In a closely watched case in which TCJL participated as an amicus, the Texas Supreme Court has held that an incentive compensation agreement between a Texas-based corporation and a senior executive can be enforced under Texas. Justice Paul Green delivered the opinion of a unanimous Court in Exxon Mobil Corporation v. Drennen (No. 12-0261).
ExxonMobil employed geologist Drennen for more than 30 years. During the term of his employment, Drennen received incentive compensation on several occasions, including bonuses, stock awards, and earnings bonus units. Each time Drennen received restricted stock, he signed a restricted-stock agreement adopting the terms of the Incentive Programs. Drennen eventually accumulated 73,900 shares of restricted stock through the incentive programs, 50% of which were to be delivered three years after each grant, with the remaining shares to be delivered after seven years. The incentive programs included choice-of-law provisions designating New York law as controlling, although ExxonMobil is incorporated in New Jersey and headquartered in Texas. The programs’ termination provisions allowed ExxonMobil to terminate any outstanding awards of stock if the employee (1) engaged in a detrimental activity, or (2) left ExxonMobil, either by terminating employment before the standard retirement plan without written approval or by taking early retirement at the employee’s initiative. The agreement further defined “detrimental activity” as accepting employment “with an entity that regulates, deals with, or competes with the Corporation or an affiliate.”
In 2007 Drennen submitted a letter of resignation, and upon retirement had received 16,700 shares of unrestricted stock and cashed out almost $10 million in pension, 401(k), and stock options. Drennen still held 57,200 shares still in restriction, and ExxonMobil warned him that if he took a job with Hess Corporation, he would forfeit the incentives. Nevertheless, Drennen began working at Hess as Senior Vice President for Global Exploration and New Ventures, a position similar to the ExxonMobil position from which he retired. ExxonMobil subsequently cancelled Drennen’s outstanding restricted shares. Drennen sued ExxonMobil to recover the restricted stock, alleging that the detrimental activity provisions of the incentive programs were illegal covenants-not-to-compete and were not enforceable under Texas law. The trial court ruled for Exxon, but the 14th Court of Appeals in Houston reversed, holding that the forfeiture conditions were unreasonable covenants not to compete. The Court of Appeals refused to apply New York law and instead applied Texas law in order to void the incentive agreements. The Texas Supreme Court reversed the 14th Court and reinstated the trial court’s take-nothing judgment for ExxonMobil.
First considering the enforceability of the choice-of-law provision itself, Justice Green reviewed DeSantis v. Wackenhut Corp., 793 S.W.2d 670 (Tex. 1990), in which the court adopted Restatement (Second) of Conflict of Laws, section 187. This section provides that the forum court will enforce a contractual choice-of-law provision directing the application of the law of another jurisdiction unless (1) 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 (2) applying 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 a particular issue and which, under the rule of §188 [of the Restatement], would be the state of applicable law in the absence of an effective choice of law by the parties.” Here the Court found that a “substantial relationship” existed because the choice of New York law was reasonable in terms of its certainty, predictability, and uniformity, especially given the large number of ExxonMobil employees working in different states and countries and the frequency of job moves. The Court thus determined that New York law could be applied.