Skip to content

Choice of Law Provisions May Not Save Non-Compete Provisions from Unfavorable State Law

How do I know what law applies to my employment agreements?

Don’t make the mistake of assuming what the employment contract says on this topic settles this question. States in the U.S. and countries around the world have policies near to their hearts that may result in an override of the choice of law provision in your employment contracts. This means that the laws of different states and countries may apply to some but not all of the terms of the contract. For example, if a state has a fundamental policy regarding non-competition agreements, then beware — the parties’ choice of law is in danger of being ignored.

Here are two more examples. First, in Cardoni v. Prosperity Bank, No. 14-20682 (5th Cir. Oct. 29, 2015), Prosperity Bank (a Texas company) acquired F&M Bank (an Oklahoma company), and the F&M bankers in Tulsa, Oklahoma entered into new employment agreements. Those agreements included non-competition and non-solicitation clauses and designated Texas law to govern. Litigation over the contracts eventually ensued when four of the bankers joined a competing bank in Tulsa.

The Court held that Oklahoma had a “more significant relationship” to the parties and the dispute, based largely on the fact that the employment relationship was centered in Tulsa, Oklahoma. The court then determined that Oklahoma had a materially greater interest than Texas in determining whether the employment covenants were enforceable, the second prong required to override the parties’ choice of law provision. Applying Oklahoma standards, the Fifth Circuit then determined that the non-competition clause could not be enforced to restrain the bankers from accepting their new employment.

Second, in Exxon Mobil Corp. v. Drennen (Tex. Aug. 29, 2014), the Texas Supreme Court reviewed a choice of law provision for New York and its application to a stock-based incentive program’s forfeiture clause should the employee work for a competitor. The employer was in Texas and the employee was in Texas when he entered into the program. But the Texas Court found that New York law should apply because there was a need for consistent law applied to a national program, New York has well-developed law on the topic, and the stock at issue was on the New York Stock Exchange.

The Federal Court of appeals in Cardoni, however, rejected Drennen’s consistency principle. One reason may be that, in Cardoni, the court was dealing with a clear non-compete provision, whereas the Drennen court concluded the forfeiture clause was not clearly a non-compete. So we have provisions with similar effect, but a different outcome, all based on how the provisions were drafted. Obviously, thought needs to be given to what law might apply.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.