United States Court of Appeals
Fifth Circuit
F I L E D
April 6, 2004
In the
Charles R. Fulbruge III
United States Court of Appeals Clerk
for the Fifth Circuit
_______________
m 03-20048
_______________
GARY M. OLANDER,
Plaintiff-Counter Defendant-
Appellee-Cross-Appellant,
WHITNEY NATIONAL BANK,
Intervenor Plaintiff-Appellee-
Cross-Appellant,
VERSUS
COMPASS BANK; COMPASS BANCSHARES, INC.,
Defendants-Counter Claimants-
Appellants-Cross-Appellees.
_________________________
Appeals from the United States District Court
for the Southern District of Texas
_________________________
Before HIGGINBOTHAM, SMITH, JERRY E. SMITH, Circuit Judge:
AND WIENER, Circuit Judges.
All parties appeal the disposition of a suit
involving six stock option agreements. The compete imposes restrictions for two years af-
district court held that Gary Olander owed ter termination of employment.4 The non-
Compass Bank (“Compass”) the profits re- compete allows Compass to obtain an injunc-
ceived under two of the agreements. On tion in the event of an actual or threatened
appeal, Compass argues that it should have breach. The agreement also contains a
received all the profits. On cross-appeal, remarkable provision,5 section 8(e):
Olander and Whitney Bank (“Whitney”) con-
tend that Olander owed Compass none of the Employee specifically recognizes and
profits.1 Agreeing with Compass, we affirm in affirms that [the aforementioned covenants
part, reverse in part, and remand. are] material and important term[s] of this
Agreement[,] and Employee further agrees
I. that should all or any part or application of
Olander worked for Compass from 1988 subdivisions (b) or (c) of Section 8 of this
until his resignation in June 2001, at which Agreement be held or found invalid or un-
time he was an Executive Vice President in the enforceable for any reason whatsoever by a
real estate lending department.2 Beginning in court of competent jurisdiction in an action
1990, he participated in a stock option pro- between Employee and the Company,
gram that took the form of separate, annual [Compass] shall be entitled to receive . . .
agreements, each providing him with the right from Employee all Common Stock held by
to purchase a certain number of common Employee . . . . If Employee has sold,
shares of Compass stock at a set price. The transferred, or otherwise disposed of Com-
option would remain in effect for ten years mon Stock obtained under this Agreement[,
after signing the agreement but would cease Compass] shall be entitled to receive from
immediately3 if Compass terminated Olander Employee the difference between the Op-
for any reason. tion Price paid by Employee and the fair
market value of the Common Stock . . . on
Beginning in 1994, the agreements con- the date of sale, transfer, or other disposi-
tained a non-competition clause (“non-com- tion.
pete”) that limited the employee’s ability to
associate with interests perceived to be ad- Thus, Compass made the enforceability of the
verse to Compass. In addition to requiring the non-competes a precondition for the stock op-
employee to “devote his or her entire time, en-
ergy and skills to the service of the Company”
4
during the period of employment, the non- Such restrictions barred an employee from
soliciting existing customers of Compass, enticing
Compass employees to leave their jobs, and di-
1 vulging trade secrets, customer lists, or other confi-
Whitney and Olander also seek attorney’s
fees. dential information. The 2000 agreement pur-
ported to eliminate an earlier provision that re-
2
Olander served as an at-will employee. stricted an employee’s ability to work for a Com-
pass competitor.
3
If the termination occurred in connection with
5
a sale of the company or pursuant to a retirement, Compass calls section 8(e) a “restoration pro-
the employee would have three months to exercise vision,” but Olander refers to it as a “clawback
his rights. provision.”
2
tion to remain in effect. If a court held sec- consequence, Compass had little chance of
tion 8 to be invalid, the employee would return succeeding on the merits. Id. at 855. This
the shares of stock or the profits arising from court upheld the denial of an injunction. Olan-
the stock’s sale. der v. Compass Bank, No. 01-21151 (5th Cir.
