Labor & Employment Law

Stock Options in Texas Noncompete Agreements

By Robert Wood

A recurring issue in Texas law is whether financial compensation can constitute sufficient consideration for a non-compete agreement.  This issue came up recently in a case from the Dallas Court of Appeals.

In that case, a company that provided insurance brokerage services granted some stock options to one of its managing directors.  The options were conveyed in an Employee Incentive and Stock Award Plan.  However, before exercising the options, the employee had to sign a non-compete agreement.

After the employee exercised his stock options, he terminated his employment.  Shortly thereafter, he began working for a competitor, at which point a lawsuit was filed to enforce the non-compete agreement.

The trial court held that the non-compete agreement was unenforceable, and the court of appeals affirmed. In doing so, the court explained, 'The most common types of consideration given in return for a covenant not to compete are a company's trade secrets or other confidential information.  A company's goodwill is dependent, in part, in keeping such information confidential.  Financial benefits, on the other hand, do not give rise to an interest worthy of protection.'

The company contended that offering stock options to a valuable employee also gave rise to its interest in protecting its goodwill.  The court of appeals rejected this argument:

Texas requires that the consideration provided by the employer give rise to the company's interest in restraining competition. . . .

All companies have an interest in retaining good employees. Stock options are frequently utilized in an effort to retain valuable employees. . . . However, the fact that a company's business goodwill benefits when an employee accepts the offered incentive and continues his employment does not mean that the incentive gives rise to an employer's interest in restraining the employee from competing. . . .

The court also explained that the 'give rise' requirement can be met 'only if the consideration given by the company creates the interest in restraining competition.'  Conveying stock options, the court held, could not meet this requirement.

Conclusion:  Several Texas cases have questioned whether financial incentives could serve as the basis for an enforceable non-compete agreement.  Perhaps more than any other case, this case rejects the notion that financial compensation, such as the granting of stock options, can constitute adequate consideration for a non-compete agreement in Texas.

Full post as published by Texas Non-Compete Law Blog on April 16, 2010 (boomark / email).