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Texas Supreme Court Hands Victory To Employers In The Evolving Law Regarding Non-Competition Agreements

September 2, 2014

Mark Oberti observes:

On Friday, August 29, 2014, the Texas Supreme Court delivered another victory for employers seeking to enforce post-employment restrictions against former employees who seek to go to work for competitors. In Exxon Mobil Corp. v. Drennan, No. 12-0621 (Tex. Aug. 29, 2014), Drennan had worked for ExxonMobil for more than thirty years. During his employment, he received restricted stock pursuant to an Incentive Progam. As for the restricted stock shares that were outstanding at the time of Drennan’s resignation, ExxonMobil’s Incentive Program provided that ExxonMobil could cancel the shares if Drennan engaged in “Detrimental activity,” including becoming employed by a competitor of ExxonMobil’s. The Incentive Program also contained a New York choice of law clause.

After receiving a negative performance appraisal for the first time in his three decade career, and being told that ExxonMobil was replacing him in his position, but would try to find him another position, Drennan decided to resign. He accepted a job with Hess Corporation. Shortly thereafter, ExxonMobil informed Drennan that by doing so, he had engaged in “Detrimental activity” and thus his outstanding restricted shares — worth millions of dollars — were all cancelled. Drennan sued ExxonMobil for return of the shares. He lost in front of a jury, but the Houston Fourteenth Court of Appeals reversed, and ordered ExxonMobil to give him the shares. The Court of Appeals reached this conclusion by finding that: (i) ExxonMobil’s choice of law clause designating New York law was unenforceable as being against Texas’s fundamental public policy in regards to non-competition agreements; and (ii) under Texas law the “Detrimental activity” provision was unenforceable because it lacked a geographic or any other reasonable limitation. ExxonMobil appealed to the Texas Supreme Court.

The Texas Supreme Court found that the “Detrimental activity” provision was not a non-competition agreement. According to the Court, unlike a non-competition provision, ExxonMobil was not using the “Detrimental activity” provision to try to stop competition, but rather to reward continued loyalty. Since the provision was not deemed to be a non-competition agreement, then it was not against Texas’s fundamental public policy to enforce the New York choice of law clause. Under New York law the “Detrimental activity” provision was was enforceable because Drennan voluntarily resigned. As a result, ExxonMobil was within its rights to have cancelled the restricted shares.

During the previous eight years, the Texas Supreme Court had issued three prior pro-employer decision in non-compete cases. While it is technically true that the Court found that this case did not involve a non-competition agreement, the reality is that this case fits the trend towards finding non-competition agreements enforceable. Multi-state employers can now structure incentive compensation programs like ExxonMobil’s and thereby financially discourage employees from going to work for a competitor for fear of losing their restricted shares, or other incentive-based compensation. In addition, while the Court did not decide whether ExxonMobil’s “Detrimental activity” provision would have been enforceable under Texas law, it strongly hinted that it would have been. As such, this decision very arguably gives Texas employers the green light to implement incentive compensation plans with robust post-employment forfeiture provisions if the employee goes to work for the competition. While it is true that in such a situation the employer could not obtain an injunction against the employee if they went to work for a competitor — since they are legally allowed to compete under such a program — as a practical matter most employees forced to chose between keeping their entitlement to a seven-figure stock award and taking a new job with a competitor will probably not take a new job with a competitor. As such, this type of program would likely be especially effective in dealing with high ranking, highly compensated managers and executives.

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