## IN THE SUPREME COURT O F TEX AS

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. 12-0621

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O N P E T I T I O N F O R R E V I E W F R O M T H E C O U R T O F A P P E A L S F O R T H E F O U R T E E N T H D I S T R I C T O F T E X A S

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Argued Novem ber 6, 2013 J U S T I C E G R E E N delivere d the opinion of the Court. J U S T I C E G U Z M A N and J U S T I C E L E H R M A N N did not participate in the de cision.

I n this decla

ratory judgme nt action, we con s id e r w h e th e r N e w Y o r k choice -of- law provisions in a Texas-based corpor ation’s executive bonus-compensa tion ince ntive prog rams are enfor cea ble and, if not, whether the prog rams’ provisions allowing forf eiture of an executive’s bonus awa rds for
eng ag ing in “detr imental activity ” are enfor cea ble under Texas law. W e h o l d t h at the New York choice -of- law provisions in the execut i ve compensa tion plan are enfor cea ble and that the detrimental-a ct iv it

y p r o visions are enfor cea

ble under New York law. Acc ording ly , without rea ching the second question, we reve rse the court of appea ls’ judgme nt and rende r judgme nt in favor of the
corpor ation.I. F actual and Proc edural Backgroun d

Wil liam Dre nnen, I I I , worke d as a g eolog ist with Ex x on Mobil Corporation (Exx onMobil) in H ouston f

or over thirty -one y ear s, from 1976 throug h May of 2007, culminating his c are er with the title of Ex ploration Vice President of the Americ as. During his employ ment, he rec eived sever al forms of incentive compensa tion, including participa tion in the 1 9 9 3 I n c e n ti v e Pr o g ram and the 2003
I ncentive Prog ram (I ncentive Prog rams). Comp en s ation under the I ncentive Prog rams included bon u s aw ards, awa

rds of restric ted stock options, and ear nings bonus units. Eac h time Dre nnen

rec eived restric t ed s t o ck, he signe d a restric ted-stock ag ree ment that adopted the terms of the
I ncentive Prog rams. These ag ree ments wer e ex ecute d in Texas by both Dre nnen and
Ex x onMobil—Drennen in Houston and Ex x onMobil throug h its corpor ate repr es entatives at its
corpor ate headqua

rters in I rving

. During his thirty -one y ear s of employ ment, Dre nnen was awa

rded
a tot al of 73,900 share s of re stricted Exx onMobil (XOM) stock. Unde r the ter ms of the I ncentive Prog rams, 50% of the share s wer e to be delivere d to Dre nnen (no longe r restric ted) three y ear s afte r

eac h g rant, with the re maining 50% to be deliver ed seve n y ear s after eac h g rant. The I ncentive Prog rams both include choice -of- law provisions providing for application of New York law, althoug h Ex x onMobil is headqua rtere d in Texas and incorporated in New J erse y . 1 The I ncentive Prog rams contain termination provisions that enabled E x x onMobil to t erminate the outstanding awa

rds if the employ ee (1) eng ag ed in a detrimental activity , or (2) left Ex x onMobil by either “not terminating normally ” (terminating befor e the standard retire ment plan without wr itten

T h e c h o i c e - o f

- l a w p r o v i s i o n s s t a t e t h a t “ a l l a c t i o n s t a k e n u n d e r t h e [ I n c e n t i v e ] P r o g r a m s h a l l b e g o v e r n e d 1 b y t h e l a w s o f t h e S t a t e o f N e w Y o r k

. ” 2approva l) under the 1993 I ncentive Prog ram or “re signing ” (ea rly retire ment at the initiative of the employ ee) under the 2003 I ncentive Prog ram. “De trimental activit y ” is define d under the 1993
I ncentive Prog ram as “ac tivity that is deter mined in individual case s by the administrative authority
to be detrimental to the interest of the Corporation of any aff iliate.” “De trimental activity ” is define d under the 2003 I ncentive Prog ram as “ac cepta nce . . . of duties to a third party under circ umstances that cre ate a materia l conflict of interest,” whe re a “m ater ial conflict of interest” includes when a g rante e “bec omes employ ed

. . . by an en t ity that reg ulates, deals with, or competes with the Corporation or a

n aff iliate.” Un t i l 2006, Dre nnen consistently ranke d in the top 20% of Ex x onMobil employ ees in h i s annual revie w. Howeve r, afte r Ex x onMobil implemented a new ranking sy stem in 2006, Dre nnen

rec eived a very unfa vorable annual perf ormanc e revie w, alleg edly a result of his ag e and the new C.E.O.’s desire to bring in a y oung er g roup of vice presidents. I n Dec ember 2006, he was told by Tim Cejka, his supervisor, that he would be repla ced at Ex x onMobil and that they wer e try ing to find him a new position but wer e thus far unsucce ssful. Dre nnen asked about his unvested options should he leave and was told by Cejka that, so long as he did n o t go t o wo rk for one of the other four “majors” (Shell, BP, ChevronTe x aco, or ConocoPhili ps), he would be fine.
I n Marc h 2007 Dre nnen submitt ed his letter of resig nation, stating his intent to retire in May

. Upon his retire ment, Dre nnen had alre ady rec eived 16,700 share s of XOM stock without restric tion and had cashe d out $4 milli on in pension funds, $1.8 milli on in 401(k) funds, and $3 milli on in stock options. Howeve r, Dre nnen had 57,200 share s still in the restric ted period. Be fore his r etireme nt, Dre nnen informed Cejka that he was considering taking a position at Hess Corpo r a ti o n ( a n o ther larg e
3ener g y company ), and Cejka war

ned him that if he acc epted the position, “it would be highly likely that [Drennen] would lose al l [ o f h is] incentives.” Despite this war ning, Dre nnen acc epted the
p o s i t i o n and beg an working at Hess as Senior Vice President for Global Ex ploration and Ne w Venture s in J uly

