Olander v. Compass Bank

• Decision Date: 06 April 2004
• Docket Number: No. 03-20048.,03-20048.
• Parties: Gary M. OLANDER, Plaintiff-Counter Defendant-Appellee-Cross-Appellant, Whitney National Bank, Intervenor Plaintiff-Appellee-Cross-Appellant, v. COMPASS BANK; Compass Bancshares, Inc., Defendants-Counter Claimants-Appellants-Cross-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

363 F.3d 560

Gary M. OLANDER, Plaintiff-Counter Defendant-Appellee-Cross-Appellant, Whitney National Bank, Intervenor Plaintiff-Appellee-Cross-Appellant, v. COMPASS BANK; Compass Bancshares, Inc., Defendants-Counter Claimants-Appellants-Cross-Appellees.

No. 03-20048.

United States Court of Appeals, Fifth Circuit.

April 6, 2004.

Gregg M. Rosenberg, Gregg M. Rosenberg & Associates, Houston, TX, for Olander.

Sherrard Lee Hayes, Rebecca Edgar Melton (argued), Thomas Andrew Nesbitt, Fulbright & Jaworski, Austin, TX, for Whitney Nat. Bank.

Neil G. Martin (argued), Kimberly R. Phillips, Gardere, Wynne & Sewell, Houston, TX, for Compass Bank and Compass Bancshares, Inc.

Appeal from the United States District Court for the Southern District of Texas.

Before HIGGINBOTHAM, SMITH, and WIENER, Circuit Judges.

JERRY E. SMITH, Circuit Judge:

All parties appeal the disposition of a suit involving six stock option agreements. The district court held that Gary Olander owed Compass Bank ("Compass") the profits received under two of the agreements. On appeal, Compass argues that it should have received all the profits. On cross-appeal, Olander and Whitney Bank ("Whitney") contend that Olander owed Compass none of the profits.¹ Agreeing with Compass, we affirm in part, reverse in part, and remand.

I.

Olander worked for Compass from 1988 until his resignation in June 2001, at which time he was an Executive Vice President in the real estate lending department.² Beginning in 1990, he participated in a stock option program that took the form of separate, annual agreements, each providing him with the right to purchase a certain number of common shares of Compass stock at a set price. The option would remain in effect for ten years after signing the agreement but would cease immediately³ if Compass terminated Olander for any reason.

Beginning in 1994, the agreements contained a non-competition clause ("non-compete") that limited the employee's ability to associate with interests perceived to be adverse to Compass. In addition to requiring the employee to "devote his or her entire time, energy and skills to the service of the Company" during the period of employment, the non-compete imposes restrictions for two years after termination of employment.⁴ The non-compete allows Compass to obtain an injunction in the event of an actual or threatened breach. The agreement also contains a remarkable provision,⁵ section 8(e):

Employee specifically recognizes and affirms that [the aforementioned covenants are] material and important term[s] of this Agreement[,] and Employee further agrees that should all or any part or application of subdivisions (b) or (c) of Section 8 of this Agreement be held or found invalid or unenforceable for any reason whatsoever by a court of competent jurisdiction in an action between Employee and the Company, [Compass] shall be entitled to receive... from Employee all Common Stock held by Employee.... If Employee has sold, transferred, or otherwise disposed of Common Stock obtained under this Agreement[, Compass] shall be entitled to receive from Employee the difference between the Option Price paid by Employee and the fair market value of the Common Stock ... on the date of sale, transfer, or other disposition.

Thus, Compass made the enforceability of the non-competes a precondition for the stock option to remain in effect. If a court held section 8 to be invalid, the employee would return the shares of stock or the profits arising from the stock's sale.

In 2000, Compass amended the non-compete to eliminate a provision that barred an employee from working for a competitor of Compass for two years after the end of employment. The 2000 agreement "supersede[d]" all prior non-compete provisions.⁶

Olander grew dissatisfied with his job and, in June 2001, resigned to start work with Whitney, a direct competitor. Before leaving Compass, Olander exercised his right to stock options under the 1994, 1995, 1996, 1997, 2000, and 2001 agreements, then immediately filed a declaratory judgment action in state court to have the non-competes from 2000 and 2001 declared unenforceable. Compass removed to federal court in July 2001, based on diversity jurisdiction, and moved for a preliminary injunction. Whitney intervened as a plaintiff and filed its own declaratory judgment complaint.