June 3, 2002) (unpublished).8
In 2000, Compass amended the non-com-
pete to eliminate a provision that barred an Compass then filed claims against Olander
employee from working for a competitor of for breach of all six non-competes, for reim-
Compass for two years after the end of em- bursement under section 8(e) of the 2000-01
ployment. The 2000 agreement “supersed- agreements, and for recovery under equitable
e[d]” all prior non-compete provisions.6 theories. Compass also filed a claim against
Whitney for tortious interference with employ-
Olander grew dissatisfied with his job and, ment. Olander and Whitney moved for sum-
in June 2001, resigned to start work with mary judgment on the matter of the non-com-
Whitney, a direct competitor. Before leaving petes’ unenforceability.9
Compass, Olander exercised his right to stock
options under the 1994, 1995, 1996, 1997,
2000, and 2001 agreements, then immediately 7
(...continued)
filed a declaratory judgment action in state three conclusions: (1) the confidentiality portions of
court to have the non-competes from 2000 and the non-compete did not represent an “otherwise
2001 declared unenforceable. Compass re- enforceable agreement,” because Compass did not
moved to federal court in July 2001, based on provide Olander with any confidential information
diversity jurisdiction, and moved for a prelimi- at the time the agreement was signed; (2) the stock
nary injunction. Whitney intervened as a plain- options did not “give rise to” Compass’s interest in
restraining Olander’s future behavior; and (3) there
tiff and filed its own declaratory judgment
was no evidence that Olander breached the non-
complaint.
disclosure provisions. Olander, 172 F. Supp. 2d
at 854-56.
The district court denied a preliminary in-
junction. Olander v. Compass Bank, 172 F. 8
The panel discussed the requirements of a val-
Supp. 2d 846 (S.D. Tex. 2001). As part of its id non-compete under Texas law by looking to
ruling, the court found that the non-compete Light v. Centel Cellular Co., 883 S.W.2d 642
provisions were unenforceable7 and that, as a (Tex. 1994), and held that the Compass non-com-
pete was not “ancillary to or part of an otherwise
enforceable contract.” Olander v. Compass Bank,
6
The “supersede” language appears in section No. 01-21151, slip. op. at 5. It also ruled that the
8(g) of the 2000 Stock Option Agreement: “This district court did not clearly err in holding that
Section 8 supercedes [sic] any provision governing “Compass did not promise to provide confidential
the Employee’s ability to compete with, or solicit information in the stock option agreement.” Id.
personnel from, the Corporation and Compass
9
contained in any stock option agreement between Olander and Whitney may have realized that
the Corporation and the Employee entered into as section 8(e) would effectively nullify the effect of
of a date prior to the date of this Agreement.” a victory, because Olander would have to return
profits earned under the agreement. In their reply,
7
The district court’s determination arose from the two asked the district court not to label the
(continued...) (continued...)
3
The district court granted summary judg- relied for attorney’s fees, did not provide a
ment on three matters, holding (1) that the basis on which it could award fees.
2000 and 2001 non-competes were unenforce-
able; (2) that Olander did not breach the non- II.
solicitation provision of the 2000 agreement A.
and did not breach the 2000-01 confidentiality We review a summary judgment de novo.
agreements; and (3) that Whitney did not tor- Frank v. Xerox Corp., 347 F.3d 130, 135 (5th
tiously interfere with Olander’s employment Cir. 2003). Following a bench trial, we review
with Compass. The court also denied, without findings of fact for clear error and conclusions
prejudice, Olander’s and Whitney’s motions of law de novo. Kona Tech. Corp. v. S. Pac.
for attorney’s fees. Transp. Co., 225 F.3d 595, 601 (5th Cir.
2000).
A bench trial on the remaining issues fol-
lowed. Compass demanded a return of profits B.
per section 8(e) of the 2000-01 agreements The district court did not err in holding un-
and asserted that, because the 2000 agreement enforceable the non-compete language from
incorporated section 8(e) into the 1994-97 the 2000 and 2001 agreements. As we have
agreements through the “superseding” lan- said, the district court, in determining whether
guage of section 8(g), Olander owed Compass Compass’s non-competes met public policy
the profits from the earlier stock option plan. requirements, looked to the Texas Supreme
Both sides sought attorney’s fees. Court’s interpretation of the Covenants not to
Compete Act.12 See Light v. Centel Cellular
The district court held that Olander owed Co., 883 S.W.2d 642 (Tex. 1994). In Light,
Compass the profits gained through the 2000 the court highlighted two requirements that a
and 2001 agreements.10 It decided, however, non-compete must satisfy before a court will
that the word “supersede” in section 8(g) void- enforce it: The agreement must “be ancillary
ed rather than replaced the non-competes from to or part of an otherwise enforceable agree-
1994-97. Consequently, it denied relief to ment at the time the agreement is made [, and
Compass on the 1994-97 agreements. It must] contain limitations as to time, geograph-
awarded, pursuant to TEX. CIV. PRAC. & REM. ical area, and scope of activity to be restrained
CODE ANN. § 38.001 (Vernon 2004), partial that are reasonable . . . .” Id. at 644. We
attorney’s fees to Compass. Finally, the court focus on the first requirement.
determined that the Texas Declaratory Judg-
ment Act,11 on which Olander and Whitney The district court considered the facts and
language of Light and correctly determined
9
that the 2000 and 2001 non-competes were
(...continued) not “ancillary to or part of an otherwise en-
2000 non-compete as unenforceable but instead to
find that Olander did not violate its terms.
