Exxon Mobil Corporation v. William T. Drennen, Iii

IN THE SUPREME COURT OF TEXAS
444444444444
NO . 12-0621
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EXXON MOBIL CORPORATION, PETITIONER,
v.
WILLIAM T. DRENNEN, III, RESPONDENT
4444444444444444444444444444444444444444444444444444
ON PETITION FOR REVIEW FROM THE
COURT OF APPEALS FOR THE FOURTEENTH DISTRICT OF TEXAS
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Argued November 6, 2013
JUSTICE GREEN delivered the opinion of the Court.
JUSTICE GUZMAN and JUSTICE LEHRMANN did not participate in the decision.
In this declaratory judgment action, we consider whether New York choice-of-law provisions
in a Texas-based corporation’s executive bonus-compensation incentive programs are enforceable
and, if not, whether the programs’ provisions allowing forfeiture of an executive’s bonus awards for
engaging in “detrimental activity” are enforceable under Texas law. We hold that the New York
choice-of-law provisions in the executive compensation plan are enforceable and that the
detrimental-activity provisions are enforceable under New York law. Accordingly, without reaching
the second question, we reverse the court of appeals’ judgment and render judgment in favor of the
corporation.
I. Factual and Procedural Background
William Drennen, III, worked as a geologist with Exxon Mobil Corporation (ExxonMobil)
in Houston for over thirty-one years, from 1976 through May of 2007, culminating his career with
the title of Exploration Vice President of the Americas. During his employment, he received several
forms of incentive compensation, including participation in the 1993 Incentive Program and the 2003
Incentive Program (Incentive Programs). Compensation under the Incentive Programs included
bonus awards, awards of restricted stock options, and earnings bonus units. Each time Drennen
received restricted stock, he signed a restricted-stock agreement that adopted the terms of the
Incentive Programs. These agreements were executed in Texas by both Drennen and
ExxonMobil—Drennen in Houston and ExxonMobil through its corporate representatives at its
corporate headquarters in Irving. During his thirty-one years of employment, Drennen was awarded
a total of 73,900 shares of restricted ExxonMobil (XOM) stock. Under the terms of the Incentive
Programs, 50% of the shares were to be delivered to Drennen (no longer restricted) three years after
each grant, with the remaining 50% to be delivered seven years after each grant.
The Incentive Programs both include choice-of-law provisions providing for application of
New York law, although ExxonMobil is headquartered in Texas and incorporated in New Jersey.1
The Incentive Programs contain termination provisions that enabled ExxonMobil to terminate the
outstanding awards if the employee (1) engaged in a detrimental activity, or (2) left ExxonMobil by
either “not terminating normally” (terminating before the standard retirement plan without written
1
The choice-of-law provisions state that “all actions taken under the [Incentive] Program shall be governed
by the laws of the State of New York.”
2
approval) under the 1993 Incentive Program or “resigning” (early retirement at the initiative of the
employee) under the 2003 Incentive Program. “Detrimental activity” is defined under the 1993
Incentive Program as “activity that is determined in individual cases by the administrative authority
to be detrimental to the interest of the Corporation of any affiliate.” “Detrimental activity” is defined
under the 2003 Incentive Program as “acceptance . . . of duties to a third party under circumstances
that create a material conflict of interest,” where a “material conflict of interest” includes when a
grantee “becomes employed . . . by an entity that regulates, deals with, or competes with the
Corporation or an affiliate.”
Until 2006, Drennen consistently ranked in the top 20% of ExxonMobil employees in his
annual review. However, after ExxonMobil implemented a new ranking system in 2006, Drennen
received a very unfavorable annual performance review, allegedly a result of his age and the new
C.E.O.’s desire to bring in a younger group of vice presidents. In December 2006, he was told by
Tim Cejka, his supervisor, that he would be replaced at ExxonMobil and that they were trying to find
him a new position but were thus far unsuccessful. Drennen asked about his unvested options should
he leave and was told by Cejka that, so long as he did not go to work for one of the other four
“majors” (Shell, BP, ChevronTexaco, or ConocoPhilips), he would be fine.
In March 2007 Drennen submitted his letter of resignation, stating his intent to retire in May.
Upon his retirement, Drennen had already received 16,700 shares of XOM stock without restriction
and had cashed out $4 million in pension funds, $1.8 million in 401(k) funds, and $3 million in stock
options. However, Drennen had 57,200 shares still in the restricted period. Before his retirement,
Drennen informed Cejka that he was considering taking a position at Hess Corporation (another large
3
energy company), and Cejka warned him that if he accepted the position, “it would be highly likely
that [Drennen] would lose all [of his] incentives.” Despite this warning, Drennen accepted the
position and began working at Hess as Senior Vice President for Global Exploration and New
Ventures in July 2007.
