Can Former Employees Be Barred From Competition Without An Enforceable Non-Compete Agreement?

The Supreme Court of Texas, in Exxon Mobil Corp. v. Drennen (No. 12-0621), on August 29 of this year may have provided a blueprint to Texas employers to preclude competition from some select former employees without having to meet the requirements of an enforceable covenant not to compete. The Supreme Court allowed ExxonMobil to enforce a "detrimental activity" (competing employment) clause in a restricted stock agreement that provided that Drennen forfeited his right to the stock when he went to work for a competing employer, finding that the provision in question is not a covenant not to compete under Texas law.

Drennen was a geologist who worked for ExxonMobil for thirty-one years and had been awarded restricted stock under ExxonMobil's Incentive Program. The ExxonMobil Incentive Program provided that stock would be forfeited if the former employee went to work for a competing enterprise. After retiring from ExxonMobil, Drennen accepted a position with Hess Corp. and ExxonMobil cancelled the remainder of Drennen's incentive awards.

The Court differentiated between the Incentive Program and a covenant not to compete. "[T]here is a distinction between a covenant not to compete and a forfeiture provision in a noncontributory 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 or accepting benefits of the retirement plan to which the employee contributed nothing."

The Supreme Court went to some length to distinguish the restricted stock grant in Drennen from the stock option agreement that was analyzed as a covenant not to compete in Marsh USA v. Cook, 354 S.W.3d 764, 769 (Tex. 2011). The Court observed that in Marsh the employee had to do three things to get exercise his stock option: (i) notify the employer he was exercising his option, (ii) pay for the stock at the discounted price, and (iii) sign a non-solicitation agreement.

Tex. Bus. Commerce Code § 1.301(a) provides that "[W]hen a transaction bears a reasonable relation to this state and also to another state or nation the parties may agree that the law either of this state or of such other state or nation shall govern their rights and duties." Despite the facts that Drennen was employed by ExxonMobil for twenty-eight out of thirty-one years in Texas, and ExxonMobil is headquartered in Texas, ExxonMobil was...