Just when we thought the Texas Supreme Court cleared things up regarding non-compete agreements, the court issues another decision that muddies the water. In Exxon Mobil Co. v. Drennen, 2014 WL 4782974 (Tex. 2014), the court addressed a non-compete agreement in which the employee would forfeit deferred compensation (stock ownership) for violating the non-compete clause. The court found that a forfeiture clause did not fall within the definition of of “covenant” under the Covenants Not to Compete Act. Because, a forfeiture clause does not actually prohibit an employee from competing after leaving employment, said the court. The court also addressed its decision in Marsh U.S.C., Inc. v. Cook, 354 S.W.2d 764 (Tex. 2011). I previously discussed that decision here.
That decision, we thought, established that the consideration for a covenant not to compete only needs to be “reasonably realated” to an interest of the employer’s. The decision had stated that “goodwill” could serve as an employer’s interest that was worth protecting. That decision brought Texas jurisprudence more in line with the rest of the country and made covenants not to compete easier to enforce. But, the court in Drennen said the Marsh decision did not actually involve a covenant not to compete. The Marsh decision also involved a forfeiture of future compensation. But, the stock ownership plan in the Drennen case is different from that in Marsh, said the court. In Marsh, the employee was required to sign a non-compete agreement when he purchased stock. Here, however, Mr. Drennen was simply awarded stock in return for hard work and loyalty. The exchange, said the court, was continued loyalty (by Mr. Drennen) in return for for stock options (by Exxon).
The Drennen court then found that New York law would apply under the choice of law provision in the agreement. See decision here.