Source: http://obermanthompson.com/executive-and-other-employment-agreements-2/
Timestamp: 2020-01-24 10:41:07
Document Index: 293379471

Matched Legal Cases: ['§ 325', '§ 325', '§ 206', '§ 176', '§ 181', '§ 325', '§ 181']

Executive and Other Employment Agreements | Employment, Non-compete, and Business Dispute Law Firm – Oberman Thompson
Prepared and Presented by Jeffrey B. Oberman
annotated EXECUTIVE EMPLOYMENT AGREEMENT
II. Annotated Executive Employment Agreement
II. OLDCO’s Goals in Drafting and Using Agreements
III. OLDCO’s Agreement Strategies
IV. OLDCO’s Potential Claims
V. Potential Defenses to OLDCO’s Claims
IV. Drafting Tips
This Annotated Executive Employment Agreement is intended to highlight drafting issues, practices and strategies. [Sections in brackets may not appear in many agreements, depending on the parties’ viewpoints and negotiations.] It is a sample, which has been edited and annotated for purposes of this presentation. Actual agreements need to address the specific needs of the parties and their unique factual and legal issues.
II. ANNOTATED EXECUTIVE EMPLOYMENT AGREEMENT.
This EMPLOYMENT AGREEMENT (“Agreement”) is made and entered into as of the ____ day of _____________, 2009, by and between XYZ Corporation (“Company”), a Minnesota corporation, and _____________________________ (“Executive”).
A. RECITALS.[1]
1. Executive has the professional and personal skills to serve Company as its [Chief Operating Officer].
2. [The parties wish to establish an employment relationship, to protect Company’s business and other interests, to provide protections to Executive in the event Executive’s employment is terminated without cause, and to provide the essential terms of Executive’s employment.]
3. [Company’s current business activities include, among other things, designing, developing, manufacturing, shipping, marketing and selling ______________ products [and/or] providing ____________ services to _________________.]
4. [Company and Executive recognize that, in performing his/her anticipated job-related duties and responsibilities, Executive will have extensive access to Company’s confidential design, manufacturing, distribution, marketing and sales information; and will have opportunities to cultivate valuable business relationships with Company’s employees, customers and vendors.]
B. AGREEMENT.
In consideration of the foregoing premises, the mutual covenants and obligations of this Agreement and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Employment. Company agrees to employ Executive, and Executive agrees to accept employment with Company, pursuant to the terms and conditions of this Agreement. It is understood that Executive will be subject to the policies and terms (as they may be amended from time to time) by Company, Company’s Employee Handbook, Company’s Code of Conduct and other policies in effect for salaried employees and officers of Company, except as otherwise specifically provided in this Agreement. [2]
2. Duties.[3] The services of Executive shall be exclusive to Company, except as otherwise agreed to in writing by Company. Executive will [initially] serve in the capacity of [Chief Operating Officer]. Executive will assume responsibility for the job titles, reporting responsibilities and duties, which are assigned and which may be changed from time to time, by Company’s [Chief Executive Officer]. Executive will perform Executive’s obligations in a competent and professional manner, consistent with the expectations of Company’s [Chief Executive Officer]. [Notwithstanding the above obligations, Executive may serve on outside boards of directors or committees if the outside activities are first disclosed to and approved in writing by Company’s (Chief Executive Officer). That approval will not be granted if the outside activities are deemed by the (Chief Executive Officer) to conflict with the provisions of this Agreement, to impair Executive’s ability to perform Executive’s duties, or to otherwise conflict with Company’s business interests.]
3. Term of Employment.[4] [This Agreement is not intended to establish any minimum or maximum period for Executive’s continuing employment. Executive and Company will have an “at-will” employment relationship, which means that either party has the right to terminate the employment relationship[5] at any time and for any reason, with or without Cause.] [The reason for and timing of the termination, as set forth in Paragraph 5, will determine the amount of post-termination payments and benefits, as set forth in paragraph 6.]
4. Compensation, Reimbursements and Benefits.[6] Company agrees to provide Executive the following compensation, reimbursements and benefits:
a. [Signing Bonus. As an inducement to enter into this Agreement, Company will pay Executive a signing bonus in the gross amount of $__________, less standard withholdings, payable within ___ days of _________________.]
b. Base Salary.[7] Company will pay Executive a monthly base salary (the “Base Salary”), payable in accordance with Company’s standard payroll practices. The initial monthly Base Salary will be in the gross amount of _______________ Dollars ($_________). The Base Salary will be subject to annual performance review and possible adjustment by Company’s [Chief Executive Officer.]
c. [Incentive Awards.[8] Executive [may] [will] be eligible to receive discretionary annual bonuses and/or long term incentive compensation (“Incentive Awards”) pursuant to the terms and conditions of Company’s Annual Bonus Plan and/or Company’s Long Term Incentive Plan (jointly, “Incentive Plans”), subject to the following:
(1) Executive’s eligibility to receive Incentive Awards will be determined by Company’s [Board of Directors.]
(2) The Incentive Plans are not necessarily all-inclusive because circumstances which Company has not anticipated may arise. Company reserves the right to make any changes at any time to the Incentive Plans or to terminate the Incentive Plans.
(3) Any questions regarding the computation of Incentive Awards under the Incentive Plans will be conclusively determined by Company’s [Board of Directors], pursuant to the terms and conditions of the Incentive Plans.]
d. Discretionary Bonus. Executive may be awarded an annual discretionary bonus (“Bonus”). The amount of the Bonus and the timing of payment of such Bonus will be determined in the sole discretion of the Company’s [Chief Executive Officer.]
e. [Stock Options. Executive may be awarded stock options from time to time, pursuant to the terms and conditions of Stock Option Plans, which may be adopted by Company’s Board.]
f. Expenses.[9] Company will reimburse Executive for ordinary, necessary and reasonable business expenses that Executive incurs in connection with the performance of Executive’s duties [including entertainment, telephone, travel and miscellaneous expenses]. Executive must obtain proper approval for such expenses pursuant to Company’s policies and procedures, and provide Company with documentation for such expenses in a form sufficient to sustain Company’s deduction for such expenses under the Internal Revenue Code.
g. Time Off.[10] Executive will be entitled to time off with or without pay in accordance with Company’s policies in effect at any particular time [; provided, however, that Executive shall, in any event, be entitled to _________ (____) days of Paid Time Off (“PTO”) during each full year of employment. Executive may carry over up to _________ (___) days annually of PTO.]
h. Health, Disability, Life Insurance and Other Employee Benefit Plans.[11] Company will provide Executive with health, disability, and life insurance coverage and other employee benefits that are presently existing or which may be established in the future by Company for its full-time salaried employees, subject to the terms and conditions of the applicable benefit plans.
i. Indemnification. Company will defend, indemnify and hold Executive harmless from costs, expenses, damages and other liability incurred by Executive as a result of performing services in good faith to Company, subject to the limitations and other terms and conditions of applicable Minnesota statutes and Company’s Articles of Incorporation or Bylaws.
j. Changes in Benefit Plans.[12] No references in this Agreement to particular employee benefit plans established or maintained by Company are intended to change the terms and conditions of the plans or to preclude Company from amending or terminating the plans.
k. Withholding; Taxes. Company may withhold from any compensation, reimbursements and benefits payable to Executive all federal, state, city and other taxes as required by any law or governmental regulation or ruling, as well as other standard withholdings and deductions.
5. Termination.[13] Executive’s employment may be terminated at any time as follows:
a. Death.[14] Executive’s employment shall automatically terminate upon Executive’s death.
b. Disability.[15] Either party may terminate Executive’s employment at any time, upon written notice to the other party, if Executive sustains a disability which precludes Executive from performing the essential functions of Executive’s job, with or without reasonable accommodations, as defined, and if required, by applicable state and federal disability laws. [Executive shall be presumed to have such a disability for purpose of this Agreement if Executive qualifies to begin receiving disability income insurance payments under any long term disability income insurance policy that Company maintains for the benefit of Executive. If Executive does not qualify for such payments, Executive shall nevertheless be presumed to have such a disability if Executive is substantially incapable of performing the essential functions of Executive’s job for a period of more than ________________.]
c. With Cause.[16] Company may terminate Executive’s employment at any time, with “Cause,” upon written notice to Executive. “Cause” shall mean any one of the following events:
(1) Executive’s breach of any material obligations under this Agreement, or Executive’s [willful and/or repeated] failure or refusal to perform or observe Executive’s duties, responsibilities and obligations to Company;
(2) Any breach of Executive’s duty of loyalty or fiduciary duties to Company;
(3) Use of alcohol or other drugs in a manner which affects the performance of Executive’s duties, responsibilities and obligations to Company;
(4) Conviction of Executive, or a plea of nolo contendere for a felony or of any crime involving theft, misrepresentation, fraud, or moral turpitude;
(5) Commission by Executive of any other [willful or intentional] act which could reasonably be expected to injure the reputation, business or business relationships of Company and/or Executive; or
(6) The existence of any court order or settlement agreement prohibiting Executive’s continued employment with Company.
d. Without Cause.[17] Company may terminate Executive’s employment at any time, without Cause, upon ______ ( ) days written notice to Executive. [Company may, at its sole discretion, opt not to have Executive provide active employment services during some or all of the notice period, and place Executive on a paid leave of absence for some or all of the notice period.]
e. Resignation.[18] Executive may, upon _______ ( ) days written notice to Company, terminate Executive’s employment at any time. [Upon receiving such notice, Company may, at its sole discretion, opt not to have Executive provide active employment services during some or all of the notice period, and place Executive on a paid leave of absence for some or all of the notice period. If Company exercises this option, it shall not convert the resignation to a termination by Company.]
f. Resignation for Good Reason.[19] Executive may terminate Executive’s employment at any time, with “Good Reason,” upon written notice to Company. “Good Reason” shall mean any one of the following events [that is not satisfactorily explained to Executive or cured within _____ ( ) days of written notification thereof to Company by Executive]:
(1) Company’s [intentional and material] breach of Company’s obligations under this Agreement;
(2) Working conditions created by Company, which are in violation of Executive’s rights under any federal or state law. [Among other things, if Company materially alters the terms and conditions of Executive’s employment, or materially reduces or changes Executive’s job duties or authority in conflict with this Agreement, it shall be considered a material breach of this Agreement.][; or
(3) ______________________________________________________ _________________________________________________________________.]
