Bank's Noncompete Agreement Likely Not Enforceable

Daily Labor Report® is the objective resource the nation’s foremost labor and employment professionals read and rely on, providing reliable, analytical coverage of top labor and employment...

By Lisa Nagele-Piazza

Oct. 30 — Texas-headquartered Prosperity Bank didn’t show a substantial likelihood that it would succeed in enforcing a noncompetition provision in employment contracts signed by four bankers in Oklahoma who left the company to work for a competitor, the U.S. Court of Appeals for the Fifth Circuit ruled Oct. 29.

When Prosperity acquired the bankers’ former employer in August 2013, they signed contracts agreeing to three-year terms as senior vice presidents. However, the claimants left Prosperity in September 2014 to work for a competitor located 7 miles from their Tulsa, Okla., branch.

Prosperity sought a preliminary injunction to enforce restrictive covenants—including noncompetition and nonsolicitation provisions. In support of its position, the bank cited Texas law, which generally permits the restrictive covenants.

Although the contracts provided that Texas law would govern the parties’ relationship, the bankers argued that Oklahoma law—which generally doesn't permit covenants not to compete—should be applied.

The appeals court found that Oklahoma had the more significant relationship with the case, as well as the more significant relationship with the parties. The case affected employees in the state, and both Prosperity and its competitor operated within its borders, the court explained. But the contracts’ choice-of-law provision would still govern the parties’ relationship unless applying Texas law would contravene a fundamental Oklahoma policy, the appeals court said.

Partially affirming the district court’s denial of the preliminary injunction, the appeals court found that the choice-of-law provision is likely unenforceable with regard to the noncompetition provision. Oklahoma has a statutory provision that renders void most restrictions on practicing a lawful profession, trade or business.

“[A]pplying Texas law, which takes a more permissive attitude of both noncompetition agreements and the ability to reform them, would contravene Oklahoma’s statutory aversion to noncompetition agreements,” the court said.

The appeals court rejected Prosperity's argument that the covenant falls within Oklahoma's “goodwill” exception involving the sale of a business. Even though the bankers were stockholders in the acquired bank, their combined .39 percent ownership was too negligible, the court said.

However, the district court erroneously lumped the noncompetition and nonsolicitation agreements together, the appeals court said. The choice-of-law provision may be enforceable with regard to the contracts’ nonsolicitation provision, because Oklahoma law permits restrictions on soliciting customers from a former employer, it said.

Even though Oklahoma law allows such agreements in more limited circumstances than Texas law or the bankers' contracts, applying Texas law to the terms of the nonsolicitation provision may not “violate a fundamental policy of Oklahoma law,” the appeals court held. Thus, the court remanded the issue for further consideration.

Joyce & McFarland LLP and Enoch Kever LLP represented the bankers. Bracewell & Giuliani LLP represented Prosperity.

To contact the reporter on this story: Lisa Nagele-Piazza in Washington at lnagele@bna.com

To contact the editor responsible for this story: Susan J. McGolrick at smcgolrick@bna.com

Text of the opinion is available at http://www.bloomberglaw.com/public/document/CHRIS_CARDONI_an_individual_WESLEY_WEBB_an_individual_TERRY_BLAIN.