'Detrimental activity' same as noncompete activity: Texas appeals courtPosted On: Feb. 17, 2012 12:00 AM CST
HOUSTON—In a decision that could have wide-ranging implications, a Texas state appellate court has ruled that the “detrimental activity” forbidden by a stock incentive plan is the same thing as noncompete activity and therefore not permitted under applicable Texas law.
Tuesday's unanimous ruling by the three-judge panel in William T. Drennen III vs. Exxon Mobil Corp. overturns a Harris County, Texas, jury's award in Exxon's favor.
According to the decision, ExxonMobil's incentive programs include a “detrimental activity” clause that permits Irving, Texas-based ExxonMobil to cancel stock incentive awards if an employee engaged in “detrimental activity,” which it defines as activity that is “detrimental to the interests of the corporation or any affiliate.”
Mr. Drennen had accumulated 73,900 shares of ExxonMobil's stock with an estimated value of about $6.2 million at the time of his 2007 retirement from the company under two incentive programs. Mr. Drennen told the company he planned to work for New York-based oil company Hess Corp., and was informed by ExxonMobil it was canceling all of his incentive awards as a result.
Mr. Drennen went to work for Hess anyway and sued ExxonMobil. The company argued that New York law applies to the programs, and the jury ruled in ExxonMobil's favor in 2009.In considering Mr. Drennen's appeal, the Texas state appellate court held that under New York law, the detrimental activity provisions are enforceable. However, in Texas, “covenants that place limits on former employees' professional mobility are restraints on trade and are governed by the Covenants Not to Compete Act,” said the court.
“Under Texas law, a noncompetition agreement is enforceable 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,” said the ruling. “Because ExxonMobil's detrimental activity provisions meet none of these requirements, they are unenforceable under Texas law.”
The appellate court then turned to the issue of whether Texas or New York law applies, and concluded that Texas law applies.
“ExxonMobil asserts that the trial court properly applied New York law in accordance with the incentive programs' terms,” said the appellate court. However, “Texas has a materially greater interest than New York in the determination of whether the detrimental activity provisions are enforceable against Drennen,” it said. “ExxonMobil's corporate headquarters are in Texas, most of Drennen's work was performed in Texas; he signed the agreement in Texas, and he resides in Texas,” said the court in remanding the case back to the trial court to “order ExxonMobil to deliver Drennen's incentive awards to him” and to “render judgment in Drennen's favor.”
An Exxon spokesman said the company is evaluating the opinion but believes that the original jury finding was correct.
Commenting on the decision, Russell D. Cawyer, a partner with law firm Kelly Hart & Hallman L.L.P. in Fort Worth, Texas, who was not involved in the case, said he believes the decision has wide-ranging implications because over the years he has read many stock grants by Texas firms just like Exxon's that “clearly were not written with the noncompete law in mind.”
In a related ruling last year that is cited in the ruling, the Texas Supreme Court held in Marsh USA Inc. and Marsh & McLennan Cos. Inc. vs. Rex Cook that firms can offer employees stock options in exchange for signing noncompete agreements.