© 2014 The Texas Lawbook.
By Janet Elliott – AUSTIN (August 20) — At a time when stock incentive plans are increasingly used to retain seasoned talent, businesses are awaiting guidance from the Texas Supreme Court on whether those benefits can be denied when an executive jumps ship.
The court heard arguments last November in the case of a former high-ranking ExxonMobil employee who was denied $5 million of the Texas energy giant’s stock when he was hired by a competitor.
William T. Drennen III had worked with ExxonMobil for 31 years and oversaw the corporation’s exploration activities in the Western Hemisphere when he retired in 2007 after being informed he would have to take a different position.
When ExxonMobil canceled his stock incentive awards because he had gone to work for Hess, Drennen sued his former employer for breach of contract, arguing that the “detrimental activity” provisions in his contract were an unenforceable covenant not to compete.
He lost a jury verdict and motion for judgment notwithstanding the verdict, but Houston’s 14th Court of Appeals ordered ExxonMobil to pay Drennen the stock he had earned.
Many heavy-hitters of the Texas business community have waded into the dispute.
An amicus brief filed jointly by the Texas Association of Business, Texas Oil & Gas Association, Texas Chemical Council and Texas Association of Manufacturers said the 14th Court’s ruling has “far-reaching and radical implications” by calling “into question the validity of countless numbers of existing contracts freely negotiated by employers and employees in reliance upon one of the most fundamental and pro-business platforms of Texas law — the freedom to contact.”
The dispute comes at a time when energy businesses are competing intensely for highly skilled employees, often luring them from other companies.
“Companies are taking a ‘wait and see’ approach regarding potential revisions to their contracts, including non-compete clauses and benefits structures,” said John Strasburger, a partner at Winston & Strawn in Houston who is not directly involved in the case.
“Depending on what the Supreme Court holds, companies trying to hire top executives subject to agreements similar to the one in dispute could be looking at higher expenses in luring talent and compensating recruits for these lost deferred compensation and equity benefits, which can be very substantial,” Strasburger said.
The 14th Court opinion by Justice Tracy Christopher found that the requirement in Texas law that non-compete clauses must be limited and reasonable also “applies to agreements that do not expressly prohibit a former employee from competing, but instead impose a severe economic penalty on the departing employee if he engages in competition.”
The court found that the language in Drennen’s agreement did not meet Texas’ reasonableness standards and is unenforceable.
Because the incentive program contained a New York choice-of-law clause, the court had to determine whether to apply that state’s law, which assumes that an employee who leaves his employer makes an informed choice to forfeit his rights under the employment contract of his former company.
Noting that ExxonMobil’s headquarters are in Texas and most of Drennen’s work was done in Texas, where he resides, the court concluded that Texas has a greater material interest than New York, where ExxonMobil’s stock is traded, and that application of New York law would be contrary to Texas public policy.
The case was argued for ExxonMobil by Russell Post, a partner at Beck Redden in Houston, and Shannon Ratliff of Austin’s Ratliff Law Firm. Drennen was represented by Scott Brister, a partner at Andrews Kurth in Austin.
In a post-submission letter brief, Ratliff said enforcement of detrimental-activity clauses like the one in Drennen’s contract ensures that all employees who are participants in the plan are treated the same and not subject to the varying views of 50 states. He said that no state or federal court has held that conditions such as those in ExxonMobil’s plan constitute an unreasonable restraint of trade.
“Instead of restraining trade, the conditions in ExxonMobil’s plan reasonably protect shareholder expectations in making the grant and the company’s goodwill and business interests, while allowing the employee to make a meaningful choice of employment at a time when he or she can weigh the economic pros and cons of pursuing competing employment,” Ratliff said.
If Drennen loses, Brister told the court in his post-submission letter, he and other Texas employees who want to change jobs will “suffer a competitive disadvantage to other Texans because they must seek higher wages to make up for those penalties.”
In an earlier filing responding to amicus briefs, Brister said the business community wants to benefit from some Texas laws and ignore others.
“Many businesses move employees to Texas precisely because they want Texas law (like the state’s right-to-work, minimum-wage, and employment-at-will laws) to govern employee relations,” he said. “Having availed themselves of Texas law generally, they cannot pick and choose bits of New York law that violate fundamental legislative and legal policies in Texas.”
A decision by the Texas Supreme Court is expected any day.
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