Exxon Mobil Corp. v. Drennen

• Court: Texas Supreme Court
• Writing for the Court: Justice GREENdelivered the opinion of the Court.
• Citation: Exxon Mobil Corp. v. Drennen, 452 S.W.3d 319 (Tex. 2014)
• Decision Date: 29 August 2014
• Docket Number: No. 12–0621.,12–0621.
• Parties: EXXON MOBIL CORPORATION, Petitioner, v. William T. DRENNEN, III, Respondent.

452 S.W.3d 319

EXXON MOBIL CORPORATION, Petitioner

v.William T. DRENNEN, III, Respondent.

No. 12–0621.

Supreme Court of Texas.

Argued Nov. 6, 2013.

Decided Aug. 29, 2014.

Rehearing Denied Feb. 27, 2015.

Michael David Peterson, McGuiness & Yager LLP, Washington, DC, for Amicus Curiae, Center on Executive Compensation.

Keith Strama, Beatty Bangle Strama, P.C., Austin, TX, for Amicus Curiae, Texas Association of Business.

George S. Christian, Texas Civil Justice League, Austin, TX, for Amicus Curiae, Texas Civil Justice League.

Pamela Stanton Baron, Attorney at Law, Austin, TX, for Amicus Curiae, The American Petroleum Institute.

Alex Benjamin Roberts, David J. Beck, David M. Gunn, Harriet O'Neill, Nina Cortell, Russell S. Post, Shannon H. Ratliff, William Robert Peterson, Beck Redden LLP, Stephen Douglas Pritchett Jr., Johnson Trent West & Taylor, L.L.P., Steven J. Watkins, McGinnis, Lockrhdige & Kilgore, L.L.P., Houston, TX, for Petitioner, Exxon Mobil Corporation.

Kathryn Elizabeth Boatman, Kendall M. Gray, Paul L. Mitchell, Scott A. Brister, Andrews Kurth LLP, Austin, TX, for Respondent, William T. Drennen III.

Opinion

Justice GREEN delivered the opinion of the Court.

In this declaratory judgment action, we consider whether New York choice-of-law provisions in a Texas-based corporation's executive bonus-compensation incentive programs are enforceable and, if not, whether the programs' provisions allowing forfeiture of an executive's bonus awards for engaging in “detrimental activity” are enforceable under Texas law. We hold that the New York choice-of-law provisions in the executive compensation plan are enforceable and that the detrimental-activity provisions are enforceable under New York law. Accordingly, without reaching the second question, we reverse the court of appeals' judgment and render judgment in favor of the corporation.

I. Factual and Procedural Background

William Drennen, III, worked as a geologist with Exxon Mobil Corporation (ExxonMobil) in Houston for over thirty-one years, from 1976 through May of 2007, culminating his career with the title of Exploration Vice President of the Americas. During his employment, he received several forms of incentive compensation, including participation in the 1993 Incentive Program and the 2003 Incentive Program (Incentive Programs). Compensation under the Incentive Programs included bonus awards, awards of restricted stock options, and earnings bonus units. Each time Drennen received restricted stock, he signed a restricted-stock agreement that adopted the terms of the Incentive Programs. These agreements were executed in Texas by both Drennen and ExxonMobil—Drennen in Houston and ExxonMobil through its corporate representatives at its corporate headquarters in Irving. During his thirty-one years of employment, Drennen was awarded a total of 73,900 shares of restricted ExxonMobil (XOM) stock. Under the terms of the Incentive Programs, 50% of the shares were to be delivered to Drennen (no longer restricted) three years after each grant, with the remaining 50% to be delivered seven years after each grant.

The Incentive Programs both include choice-of-law provisions providing for application of New York law, although ExxonMobil is headquartered in Texas and incorporated in New Jersey.¹ The Incentive Programs contain termination provisions that enabled ExxonMobil to terminate the outstanding awards if the employee (1) engaged in a detrimental activity, or (2) left ExxonMobil by either “not terminating normally” (terminating before the standard retirement plan without written approval) under the 1993 Incentive Program or “resigning” (early retirement at the initiative of the employee) under the 2003 Incentive Program. “Detrimental activity” is defined under the 1993 Incentive Program as “activity that is determined in individual cases by the administrative authority to be detrimental to the interest of the Corporation of any affiliate.” “Detrimental activity” is defined under the 2003 Incentive Program as “acceptance ... of duties to a third party under circumstances that create a material conflict of interest,” where a “material conflict of interest” includes when a grantee “becomes employed ... by an entity that regulates, deals with, or competes with the Corporation or an affiliate.”