g. Other Reasons. [_______________________________________ _____________________________________________________________________.][20]
6. Payments and Benefits upon Termination.[21] Upon the termination of Executive’s employment, Executive shall only[22] be entitled to the following payments and benefits:
a. Death; Disability.[23] If Executive’s employment is terminated due to Executive’s death or disability, regardless of the date of termination, Executive or Executive’s estate or heirs, as appropriate, shall only be paid (i) Executive’s Base Salary and accrued, but unpaid, PTO, prorated through the date of termination; (ii) any unpaid expense reimbursement; (iii) other accrued and vested benefits, if any, under any of Company’s Incentive Plans or any of Company’s other employee benefit plans (e.g., 401(k) plan), subject to the terms and conditions of those plans; and (iv) any benefits payable under any life or disability insurance policy maintained by Company for the benefit of Executive at the time of the termination of employment, subject to the terms and conditions of such policy.
b. For Cause [; Resignation without Good Reason].[24] If Company terminates Executive’s employment for Cause, [or if Executive resigns without Good Reason,] regardless of the date of termination, Executive shall only be paid (i) Executive’s Base Salary and accrued but unpaid PTO, prorated through the date of termination; (ii) any unpaid expense reimbursement; and (iii) other accrued and vested benefits as of the date of termination, if any, under any of Company’s Incentive Plans or any of Company’s other employee benefit plans (e.g., 401(k) plan), subject to the terms and conditions of those plans.
c. Without Cause [; Resignation for Good Reason].[25] If Company terminates Executive’s employment without Cause [or Executive resigns for Good Reason], regardless of the date of termination, Executive shall be paid the same payments and benefits as set forth in Subparagraph 6.b. above. In addition, if Executive signs (and does not rescind, as allowed by law) a Release of Claims [in a form satisfactory to Company which assures, among other things, that Executive will not commence any type of litigation or assert other claims against Company] [or] [a copy of which is attached hereto as Exhibit A], and if Executive complies with all of Executive’s post-termination obligations to Company under this Agreement and Executive’s Confidentiality, Noncompetition and Nonsolicitation Agreement,[26] Company shall pay Executive a post-termination payment [in the amount of_______________] [, as set forth below:
(1) If the effective date of termination of employment is during the first full year of Executive’s employment, an amount equal to ____ (__) months of Executive’s Base Salary as of the date of termination;
(2) If the effective date of termination of employment is during the second full year of Executive’s employment, an amount equal to ____ (__) months of Executive’s Base Salary as of the date of termination; or
(3) If the effective date of termination is after the second full year of Executive’s employment, an amount equal to ____ (__) months of Executive’s Base Salary as of the date of termination.]
The [applicable] payment shall be made [in a lump sum on] [at the same intervals and amounts as Executive’s pre-termination Base Salary, beginning with] the first payroll date after Executive signs (and does not rescind, as allowed by law) the above referenced Release of Claims, subject to appropriate withholdings and deductions, and subject to Executive’s compliance with all of Executive’s post-termination obligations to Company under this Agreement and Executive’s Confidentiality, Noncompetition and Nonsolicitation Agreement. No Incentive Awards, retirement savings contributions, 401(k) contributions or other employee payments or benefits will be paid to Executive by Company based on the amount of the post-termination payment[.] [, except the following: ______________.]
d. [At Any Time As a Result of a Change of Control.[27] If Company terminates Executive’s employment at any time as a result of a “Change of Control,” and if Executive does not receive [and accept] an offer of employment [, which has comparable responsibilities and compensation] [that continues for at least ____ ( ) months] with the new controlling entity, Executive shall be paid the same payments and benefits as set forth in Subparagraph 6.b. above. In addition, if Executive signs (and does not rescind, as allowed by law) a Release of Claims in a form satisfactory to Company and the new controlling entity which assures, among other things, that Executive will not commence any type of litigation or assert other claims against Company, and if Executive complies with all of Executive’s post-termination obligations to Company under this Agreement and Executive’s Confidentiality, Noncompetition and Nonsolicitation Agreement, Company shall pay Executive a post-termination payment equal to ___ months of Executive’s Base Salary as of the effective date of the termination of employment.
This payment shall be made [in a lump sum on] [at the same intervals and amounts as Executive’s pre-termination Base Salary, beginning with] the first payroll date after Executive signs (and does not rescind, as allowed by law) the above-referenced Release of Claims, subject to appropriate withholdings and deductions, and subject to Executive’s compliance with all of Executive’s post-termination obligations to Company under this Agreement and Executive’s Confidentiality, Noncompetition and Nonsolicitation Agreement. The payment under this Change of Control provision will be paid in lieu of, and not in addition to, the post-termination payment referenced in Subparagraph 6.c.(1), (2) or (3) above. No Incentive Awards, retirement savings contributions, 401(k) contributions or other employee payments or benefits will be paid to Executive by Company based on this post-termination payment[.] [, except the following: ________________].
If Executive does receive an offer of [comparable] employment with the new controlling entity, and chooses not to accept that employment, Executive’s termination of employment shall be considered a resignation, and treated as set forth in Subparagraph 6.b. above. For purposes of this provision, “Change of Control” means a sale or lease of the assets or a controlling interest of the stock of Company to a third party, which may come as a result of a divestiture, an acquisition, a lease arrangement, or a merger.]
7. Business Protections.[28]
a. Representations by Executive.[29] Executive represents to Company that Executive has not signed and/or entered into any written or oral noncompetition agreements, confidentiality agreements, or other proprietary information agreements that would prevent Executive from accepting this offer or performing the anticipated duties and services at Company. This Agreement is subject to these representations being correct.
b. No Violations of Others’ Rights.[30] Company does not authorize Executive to utilize any other individual or entity’s intellectual or other property, confidential or proprietary information on Company’s behalf. Executive will not knowingly do any of the following on Company’s behalf:
(1) Use any other individual or entity’s intellectual or other property, confidential or proprietary information. Specifically, Executive will not bring any other individual or entity’s proprietary information, customer lists, records, trade secrets, or any other property or confidential information with Executive when Executive comes to work at Company. All of that information and property should be left with the proper owner(s);
(2) Contact or do business with any supplier or other individual or entity who or which has an exclusive contract or any other agreement with any other individual or entity which prevents him/her/it from doing business with Company; or
(3) Interfere with, infringe, misappropriate or violate any intellectual property rights of a third party.
c. Protective Covenants.[31] Company has many confidential and proprietary business interests and other information relating to its products, services, customers and employees, which it needs to adequately protect. Company’s willingness to enter into this Agreement is contingent upon Executive simultaneously signing a separate Confidentiality, Noncompetition and Nonsolicitation Agreement with Company. The business protections in that Confidentiality, Noncompetition and Nonsolicitation Agreement will apply throughout Executive’s employment, and will continue to apply thereafter even if Executive’s employment is terminated under Paragraph 5 of this Agreement, regardless of the reason for or timing of the termination.
a. Entire Agreement. This Agreement contains the entire agreement of the parties relating to the subject matter hereof and, except as otherwise stated[32], supersedes any and all oral or written prior agreements and understandings with respect to such subject matter. The parties have made no agreements, representations, or warranties relating to the subject matter of this Agreement which are not set forth herein.
b. Construction. Each provision of this Agreement shall be interpreted so that it is valid and enforceable under applicable law. If any provision of this Agreement is to any extent invalid or unenforceable under applicable law, that provision will still be effective to the extent it remains valid and enforceable. The remainder of this Agreement also will continue to be valid and enforceable, and the entire Agreement will continue to be valid and enforceable in other jurisdictions.
c. Waivers. No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel to enforce any provisions of this Agreement, except by a statement in writing signed by the party against whom enforcement of the waiver or estoppel is sought. A waiver shall operate only as to the specific term or condition waived. No waiver shall constitute a continuing waiver or a waiver of such term or condition for the future unless specifically stated. No single or partial exercise of any right or remedy under this Agreement shall preclude any party from otherwise or further exercising such rights or remedies, or any other rights or remedies granted by law or any other document.
d. Captions. The headings in this Agreement are for convenience of reference only and do not affect the interpretation of this Agreement.
e. Modification. This Agreement may not be altered, modified or amended except by an instrument in writing signed by each of the parties hereto.
f. Choice of Law; Forum Selection.[33] The laws of the State of Minnesota shall govern the validity, construction and performance of this Agreement, to the extent not pre-empted by federal law. Any legal proceeding related to this Agreement shall be brought in Minnesota in the Hennepin County District Court or the Minnesota District of the U.S. District Court, and each of the parties hereto hereby consents to the exclusive jurisdiction of the Minnesota state and federal courts for this purpose. The parties acknowledge the existence of sufficient contacts to the State of Minnesota and Hennepin County to confer jurisdiction upon these courts.
g. Notices. All notices and other communications required or permitted under this Agreement shall be in writing and provided to the other party either in person, by fax, or by certified mail. Notices to Company must be provided or sent to its [Chief Executive Officer]; notices to Executive must be provided or sent to Executive in person or at Executive’s home.
h. Survival. Notwithstanding the termination of Executive’s employment with Company, the terms of this Agreement which relate to periods, activities, obligations, rights or remedies of the parties upon or subsequent to such termination shall survive such termination and shall govern all rights, disputes, claims or causes of action arising out of or in any way related to this Agreement.
i. Successors and Assigns. This Agreement shall be binding on and inure to the benefit of Company’s successors and assigns.
___________________________________EXECUTIVE XYZ CORPORATIONBy:________________________________
In conclusion, the parties’ employment agreements should anticipate all possible scenarios unique to the parties’ situation, and assure that both parties know their rights and obligations during and after the employment relationship.
NON-COMPETE, CONFIDENTIALITY
AND NON-SOLICITATION AGREEMENTS
More employers than ever are using non-competition, confidentiality and non-solicitation agreements to prevent unfair competition and solicitation of their executives and other key employees, and to protect their trade secrets and confidential information. As a result, potential new employers often want to hire people who have signed such agreements—and face difficult issues and decisions. This next section will discuss the current law on such agreements, using a hypothetical conflict between a former employer (“OLDCO”) and a new employer (“NEWCO”).
