Under Texas law, a restraint on competition without reasonable time and geographical limitations is unenforceable. Although New York generally disfavors an unreasonable non-competition covenant, there is an exception under the employee-choice doctrine. A recent Texas appellate court panel, applying Texas law, reversed a lower court order declaring valid under New York law an employment contract provision imposing a substantial penalty on a 30-plus year Exxon Mobil employee based in Texas who retired and then went to work for a competitor. Drennen v. Exxon Mobil Corp., No. 14-10-01099-CV (14th Tex. App., Feb. 14, 2012).

Over the years, Drenner was the recipient of incentive compensation in the form of 73,900 shares of restricted Exxon Mobil stock registered in his name and “earnings bonus units” which entitled him to share in the company’s earnings under certain circumstances. The incentive program allowed Exxon Mobil to cancel an incentive award to anyone who engaged in activity detrimental to the interests of the corporation as determined by the program administrator. A choice-of-law provision designated New York law although there was an exception for certain foreign nationals which provided for accommodation of “local laws, tax policies, or customs” of the foreign countries.

Shortly before Drenner retired, Exxon Mobil requested him to notify senior management if, within two years, he intended to accept a position with a competitor. Complying, he notified his former supervisor that he was considering acceptance of a senior officer position with Hess Corporation, a competitor of Exxon Mobil. The supervisor warned Drenner that a consequence would be loss of all of his incentives. Nevertheless, he accepted a position as senior vice president of Hess whereupon Exxon Mobil cancelled his restricted stock and earnings bonus units. He sued Exxon Mobil in a Texas state court, seeking a declaration that the cancellation was unlawful. The trial court ruled against him, and he appealed. The only issues involved questions of law.

Under the employee-choice doctrine, New York courts hold that an employee is not unreasonably restrained if the employee is free to choose between (a) preserving economic benefits by refraining from competition, and (b) risking forfeiture of those benefits by exercising his right to compete. The Texas appellate court held “that under New York law, the detrimental activity provisions [of the incentive program] are covenants not to compete and are enforceable under the employee-choice doctrine.” The court cited a Texas statute which, by contrast, provides that “a noncompetition agreement is enforceable [only] if it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the employer.” Continuing, the court held that “Because Exxon Mobil’s detrimental activity provisions meet none of these requirements, they are unenforceable under Texas law.” The dispositive question was which state’s law applies.

The court concluded that Texas has a materially greater interest that New York in the determination of enforceability. First, Exxon Mobil is headquartered in Texas, Dreener lives and worked there, and he signed the agreements in that state. “Second, issue of whether non-competition agreements are reasonable restraints upon employees who live and work in this state is a matter of fundamental Texas public policy.” Third, “the rationale underlying [the employee-choice] doctrine has been rejected by both the Texas legislature and the Texas Supreme Court.” Finally, Exxon Mobil’s contention that it has a strong interest in uniform application of its employment agreements was refuted by the exception for accommodation of local laws and policies for foreign nationals, and “If creating this exception does not significantly impede Exxon Mobil’s operations, we conclude that making the same accommodation for a long time Texas resident, whose work was in Texas and who signed the agreements in Texas, similarly would not be excessively disruptive.”

This case teaches that choice-of-law provisions may have to yield to the law of a different state whose fundamental public policy is paramount. Further, the decision reinforces the principle that a substantial loss of benefits as a price for competing is the equivalent of a non-competition clause.