Restrictive Covenants in Awards

Today I look at recent litigation relating to the use of non-compete provisions in award agreements.  The case (Newell Rubbermaid v. Storm) involves an employee, Sandy Storm (yes, that's her real name), of Newell Rubbermaid.  Storm was responsible for the sale of infant and juvenile products (sold under the Graco brand) by Newell Rubbermaid to Target. In 2013, Storm signed an RSU agreement that included a number of post-employment restrictive covenants (e.g., relating to confidentiality, use of trade secrets, and non-solicitation) that effectively prohibited her from competing with Newell Rubbermaid.  In 2014--you guessed it--she resigned from Newell Rubbermaid to work for one of their competitors (Artsana) selling infant and juvenile products (including to Target).

What is interesting here is that the Delaware Chancery Court agreed that the restrictive covenants are enforceable and issued a temporary restraining order against Storm.  In today's entry, I discuss some other aspects of the case that I think are interesting.

An Online Agreement and Acceptance

The agreement was distributed online and Storm consented to it with an electronic signature.  The court did not seem to view this any differently than if the agreements had been in paper format and she had manually signed them, saying "Agreements may, of course, be made online."

You Really Should Read All Those Online Agreements

Storm had not read the agreement, so she didn't know about the restrictions.  She knew that other employees had been asked to sign separate non-compete agreements, so, before resigning, she checked several other sources for prohibitions against working for a competitor (including her personnel file and the company intranet) and didn't find anything. But she didn't think to check her RSU agreement. And who can blame her--she thought that agreement related solely to her RSU award, which she was going to forfeit anyway because it wasn't vested, and she'd signed RSU agreements in 2011 and 2012 that didn't contain these provisions.

The court didn't care, saying "Storm is understandably unhappy that she did not read the 2013 Agreements...She altered her post-employment rights in a manner she appears to regret now, but it was her choice to modify her rights without fully investigating the terms to which she agreed." Harsh! Something to keep in mind the next time you accept an online service agreement without reading it.

Enforcement Went Beyond Forfeiture of the Award

What we typically see with non-compete provisions in awards is that the award is forfeited (or, if vested, clawed back) if the employee violates the provision.  The employee essentially has a choice of (A) keeping the award or (B) competing. That wasn't the case here.  The restrictive covenants apply regardless of whether the award is forfeited.  In fact, the award had not yet vested by the time Storm terminated, so she forfeited it regardless of where she went to work after leaving Newell Rubbermaid.  The question is not whether she gets to keep the award but whether she can work for Newell Rubbermaid's competitor at all. It's a lose-lose situation for her; she already forfeited the award and now she's out of work.

New Possibilities and Challenges

This certainly opens up some new possibilities for award agreements.  Mike Melbinger of Winston & Strawn and blogger at CompensationStandards.com thinks, given Storm's level in the organization and access to sensitive information, this particular scenario might even withstand a challenge in California.

But a provision like this would be a darn good reason for an employee to refuse to accept an award. Storm's future employment opportunities were limited as soon as she accepted the award agreement (without even reading it!).  Enforcing acceptance of award agreements is already a challenge (see the NASPP webcast "Is Silence the Answer? Acceptance of Grant Agreements"), giving employees a legitimate reason to decline them makes this process even harder.

Moreover, a key consideration for the court was that Storm checked a box labeled "I have read and agree to the terms of the Grant Agreement," and clicked a button labeled "Accept."  The court reviewed screen shots of the page that Storm used to accept the agreement and emphasized this in its decision.  I'm not sure that the court would have sided with Newell Rubbermaid if Storm hadn't had to voluntarily take action to accept the award.  And many companies don't get serious about enforcing acceptance until awards are about to vest.  Storm's award hadn't vested yet; if Newell Rubbermaid had taken that approach, Storm would probably be happily working at their competitor today.

For more information on this case, see the McGuireWoods alert, "Include Restrictive Covenants in Equity Grants? Why Not?"

- Barbara