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Russell D. Cawyer and Ezra R. Kuenzi

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  1. 1. EXXON MOBIL CORP. V. DRENNEN Russell D. Cawyer and Ezra R. Kuenzi1 The Texas Supreme Court recently held that a forfeiture clause of an employee retention award contained in a large, multi-state employer’s non-contributory profit sharing plan (i.e., a plan to which the employee contributes nothing) did not constitute a covenant not to compete under Texas law.2 In doing so, the Court placed its stamp of approval (albeit in limited circumstances) on using employee incentive plans as an alternative method of employee retention and discouraging competition or, as the Court stated, to “reward loyalty” without requiring those agreements to comply with all of the technical provisions of the Texas Covenant not to Compete Act.3 In Exxon Mobil Corp. v. Drennen, the plaintiff, Drennen, worked for ExxonMobil for 31 years.4 During his employment, Drennen participated in ExxonMobil’s Incentive Program (“Program”) that awarded restricted stock grants and bonuses to high-performing employees.5 At the time of his retirement, Drennen had accumulated 73,900 shares of ExxonMobil stock through the Program valued at approximately six million dollars.6 Drennen had already received 16,700 shares, but 57,200 shares were still in the restricted period.7 Importantly, the Program was a non-contributory program where Drennen contributed nothing for the incentive awards. The Program provided that New York law would govern the Program and allowed ExxonMobil to cancel an employee’s awards if he engaged in “detrimental activity.”8 Detrimental activity was defined, in relevant part, as the employee’s acceptance of duties to a third party that creates or appears to create a material conflict of interest and includes becoming “employed or otherwise engaged by an entity that regulates, deals with, or competes with” ExxonMobil.9 The Program did not contain any restrictions as to time, geographic area or scope of activity that might constitute detrimental activity as one would expect to see in a covenant not to compete governed by Texas law.10 Around the time Drennen retired,11 he interviewed for a position with Hess Corporation.12 Drennen informed ExxonMobil that he was considering taking a position with Hess, and ExxonMobil warned Drennen that he risked forfeiture of his incentive awards if he accepted the position.13 Nonetheless, Drennen accepted the job with Hess, and ExxonMobil notified Drennen that his 57,200 outstanding restricted shares of ExxonMobil were forfeited and canceled by the plan administrator.14 Drennen sued ExxonMobil to recover the restricted stock based on a number of legal theories.15 ExxonMobil won following a jury trial, but Drennen asked the trial court to enter judgment notwithstanding the jury verdict claiming that the Program was a noncompete that was unenforceable under Texas law.16 The trial court denied Drennen’s motion. Drennen appealed to the Fourteenth District Court of Appeals in Houston arguing that the “detrimental activity” clause of the Program was tantamount to a non-compete and that because it lacked reasonable limitations as to time, geographic areas, and scope of activity limitations, was unenforceable under Texas law.17 The court of appeals reversed and ordered the trial court to render a declaratory judgment in favor of Drennen.18 The court of appeals concluded using traditional conflict of law analysis that (1) Texas had a more significant relationship with the parties and their transaction than New York; (2) Texas had a materially greater interest in the dispute between the parties; and (3) the forfeiture provisions were contrary to Texas fundamental public policy and constituted an over broad, unreasonable, covenant not to compete.19 On further appeal, the Texas Supreme Court reversed the case and rendered judgment for ExxonMobil.20 The Supreme Court first conducted an extensive conflict-of-law analysis and determined that the New York choice-of-law provision in the Program was enforceable.21 The Court applied the Restatement (Second) of Conflict of Laws § 187(2) which provides that the law of a state chosen by the parties to govern their contracts will be applied unless: “(a) the chosen state has no substantial relationship to the
  2. 2. parties or the transaction and there is no other reasonable basis for the parties’ choice; or (b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which . . . would be the state of applicable law in the absence of an effective choice of law by the parties.”22 Requiring only a minimal rather than a substantial relationship, the Court concluded that there was a “reasonable basis” for the choice of New York law because: (1) ExxonMobil provides incentive awards to large numbers of employees in many states and countries . . . so consistency is required to administer the Incentive Programs; (2) New York has a well-developed and clearly defined body of law regarding employee stock and incentive programs; and (3) ExxonMobil is listed on the New York Stock Exchange, and New York . . . has a well-developed and predictable body of law.23 Although the Court determined that Texas had a materially greater interest in the determination of whether the forfeiture provision was enforceable, it also found that applying New York law would not be contrary to fundamental public policy of Texas because the forfeiture provision was not a covenant not to compete under Texas law.24 The Court reasoned that “there 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.”25 The Court recognized that “[t]here is a difference, although a narrow one, between an employer's desire to protect an investment and an employer's desire to reward loyalty.”26 The Court also acknowledged the interest that multi-national corporations headquartered in Texas have in maintaining uniformity and consistency in the application and interpretation of their employment agreements. As the Court said, [T]he policy concerns regarding uniformity of law raised in DeSantis have changed in the past twenty-four years. 