2007. Shortly there afte r, Dre nnen’s former supervisor, Cejka, sent him a letter ca n ce l l ing his incentive awa

rds, explaining that He ss is a direct c ompetitor of Exx onMobil so there is a materia l conflict of interest, constituting detrimental activity under both I ncen t i v e P rog rams. There fore , Dre nnen’s 57,200 outstanding restricted shares of E x x o n M obil wer e forfeited and “ca ncelled” by the plan administrator. Dre nnen sued to rec over the restric ted stock, which Ex x onMobil claimed he forf eited when he acc ep t ed t h e p o s ition with Hess, a competitor. Dre nnen soug ht a decla ratory judgme nt that: (1) the detrimental-a ctivity provisions in the I ncentive Progr ams wer e being util ized as covenants
not to compete; (2) the covena nts not to compete are unenfor cea ble beca use they are not limit ed as
to time, g eog raphic are a, or scope of activity ; and (3) there fore , Ex x onMobil’s canc ellation of the restric ted share s and bonus units was an impermissible attempt to rec over monetary damag es for an alleg ed brea ch of an unenfor cea ble covena

nt not to compete. The parties ag ree d that the decla ratory

judgme nt action would be decide d by the trial court afte r the jury verdic t. Additionally , Dre nnen bro u g ht a claim for brea ch of an oral contra ct (the conver sation betwee n Dre nnen and Cjeka that Dre nnen could reta in hi s i n ce n t i ve awards so long as he did not g o work for one of the four other “majors” ), ra ised a waiver or estoppel arg ument based on Cjeka ’s asser tions, and claimed that the
I ncentive Prog ram a g ree ments had bee n modified by his conversa

tion with C

jeka.

4T h e j u ry found for Ex x onMobil on all claims and theories put befor e it—the brea ch o f

contra ct claim, the waiver and estoppel theory , and the oral contra ct modification theory

. Dre nnen moved for judgme nt notwithstanding the verdi ct (J NO V) , urg ing the court to find that the detr i m en t al-a ctivity provisions in the I ncentive Prog rams are unenfor cea ble covena

nts not to compete under Texas law. The trial court denied the motion, reje cted Dre nnen’s arg uments on the decla ratory -judg ment action, and enter ed a take- nothing judgment for Ex x onMobi l

. Dr ennen did
not challeng e the jury verdic t on appea l; rathe r, he appea led the denial o f the J NOV, arg uing that Texas public policy prohibits enfor ceme nt of t h e detrimental-a ctivity provisions in the I ncentive Prog rams as void c ovenants not to compete

. The court of appea ls reve rsed and order ed the trial court to rende r a decla ratory judgme nt for Dre nnen. 367 S.W .3d 288, 298 (Tex. App.—Houston [14t h Dist.] 2012), pet. granted , 56 Tex. Sup. Ct. J

. 861, 8 6 4 (A u g. 26, 2013). The court of appea ls held that the forf eiture conditions wer e

unrea sonable covena

nts not to compete, which are unenforce ab l e u n der Texas law as a matter of public policy

. See id. at 295. Apply ing c onflicts-of- law ana ly sis under the Restatement, the court of appe als ref

used to apply

New Y ork law be cause the result would be ag ainst Texas f undamental policy

. See id. at 296–97 (citing R E S T A T E M E N T (S E C O N D ) O F C O N F L I C T O F L A W S § 187(2))

. There fore , the court of appea ls held that Texas law applies beca use the choice -of- law provisions are

un en fo rc ea ble and held that the detrminental-a ctivity provisions, as forf eiture conditions, are unenfor cea

ble cove nants not to compete unde r Texas law. Id. at 298.
Ex x onMobil petitioned this Court for revie w, arg uing primarily that the choice -of- law provisions are enfor cea

ble and the detrimental-a ctivity provisions should, there fore , be enfor ced

5under New York law. Alterna tively , Ex x onMobil arg ues that, even i f T ex as l aw applies, the

detrminental-a ctivity

provisions should be enforc ed under Texas law. II. Discussion We b e g in o u

r a n a ly s is b y d e te rmining whether the choice -of- law provisions, elec ting to apply New Y ork law f

or all disputes arising out of the I ncentive Prog rams, ar e enf orce able. A. Enf orce abili ty of the Choice-of-Law P rovisions Ex x onMobil arg

ues that New York law should g overn beca use the choice -of- law provisions

are enfor cea

ble under the Restatement. See R E S T A T E M E N T (S E C O N D ) O F C O N F L I C T O F L A W S § 187. We fi rs t note that Texas law rec og nizes the “par ty autonomy rule” that parties can ag ree to be
g overne d by the law of another state. See DeSantis v. W acke nhut Corp. , 793 S.W .2d 670, 677 (Tex. 1990); cf. T E X
. B U S
. & C O M
. C O D E § 1.301(a) (“[W] hen a transac tion bear s a rea sonable rela tion to this state and also to a

nother state or nation the parties may ag ree that the law either of this state or of such other state or nation shall g overn their rig hts and duties.”). Whil e we rec og nize that parties “ca nnot require that their contra ct be g overne d by the law of a jurisdiction which has no relation whatever to them or their ag ree ment,” DeSantis , 793 S.W .2d at 677 (empha sis a dded), both Texas and New York bear some rela tion to the parties and the ag ree ment s at issue in this case . Ex x onMobil is now headqua rtere d in Texas, and Dre nnen worke d in Housto n w h e n h e e x ecute d both
I ncentive Prog ram ag ree ments. But Dre nnen spent three y ear s of his car eer wor k ing for Ex x onMobil in its New York City office in the mid-1980s. Additionally , Ex x onMobil’s outside counsel is a New York law firm. Finally , the subject-matter of the transac tion—XOM share s—are trade d on the New

6York Stock Exchang e and a re va lued base d on the ave rag e of the high and l ow price of t he shar es

as re ported on the c onsolidated tape a t the New Y ork Stock Exchang e in New York City

