Last week, we discussed 5 executive agreement provisions to consider now to help avoid future risk. This week, we are back with our second installment.
As with the previous 5 provisions, companies should pay close attention when drafting the following executive agreement terms so as to best position itself in the event of future disputes.
6. Trade Secret – Last year, the Defend Trade Secrets Act was passed and created a federal cause of action for misappropriation of trade secrets. However, to recover exemplary damages and/or attorneys’ fees under the Act, companies must provide explicit notice to employees that identifies the Act’s immunity provisions for certain types of trade secret disclosure, such as when a trade secret is disclosed through the reporting of a violation of law to federal, state, or local government officials. To maximize their recovery potential, companies should include the relevant notice in their executive agreements.
7. Tax Code § 409A – The Internal Revenue Code includes significant tax penalties for certain deferred compensation arrangements. Under IRC Section 409A, there could be penalties if an executive agreement allows for payments to be made to the executive more than 2.5 months after the tax year in which the executive acquires a legal right to the compensation. This could apply to contract provisions regarding bonuses, severance payments, equity payments, change in control, terminations, and other compensation and benefits provisions. Given the intricacies surrounding these rules and exceptions, companies should engage in a specific review of all executive agreements for compliance to avoid these risks. For more information and updates on 409A in light of recent US tax reform, visit The Compensation Connection.
8. Dispute Resolution – Before executing an agreement, companies should consider whether to include an arbitration provision requiring that disputes be submitted to arbitration instead of litigation in state or federal court. Both forms of dispute resolution offer potential advantages, with arbitration allowing for possible cost savings through limitations on discovery and condensed scheduling, the ability to choose your arbitrator, and exclusion from public record. Likewise, litigation in court can allow for accelerated access to injunctions and restraining orders for breaches of non-competes, non-disclosures, and other contract violations; a more expansive appeals process; and the use of familiar rules and procedures. Companies should weigh their options and carefully craft the corresponding provisions in their executive agreement.
9. Applicable Law – Executive agreements are, in essence, contracts, and thus generally governed by state contract law. With this, many agreements choose to specify the state law that governs the agreement. While some courts or arbitrators may automatically give effect to an executive agreement’s choice of law provision, others may be hesitant to do so unless there is a nexus to the employment relationship, such as the state in which the executive performs his or her duties. Because many of the terms within the agreement will be governed by the applicable state’s law, it is essential to understand the local laws and their impact on the agreement’s various provisions.
10. Complete/Entire Agreement – While often deemed boilerplate, companies should pay attention to the “complete agreement” provision within an executive agreement. Disputes often arise when the employee alleges that he or she was promised something by the company in negotiations or in later conversations or communications. A well-drafted executive agreement will establish that it, along with any other written plans, contracts, or agreements, are the only contracts between the parties, and that the company has no obligation to the executive outside of those specific written agreements. Companies should also ensure that the provision does not eradicate any other agreement that they want to remain effective (e.g., a previous confidentiality agreement).
Please reach out to your Baker McKenzie lawyer for more details.