Rewarding Loyalty, Not Protecting an Investment: Texas Court Extends Forfeiture-for-Competition Rule Beyond Executive Compensation

Texas law draws a narrow line between a covenant that restricts an employee’s ability to compete and an incentive that rewards the employee for choosing not to do so. In Afzal v. Ramineni, 2026 WL 2268582 (Tex. App.—Beaumont Aug. 6, 2026, pet. filed), the Beaumont Court of Appeals carried that distinction beyond the restricted-stock incentive awards at issue in Drennen, the Texas Supreme Court case where the line was first drawn, to a physician-shareholder’s claim for a payment of more than $428,000 calculated from the practice’s accounts receivable. The result gives employers, including health care practices, a potentially powerful alternative to a traditional noncompete, but only if the benefit is structured as a true, unvested reward rather than earned compensation in disguise.

In Afzal, the appellee-physician purchased an ownership interest in the appellant’s medical practice for $180,000. Their agreements provided that, upon his departure, the departing physician would receive the value of his shares and, if he did not compete within 20 miles of the practice, an additional payment equal to 50 percent of the accounts receivable attributable to his work. After leaving the practice, the departing physician opened a competing clinic across the street and sought the additional payment, which he valued at more than $428,000. The trial court awarded him the payment, but the Beaumont Court of Appeals reversed, concluding that the practice owned the receivables and that the disputed payment was an additional, unvested benefit conditioned on his decision not to compete, not compensation he had already earned.

In doing so, the courtheld that a physician-shareholder agreement could condition a loyalty bonus on the physician’s decision not to compete within a 20-mile radius. The court treated it as a forfeiture-for-competition provision rather than a covenant not to compete because the provision did not prohibit competition, make competition a breach, or authorize an injunction or damages. The departing physician remained free to practice across the street from his former practice, as he ultimately did. His choice simply meant that he did not qualify for the additional payment. The court therefore reversed the trial court’s grant of summary judgment and rendered a take-nothing judgment against the physician.

The decision builds on two important Texas Supreme Court cases involving employee incentives and restrictive covenants. In Marsh USA Inc. v. Cook, 354 S.W.3d 764 (Tex. 2011), the Court held that stock options may provide the necessary connection between a noncompete and an employer’s legitimate interest in protecting goodwill. Stock ownership, the Court reasoned, can align a key employee’s interests with the employer’s long-term success and encourage the employee to foster valuable customer relationships. Marsh, however, involved an actual noncompete provision, and although financial incentives could support its enforcement, the covenant still had to satisfy the Texas Covenants Not to Compete Act’s requirements for reasonableness and protection of a legitimate business interest.

Three years later, Exxon Mobil Corp. v. Drennen, 452 S.W.3d 319 (Tex. 2014), identified the narrow but critical line between restricting competition and rewarding loyalty. As the Court explained: “There is a difference, although a narrow one, between an employer’s desire to protect an investment and an employer’s desire to reward loyalty. Non-competes protect the investment an employer has made in an employee, ensuring that the costs incurred to develop human capital are protected against competitors who, having not made such expenditures, might appropriate the employer’s investment.” By contrast, the court reasoned, a loyalty-based forfeiture provision does not prohibit the employee from accepting competitive employment. Instead, the employee makes a choice between competing with the employer and foregoing an additional, unvested benefit. Drennen therefore held that forfeiture clauses in noncontributory profit-sharing plans are not non-competes, although it reserved the separate question whether such provisions could constitute unreasonable restraints of trade under Texas law.

Afzal extends that reasoning beyond the executive equity plan at issue in Drennen. The departing physician argued that Drennen should be confined to noncontributory plans because he had paid to become a shareholder and had generated the accounts receivable used to calculate the disputed payment. The Beaumont Court of Appeals disagreed. The court emphasized that the parties’ agreements assigned the practice ownership of the receivables, gave the physician no existing financial interest in them, and described the 50 percent payment as something he would receive “in addition” to the agreed value of his shares. The court also connected the shareholder relationship to Marsh: as an owner, the physician acquired an interest in fostering the practice’s goodwill and protecting the other shareholders’ economic interests, thus, the payment was additional, unvested compensation belonging to the practice, not earned compensation or property that the physician already owned. As a result, competition caused no breach and triggered no repayment obligation; it only made the employee ineligible to receive the additional benefit.

Texas courts have previously addressed non-traditional provisions that impose economic consequences on employee mobility without expressly prohibiting competition. In Rieves v. Buc-ee’s Ltd., 532 S.W.3d 845 (Tex. App.—Houston [14th Dist.] 2017, no pet.), Buc-ee’s argued that a provision requiring an employee to repay “Additional Compensation” and “Retention Pay” compensation were permissible forfeiture provisions under Drennan. The court disagreed, distinguishing Drennan because the provision permitted the employer to claw back compensation that had already been paid and taxed, rather than withhold an unvested benefit. The court held that the provisions imposed a severe and broadly applicable economic penalty on an at-will employee’s right to quit. Therefore, these provisions lacked the “hallmarks” of forfeiture provisions identified in Drennan.

Afzal provides a more direct application of Drennan beyond the executive compensation context. The practice did not seek to recover vested benefits, demand repayment of paid wages, or impose a penalty for leaving employment generally. The practice simply retained an additional benefit that never became payable because an express condition precedent was not satisfied. In that sense, Afzal is a direct application of the Drennen court’s core distinction; that an employer may reserve an unvested reward for loyalty, but it cannot re-label earned compensation and then seek its return for competition.

Afzal provides an important drafting lesson for employers. A defensible forfeiture-for-competition provision should:

• identify the benefit as additional and unvested,
• make clear that the employee remains free to compete without breaching the agreement,
• distinguish the benefit from wages, commissions, or other earned compensation; and
• avoid injunctions, damages, repayment obligations, or other remedies directed at the competitive activity itself.

Afzal may not be the final word, however. Appellee has petitioned the Texas Supreme Court for review and the briefing process is ongoing at the time of publication. We will continue to monitor the proceedings and evaluate their potential implications.