II. OLDCO’S GOALS IN DRAFTING AND USING AGREEMENTS.
A. Deterrence. OLDCO’s goal is not to litigate these problems; but rather to avoid them. OLDCO wants to deter violations in the first place, if possible; and learn about its risks before—not after—they occur.
B. Damage Control. If OLDCO learns of potential violations, it wants to enhance its negotiation positions—again, in hopes that it can resolve the problems short of litigation. If litigation is needed, OLDCO wants to enhance its odds of getting a temporary restraining order and/or an injunction, in hopes that it can quickly put a stop to ongoing violations.
C. Damage Recovery. If extensive litigation is needed, OLDCO wants to enhance its potential damage recovery from the former employee and from NEWCO.
III. OLDCO’S AGREEMENT STRATEGIES.
A. Anticipate Executive’s Enhanced Leverage (Potential Harm). Given the nature of their responsibilities, access to information and access to and influence over other people (employees, customers, suppliers, etc); executives have many unique legal issues, as well as business and public relations leverage. OLDCO should anticipate all of this – up front.
B. Use Protective Employment Agreements. Protective employment agreements—up front—can avoid or minimize violations, reduce antagonistic negotiations and provide OLDCO with post-termination business protections that may never again become available. For example, this is a perfect time to bargain for the following post-termination protections (which should expressly survive the termination of employment, and should apply regardless of the reason for and timing of termination): non-competition; confidentiality; non-solicitation; inventions; patents; developments; full disclosure of future business plans upon departure; return of property upon departure; non-disparagement; cooperation with litigation; and/or buy-sell agreements for shareholders.
C. Require Reasonable and Necessary Business Protections. OLDCO should not overuse non-competes or make them unreasonably long or broad. That can weaken OLDCO’s ability to accomplish its goals. On the other hand, OLDCO does not want to make it so limited that it misses the mark in the event of a later dispute. OLDCO wants to make sure that it protects—at a minimum—its intellectual and other property, confidential information, workforce, existing customers (where ever they are) and targeted prospective customers (where ever they are).
D. Make Any Post-Termination Compensation Packages Contingent on Compliance with Business Protections. Executives often bargain for generous post-termination severance or other long-term incentives. OLDCO should make these payments contingent on complete compliance with the executive’s business protection obligations (as well as a release of claims).
E. Avoid Common Drafting and Implementation Mistakes. Given the changes in the job market and increased numbers of protective business agreements, there is a heightened judicial scrutiny; and there are many traps for the unwary, which OLDCO needs to avoid.
1. Avoid Inadequate Consideration for Non-Competes.
a. New Employees. New employees, including executives, should be given a conditional offer of employments, with a copy of agreement that they are expected to sign—before they begin employment; and should be required to sign the agreement—before they are put on the payroll.
b. Current Employees. If OLDCO is trying to implement a non-compete agreement for existing employees, including executives, it needs to provide separate and independent consideration, which must be real and bargained for; and it needs to assure that only those that sign the non-compete receive the stated separate and independent consideration. There are many opportunities to do this, such as promotions, incentive plans, benefit plans, severance plans, etc.
2. Avoid Nullifying the Non-Compete Agreement.
a. Post-Employment Obligations. Post-termination obligations must expressly survive termination of employment. Do not allow the parties to “terminate the Agreement” unless that is what you intend to provide.
b. Assignments. The agreement must preserve OLDCO’s right to assign, in the event of later changes in business circumstances (mergers, acquisitions, etc.)
c. Merger. Merger clauses in subsequent agreements, such as separation agreements, must not supersede the non-compete agreement.
3. Strengthen Potential Remedies. Include remedies with “teeth”, such as requiring full accountings, recovery of attorneys’ fees and costs, bond waivers, and/or setting damages based on a pre-determined formula.
4. Require/Authorize Disclosures. OLDCO should require the executive to disclose full and material information to it about potential violations; and should also require the executive to provide the agreement to NEWCO. Best case: OLDCO learns of potential problems and can deal with them. Worst case: the executive and/or NEWCO are on notice of the obligation and breached it. Either way, it helps OLDCO accomplish its goals.
5. Anticipate Multi-State Issues. There are many conflicts among state laws pertaining to non-compete agreements. OLDCO needs to anticipate these issues, and vary its agreements as needed. Further, it is critical to include a choice of law provision and a forum selection clause, to best protect OLDCO in the event of multi-state issues.
IV. OLDCO’S POTENTIAL CLAIMS.
OLDCO can assert several claims directly against NEWCO and others against the executive or other employee, which can also directly or indirectly impact NEWCO.
A. Breach of Contract; Tortious Interference with Contract. In addition to a direct claim against the former employee for breach of contract, tortious interference claims can be asserted against the former employee and NEWCO. OLDCO may assert an interference claim where the employee and NEWCO interfered with a contractual relationship with OLDCO’s customers. See, e.g., National Recruiters, Inc. v. Cashman, 323 N.W.2d 736, 741 (Minn. 1982); United Wild Rice, Inc. v. Nelson, 313 N.W.2d 628, 632 (Minn. 1982); Bennett v. Storz Broadcasting Co., 134 N.W.2d 892, 897 (Minn. 1965). If NEWCO hires an employee who is subject to a non-compete agreement, NEWCO may be liable to OLDCO for tortious interference with contract. Kallok v. Medtronic, Inc., 573 N.W.2d 356 (Minn. 1998); Ultra Lube, Inc. v. Dave Peterson Monticello Ford-Mercury, Inc., 2002 WL 31302981 (Minn. App. 2002). NEWCO may also be required to indemnify OLDCO for attorneys’ fees incurred by OLDCO in litigation to enforce the valid non-compete agreement. Id. The employee may have several contracts with which he or she could be accused of breaching and with which NEWCO could be accused of interfering.
1. Non-Compete Agreement. In Minnesota[34] a non-compete agreement can be enforced to the extent it is necessary to safeguard OLDCO’s protectable interests and reasonable as between the parties. See Bennett v. Storz Broad. Co., 134 N.W.2d 892 (Minn. 1965); Alpine Glass, Inc. v. Adams, 2002 WL 31819910, *4-5 (Minn. App. 2002); Lemon v. Gressman, 2001 WL 290512 at *1 (Minn. App. Mar. 27, 2001); Medtronic, Inc. v. Sun, 1997 WL 729168, at *3 (Minn. App., Nov. 25, 1997).
2. Agreement not to Solicit Customers. Restrictions on solicitation of customers have been deemed enforceable as protecting the good will of OLDCO’s business. See Dynamic Air, Inc. v. Bloch, 502 N.W.2d 796, 800 (Minn. App. 1993).
3. Agreement not to Solicit Employees. In Frank B. Hall & Co., Inc. v. Alexander & Alexander, Inc., 974 F.2d 1020, 1025 (8th Cir. 1992), the Eighth Circuit assumed that employee non-solicitation agreement were valid and enforceable.
4. Confidentiality Agreements. Even employees without non-compete agreements may have confidentiality agreements that protect OLDCO’s confidential information and trade secrets. See, e.g., Tenant Const., Inc. v. Mason, 2008 WL 314515 (Minn. App. 2008); Electro-Craft Corp. v. Controlled Motion, Inc., 332 N.W.2d 890 (Minn. 1983).
B. Violation of Trade Secret/Confidentiality Laws.[35] Regardless of the existence of agreements, the former employee and/or NEWCO may also have direct or indirect liability to OLDCO for violations of trade secret and/or confidentiality laws. See, e.g., Minn. Stat. § 325C.01, subd. 5 (2006); Eaton v. Giere, 971 F.2d 136, 141 (8th Cir. 1992) (finding employee violated fiduciary duties of confidentiality and loyalty when he courted employer’s customers with product that combined both employee’s invention and employer’s confidential information) cert. denied, 506 U.S. 1034 (1992); Electro-Craft, 332 N.W.2d at 899; see also Northwest Publications, L.L.C. v. Star Tribune Company, No. C6-07-003489 (Ramsey Co. Dist. Ct. Sept. 18, 2007). The employee has a duty to protect the secrecy of OLDCO’s confidential information, and NEWCO cannot benefit from a violation of that duty.
C. Violation of Patent Rights. In the absence of an express contractual agreement defining ownership rights in inventions, the employer’s right to claim ownership in discoveries made by an employee depends on both the nature of the discovery and the nature of the employment relationship. An employer can require an employee to assign ownership rights in past and future inventions, and should do so in writing.[36] The general rule is that “an individual owns the patent rights to the subject matter of which he is an inventor, even though he conceived it or reduced it to practice in the course of his employment.” See, e.g., Banks v. Unisys Corp., 228 F.3d 1357, 1359 (Fed. Cir. 2000). There are two widely recognized exceptions to the general rule: “First, an employer owns an employee’s invention if the employee is a party to an express contract to that effect; second, when an employee is hired to invent something or solve a particular problem, the property of the invention related to this effort may belong to the employer.” Id.
D. Interference with Business Relations or Prospective Business Relations. Minnesota courts have recognized causes of action for wrongful interference with present and prospective contractual and business relationships. See, e.g., United Wild Rice, 313 N.W.2d. 628 (Minn. 1982). If the employee and/or NEWCO intentionally and improperly interfere with OLDCO’s current or prospective contractual relations, they may be liable for this tort. Id. at 632-33.
E. Respondeat Superior. Under the doctrine of respondeat superior, an employer is “vicariously liable for the wrongful acts of its employees committed within the scope of their employment.” Oelschlager v. Magnuson, 528 N.W.2d 895, 902 (Minn. App. 1995). To establish that an employee’s acts occurred within his or her scope of employment, “it must be shown that the conduct was, to some degree, in furtherance of the interests of the employer.” Hentges v. Thomford, 569 N.W.2d 424, 427 (Minn. App. 1997). In an unpublished opinion, the Minnesota Court of Appeals held that a new employer may be held vicariously liable for an employee’s misappropriation of trade secrets. See Hagen v. Burmeister & Assoc., 1999 WL 31130 at *3–4 (Minn. App. Jan. 26, 1999). This theory could lead NEWCO to any number of other claims against it, which are typically asserted just against the employee. Regardless, claims asserted against the employee will affect NEWCO, even if NEWCO is not legally liable for the claims.
