Choice of Law Clauses in Texas Non-Compete Agreements

We are blogging on “Non-competes, Trade Secrets, Fiduciary Duties, and the Inevitable Disclosure Doctrine.” Mark Oberti has prepared a detailed paper on all of these issues, which can be found here.

In Texas, contractual choice-of-law provisions are typically enforced, unless the provision violates a fundamental public policy of Texas or the contract bears no reasonable relation to the chosen state. TEX. BUS. & COMM. CODE § 1.301; Smith v. EMC Corp., 393 F.3d 590, 598 (5th Cir. 2004); Exxon Corp. v. Burglin, 4 F.3d 1294, 1298 n. 5 (5th Cir. 1993); Access Telecom, Inc. v. MCI Telcomms. Corp., 197 F.3d 694, 705 (5th Cir. 1999) (citing DeSantis v. Wackenhut Corp., 793 S.W.2d 670, 677-78 (Tex.1990)).

In 1990, the Texas Supreme Court held that the law governing enforcement of non-competition agreements is fundamental policy in Texas. DeSantis, 793 S.W.2d at 681. DeSantis remains good law. In re AutoNation, Inc., 228 S.W.3d 663, 669 (Tex. 2007) (declining to overrule DeSantis following the enactment of § 15.50 and Sheshunoff); Turford v. Underwood, 952 S.W.2d 641 (Tex. App.–Beaumont 1997, orig. proceeding) (following DeSantis and applying Texas law because Texas has a greater interest in enforcing non-compete covenants in Texas than does Michigan).

A choice-of-law provision will not be applied if another jurisdiction has a more significant relationship with the parties and their transaction than the state they choose, that jurisdiction has a materially greater interest than the chosen state, and the jurisdiction’s fundamental policy would be contravened by the application of the law of the chosen state. See Restatement (Second) of Conflict of Laws (“Restatement”) § 187; Access Telecom, Inc. v. MCI Telecommunications Corp., 197 F.3d at 705; International Interests, L.P. v. Hardy, 448 F.3d 303, 308 (5th Cir. 2006). To reject the parties’ choice-of-law, each element of the Restatement’s test must be met. Mary Kay Inc. v. Woolf, 146 S.W.3d 813, 816-17 (Tex. App.–Dallas 2004, pet. denied). To understand whether a state has a more significant interest than the chosen state, the Restatement emphasizes several factors: (a) the place of contracting; (b) the place of negotiation of the contract; (c) the place of performance; (d) the location of the subject matter of the contract; and (e) the domicile, residence, nationality, place of incorporation and place of business of the parties. Restatement §§ 6, 188(2); Minnesota Mining & Manufacturing Co. v. Nishika, Ltd., 955 S.W.2d 853, 856 (Tex. 1996); DeSantis, 793 S.W.2d at 678. These contacts are evaluated by their importance, not their number. Minnesota Mining & Manufacturing Co., 955 S.W.2d at 856.

Based on these factors, courts sometimes conclude that a choice of law clause must be disregarded, and Texas law applied – under DeSantis, this is especially the case if the employee worked most or all of their tenure in Texas and the proposed enforcement would occur in Texas. See DeSantis, 793 S.W.2d at 679 (holding that where the “gist” of the agreement, including the non-compete, was the performance of services in Texas, the relationship of the parties to Texas was more significant than the Florida state law identified in the choice of law clause, and Texas law applied); Turford, 952 S.W.2d at 642-43 (disregarding Michigan choice of law clause and applying Texas law based on DeSantis because Texas has a greater interest in enforcing non-compete covenants in Texas than does Michigan).

In Drennen v. Exxon Mobil Corp., 367 S.W.3d 288 (Tex. App. – Houston [14th Dist.] 2012, pet. granted), the appellate court concluded that Texas rather than New York law applied because Texas had a materially greater interest in the dispute between the parties. The court stated that Texas has a strong public policy interest in determining the enforceability of covenants not to compete used in this state because the plaintiff, Drennen, worked the majority of his career in Texas; he signed the agreements in Texas; he resided in Texas, and Exxon is based in Texas. The court rejected Exxon’s argument that, as a large multi-national corporation, it had a stronger interest in uniform application of its employment agreements than Texas’s public policy interest because the Incentive Program at issue provides exceptions to New York law application for foreign-national employees that there was no showing that making other exceptions would significantly impede Exxon’s operations. Because the restriction at-issue in the case was not enforceable under Texas law, the plaintiff-employee prevailed. The Texas Supreme Court granted review of this case earlier this year.

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