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 employeremployee relations” within those multistate companies and avoids disruption to “competition in the marketplace.”27 Because the forfeiture provision was not a covenant not to compete, the public policy of the state of Texas was not implicated, and the Court held that the parties’ choice of law provision must be honored.28 Applying New York law and its “employee choice” doctrine, a restrictive covenant will be enforced without regard to reasonableness if the employee voluntarily left his or her employment or was terminated for cause.29 The rationale for New York’s rule is that “the employee is given the choice to either preserve his rights under the contract by refraining from competition or forfeit such rights by exercising the right to compete.”30 As the Court further explained, One essential element to the employee choice doctrine is the employer’s ‘continued willingness to employ’ the employee. Should the employer terminate the employment relationship without cause, enforcement of the restrictive covenant is no longer reasonable. If the employee left his employer voluntarily or engaged in conduct for which he was terminated for cause, a restrictive covenant will be enforceable without regard to reasonableness under the employee choice doctrine.31 The Court noted that Drennen was told in his latest performance review that his performance was unsatisfactory but that another position would be found for him within the Company.32 Because Drennen voluntarily left his position with ExxonMobil four months later, the Court concluded that the employee choice doctrine applied and Drennen elected to forfeit his incentive awards by working for a competitor.33
  3. 3. The Court did not address whether ExxonMobil’s forfeiture provision was enforceable under Texas law.34 Indeed, the Court reserved for another day whether forfeiture of employee bonus awards are enforceable under Texas law or are unreasonable restraints of trade. Thus, employers should proceed with caution when seeking to use forfeiture clauses as a tool to prevent competition. Employers should take note that: • Texas law still appears to compel ignoring foreign choice of law provisions for noncompetition agreements that restrict an employee’s mobility and ability to work for a competitor with Texas-based employees35; • Forfeiture provisions conditioned on continued loyalty rather than to protect the investment in employees (i.e., a traditional noncompete) do not necessarily constitute noncompetition agreements; and • Forfeiture provisions conditioned on continued loyalty in employment agreements, may still however, be unreasonable restraints of trade under Texas law. This case signals a clear shift in policy by the Texas Supreme Court by valuing uniformity of employment contracts for multi-state employers over uniform treatment of Texas employees. In doing so, the Court drew a distinction between agreements that merely discourage competition versus agreements that prohibit of competition. Based on this distinction, the Court held that ExxonMobil’s non-contributory profit sharing plan did not constitute a covenant not to compete under Texas law ultimately causing Drennen to lose millions of dollars. ENDNOTES 1 Copyright © 2014. 2 Exxon Mobil Corp. v. Drennen, 12-0621, 2014 WL 4782974 (Tex. Aug. 29, 2014). 3 Id. at *7. 4 Id. at *1. 5 Id. 6 Id. at *2. 7 Id. 8 Id. at *1. 9 Id. 10 Id. at *10. 11 Drennen retired four months after receiving a negative annual performance review and being told he would be replaced but that the Company was trying to find him new position. Id at * 2. 12 Drennen, 12-0621, 2014 WL 4782974, * 10. 13 Id. 14 Id. 15 Id. 16 Id. at *3. 17 Id. 18 Id. 19 Id.; see also Drennen v. Exxon Mobil Corp., 367 S.W.3d 288, 296 (Tex. App.—Houston [14th Dist.] 2012,
  4. 4. reh'g denied (June 19, 2012), rev'd (Aug. 29, 2014)), rev'd, 12-0621, 2014 WL 4782974 (Tex. Aug. 29, 2014). 20 Drennen, 12-0621, 2014 WL 4782974 at *1. 21 Id. at *3-6. 22 Id. at *4 (quoting Restatement (Second) of Conflict of Laws § 187 (1971). 23 Id. 24 Id. at *5-8. 25 Id. at *8. 26 Id. at *7. 27 Id. (internal citations omitted) (emphasis added). 28 Id. at *11. 29 Id at *10. 30 Id. 31 Id. (internal citations omitted). 32 The Court did not address the fact that while Drennen was told ExxonMobil was trying to find him a new position, it had been unsuccessful in doing so. Cf id. at *2 with *10. 33 Id. at *10. 34 Id. at *8. 35 See DeSantis v. Wackenhut, 793 S.W.2d 670 (Tex. 1990). Russell D. Cawyer is a partner in the Labor and Employment group at Kelly Hart & Hallman LLP Ezra R. Kuenzi is an associate in the Labor and Employment group at Kelly Hart & Hallman LLP