F. Breach of Duty of Loyalty. All employees owe a duty of loyalty to their employers. See, e.g., Eaton Corp., 971 F.2d 136 (8th Cir. 1992); Sanitary Farm Dairies, Inc. v. Wolf, 112 N.W.2d 42 (Minn. 1961). Among other things, the duty of loyalty prohibits an employee “from soliciting the employer’s customers for herself, or from otherwise competing with her employer, while she is employed.” Rehabilitation Specialists, Inc. v. Koering, 404 N.W.2d 301, 304 (Minn. App. 1987).
G. Breach of Fiduciary Duty. Partners in partnerships, and officers, directors and shareholders in close corporations owe even higher fiduciary duties to OLDCO. See, e.g. Triple Five of Minnesota, Inc. v. Simon, 404 F.3d 1088, 1095 (8th Cir. 2005); Gunderson v. Alliance of Computer Professionals, 628 N.W.2d 173, 186 (Minn. App. 2001).
1. Corporate Opportunities. The fiduciary duty includes a duty not to take a corporate opportunity. See, e.g., Diedrick v. Helm, 14 N.W.2d 913, 919 (1944). Under this doctrine, when a business opportunity related to OLDCO’s business is presented to an employee, he or she may not take it for personal benefit, or direct it to another person without first making the opportunity available to OLDCO. See, e.g., Matter of Villa Maria, Inc., 312 N.W.2d 921, 922 (Minn. 1981). Miller v. Miller, 222 N.W.2d 71 (1974), sets out a two-part test for establishing a prima facie case of usurpation of corporate opportunity. First, the new business opportunity must be “so closely related to the existing or prospective activity of the corporation” that it constitutes a corporate opportunity. If the business opportunity is a corporate opportunity, the party acquiring the opportunity must have violated the duties of loyalty, good faith, and fair dealing toward the corporation. Id., at 81.
2. Soliciting Employees. The fiduciary duty may also include a duty not to recruit other employees to leave OLDCO. See, e.g., U. S. Anchor Mfg., Inc. v. Rule Industries, Inc., 717 F. Supp. 1565 (N.D. Ga. 1989); Duane Jones Co. v. Burke, 177 N.E.2d 237 (N.Y. 1954); Lowndes Prods., Inc. v. Brower, 191 S.E.2d 761 (S.C. 1972). But see Headquarters Buick–Nissan, Inc. v. Michael Oldsmobile, 149 A.D.2d 302 (1989).
H. Remedies.
1. Injunctive Relief. OLDCO may seek injunctive relief. See, e.g., Ticor Title Ins. Co. v. Cohen, 173 F.3d 63, 68-69 (2d Cir. 1999) (holding acknowledgement of irreparable harm in the agreement could arguably be viewed as an admission by the employee that his former employer would indeed suffer irreparable harm should he breach the non-compete provisions).
2. Monetary Damages. OLDCO might choose to sue for damages rather than injunctive relief. OLDCO may also seek both. Monetary damages can be recovered in an action seeking injunctive relief as a remedy ancillary to equitable relief granted. See, e.g., B & Y Metal Painting, Inc. v. Ball, 279 N.W.2d 813, 817 (Minn. 1979). The damages caused by a former employee’s breach of a non-compete agreement are measured by the business loss actually suffered as a consequence of the breach. See Lemon, 2001 WL 290512, at *3 (citing Faust v. Parrott, 270 N.W.2d 117, 120 (Minn. 1978)).
3. Contractual Damages. Employers can, and often do, contractually enhance their potential damage claims. This might include, for example, requiring full accountings, liquidated damages, recovery of attorneys’ fees and costs, and/or setting damages based on a pre-determined formula.
V. POTENTIAL DEFENSES TO OLDCO’S CLAIMS.
Non-compete agreements in the employment context are generally disfavored.[37] Freeman v. Duluth Clinic, Inc., 334 N.W.2d 626 (Minn. 1983). They are partial restraints of trade and, therefore, are disfavored by courts and will be narrowly construed. Bennett, 134 N.W.2d 892; Lemon, 2001 WL 290512 at *1.
A. The Agreement Is Not Necessary or Reasonable.[38]
1. Necessity / Reasonableness Requirement. In Minnesota an enforceable non-compete agreement must be both necessary to safeguard the employer’s protectable interests and reasonable as between the parties. See Bennett, 134 N.W.2d at 898; Medtronic, Inc. v. Sun, 1997 WL 729168, at *3 (Minn. App. Nov. 25, 1997). The agreement must not impose any greater restriction on the employee than is necessary to protect the employer’s business. Bennett, 134 N.W.2d at 899.
a. Reasonableness Standard; Impact of Overreaching. The
reasonableness inquiry is on a case-by-case, fact-specific basis. Davies & Davies Agency, Inc. v. Davies, 298 N.W.2d 127 (Minn. 1980). Different jurisdictions use various methods of addressing overly broad and unreasonable covenants. Some courts hold restrictive covenants totally unenforceable if they are unreasonable in scope or duration. See, e.g., Fields Found Ltd. v. Christiansen, 309 N.W.2d 125 (Wis. App. 1981). Such courts may take this approach in order to encourage employers to write more narrowly-tailored covenants. See Telxon Corp. v. Hoffman, 720 F.Supp. 657 (N.D. Ill. 1989). In other jurisdictions, the courts will “blue pencil” invalid portions of the agreement, and enforce the rest as written. See BDO Seidman v. Hirshberg, 93 NY.2d 382, 394 (N.Y. 1999). Minnesota courts utilize a modified “blue pencil” doctrine and will rewrite portions to make them reasonable. Dean Van Horn Consulting Assoc. v. Wold, 395 N.W.2d 405 (Minn. App. 1986); Ikon Office Solutions, Inc. v. Dale, 2001 WL 1269994 (8th Cir. 2001).
2. Time Too Long. Employment-related non-compete agreements must be reasonable in their temporal scope, or they will not be enforced. See, e.g., Webb Publishing Co. v. Fosshage, 426 N.W.2d 445, 448 (Minn. App. 1988) (citing Dahlberg Brothers, Inc. v. Ford Motor Co., N.W.2d 314, 321?22 (Minn. 1965)).
a. Factors. Courts consider a variety of factors in determining whether a restrictive covenant is reasonable from a temporal standpoint, including the following: (1) nature of the work; (2) time necessary to train new employees to replace exiting employees; (3) time necessary to allow customers to become familiar with new employees; and (4) time necessary to obliterate the identification between the employer and the employee in the minds of the employer’s customers. Dean Van Horn, 395 N.W.2d 405 (Minn. App. 1986); Klick v. Crosstown State Bank of Ham Lake, Inc., 372 N.W.2d 85 (Minn. App. 1985).
3. Territory Too Large. Employment-related covenants restricting competition must be reasonable from a geographic standpoint as well, or they will not be enforced. See, e.g., Ring Computer Sys. v. Paradata Computer Networks, 1990 WL 132615 (Minn. App. 1990).
a. Factors. Courts have historically considered a variety of factors in determining whether a restrictive covenant is reasonable from a geographic standpoint, including the following: (1) a “reasonable” trade area; (2) area where employee actually performed duties; (3) employer’s actual business area; and (4) location of employer’s customers. Overholt, 437 N.W.2d 698; Satellite Indus. Inc. v. Keeling, 396 N.W.2d 635 (Minn. App. 1986); Metro Networks Comm. v. Zavodnick, 2004 WL 73591 (D. Minn. 2004) (denying defendant’s motion to stay injunction where non-compete agreement restricting defendant from doing several “restricted activities” in the Minneapolis/St. Paul metropolitan area for one year was reasonable in terms of time, geography, and scope); Universal Hosp. Serv., Inc. v. Hennessy, 2002 WL 192564, (D. Minn. 2002) (granting TRO because non-compete was supported by consideration and reasonable: period of 12 months, radius of 100 miles).
b. Customer Restrictions. Customer restrictions may substitute for, or complement, a geographic restriction. See IDS Life Ins. Co. v. SunAmerica, Inc., 958 F. bSupp. 1258, 1273 (N.D. Ill. 1997) rev’d on other grounds, 136 F.3d 537 (7th Cir. 1998) (applying Minnesota law); see also Madsen v. Spectro Alloys Corp., 1998 WL 373067, *3 (Minn. App. 1998) (prohibition against competing “in any market” in which employer does business was not ambiguous and not limited to employer’s territory when employee signed agreement); Farm Credit Services v. Wysocki, 627 N.W.2d 444 (Wis. 2001) (restricting employee from list of customers the employee consulted or served in the year prior to separation is not per se invalid); Commodities Specialists, Co. v. Brummet, 2002 WL 31898166 (D. Minn. 2002) (granting preliminary injunction where defendant was primary contact with customers, non-compete provisions were supported by adequate consideration, one year was a reasonable temporal restriction, no geographical restriction was necessary in light of plaintiff’s international business, and plaintiff had a legitimate business interest in preventing loss of customers).
B. Lack of Consideration. Signing a non-compete agreement at the inception of the employment relationship provides sufficient consideration to support the covenant. See, e.g., Overholt, 437 N.W.2d at 702. However, ongoing employment is not valid consideration.