Until 2006, Drennen consistently ranked in the top 20% of ExxonMobil employees in his annual review. However, after ExxonMobil implemented a new ranking system in 2006, Drennen received a very unfavorable annual performance review, allegedly a result of his age and the new C.E.O.'s desire to bring in a younger group of vice presidents. In December 2006, he was told by Tim Cejka, his supervisor, that he would be replaced at ExxonMobil and that they were trying to find him a new position but were thus far unsuccessful. Drennen asked about his unvested options should he leave and was told by Cejka that, so long as he did not go to work for one of the other four “majors” (Shell, BP, ChevronTexaco, or ConocoPhilips), he would be fine.

In March 2007 Drennen submitted his letter of resignation, stating his intent to retire in May. Upon his retirement, Drennen had already received 16,700 shares of XOM stock without restriction and had cashed out $4 million in pension funds, $1.8 million in 401(k) funds, and $3 million in stock options. However, Drennen had 57,200 shares still in the restricted period. Before his retirement, Drennen informed Cejka that he was considering taking a position at Hess Corporation (another large energy company), and Cejka warned him that if he accepted the position, “it would be highly likely that [Drennen] would lose all [of his] incentives.” Despite this warning, Drennen accepted the position and began working at Hess as Senior Vice President for Global Exploration and New Ventures in July 2007.

Shortly thereafter, Drennen's former supervisor, Cejka, sent him a letter cancelling his incentive awards, explaining that Hess is a direct competitor of ExxonMobil so there is a material conflict of interest, constituting detrimental activity under both Incentive Programs. Therefore, Drennen's 57,200 outstanding restricted shares of ExxonMobil were forfeited and “cancelled” by the plan administrator.

Drennen sued to recover the restricted stock, which ExxonMobil claimed he forfeited when he accepted the position with Hess, a competitor. Drennen sought a declaratory judgment that: (1) the detrimental-activity provisions in the Incentive Programs were being utilized as covenants not to compete; (2) the covenants not to compete are unenforceable because they are not limited as to time, geographic area, or scope of activity; and (3) therefore, ExxonMobil's cancellation of the restricted shares and bonus units was an impermissible attempt to recover monetary damages for an alleged breach of an unenforceable covenant not to compete. The parties agreed that the declaratory-judgment action would be decided by the trial court after the jury verdict. Additionally, Drennen brought a claim for breach of an oral contract (the conversation between Drennen and Cjeka that Drennen could retain his incentive awards so long as he did not go work for one of the four other “majors”), raised a waiver or estoppel argument based on Cjeka's assertions, and claimed that the Incentive Program agreements had been modified by his conversation with Cjeka.

The jury found for ExxonMobil on all claims and theories put before it—the breach of contract claim, the waiver and estoppel theory, and the oral contract modification theory. Drennen moved for judgment notwithstanding the verdict (JNOV), urging the court to find that the detrimental-activity provisions in the Incentive Programs are unenforceable covenants not to compete under Texas law. The trial court denied the motion, rejected Drennen's arguments on the declaratory-judgment action, and entered a take-nothing judgment for ExxonMobil. Drennen did not challenge the jury verdict on appeal; rather, he appealed the denial of the JNOV, arguing that Texas public policy prohibits enforcement of the detrimental-activity provisions in the Incentive Programs as void covenants not to compete.

The court of appeals reversed and ordered the trial court to render a declaratory judgment for Drennen. 367 S.W.3d 288, 298 (Tex.App.–Houston [14th Dist.] 2012), pet. granted, 56 Tex.Sup.Ct.J. 861, 864, –––S.W.3d ––––, –––– (Aug. 26, 2013). The court of appeals held that the forfeiture conditions were unreasonable covenants not to compete, which are unenforceable under Texas law as a matter of public policy. See id. at 295. Applying conflicts-of-law analysis under the Restatement, the court of appeals refused to apply New York law because the result would be against Texas fundamental policy. See id. at 296–97 (citing Restatement (Second) of Conflict of Laws § 187(2) ). Therefore, the court of appeals held that Texas law applies because the choice-of-law provisions are unenforceable and held that the detrimental-activity provisions, as forfeiture conditions, are unenforceable covenants not to compete under Texas law. Id. at 298.

ExxonMobil petitioned this Court for review, arguing primarily that the choice-of-law provisions are enforceable and the detrimental-activity provisions should, therefore, be enforced under New York law. Alternatively, ExxonMobil argues that, even if Texas law applies, the detrimental-activity provisions should be enforced under Texas law.

II. Discussion

We begin our analysis by determining whether the choice-of-law provisions, electing to apply New York law for all disputes arising out of the Incentive Programs, are enforceable.

A. Enforceability of the Choice–of–Law Provisions

ExxonMobil argues that New York law should govern because the choice-of-law provisions are enforceable under the Restatement. See Restatement (Second) of Conflict of Laws § 187. We first note that Texas law recognizes the “party autonomy rule” that parties can agree to be governed by the...