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Stock Incentive Plans may allow Texas Employers to Recoup Bonus Pay from Employees that Leave and Work for a Competitor

As far as employee compensation agreements are concerned, Texas employers are riding a wave of pro-business precedent to recoup bonus pay from employees.   The Supreme Court of Texas’ recent opinion in ExxonMobil Corporation v. Drennen continues the trend.   In its August 29, 2014 opinion, the Drennen Court reversed the Fourteenth Court of Appeals judgment in favor of William T. Drennen, III ("Drennen") and rendered judgment in favor of ExxonMobil, Corporation ("Exxon").

Before he left Exxon to work for a competitor, Drennen was an executive with Exxon for more than thirty years.  While employed by Exxon, he entered into two separate stock incentive plans.  Per the terms of these plans, Exxon awarded Drennen 73,900 shares of restricted Exxon stock.   Drennen was to receive 50% of the shares after three years and the remaining 50% of the shares after seven years.

The incentive agreements contained “detrimental activity” provisions and provided that New York law applied.  The detrimental activity provisions provided that, in the event Drennen left and worked for a competitor, Exxon could cancel the award of any unvested shares.   At the time he submitted his letter of resignation, he had 57,200 shares of unvested restricted Exxon stock.

Despite being warned by Exxon that if he went to work for a competitor it would cancel the award of the 57,200 unvested shares, Drennen went to work for a competitor.  Drennen sued for declaratory judgment asking for a declaration that: (1) the detrimental activity provisions were effectively covenants not to compete; (2)  the covenants not to compete were unenforceable because they were not reasonably limited in time, geographic area and scope of activity; and (3) Exxon’s cancellation of the unvested shares was an impermissible attempt to recover monetary damages for an alleged breach of an unenforceable covenant not to compete.

At the trial court, Exxon was successful.   The Fourteenth Court of Appeals, however, found for Drennen.  The court of appeals found the forfeiture provisions were unreasonable covenants not to compete that, as a matter of Texas public policy, were unenforceable.  Based on that determination, the court of appeals refused to apply New York law because the result would be against Texas fundamental policy.

Reversing the court of appeals, the Supreme Court of Texas held that the detrimental activity provisions were NOT covenants not to compete.  Relying on its Marsh USA Inc. v. Cook, 354 S.W.3d 764 (Tex. 2011) opinion, the court generally defined covenants not to compete as “Covenants that place limits on former employees’ professional mobility or restrict their solicitation of the former employers’ customers and employees are restraints of trade and are governed by the Act.”  The court further reasoned that legitimate covenants not to compete were designed to protect a company’s investment.

The Court concluded that the incentive agreements did not restrict Drennen working for a competitor.   Instead, he had a choice.  He could remain loyal to Exxon and receive the unvested stock as it became due to him, or he could work for a competitor and Exxon could keep the unvested stock.   The court reasoned that the stock program belonged to Exxon and Exxon could decide to reward loyalty.  A condition of that loyalty reward was that Drennan not compete with Exxon.

The court went on to say “[w]hatever it may mean to be a covenant not to compete under Texas law, forfeiture clauses in non-contributory profit-sharing plans, like the detrimental-activity provisions in ExxonMobil’s Incentive Programs, clearly are not covenants not to compete.”  After making that finding, the court expressly refrained from determining whether such provisions were unreasonable restraints of trade under Texas law such that they were unenforceable.  Because the detrimental activity provisions are not covenants not to compete against Texas fundamental policy, the Court concludes that New York law applies and allows the enforcement of the detrimental activity provisions in Exxon’s incentive agreements.

Texas employers with no substantial connections to New York can take two things from this opinion.  First, whatever a covenant not to compete may be in Texas, a detrimental activity provision in a stock incentive plan is not such a covenant.  Second, there is a possibility that such stock incentive plans could be unreasonable restraints of trade under Texas law.  Albeit, the language of the opinion suggests that such provisions would not be an unreasonable or may not even be a restraint of trade at all.  A savvy employer may now anticipate these arguments and consider utilizing the Drennen opinion as a “play book” for drafting its stock incentive compensation plans.