Late last month, I blogged on an important case analyzing restrictive covenants in electronically delivered stock award agreements, Newell Rubbermaid Inc. v. Storm, (Del. Ch. March 27, 2014). In Newell Rubbermaid Inc. v. Storm, the Court granted the company a temporary restraining order against a former employee for actions that appeared to violate the non-solicitation and confidentiality covenants of RSU agreements. The RSU agreements to which the employee assented and which the Court enforced were so-called “clickwrap” agreements.
Today, I will list four of the 14 lessons that employers and stock plan administrators can learn from this case.
- Courts will enforce restrictive covenants contained in stock award agreements. I think that we all knew this. The Court did not even discuss this issue. Rather, it only discussed whether the employee’s electronic assent to the terms of the restrictive covenants in the agreements was effective.
- Courts will enforce electronic agreements. The first sentence of the Court’s opinion states flatly that “Agreements may, of course, be made online.” The conventional wisdom had been that it is better to have a hard copy award agreement signed by an employee in order to be able to enforce the restrictive covenants in the agreement.
- Courts may enforce all remedies set forth in the stock award agreement, including remedies that go beyond simply the forfeiture of the stock award, such as an injunction against the former employee. Many courts have enforced restrictive covenants in stock award agreements under the so-called “employee choice doctrine.” Most state and federal courts considering whether to enforce restrictive covenants, particularly non-compete provisions, in stock award agreements begin their decision by observing that the law of the governing state strongly disfavors the enforcement of restrictive covenants as a matter of public policy because enforcement could prevent the individual (often a citizen of that state) from earning a living in his or her chosen profession. The employee choice doctrine holds essentially, that the restrictive covenants in the award agreement does not violate (or even implicate) the state’s public policy against restrictive covenants because the remedy set forth in award agreement for violating the restrictive covenant is merely the forfeiture of the outstanding stock award. Thus, the employee has the choice of adhering to the covenants and keeping the valuable award or earning a living in his chosen profession at a competitor, but forfeiting the award. The extent of the remedies provided for in the award agreement is an important design decision for the company.
- Companies and stock plan administrators should use the “clickwrap” form of electronic delivery and acknowledgement of agreements rather than the browse-wrap form. I discussed this in my first blog on the Newell case last month. The Court observed that a browse-wrap license “often fails to provide adequate notice before assent.”