10 11
The court held that such profits totaled (...continued)
$57,672.03. § 37.009 (Vernon 2004).
11 12
TEX. CIV. PRAC. & REM. CODE ANN. T EX. BUS. & COM. CODE ANN. § 15.50
(continued...) (Vernon 2004).
4
forceable agreement as required by Texas at the time the agreement is made.” Light, 883
law.”13 As mentioned in Light and in the dis- S.W.2d at 644.
trict court’s decisions, Texas law, has been in-
terpreted by its courts to limit restraints on The parties cannot make illusory promises
trade. TEX. BUS. & COM. CODE ANN. to satisfy the requirement of an “otherwise
§ 15.05(a) (“Every contract, combination, or enforceable agreement.” In an at-will context,
conspiracy in restraint of trade or commerce is “[c]onsideration for a promise, by either the
unlawful.”). Section 15.50 of the Texas Busi- employee or the employer[,] cannot be depen-
ness and Commerce Code establishes the re- dent on a period of continued employment.
quirements for a valid non-compete, and Light Such a promise would be illusory, because it
has applied those requirements. fails to bind the promisor who always retains
the option of discontinuing employment in lieu
A non-compete cannot, on its own, form of performance.” Id. at 644-45. The presence
the consideration for an agreement. Instead, of an illusory promise does not destroy the
the non-compete must be connectedSSmust be possibility of a contract. Instead, it may create
ancillary toSSan already valid agreement. In a unilateral contract, and “the promisor who
making this determination, a court must make made t he illusory promise can accept [it] by
two inquiries: “(1) [I]s there an otherwise en- performance.” Id. at 645 n.6.
forceable agreement, to which (2) the cove-
nant not to compete is ancillary to or a part of Compass’s stock option agreement contains
only illusory promises on the part of the em-
ployer and renders the non-compete unen-
13 forceable. As an at-will employer, Compass
Interestingly, neither party challenges, as a
could terminate Olander for “good cause, bad
primary ground for appeal, the summary judgment
ruling on the 2000 and 2001 agreements. Instead, cause, or no cause at all.” Montgomery Coun-
the litigants attack the unenforceability rulings only ty Hosp. Dist. v. Brown, 965 S.W.2d 501, 502
as secondary arguments. Because a ruling on the (Tex. 1998). At the time of termination, the
2000 language directly affects the panel’s deter- rights under the stock option agreement would
mination on the 1994-97 agreements, we consider disappear. Compass claims, as an alternative
the general enforceability of the non-compete. argument, that “Olander’s promise not to dis-
close confidential information . . . was an offer
Olander first asserts that the 1994-97 agree- to Compass to enter into a unilateral agree-
ments are void and do not trigger, in any fashion, ment . . . . Compass accepted that offer when
section 8(e). Alternatively, he claims that the dis- it provided Olander with confidential informa-
trict court erred in its construction of the 2000 tion . . . .”
language, that the non-competes are valid, and that
he did not breach any of the non-competes.
Nothing in the record suggests that Com-
Compass, predictably, argues that all the non-
pass provided Olander with confidential infor-
competes are unenforceable and that it should re- mation immediately on signing any of his stock
ceive all the profits received under all of the agree- options. Additionally, the non-disclosure
ments. Alternatively, it asserts that the district provisions do not contain express promises on
court erred in its construction of the 2000 the part of Compass to provide any informa-
language, that the non-competes are valid, and that tion to Olander. Instead, only Olander prom-
Olander breached the provisions.