Shortly thereafter, Drennen’s former supervisor, Cejka, sent him a letter cancelling his
incentive awards, explaining that Hess is a direct competitor of ExxonMobil so there is a material
conflict of interest, constituting detrimental activity under both Incentive Programs. Therefore,
Drennen’s 57,200 outstanding restricted shares of ExxonMobil were forfeited and “cancelled” by
the plan administrator.
Drennen sued to recover the restricted stock, which ExxonMobil claimed he forfeited when
he accepted the position with Hess, a competitor. Drennen sought a declaratory judgment that:
(1) the detrimental-activity provisions in the Incentive Programs were being utilized as covenants
not to compete; (2) the covenants not to compete are unenforceable because they are not limited as
to time, geographic area, or scope of activity; and (3) therefore, ExxonMobil’s cancellation of the
restricted shares and bonus units was an impermissible attempt to recover monetary damages for an
alleged breach of an unenforceable covenant not to compete. The parties agreed that the declaratory-
judgment action would be decided by the trial court after the jury verdict. Additionally, Drennen
brought a claim for breach of an oral contract (the conversation between Drennen and Cjeka that
Drennen could retain his incentive awards so long as he did not go work for one of the four other
“majors”), raised a waiver or estoppel argument based on Cjeka’s assertions, and claimed that the
Incentive Program agreements had been modified by his conversation with Cjeka.
4
The jury found for ExxonMobil on all claims and theories put before it—the breach of
contract claim, the waiver and estoppel theory, and the oral contract modification theory. Drennen
moved for judgment notwithstanding the verdict (JNOV), urging the court to find that the
detrimental-activity provisions in the Incentive Programs are unenforceable covenants not to
compete under Texas law. The trial court denied the motion, rejected Drennen’s arguments on the
declaratory-judgment action, and entered a take-nothing judgment for ExxonMobil. Drennen did
not challenge the jury verdict on appeal; rather, he appealed the denial of the JNOV, arguing that
Texas public policy prohibits enforcement of the detrimental-activity provisions in the Incentive
Programs as void covenants not to compete.
The court of appeals reversed and ordered the trial court to render a declaratory judgment for
Drennen. 367 S.W.3d 288, 298 (Tex. App.—Houston [14th Dist.] 2012), pet. granted, 56 Tex. Sup.
Ct. J. 861, 864 (Aug. 26, 2013). The court of appeals held that the forfeiture conditions were
unreasonable covenants not to compete, which are unenforceable under Texas law as a matter of
public policy. See id. at 295. Applying conflicts-of-law analysis under the Restatement, the court
of appeals refused to apply New York law because the result would be against Texas fundamental
policy. See id. at 296–97 (citing RESTATEMENT (SECOND ) OF CONFLICT OF LAWS § 187(2)).
Therefore, the court of appeals held that Texas law applies because the choice-of-law provisions are
unenforceable and held that the detrminental-activity provisions, as forfeiture conditions, are
unenforceable covenants not to compete under Texas law. Id. at 298.
ExxonMobil petitioned this Court for review, arguing primarily that the choice-of-law
provisions are enforceable and the detrimental-activity provisions should, therefore, be enforced
5
under New York law. Alternatively, ExxonMobil argues that, even if Texas law applies, the
detrminental-activity provisions should be enforced under Texas law.
II. Discussion
We begin our analysis by determining whether the choice-of-law provisions, electing to apply
New York law for all disputes arising out of the Incentive Programs, are enforceable.
A. Enforceability of the Choice-of-Law Provisions
ExxonMobil argues that New York law should govern because the choice-of-law provisions
are enforceable under the Restatement. See RESTATEMENT (SECOND ) OF CONFLICT OF LAWS § 187.
We first note that Texas law recognizes the “party autonomy rule” that parties can agree to be
governed by the law of another state. See DeSantis v. Wackenhut Corp., 793 S.W.2d 670, 677 (Tex.
1990); cf. TEX . BUS. & COM . CODE § 1.301(a) (“[W]hen a transaction bears a reasonable relation to
this state and also to another state or nation the parties may agree that the law either of this state or
of such other state or nation shall govern their rights and duties.”). While we recognize that parties
“cannot require that their contract be governed by the law of a jurisdiction which has no relation
whatever to them or their agreement,” DeSantis, 793 S.W.2d at 677 (emphasis added), both Texas
and New York bear some relation to the parties and the agreements at issue in this case.