. I n DeSantis v.W

acke nhut Cor

p. , we adopted Restatement section 187, which provides the framework for deter

mining whether the parties’ ag ree ment as to choice of law is enfor cea ble. See 2
793 S.W .2d at 677–78; see also R E S T A T E M E N T (S E C O N D ) O F C O N F L I C T O F L A W S § 1 8 7

. Section 187(2) pr ovides: The law of the state chosen by the parties to g overn their contra ctual rig hts and duties will be applied, even if the p ar t i cular issue is one which the parties could not have resolved by an expli cit provision in their ag ree ment direc ted t o t h at issue, unless either (a) the chosen state has no substantial rela tionship to the parties or the transac tion and there is no other re asonable basis for the pa rties’ c hoice, or (b) application of the l aw o f the chosen state would be contra ry to a fundame ntal policy of a state which has a materia lly g rea ter interest than the chosen state in the deter

mination of the particula

r issue and which, under the rule of § 188 , woul d be the state of applicable law in the absenc e of an eff ective c hoice of

law by the par ties.
R E S T A T E M E N T (S E C O N D ) O F C O N F L I C T O F L A W S § 187(2). We have alre ady explained that some rela tionship exis ts betwee n the parties and ag ree ments in this case and thei r chosen jurisdiction. Nowher e does the Restatement define “substantial rela tionship,” nor have w e define d the term. The comments to the Restatement do indicate, howeve r, that parties will be he ld to their choice when “the state of the c hosen law [has] a sufficie ntly close

S e c t i o n 1 8 7 h a s t w o s u b p a r t s . H o w e v e r , t h e p a r t i e s d o n o t a r g u e t h a t s e c t i o n 1 8 7 ( 1 ) a p p l i e s . S e c t i o n 1 8 7 ( 1 ) 2 p r o v i d e s t h a t t h e l a w o f t h e c h o s e n s t a t e g o v e r n s i f t h e p a r t i c u l a r i s s u e t o b e d e c i d e d i s o n e w h i c h t h e p a r t i e s c o u l d h a v e e x p l i c i t l y r e s o l v e d i n t h e i r a g r e e m e n t

. R E S T A T E M E N T ( S E C O N D ) O F C O N F L IC T O F L A W S § 1 8 7 ( 1 )

. T h i s C o u r t h e l d i n D e S a n t i s t h a t t h e i s s u e o f w h e t h e r a n o n - c o m p e t e a g r e e m e n t i s e n f o r c e a b l e i s n o t a q u e s t i o n t h e p a r t i e s c o u l d h a v e r e s o l v e d b y e x p l i c i t p r o v i s i o n , s o s e c t i o n 1 8 7 ( 1 ) d o e s n o t a p p l y . S e e 7 9 3 S

. W

. 2 d a t 6 7 8

. 7rela tionship to the parties and the contra ct to make the parties’ choice rea sonable.” Id. § 187 cmt. f.

Even when a rela tionship is not substantial, the parties may be held to the chosen state’s law when they had a r easona

ble basis for the ir choice , such as c hoosing la w they know well or that it is well develope d. Id. Her e, Ex x onMobil claims that the choice of New York law was rea sonable beca use it assure s uniformity , cer tainty , and predic tability in the appli ca t i o n of its I ncentive Prog rams. Ex x onMobil provi d ed af fi davit testimony that New York law was chosen to g overn its incentive
ag ree ments for three rea sons: (1) Ex x onMo b i l p rovides incentive awa rds to larg e numbers of employ ees in many states and countries, many of whom move throug h o u t t h eir car eer s, so consistency is require d to administer t he I ncentive Progr ams; (2) New Yor k has a well-de veloped and clea rly define d bod y o f law reg arding employ ee stock and incentive prog rams; and (3)
E x x o n M o bil’s stock is listed on the New York Stock Ex chang e, and New York—a s home o f t h e Stock E x ch an ge— has a well-de veloped and predic table body of law reg arding a wide varie ty of financ ial transac tions, secur ities, and s ec u ri t i es-related transac tions, making it a routine choice of law for parties to stock-re lated transac tions and ag ree ments. I ndeed, the Restatement rec og nizes that the prime objectives of contra ct law—prote cting parties’ expectations and enabling parties to predic t

acc urate ly what their rig hts and liabiliti es will be—ar e best further ed, and cer tainty and pred ic ta

b il ity of result most likely to occur , when parties to multis tate transac tions can choose the g overning law. Id. § 187 cmt. e. Fur

ther, “[c]ontracts are enter ed into for serious purposes and rar ely , if ever , will the parties choose a law without g o o d reason for doing so.” Id. § 187 cmt. f. Under the circ umstances of this case , we conclude that section 187(2)( a) of the Restatement does not prec lude application of N ew Yor

k law.
8We must next deter mine, in acc ordanc e with the three -step approa ch set forth in DeSantis , 793 S.W .2d at 678, whether Dre nnen and Ex x onMobil’s ch o i ce o f New York law is enfor cea ble under se ction 187(2)( b) of the Re statement. 1. Most Signif

icant Relationship The first deter

mination of Restatement section 187(2)( b) is “whe ther there is a state the law of which would apply under section 188 of the Restatement absent an eff ective choice of law by the parties.” DeSantis , 793 S.W .2d at 678. This inquiry evalua tes “whe ther a state has a more signific ant relationship with t he par ties and their tra

nsaction than the state they chose.” Id. Thus, in DeSanti s we co n s idere d whether the rela tionship of the transac tion and parties to Texas was clea rly more signific ant than their rela tionship to the chosen state, taking into a ccount such fac tors

as the locations of the parties, the location of neg otiations of the ag ree ment, the location of th e execution of the ag ree ment, and the place of perf ormanc e. See id. at 678–79. Her e, the parties are both located in Texas, as Ex x onMobil is headqua rtere d in I rving and Dre nnen is a Houston resident; the neg otiations, if any , took place in Houston, as did the ex ec u t i o n o f t he I ncentive Prog ram ag ree ment s; and the perf ormanc e of the contra ct took place in Houston, Dre nnen’s place of employ ment, and in I rving , at Ex x onMobil’s headqua rters. Howeve r, E x x o nMobil is a multinational corpor ation with a prese nce in New York. Additionally , as discussed above, Dre nnen spent 3

