This article continues with another tip for drafting executive employment agreements and the importance of consulting counsel.
For every well drafted executive employment agreement in the business world, there seem to be multiple, poorly drafted agreements. Too often, employers simply copy and paste from older agreements without knowing anything about the identity or qualifications of the author of the original agreement, the jurisdiction, or circumstances in which the agreement was intended to be used. Moreover, employers sometimes borrow terms from an agreement that was heavily negotiated by an executive with considerable leverage. Under such circumstances, the agreement likely will contain terms that are less favorable to the employer than those that can be negotiated with another executive. Most employers do not realize their mistakes until they are consulting an employment attorney regarding their rights and obligations with respect to an executive who has engaged in misconduct or is simply performing poorly. The purpose of this series is to provide tips for drafting executive employment agreements and to highlight the importance of consulting counsel before tendering an agreement to an executive for consideration.
Tip No. 3: Check Applicable Law Before Drafting Restrictive Covenants
Executives often are provided with access to high-level client contacts and highly confidential, proprietary, and competitively valuable information. While state law typically provides some protection against the disclosure of trade secret information in the absence of contractual commitments, including restrictive covenants in an executive employment agreement can provide additional and, in most cases, much more effective, protection. Employers must keep in mind, however, that the law differs considerably from state to state, and it is imperative that the employer consult applicable state law (typically, where the executive is employed, but some states will recognize the law of the state where the employer is headquartered), when drafting restrictive covenant provisions.
For example, Oregon has a statute that provides that a noncompetition provision is voidable and unenforceable in certain circumstances unless the “employer informs the employee in a written employment offer received by the employee at least two weeks before the first day of the employee’s employment that a noncompetition agreement is required as a condition of employment.” Or. Rev. Stat. Section 653.295. Even in states that do not have a statute that addresses restrictive covenants, all states have case law on the topic that provides guidance regarding the circumstances in which courts have enforced and refused to enforce restrictive covenants. Some states are very employee-friendly (e.g., California, which typically will not enforce a straight noncompetition provision), while others are employer-friendly (e.g., Florida and Missouri). Key factors include the temporal and geographic scope of the restrictions, the types of activities sought to be restricted, and the types and competitive value of the confidential information sought to be protected.
Moreover, many states will permit the court to modify an otherwise overly broad restriction to make it enforceable under the law, provided the agreement contains a provision granting the court the power to do so. Depending on the type and extent of the permissible modification, this doctrine is referred to as either “reformation” or “blue-penciling.” Thus, including such a provision in an executive employment agreement typically increases the likelihood of the court enforcing the restrictive covenant.