ExxonMobil is now headquartered in Texas, and Drennen worked in Houston when he executed both
Incentive Program agreements. But Drennen spent three years of his career working for ExxonMobil
in its New York City office in the mid-1980s. Additionally, ExxonMobil’s outside counsel is a New
York law firm. Finally, the subject-matter of the transaction—XOM shares—are traded on the New
6
York Stock Exchange and are valued based on the average of the high and low price of the shares
as reported on the consolidated tape at the New York Stock Exchange in New York City.
In DeSantis v.Wackenhut Corp., we adopted Restatement section 187, which provides the
framework for determining whether the parties’ agreement as to choice of law is enforceable.2 See
793 S.W.2d at 677–78; see also RESTATEMENT (SECOND ) OF CONFLICT OF LAWS § 187. Section
187(2) provides:
The law of the state chosen by the parties to govern their contractual rights and duties
will be applied, even if the particular issue is one which the parties could not have
resolved by an explicit provision in their agreement directed to that issue, 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’ choice, or
(b) application of the law of the chosen state would be contrary to a
fundamental policy of a state which has a materially greater interest than the
chosen state in the determination of the particular issue and which, under the
rule of § 188, would be the state of applicable law in the absence of an
effective choice of law by the parties.
RESTATEMENT (SECOND ) OF CONFLICT OF LAWS § 187(2).
We have already explained that some relationship exists between the parties and agreements
in this case and their chosen jurisdiction. Nowhere does the Restatement define “substantial
relationship,” nor have we defined the term. The comments to the Restatement do indicate, however,
that parties will be held to their choice when “the state of the chosen law [has] a sufficiently close
2
Section 187 has two subparts. However, the parties do not argue that section 187(1) applies. Section 187(1)
provides that the law of the chosen state governs if the particular issue to be decided is one which the parties could have
explicitly resolved in their agreement. R ESTATEM EN T (S ECOND ) O F C O N FLIC T O F L AW S § 187(1). This Court held in
DeSantis that the issue of whether a non-compete agreement is enforceable is not a question the parties could have
resolved by explicit provision, so section 187(1) does not apply. See 793 S.W .2d at 678.
7
relationship to the parties and the contract to make the parties’ choice reasonable.” Id. § 187 cmt. f.
Even when a relationship is not substantial, the parties may be held to the chosen state’s law when
they had a reasonable basis for their choice, such as choosing law they know well or that it is well
developed. Id. Here, ExxonMobil claims that the choice of New York law was reasonable because
it assures uniformity, certainty, and predictability in the application of its Incentive Programs.
ExxonMobil provided affidavit testimony that New York law was chosen to govern its incentive
agreements for three reasons: (1) ExxonMobil provides incentive awards to large numbers of
employees in many states and countries, many of whom move throughout their careers, so
consistency is required to administer the Incentive Programs; (2) New York has a well-developed
and clearly defined body of law regarding employee stock and incentive programs; and (3)
ExxonMobil’s stock is listed on the New York Stock Exchange, and New York—as home of the
Stock Exchange—has a well-developed and predictable body of law regarding a wide variety of
financial transactions, securities, and securities-related transactions, making it a routine choice of
law for parties to stock-related transactions and agreements. Indeed, the Restatement recognizes that
the prime objectives of contract law—protecting parties’ expectations and enabling parties to predict
accurately what their rights and liabilities will be—are best furthered, and certainty and predictability
of result most likely to occur, when parties to multistate transactions can choose the governing law.
Id. § 187 cmt. e. Further, “[c]ontracts are entered into for serious purposes and rarely, if ever, will
the parties choose a law without good reason for doing so.” Id. § 187 cmt. f. Under the
circumstances of this case, we conclude that section 187(2)(a) of the Restatement does not preclude
application of New York law.
8
We must next determine, in accordance with the three-step approach set forth in DeSantis,
793 S.W.2d at 678, whether Drennen and ExxonMobil’s choice of New York law is enforceable
under section 187(2)(b) of the Restatement.
