Missouri Federal Court Finds Forfeiture-For-Competition Provision in Stock Option Agreement Enforceable

A recent Missouri federal court decision highlights the different standards that courts employ in evaluating forfeiture-for-competition provisions contained in stock option plans. 

Summary.  Many courts testing the validity of a contractual forfeiture-for-competition provision use a “reasonableness” standard.  Recently, however, a Missouri district court judge aligned himself with the minority view and held that regardless of whether the provision in an employee’s stock option plan is fair or unfair, it is enforceable.  The reason: the plan provided that the Board of Directors, which was not shown (or even alleged) to have engaged in fraud or bad faith, had the right to decide whether to exercise the company’s rights.  Smythe v. Raycom Media, Inc., Case No. 1-13-CV-12 (CEJ) (E.D. Mo., Aug. 15, 2013).

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