1. “Midstream Agreements” Must Be Supported By Separate, Independent Consideration. Where a non-compete agreement is executed after an employee has commenced employment, the agreement must be supported by “independent consideration” to be enforceable. National Recruiters, 323 N.W.2d 736. Even if an employee has not physically begun to work, but has already accepted an offer of employment, a non-compete agreement following the original offer of employment cannot be enforced absent independent consideration. Sanborn Mfg. Co. v. Currie, 500 N.W.2d 161 (Minn. App. 1993); see also TestQuest, Inc. v. La France, 2002 WL 196287 (Minn. App. 2002) (affirming injunction against former sales executive because mid-stream agreement allowing the employee to continue working and obtain additional vested stock options constituted sufficient consideration); Midwest Sports Mktg., Inc. v. Hillerich & Bradsby of Can., Ltd., 552 N.W.2d 254, 265 (Minn. App. 1996); review denied (Sep. 20, 1998) (holding non-competition covenant invalid where employee knew before he began working that he would have to sign the covenant, but did not know its terms and conditions until two weeks after his employment began); See also Tonna Heating Cooling, Inc., v. Waraxa, 2002 WL 31687601 (Minn. App. Dec. 3, 2002) (holding non-compete agreement signed after employment commences is presumed unenforceable unless clearly ancillary to the employment agreement or supported by adequate consideration); FSI Int’l, Inc. v. Shumway, 2002 WL 334409, (D. Minn. Feb. 26, 2002) (denying motion for preliminary injunction or TRO on the basis that the mid-stream non-compete agreement was not supported by sufficient independent consideration and there was no evidence of a competing product); J. K. Harris & Co., LLC v. Dye and ABC Co., 2001 WL 1464728, (D. Minn. Nov. 16, 2001) (denying TRO because Court found that covenant not to compete was entered into after employment began and was not supported by adequate consideration). However, where the employee signed a non-compete after starting working, but knew of the implementation of the non-compete agreement, continued working, and continued to receive monthly “draws” (or advance payments on unearned commissions), the Court held that this constituted sufficient consideration. See Progressive Tech. Inc., v. Shupe, 2005 WL 832059 (Minn. App. April 12, 2005) (upholding non-compete agreement signed contingent with ‘draw’ agreement after employee had already begun working).
2. The Consideration Must Be Real. Independent consideration consists of real benefits, which are bargained for between the employee and the employer. “Real benefits” include benefits beyond those to which the employee is already entitled to by virtue of employee status or a separate contract. Sanborn, 500 N.W.2d, at 161. While the adequacy of consideration is a fact issue particular to each case, the Minnesota Court of Appeals recently held that $500 provided a “real advantage” to the employee and that, along with ongoing employment, constituted sufficient consideration. Tenant, 2008 WL 314515, at *2. But see Jostens, Inc. v. Nat’l Computer Sys., Inc., 318 N.W.2d 691, 703 (Minn. 1982) (a non-compete agreement not supported by real advantages, such as future benefits to the employee, was not supported by consideration). The Minnesota Court of Appeals has also held that continued employment after a midstream non-compete may be sufficient consideration if the employee enjoys long term career advantages after the signing of the agreement. For example, if the employee is employed for many years, advances within the company, is provided with training, and is given increased responsibilities, there is sufficient consideration. Witzke v. Mesabi Rehabilitation Svcs., Inc., 2008 WL 314535, *3 (citing Satellite Indus., Inc. v. Keeling, 396 N.W.2d 635, 639 (Minn. App. 1986), but see Northwest Publications, supra (holding that even if newspaper executive received bonuses or other “real advantages” throughout his employment, there is no evidence that executive knew those advantages were in exchange for signing non-compete agreement or that he was bargaining for his non-compete agreement).
a. Promotions. A promotion to a management position, with increased authority and responsibility is generally viewed as adequate consideration. Guidant Sales Corp. v. Baer 2009 WL 490052, at *2 (D. Minn. 2009). Cf. Davies, 298 N.W.2d, at 131 (finding independent consideration where the employee continued his employment for ten years after signing the agreement and advanced to a position that would not have been open to him if he had not signed the contract); but see Sanborn Mfg. Co., 500 N.W.2d, at 164 (finding no independent consideration because there was no difference between what the employee was promised in his initial employment contract and what he received in the course of his employment). In fact, a promotion may be adequate consideration even if the employee makes less money after the promotion. See Guidant Sales Corp., 2009 WL 490052, at *3. (“[I]n deciding whether a non-compete agreement is supported by independent consideration, a court must consider the entire context, and not just the money”).
The timing of the promotion and the signing of the agreement is critical. If an employee is promoted prior to signing the non-compete agreement, then the promotion cannot serve as consideration for the agreement. See Sheehy v. Bodin, 349 N.W.2d 353, 354 (Minn. App. 1984) (stating that past consideration cannot support a future promise). In an issue of first impression, the Minnesota Court of Appeals recently had to decide if a promotion serves as consideration for a nonsolicitation (of employees or customers) agreement at the time when an employee is informally told that he has been selected for promotion, or at the time when that employee is formally offered the position and signs and accepts an offer letter (containing the nonsolicitation language). Softchoice, Inc. v. Schmidt, 2009 WL 911009 (Minn. App. Apr 07, 2009). In that case, the employee argued that he was promoted when he was first informed that he would receive the promotion (even though the promotion was not implemented at that time); the employer argued that the employee was promoted when he signed a formal offer letter. The Court held that a promotion serves as consideration for a non-compete agreement at the time when the terms of the promotion have been defined and the promotion has been formally offered and accepted in writing (because the “key inquiry is when the promotion provides the employee with ‘real advantages’”). Id., at 6. In reviewing that decision, however, it seems that if the employee had actually received the increase in compensation, duties and benefits prior to being provided the documents, the result would be different.
b. Benefit Agreements. In recent years, more and more employers are making stock option agreements and other mid-stream benefit agreements, such as severance agreements, bonus agreements, change of control agreements and other incentive agreements (often including “forfeiture clauses”) conditioned on receiving signed non-compete agreements. To satisfy the independent consideration requirement, there must be a distinction between employees who sign non-compete agreements and those who do not sign. Otherwise, the alleged “independent consideration” is illusory and insufficient to allow enforcement of a restrictive covenant. Freeman, 334 N.W.2d, at 626; BFI-Portable Services. Inc. v. Kemple, 1989 WL 138978 (Minn. App. 1989). In April 2009, the Minnesota Court of Appeals, applying Missouri law, held that a benefit plan that allowed, but did not require, the employer to provide benefits to the employee was not sufficient consideration for the non-compete agreement because it was “unilateral” and could not be enforced. Softchoice, Inc. v. Schmidt, 2009 WL 911009, at *4 (Minn. App. Apr 07, 2009).
c. Forfeiture Clauses. As noted above, many employers are including forfeiture clauses in benefit related agreements, in the event of competition. These provisions, even in the absence of a separate non-compete agreement, are evaluated by the courts the same as non-compete agreements. Medtronic, Inc. v. Hedemark, 2009 WL 511760, at *3 (Minn.App. Mar 03, 2009), citing Minneapolis Pub. Hous. Auth. v. Lor, 591 N.W.2d 700, 704 (Minn.1999) (stating “[u]nambiguous contract language must be given its plain and ordinary meaning”); Harris v. Bolin, 247 N.W.2d 600, 602-03 (1976) (assessing a forfeiture penalty imposed for competition according to principles applicable to non-compete agreements). Id, citing Harris, 247 N.W.2d, at 603 n. 3 (permitting enforcement of forfeiture penalties imposed for competing only when “reasonable in scope after balancing the interests of the employer and employee”).
C. The Agreement Is No Longer Binding. Non-compete obligations should expressly survive termination of employee’s employment or expiration of the employment agreement. If the non-compete clause is part of a larger agreement – for example, an employment agreement – which contemplates and allows for termination “of the agreement,” it may not be clear that the non-compete obligations survive termination of the underlying agreement. See Burke v. Fine, 608 N.W.2d 909, (Minn. App. 2000) review denied (June 13, 2000). Also, the language in particular contracts may require the employee’s consent to an assignment, in order for the restrictive covenant to be enforceable by an assignee of the former employer. See, e.g., Inter-Tel, Inc. v. CA Communications, Inc., 2003 WL 23119384 (D. Minn. Dec. 29, 2003). In addition, employers often draft merger clauses in subsequent agreements – for example, a separation agreement or release of claims – that by their terms supersede and, thus, render unenforceable, an employee’s continuing non-competition obligations.
D. OLDCO Breached. If OLDCO materially breached an employment contract with the employee, the non-compete agreement may be defeated. See Marso v. Makato Clinic, Ltd., 153 N.W.2d 281, 290 (Minn. 1967); Prow v. Medtronic, Inc., 770 F.2d 117, 121 (8th Cir. 1985).
E. OLDCO Waived. If OLDCO failed to enforce non-compete agreements against other similarly positioned employees, OLDCO may have waived its right to future enforcement of the agreement. See Minn. Mining and Mfg. Comp. v. Kirkevold¸ 87 F.R.D. 324, 336 (D. Minn. 1980). However, waiver may need to be in writing in order for the statute of frauds to be satisfied. Northwest Publications, supra.
F. Other Contract Defenses. Legal contract defenses, such as fraudulent inducement and misrepresentation, can be asserted as defenses to non-compete agreements. See Empiregas, Inc. of Ardmore v. Vernon Hardy, 487 So.2d 244, 249 (Ala. 1985), cert denied, 476 U.S, 1116 (1986); Richardson v. Permacel Tape Corp., 244 F.2d 80, 83-4 (5th Cir. 1957).
G. Equitable Defenses. Since employers are usually seeking an equitable remedy from the courts (injunction, etc), equitable defenses may apply, such as the equitable defense of “unclean hands.” See H & R Block v. Majkowski, 410 F. Supp. 2d 1, 3 (D.D.C. 2006); Medtronic, Inc. v. Advanced Bionics Corporation, 630 N.W.2d 438 (Minn. App. 2001); Edin v. Jostens, Inc., 343 N.W.2d 691 (Minn. App. 1984).
H. OLDCO Did Not Keep Its Secrets Secret. The entity seeking protection of the trade secret must make a “reasonable effort under the circumstances” to maintain secrecy. See Electro-Craft, 332 N.W.2d at 901 (quoting Minn. Stat. § 325C.01, subd. 5(ii)). One example of measures that signal that an employer intends to keep information confidential is to require every employee to sign non-disclosure agreements. Surgidev Corp. v. Eye Tech., Inc., 648 F. Supp. 661, 693-94 (D. Minn. 1986). If OLDCO failed to make efforts to keep its alleged secrets private, they likely will not be protected.
In sum, if properly drafted and implemented, non-compete agreements can provide an abundance of business protections to employers; but there are many “traps for the unwary.”
I. BENEFITS.
In the modern workplace, the use of independent contractors has flourished. One benefit of using independent contractors, rather than employees, is that employers need not pay social security or unemployment insurance taxes, nor are employers obligated to withhold federal and state payroll taxes. Employers also do not have to provide other benefits, such as health insurance or pension benefits, to independent contractors, nor are independent contractors covered by workers’ compensation laws.