1. Most Significant Relationship
The first determination of Restatement section 187(2)(b) is “whether there is a state the law
of which would apply under section 188 of the Restatement absent an effective choice of law by the
parties.” DeSantis, 793 S.W.2d at 678. This inquiry evaluates “whether a state has a more
significant relationship with the parties and their transaction than the state they chose.” Id. Thus,
in DeSantis we considered whether the relationship of the transaction and parties to Texas was
clearly more significant than their relationship to the chosen state, taking into account such factors
as the locations of the parties, the location of negotiations of the agreement, the location of the
execution of the agreement, and the place of performance. See id. at 678–79. Here, the parties are
both located in Texas, as ExxonMobil is headquartered in Irving and Drennen is a Houston resident;
the negotiations, if any, took place in Houston, as did the execution of the Incentive Program
agreements; and the performance of the contract took place in Houston, Drennen’s place of
employment, and in Irving, at ExxonMobil’s headquarters. However, ExxonMobil is a multi-
national corporation with a presence in New York.3 Additionally, as discussed above, Drennen spent
3
See, e.g., Exxon Corp. v. Cent. Gulf Lines, Inc., 500 U.S. 603, 604–06 (1991) (detailing Exxon’s business
dealings in New York); In re Methyl Tertiary Butyl Ether (“MTBE”) Prods. Liab. Litig., 725 F.3d 65, 78–88 (2d Cir.
2013) (detailing ExxonMobil’s conduct in New York leading to liability for environmental contamination), cert. denied
sub nom. Exxon Mobil Corp. v. City of New York, 134 S. Ct. 1877 (2014); Exxon Corp. v. Duval Cnty. Ranch Co., 406
F. Supp. 1367, 1368 (S.D. Tex. 1975) (explaining that, at the time, Exxon maintained its principal place of business in
the State of New York).
9
three years of his career with ExxonMobil working in its New York City office. While the
transaction and parties bear relations to both states, weighing the respective interests between New
York and Texas, we conclude that the relationship of the transaction and parties to Texas is more
significant than their relationship to New York. See id. at 679.
2. Materially Greater Interest
Under the Restatement, if Texas does not have a materially greater interest than New York
in the determination of this particular issue, it is immaterial whether the application of New York
law here would be contrary to a fundamental policy of Texas. See id. at 679. The next step in the
analysis, then, is determining whether Texas has a materially greater interest in the determination
of whether the detrimental-activity provisions are enforceable. Id.
In DeSantis, we considered both the specific facts of the case and the agreement’s potential
impact on the employee to determine whether Texas had a materially greater interest than did
Florida, the chosen state. See id. Wackenhut, the employer, was headquartered in Florida, and the
parties chose the law of Florida to govern the non-compete. Id. at 675. We recognized that Florida
shared an interest with Texas in protecting the justifiable expectations of entities doing business in
several states and noted that Florida had a direct interest in the enforcement of the agreement in
protecting a national business headquartered in Florida. Id. at 679. However, we noted that Texas
was directly interested in: (1) DeSantis—as an employee in Texas; (2) Wackenhut—as a national
employer doing business in Texas; (3) the new business DeSantis formed in Texas in violation of
the non-compete; and (4) consumers of the services in Texas. Id. We ultimately held that Texas
clearly had a materially greater interest in whether the agreement should be enforced. Id.
10
Here, ExxonMobil argues that Texas has no “materially greater interest” in the enforceability
of the forfeiture conditions than New York because New York law was chosen for uniformity and
predictability. The weight of the interests involved in DeSantis appear very similar to those involved
here. So while New York shares with Texas a general interest in protecting the justifiable
expectations of entities doing business in several states, that does not outweigh Texas’s interests in
this transaction. Having concluded in DeSantis that Texas had a materially greater interest in
enforcement of the agreement than Florida when the employer at issue was Floridian, see 793
S.W.2d at 679, we must conclude that Texas has a materially greater interest than New York here,
where both the employee and the employer are Texas residents. The second step of the analysis
weighs in favor of Texas.
3. Contrary to Fundamental Policy
The final step in the analysis is determining whether the application of New York law would
be contrary to a fundamental policy of Texas. Id. at 678; see also RESTATEMENT (SECOND ) OF
CONFLICT OF LAWS § 187(2)(b). In DeSantis, we recognized that neither this Court nor the
Restatement has adopted a general definition of “fundamental policy,” and we declined to define it
then. 793 S.W.2d at 680. We determined that applying the Florida choice-of-law provision would
contravene fundamental policy in Texas because the law governing enforcement of non-competes
is fundamental policy in Texas, and that “to apply the law of another state to determine the
enforceability of such an agreement in the circumstances of a case like this would be contrary to that
policy.” Id. at 681 (emphasis added). Notably, we based this reasoning, at least in part, on the desire
to avoid “disruption of orderly employer-employee relations [and] competition in the marketplace.”
11
Id. at 680. We must, then, determine whether the provisions at issue in the Incentive Programs are
covenants not to compete.
In this Court’s most recent decision involving a non-compete provision, Marsh USA Inc. v.