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. 9three y ear s of his car eer with Ex x onMobil working in its New York City office

. Wh i le the

transac tion and parties bear rela tions to both states, weig hing the respe ctive interests betwee n New York and Texas, we conclude th at t h e relationship of t he transaction and parties to Texas is more signific ant than their r elationship to New Yor k. See id. at 679. 2. Mate rially Gr eate r Inter est Under the Restatement, if Texas does not have a materia lly g rea ter interest than New York in the determination of t his particula r i ssue, i t is immaterial whether the application of New York law here would be contrary to a fundamental pol icy of Tex as. See id. at 679. The nex t step in the analy sis, then, i s d et er m i ning whether Texas has a materia lly g rea ter int ere st in the determination of whe ther the de trimental-ac tivity provisions are e nforc eable

. Id.
I n DeSantis , we considere d both the specific fac ts of the case and the ag ree ment’s potential impact on the employ ee to deter mine whether Texas h ad a m ater ially g rea ter interest than did Florida , the chosen state. See id. Wackenhut, the employ er, was headqua rtere d in Florida , and the parties chose the law of Florida to g overn the non-compe te. Id. at 675. We rec og nized that Florida share d an interest with Texas in protec ting the justifiable expectations of entities doing business in

sever al states and noted that Florida h ad a d i rec t interest in the enfor ceme nt of the ag ree ment in protec ting a national business headqua rtere d in Florida

. Id. at 679. Howeve r, we noted that Texas was directly interested in: (1 ) DeSantis —as an employ ee in Texas; (2) W acke nhut—as a national employ er doing business in Texas; (3) the new busi ness DeSantis formed in Texas in violation of the non-compe te; and (4) consum er s of the service s in Texas. Id. We ultimately held that Texas clea rly had a ma terially

g rea ter intere st in whether the a g ree ment should be enfor ced. Id.

1 0Her e, Ex x onMobil arg ues that Texas has no “mater ially g rea ter interest” in the enfor cea bility of the forf

eiture conditions tha

n New York beca

use Ne w York la

w was c hosen for

uniformity

and predic tability

. The weig ht of the interests involved in DeSantis appea r very simil ar to those involved here

. So while New York shar es wi t h Texas a g ener al interest in protec ting the justifiable expectations of entities doing business in sever al states, that does not outweig h Texas’s interests in this transac tion. Ha v i n g conclude d in DeSantis that Texas had a materia lly g rea ter interest in enfor ceme n t o f t h e ag ree ment than Florida when the employ er at issue was Floridian, see 793 S.W .2d at 679, we must c onclude that Texas ha s a materia lly g rea ter interest than New York here , wher e b o t h t h e employ ee and the employ er are Texas residents. The second step of the analy sis weig hs in favor of

Texas. 3. Contrar y to F und am ental P olicy The final step in the analy sis is deter mining whether the application of New York law would be contra ry to a fundame ntal policy of Texas. Id. at 678; s ee also R E S T A T E M E N T (S E C O N D ) O F C O N F L I C T O F L A W S § 187(2)( b). I n De S a n t i s , we rec og nized that neither this Court nor the Restatement has adopted a g ener al definition of “funda mental policy ,” and we declined to define it then. 793 S.W .2d at 680. We deter mined that apply

ing the Florida choice -of- law provision would
contra vene f

undamental policy

in Texas because the law g overning enfor ceme nt of non-compe tes i s fundame ntal policy in Texas, and that “to apply the law of another state to deter min e t h e enfor cea bility of such an ag ree ment in the circumstance s of a case like this would be contra ry to that policy .” Id. at 681 (empha sis added)

. Notably , we based this rea soning, at least in part, on the desire
to avoid “disruption of order ly employ er- employ ee rela tions [and] competition in the marke tplace.”

1 1Id. at 680. We must, then, deter mine whether the provisions at issue in the I ncentive Prog rams are

covena nts not to compete. I n this Court’s most rec ent decision involving a non-compe te provision, Marsh USA Inc. v. Cook , 354 S.W .3d 764 (Tex. 2011) , we did not addre ss this particula r question beca

use the parties
ag ree d that the provision in question was g overne d by the Covenants Not to Compete Act. See id.
at 768. We laid out a g ener al definition for covena nts not to compete: “Covena nts that place limit s

on former employ ees’ profe ssional mobilit y or restric t their solicitati on of the former employ ers’
customers and employ ees are restra ints on trade and are g overne d by the Act.” Id. The ag ree ment here , arg uably , does not fit within this definition as it does not “limit” Dre nnen’s prof es s i o n al mobilit y , per se . L ooking at the fac ts in our prior non-compe te case s, it is clea r that the ag ree ment here does
not fit the mold. I n Marsh , the employ ee ag ree d that he would not solicit or acc ept business of the ty pe offe red by his employ er, perf orm or supervise any services related to that business, solicit clients, or solicit employ ees for a period of two y ear s followi n g h i s t ermination. Id. at 767. I n another landmark non-compe te case , Light v. Centel Cellular Co. of Tex as , 883 S.W .2d 642 (Tex. 1994), the employ ee ag ree d that, upon termination of employ ment and for one y ear afte r, she would

no t d i rectly or indirectly compete with her employ er in the L ong view–Ty ler–Kilg ore–Ma rshall service ar ea . Id

. at 645 n.8. Finally , in DeSantis v. W acke nhut Corp. , a thi rd hi storic Tex as noncompete c ase, the employ ee sig ned an a g ree ment that, as l ong as he was employ ed by Wackenhut and for two y ear s there afte r, he would not compete in any way wi t h Wackenhut in a forty -county

are a in south Texas. 793 S.W .3d at 675.

