In a detailed, 26-page published decision in the matter of Cardoni v. Prosperity Bank, No. 14-20682 (5th Cir. Oct. 29, 2015) the Fifth Circuit Court of Appeals took a deep look at choice of law provisions in restrictive covenants. The Appellate Court started out by noting that in addition to their well-known disagreements over boundaries and football, Texas and Oklahoma do not see eye to eye on the enforceability of non-compete agreements. Texas generally allows them, Oklahoma does not.

The case arose after Texas-based Prosperity Bank acquired Oklahoma-based F&M Bank and Trust Company. Key employees were required to sign employment agreements containing non-compete, non-solicit, and non-disclosure provisions. Less than a year after the merger, four employees decided to leave and filed declaratory judgment actions in state court in Oklahoma seeking to invalidate the agreements under Oklahoma law. Prosperity filed suit in Texas seeking to enforce the agreements, citing the Texas choice of law and choice of venue provisions. After both cases were removed to Federal Court, they were consolidated in Houston based on the exclusive venue provision. While honoring the choice of venue provision, the District Court found that Oklahoma law applied to both the non-compete and non-solicit provisions in the agreement and they were unenforceable. The trial court also found that Texas law governed the non-disclosure provision, but there was not sufficient proof of a breach to support an injunction.

The Fifth Circuit opinion affirmed in part and reversed in part, noting the following:

1. In football, University of Texas leads the University of Oklahoma 61-44-5 in the “Red River Rivalry.”

2. The Texas-based company’s interest in maintaining uniform contracts for multi-state employees was not greater than Oklahoma’s interest in regulating (in this case invalidating) restrictions on Oklahoma employees’ ability to work and earn a living.

3. Non-solicit agreements do not have the same public policy arguments because Oklahoma employees can still work and earn a living even if refraining from soliciting customers, so the Texas choice of law provision can be enforced with respect to the non-solicitation provision. (Oklahoma law bars traditional non-competition agreements, but does not bar agreements prohibiting the solicitation of customers.)

4. Although the Texas choice of law provision was enforceable as to the non-disclosure provision, there is no well-established “inevitable disclosure” doctrine in Texas, so Prosperity Bank had to prove actual disclosure to obtain an injunction.

In its decision, the Court of Appeals noted that although the U.S. Supreme Court has made it clear that courts should give effect to knowing and voluntary agreements between parties to arbitrate disputes, and recently ruled that forum selection clauses should be enforced in all but the most exceptional cases, public policy considerations still come into play with regard to choice of law provisions: “Unlike arbitration and forum selection clauses, which dictate where a dispute will be heard, choice-of-law provisions dictate the law that will decide the dispute, and thus create more tension with a state’s power to regulate conduct within its borders.” Thus, even though the choice of forum clause meant the dispute was heard in Texas, the public policy concerns of Oklahoma, where the employees resided, took precedence over the choice of law provisions in the contract that they signed.

The decision blows tumbleweeds in the way of multi-state employers who wish to utilize a “one size fits all” agreement in Oklahoma, even if the agreement contains a choice of law and exclusive choice of forum provision selecting a state which favors enforcement of non-compete agreements. Although many courts in other jurisdictions have relied on choice of law/choice of forum clauses to enforce certain restrictive covenants against employees residing in states with strong public policies against such restrictions (such as California), in this case the terms of the contract did not carry the day. Employers relying on a “one size fits all” strategy should proceed cautiously, and at least consider the possibility that the law of the state where the employee lived and worked may trump a choice of law provision to the contrary.

William R. Davis is the author of this article.