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5th Cir. Favors Worker Mobility Over Texas-Based Non-Compete Clauses

By Jonathan R. Tung, Esq. on November 04, 2015 | Last updated on March 21, 2019

The Fifth Circuit unanimously rejected a Texas-based financial institution's argument that Texas' applied Selection Clause automatically subsumed Choice-of-Contract because allowing such an application would violate Oklahoma's public policy in favoring worker's right to earn a living.

The is noteworthy because it contrasts the two state's competing viewpoints of worker's rights. It also displays the Fifth Circuit's lively writing style.

In Simple Terms

Prosperity Bank entered into a contract with Tulsa-based F&M Bank and Trust Company under which both companies would merge. The terms of the contract provided that Texas law would apply.

In reviewing the case, the Fifth Circuit noted that Texas generally has allowed non-compete covenants under the theory that parties should be allowed to contract; and that Oklahoma tends to disfavor such clauses, eyeing a citizen's right to work and earn a living.

The Merger

Prosperity bank favored a quick merging of the companies and also sought the employment of thirty of the F&M bankers whom the former considered essential for the well being of the merger. These bankers were given a non-compete clause to sign as a condition of their employment that would apply within a 50 mile radius of Prosperity/F&M.

Almost immediately afterward, the same bankers took up employment at another bank only seven miles away from where Prosperity/F&M was located. They alleged false representation, and tortious interference with contract. Properity Answered with a breach of contract claim and sought enforce the provisions.

One Issue of Many

Multiple issues were debated, but the Fifth Circuit found that the contract terms should not stand because they stood to contravene Oklahoma's "fundamental policy" interest in invalidating non-competes. The court, earlier in its opinion did acknowledge that the Texas Supreme Court reiterated its fondness in Exxon Mobil v. Drennen III. for the "party autonomy rule" which allows parties to agree to be governed by the laws of another state.

These selection clauses, however, must be distinguished from Contract Choice of Law provisions, where the states' interest in governing activity that clearly falls within its jurisdiction is much greater. Since the lower court "lumped" these two concepts together, the panel provided a nuanced ruling that affirmed in part and reversed in part.

The Court's opinion is an educational read that discusses legal issues beyond the enforceability of non-compete clauses. It's a recommended read.

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