Loss of Company Stock Due to Noncompete Violation

The Houston Court of Appeals recently decided a case in which a former employee lost his company stock because he competed with his former employer.  In the case, the employee had been awarded several thousand shares of restricted stock.  The stock award document stated that the company could recover the stock if the employee engaged in "detrimental activity," which was defined as activity which might "create a material conflict of interest."

After resigning from the company, the employee went to work for a competitor.  The former employer then told the employee that he would lose his stock.  The employee sued.

The court of appeals' opinion contained two primary findings:

1.  The provision allowing the company to cancel the employee's stock was effectively a covenant not to compete, because it imposed a penalty upon the employee if he competed; and

2.  the agreement was unenforceable because the covenant not to compete contained no limitations as to time, geographic area, or scope of activity to be restrained.  Rather, the agreement merely prohibited "detrimental activity," and this term was defined very broadly, without any particular limitations.

Interestingly, the court did not reform the covenant to make it reasonable, as Texas courts often do.  Rather, the court invalidated the overly broad covenant and returned the stock to the employee.  This opinion may be useful to an employee who has lost stock or other incentive awards due to an alleged violation of a noncompetition covenant.

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