We have blogged on this issue before in detail (Restrictive Covenants in Stock Award Agreements: Critical Lessons for Employers, Executives, and Stock Plan Administrators). However, due to the increasing prevalence of (i) electronically delivered equity awards and (ii) restrictive covenants in equity awards, we wanted to highlight another recent federal court case.
In ADP v. Lynch (3rd Cir. 2017), the Third Circuit Court of Appeals affirmed a federal district court’s holding that restrictive covenants in electronically delivered equity award agreements were enforceable. In ADP, the two plaintiffs/former employees had on five occasions accepted stock awards by accessing a webpage containing the award documents. The webpage stated, “you must select the checkbox to indicate you have read all associated documents before you can proceed” and provided a checkbox next to the statement “I have read all the documents below.” Next to the checkbox was a link to open a 19-page PDF document, which included (i) the plan document, (ii) the award agreement, and (iii) the non-compete agreement. The first page of the award agreement stated that the employee would have 90 days to review the terms and decide whether to accept. It also specifically advised employees that the acceptance of the award was conditioned on agreement to the non-compete. The first page of the non-compete reiterated this condition. After they checked the “I have read all the documents” box, employees had to enter their personal password and click the “Accept Grant” or “Reject Grant” buttons.
The court easily rejected plaintiffs’ argument that they had never checked a box stating they “agreed to” or “accepted or acknowledged” the terms of the agreements. The court observed that they had checked a box affirming that they “read” the documents, and the documents explicitly advised them that the non-competes were a condition of accepting the stock award. The court also found the plaintiffs’ contention that they did not recall reading the documents, irrelevant.