1 2There is a d i ff erence , althoug h a narr ow one, betwee n an employ er’ s desire to protec t an investment and an employ er’ s desire to rew ard l o y al t y . Non-c ompetes protec t the investment an employ er has made in an employ ee, ensuring that the costs incurre d to dev el o p human capital are protec ted ag ainst competitors wh o , having not made such expenditures, might appropr iate the employ er’ s investment. Marsh , 354 S.W .3d at 769. For feiture provisions conditioned on loy alty , howeve r, do not restric t or prohibit the employ ees’ future employ ment opportunities. I nstead, they

rew ard e mploy ees for continued employ ment and loy alty

. As we recog nized in Marsh , employ ee

s t ock-ow nership plans have a purpose that is unrela ted to restra ining competition—lin k i n g t h e interest of key employ ees with the employ er’ s long- term succe ss . See id. at 777. Under a noncompete, the former

employ er c an bring a bre ach of contra ct suit to enforc e the clause

. But unde r

a forf eiture provision, the former em ploy er does not need to take leg al action beca use the profitsharing plan belong s to the employ er. I n Marsh , we wer e fac ed with an employ ee stock-owne rship plan with a restric tive covena nt, and we held that the covena nt was an enfor cea

ble non-compe te. S

ee i d

. at 7 6 6

. Howeve r, the provision in Marsh was materia lly differ ent from the provision p re s ented here in Ex x onMobil’s
I ncentive Prog rams. I n Marsh , to exercise a stock option under the plan’s terms, employ ees w ere require d to provide the employ er with written not ice that the employ ee was ex erc ising his option,
pay for the stock at t he dis counted stock price , and s i g n a non-solicitation ag ree ment. Id. at 767. The non-solicitation ag ree ment was held to be an enfor cea ble non-compe te. Id. at 766. The issue in Marsh was not whether the ag ree ment was a covena nt not to compete, or even whether the terms of the ag ree ment made it unenf orce able, but ra ther whe ther, unde r Light and the Te x as Covenants

1 3No t to Compete Act, the non-compe te was an unenforce able contrac t beca use i t did not appea

r t o be ancillar

y to or part of an o therwise enfor cea ble ag ree ment. Id. at 767–68; T E X
. B U S
. & C O M
. C O D E § 15.50. A divided Court he ld tha t suc h independe nt a g ree ments are enfor cea ble so long a s the considera

tion for the non-compe te is rea sonably rela ted to the company ’s interest in pr otecting its g oodwill, vaca

ting that part of Light which held th at a u nilatera l non-compe te ag ree ment supported by considera

tion did not meet the require ment that the covena nt be ancillar

y to or part of an other wise enf orce able a g ree ment. Marsh , 354 S.W .3d at 775–76, 780. Her e, the detrimental activity provisions in the I ncentive Prog rams are not like the provisions in Marsh , Light , or DeSantis

. They are , howeve r, simil ar to the provision at stake in Peat Marwick Main & Co. v. Haass , 818 S.W .2d 381 (Tex. 1991). Haa ss, an accountant, beg rudg ingly signe d a merg er ag ree ment with the acc ounting firm o f Main Hurdmann (MH) wher eby he promised to 4
compensa te MH as provided for in the partne rship ag ree ment should Haa ss withdraw from MH and take MH clients with him. Id. at 383. After Haa ss left MH, t h e fi rm s u ed him for brea ch of the 5 partne rship ag ree ment and brea ch of fiduciar y duty

. Id. at 384. Haa ss, in response , asser ted that the
ag ree m en t o p era ted in restra int of trade and as a penalty , and was thus unenfor cea ble and
counte rc l ai m ed for his capital acc ount, which MH was holding. Id. The parties disag ree d as to

B e f o r e s u i t w a s f

i l e d , M a i n H u r d m a n n m e r g e d w i t h a n o t h e r l a r g e i n t e r n a t i o n a l a c c o u n t i n g f i r m t o f o r m P e a t 4 M a r w i c k M a i n & C o . H a a s s , 8 1 8 S

. W

. 2 d a t 3 8 2 n . 1

. P e a t M a r w i c k s u c c e e d e d t o t h e i n t e r e s t o f M a i n H u r d m a n a n d w a s t h e p a r t y o n a p p e a l

. I d

. W h i l e H a a s s n e v e r s i g n e d t h e p a r t n e r s h i p a g r e e m e n t i t s e l f , t h e p r o v i s i o n i n t h e p a r t n e r s h i p a g r e e m e n t 5
r e f e r e n c e d b y a n d i n c o r p o r a t e d i n t h e m e r g e r a g r e e m e n t c o n t a i n e d a s e c t i o n t i t l e d “ T e r m i n a t i o n O t h e r T h a n b y R e t i r e m e n t

— P a y m e n t t o F i r m . ” S e e i d

. a t 3 8 3 n . 3

. T h a t s e c t i o n p r o v i d e d t h a t a p a r t n e r i s l i a b l e t o t h e f i r m f o r t h e c o s t s o f a c q u i r i n g t h e c l i e n t a n d a n y f e e s a n d e x p e n s e s d u e t o t h e f i r m f r o m s u c h c l i e n t s , s h o u l d t h e p a r t n e r ( 1 ) t e r m i n a t e f o r a n y r e a s o n o t h e r t h a n r e t i r e m e n t , a n d ( 2 ) w i t h i n t w o y e a r s o f l e a v i n g t h e f

i r m , s o l i c i t o r p r o v i d e s e r v i c e s t o a n y c u r r e n t c l i e n t o f M H o r c l i e n t a c q u i r e d b y M H i n t h e t w o y e a r s a f t e r t e r m i n a t i o n . I

d

. 1 4whether this provision was, in fac t, a coven an t n o t t o compete. Id. at 384–85. The provision in

question did not expressly prohibit Haa ss from providing acc ounting service s to clients of MH and

was not an express promise by Haa ss not to compete. See id. at 385–86. Whil e we ultimately d et er m i n ed t hat the provision in Haass was an unrea sonable restra int of trade , notably , we never conclude d that the damag e provision was, it s el f, a covena nt not to compete. See id. at 385–87. Fur ther, we did not provide a definition of a covena nt not to compete. See generally id. at 385–88. The Covenants Not to Compete Act likewise does not define what it i s t o be a covena nt not to compete. See T E X
. B U S
. & C O M
. C O D E §§ 15.50–.52.
I t is not nece ssary here to answe r the question of wh at it means to be a covena nt not to compete any more than i t wa s i n Ha a s s or Marsh

