No Non-Compete Needed: How to Reward an Exceptional Employee and Discourage Their Departure for a Competitor

October 30, 2014

Employers and employees should take note of two recent cases that demonstrate there are a number of ways for employers to discourage employees from leaving work for a competitor.

First, in Exxon-Mobil v. Drennen, the Texas Supreme Court, on August 29, 2014, held that a loyalty incentive plan, which allowed Exxon to declare a forfeiture under the plan if an employee left Exxon to work for a competitor, did not constitute an enforceable non-compete agreement. In rendering its decision, the Texas Supreme Court concluded that there is a distinction between a non-compete agreement and a loyalty incentive plan: a non-compete agreement is used to protect an employer’s investment in the employee, while a forfeiture provision conditioned on employee loyalty is used to reward the employee for his or her continued employment and loyalty.

Because of this distinction, the Texas Supreme Court rejected Drennen’s argument that Exxon’s incentive plan was an unenforceable non-compete agreement. As a result, Drennen, who retired and went to work for one of Exxon’s competitors, lost 57,200 shares of Exxon stock.

In the second case—decided less than one month after Drennen—the First Court of Appeals, in Cameron Int’l Corp. v. Guillory, held that Cameron could enforce a non-compete provision contained in a restricted stock agreement between it and a former employee, even though the employee did not read the restricted stock agreement. In that case, Cameron awarded Guillory restricted stock units for his “exceptional” work performance, which Guillory had to accept through a website. Guillory accepted the shares and executed an electronic acknowledgement that he read and accepted the restricted stock agreement’s terms, which authorized Cameron to revoke Guillory’s shares if Guillory left Cameron for a competitor.

When Guillory left Cameron to join a competing business, Cameron sued Guillory to enforce the non-compete provision in the restricted stock agreement. The First Court of Appeals held that the non-compete provision was enforceable, concluding that Guillory’s failure to read the restricted stock agreement was not a defense to its enforcement.

These cases make clear that employers may use methods other than traditional non-compete agreements to restrict their employees from leaving work for a competitor. Employees should be aware of these methods and understand what they are signing.