BakerHostetler

Under Texas law, to establish an enforceable covenant not to compete, the first question is often whether the covenant is supported by adequate consideration. Unlike many states, in Texas, an employer cannot pay for a restrictive covenant (which includes both noncompetes and customer non-solicitation restrictions). In other words, in Texas, a raise, bonus or severance payment is typically not sufficient consideration to support a restrictive covenant. Some thought Texas might move in the direction of allowing payments to act as sufficient consideration when the Texas Supreme Court issued its 2011 decision in Marsh USA Inc. v. Cook. However, the cases that have followed have not moved Texas law any closer to finding pure payments to be adequate consideration for restrictive covenants.

Under Texas Business and Commerce Code § 15.50(a), a covenant not to compete is only enforceable (1) if it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made, and (2) to the extent that it contains limitations as to time, geographical area and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the employer’s goodwill or other business interest. Although litigants often fiercely debate the second prong – the reasonableness of the restrictions – employers must also ensure their restrictive covenants satisfy the first threshold requirement: that such covenants be supported by adequate consideration.

Ten years ago, the Texas Supreme Court issued Marsh USA Inc. v. Cook, its most recent decisive ruling on when a restrictive covenant is considered “ancillary to or part of an otherwise enforceable agreement.” The court had previously held that, to meet this requirement, the consideration given by the employer had to “give rise” to the employer’s interest in restraining the employee from competing.[1] In practice, other than a promise to provide confidential information in connection with a confidentiality covenant, “little else seem[ed] to satisfy” this requirement.[2]

In Marsh, the Texas Supreme Court rejected the “give rise” standard and, instead, explained that there must be “a nexus between the otherwise valid transaction and the interest worthy of protection.”[3] The court further explained that consideration that is “reasonably related” to an interest worthy of protection, such as trade secrets, confidential information or goodwill, satisfies the nexus requirement.[4] In Marsh, the court found that awarding stock options to a “key” employee to encourage him to develop goodwill with the employer’s clients was reasonably related to the employer’s need for restrictive covenants to protect that goodwill.[5] Thus, the court found the stock options to be sufficient consideration to support the enforceability of the restrictive covenants in the stock agreement.[6]

After Marsh, some questioned whether Texas courts would further expand the types of consideration that could support restrictive covenants to include monetary payments like raises, bonuses or severance payments, or even nonmonetary considerations that can suffice in other states, like promotions and continued employment. In practice, however, Texas courts have rejected a further expansion of the types of consideration that can support restrictive covenants. Instead, courts applying Texas law have still generally only found sufficient consideration to support restrictive covenants in (1) a promise to provide (and later provision) confidential information or specialized training, along with the employee’s reciprocal promise not to use or disclose the employer’s confidential information other than in the employer’s interest; and (2) a grant of stock options that encourages the employee to develop the company’s goodwill with its customers.[7]

For example, in Lazer Spot, Inc. v. Hiring Partners, Inc., a Texas appellate court found that, despite Marsh, the proffered consideration of at-will employment was “illusory” and “insufficient” to support a noncompete.[8] The Lazer Spot court explained that, whereas the employee in Marsh was a managing director whose stock options were reasonably related to the goodwill he developed for the company, the employees in Lazer Spot were “blue[-]collar workers who signed noncompetition agreements in the absence of consideration” other than at-will employment.[9]

Similarly, in Wharton Physician Services, P.A. v. Signature Gulf Coast Hosp., L.P., another Texas appellate court found that a company’s promise to pay a worker for his services in a contract did not constitute sufficient consideration for the restrictive covenants contained in that contract.[10] The court found that this monetary consideration was provided in exchange for the worker’s promise to perform the services and did not provide consideration that was reasonably related to the need for the worker’s restrictive covenants.[11]

As the above cases illustrate, the decade of jurisprudence following the Texas Supreme Court’s decision in Marsh has not expanded on its holding. As a result, employers should not rely on at-will employment, promotions, bonuses, severance payments or other monetary payments as consideration for restrictive covenants with employees in Texas. Rather, the employer’s restrictive covenants should be tied to (1) a confidentiality covenant in which the employer promises to provide the employee with confidential information, and then actually does provide such information; or (2) in limited instances, stock options designed to encourage the employee to develop goodwill with the employer’s customers.


[1] See Marsh USA Inc. v. Cook, 354 S.W.3d 764, 773 (Tex. 2011) (quoting Light v. Centel Cellular Co. of Texas, 883 S.W.2d 642, 647 (Tex. 1994)).

[2] Id. at 774.

[3] Id. at 776.

[4] Id. at 775.

[5] Id. at 777.

[6] Id.

[7] E.g., Smith v. Nerium Int’l, LLC, 05-18-00617-CV, 2019 WL 3543583, at *6 (Tex. App. – Dallas Aug. 5, 2019) (provision of confidential information was sufficient consideration for restrictive covenants); Neurodiagnostic Tex, L.L.C. v. Pierce, 506 S.W.3d 153, 165 (Tex. App. – Tyler 2016) (concluding that “specialized” training provided by employer qualified as an interest worthy of protection and supported restrictive covenant); Republic Services, Inc. v. Rodriguez, 14-12-01054-CV, 2014 WL 2936172, at *5 (Tex. App. – Houston [14th Dist.] Jun. 26, 2014) (“Courts have recognized that training and customer information can provide consideration.”); CDX Holdings, Inc. v. Heddon, 3:12-CV-126-N, 2012 WL 11019355, at *8 (N.D. Tex. Mar. 2, 2012) (finding that “a plan to grant stock options to a valued employee” could constitute sufficient consideration for restrictive covenants).

[8] Lazer Spot, Inc. v. Hiring Partners, Inc., 387 S.W.3d 40, 47 (Tex. App. – Texarkana 2012).

[9] Id. at 48–49.

[10] Wharton Physician Services, P.A. v. Signature Gulf Coast Hosp., L.P., 13-14-00437-CV, 2016 WL 192069, at *3 (Tex. App. – Corpus Christi-Edinburg Jan. 14, 2016)

[11] Id.

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