A case last year from the Texas Supreme Court is favorable to employers regarding covenants not to compete. Noncompetition agreements are often included as ancillary agreements to certain otherwise enforceable contracts, such as employment contracts or agreements to sell a business. The case, Marsh USA, Inc. v. Cook, makes it easier for employers to enforce noncompete agreements, though it leaves some questions unanswered.
In 1994, the Texas Supreme Court established a two-prong test for whether a noncompete agreement is enforceable. The case, Light v. Centel Cellular Co. of Texas, held that for a noncompete to be enforceable, the consideration provided by the employer must be linked to the employer’s interest in restraining competition, and the noncompete clause must be intended to enforce the employee’s performance.
The Marsh case reversed an appellate decision that a grant of stock options failed the first prong of the Light test. The Texas Supreme Court held that the stock options were reasonably linked to the company’s desire to protect its goodwill, so the noncompete agreement was not unenforceable per se. However, the question of whether the second prong for enforceability had been met was remanded to the lower court.
The bottom line is that, the criteria for analyzing the enforceability of noncompete agreements has dramatically changed. While parties generally used to argue whether there was sufficient consideration for a noncompete, the arguments now are more likely to focus on whether the terms are reasonable.