United States Court of Appeals

Fifth Circuit



## FILED

April 6, 2004

Charles R. Fulbruge III

Clerk 

## In the 

# United States Court of Appeals

for the Fifth Circuit

_______________



### m 03-20048

_______________



### G ARY 

### M. O LANDER



### ,

Plaintiff-Counter DefendantAppellee-Cross-Appellant,



### W HITNEY 

### N ATIONAL 

### B ANK



### ,

Intervenor Plaintiff-AppelleeCross-Appellant,

VERSUS



### C OMPASS 

### B ANK 

### ; C OMPASS 

### B ANCSHARES



### , I NC



### .,

Defendants-Counter ClaimantsAppellants-Cross-Appellees.

_________________________

Appeals from the United States District Court

for the Southern District of Texas

_________________________

Before H IGGINBOTHAM

, S MITH

,

AND W IENER , Circuit Judges. J ERRY E. S MITH , Circuit Judge:

All parties a ppeal the disposition of a suit2

in vo lving six stock option agreements. The

district court held that Gary Olan der owed

Compa s s Bank (“Compass”) the profits receive d under two of the agreements. On

a ppeal, Compass argues that it should have

received all the profits. On cross-appeal,

Olander and Whitney Bank (“Whitney”) contend that Olander owed Compass none of the

profits. 1 Agreeing with Compass, we affirm in

part, reverse in part, and remand.

I.

Olander worked for Comp ass from 1988

until his resignation in June 2001, at which

time he was an Executive Vice President in the

real estate lending department. 2 Beginning in

1990, h e participated in a stock option program that took t he form of separate, annual

agreements, each providing him with the right

to purchase a certai n number of common

shares of Compass stock at a set price. The

opti on would remain in effect for ten years

after sign ing the agreement but would cease

immediately 3 if Compass termin a ted Olander

for any reason.

Beginning in 1994, the agreements contained a non-c o mpetition clause (“non-compete”) that limit

ed the employee’s abilit

y to

associate with interests p e rceived to be adverse to Compass. In addition to requiring the

employee to “devote his or her entire time, energy and skills to the service of the Company”

during the period of employment, the noncompete imposes restrictions for two years after termination of employment. 4 The noncompete allows Compass to obtain an injunction in the event of an ac tual or threatened

breach. The agreement also contains a

remarkable provision, 5 section 8(e):

Employee specifically

recognizes and

affirms that [the aforementioned covenants

are] material and important term[s] of this

Agreement[,] and Employee further agrees

that should all or any part or application of

s ubdivisions (b) or (c) of Section 8 of this

Agreement be held or found invalid or unenforceable for any reason whatsoever by a

court of competent jurisdiction in an action

between Employee and the Com pany,

[Compass] shall be entitled to r eceive . . .

from Employee all Common Stock held by

Employee

. . . . If Employee has sold,

transferred, or otherwise disposed of Common Stock obtained under this Agreement[,

Compass] shall be entitled to receive from

Employee the difference between t h e Option Price pa id by Employee and the fair

market value of the Common Stock

. . . on

the da t e of sale, transfer, or other disposition.

Thus, Compass made the enforceability of the

non-competes a precondition for the stock op1 Whitney and Olander al so seek attorney’s

fees.

2 Olander served as an at-will employee.

3 If the termination occurred in connection with

a sale of the company or pursuant to a retirement,

the employee would have three months to exercise

his rights. 4 Such restrictions ba r r ed an employee from

soliciting existing customers of Compass, enticing

Compass employees to leave their jobs, and divulging trade secrets, customer lists, or other confidential information. The 2000 agreement purported to eliminate an earlier provision that restricted an employee’s ability to work for a Compass competitor.

5 Compass calls section 8(e) a “restoration provis ion,” but Olander refers to it as a “clawback

provision.”3

tion to remain in effect. If a court held section 8 to be invalid, the employee would return

the shares of stock or the profits arising from

the stock’s sale.

In 2000, Compass amended the non-compete to eliminat e a provision tha t barred an

employee from working for a competi tor of

Compass for two years after t he end of employment. The 2000 agreement “supersede[d]” all prior non-compete provisions. 6

Olander grew dissatisfied with his job and,

in June 2001, resigned to start work with

Whitney, a direct competitor. Before leaving

Compass, Olander exercised his right to stock

options under the 1994, 1995, 199 6

, 1997,

2000, and 2001 agreements, then immediately

filed a declaratory judgment action i n state

court to have the non-competes from 2000 and

2001 declared unenforce a ble. Compass removed to federal court in July 2001, based on

diversity jurisdiction, and moved for a preliminary injunction. Whitney intervened as a plaint iff and filed its own declaratory judgmen t

complaint.

