© 2014 The Texas Lawbook.
By Janet Elliott — AUSTIN (August 29) — The Texas Supreme Court ruled Friday in favor of ExxonMobil in a dispute over whether the corporation’s stock incentive plan could serve as a de facto non-compete clause.
In finding that detrimental activity provisions in an employee incentive plan were enforceable under New York law, the court sidestepped the question of whether such provisions are enforceable under Texas law.
The case involves a former high-ranking ExxonMobil executive who was denied $5 million of the Texas energy giant’s stock when he was hired by a competitor.
William T. Drennen III retired from ExxonMobil in 2007 after the corporation removed him from his duties overseeing Western Hemisphere exploration. He later went to work for Hess, a company Exxon considered to be a competitor.
The case was closely watched by the Texas business community, which was concerned that a ruling in favor of Drennen would impact a large number of executive incentive programs.
In an opinion by Justice Paul W. Green, the court said that although Texas has a materially greater interest than New York because both the employee and the employer are Texas residents, ExxonMobil’s desire for uniformity in dealing with employees in many locations is a logical rational for choosing New York law.
The court drew a distinction between a covenant not to compete and a forfeiture provision in a non-contributory profit-sharing plan.
Such forfeiture provisions “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,” Green said.
“While Texas law may or may not permit the enforcement of these detrimental-activity provisions, New York law does,” Justice Green said.
The court’s ruling reversed the 14th Court of Appeals, which found that the language in Drennen’s agreement was unenforceable under Texas law. The court rendered a take-nothing judgment for ExxonMobil in accordance with the trial court’s judgment.
Justices Eva Guzman and Debra Lehrmann did not participate in the decision.
A Houston attorney who followed the case said the ruling provides an important reminder that “choice of law” provisions like the ones in Drennen’s stock incentive agreements really do matter.
“With this opinion on the books, companies who can legitimately have a New York choice of law provision in an agreement like this will choose to do so,” said John Strasburger, a partner at Winston & Strawn in Houston who was not involved in the case. “Some may already be doing that and many who have not will start to do so.”
Now that Texas is host to many of the world’s largest corporations, Justice Green said, 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 resides in Texas or New York.”
“That is an interesting comment and pretty starkly reminds us we are now squarely in a global economy,” said Strasburger. “I can’t imagine that language appearing in a case 20 years ago.”
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.
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