Texas Supreme Court Rules For Exxon: A New Day For Noncompete-Triggered Forfeitures In Texas?

On August 29, 2014, the Texas Supreme Court in Exxon Mobil Corp. v. Drennen1 upheld a noncompete-triggered forfeiture provision in an executive compensation plan that applied New York law. This is a landmark decision in a number of important ways discussed below, but did it signal a new day for noncompete-triggered forfeiture clauses in Texas? Maybe, maybe not. Despite making a number of very important rulings on public policy, choice of law, and what it considers to be a "covenant not to compete," the Texas Supreme Court intentionally left the fundamental issue of enforceability of detrimental-activity provisions (i.e., noncompete-triggered forfeiture clauses) under Texas law undecided.

The heart of the court's ruling turned on the choice of law decision and is summed up nicely at the end of the case:

While Texas law may or may not permit the enforcement of these detrimental-activity provisions, New York law does. Application of New York law, resulting in the enforcement of these provisions, does not contravene any fundamental policy in Texas. Accordingly, without determining the enforceability of the detrimental-activity provisions under Texas law, we reverse the court of appeals' judgment and, applying New York law, render a take-nothing judgment for ExxonMobil in accordance with the trial court's judgment.

So, if the court did not decide the noncompete-triggered forfeiture issue based on Texas law, why should this be considered a landmark Texas decision? The answer lies in how the court got to the conclusion it describes above – getting to this result required some major shifts away from historic precedent.

Factual Background

The plaintiff worked for ExxonMobil for over 30 years. He received incentive compensation under a variety of programs, some of which involved shares in the company with delayed delivery provisions (e.g., 50% of the shares delivered three years after a grant, and 50% delivered seven years after a grant). The program agreements contained New York choice of law provisions. The programs contained termination provisions that allowed ExxonMobil to terminate outstanding awards under certain conditions. Engaging in "detrimental activity" was one such condition. "Detrimental Activity" was defined as "acceptance ... of duties to a third party under circumstances that create a material conflict of interest," and "material conflict of interest" included becoming employed "by an entity that regulates, deals with, or competes with the Corporation or an affiliate."

The plaintiff was told his job at the company was likely to...