Cook, 354 S.W.3d 764 (Tex. 2011), we did not address this particular question because the parties
agreed that the provision in question was governed by the Covenants Not to Compete Act. See id.
at 768. We laid out a general definition for covenants not to compete: “Covenants that place limits
on former employees’ professional mobility or restrict their solicitation of the former employers’
customers and employees are restraints on trade and are governed by the Act.” Id. The agreement
here, arguably, does not fit within this definition as it does not “limit” Drennen’s professional
mobility, per se.
Looking at the facts in our prior non-compete cases, it is clear that the agreement here does
not fit the mold. In Marsh, the employee agreed that he would not solicit or accept business of the
type offered by his employer, perform or supervise any services related to that business, solicit
clients, or solicit employees for a period of two years following his termination. Id. at 767. In
another landmark non-compete case, Light v. Centel Cellular Co. of Texas, 883 S.W.2d 642 (Tex.
1994), the employee agreed that, upon termination of employment and for one year after, she would
not directly or indirectly compete with her employer in the Longview–Tyler–Kilgore–Marshall
service area. Id. at 645 n.8. Finally, in DeSantis v. Wackenhut Corp., a third historic Texas non-
compete case, the employee signed an agreement that, as long as he was employed by Wackenhut
and for two years thereafter, he would not compete in any way with Wackenhut in a forty-county
area in south Texas. 793 S.W.3d at 675.
12
There is a difference, although a narrow one, between an employer’s desire to protect an
investment and an employer’s desire to reward loyalty. Non-competes protect the investment an
employer has made in an employee, ensuring that the costs incurred to develop human capital are
protected against competitors who, having not made such expenditures, might appropriate the
employer’s investment. Marsh, 354 S.W.3d at 769. Forfeiture provisions conditioned on loyalty,
however, do not restrict or prohibit the employees’ future employment opportunities. Instead, they
reward employees for continued employment and loyalty. As we recognized in Marsh, employee
stock-ownership plans have a purpose that is unrelated to restraining competition—linking the
interest of key employees with the employer’s long-term success. See id. at 777. Under a non-
compete, the former employer can bring a breach of contract suit to enforce the clause. But under
a forfeiture provision, the former employer does not need to take legal action because the profit-
sharing plan belongs to the employer.
In Marsh, we were faced with an employee stock-ownership plan with a restrictive covenant,
and we held that the covenant was an enforceable non-compete. See id. at 766. However, the
provision in Marsh was materially different from the provision presented here in ExxonMobil’s
Incentive Programs. In Marsh, to exercise a stock option under the plan’s terms, employees were
required to provide the employer with written notice that the employee was exercising his option,
pay for the stock at the discounted stock price, and sign a non-solicitation agreement. Id. at 767.
The non-solicitation agreement was held to be an enforceable non-compete. Id. at 766. The issue
in Marsh was not whether the agreement was a covenant not to compete, or even whether the terms
of the agreement made it unenforceable, but rather whether, under Light and the Texas Covenants
13
Not to Compete Act, the non-compete was an unenforceable contract because it did not appear to
be ancillary to or part of an otherwise enforceable agreement. Id. at 767–68; TEX . BUS. & COM .
CODE § 15.50. A divided Court held that such independent agreements are enforceable so long as
the consideration for the non-compete is reasonably related to the company’s interest in protecting
its goodwill, vacating that part of Light which held that a unilateral non-compete agreement
supported by consideration did not meet the requirement that the covenant be ancillary to or part of
an otherwise enforceable agreement. Marsh, 354 S.W.3d at 775–76, 780.
Here, the detrimental activity provisions in the Incentive Programs are not like the provisions
in Marsh, Light, or DeSantis. They are, however, similar to the provision at stake in Peat Marwick
Main & Co. v. Haass, 818 S.W.2d 381 (Tex. 1991). Haass, an accountant, begrudgingly signed a
merger agreement with the accounting firm of Main Hurdmann (MH)4 whereby he promised to
compensate MH as provided for in the partnership agreement should Haass withdraw from MH and
take MH clients with him.5 Id. at 383. After Haass left MH, the firm sued him for breach of the
partnership agreement and breach of fiduciary duty. Id. at 384. Haass, in response, asserted that the
agreement operated in restraint of trade and as a penalty, and was thus unenforceable and
counterclaimed for his capital account, which MH was holding. Id. The parties disagreed as to
4
Before suit was filed, M ain Hurdmann merged with another large international accounting firm to form Peat
Marwick Main & Co. Haass, 818 S.W .2d at 382 n.1. Peat Marwick succeeded to the interest of Main Hurdman and
was the party on appeal. Id.