The district court denied a preliminary injunction. O lander v. Compass B a nk

, 172 F.

Supp. 2d 846 (S.D. Tex. 2001). As part of its

ruling, the court found that the non-compet e

provisions were unenforceable 7 and that, as a consequence, Com pass had little chance of

succeeding on the merits. I d

. at 855. This

court upheld the denial of an injunction. O lander v. Compass Bank

, No. 01-21151 (5th Cir.

June 3, 2002) (unpublished). 8

Compass then filed claims against Olander

for breach of all six non-competes, for reimbursement under sec t ion 8(e) of the 2000-01

agreements, and for recovery under equitable

theories. Compass also filed a claim against

Whitney for torti ous interference with employment. Olander and Whitney moved for summary judgment on the matter of the non-competes’ unenforceability. 9

6 The “supersede” language appears in section

8(g) of the 2000 Stock Option Agreement: “This

Section 8 supercedes [sic] any provision governing

the Employee’s ability to compete with, or solicit

personnel from, the C orporation and Compass

contained in any stock option agreement between

the Corporation and the Employee entered into as

of a date prior to the date of this Agreement.”

7 The district court’s determination arose from

(continued...) 7 (...continued)

three conclusions: (1) the confidentiality portions of

the non-compete did not represent an “oth erwise

enforceable agreement,” because Compass did not

provide Olander with any confidential information

at the time the agreement was signed; (2) the stock

options did not “give rise to” Compass’s interest in

restraining Olander’s future behavior; and (3) there

was no evidence that Olander breached the nondisclosure provisions. O lander , 172 F. Supp. 2d

at 854-56.

8 The panel discussed the requirements of a valid non-compete under Texas la w by looking to

Light v. Centel Cellular Co.

, 883 S.W .2d 642

(Tex. 1994), and held that the Compass non-compete was not “ancillary to or part of an otherwise

enforceable contract.” O lander v. Compass Bank

, No. 01-21151, slip. op. at 5. It also ruled that the

district court did not clearly err in holdin g that

“Compass did not promise to provide confidential

information in the stock option agreement.” Id

.

9 Olander and Whitney may have realized tha t

section 8( e) would effectively nullify the effect of

a victory, because Olander would have to return

profits earned under the agreement. In their reply,

the two asked

the district court not to label the

(continued...)4

The dis t rict court granted summary judgment on three matt e rs, holding (1) that the

2000 and 2001 non-competes were unenforceable; (2) that Olander did not breach the nonsolicitation provision of the 2000 agreement

and did not breach the 2000-01 confidentiality

agreements; and (3) that Whitney did not tortiously interfere with Oland er’s employment

with Compass. The court also denied, without

pr e judice, Olander’s and Whitney’s motions

for attorney’s fees.

A bench trial on the remaining issues followed. Compass demanded a return of profits

per section 8(e) of the 2000-01 agreements

and asserted that, because the 2000 agreement

incorporated section 8(e) into the 19 9 4-97

agreements through the “superseding” language of section 8(g), Olander owed Compass

the profits from the earlier stock option plan.

Both sides sought attorney’s fees.

The district court held that Olander owed

Compass the profits gained through the 2000

and 2001 agreements. 10 It decided, however,

that the word “supersede” in section 8(g) voided rather than replaced the non-competes from

1994

- 97. Consequently, it denied relief to

Compass on the 1994 -97 agreements. It

awarded, pursuant to T EX

. C IV

. P RAC

. & R EM

. C ODE A NN

. § 38.001 (Vernon 2004), parti a l

attorney’s fees to Compass. Finally, the court

det ermined that the Texas Declaratory Judgment Act, 11 on which Olander and W hitney relied for attorney’s fees, did not provi de a

basis on which it could award fees.

II.

A.

We review a summary judgment de novo

. Frank v. Xerox Corp.

, 347 F.3d 130, 135 (5th

Cir. 2003). Following a bench trial, we review

findings of fact for clear error and conclusions

of law de novo

. Kona Tech. Corp. v. S. Pac.

Transp. Co. , 225 F.3d 595, 601 (5th Cir.

2000).

B.

The district court did not err in holding unenforceable the non-compete language from

the 2000 and 2001 agreements. As we have

said, the district court, in determining whether

Co mpass’s non-competes met public policy

requirements, looked to the Te xas Supreme

Court’s interpretation of the Covenants not to

Compete Act. 12 S ee Light v. Cen t el Cellular

Co.

