Court Refuses to Enforce Noncompete Clause

By Domenick Carmagnola and Philip A. Portantino Dec 14, 2015
LIKE SAVE PRINT
Reuse Permissions

A choice-of-law provision in an employment contract does not always control what law will be applied to a contract’s specific provisions, and may result in a limited enforcement of the post-employment competition provisions contained in the contract, the 5th U.S. Circuit Court of Appeals ruled.

In August of 2013, Texas-based Prosperity Bank sought to acquire Oklahoma-based F&M Bank and Trust Co. (F&M). As part of the acquisition, F&M required the execution of employment contracts, which contained noncompetition and nonsolicitation provisions. Each agreement also contained a choice-of-law provision, stating that Texas law was to govern the interpretation of the employment contracts.

Shortly after the merger, four senior-level bankers left Prosperity and joined a Tulsa, Oklahoma-based competitor. The bankers were previously employed by F&M, and had signed the most recent employment agreements presented to them by Prosperity Bank. All prior work on behalf of F&M was performed in Oklahoma, as was the vast majority of the bankers’ work for Prosperity. The competitor was located within seven miles of Prosperity’s offices in Tulsa.

Prosperity filed an application for injunctive relief, seeking to enforce the restrictive covenants under Texas law, consistent with the contractual choice-of-law provision. Finding that Oklahoma law controlled the interpretation of both the noncompetition and nonsolicitation provisions, the district court in Houston denied the application.

Upon review, the circuit court affirmed in part and reversed in part. Unlike the lower court, the 5th Circuit determined the validity of the agreement’s choice-of-law provision as it applied individually to each restrictive covenant. Owing to the fact that both the prior work and prospective work occurred in Oklahoma, the circuit court found that Oklahoma, rather than Texas, had a more significant relationship and a materially greater interest in the dispute. Therefore, the ultimate question became whether the application of Texas law to the noncompetition and nonsolicitation provisions would contravene a fundamental policy of Oklahoma.

Unlike Texas, Oklahoma has a clear policy against enforcement of most noncompetition agreements. Due to Oklahoma’s firm rejection of such agreements, the circuit court found that the application of Texas law, and the resulting enforcement of the agreement’s noncompetition provision, would violate a fundamental Oklahoman policy.

However, the court did not make the same finding regarding the nonsolicitation provision contained in the same agreement. Rather, the court held that, while Oklahoma disapproved of noncompetition agreements, it was not categorically opposed to the enforcement of nonsolicitation agreements. Consequently, the court found that Texas law could be applied to the nonsolicitation clause, without contravening fundamental policy in Oklahoma. Ultimately, while the noncompetition provision was ruled unenforceable, the 5th Circuit remanded the matter to consider whether the employer could demonstrate a need for injunctive enforcement of the nonsolicitation provision under Texas law.

Cardoni v. Prosperity Bank, 5th Cir., No. 14-20682 (Oct. 29, 2015).

Professional Pointer: The circuit court’s holding serves as a reminder of the importance of reviewing the law in each jurisdiction when a company becomes involved in a multistate merger and intends on having employees sign new agreements containing post-employment restrictions.

Domenick Carmagnola and Philip A. Portantino are attorneys with Carmagnola & Ritardi LLC, the Worklaw® Network member firm in Morristown, N.J.

LIKE SAVE PRINT
Reuse Permissions

MEMBER BENEFITS

CA Resources at Your Fingertips

View all Resources Now

Job Finder

Find an HR Job Near You

SPONSOR OFFERS

Find the Right Vendor for Your HR Needs

SHRM’s HR Vendor Directory contains over 3,200 companies

Search & Connect