As companies grow and expand into multiple U.S. states, particularly in our increasingly knowledge and relationship-based economy, determining the applicable law for companywide restrictive covenants can be puzzling. Determining which law applies can make the difference between enforcement or the inability to enforce the covenants.
In Cardoni et al. v. Prosperity Bank (Case Nos. 14-20682 and 15-20005), decided on Oct. 29, 2015, the Fifth Circuit provided a useful roadmap for how a court should analyze various covenants involving interstate parties and interests. Simplifying the facts somewhat, Prosperity Bank in Texas acquired F&M Bank in Oklahoma by merger. In connection with the purchase, Prosperity signed several of the F&M employees to new employment agreements that included noncompete, customer nonsolicitation, and confidential information nondisclosure provisions. These agreements were governed by Texas law and had an exclusive Texas choice of forum provision, even though the employees did most of their work, both before and after signing the agreements, in Oklahoma. Four of the employees later became parties to the litigation. Those four individuals also had been very small shareholders in F&M, and sold their stock in exchange for cash and Prosperity stock as part of the merger transaction; however, the covenants at issue in their new employment agreements were not included in the merger agreement.