The district court denied a preliminary injunction. Olander v. Compass Bank, 172 F.Supp.2d 846 (S.D.Tex.2001). As part of its ruling, the court found that the non-compete provisions were unenforceable⁷ and that, as a consequence, Compass had little chance of succeeding on the merits. Id. at 855. This court upheld the denial of an injunction. Olander v. Compass Bank, 44 Fed.Appx. 651 (5th Cir. 2002) (unpublished).⁸

Compass then filed claims against Olander for breach of all six non-competes, for reimbursement under section 8(e) of the 2000-01 agreements, and for recovery under equitable theories. Compass also filed a claim against Whitney for tortious interference with employment. Olander and Whitney moved for summary judgment on the matter of the non-competes' unenforceability.⁹

The district court granted summary judgment on three matters, holding (1) that the 2000 and 2001 non-competes were unenforceable; (2) that Olander did not breach the non-solicitation provision of the 2000 agreement and did not breach the 2000-01 confidentiality agreements; and (3) that Whitney did not tortiously interfere with Olander's employment with Compass. The court also denied, without prejudice, Olander's and Whitney's motions for attorney's fees.

A bench trial on the remaining issues followed. Compass demanded a return of profits per section 8(e) of the 2000-01 agreements and asserted that, because the 2000 agreement incorporated section 8(e) into the 1994-97 agreements through the "superseding" language of section 8(g), Olander owed Compass the profits from the earlier stock option plan. Both sides sought attorney's fees.

The district court held that Olander owed Compass the profits gained through the 2000 and 2001 agreements.¹⁰ It decided, however, that the word "supersede" in section 8(g) voided rather than replaced the non-competes from 1994-97. Consequently, it denied relief to Compass on the 1994-97 agreements. It awarded, pursuant to TEX. CIV. PRAC. & REM.CODE ANN. § 38.001 (Vernon 2004), partial attorney's fees to Compass. Finally, the court determined that the Texas Declaratory Judgment Act,¹¹ on which Olander and Whitney relied for attorney's fees, did not provide a basis on which it could award fees.

II.

A.

We review a summary judgment de novo. Frank v. Xerox Corp., 347 F.3d 130, 135 (5th Cir.2003). Following a bench trial, we review findings of fact for clear error and conclusions of law de novo. Kona Tech. Corp. v. S. Pac. Transp. Co., 225 F.3d 595, 601 (5th Cir.2000).

B.

The district court did not err in holding unenforceable the non-compete language from the 2000 and 2001 agreements. As we have said, the district court, in determining whether Compass's non-competes met public policy requirements, looked to the Texas Supreme Court's interpretation of the Covenants not to Compete Act.¹² See Light v. Centel Cellular Co., 883 S.W.2d 642 (Tex.1994). In Light, the court highlighted two requirements that a non-compete must satisfy before a court will enforce it: The agreement must "be ancillary to or part of an otherwise enforceable agreement at the time the agreement is made [, and must] contain limitations as to time, geographical area, and scope of activity to be restrained that are reasonable...." Id. at 644. We focus on the first requirement.

The district court considered the facts and language of Light and correctly determined that the 2000 and 2001 non-competes were not "ancillary to or part of an otherwise enforceable agreement as required by Texas law."¹³ As mentioned in Light and in the district court's decisions, Texas law, has been interpreted by its courts to limit restraints on trade. TEX. BUS. & COM.CODE ANN. § 15.05(a) ("Every contract, combination, or conspiracy in restraint of trade or commerce is unlawful."). Section 15.50 of the Texas Business and Commerce Code establishes the requirements for a valid non-compete, and Light has applied those requirements.

A non-compete cannot, on its own, form the consideration for an agreement. Instead, the non-compete must be connected — must be ancillary to — an already valid agreement. In making this determination, a court must make two inquiries: "(1) [I]s there an otherwise enforceable agreement, to which (2) the covenant not to compete is ancillary to or a part of at the time the agreement is made." Light, 883 S.W.2d at 644.

The parties cannot make illusory promises to satisfy the requirement of an "otherwise enforceable agreement." In an at-will context, "[c]onsideration for a promise, by either the employee or the employer[,] cannot be dependent on a period of continued employment. Such a promise would be illusory, because it fails to bind the promisor who always retains the option of discontinuing employment in lieu of performance." Id. at 644-45. The presence of an illusory promise does not destroy the possibility of a contract. Instead, it may create a unilateral contract, and "the promisor who made the illusory promise can accept [it] by performance." Id. at 645 n. 6.

Compass's stock option agreement contains only illusory promises on the part of the employer and renders the non-compete unenforceable. As an at-will employer, Compass could terminate Olander for "good cause, bad cause, or no cause at all." Montgomery County Hosp. Dist. v. Brown, 965 S.W.2d 501, 502 (Tex.1998). At the time of termination, the rights under the stock option agreement would disappear. Compass claims, as an alternative argument, that "Olander's promise not to disclose confidential information ... was an offer to Compass to enter into a unilateral agreement.... Compass accepted that offer...