II. RISKS.
Unfortunately, many employers misclassify employees as independent contractors. There may be serious consequences for employers who do so.
A. Retroactive Assessment of Employment Taxes and Penalties. Independent contractors are responsible for payment of their own taxes. Employers are relieved of the obligation to pay social security and unemployment insurance taxes, and need not withhold payroll taxes from payments made to an independent contractor. As the use of independent contractors has increased, the Internal Revenue Service has become more aggressive in pursuing misclassifications of employees as independent contractors. If the IRS finds that an employer has misclassified an employee as an independent contractor, the employer will be obligated to pay back taxes, as well as interest and potential penalties. IR-2004-47, April 5, 2004.
B. Employee Benefit Plans Could Be Placed in Jeopardy. Independent contractors generally are not eligible to participate in an employer’s employee benefit plans (health insurance, pension plan, etc.). If, as a result of being misclassified as an independent contractor, an individual is not eligible to receive these benefits, the employer risks the disqualification of its benefit plans. This is a potentially catastrophic risk, as it affects all employees and not merely the employee who was misclassified.
C. Retroactive Payments Required by Wage & Hour Laws. Independent contractors are not subject to the requirements of the Fair Labor Standards Act. See 29 U.S.C. §§ 206, 207. If an individual is misclassified, however, the employer will be required to determine retroactively whether the individual received required minimum wage and overtime payments. If not, the employer will be obligated to make such payments to the employee, and may be subject to additional penalties.
D. Penalties Under the Minnesota Workers’ Compensation Act. Failure to provide workers’ compensation insurance coverage where required by law can result in substantial financial penalties. In addition, an employer that willfully and intentionally fails to provide such coverage is guilty of a misdemeanor. Minn. Stat. § 176.181.
E. Application of Other Laws. Employees receive the benefit of numerous other laws including, for example, the federal Family and Medical Leave Act and Americans with Disabilities Act, and various Minnesota leave laws including those related to parental leave, school conferences and school-related activities leave. An employer that wrongly classifies an individual as an independent contractor may be subject to liability for violation of these laws.
F. “Domino Effect” of Legal Challenges to Worker Classification. An employer’s classification of a worker as an independent contractor rather than an employee may be disputed in a number of contexts: audits from tax agencies; claims by workers for workers’ compensation or unemployment benefits; third-party lawsuits where the actions of the worker are sought to be attributed to the putative employee; actions from labor organizations; or audits from pension authorities. See Robert W. Wood, Defining Employees and Independent Contractors: Don’t Try This at Home!, Business Law Today, at 46 (May/June 2008). A challenge to a classification in one context may lead to retroactive reclassification by any number of agencies or groups. In Vizcaino v. Microsoft, 97 F.3d 1187 (9th Cir. 1996), a group of freelance programmers who had been hired on the understanding that they were independent contractors sought and received employment benefits from their employer after an IRS examination of the employer’s records concluded that the programmers were employees, not independent contractors. This case clearly demonstrates that interactions between tax agencies and other worker status inquiries are practically inevitable. “Vizcaino was a civil suit brought by workers. Yet, the IRS really started Vizcaino.” Wood, supra, at 48.
III. FACTORS.
Whether an individual is an employee or an independent contractor is based upon several factors. An agreement that classifies an individual as an independent contractor is beneficial, but is not determinative of the issue.
A. IRS. The IRS applies a twenty-factor analysis to be used as a guide to determine the status of a worker. IRS Rev. Rul. 87-41. The degree of importance of each factor varies depending on the occupation and the factual context in which the services are performed. The most important aspect of the relationship is the degree of control exercised by the principal over the individual worker. The twenty factors are intended to indicate whether the principal has a sufficient degree of control over the worker such that an employer-employee relationship exits. In general, the greater the control exercised by the principal, the more likely the worker will be found to be an employee.
The twenty factors identified by the IRS are as follows: (1) Instructions (a worker who must comply with the principal’s instructions about when, where and how to work is more likely an employee); (2) Training (a worker who receives training from, or at the direction of, the principal is more likely an employee); (3) Integration (a worker who provides services that are integrated into the principal’s business is more likely an employee); (4) Services Rendered Personally (a worker who must render services personally is more likely an employee); (5) Hiring, Supervision and Payment of Assistants (a principal who hires, supervises and pays assistants indicates that the worker is an employee; if, on the other hand, the worker hires, supervises and pays assistants, then the individual may be an independent contractor); (6) Continuing Relationship (a continuing working relationship between the worker and the principal indicates an employer-employee relationship); (7) Set Hours (a worker who must follow set hours of work is more likely an employee); (8) Full-Time Employment (a worker who works full-time for the principal is more likely an employee); (9) Works on Principal’s Premises (a worker who works on the principal’s premises is more likely an employee); (10) Order of Work (a worker who must do his/her work in a sequence set by the principal is more likely an employee); (11) Reports (a worker who must submit regular reports to the principal is more likely an employee); (12) Payment by Hour, Week, Month (a worker who receives payments of regular amounts at set intervals (hour, week, month) is more likely an employee); (13) Payment of Expenses: A worker who receives payment or reimbursement for business and/or travel expenses is more likely an employee); (14) Furnishing Tools and Materials (a worker who relies on the principal to furnish tools and materials is more likely an employee); (15) Significant Investment (a worker who lacks major investment in facilities used to perform services is more likely an employee); (16) Realization of Profit or Loss (a worker who cannot make a profit or suffer a loss from his/her services is more likely an employee); (17) Works for One Company (a worker who works for only one employer at a time is more likely an employee); (18) Services Available to Public (a worker who does not offer his/her services to the general public is more likely an employee); (19) Principal’s Right to Discharge (a worker who can be fired by the principal is more likely an employee); (20) Worker’s Right to Quit (a worker who may quit work at any time without incurring any liability for breach of contract is more likely an employee).
1. Common Law Approach. Minnesota courts will apply factors similar to the IRS factors. Specifically, courts consider: (1) who has the right to control the means and manner of performance; (2) the mode of payment; (3) who furnishes the material or tools; (4) who controls the premises where the work is done; and (5) the employer’s right to discharge. Goodnature v. Mower County, 558 N.W.2d 19, 21 (Minn. App. 1997). The right to control the means and manner of performance generally carries the greatest weight in a determination of the worker’s status. Id.; see also Speaks, Inc. v. Jensen, 243 N.W.2d 142, 144 (Minn. 1976) (observing that an employee “undertakes to achieve a given result under an arrangement with another who has authoritative control over the manner and means in which and by which the result shall be accomplished” while an independent contractor “agrees to achieve a given result but is not subject to the orders of another as to the method or means to be used.” (internal quotation omitted) (emphasis added))). The industry standard on classification of an individual as an employee or independent contractor can be very persuasive to courts. Neve v. Austin Daily Herald, 552 N.W.2d 45, 48 (Minn. App. 1996).
2. Statutory Considerations. Minnesota has also adopted the economic realities test. Pursuant to Minnesota Rule 5200.0221, “all factors must be weighed to determine whether the worker is economically dependent upon the business to which the worker provides services.” (emphasis added). In 2005, the Minnesota Legislature enacted a law forbidding misrepresentation by an employer of the employment relationship. Minn. Stat. § 181.722 (2005). The law prohibits an employer (1) from misrepresenting the nature of the relationship to any government unit or to its employees, id. at subd. 1, and (2) from requesting or requiring an employee to enter into an agreement that results in misclassification. Id. at subd. 2. The statute provides that the nature of the employment relationship is determined by the tests used under applicable workers compensation and unemployment insurance laws. Id. at subd. 3.
C. Reliance on State or Federal Regulations. It may be tempting for employers to assume that compliance with federal or state labor regulations will assure correct classification of an individual as an employee rather than an independent contractor. Unfortunately, courts do not always view such compliance as asserting sufficient “control” over the worker. When an employer merely obeys national or local employment laws, it is the law, not the employer, which exerts control over the employee. Many courts have concluded that workers in such situations should properly be classified as independent contractors are wrongly classified as employees. See, e.g., K&D Auto Body, Inc. v. Division of Employment Security, S.W.3d 100 (Mo. App. W.D. 2005) (arguing that an employer who implementing random drug testing of “employees” is requiring no more from its workers than the law required, so without independent forms of control, such “employees” would be independent contractors). By the same token, employers who subject workers to standards in excess of legal requirements, even if those standards are merely to ensure compliance with the law, may be asserting such control that they convert the status of their workers from independent contractors to employees. See National Labor Relations Board v. Deaton, Inc., 502 F.2d 1221, 1224 (5th Cir. 1974), cert. denied, 422 U.S. 1047 (1975). The result is that it can be very difficult for an employer to comply with national and local employment standards, while maintaining the desired worker classification. Implementing only the necessary workplace regulations can, unless other methods of control are demonstrated, convert an “employee” into an independent contractor; on the other hand, ensuring compliance by requiring standards in excess of government regulations may convert an “independent contractor” into an employee.
IV. DRAFTING TIPS.
Again, a written agreement is not necessarily a binding determination that an independent contractor relationship exists, particularly with respect to various state or federal agencies. Nevertheless, careful drafting of an independent contractor agreement, along with clear discussions of expectations, can help avoid problems, or at least minimize the risks.
A. Define Relationship. Clearly state that the intention of the parties is to have an independent contracting relationship, and not an employer-employee relationship. Stress, in language appropriate for the circumstances, that the hiring entity not have control or responsibility with respect to the daily expectations of the independent contractor and his/her/its employees, but rather, is only interested in the end result.
B. Wages and Withholding. State, up front, that wages will not be paid and withheld on a W-2 basis, and will be paid on a gross-1099 basis. Confirm that the independent contractor has complete and total responsibility to withhold, administer and pay all applicable federal, state and local employment and income taxes.
C. Employee Benefits. State clearly that the independent contractor has full responsibility to maintain and administer any and all benefit plans for him/her/it and the independent contractor’s employees.
D. Workers’ Compensation. Expressly state that the independent contractor, and not the employer, is obligated to provide workers’ compensation insurance, and to comply with all applicable workers’ compensation laws and regulations.
