DELVACCA Presents…
Executive Employment Agreements:
Minimizing Risk in a Mythological
Minefield
Presented by:
Todd J. Glassman (tjg@obermayer.com)
Jason E. Reisman (jr@obermayer.com)
Obermayer Rebmann Maxwell & Hippel LLP
Robert H. Taylor, Senior Counsel
Thomas Jefferson University
We thank Obermayer for sponsoring this presentation.
Introduction
The focus of today’s presentation is not on
the typical, one-sided “standard” at-will
employment agreement.
This presentation assumes that the parties
have already agreed upon compensation
and benefits (i.e., negotiated a term
sheet).
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Introduction
The Company is voluntarily creating
obligations on itself greater than those
required by law under the “at-will”
employment doctrine.
The Executive enjoys rights greater than
those granted by law under the “at-will”
employment doctrine.
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Background: So how does it end?
When employment is not “at-will,” one of
the parties will typically end the
employment relationship in one of four
ways:
– The Company terminates employee for
“Cause”
– The Company terminates employee without
“Cause”
– The Executive terminates employment for
“Good Reason”
– The Executive terminates employment without
“Good Reason”
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Other ways that it may end…
Death
Disability
Retirement
Change in Control
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The Company’s Perspective
1. What matters in “real life”?
– Few provisions of an executive employment
agreement (“EEA”) are ever negotiated by the
Executive.
2. What matters in litigation?
– The majority of the provisions in an EEA are
boilerplate-type concepts that become critical
only in litigation (or pre-litigation negotiations).
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Executive’s “Real-Life” Concerns
Typically, the Executive will have reason
to negotiate only three elements of an
EEA:
– 1. Severance Package
– 2. Definition of “Cause”
– 3. Post-Employment Restrictions
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What Executives Want:
1. The Severance Package
Salary Continuation (or Lump Sum
Payout)
Health & Welfare Benefits
– Benefits during salary continuation
– Reimbursement of COBRA
Commission Tail
Accelerated Vesting of Equity Grants
Extended Exercise Periods for Stock
Options
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What Executives Get: NOTHING***
***The
Company should never agree to
provide post-employment benefits absent
the Executive’s agreement to execute a
general release at the time of termination
of employment and prior to the Executive’s
receipt of post-employment benefits.
The Company may wish to attach that
general release to the EEA.
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What Executives Want:
2. Narrow/Objective “Cause”
Definition
The Company’s termination of the
Executive for “Cause” disentitles the
Executive to severance benefits.
General Company view: the broader the
better.
Consider Executive right to cure.
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“Cause” Defined
Element: Convictions
– Felony
– Crimes of Moral Turpitude
– Any Crime
Narrow example: The Executive’s conviction of
or plea of guilty or nolo contendere to a
felony, a crime of falsehood or a crime
involving moral turpitude
Broad example: The Executive’s conviction of
or plea of guilty or nolo contendere to a crime
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“Cause” Defined
Element: Misconduct
Narrow: Any gross misconduct or violation
of law which is materially injurious to the
operations, financial condition or business
reputation of the Company
Broad: Any misconduct or violation of law
which is injurious or potentially injurious
to the operations, financial condition or
business reputation of the Company
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“Cause” Defined
Element: Violation of Company Policy
Narrow: Willful, material violation of any
written Company policy in effect as of the
effective date of the EEA
Broad: Violation of any written Company
policy
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“Cause” Defined
Element: Breach of EEA
Narrow: The Executive’s intentional breach
of a material provision of this Agreement
Broad: The Executive’s breach of any
provision of this Agreement
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“Cause” Defined
Element: Performance
Narrow: The Executive’s willful failure to perform her
duties to the Company (other than a failure resulting
from the Executive’s incapacity because of physical or
mental illness, as provided in the EEA), which failure
results in monetary injury to the Company; or the
Executive’s willful failure to follow the good faith, lawful
instructions of her direct supervisor or the Company’s
Board of Directors with respect to the operations of
the Company
Broad: The Executive’s continued failure to substantially
perform her duties under the EEA or to follow the lawful
and reasonable directions of her supervisor or the
Board
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Other “Cause” Elements
Misappropriation/Fraud
Discrimination/Harassment
Failure to Report to Work
Dishonesty or Gross
Negligence/Misrepresentation
Breach of Fiduciary Duty
Substance Abuse
Breach of Pre-Existing Restrictive Covenant or
Duty of Confidentiality
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Some “Cause” ‘Wiggle Words’
Material
Substantial
Gross
Reckless
Willful/Intentional
Reasonable
Arbiter of conduct (reservation of
discretion)
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Without “Cause” Defined:
An Important Intricacy to Consider
Whether non-renewal by the Company of
an EEA that is for a term of years
constitutes a without “Cause” termination
will determine whether the Executive shall
receive severance benefits upon the
expiration and non-renewal of an EEA.
