Texas Supreme Court holds Forfeiture Provision is not a Covenant Not to Compete; Enforces Governing Law Provision

On August 29, 2014, the Texas Supreme Court handed down its decision on Exxon Mobil Corp. v. William Drennen, III Case No. 12-0621. The essential facts are these: a long time (31 years) employee of Exxon Mobil was told in 2006 that he was going to be replaced, but that they were looking for another position for him. Thereafter, rather than be let go, Mr. Drennen found a new position at Hess and gave his notice. Exxon Mobil then informed him that if he left for Hess, they would terminate his unvested incentive awards. Mr. Drennen ignored the warning and Exxon Mobil revoked his unvested shares. Thereafter, Mr. Drennen instituted a lawsuit to recover his shares.

While restraints on trade are generally held to be subject to the same rules as noncompetes the Court interestingly held that:

While we ultimately determined that the provision in Haass was an unreasonable restraint of trade, notably, we never concluded that the damage provision was, itself, a covenant not to compete. See id. at 385–87. Further, we did not provide a definition of a covenant not to compete. See generally id. at 385–88. The Covenants Not to Compete Act likewise does not define what it is to be a covenant not to compete. See TEX. BUS.& COM. CODE §§ 15.50–.52.

The Court based its reasoning on the practical reality that “[f]orfeiture provisions [are] conditioned on loyalty, [but] do not restrict or prohibit the employees’ future employment opportunities. Instead, they reward employees for continued employment and loyalty. Further, the Court explained, “[t]here is a distinction between a covenant not to compete and a forfeiture provision in a non-contributory profit-sharing plan because such plans do not restrict the employee’s right to future employment; rather, these plans force the employee to choose between competing with the former employer without restraint from the former employer and accepting benefits of the retirement plan to which the employee contributed nothing.”

This holding, combined with the Court’s holding that a Governing Law clause (which stated that New York law applied) meant the employee was out of luck and the employer with careful forethought and a properly drafted contract could skirt what would most likely contravene Texas law (though ultimately the Court left that question open).

The takeaway from Drennan that both employers and employees should keep in mind is the Court’s musings on Texas public policy. As the Court states:

With Texas now hosting many of the world’s largest corporations, our public policy has shifted from a patriarchal one in which we valued uniform treatment of Texas employees from one employer to the next above all else, to one in which we also value the ability of a company to maintain uniformity in its employment contracts across all employees, whether the individual employees reside in Texas or New York. This prevents the “disruption of orderly employer-employee relations” within those multistate companies and avoids disruption to “competition in the marketplace.” Citing DeSantis v. Wackenhut, 793 S.W.2d 670 (Tex. 1990).

The Court decided last Friday that freedom of contract trumps protecting employees. This echoes of another recent Supreme Court decision Ritchie v. Rupe wherein the Court held shareholders should protect themselves in contracts and not depend on equitable litigation claims.

http://thevethanlawfirm.blogspot.com/2014/07/texas-supreme-court-removes-shareholder.html

It will be interesting to see if the Texas Supreme Court shakes up any other areas of law based on this “shifting public policy.”

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Mr. Charles Marcellus Vethan

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Licensed since 1994

Member at firm The Vethan Law Firm, P.C.

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