corona
ought
tion under such circumstances alone
Co.,
393, 406,
do Oil & Gas
U.S.
S.Ct.
persuade
poli
is a
us that stare decisis
sound
(Brandeis, J.,
(1932)