5
ises not to disclose or make use of “any trade valid at the time of the promise.
secrets, customer lists, information regarding
customers, or other confidential information.” In the absence of a unilateral promise, the
continued existence of the stock option agree-
Furthermore, the district court noted that ment depends entirely on Olander’s remaining
Compass only produced evidence that Olander an employee of Compass, a relationship that
could access confidential information. The Compass, acting alone, could terminate at any
court expressly held that Compass failed to time. Because this is the essence of an illusory
produce ample evidence of Olander’s misuse promise, the district court did not err in hold-
of such information. The court also did not ing that, under Texas law, it could not enforce
mention whether Compass proved that Olan- the non-competes.
der actually received any information.14 Thus,
Compass failed to produce evidence that it ac- C.
cepted a unilateral agreement. That agreement After holding that it could not enforce the
does not constitute an otherwise enforceable non-competes from 2000 and 2001, the district
agreement under Light,15 because it was not court applied section 8(e) and ordered the
return of the profits earned from the two
agreements. During the bench trial, Compass
14
“After months of discovery, Compass has not argued that, through section 8(g), the parties
identified a single specific instance in which incorporated into the 1994-97 agreements the
Olander allegedly used or disclosed a specific piece same language that the district court declared
or type of confidential information.” unenforceable.16 Consequently, Compass de-
15 manded, via section 8(e), the profits earned
Compass also asserts, as an alternative argu-
under those agreements.
ment, that Guy Carpenter & Co. v. Provenzale,
334 F.3d 459 (5th Cir. 2003), requires us to find
an otherwise enforceable agreement in the stock Compass’s claim turns on the meaning of
option agreements and to give force to the non- “supersede.” Section 8(g) states that “[t]his
compete. Guy Carpenter is distinguishable on two
fronts.
15
(...continued)
First, the Guy Carpenter panel held that a sep- As a further alternative argument, Compass
arate and enforceable agreement existed, because asks that we certify the question of unilateral con-
the parties agreed to a severance package in the tracts to the Texas Supreme Court. Such certifi-
event of an improper termination. Id. at 465. cation, however, “is not a proper avenue to change
Olander’s agreement contained no such separate our binding precedent.” Hughes v. Tobacco Inst.,
agreement. Secondly, in Guy Carpenter the em- Inc., 278 F.3d 417, 425 (5th Cir. 2001) (internal
ployer explicitly promised to provide confidential quotations and citations omitted). Light controls in
information to the employee. Id. at 466 (“[Em- this case.
ployer’s] promise to provide confidential informa-
16
tion gives rise to its interest in restraining [the By using the word “supersede,” Olander and
employee] from competing”). As we have men- Compass altered their prior agreements with an eye
tioned, Compass’s contract contained no explicit toward affecting their future use. That is, the
promise or acknowledgment that it would provide alterations to the 1994-97 agreements would matter
any confidential information to Olander. only if and when Olander exercised his stock
(continued...) options.
6
Section 8 supercedes [sic] any provision gov- Agreement into the prior agreements. Instead,
erning the Employee’s ability to compete with, the parties chose to void the prior versions
or solicit personnel from [Compass] contained . . .” (emphasis added). Something, however,
in any stock option agreement . . . entered into must take the place of the superseded words.
as of a date prior to the date of this Agree-
ment.” Because the district court used the Instead of replacing the previous language,
language referenced in section 8(e) to hold the the district court eliminated it entirely. Such a
2000-01 non-competes unenforceable, that holding runs contrary to the language of the
language’s incorporation into a prior stock 2000 agreement. Consequently, the district
option agreement would similarly render court erred in its application of “supersede.”
unenforceable that agreement’s non-compete. The court correctly held that the 2000-01 lan-
guage was unenforceable and that such unen-
The district court, however, erred in its ap- forceability triggered section 8(e)’s restoration
plication of “supersede.” As the court noted, provision, so Olander owes the profits arising
supersede means “[t]o annul, make void, or from the 1994-97 agreements.18
repeal by taking the place of.” BLACK’S LAW
DICTIONARY 1452 (7th ed. 1999). Criminal III.
courts follow such a meaning with respect to As part of their cross-appeal, Olander and
superseding indictments, and civil courts often Whitney assert that the district court erred by
have examples of contracts that supersede pre- not awarding them attorney’s fees. Because
vious agreements.17 no party has argued against the partial fee
award for Compass, we need only to consider
Thus, “supersede” carries two elements: the denials with respect to Olander and Whit-
(1) an invalidation of a prior entity; and (2) the ney.19 The denial of attorney’s fees is re-
replacement of that entity with another. The viewed for abuse of discretion. Mathis v. Ex-
2000 agreement invalidated the non-compete xon Corp., 302 F.3d 448, 461-62 (5th Cir.
clauses from the 1994-97 stock option agree- 2002). In diversity cases, state law governs
ments and replaced them with the 2000 the award of fees. See, e.g., McLeod, Alexan-
language. Such an amendment became rele- der, Powel & Apffel, P.C. v. Quarles, 894
vant when Olander cashed in his stock options. F.2d 1482, 1487 (5th Cir. 1990).
