Marsh USA Inc. v. Cook

• Decision Date: 16 December 2011
• Docket Number: No. 09–0558.,09–0558.
• Citation: 33 IER Cases 999,354 S.W.3d 764,55 Tex. Sup. Ct. J. 184
• Parties: MARSH USA INC., and Marsh & McLennan Companies, Inc., Petitioners, v. Rex COOK, Respondent.
• Court: Texas Supreme Court

33 IER Cases 999
354 S.W.3d 764
55 Tex. Sup. Ct. J. 184

MARSH USA INC., and Marsh & McLennan Companies, Inc., Petitioners,
v.
Rex COOK, Respondent.

No. 09–0558.

Supreme Court of Texas.

Argued Sept. 16, 2010.Decided Dec. 16, 2011.

[354 S.W.3d 766]

Thomas L. Case, Beverly A. Whitley, John R.W. Fugitt, Bell Nunnaly & Martin LLP, Dallas, for Petitioners.

Monica Wiseman Latin, Stephanie Dooley Nelson, Jesse Keith Shumway, Carrington Coleman Sloman & Blumenthal LLP, Dallas, for Respondent.

Justice WAINWRIGHT delivered the opinion of the Court, in which Justice HECHT, Justice MEDINA, Justice JOHNSON, and Justice GUZMAN joined.

We deny Rex Cook's motion for rehearing. We withdraw our opinion of June 24, 2011 and substitute the following in its place.

In this case, we decide whether a covenant not to compete signed by a valued employee in consideration for stock options, designed to give the employee a greater stake in the company's performance, is unenforceable as a matter of law because the stock options did not give rise to an interest in restraining competition. We hold that, under the terms of the Covenants Not to Compete Act (Act), the consideration for the noncompete agreement (stock options) is reasonably related to the company's interest in protecting its goodwill, a business interest the Act recognizes as worthy of protection. The noncompete is thus not unenforceable on that basis. We reverse the court of appeals' judgment and remand to the trial court for further proceedings.

I. BACKGROUND

Rex Cook had been employed by Marsh USA Inc. (Marsh) since 1983 and rose to become a managing director. Marsh & McLennan Companies, Inc. (MMC) is the parent company for various risk management and insurance businesses, including Marsh. On March 21, 1996, MMC granted Cook the option to purchase 500 shares of MMC common stock pursuant to its 1992 Incentive and Stock Award Plan (Plan). The Plan was developed to provide “valuable,” “select” employees with the opportunity to become part owners of the company with the incentive to contribute to and benefit from the long-term growth and profitability of MMC. Under the Plan, stock option awards would vest in twenty-

[354 S.W.3d 767]

five percent increments each year, becoming fully vested and exercisable after a period of four years. To exercise a stock option under the Plan's terms, employees must provide MMC with a Notice of Exercise of Option Letter, a signed Non–Solicitation Agreement (Agreement), and payment for the stock at the discounted strike price. The term of the option was ten years. Cook's option was set to expire on March 20, 2006.

In February 2005, Cook signed the Agreement and a notice form stating that he wanted to exercise the stock options to acquire 3000 shares ¹ of MMC common stock at the strike price. The Agreement Cook signed provided that if he left the company within three years after exercising the options, then for a period of two years after termination Cook would not:

(a) solicit or accept business of the type offered by [MMC] during [Cook's] term of employment with [MMC], or perform or supervise the performance of any services related to such type of business, from or for (I) clients or prospects or [MMC] or its affiliates who [Cook] solicited or serviced directly ... or where [Cook] supervised, directly, indirectly, in whole or in part, the solicitation or servicing activities related to such clients or prospects; or (II) any former client of [MMC] or its affiliates who was such within two (2) years prior to [Cook's] termination of employment and who was solicited or serviced directly by [Cook] or where [Cook] supervised directly or indirectly, in whole or in part, the solicitation or servicing activities related [to] such former clients; or

(b) solicit any employee of [MMC] who reported to [Cook] directly or indirectly to terminate his employment with [MMC] for the purpose of competing with [MMC].

In addition, the Agreement provided that Cook would keep MMC's confidential information and trade secrets confidential during and after his employment with Marsh.

Less than three years after signing the Agreement and exercising the stock options, Cook resigned from Marsh and immediately began employment in Dallas with Dallas Series of Lockton Companies, LLC (Lockton), a direct competitor of MMC. Within a week after Cook's resignation, MMC sent Cook a letter including allegations that he violated the Agreement through his efforts to solicit Marsh clients and employees.

MMC filed suit against Cook and Lockton for breach of contract and breach of fiduciary duty, claiming, among other things, that Cook had solicited and accepted business from clients and prospects of Marsh who were serviced directly by Cook or where Cook supervised, directly or indirectly, the solicitation activities related to the client or potential client. Cook filed a motion for partial summary judgment on the ground that the Agreement constituted an unenforceable contract because it was not ancillary to or part of an otherwise enforceable agreement under Light v. Centel Cellular Co. of Texas, 883 S.W.2d 642, 647 (Tex.1994). The trial court granted Cook's motion for partial summary judgment on the breach of contract claim, concluding in the order that the Agreement was unenforceable as a matter of law. Marsh non-suited its other claims and appealed the partial summary judgment.

