Labor & Employment Law

Enforceability of Clawback Provisions in Texas

By Robert Wood

What happens when an employer gives an employee stock in exchange for a non-compete agreement, but the non-compete agreement is held to be unenforceable.  Does the employee still get to keep the stock?  This question was raised in a case in which the employer gave a ten percent ownership interest in the company to one of its employees.  The employer prepared a stock certificate in the employee's name, but it retained possession of the stock certificate. 

Approximately four years after executing the agreement, the employee left the employer and took a job with a competing company.  The employer claimed that because the employee breached the non-compete agreement, he was not entitled to the stock.  The employee filed suit seeking a declaratory judgment that the stock issued in his name should be delivered to him.

The trial court ruled that the noncompete agreement amounted to an unenforceable restraint of trade and awarded the employee the stock.  The court of appeals agreed that the noncompete agreement was unenforceable, because it was unlimited as to time and extended to customers with whom the employee had no association with while working for the employer. 

However, the court also held that the employee should not receive the stock. In reaching this conclusion, the court considered whether the promise not to compete and the promise of stock were mutually dependent promises.  That is, but for the employee's promise not to compete, the employer would not have promised to give him stock.  Because the employer did not get what it bargained for (i.e., the employee's noncompetition), the employee was not entitled to the consideration promised by the employer (i.e., the stock).  Therefore, the employee was allowed to work for the new employer, but he lost the stock. 

As we can see from this case, an employee who challenges the enforceability of a non-compete agreement may, if he or she prevails, forfeit the consideration (in this case, stock) that was given for the non-compete.

John R. Ray & Sons, Inc. v. Stroman, 923 S.W.2d 80 (Tex. App.—Houston [14^th Dist.] 1996, writ denied).

Full post as published by Texas Non-Compete Law Blog on April 16, 2010 (boomark / email).