From the employer’s perspective it’s always nice to have something new to use to prevent an employee from competing or using proprietary/confidential information once the employment relationship ends. Of course we talk all the time here about the standard post-employment covenants like the non-compete and non-solicitation provision.
One item we haven’t addressed previously is an incentive plant that contains a forfeiture provision. What is that? Basically, it’s a provision that ties continued benefits (usually cash or stock) to continued compliance with some type of post-employment condition. It’s not quite a non-compete but arguably has the impact. Which brings us to the Texas Supreme Court’s latest opinion in Exxon v. Drennen.
Basically, the employee was entitled to participate in an incentive program that provided for stock options. The former employee agreed among other things not to engage in detrimental activity. Detrimental activity was defined to mean:
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’
That language is pretty close to a non-compete and the former employee went to work with a competitor and Exxon said he could no longer participate in the program and forefeited his stock. The key question was would the Texas Supreme Court require athe agreement to comply with the non-compete statute and if so would this provision be enforceable? (Meaning it would have to be reasonable in time and scope and ancillary to an otherwise enforceable agreement.) The Texas Supreme Court answered the first question and held the incentive program was not a covenant not to compete. It then held that whether the agreement was an unreasonable restratint of trade was an issue to consider for another day because the Court determined that it would consider the provision under New York law (there was a choice of law provision for New York.)
So, we never got an answer as to whether the provision passes under Texas law. We only know that it does not rise to the level of the non-compete.