[354 S.W.3d 768]

Relying on Light, the court of appeals affirmed the trial court's judgment, holding that the transfer of stock did not give rise to Marsh's interest in restraining Cook from competing. Marsh USA Inc. v. Cook, 287 S.W.3d 378, 382 (Tex.App.-Dallas 2009, pet. granted). Marsh appealed.

We granted Marsh's petition for review to address the enforceability of the covenant at issue. We review de novo issues of statutory construction and application of the law to undisputed facts in summary judgments. McIntyre v. Ramirez, 109 S.W.3d 741, 745 (Tex.2003); Provident Life & Accident Ins. Co. v. Knott, 128 S.W.3d 211, 215 (Tex.2003).

II. ENFORCEABILITY OF THE COVENANT NOT TO COMPETE

The Agreement generally prohibits Cook from soliciting or accepting business of the type offered by MMC and in which Cook was involved from clients, prospective clients, and former clients of MMC or its affiliates who were such within the two years prior to Cook's termination. It also provides that Cook may not solicit any MMC employee who reported directly or indirectly to Cook and includes a nondisclosure requirement to keep confidential MMC's trade secrets during and after his employment with Marsh.

Covenants that place limits on former employees' professional mobility or restrict their solicitation of the former employers' customers and employees are restraints on trade and are governed by the Act. See DeSantis v. Wackenhut Corp., 793 S.W.2d 670, 681–82 (Tex.1990); Miller Paper Co. v. Roberts Paper Co., 901 S.W.2d 593, 599–600 (Tex.App.-Amarillo 1995, no writ) (stating that non-solicitation covenants prevent the employee from soliciting customers of the employer and effectively restrict competition); see also Guy Carpenter & Co. v. Provenzale, 334 F.3d 459, 464–65 (5th Cir.2003) (applying Texas law and stating that non-solicitation covenants restrain trade and competition and are governed by the Act); Rimkus Consulting Grp., Inc. v. Cammarata, 255 F.R.D. 417, 438–39 (S.D.Tex.2008) (holding that a “nonsolicitation covenant is also a restraint on trade and competition and must meet the criteria of section 15.50 of the Texas Business and Commerce Code to be enforceable” (citations omitted)). Agreements not to disclose trade secrets and confidential information are not expressly governed by the Act. See, e.g., CRC–Evans Pipeline Int'l, Inc. v. Myers, 927 S.W.2d 259, 265 (Tex.App.-Houston [1st Dist.] 1996, no writ); Zep Mfg. Co. v. Harthcock, 824 S.W.2d 654, 663 (Tex.App.-Dallas 1992, no writ); see also Olander v. Compass Bank, 172 F.Supp.2d 846, 852 (S.D.Tex.2001). The parties concur that the Agreement in this case is governed by the Act. To the extent this Agreement extends beyond the non-disclosure of Marsh's trade secrets and confidential information, we address its enforceability under the Act.

A. Rationale for Enforcement of Covenants Not to Compete

The Texas Constitution protects the freedom to contract. See Tex. Const. art. I, § 16; Fairfield Ins. Co. v. Stephens Martin Paving, LP, 246 S.W.3d 653, 663–64 (Tex.2008); see also In re Prudential Ins. Co. of Am., 148 S.W.3d 124, 128–29 (Tex.2004). Entering a noncompete is a matter of consent; it is a voluntary act for both parties. However, the Legislature may impose reasonable restrictions on the freedom to contract consistent with public policy. See Fairfield Ins. Co., 246 S.W.3d at 664–65. It has done so with the Texas Free Enterprise and Antitrust Act of 1983, Tex. Bus. & Com.Code ch. 15, which includes the Act, Tex. Bus. & Com.Code §§ 15.50–.52.

[354 S.W.3d 769]

The purpose of Chapter 15 is “to maintain and promote economic competition in trade and commerce” occurring in Texas. Tex. Bus. & Com.Code § 15.04. Unreasonable limitations on employees' abilities to change employers or solicit clients or former co-employees, i.e., compete against their former employers, could hinder legitimate competition between businesses and the mobility of skilled employees. See id.; Potomac Fire Ins. Co. v. State, 18 S.W.2d 929, 934 (Tex.Civ.App.-Austin 1929, writ ref'd) (holding that a contract between two insurance companies to limit compensation and not hire their competitors' companies was unenforceable as it was intended to “crush and destroy competition”). On the other hand, valid noncompetes constitute reasonable restraints on commerce agreed to by the parties and may increase efficiency in industry by encouraging employers to entrust confidential information and important client relationships to key employees. See Hill v. Mobile Auto Trim, Inc., 725 S.W.2d 168, 176–77 (Tex.1987)...