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Don’t Sign an Employment Agreement that May Blow Up in Your Face.

May 25, 2021 by in "Two Minute Takeaway"

I advise executives transitioning employment and therefore regularly review employment agreements.  Many agreements are more akin to ticking time-bombs than enforceable agreements negotiated by two consenting parties.  Is your “employment agreement” really an IED?

Unreasonable Restrictive Covenants

Employers often include boilerplate restrictive covenants that courts will never enforce.  Many agreements, for example, define “confidential information” as any information about the employer, its clients, and its employees and prohibit employees from “using” or “disclosing” such information in any way.  If enforced as written, employees could never use any skills learned on the job or ever again do business with any clients of the employer.  Courts disregard such provisions and instead inquire whether an employee acquired bona fide trade secrets and fashion reasonable restrictions protecting only that information.

Similarly, many agreements prohibit employees from working for any competitors or soliciting any clients for a year or more after terminating employment.  In New York, such blanket restrictions are a non-starter.  Courts will ask what specific unfair competitive harm such employment may cause.  Did the employer train the employee such that it will be unfair for the employee immediately to make use of that training at a competitor?  If not, a court will significantly limit the non-compete provision.  Courts also limit non-solicit restrictions to cover only clients that the employer introduced to the employee.  If the employee independently developed a relationship with a client, or if the client is a prominent market participant that everybody in the field solicits, those clients will be fair game regardless of the terms of the employment agreement.

Recipe for Disaster

When push comes to shove, therefore, many agreements are useless for defining an employee’s post-termination rights and responsibilities.  But they are very effective in igniting costly and protracted litigation.  Their draconian restrictions embolden employers to litigate, believing that a court may hold an employee to the terms of its written and signed agreement.  Employees are also incentivized to litigate because they realize that they cannot do any worse in litigation and, in fact, are likely to obtain significant relief from unreasonable provisions.   

So the parties send teams of lawyers into court to fight out the terms of temporary restraining orders and preliminary injunctions that will control the employee’s post-termination conduct.  A court must determine the employee’s obligations because the written agreement that the parties entered to do precisely that failed of its essential purpose.  The agreements therefore have all the hallmarks of improvised explosive devices: crudely designed weapons, which may sit undisturbed for years, but then indiscriminately detonate when subject to pressure.  

Executives Need to Insist on Reasonable Restrictive Covenants

Executives transitioning into new jobs need carefully to negotiate these terms.  Executives often focus on negotiating the financial terms of their employment but neglect to negotiate restrictive covenants.  Executives sometimes feel that it sends the wrong message to focus on how they can later compete against the employer before they have even started working for the employer.  Understandably, few employees want to haggle over the terms of a potential divorce when they are still enjoying the honeymoon.

But employers are more willing to negotiate restrictive covenants than might be assumed.  Initially, the law in states like New York is so clear that counsel for the employer cannot insist on blanket restrictive covenants in good faith.  Further, the process of drafting employment agreements at many employers is less intentional than one might think.  Many provisions are legacy provisions that are contained in agreements only because they were in the last agreement, and the agreement before that, not because of any institutional commitment to the provision.  Employers can be convinced to enter enforceable agreements that minimize the risk of expensive litigation if they are pressed to do so.  But you won’t know unless you try.

Reasonable, enforceable, agreements should identify specific trade secrets that the employer regards as confidential.  Similarly, non-compete and non-solicit provisions should identify specific competitors and clients that are off-limits.  To maintain flexibility, an agreement may contain a procedure whereby an employer can designate new trade secrets, competitors, and clients during the employment.  

Conclusion

Executives entering employment agreements should seek to re-negotiate blanket restrictive covenants.  Blanket provisions fail reasonably to define an employee’s post-termination rights and obligations and therefore create a substantial risk of litigation.  Employees’ leverage to obtain reasonable restrictions is greatest when going into a job and it is critical that they use that opportunity to request fair provisions, that comport with prevailing law, and which will be enforced as written.