United States: Did The Supreme Court Make The Right Choice (Of Law)?

Last Updated: November 4 2014
Article by Judith R. Blakeway

Exxon Mobile Corp. v. Drennen, 2014 Tex. LEXIS 760 (Tex. Aug. 29, 2014) is a case which has occasioned much comment and consternation. There, the Supreme Court considered whether a New York choice of law provision in a Texas-based corporation's executive bonus compensation incentive program was enforceable.

Exxon Mobile's incentive compensation program allowed forfeiture of an executive's bonus compensation if he accepted employment with a competitor. When Exxon Mobile canceled an executive's incentive awards after he went to work for a competitor, he sued, seeking a declaration that Exxon Mobile's cancellation of his stock award was an impermissible attempt to enforce an unenforceable noncompete. After the jury found for Exxon Mobile, the executive moved for judgment notwithstanding the verdict. The trial court entered judgment on the verdict for Exxon Mobile.

The court of appeals reversed and ordered the trial court to render judgment for the executive, reasoning that the forfeiture provision was an unreasonable covenant not to compete, unenforceable under Texas law as a matter of public policy. The court of appeals refused to give effect to the New York choice of law provision because the result would be against Texas public policy. Exxon Mobile appealed, arguing that the New York choice of law provision was enforceable.

The Supreme Court began its discussion of the enforceability of the choice of law provision by citing Texas Business & Commerce 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 such other state or nation shall govern their rights and duties.")

The Supreme Court analyzed the transaction in terms of the Restatement (Second) of Conflict of Law §187, which provides that the law chosen by the parties will govern their contractual rights unless:

  • it has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties' choice, or
  • the chosen law is contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in determining the particular issue, and which would be the state of applicable law in the absence of an effective choice of law.

Exxon Mobile is headquartered in Texas and the executive worked in Houston where he executed the incentive program agreement. But he spent three years working for Exxon Mobile in its New York City office. Exxon Mobile's outside counsel is a New York law firm, and the subject matter of the transaction––XOM shares––are traded on the New York Stock Exchange.

Exxon Mobile claimed the choice of New York law was reasonable because it assured uniformity, certainty and predictability in the application of its incentive programs. Exxon Mobile explained New York law was chosen to govern its incentive agreements for three reasons:

  • Exxon Mobile 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 program;
  • New York has a well–developed and clearly defined body of law regarding employee stock incentive programs;
  • Exxon Mobile stock is listed on the New York Stock Exchange and New York has a well–developed and predictable body of law regarding securities–related transactions.

The Court found these reasons compelling, acknowledging that the Restatement itself 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.

In analyzing the Restatement factors, the Court found:

  • the relationship of the transaction and the parties to Texas was more significant than their relation to New York;
  • Texas has a materially greater interest than New York in determining whether the provisions are enforceable;
  • applying New York law to determine the enforceability of forfeiture clauses in non–contributory profit–sharing plans like Exxon Mobile's incentive programs is not contrary to a fundamental policy of Texas.

The Court found persuasive the argument that 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 an employee's right to future employment; rather, these plans force an employee to choose between (1) competing with a former employer without restraint from the former employer or (2) accepting benefits of the retirement plan to which the employee contributed nothing.

Accordingly, the Court held that Exxon Mobile lawfully terminated the outstanding awards upon the executive's breach of the incentive program.

The Court did not analyze whether the transaction was a "qualified transaction" under Business and Commerce Code Section 271.001, probably because the transaction was entered into before the effective date of the statute. A "qualified transaction" is a transaction under which a party pays or receives consideration with an aggregate value of at least $1 million. Bus. & Comm. Code §271.001. On retirement, Drennen had already received 16,700 shares of XOM stock and had cashed out $4 million in pension funds, $1.8 million in 401(k) funds, and 3 million in stock options. His 57,200 restricted shares were worth considerably more than $1 million so the transaction was within the terms of the statute if it otherwise applied.

Under Chapter 271, the law chosen by the parties would:

  • govern the validity or enforceability of the agreement if the transaction bore a reasonable relation to that jurisdiction "regardless of whether the application of that law was contrary to a fundamental or public policy of this state or any other jurisdiction" §271.005;
  • govern the interpretation or construction of the agreement regardless of whether the transaction bore a reasonable relation to that jurisdiction; §271.006; and
  • if the transaction bore a reasonable relation to a particular jurisdiction at the time the parties entered into the transaction, the transaction would continue to bear a reasonable relation to the jurisdiction, regardless of any subsequent change in facts or circumstances with respect to the transaction, the subject matter of the transaction, or any party to the transaction. §271.004(c)(1).

Had the Court applied Chapter 271, the outcome would have been the same.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Judith R. Blakeway
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