. Dre nnen did not promise to ref rain from competing with Ex x onMobil or ref rain from soliciting clients or employ ees from Ex x onMobil.
I nstead, he ag ree d that, in rew ard for his hard work and l o y al t y , he would rec eive bonus
compensa tion in the form of stock options. One of the conditions of this bonus compensa tion was continued loy alty , which was not a promise on Dre nnen’s p art, but rathe r a power rese rved to his employ er should he opt into the I ncentive Prog rams. I f he chose to compete with Ex x onMobil (which he did), he would forf eit th e s h ar es still in the restric ted phase that wer e to be awa rded as bonus compensa t i o n . There is a distinction betwee n a covena nt not to compete and a forf eiture provision in a non-contributory profit-shar ing plan beca use such plans do not restric t the employ ee’ s ri g h t to f u tur e employ

ment; rathe r, these plans forc e the employ ee to choose betwee n competing with the form er em p l o y er without restra int from the former employ er and acc epting benef its of the retire ment plan to which the employ ee contributed nothing. See Dollgener v. Robertson Fleet Servs.,

1 5Inc. , 527 S.W .2d 277, 278–80 (Te x . C i v . App.—W aco 1975, writ ref ’d n.r.e.)

. Whatever it may

mean to be a covena

nt not to compete under Texas law, forf eiture clause s in non-contributory profitsharing plans, like the detrimental-a ctivity provisions in Ex x onMobil’s I ncentive Prog rams, clea rly

are not covena

nts not to compete. Acc ording ly , we hold that, under Texas law, this provision is not a covena nt not to compete. Whether such provisions in non-contributory empl o y ee incentive prog rams are unrea sonable
restra ints of trade under Texas law, such that they are unenfor cea ble, is a separ ate question and one which we rese rve f

or anothe r day

. See H

aass , 818 S.W .2d at 385–86. Turning back to our analy sis under Restatement section 187(2)( b), we can easily distinguish the curr ent case from our holding in DeSantis

. First and most importantly , Ex x onMobil’s I ncentive Prog rams do not involve covena nts not to compete. S

ee d i scussion, infra

. Second, the policy

conce rns reg arding uniformity of law raised in DeSantis have chang ed in the past twenty -four y ear s. See Funk v. United States , 290 U.S. 371, 381 (1933) (“The public policy of one g ener ation may not, under chang ed conditions, be the public policy of another .”). Wit h Texas now hosting many of the world’s larg est corpor ations, our public policy has shifted from a patriar chal one in which we valued 6 uniform trea tment of Texas employ ees from one employ er to the next above all else, to one in which

we also value the ability of a company to maintain uniformity in its employ ment contra cts acr oss all employ ees, whether the individual employ ees reside in Tex as o r New York. This preve nts the

F i f t y - t w o o f t h e 2 0 1 4 F o r t u n e 5 0 0 C o m p a n i e s m a i n t a i n h e a d q u a r t e r s i n T e x a s , p l a c i n g T e x a s t h i r d b e h i n d 6 C a l i f o r n i a a n d N e w Y o r k ’ s f i f t y - f o u r c o m p a n i e s . M a r i a H a l k i a s , T e x a s R e m a i n s N e a r T

o p f o r F o r t u n e 5 0 0 C o m p a n i e s , T H E D A L L
. M O R N IN G N E W S , J u n e 3 , 2 0 1 4 , a v a i l a b l e a t 2 0 1 4 W L N R 1 4 9 4 7 0 3 2

. 1 6“disruption of order ly employ er- employ ee rela tions” within those multis tate companies and avoids

disruption to “competition in the marketplac e.” DeSantis , 793 S.W .2d at 680. The draf ters of the Restatement explained the rationale for section 187 by stating that “[p] rime objectives of contra ct law are to protec t the justified expectations of the parties and to make it possible for them to fore tell with acc urac y what wil l be their rig hts and liabiliti es.”
R E S T A T E M E N T (S E C O N D ) O F C O N F L I C T O F L A W S § 187 cmt. e. I n multis tate transac tions, these prime objectives “may best be attained . . . by letting the parties choose t he law to g overn the validity of the contra ct.” Id. Our fea r in DeSantis that “[e]mpl oy ers would be encour ag ed to attempt to invoke the most favor able state law available to g overn their rela tionship with their employ ees in Texas or other states,” 793 S.W .2d at 680, is directly addre ssed by

the dra fters of

the Restatement:
I t may . . . be objected that, if g iven this power of choice , the parties will be enable d to esca pe prohibitions preva iling in the state which would other wise be the state of the applicable law. Neve rtheless, the demands o f cer tainty , predic tability and convenie nce dictate that, subject to some limit ations, the parties should have power to choose the a

pplicable law

. R E S T A T E M E N T (S E C O N D ) O F C O N F L I C T O F L A W S § 187 cmt. e. As the court of appea ls noted,
Ex x onMobil’s arg ument, in essenc e, is that, “as a larg e, multi-national corpor ation, Ex x onMobil has

a strong interest in uniform application of its employ ment ag ree ments.” 36 7 S .W.3d at 297. Uniformity is a fre quent g oal of contra cting , as rec og nized in the comments to Restatement section 187, and parties should be able to achie ve that g oal by ch o o s i n g the applicable law. Whil e appli cation of Texas and New York law may rea ch differe nt results on the enforce abil i t y o f t h es e particula r detrimental-a ctivity provisions—which we do not decide today —we cannot conclude that

1 7apply ing New York law in such a deter mination is “contr ary to a fundame ntal policy ” of Texas. See 7
R E S T A T E M E N T (S E C O N D ) O F C O N F L I C T O F L A W S § 187 cmt. g (“The forum will not ref rain from apply ing the chosen law mere ly beca use this would lead to a differ ent result than would be obtained under the local law of t he st ate of the ot herw ise applicable law.”) ; see also DeSantis , 793 S.W .2d
at 680 (“[T]he result in one case cannot deter mine whether the issue is a matter of fundame ntal state policy for purposes of resolving a conflict of laws.”)

