ERISA and Global Benefits

Forfeiture-for-Disloyalty Sustained by Texas Supreme Court (applying NY Choice of Law)

September 08, 2014

The Global Compensation, Benefits & ERISA Practice Group

There is a crucial difference between non-competition provisions and forfeitures-for-competition, and the Supreme Court of Texas highlighted that in ruling against a Texas-based employee who resigned from Exxon Mobil to join a competitor. That employee forfeited about $5.7 million of restricted stock awards due to "detrimental conduct" within the meaning of to the underlying plan and award agreements. The decision highlights the importance of well-grounding the forfeiture in suitable state law. Writing that "Forfeiture provisions conditioned on loyalty . . . do not restrict or prohibit the employee's future employment opportunities," the Supreme Court of Texas declined to apply state non-compete principles and instead applied New York's employee choice doctrine. The court enforced the parties' designation of New York law as controlling partly because the employee had worked in New York for 3 of his 31 years, but seemingly more so because --

  1. 1.   "the subject matter of the transaction - XOM shares - are traded on the New York Stock Exchange";

  2. 2.   "consistency is required to administer the Incentive Programs" for "large numbers of employees in many states and countries, many of whom move throughout their careers";

  3. 3.   New York has a well-developed and clearly defined body of law regarding employee stock and incentive plans"; and

Applying New York's employee choice doctrine, the Texas Supreme Court enforced the restricted stock forfeiture 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" (page 19 of Exxon Mobil Corp. v. Drennen).

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