E. Compliance with COBRA. Similarly, make it clear that the independent contractor, and not the employer, is fully responsible for any COBRA obligations.
F. Maintenance and Retention of Payroll and Benefit Records. The contract should include language requiring the independent contractor to maintain and complete records as legally required with respect to wages, benefits and personnel actions, and to comply with all applicable federal, state and local laws regarding such records.
G. Other Legal Compliance. The contract should expressly state that the independent contractor, and not the hiring entity, has full responsibility for other legal obligations, such as licensing obligations, permit obligations, compliance with state or federal environmental, import or other rules and regulations, employment laws, etc.
H. Insurance. The contract should clearly state that the independent contractor is obligated to obtain and provide all required insurance, which relates in any way to the services which he/she/it is rendering. Also consider adding the hiring entity as an additional insured, and/or requiring certificates of insurance.
I. Warranties, Representations and Indemnification. Although each situation may vary, it is always important to clarify, up front, who is responsible, legally and otherwise, for what. Often, it is appropriate to have the hiring entity defend and indemnify the independent contractor for certain risks, while the independent contractor defends and indemnifies the hiring entity for others.
J. Supervision, Direction and Control. At the risk of repetition, it is critically important for the agreement to state clearly that the independent contractor is responsible for and the employer of any of its employees and/or subcontractors. It, and not the hiring entity, should retain and exercise supervisory responsibilities and obligations with respect to its employees and subcontractors, including day-to-day control and direction, performance reviews, evaluations, and promotions, and any termination decisions.
In sum, it is far better for the parties to discuss and agree on these and all other issues relating to the relationship than it is to leave those items open for future disagreement.
[1] Recitals. Recitals are often viewed as mere “boilerplate.” However, recitals can provide very helpful language, in the event of future disputes. The language in this sample assumes a new employment relationship. If the Agreement is made with an existing employee, and is part of, for example, a new incentive package, the Recitals might include the following:
a. Executive desires to become a Participant in Company’s Long Term Incentive Plan.
b. Company desires to have Executive make agreements, which will protect Company’s business and other interests during the term of Executive’s employment and thereafter.
c. Company is willing to make Executive a Participant in Company’s Long Term Incentive Plan, in exchange for having Executive enter into this Agreement. Execution of this Agreement is a prerequisite to participation in this plan, and this Agreement is considered part of this plan.
d. Company and Executive desire to clarify their employment relationship, pursuant to the terms and conditions of this Agreement.
[2] General Terms and Conditions. It is often unclear which general policies apply to executives. Even high level executives must be aware that they are subject to company rules and requirements (e.g., policies regarding sexual harassment, ethics, legal behavior, etc.), even if they are not summarized in the Agreement – unless, of course, the stated intent is to override other general terms.
[3] Duties. Although it is helpful to describe the initial title and duties (perhaps with reference to a job description as an exhibit), companies should be careful about this provision. A disenchanted executive may claim breach of contract, claiming the employer changed his/her title and/or duties. Generally, this section should not create the possibility of having later good faith changes constitute a breach, or otherwise give a disenchanted and/or terminated executive an opportunity to claim that he or she should not be obligated to perform his/her post-termination obligations (no-compete, anti-solicitation, trade secret, etc.) It should be noted, however, that many executive employment agreements clearly do identify that the executive will serve in a particular capacity throughout the term of the agreement “unless mutually agreed” otherwise. Further, several executive employment agreements carefully set out in the body of the agreement, or in a separate exhibit, the exact, detailed duties that are expected. That type of specificity can create problems because detailed job descriptions are rarely kept current. If circumstances change, a company should have the right to expect its employees to be flexible, without risking a breach of contract claim. A good compromise is to have language that assures that, if the duties or titles are materially reduced, it may give the executive grounds to resign for “Good Reason,” as discussed below.
[4] Term of Employment. There are many options here. For example:
No Term at All; “At-Will” Relationship. Some employment agreements do not contain any stated term. They state that the relationship can be terminated by either party at any time, and for any reason – expressly stating an “at-will” relationship. That may be the only provision, with no guarantees whatsoever. Many “at-will” agreements, like this sample, allow either party to end the relationship at any time, but set forth post-termination rights. The agreement may change the rights, depending on who decides to terminate the relationship, why and/or when. Consider, for example, an agreement that provides the executive with a substantial severance package if the employer terminates the relationship without Cause during the first year, with the size of the separation pay decreasing over time. Such a provision might adequately address an executive’s initial concerns (e.g., not being willing to leave a prior employer without minimum guarantees), without creating an overly generous separation package.
Specific Period of Time (e.g., two years, with no reference to what happens once it expires). Presumably, once this expires, the relationship is either over or converts to an “at-will” employment relationship. If the employment continues without a new agreement, and if some of the provisions in the agreement continue forward, there is much room for misunderstandings and disagreements. For example, if the compensation and benefits packages continue to be in force (as they were during the term of the agreement), does that mean the post-termination compensation package continues to apply? What about other provisions such as non-competes, confidentiality clauses, etc? The agreement should be clear on these points.
Initial Term with Anticipated Renewals. Employment agreements are often drafted to have an initial term (e.g., one year), with the expressed understanding that the term may continue into the future. If that is the desire of the parties, they should state whether the term automatically renews, absent adequate notice by one party to the other not to renew (commonly referred to as an “evergreen” agreement); or whether the parties must renegotiate a new agreement at the end of its term, and, absent that, the employment will terminate. Regardless which type of renewal system is used, both parties should anticipate and address the renewal period. Avoid drafting an agreement that either automatically renews itself or automatically expires because one or both parties “dropped the ball.”
[5] Termination of Employment. From the employer’s perspective, only the employment relationship – not the agreement – should be terminated. Termination of the agreement could inadvertently terminate post-termination business protections.
[6] Compensation, Reimbursements and Benefits. Executives often have unique compensation packages. In addition to base salaries and basic benefits, a compensation package may include intricate bonus plans, incentive compensation plans, separation or severance plans, stock grants, stock warrants, stock options, etc. If unique compensation arrangements are made, be sensitive to the issues that they create. For example, if a stock option is granted, or if stock is given to the executive, it should be clear in the executive agreement and in a separate Stock Purchase Agreement what will happen if the employment relationship ends. From the employer’s perspective, typically one would want a Stock Purchase Agreement which triggers in the event of termination of employment, regardless of the reason. Similarly, if there are unique promises for employee benefit plans that may be covered by ERISA, care should be taken to prepare proper documentation which reflects the company’s ERISA obligations and desires. Critically, be sensitive to tax, SEC and Sarbanes-Oxley issues and obligations created by an executive agreement.
[7] Base Salary. Executive agreements typically set the base salary for the first year, with an understanding that the salary will be subject to annual review. Some agreements state that the base salary will never drop below a certain floor during the entire course of the agreement; some guarantee minimal percentage increases each year; some make no guarantees whatsoever.
[8] Bonus and Other Incentive Packages. Executive agreements may indicate that an annual bonus will be considered, at the discretion of the employer, or set up an objective (or combined objective/subjective) bonus plan, which sets out criteria for achievement (e.g., percentage of sales, etc.). Alternatively, the agreement may simply refer to other bonus or incentive programs which are in existence, and state that the executive is eligible for bonuses or incentives under those programs, subject to their terms and conditions. The company should make it clear that it maintains the right to interpret, alter, or replace the bonus/incentive program at its discretion, and specifically should reserve the right to add to, delete from, amend, or even cancel the program if business circumstances warrant. The agreement should not supersede the company’s obligations under the bonus or incentive plan, unless that is what the parties intend to have it do (which would rarely be the case). The executive may want to set minimum expectations/obligations, or make it clear that if certain award levels are not reached, the executive has a right to resign for Good Reason, discussed below. A common source of disagreement over bonuses and other incentive packages is whether the bonus is payable if the executive leaves before a particular bonus period (e.g., fiscal year) is over. The agreement should state whether a mid-year departure will entitle the executive to a pro rata share of the annual bonus, the entire bonus, or no bonus at all. This may be written to vary, depending on the timing and/or the reason for the departure. In any event, be sure that the executive agreement does not conflict with other employee benefit plans.
[9] Business Expenses. Executive agreements often provide specific provisions for car expenses, plane expenses, country club expenses, and other matters – some of which may or may not be deductible by the company under the Internal Revenue Code. The agreement should clearly state the various responsibilities.
[10] Time Off. Executives often mix business and pleasure, and generally work while traveling. Depending on a company’s policies and practices, that can lead to large and unexpected accruals of paid time off. Address all of this up front, to avoid major disputes later; and make sure the company’s time off and accrual policies are in compliance with recent legal developments.
[11] Benefits. Agreements often summarize specific benefits available to the executive. The company should make it clear that references in the agreement to particular employee benefit plans established or maintained by the company do not change the terms and conditions of the plans or preclude the company from amending or terminating the plans.
[12] Changes in Benefits. Companies often change policies or employee benefit plans, at least on a prospective basis. Particularly if the executive agreement identifies specific policies or employee benefit plans (which they often do), it is critical for the company to reserve its right to make changes to those plans.
[13] Termination. The agreement should anticipate and address all likely reasons for termination of employment. The parties may have a very different view about post-termination packages and obligations, depending on the reason for and timing of the departure. It is better to have a road map for the different options than to leave items vague or open, and subject to later disputes.
[14] Death of Executive. Obviously, the death of the executive terminates the employment relationship. It is necessary to state this, however, because the employer almost certainly will have a different view about post-termination payments in this situation, as compared to others.
[15] Disability of Executive. An executive’s disability, if serious enough, should be a ground for termination. Draft the definition so the agreement does not violate the Americans with Disabilities Act or the Family and Medical Leave Act. Many agreements state that, subject to these laws, the executive will be “presumed” to have such a disability if he or she is substantially incapable of performing his or her duties for a particular period of time (12 weeks would be the minimum here, due to the FMLA; the ADA may dictate a longer period).
