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:

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.
& COM.


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

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

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.


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