. Be cause enfor ceme nt of New York law does
not contra vene any fundame ntal public policy of Texas, we are bound to enfor ce the parties’ choice

of-law provisions and apply

New Y ork law. B. App lication of

New York Law I n the Court of Appea ls of New York’s cer tified-question case of Morris v. Schroder Capital Managem ent International , 859 N.E.2d 50 3 (N

. Y. 2 0 0 6), the New York high court analy zed an almost identical set of fac ts. As a portion of his y ear -end bonus, the plaintiff-e mploy ee, Paul Morris,

was awa rded defe rre d compensa tion bonuses for the y ear s 1997, 1998, and 1999 that would vest in

W e r e c o g n i z e t h a t o t h e r j u r i s d i c t i o n s h a v e h e l d , a s w e d i d i n D e S a n t i s , t h a t t h e a p p l i c a t i o n o f a n o t h e r s t a t e ’ s 7 l a w w h i c h r e s u l t s i n t h e e n f o r c e m e n t o f

a n o n - c o m p e t i t i o n a g r e e m e n t c o n t r a v e n e s t h e f o r u m s t a t e ’ s f

u n d a m e n t a l p u b l i c p o l i c y . S e e D r e s s e r I

n d u s
. , I n c
. v
. S a n d v i c k , 7 3 2 F

. 2 d 7 8 3 , 7 8 7

– 8 8 ( 1 0 t h C i r . 1 9 8 4 ) ( “ [ T ] h e t e n d e n c y o f t h e c o u r t s [ i s ] t o a p p l y t h e p o l i c y o f t h e f o r u m s t a t e w h e n p a r t i e s a r e l i t i g a t i n g c o v e n a n t s n o t t o c o m p e t e . ” ) ; N o r d s o n C o r p
. v
. P l a s s c h a e r t , 6 7 4 F

. 2 d 1 3 7 1 , 1 3 7 5 ( 1 1 t h C i r . 1 9 8 2 ) ; M e r r i l l L y n c h , P i e r c e , F e n n e r & S m i t h , I n c
. v
. S t i d h a m , 6 5 8 F

. 2 d 1 0 9 8 , 1 1 0 0 n . 5 ( 5 t h C i r . U n i t A 1 9 8 1 ) ; D a v i s v
. J o i n t l e s s F i r e B r i c k C o
. , 3 0 0 F

. 1 , 3

– 4 ( 9 t h C i r . 1 9 2 4 ) ; M u m a v
. F i n
. G u a r d i a n , I

n c
. , 5 5 1 F

. S u p p . 1 1 9 , 1 2 1

– 2 3 ( E

. D

. M i c h

. 1 9 8 2 ) ; W a l l i n g C h e m
. C o
. v
. H a r t , 5 0 8 F

. S u p p . 3 3 8 , 3 4 0 ( D

. N e b

. 1 9 8 1 ) ; F o r t S m i t h P a p e r C o
. v
. S a d l e r P a

p e r C o
. , 4 8 2 F

. S u p p . 3 5 5 , 3 5 7 ( E

. D

. O k l

. 1 9 7 9 ) ; B l a l o c k v
. P e r f e c t S u b s c r i p t i o n C o
. , 4 5 8 F

. S u p p . 1 2 3 , 1 2 7 ( S

. D

. A l a . 1 9 7 8 ) , a f f ’ d p e r c u r i a m , 5 9 9 F

. 2 d 7 4 3 ( 5 t h C i r . 1 9 7 9 ) ; A s s o c
. S p r i n g C o r p
. v
. R o y F

. W i l

s o n & A v n e t

, I n c
. , 4 1 0 F

. S u p p . 9 6 7 , 9 7 6

– 7 8 ( D

. S

. C

. 1 9 7 6 ) ; F i n e v
. P r o p
. D a m a g e A p

p r a i s e r s , I

n c
. , 3 9 3 F

. S u p p . 1 3 0 4 , 1 3 1 0 ( E

. D

. L a . 1 9 7 5 ) ; B o y e r v
. P i p e r , J a f f r a y & H o

p w o o d , I

n c
. , 3 9 1 F

. S u p p . 4 7 1 , 4 7 3 ( D

. S

. D

. 1 9 7 5 ) ; F o r n e

y I n d u s
. , I n c
. v
. A n d r e , 2 4 6 F

. S u p p . 3 3 3 , 3 3 4

– 3 5 ( D

. N

. D

. 1 9 6 5 ) ; N a s c o , I n c
. v
. G i m b e r t , 2 3 8 S

. E

. 2 d 3 6 8 , 3 6 9 ( G a . 1 9 7 7 ) ; S t d

. R e g i s t e r C o
. v
. K e r r i g a n , 1 1 9 S

. E

. 2 d 5 3 3 , 5 4 1

– 4 2 ( S

. C

. 1 9 6 1 ) ; T e m p o r a r i l

y Y o u r s

– T e m p
. H e l p S e r v s
. , I n c
. v
. M a n

p o w e r , I n c
. , 3 7 7 S o . 2 d 8 2 5 , 8 2 7 ( F l a . D i s t

. C t

. A p p . 1 9 7 9 ) ; s e e a l s o B a r n e s G r o u p , I n c
. v
. C & C P r o d s
. , I n c
. , 7 1 6 F