, 883 S.W.2d 642 (Tex. 19 94). In L ight

, the court highlighted two requirements that a

non-compete must satisfy before a court wi l l

enforce it: The agreement must “be ancillary

to or part of an otherwise enforceab le agreement at the time the agreement is made [, and

must] contain limitations as to time, geographical area, and scope of activity to be restrained

th at are reasonable . . . .” I d

. at 644. We

focus on the first requirement.

The district court considered the facts and

languag e of L ight and correctly determined

th at the 2000 and 2001 non-competes were

no t “ancillary to or part of an otherwise en9 (...continued)

2000 non-compete as unenforceable but instead to

find that Olander did not violate its terms.

10 T he court held that such profits totaled

$57,672.03.

11 T EX

. C IV

. P R AC

. & R EM

. C ODE A NN

. (continued...) 11 (...continued)

§ 37.009 (Vernon 2004).

12 T EX

. B US

. & C OM

. C ODE A NN

. § 15. 5 0

(Vernon 2004).5

forceab l e agreement as required by Texas

law.” 13 As mentioned in Light and in the district court’s decisions, Texas law, has beeninterpreted by its courts to limit restraint s on

trade. T E X

. B US

. & C OM

. C ODE A NN

. § 15.05(a) (“Every contract, combination, or

conspiracy in restraint of trade or commerce is

unlawful.”). Section 15.50 of the Texas Business and Commerce Code establishes the requirements for a valid non-compete, and Light

has applied those requirements.

A non-compete cannot, on its own, form

the consideration f

or an agreement. Instead,

the non-compete must be connected 

### SS must be

an cillary to 

### S

S an already valid agreement. In

making this determination, a court must make

two inquiries: “(1) [I]s there an otherwise enforceable agreement, to which (2 ) the covenant not to compete is ancillary to or a part of at the time the agreement is made.” L ight

, 883

S.W.2d at 644.

The parties cannot make illusory promises

t o satisfy the requirement of an “otherwi s e

enforceable agreement.” In an at-will context,

“[c]onsideration for a promise, by either the

employee or the employer[,] cannot be dependent on a period of continued employm ent.

Such a promise would be illu so ry, because it

fails to bind the promisor who always retai ns

the opti on of discontinuing employment in lieu

of performance.” I

d. at 644-45. The presence

of an illusor y promise does not destroy the

possibility of a contract. Instead, it may create

a unilateral contract, and “th e promisor who

m ade t he illusory promise can accept [it] by

performance.” Id . at 645 n.6.

Compass’s stock opti on agreeme nt contains

o nly illusory promises on the part of the employer and renders the non-compete unenforceable. As an at-will emplo yer, Compass

could terminate Olander for “good cause, bad

cause, or no cause at all.” M ontgomery County Hosp. Dist. v. Brown

, 965 S.W.2d 501, 502

(Tex. 1998). At the time of terminat io n, the

rights under the stock opti on agreement would

disappear. Compass claims, as an alternative

argument, that “Olander’s promise not to disclose confidential information

. . . was an offer

to Compass to enter into a unilateral agreement

. . . . Compass accepted that offer when

it provided Olander with confidential informati on . . . .”

Nothing in the record suggests that Com

pass provided Olander with confidential information immediately on signing any of his stock

options. Additionally, the non-disclosure

provisions do not contain express promises on

the part of Compass to provide any information to Olander. Instead, o nly Olander prom13 Int er estingly, neither party challenges, as a

primary ground for appeal, the summary judgment

ruling on the 2000 and 2001 agreements. Instead,

the litigants attack the unenforc e ability rulings only

as secondary arguments. Because a ruling on the

2 000 language directly affects the panel’s d etermination on the 1994-97 agreements, we consider

the general enforceability of the non-compete.

Olander first asserts that the 1994-97 agreements are void and do no t trigger, in any fashion,

section 8(e). Alternatively, he claims that the district court erred in its construction of the 2000

language, that the non-competes are valid, and that

he did not breach any of the non-competes.

Compass, predictably, argues that all the noncompetes are unenf

orceable and that it should receive all the profits received under all of the agreements. Alternatively, it asserts that the district

court erred in its construction of the 2000

language, that the non-competes are valid, and that

Olander breached the provisions.6

ises not to disclose or make use of “any trade

secrets, custome r lists, information regarding

customers, or other confidential information.”