5
W hile Haass never signed the partnership agreement itself, the provision in the partnership agreement
referenced by and incorporated in the merger agreement contained a section titled “Termination Other Than by
Retirement— Payment to Firm.” See id. at 383 n.3. That section provided that a partner is liable to the firm for the costs
of acquiring the client and any fees and expenses due to the firm from such clients, should the partner (1) terminate for
any reason other than retirement, and (2) within two years of leaving the firm, solicit or provide services to any current
client of MH or client acquired by MH in the two years after termination. Id.
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whether this provision was, in fact, a covenant not to compete. Id. at 384–85. The provision in
question did not expressly prohibit Haass from providing accounting services to clients of MH and
was not an express promise by Haass not to compete. See id. at 385–86. While we ultimately
determined that the provision in Haass was an unreasonable restraint of trade, notably, we never
concluded that the damage provision was, itself, a covenant not to compete. See id. at 385–87.
Further, we did not provide a definition of a covenant not to compete. See generally id. at 385–88.
The Covenants Not to Compete Act likewise does not define what it is to be a covenant not to
compete. See TEX . BUS. & COM . CODE §§ 15.50–.52.
It is not necessary here to answer the question of what it means to be a covenant not to
compete any more than it was in Haass or Marsh. Drennen did not promise to refrain from
competing with ExxonMobil or refrain from soliciting clients or employees from ExxonMobil.
Instead, he agreed that, in reward for his hard work and loyalty, he would receive bonus
compensation in the form of stock options. One of the conditions of this bonus compensation was
continued loyalty, which was not a promise on Drennen’s part, but rather a power reserved to his
employer should he opt into the Incentive Programs. If he chose to compete with ExxonMobil
(which he did), he would forfeit the shares still in the restricted phase that were to be awarded as
bonus compensation. There is a distinction between a covenant not to compete and a forfeiture
provision in a non-contributory profit-sharing plan because such plans do not restrict the employee’s
right to future employment; rather, these plans force the employee to choose between competing with
the former employer without restraint from the former employer and accepting benefits of the
retirement plan to which the employee contributed nothing. See Dollgener v. Robertson Fleet Servs.,
15
Inc., 527 S.W.2d 277, 278–80 (Tex. Civ. App.—Waco 1975, writ ref’d n.r.e.). Whatever 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.
Accordingly, we hold that, under Texas law, this provision is not a covenant not to compete.
Whether such provisions in non-contributory employee incentive programs are unreasonable
restraints of trade under Texas law, such that they are unenforceable, is a separate question and one
which we reserve for another day. See Haass, 818 S.W.2d at 385–86.
Turning back to our analysis under Restatement section 187(2)(b), we can easily distinguish
the current case from our holding in DeSantis. First and most importantly, ExxonMobil’s Incentive
Programs do not involve covenants not to compete. See discussion, infra. Second, the policy
concerns regarding uniformity of law raised in DeSantis have changed in the past twenty-four years.
See Funk v. United States, 290 U.S. 371, 381 (1933) (“The public policy of one generation may not,
under changed conditions, be the public policy of another.”). With Texas now hosting many of the
world’s largest corporations,6 our public policy has shifted from a patriarchal one in which we valued
uniform treatment of Texas employees from one employer to the next above all else, to one in which
we also value the ability of a company to maintain uniformity in its employment contracts across all
employees, whether the individual employees reside in Texas or New York. This prevents the
6
Fifty-two of the 2014 Fortune 500 Companies maintain headquarters in Texas, placing Texas third behind
California and New York’s fifty-four companies. Maria Halkias, Texas Remains Near Top for Fortune 500 Companies,
T H E D ALL . M O RN IN G N EW S , June 3, 2014, available at 2014 W LNR 14947032.
16
“disruption of orderly employer-employee relations” within those multistate companies and avoids
disruption to “competition in the marketplace.” DeSantis, 793 S.W.2d at 680.
The drafters of the Restatement explained the rationale for section 187 by stating that
“[p]rime objectives of contract law are to protect the justified expectations of the parties and to make
it possible for them to foretell with accuracy what will be their rights and liabilities.”