. 2 d 1 0 2 3 , 1 0 3 1

– 3 2 ( 4 t h C i r . 1 9 8 3 ) ; B u s h v
. N a t ’ l S c h

. S t u d i o s , I

n c
. , 4 0 7 N

. W

. 2 d 8 8 3 , 8 8 6

– 8 8 ( W i s c . 1 9 8 7 ) ( s u i t f

o r u n f a i r t e r m i n a t i o n )

. H o w e v e r , o n c e a g a i n , i t s h o u l d b e n o t e d t h a t t h i s c a s e d o e s n o t i n v o l v e a c o v e n a n t n o t t o c o m p e t e . S e e d i s c u s s i o n i n f r a . 1 82001, 2002, and 2003. Id. at 505. Prior to the pay ments, Morris resig ned and established a competing hedg e fund. Id. The defe rre d compensa tion awa rds wer e eac h g overne d by a plan with a forfeiture provision that provided that if, b ef o re the end of t he three-y ear vesting period, Morris resig ned and took employ ment wi t h a company that SI MNA, hi s then employ er, considere d to be

a competitor, all defe rre d compensa tion would be forf eited. Id. Shortly afte r forming his own hedg e fund, SI MNA notified Morris that he had forf eited his defe rre d compensa tion benef its by eng ag ing in a business that compete s with SI MNA. Id. Whil e recog nizi ng that non-compe te clauses in employ ment contra cts ar e n ot favor ed and will be enfor ced only to the extent rea sonable and nece ssary to pr otect valid business interests, the Court of Appea ls of New York held that this forf eiture provision fell within the “employ ee choice ” doctrine recog nized in New York. See id. at 506. I n case s wher e an employ er conditions rec eipt of a benef it post-employ

ment upon compliance with a restrictive covenant, t he employ ee is g iven the choice to e ither prese rve his r ights under the contra ct by ref rainingfrom compe tition or forfeit such rig hts by exercising the rig ht to compete. Id. Be cause the employ ee who leave s his employ er voluntarily or is terminated with c ause makes an informed choice betwee n reta ining the benef it by avoiding competitive employ ment or forf

eiting his benef

it by taking competitive employ ment, such

a provision is not an unre as o n ab l e re straint upon an employ ee’ s liberty to ear n a living. See id. When the doctrine applies, “a restric tive covena nt will be enfor ce ab l e wi thout reg ard to

rea sonablene ss” so long as the employ ee voluntarily left his or her e mploy ment or wa s terminated fo r ca u s e. Id

. at 507; see also Post v. Merrill Lynch, Pierce , Fenne r & Smith , 397 N.E.2d 358 , 360–61 (N.Y. 1999)

. 1 9Her e, Dre nnen ag ree d to the detrimental-a ctivity provisions in ex ch ang e for the rec eipt of

additional incentive compensa tion, i.e., stock options. See Int’l Bus. Mach. Corp. v. Martson , 37 F. Supp. 2d 613, 617 (S.D.N.Y. 1999). B y enrolling in the I ncentive Prog rams, Dr ennen a g ree d that he would forf

eit any outstanding awa

rds should he eng ag e in activity deter mined to be detrimental to the interest of Ex x onMobil or should he acc ept employ ment with a competitor of Ex x onMobil. The I ncentive Prog rams’ detrimental-a ctivity provisions did not bar Dre nnen from seeking or

acc epting other employ

ment, but rathe r g ave Dre nnen the “choic e of prese rving his rig hts under the [I ncentive Prog rams] by ref raining from competition with [Ex x onMobil] or risking f o r f e it u r e o f s u ch rig hts by exercising his rig ht to compete with [Ex x onMobil] .” See Lenel Sys. Int’l, Inc. v. Smith , 966 N.Y.S.2d 618, 621 (N.Y. App. Div. 2013) (quoting Krist t v. W helan , 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 employ ee choice doctrine is the employ er’ s “continued willingness t o em p l o y ” the employ ee. Morris , 859 N.E.2d at 506 (quoting Post , 397 N.E.2d at 360–61). Should the employ er terminate the employ ment rela tionship without cause , enfor ceme nt

o f t h e re s trictive covena

nt is no longe r rea sonable. See id. at 506–07. I f the employ ee left hi s emplo y er v o l untarily or eng ag ed in conduct for which he was terminated for cause , a restric tive

covena nt will be enfor cea

ble without reg ard to rea sonablene ss under the employ ee choice doctrine. Id. at 507. Her e, Dre nnen was told by his supervisor during his annual revie w that his perf ormanc e had suffe red to the point wher e he would no longe r continue overse eing Ex x onMobil’s exploration activities in the Western Hemisphere. Dre nnen was told that another position would be found for him within the co m p an y , b u t he retire d four months later. Dre nnen made an informed choice

2 0betwee n forf eiting his outstanding awa rds or reta ining the awa rds by avoiding compe t i t i v e employ ment and volunt arily left hi s position wit h Ex x onMobil. Theref ore, unde r New York law,
Ex x onMobil lawfully terminated the outstand i n g awa rds upon Dre nnen’s brea ch of the I ncentive Prog rams and voluntar

y resig nation from Exx onMobil. See id. at 507–08.

III. Conclusi on Uniformity is a worthy g oal and a logic al rationale for choosing New York law and is a g oal

rec og niz ed in the Restatement (Second) of Conflict of L aws. Whil e Texas law may or may not permit the enfor ceme nt of these detrimental-a ctivity provisions, New York law does. Application of New York law, resulting in the enfor ceme nt of these provisio ns, does not contra vene any fundame ntal policy in T ex as . Ac cording ly , without deter mining the enfor cea

bility of the detrimental-a ctivity provisions under Texas law, we reve rse the court of appea ls’ judgme nt and, apply ing New York la

w , r e n d er a take- nothing judgme nt for Ex x onMobil in acc ordanc e with the trial court’s judg ment.

____________________________________ Paul W. Green J ustice

OPI NI ON DEL I VERED: Aug ust 29, 2014

2 1