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Hmmm…
Bill Oliver joined Acme’s executive team in January 2008
following an impressive track record at Big Retailer. As
Acme’s EVP for Strategic Planning, Mr. Oliver entered into
an EEA that could provide cash and equity of about $20
million over five years. Acme officials have determined that
Oliver fostered an inappropriate relationship with the
teenaged daughter of another Acme employee (a manager
who reports to Oliver) and believes Oliver’s employment
should be terminated. Oliver’s employment contract
contains the following definition of acts which could warrant
termination for cause:
– “Any gross misconduct or violation of law which is materially
injurious to the operations, financial condition or business reputation
of the Company.”
The CEO of Acme seeks your legal advice regarding Mr.
Oliver’s employment. What do you recommend? Why?
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Good Reason:
The Dark Side of “Cause”
Examples of “Good Reason” for the Employee to
terminate her employment and receive
severance benefits:
– the Company’s substantial diminution of the
Executive’s duties and responsibilities
– a material reduction in the Executive’s salary or
benefits, except such reductions that are “across the
board”
– a reassignment which requires the Executive to move
his principal office more than fifty (50) miles from the
Executive’s office on the date of the entry of the EEA
Consider Company right to cure
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Change in Control
Standard change in control benefits may involve
a cash bonus and/or accelerated vesting.
The Executive may seek enhanced severance
benefits following a change in control and (1) a
no “cause” termination by the Company or (2)
the occurrence of an event giving rise to “good
reason” for the Executive to terminate
employment.
The Company will usually tie enhanced
severance benefits to timing in relation to the
change in control.
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What Executives Want:
3. “Non-Restrictive” PostEmployment Restrictions
1. Covenant not to compete
2. Covenant not to solicit/interfere
3. Covenant not to raid employees
4. Covenant to protect trade secret,
proprietary and confidential information
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Covenants Not to Compete (PA)
1. Continued employment is not sufficient
consideration to support a non-competition or
non-solicitation agreement.
2. Notify prospective Executive that his or her
EEA will contain restrictive covenants & provide
a copy in advance of first day of employment.
3. Obtain the Executive’s signed EEA on or
prior to first day of employment. (You’d be
surprised!)
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Covenants Not to Compete (PA)
4. Make copies and keep original EEA and
copies in secure area. (You’d really be
surprised!)
5. Carefully consider the wording of restrictive
covenants (e.g., “indirectly solicit” versus “solicit
through another person or entity”).
6. Covenants not to compete are restraints on
trade and, as such, are inherently disfavored by
Courts. So…
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Covenants Not to Compete (PA):
Think before you draft!
1. Carefully consider the restricted activities and the
geographical and temporal scope.
2. Court will apply a fact-specific, reasonableness standard.
3. To be enforceable, a restrictive covenant must be:
– Ancillary to an employment relationship;
– Supported by adequate consideration;
– Reasonably necessary for the protection of legitimate
interests of the employer; and
– Reasonably limited in duration and geographic extent.
4. Balancing test: A court will balance the employer’s
legitimate business interests against the interest of the
employee in earning a living in his or her chosen profession,
trade or occupation, and will then balance the result against the
interest of the public.
4. Now that we’ve got that cleared up…what’s reasonable?
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Restrictive Covenants:
What’s Reasonable?
You’ll find out!!! (After the fact,
unfortunately…)
To minimize risk, restrict what you need,
not what you want.
Be careful of “boilerplate restrictive
covenants.”
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Other Protections Related to
Restrictive Covenants
Contractual requirement for the Executive to notify
subsequent employer of restrictions and to provide a
copy of EEA
Contractual consent for the Company to provide notice
of restrictions to a subsequent employer
Contractual requirement for the Executive to notify the
Company of identity of subsequent employer and
title/duties regarding subsequent employment
The Company may obtain right to cease severance
payments if the Executive has breached his or her
restrictive covenants (and to recoup previous payments
made)
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Hmmm…
On July 8, 2010, Acme terminated Mr. Oliver’s
employment due to his inappropriate relationship with
the teenaged daughter of another Acme employee.
Shortly thereafter, Oliver filed a lawsuit alleging Acme
owes him the balance of the compensation set forth in
his contract, or roughly $12 million. Acme has
retained outside counsel to defend the lawsuit.
However, on September 15, 2010, Acme learned that
Oliver had joined Big Competitor, as its SVP for
Strategic Planning. The CEO of Acme views this as
unacceptable, given the knowledge that Oliver has of
Acme’s business plans. The CEO reminds you that
Mr. Oliver has a two year non-compete provision in his
employment contract, and says that he wants to seek
enforcement of that provision. Yikes!