F urthermore, the district court noted that

Compass only produced evidence that Olander

could access confidential information. The

court expressly held that Co mpass failed to

produce ample evidence of O lander’s misuse

of such information. The court also did not

mentionwhether Compass proved that Olander actually received any information. 14 Thus,

Compass failed to produce evidence that it accepted a unilateral agreement. That agreement

does not constitute a n otherwise enforceable

agreement under Light

, 15 be cause i t was not valid at the time of the promise.

In the absence of a unilateral promise, the

continued existence of the stock opti on agreement depends entirely on Olander’s remaining

an employee of Compass, a relationship that

Compass, acting alone, could terminate at any

time. Because this is the essence of an illusory

promise, the district court did not err in holding that, under Texas law, it could not enforce

the non-competes.

C.

After holding t hat it could not enforce the

non-competes from 2000 and 2001, the district

court applied sectio n 8(e) and ordered the

return of the pro fits earned from the two

agreements. During the bench trial, Compass

argued that, through secti on 8(g), the parti es

incorporated into the 1994-97 agreements the

same language that the district court declared

unenforceable. 16 Consequently, Compass deman d ed, via section 8(e), the profits earned

under those agreements.

Compass’s cla im t urns on the meaning of

“supersede.” Section 8(g) states that “[t]his 14 “After months of discovery, Compass has not

identified a single specific instance in which

Olander allegedly used or disclosed a specific piece

or type of confidential information.”

15 Compass also asserts, as an alternative argument , that G uy Carpenter & Co. v. Provenzale

, 334 F.3d 459 (5th Cir. 200 3), requires us to find

an otherwise enforceable agreement in the stock

option agreements and to give fo r ce to the noncompete. G uy Carpenter is distinguishable on two

fronts.

First, the Guy Carpenter panel held that a separate and enforceable agreement existed, because

the parties agreed to a seve r ance package in the

eve n t of an improper termination. I d

. at 465.

Olander’s ag r eement contained no such separate

agreement. Secondly, in G uy Carpenter the employer explicitly promised to provide confid ential

information to the employe e

. I d

. at 466 (“[Employer’s] promise to provide confidential informati on gives rise to its interest in restraining [the

employee] from competing”). As we have mentioned, Compass’s contract contained no explicit

promise or acknowledgment that it would provide

any confidential information to Olander.

(continued...) 15 (...continued)

As a further alternative

argument, Compass

asks that we certify the question of unilateral contr acts to the Texas Supreme Court. Such certification, however, “is not a proper avenue to change

our binding precedent.” H ughes v. Tobacco Inst.,

Inc.

, 278 F.3d 417, 425 (5th Cir. 2001) (internal

quotations and citations omitted). L ight controls in

this case.

16 By using the word “supersede,” Olander and

Compass altered their prior agreements with an eye

toward affecting their future use. That is, the

alterations to the 1994- 97 agreements would matter

only if and when Olander exercised his stock

options.7

Section 8 supercedes [sic] any provision governing the Employee’s abilit y to compete with,

or solicit personnel from [Compass] contained

in any stock opti on agreement

. . . entered into

as of a date prior to the date of this Agreement.” Because the district court used the

language referenced in section 8(e) to hold the

2000-01 non-competes unenforceable, that

l anguage’s incorporation into a prior stock

opti on a g reement would similarly render

unenforceable that agreement’s non-compete.

The district court, however, erred in its application of “supersede.” As the court noted,

sup e rsede means “[t]o annul, make void, or

repeal by taking the place of.” B L ACK ’ S L AW

D ICTIONARY 1452 (7th ed. 1999). Criminal

courts follow such a m

eaning with respect to

superseding indictments, and civil courts often

have examples of contracts that supersede previous agreements. 17

Thus, “supersede” carries two elem ents:

(1) an invalidation of a prior entity; and (2) the

replacement of that entity with another. The

2000 agreement invalid at ed the non-compete

clauses from the 1994-97 stock option agreements and replaced t h em with the 2000

lan guage. Such an amendment became relevant when Olander cashed in his stock options.

Interestingly, the district court applied only

the first half of the definition of “supersede”:

“Olander and Compass did not agree to incorporate the non-compete provisions of the 2000 Agreement into the prior agreements. Instead,

the parties chose to void the prior vers i ons

. . .” (emphasis added). S omething

, however,

must take the place of the superseded words.

Instead of replacing the previous language,

the district court eliminated it entirely. Such a

holding runs contrary to the language of t h e

2000 agreement. Consequently, the district

court erred in its a pplication of “supersede.”