RESTATEMENT (SECOND ) OF CONFLICT OF LAWS § 187 cmt. e. In multistate transactions, these prime
objectives “may best be attained . . . by letting the parties choose the law to govern the validity of
the contract.” Id. Our fear in DeSantis that “[e]mployers would be encouraged to attempt to invoke
the most favorable state law available to govern their relationship with their employees in Texas or
other states,” 793 S.W.2d at 680, is directly addressed by the drafters of the Restatement:
It may . . . be objected that, if given this power of choice, the parties will be enabled
to escape prohibitions prevailing in the state which would otherwise be the state of
the applicable law. Nevertheless, the demands of certainty, predictability and
convenience dictate that, subject to some limitations, the parties should have power
to choose the applicable law.
RESTATEMENT (SECOND ) OF CONFLICT OF LAWS § 187 cmt. e. As the court of appeals noted,
ExxonMobil’s argument, in essence, is that, “as a large, multi-national corporation, ExxonMobil has
a strong interest in uniform application of its employment agreements.” 367 S.W.3d at 297.
Uniformity is a frequent goal of contracting, as recognized in the comments to Restatement section
187, and parties should be able to achieve that goal by choosing the applicable law. While
application of Texas and New York law may reach different results on the enforceability of these
particular detrimental-activity provisions—which we do not decide today—we cannot conclude that
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applying New York law in such a determination is “contrary to a fundamental policy” of Texas.7 See
RESTATEMENT (SECOND ) OF CONFLICT OF LAWS § 187 cmt. g (“The forum will not refrain from
applying the chosen law merely because this would lead to a different result than would be obtained
under the local law of the state of the otherwise applicable law.”); see also DeSantis, 793 S.W.2d
at 680 (“[T]he result in one case cannot determine whether the issue is a matter of fundamental state
policy for purposes of resolving a conflict of laws.”). Because enforcement of New York law does
not contravene any fundamental public policy of Texas, we are bound to enforce the parties’ choice-
of-law provisions and apply New York law.
B. Application of New York Law
In the Court of Appeals of New York’s certified-question case of Morris v. Schroder Capital
Management International, 859 N.E.2d 503 (N.Y. 2006), the New York high court analyzed an
almost identical set of facts. As a portion of his year-end bonus, the plaintiff-employee, Paul Morris,
was awarded deferred compensation bonuses for the years 1997, 1998, and 1999 that would vest in
7
We recognize that other jurisdictions have held, as we did in DeSantis, that the application of another state’s
law which results in the enforcement of a non-competition agreement contravenes the forum state’s fundamental public
policy. See Dresser Indus., Inc. v. Sandvick, 732 F.2d 783, 787–88 (10th Cir. 1984) (“[T]he tendency of the courts [is]
to apply the policy of the forum state when parties are litigating covenants not to compete.”); Nordson Corp. v.
Plasschaert, 674 F.2d 1371, 1375 (11th Cir. 1982); Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Stidham, 658 F.2d
1098, 1100 n.5 (5th Cir. Unit A 1981); Davis v. Jointless Fire Brick Co., 300 F. 1, 3–4 (9th Cir. 1924); Muma v. Fin.
Guardian, Inc., 551 F. Supp. 119, 121–23 (E.D. Mich. 1982); Walling Chem. Co. v. Hart, 508 F. Supp. 338, 340 (D.
Neb. 1981); Fort Smith Paper Co. v. Sadler Paper Co., 482 F. Supp. 355, 357 (E.D. Okl. 1979); Blalock v. Perfect
Subscription Co., 458 F. Supp. 123, 127 (S.D. Ala.1978), aff’d per curiam, 599 F.2d 743 (5th Cir. 1979); Assoc. Spring
Corp. v. Roy F. Wilson & Avnet, Inc., 410 F. Supp. 967, 976–78 (D.S.C. 1976); Fine v. Prop. Damage Appraisers, Inc.,
393 F. Supp. 1304, 1310 (E.D. La. 1975); Boyer v. Piper, Jaffray & Hopwood, Inc., 391 F. Supp. 471, 473 (D.S.D.
1975); Forney Indus., Inc. v. Andre, 246 F. Supp. 333, 334–35 (D.N.D. 1965); Nasco, Inc. v. Gimbert, 238 S.E.2d 368,
369 (Ga. 1977); Std. Register Co. v. Kerrigan, 119 S.E.2d 533, 541–42 (S.C. 1961); Temporarily Yours–Temp. Help
Servs., Inc. v. Manpower, Inc., 377 So. 2d 825, 827 (Fla. Dist. Ct. App. 1979); see also Barnes Group, Inc. v. C & C
Prods., Inc., 716 F.2d 1023, 1031–32 (4th Cir. 1983); Bush v. Nat’l Sch. Studios, Inc., 407 N.W .2d 883, 886–88 (W isc.
1987) (suit for unfair termination). However, once again, it should be noted that this case does not involve a covenant
not to compete. See discussion infra.
