Free Market Capitalism in Texas and Marsh USA

January 7, 2012 / By Robert Wood

I re-read (again) the Marsh USA case this morning, including the concurring and dissenting opinions. The concurring opinion by Justice Willett is one of the most articulate and thoughtful opinions I have read in a long time. He tries to strike a balance between the pro-enforcement majority opinion and the dissenting opinion which fears that the majority has gone too far in stifling competition. Justice Willett’s opinion should be required reading for every Texas trial court judge who hears disputes involving covenants not to compete.

The majority opinion quotes this language from a 1947 Texas Supreme Court case: “A person’s right to use his own labor in any lawful employment is . . . one of the first and highest of civil rights.”

The Court then reminds us: “The Texas Constitution protects the freedom to contract.”

How are these potentially conflicting values to be reconciled? On the one hand, Texas presumably favors the right of a person to work where he wishes. On the other hand, Texas favors the right of that same person to contract away his right to do so. The various opinions handed down in the Marsh USA case depict a philosophical war going on at the Texas Supreme Court. It is not simply a legal dispute. Rather, it is a dispute over the type of economy we want to have in Texas.

Do we, for example, want an economy in which virtually everyone (other than lawyers, of course) is bound to a restrictive covenant? Or, do we expect courts to closely scrutinize these agreements so that only competition which is “unfair” is prohibited?

Unfortunately, although the Marsh USA case unambiguously informs us that the Texas Supreme Court is wary of disputes involving non-compete agreements, and that it has decided to adopt a far more pro-enforcement position, there are many unanswered questions. As the dissent notes, if protecting goodwill is an interest that can support a covenant not to compete, what happens to the long-standing rule in Texas that an employer cannot simply “buy” a noncompete agreement? Is it now the case that a Texas employer can simply give an employee a raise, or a signing bonus, or a promotion, or even continued employment, and have an enforceable covenant not to compete? After all, wouldn’t providing these to an employee might motivate the employee to develop goodwill for the employer.

Perhaps recognizing the possibility that its opinion might be interpreted too broadly, the majority in Marsh USA emphasizes that the employee was an “owner” and “managing director” of the company, and that he was a “valuable employee who had successfully performed at his position . . . and had been successful with attracting and retaining business for Marsh.” In other words, the Court may be saying, the rule we hand down today may not be as expansive and pro-enforcement as it appears to be.

All we know for sure is that the continued viability of any portion of the Light case decided in 1994 is dubious at best. As practitioners in this area know, the Court in Light imposed a two-part test to determine whether a covenant not to compete was “ancillary” to an “otherwise enforceable agreement.” The court in Marsh USA goes to great lengths to explain why the Light Court misinterpreted the meaning of “ancillary.” In doing so, Marsh USA does away with, or at least significantly changes, the “give rise” requirement. The opinion does not seem to explicitly abolish the second prong of the Light test (i.e., that the covenant be designed to enforce the employee’s “reciprocal” promise contained in the otherwise enforceable agreement), but it arguably impliedly done so, because the Court calls into question Light‘s entire definition of “ancillary.”

Obviously, for laypeople, this post is, as the Texas Supreme Court might say, “overly technical.” The bottom line is, the pendulum has definitely swung in Texas. Employees who are bound by noncompete agreements in Texas have much to be concerned about.

Happy New Year.

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About the Author

Robert Wood has been a Texas trial lawyer since 1993. During that time, he has represented small, mid-sized, and Fortune 100 companies in business and employment litigation matters all over Texas and the United States. He has also advised and represented hundreds of individuals in employment litigation matters. Read more about Robert Wood