The court correctly held that the 2000-01 language was unenforceable and that such unenforc e abilit y triggered section 8(e)’s restorati on

provision, so Olander owes the profits arising

from the 1994-97 agreements. 18

III.

As part of t heir cross-appeal, Olander and

Whitney assert that the district court erred by

not awarding them attor ney’s fees. Because

no party has argued against the partial fee

award for Compass, we need only to consider

the denials with respect to Olander and Whitney. 19 The denial o f attorney’s fees is reviewed for abuse of discretion. M athis v. Exxon Corp.

, 302 F.3d 448, 461-62 (5th Cir.

2002). In diversity cases, state law go verns

the award of fees. S ee, e.g., McLeod, Alexander, Powel & Apffel, P.C. v. Quarles , 894

F.2d 1482, 1487 (5th Cir. 1990).

In seeking attorney’s fees, the parties relied

17 See, e.g., Millennium Petrochemicals, Inc. v.

Brown & Root Hol d ings, Inc.

, 246 F. Supp. 2d

632, 639 (S.D. Tex. 2003) (“It is well established

that a modified contract prevails over the old contract and supercedes [sic] the earlier contract to the

extent of any inconsistencies.”). 18 Compass argues, as another alternative, that

the district court erred in not awarding it Olander’s

profits under equitable theories. Because the

district court erred in its construction of

“supersed e ,” and because that error provides ample

reason to order a return of all profits to Compass,

we do not address this ground.

19 United States v. Thibodeaux , 211 F.3d 910,

912 (5th Cir. 2000) (stating the general rule that

failure to raise an issue on appeal waives it).8

on two statutes. Compass sought fees pursuant to T EX

. C IV

. P RAC

. & R EM

. C ODE A NN

. § 38.001 et seq. (Vernon 2004). 20 Olander

and Whitney requested fees under the Texas

Declaratory Judgment Act, 21 which empowers

a court to “award co sts and reasonable and

necessary attorney’s fees as are equitable and

just.” T E X

. C IV

. P R AC

. & R EM

. C ODE A NN

. § 37.009 (Vernon 2004).

Although Olander and Whitney successfully 

### SS but phyrricly 

### SS

r endered the non-competes

unenforceable, this court’s precedent forecloses an award under t his statute in a diversity

case. U tica Lloyd’s v. Mitchell

, 138 F.3d 208,

210 (5th Cir. 1998) (“[W]e now hold, that a

party may not rely on the Texas DJA to authorize attorney’s fees in a diversity case because

the statute is not substantive law.”). 22 Thus, because Whitney and Ol ander sought attorney’s fees through an inapplicable statute, the

district court did not err in denying fees.

IV.

The district court correctly held Compass’s

non-compete unenforceable and correctly ordered the return of the profits received under

it. The court erred, however, in its interpretati on of “supersede” and in its refusal to apply

to the 1994-97 agreements the unenforceability ruling regarding the 2000-01 agreements.

Olander owes Compass $224,908, the amount

earned under all six stock opti on agreements. 23

We render judgment in

Co mpass’s favor for

that amount. 24 Finally, the court did not err in

denying attorney’s fees to Olander and Whitney.

Consequently, we AFFIRM in part,

R EVERSE in part, and REMAND with instructi on to enter judgment in favor of Compa ss for $224,908 and to address pre- and

post-judgment interest and any other ancillary

matters, all in accordance with this opinion. 20 Section 38.001 contain s the rather broad

statement that “[a] person may recover reasonable

attorney’s fees from an individual or corporation,

in addition to the amount of a valid claim and costs

. . . .” 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, T EX

. B US

. & C OM

. C ODE A NN

. § 15.51(c)

(Vernon 2004). The district court, however, did

not suggest that Olander properly pleaded anything

related to § 15.51(c), and Ola n der does not argue

that he previously pleaded this matter. Consequently, Olander did not properly raise the issue

before the district court and cannot do so here.

Nissho-Iwai Am. Corp. v. Kline

, 845 F.2d 1300,

1307 (5th Cir. 1988).

22 See also Travelers Indem. Co. v. Citgo Petroleum Corp.

, 166 F.3d 761, 772 n.13 (5th Cir.

1999) (stating that Utica Lloyd’s “is not a departure from the

prior law of this Circuit, but is instead a logical application of previously stated

(continued...) 22 (...continued)

principles.”).

23 Olander testified that he profited $224,908 by

exercising his six stock options.

24 The district court apparently erred in its original calculation of damages for the 2000 and 2001

agreements. We remedy any such defect by

ordering a return of all profits received under all

six agreements.