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Cardoni v. Prosperity Bank: Useful teaching case

Adapted from an email I just sent to the students in my contract-drafting course.

Cardoni v. Prosperity Bank, No. 14-20682 (5th Cir. Oct. 29, 2015), is a useful teaching case for people drafting (i) merger-and-acquisition agreements, and (ii) related employment agreements, especially those being offered to employees of an acquired company.

For students:  It’s worth reading the factual narrative of how the M&A transaction progressed to get an idea how such transactions typically take place.  In a nutshell:

  • The target bank was in Oklahoma; the acquiring bank, in Texas.
  • Before the deal closed, the acquiring bank offered employment contracts to 35 of the Oklahoma bank’s senior-level employees (“bankers”), and suggested that the deal might fall apart if they didn’t sign.
  • All but one of the 35 Oklahoma bankers signed, but some of them soon became unhappy with their new employment situation and left to join a competitor.
  • As is often the case in such affairs, the departing bankers’ employment agreements with the Texas acquiring bank contained five provisions of particular interest:
    • a non-competition covenant, prohibiting the bankers from competing with the Texas acquiring bank within 50 miles of the Oklahoma target bank’s banking centers;
    • a non-solicitation covenant, precluding the bankers from soliciting customers of either the Texas acquiring bank or the Oklahoma target bank;
    • a non-disclosure covenant, prohibiting the bankers from disclosing confidential information of either the Texas acquiring bank or the Oklahoma target bank;
    • a Texas choice of law clause — this is salient because Texas law generally allows non-competition covenants, as long as they’re limited both geographically and temporally, but Oklahoma law generally doesn’t (remember, the departing bankers were all in Oklahoma); and
    • a forum-selection clause specifying Texas as the exclusive jurisdiction.

After the parties filed dueling state-court lawsuits in both Texas and Oklahoma, the cases were removed to federal court and consolidated in Houston.

Key takeaways:  The district court held in part that:

  • notwithstanding the Texas choice-of-law clause, Oklahoma law governed both the non-competition covenant because of Oklahoma’s strong public policy favoring employee mobility (the Fifth Circuit affirmed on this point) and the non-solicitation covenant (the Fifth Circuit reversed on this point);
  • the Texas choice-of-law clause was effective to make Texas law govern the non-disclosure covenant; — but on the facts of the case, said the district court, the Texas acquiring bank had not shown that the departing bankers had disclosed confidential information, and so the court denied the Texas acquiring bank’s motion for a preliminary injunction against the departing bankers (the Fifth Circuit affirmed on this point as well).

At pages 8-11, the Fifth Circuit also gives a useful recap of the law concerning choice-of-law clauses and forum-selection clauses, as well as explaining some of the underlying policy differences.

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