In recent years, disputes surrounding executive employment agreements have increased significantly.
This is no surprise given the amounts at stake, whether it is the compensation and incentives arguably owed to the executive, or threats to the company’s business itself through unlawful competition, trade secret theft, or unauthorized use of confidential information.
While impossible to safeguard against all risk of course, pay close attention to the following provisions when drafting executive employment agreements. By doing so, the company will be better prepared to defend itself in future litigation, if necessary.
- Duties and Reporting – While the company may want to list specific job duties in the agreement, make sure to include the express ability to assign other duties as determined by the company from time to time. Likewise, even if the written agreement specifies to whom the executive will report, always include the ability to re-assign reporting structures. Failure to allow for flexibility could lead to disputes regarding potential diminution of duties and claims of breach of contract.
- Termination – Many agreements define the circumstances in which the company may terminate the executive’s employment “for cause” or “without cause,” and when the employee may resign with or without “good reason.” When drafting the agreement, pay special attention to defining when each event may be triggered, as terminations “without cause” and “with good reason” will likely require certain payments to the executive. Further, carefully craft the definition of “for cause” termination so that it is not overly narrow and allows for terminations in situations where the executive is not meeting performance expectations.
- Severance and Release Agreements – Many executive agreements provide for severance pay when termination occurs “without cause” or “with good reason.” Regardless of how it is triggered, include a provision that the executive must enter into a separate release and waiver of claims agreement before becoming entitled to any severance payments.
- Non-Competition Provisions – Companies often include post-employment restrictive covenants in their executive agreements, including non-competition, non-solicitation, and no-raid provisions. While many states, including Texas, allow post-employment restrictive covenants, others, such as California, generally do not. In jurisdictions where these provisions are legal, courts and arbitrators are generally hesitant to enforce overly broad restrictions that prohibit the individual from working in any capacity. As such, when drafting restrictive covenants, it is important to understand state law requirements and to narrowly tailor the provisions as to time, geography, and scope of duties, so as to only restrict activities in which the executive could use company proprietary information to unfairly compete in another job. Further, multinationals should give special review to agreements that extend outside of the US, such as the UK, as those could have their own risks for enforcement.
- Intellectual Property and Invention Assignment – It is important for executive agreements to spell out exactly who owns the intellectual property and inventions developed during the term of the executive’s employment. Although many proprietary information and invention assignment (“PIIA”) provisions look similar on their face, companies should analyze them under the governing local law, as certain procedures may be required. Companies also should craft the provision accounting for the individual executive’s specific job duties and access and exposure to company inventions, intellectual property, and proprietary information.
Thanks for reading and check back next week for Part II on “Executive Agreement Litigation – Top 10 Agreement Provisions To Consider Now To Avoid Future Risk.”