[16] Termination by Company “For Cause.” The agreement should make it clear that the company can terminate, at any time, “for Cause.” The parties should carefully define “Cause.” Various types of misconduct, illegal activities, intentional breaches of the agreement, etc., will often be included in the definition. Employers are well served if they can get the definition of “Cause” to include less heinous actions of the executive that would, nevertheless, justify a termination. Executives prefer to have “Cause” only in misconduct situations. Often, the less serious issues may be subject to a notice/opportunity to cure provision.
[17] Termination by Company Without Cause. This is the situation that new executives are most concerned about. What if the employer decides to terminate the employment relationship due to a change in business plans, a down turn in the market, a mere personality dispute, or some other reason why “it’s just not working out?” Employers who enter into executive agreements definitely want to reserve the right to terminate “without Cause;” they do not want to prove “Cause” every time they want to part ways with the executive. Typically, this is a situation where fairness and the new executive’s negotiating demands dictate that post-termination separation packages are warranted.
[18] Voluntary Termination by Employee. Employers cannot prevent an executive from voluntarily terminating employment. However, the agreement should state that if the executive voluntarily quits, separation payment obligations will not apply.
[19] Resignation for Good Reason. This provision is rare. Employers rarely offer it, and executives often fail to ask for it. Even once it is agreed to in concept, there are often disagreements on the definition. Executives generally want the ability to trigger this provision if the job materially changes after they begin (e.g., material reduction in compensation or title, or forced and unacceptable relocation), or if there is other treatment that may not necessarily rise to the level of a “constructive discharge” under applicable law, but is nevertheless intolerable to the executive. Employers generally resist some or all of these, preferring to maintain flexibility and discretion. This may be a very good place to address situations where the employer and executive discuss and fully expect a situation to occur (such as a promotion from COO to CEO in one year, after the current CEO retires), but the employer cannot contractually guarantee it – basically assuring the executive that if it does not occur, there will be some ability to trigger a termination package.
[20] Termination as a Result of Other Reasons. Executive agreements occasionally address the possible termination of employment as a result of other reasons. For example, executive agreements often discuss terminations as a result of divestitures, acquisitions, mergers, or other changes in control. From the company’s perspective, this is not necessary because these types of provisions would constitute a termination “without Cause.” Executives may want to see this type of provision set out separately, however, to set up a later provision for severance pay in the event of this type of separation. The executive may even want to make it a ground for a Good Reason resignation.
[21] Post-Termination Compensation Packages. Many executive agreements provide a flat severance payment (e.g., twelve (12) months Base Salary) regardless of the reason for the termination, the timing of the termination, and whether the executive abides by other commitments. This may not be a logical approach from the company’s perspective. Employers should not agree to pay separation pay simply because an executive’s employment is terminated. The reason for the termination is critical.
[22] No Additional Pay/Benefits. There have been many claims by former executives for bonus or other incentive payments, various fringe benefits (e.g., cars, club dues, profit sharing, etc.), and even claims for bonuses based on post-termination severance pay. Not surprisingly, companies usually take the position that no such benefits or payments were anticipated. To avoid such a dispute, executive agreements should clearly state whether additional payments or benefits will result from the payment of a post-termination payment, or whether the gross payment stands alone.
[23] Death or Disability of Employee. If the employment relationship terminates as a result of the executive’s death or disability, this is not the employer’s fault. Further, executives often have (usually through the employer) life and disability insurance.
[24] Termination by Company for Cause [; Resignation Without Good Reason]. If the executive truly did give “Cause” to terminate, and particularly if it was a serious act of misconduct, employers do not want a contractual commitment to make post-termination payments. Similarly, few employers are happy to make payments to an executive who quits through no fault of the employer.
[25] Termination by Company Without Cause [; Resignation for Good Reason]. Here, a good argument can be made for post-termination compensation. Through no serious fault of the executive, the employment relationship is ended. Accordingly, it is not uncommon for employers to agree to provide post-termination pay to executives who are terminated “without Cause.” This may be part of an overall benefits package or may be contained within the executive agreement. The amount of post-termination compensation might be a flat amount (e.g., one year), a formula (e.g., one month for each year of service), a diminishing amount (e.g., one year if the termination takes place within the first year, six months, if it takes place in the second year, etc.), or some other formula. If the executive is able to negotiate certain rights to resign for Good Reason, the severance sections may be similar, or even identical, to the severance for a termination by the company without Cause.
[26] Contingencies. If an employer agrees to pay post-termination compensation, it should make the receipt of such compensation contingent on the executive’s compliance with all post-termination obligations (noncompete agreements, trade secret and confidentiality agreements, agreements not to hire or solicit employees, cooperation with litigation clauses, etc.); and a signed release of claims.
[27] Change of Control. Change of Control provisions are rare. This is a simple change of control provision. Many are far more complex. The language in a Change of Control provision, as a practical matter, can make future business combinations difficult, if not impossible. There needs to be a reasonable balance between protecting executives from the sudden loss of employment and essentially making the business change impossible to achieve.
[28] Business Protections. This sample assumes a separate Confidentiality, Noncompetition and Nonsolicitation Agreement. Any or all business protections could be incorporated into the executive agreement, rather than in a separate document.
[29] Representations by Executive. If the new executive has restrictions from a former employer, it is critical to discovery that up front, rather than after the fact. In fact, these representations should be confirmed as part of the offer. The Company may choose not to go forward with the arrangement, to negotiate or litigate with the former employer as needed or to change the terms of the new agreement, in order to avoid violations with the existing agreements.
[30] No Violation of Others’ Rights. Again, it is important to clearly assure, up front, that the employer does not want the executive to violate any other entity’s legal rights. This language may prevent legal conflicts, or at least support “good faith” defenses.
[31] Protective Covenants. It may be critical to the survival of a company to protect its trade secrets, prevent unfair competition, and prohibit the solicitation of its customers and/or employees if a key executive departs. As further discussed in other presentations and articles in this program, a company can do many things to protect itself with respect to these problems. To stand the best possible chance of prevailing in litigation, the company wants to be able to prove that its trade secrets and other confidential information were truly secret; that it, from day one, took steps to protect that confidential information; and that the executive knew that the information was confidential, etc. Further, the fairness and reasonableness of noncompete agreements, as well as the consideration requirement, should be clear from day one. If the employer does not have a separate noncompete confidentiality/trade secret agreement, those provisions can be included in the executive agreement. Even if the employer does have a separate agreement, it is a good idea to make reference to that agreement in the executive agreement.
[32] Merger Clause. The employer should be careful not to inadvertently supersede something that it wants to survive.
[33] Arbitration Clause. The parties can opt to have future disputes decided in an arbitration forum in lieu of traditional litigation, and they can specially design the procedures under which arbitration will be conducted. Advantages generally include an expedited ultimate resolution, decreased protracted discovery and court procedures, and avoidance of erratic jury verdicts. However, some may perceive these so-called advantages as disadvantages depending upon the facts of the particular case. First, as to both issues of law and fact, the ultimate decisions are left to the arbitrator with limited grounds for appeal (e.g., award procured by corruption, fraud or other undue means). Thus, the threat of an appeal which faces a judge who erroneously applies the law does not have the same effect on an arbitrator who may couch technical applications of the law in order to “split the baby.” Also, beware of the fact that the existence of an arbitration clause in an executive agreement, trade secret/confidentiality agreement, noncompete agreement, etc. can effectively prevent the employer from obtaining an injunction with respect to violations. If an arbitration clause is vastly preferred, consider at least using compromise language between the two competing issues. For example, consider making it clear that arbitration is encouraged, but not required; consider adding mediation as another voluntary alternative; and, in any event, make it clear that the arbitration language does not apply to the various non-competition/trade secrets provisions, nor does it bar the company from seeking judicial remedies to enforce them. Finally, be aware that Arbitration provisions may or may not cover traditional employment claims, depending on how they are drafted.
[34] Non-compete laws are different in virtually every state, and individual agreements may or may not have choice of law and forum selection clause provisions. It is critical to know what law applies and which court will apply it.
[35] Minn. Stat. § 325C.01, subd. 5 (2006) provides, in part, that “ ‘Trade Secret’ means information . . . that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” Electro-Craft v. Controlled Motion, Inc., 332 N.W.2d 890, 899 (Minn. 1983); Widmark v. Northrup King Co., 530 N.W.2d 588 (Minn. App. 1995).
[36] At the time such an agreement is made, the employer must provide the employee with written notice that the agreement “does not apply to an invention for which no equipment, supplies, facility or trade secret information of the employer was used and which was developed entirely on the employee’s own time, and (1) which does not relate (a) directly to the business of the employer or (b) to the employer’s actual or demonstrably anticipated research or development, or (2) which does not result from any work performed by the employee for the employer.” Minn. Stat. § 181.76. Existing employees should be provided independent consideration to support such agreements. See Eaton Corp. v. Giere, 971 F.2d 136, 139-40 (8th Cir. 1992).
[37] Minnesota law recognizes a distinction between non-compete agreements associated with employment contracts and those arising as part of the sale of a business. Kunin v. Kunin, 1999 WL 486814, at *3 (Minn. App. July 13, 1999), citing Bennet, 134 N.W.2d at 899.
[38] The reasonableness inquiry is on a case-by-case, fact-specific basis. Davies & Davies Agency, Inc. v. Davies, 298 N.W.2d 127 (Minn. 1980). Different jurisdictions use various methods of addressing overly-broad and unreasonable covenants. Some courts hold restrictive covenants totally unenforceable if they are unreasonable in scope or duration. See, e.g., Fields Found Ltd. v. Christiansen, 309 N.W.2d 125 (Wis. App. 1981). Such courts may take this approach in order to encourage employers to write more narrowly-tailored covenants. See Telxon Corp. v. Hoffman, 720 F. Supp. 657 (N.D. Ill. 1989). In other jurisdictions, the courts will “blue pencil” invalid portions of the agreement, and enforce the rest as written. See BDO Seidman v. Hirshberg, 93 NY.2d 382, 394 (N.Y. 1999). Minnesota courts utilize a modified “blue pencil” doctrine and will rewrite portions to make them reasonable. Dean Van Horn Consulting Assoc. v. Wold,, 395 N.W.2d 405 (Minn. App. 1986); Ikon Office Solutions, Inc. v. Dale, 2001 WL 1269994 (8th Cir. Oct. 24, 2001).
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