Attorney: Texas Supreme Court Decision On Noncompete Agreements Is A Game Changer

Texas' highest court has ruled that Marsh USA Inc. can continue to seek enforcement of a noncompete agreement that a former broker signed in exchange for receiving company stock.

The decision marks a significant change to Texas law, said attorney Russell D. Cawyer , a partner with Fort Worth-based Kelly Hart & Hallman LLP.

"It changes what has been the law for 30 years: You can't give an employee purely something of a financial incentive in exchange for a noncompete agreement," Cawyer said.

In the past, Texas was a jurisdiction where noncompete agreements were notoriously difficult to enforce. Companies generally offered employees the use of confidential information -- not financial incentives -- in exchange for their promise to not compete against the company should they leave, Cawyer said.

The Texas Supreme Court decision, Marsh USA Inc. v. Rex Cook , changes that, making Texas one of the easier jurisdictions to enforce a noncompete agreement, Cawyer said.

"It suggests the relationships developed by the employee were really owned by the employer," Cawyer said. Cawyer specializes in employment and labor law, but was not involved directly in the case.

At issue in the case is Rex Cook , who had worked for Marsh USA since 1983 and rose to become managing director. In 1996, Marsh offered Cook the option to purchase Marsh shares of stock. To exercise the stock options, Marsh employees had to sign a non-solicitation agreement.

Cook signed the agreement and acquired 3,000 shares of Marsh in 2005. The non-solicitation agreement said if he left the company within three years of exercising the options, he agreed to not compete against Marsh for a period of two years, either by soliciting business or other Marsh employees, according to court papers.

Less than three years after signing the agreement, Cook left the company to work for Lockton Cos. of Dallas. Within a week of his departure, Marsh sent Cook a letter alleging he had violated his agreement by soliciting Marsh clients and employees at his new employer.

Marsh filed a lawsuit against Cook and Lockton for breach of contract and breach of fiduciary duty. A lower court agreed with Cook, who filed a motion to dismiss the case because the contract was unenforceable. Marsh appealed, and a lower appellate court also sided with the trial court.

However, the Texas Supreme Court overruled those lower courts with a 6-3 opinion. The case now can go back to the lower court who will determine whether the time and geographic restrictions on the noncompete agreement were reasonable, Cawyer said.

"Marsh is pleased with the Texas Supreme Court's ruling, which confirms that employers can use reasonable covenants to protect their business interests and goodwill. We see this decision as a victory for Marsh and other employers in Texas," Sally Roberts , senior vice president of Marsh, said in an email.

Dean Davison , a spokesman for Lockton, said the company would continue to "vigorously defend against the plaintiff's claims."

"This decision changes Texas law as it has stood since 1994. We are continuing to evaluate the ruling to further understand its implications for Texas businesses and Texas employees," Davison said in an email.

Several lawsuits have resulted from allegations of violations of employment agreements. Recently, Aon Corp. sued three former executives and their new employer, Alliant Insurance Services, for allegedly poaching more than 40 employees from the Aon Construction Services Group. In a chancery suit filed June 15 in Cook County Circuit Court in Chicago, Aon Risk Services Cos. Inc. and Aon Risk Insurance Services West Inc. accuse three former Aon executives of breach of contract and conspiring to "rob" the construction service group of employees and clients. Aon alleges the executives conspired to orchestrate the "massive defection." Aon alleges the former executives violated their employment agreements with Aon.

Marsh is the No. 1-ranked global insurance broker, with 2009 revenue of $10.5 billion, according to Best's Review. Lockton is the 10th-largest broker by 2009 brokerage revenue.

(By Meg Green , senior associate editor, BestWeek: [email protected])