Analysis Of Exxonmobil Corp. V. Drennen Essays

Analysis Of Exxonmobil Corp. V. Drennen Essays

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In ExxonMobil Corp. v. Drennen , No. 12-0621, 2013 WL 9600951 (Tex. Aug. 29, 2014), the court was asked to consider the enforceability of restricted stock agreements that included New York choice-of-law clauses and called for the forfeiture of outstanding awards if a recipient engaged in "detrimental activity." After a former ExxonMobil Vice President accepted employment with a competitor, the company exercised the awards ' forfeiture provisions and determined that it would claw back approximately $5 million in unvested awards. The executive sued, claiming that the provisions amounted to overly broad non-competition clauses and therefore were unenforceable under Texas law. Although ExxonMobil prevailed after a jury trial, an appeals court sided with the executive and determined that, even if the New York law chosen in the restricted stock agreements would permit the forfeiture, Texas law had to apply because restraints of trade implicate fundamental Texas policy and that policy was violated because the forfeiture restrictions imposed by ExxonMobil amounted to overly broad - and thus unenforceable - non-competes.

On further appeal, the Texas Supreme Court conducted an extensive analysis of choice-of-law principles and determined that New York law should have been applied, and the forfeiture-for-competition clauses should have been respected, in part because the clawback structure did not offend Texas policy.

Applying the Restatement (Second) of Conflict of Laws § 187, the court emphasized that the law of a state designated by parties in their contracts will be applied unless either: "(a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties ' cho...

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... nothing."

After concluding that New York law could apply, the court then held that under New York 's "employee choice" principles, an executive who voluntarily left employment could be forced to forfeit his unvested stock if he chose to compete.

Although the Drennen opinion leaves several questions unanswered and purports to reserve the issue of whether Texas law would enforce ExxonMobil 's "detrimental activity" provision for another day, the ruling provides important new guidance for employers seeking to include restrictive covenant regimes within incentive and compensation arrangements for Texas employees. How best to structure those arrangements, and which state 's law to choose to govern them, will depend from company-to-company and from arrangement-to-arrangement. However, Texas employers now have an expanded toolkit to use when seeking to deter competition.

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