In seeking attorney’s fees, the parties relied
Interestingly, the district court applied only
the first half of the definition of “supersede”:
18
“Olander and Compass did not agree to incor- Compass argues, as another alternative, that
porate the non-compete provisions of the 2000 the district court erred in not awarding it Olander’s
profits under equitable theories. Because the
district court erred in its construction of
“supersede,” and because that error provides ample
17
See, e.g., Millennium Petrochemicals, Inc. v. reason to order a return of all profits to Compass,
Brown & Root Holdings, Inc., 246 F. Supp. 2d we do not address this ground.
632, 639 (S.D. Tex. 2003) (“It is well established
19
that a modified contract prevails over the old con- United States v. Thibodeaux, 211 F.3d 910,
tract and supercedes [sic] the earlier contract to the 912 (5th Cir. 2000) (stating the general rule that
extent of any inconsistencies.”). failure to raise an issue on appeal waives it).
7
on two statutes. Compass sought fees pursu- because Whitney and Olander sought attor-
ant to TEX. CIV. PRAC. & REM. CODE ANN. ney’s fees through an inapplicable statute, the
§ 38.001 et seq. (Vernon 2004).20 Olander district court did not err in denying fees.
and Whitney requested fees under the Texas
Declaratory Judgment Act,21 which empowers IV.
a court to “award costs and reasonable and The district court correctly held Compass’s
necessary attorney’s fees as are equitable and non-compete unenforceable and correctly or-
just.” TEX. CIV. PRAC. & REM. CODE ANN. dered the return of the profits received under
§ 37.009 (Vernon 2004). it. The court erred, however, in its interpre-
tation of “supersede” and in its refusal to apply
Although Olander and Whitney successful- to the 1994-97 agreements the unenforceabili-
lySSbut phyrriclySSrendered the non-competes ty ruling regarding the 2000-01 agreements.
unenforceable, this court’s precedent foreclos- Olander owes Compass $224,908, the amount
es an award under this statute in a diversity earned under all six stock option agreements.23
case. Utica Lloyd’s v. Mitchell, 138 F.3d 208, We render judgment in Compass’s favor for
210 (5th Cir. 1998) (“[W]e now hold, that a that amount.24 Finally, the court did not err in
party may not rely on the Texas DJA to autho- denying attorney’s fees to Olander and Whit-
rize attorney’s fees in a diversity case because ney.
the statute is not substantive law.”).22 Thus,
Consequently, we AFFIRM in part,
REVERSE in part, and REMAND with in-
20
Section 38.001 contains the rather broad struction to enter judgment in favor of Com-
statement that “[a] person may recover reasonable pass for $224,908 and to address pre- and
attorney’s fees from an individual or corporation, post-judgment interest and any other ancillary
in addition to the amount of a valid claim and costs
matters, all in accordance with this opinion.
. . . .” Subsequent sections condition such a grant
on certain actions by the requesting party.
21
Olander also asserts that he should receive
fees under the Texas Covenant Not To Compete
Act, TEX. BUS. & COM. CODE ANN. § 15.51(c)
(Vernon 2004). The district court, however, did
not suggest that Olander properly pleaded anything
related to § 15.51(c), and Olander does not argue
that he previously pleaded this matter. Con-
sequently, Olander did not properly raise the issue 22
(...continued)
before the district court and cannot do so here. principles.”).
Nissho-Iwai Am. Corp. v. Kline, 845 F.2d 1300,
23
1307 (5th Cir. 1988). Olander testified that he profited $224,908 by
exercising his six stock options.
22
See also Travelers Indem. Co. v. Citgo Pe-
24
troleum Corp., 166 F.3d 761, 772 n.13 (5th Cir. The district court apparently erred in its ori-
1999) (stating that Utica Lloyd’s “is not a depar- ginal calculation of damages for the 2000 and 2001
ture from the prior law of this Circuit, but is in- agreements. We remedy any such defect by
stead a logical application of previously stated ordering a return of all profits received under all
(continued...) six agreements.
8