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2001, 2002, and 2003. Id. at 505. Prior to the payments, Morris resigned and established a
competing hedge fund. Id. The deferred compensation awards were each governed by a plan with
a forfeiture provision that provided that if, before the end of the three-year vesting period, Morris
resigned and took employment with a company that SIMNA, his then employer, considered to be
a competitor, all deferred compensation would be forfeited. Id. Shortly after forming his own hedge
fund, SIMNA notified Morris that he had forfeited his deferred compensation benefits by engaging
in a business that competes with SIMNA. Id.
While recognizing that non-compete clauses in employment contracts are not favored and
will be enforced only to the extent reasonable and necessary to protect valid business interests, the
Court of Appeals of New York held that this forfeiture provision fell within the “employee choice”
doctrine recognized in New York. See id. at 506. In cases where an employer conditions receipt
of a benefit post-employment upon compliance with a restrictive covenant, the employee is given
the choice to either preserve his rights under the contract by refraining from competition or forfeit
such rights by exercising the right to compete. Id. Because the employee who leaves his employer
voluntarily or is terminated with cause makes an informed choice between retaining the benefit by
avoiding competitive employment or forfeiting his benefit by taking competitive employment, such
a provision is not an unreasonable restraint upon an employee’s liberty to earn a living. See id.
When the doctrine applies, “a restrictive covenant will be enforceable without regard to
reasonableness” so long as the employee voluntarily left his or her employment or was terminated
for cause. Id. at 507; see also Post v. Merrill Lynch, Pierce, Fenner & Smith, 397 N.E.2d 358,
360–61 (N.Y. 1999).
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Here, Drennen agreed to the detrimental-activity provisions in exchange for the receipt of
additional incentive compensation, i.e., stock options. See Int’l Bus. Mach. Corp. v. Martson, 37 F.
Supp. 2d 613, 617 (S.D.N.Y. 1999). By enrolling in the Incentive Programs, Drennen agreed that
he would forfeit any outstanding awards should he engage in activity determined to be detrimental
to the interest of ExxonMobil or should he accept employment with a competitor of ExxonMobil.
The Incentive Programs’ detrimental-activity provisions did not bar Drennen from seeking or
accepting other employment, but rather gave Drennen the “choice of preserving his rights under the
[Incentive Programs] by refraining from competition with [ExxonMobil] or risking forfeiture of such
rights by exercising his right to compete with [ExxonMobil].” See Lenel Sys. Int’l, Inc. v. Smith, 966
N.Y.S.2d 618, 621 (N.Y. App. Div. 2013) (quoting Kristt v. Whelan, 164 N.Y.S.2d 239, 243 (N.Y.
App. Div. 1957), aff’d, 155 N.E.2d 116 (N.Y. 1958)).
One essential element to the employee choice doctrine is the employer’s “continued
willingness to employ” the employee. Morris, 859 N.E.2d at 506 (quoting Post, 397 N.E.2d at
360–61). Should the employer terminate the employment relationship without cause, enforcement
of the restrictive covenant is no longer reasonable. See id. at 506–07. If the employee left his
employer voluntarily or engaged in conduct for which he was terminated for cause, a restrictive
covenant will be enforceable without regard to reasonableness under the employee choice doctrine.
Id. at 507. Here, Drennen was told by his supervisor during his annual review that his performance
had suffered to the point where he would no longer continue overseeing ExxonMobil’s exploration
activities in the Western Hemisphere. Drennen was told that another position would be found for
him within the company, but he retired four months later. Drennen made an informed choice
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between forfeiting his outstanding awards or retaining the awards by avoiding competitive
employment and voluntarily left his position with ExxonMobil. Therefore, under New York law,
ExxonMobil lawfully terminated the outstanding awards upon Drennen’s breach of the Incentive
Programs and voluntary resignation from ExxonMobil. See id. at 507–08.
III. Conclusion
Uniformity is a worthy goal and a logical rationale for choosing New York law and is a goal
recognized in the Restatement (Second) of Conflict of Laws. While Texas law may or may not
permit the enforcement of these detrimental-activity provisions, New York law does. Application
of New York law, resulting in the enforcement of these provisions, does not contravene any
fundamental policy in Texas. Accordingly, without determining the enforceability of the
detrimental-activity provisions under Texas law, we reverse the court of appeals’ judgment and,
applying New York law, render a take-nothing judgment for ExxonMobil in accordance with the trial
court’s judgment.
____________________________________
Paul W. Green
Justice
OPINION DELIVERED: August 29, 2014
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