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Confidential Information
1. What’s really confidential? (e.g., customer
identity versus customer decision-maker identity)
2. How to define: general or specific?
– General:
“All knowledge, information, material or data about the
Company or its business disclosed to or learned by
the Executive through his employment with the
Company, whether or not specifically designated by
the Company as confidential, which is proprietary
and/or confidential, and including any information the
Company has developed or develops that is not
known to the Company’s competitors and which
provides the Company a competitive advantage.”
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Confidential Information
– Specific (a/k/a the “Rolodex Definition”):
“The Company’s Confidential information includes: (i)
Financial data, vendor pricing to the Company, vendor
lists, computer printouts, accounts receivable reports,
revenue reports, cost reports, budgets, profit and loss
reports, sales figures and sales targets; (ii) Customer lists,
customer contacts, potential customer contacts, targeted
potential customers, rolodex(es), sales territories, sales
strategies, proposals and contracts; (iii) Employee lists,
employee salaries, memoranda, samples, notes, books,
correspondence, all written and graphic records belonging
to the Company and in the Executive’s possession or
under the Executive’s control; (iv) Such other Company
information designated as confidential, proprietary and/or
trade secret to which the Executive gains access during
his employment; and (v) All documents, files,
correspondence, notes or other papers memorializing or
containing any such information.”
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What Matters In Litigation?
Specific to Restrictive Covenants
– Provide for the Company’s right to obtain
attorneys’ fees and costs for the Executive’s
breach
– Set forth the Executive’s acknowledgment of
irreparable harm and consent to the
Company’s right to obtain injunctive relief
– Provide for a court’s ability to blue-pencil an
overbroad restriction (in a blue-pencil state)
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What Matters In Litigation?
Integration (“Entire Agreement”) clause
This is the entire Agreement that exists
between the parties and supersedes all
other agreements and understandings
between the parties, written or verbal.
Prevents use of extrinsic evidence in
interpreting EEA in the event of a dispute
over its terms.
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What Matters In Litigation?
Choice of Law/Consent to Venue
The parties agree that the terms of this Agreement
shall be construed in accordance with the laws of
the Commonwealth of Pennsylvania. In the event
of any dispute arising under this Agreement, the
parties consent to the jurisdiction of the courts
located within Pennsylvania.
Understand the intricacies of the state in which
you wish for the agreement to be enforced and
litigated.
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What Matters In Litigation?
Severability (especially restrictive covenants)
If any provision of this Agreement or its application
to anyone or under any circumstances is
adjudicated to be invalid or unenforceable, such
invalidity or unenforceability shall not affect or
impair in any way the validity, legality or
enforceability of the remainder of this Agreement,
and shall not invalidate or render unenforceable
such provision or application in any other
jurisdiction.
Ensures that the Company avoids the legal
principle that the presence of one legally invalid
contract provision impacts the enforceability of
other otherwise enforceable provisions.
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What Matters In Litigation?
No Drafting Parties
The parties acknowledge and agree that each has
fully participated in the negotiation and drafting of
this agreement and, as such, neither party shall
be considered the drafter of this agreement. As
such, this agreement shall not be construed either
for or against either party in that regard.
Addresses the principle of law that a contractual
ambiguity shall be construed against the drafter
(i.e., the Company) of the agreement.
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What Matters In Litigation?
Non Waiver of Breach
The failure of either party to enforce any provision or
provisions of this Agreement shall not be construed
as a waiver of any such provision or provisions as to
any future violations thereof, nor prevent that party
thereafter from enforcing each and every other
provision of this Agreement. The rights granted
herein by and to the parties are cumulative and the
waiver of any single remedy shall not constitute a
waiver of such party’s right to assert all other legal
remedies available to it under the circumstances.
Ensures that the Company’s failure to enforce a
right under the agreement is not affected by the
Company’s waiver of enforcement of another
contractual right.
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What Matters In Litigation?
No Modification
The parties agree that this Agreement may
only be amended by an instrument in
writing executed by the parties hereto, and
that neither party shall assert that this
Agreement has been modified in any
manner other than by written instrument.
Prevents a party from asserting that the
parties modified an EEA orally or by their
course of conduct.
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What Matters In Litigation?
Successors and Assigns
This Agreement shall not be assignable by
any party, except by Company to any
successor in interest to its respective
businesses.
In some states, the Company’s failure to
contract for its right to assign an EEA upon
its sale of business will preclude the
Company from automatically assigning the
EEA to the successor.
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What Matters In Litigation?
Jury Trial Waiver/ADR
– Litigation v. ADR
– If litigation, waive right to jury trial?
– Jury trial waiver must be “knowing and voluntary”:
whether a gross disparity in bargaining power existed between
parties
business or professional experience of the party opposing the
waiver
whether the clause containing the waiver was inconspicuous
whether the opposing party had an opportunity to negotiate
contract terms
– Types of ADR to consider: mediation, arbitration or both
– split venues for injunctive (in court) v. non-injunctive (in
arbitration) relief
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