COVENANT NOT TO SUE

BY G. A. FINCH

“A covenant not to sue” as the term suggests is a legal promise not to file a lawsuit.  It is usually a companion provision to releases and waivers in a release agreement. Releases and waivers are de rigueur in employment separation/severance agreements.  Lawyers drafting separation/severance agreements favor including a covenant not sue because it can be raised as an affirmative defense in litigation if the party giving the covenant not to sue then decides subsequently to file a lawsuit.

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As the employer’s attorney is the person that usually does the initial draft of a separation agreement, the covenant not to sue is a provision  that an employee reflexively gives to an employer without much thought and not vice versa.  When I represent the employee, I negotiate for the covenant not to sue be mutual, i.e., what is good for the goose is good for the gander.

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If the employer requires peace of mind that the separation agreement will prevent future controversies, so should the employee have the same.

In a separation/severance agreement, a covenant not to sue is subject to certain limitations and exceptions concerning 1) an employee’s ability to file administrative charges with the Equal Opportunity Commission and corresponding state or local agency, 2) an employee’s ability to file a lawsuit to challenge whether the employee signed the agreement knowingly and voluntarily for purposes of the Age Discrimination in Employment Act, 3) an employee’s ability to being a witness in a class action suit against the employer,  or 4)  an employee’s ability  to waive a right which waiver is prohibited by law.

 

Final points:  Although releases and covenants to not sue are usually set out together in a separation/ release agreement, there is a subtle difference between them.  A release gives up or relinquishes a right to enforce a right or a claim that could have been enforced while a covenant not to sue is an agreement not to assert a right to bring a cause of action in court.   Put another way, a release extinguishes a right and a covenant not to sue does not allow a right to proceed to litigation.  A permanent or perpetual covenant not to sue, as opposed to a set time limit not to sue, has the same effect as a release or discharge.

This may be too much information for the typical executive to know or care about.  The important thing to remember is to make reciprocal both releases and covenants not to sue.

NEVER START A JOB BEFORE EMPLOYMENT AGREEMENT IS SIGNED

BY G. A. FINCH

Too many times, a situation in which an executive starts a job with an unfinished employment agreement does not turn out well.  Not always the case, but often the case.  An executive does not want to be in the percentage of employees who get terminated without a back-on-the-marketcompleted, signed employment agreement.   The executive’s relying on the employer to do the right thing in terms of what the employee thinks the deal was, is not a good choice.

Obviously an executive has the most negotiating leverage when a company is seeking to hire the executive.  At the start of the relationship, there is good will between the employer and prospective employee and there are high, positive expectations on both sides.happy_lady

An executive is eager to demonstrate trust and enthusiasm by agreeing to start while an agreement is being finalized.  I know of executives who have quit their prior jobs, forsaken substantial benefits, and relocated to distant cities without a signed agreement.  Two scenarios usually are the case.  One scenario is that the executive and the employer are still hashing out contract terms after the executive has started employment.  Another scenario is the executive has started working and has never received a signed agreement – it falls through the cracks so to speak.

There is an old saying that “Familiarity breeds contempt.”  An employer’s shiny new executive now has blemishes and scratches upon closer inspection.  The sense of urgency has dissipated once the employer has gotten its prized employee.  It is human nature to value something less after it has been obtained.

Accordingly, an executive must never start a job without a completely finished, signed agreement in hand.  Moreover, whatever “final” employment agreement is tendered to him, the executive’s attorney must review it one last time to ensure that the final draft reflects the latest iteration of the negotiated contract terms.  Last minute language insertions or failure to include agreed-upon provisions can and do happen, sometimes carelessly and in good faith by the employer and sometimes by design.  An executive’s insistence upon having in hand an executed agreement prior to work commencement is prudent and makes common sense.  In order for the executive to be able to maintain a congenial relationship with his prospective colleagues or bosses, the executive’s attorney should take the responsibility for requiring a signed agreement.legal-document-2

An executive does not want to be in the more difficult position of proving up the terms of an unsigned, draft contract in a court of law than the easier position of proving up a final, signed contract.

 

 

POWER WORD PLAY (A Term, Word, or Concept an Executive Ought to Know): MORAL RIGHTS

BY G. A. FINCH

To the uninitiated, the term “moral rights”, would at first blush (pun intended), seem to suggest having something to do with bad character, improper behavior or religious and philosophical subjects.

Actually it has to do with intellectual property rights of an author, artist, or creator beyond mere copyright interests.

Moral Rights is beginning to appear more often in employment agreement provisions pertaining to intellectual property rights.  The employer usually seeks to obtain a waiver of the employee’s moral rights to works subject to copyright which works are made by the employee within the scope of employee’s employment or using employer’s resources or confidential information.

It is a European legal concept and not rooted in American jurisprudence, although similar and analogous concepts have been asserted or litigated in the United States from time to time.  I believe burgeoning multinational corporations and global trade have facilitated the infiltration of moral rights provisions into American legal documents. The American version of moral rights became codified as the Visual Artists Rights Act of 1990 (VARA) pursuant to the mandates of the Berne Convention.

VARA provides that the author of visual art has the right:

 

A) to claim authorship of his work,

B) to prevent the use of his name as author of any visual art that he did not create,

C) to prevent any intentional distortion, mutilation or other modification of his work that would prejudice his honor or reputation,

D) to prevent any destruction of a work of recognized stature, and any intentional or grossly negligent destruction of that work is a violation of the right.

 

Under VARA, only the author of the subject visual art has these rights whether or not the author owns the copyright. VARA does not provide moral rights for authors of literary or musical works.

Black’s Law Dictionary sets out the most succinct global definition of Moral Rights:

“Moral rights include rights of (1) attribution (also termed “paternity”): the right to be given credit and to claim credit for a work, and to deny credit if the work is changed; (2) integrity: the right to ensure that the work is not changed without the artist’s consent; (3) publication: the right not to reveal a work before its creator is satisfied with it; and (4) retraction: the right to renounce a work and withdraw it from sale or display…”  Black’s Law Dictionary, p. 1030 (Eighth Edition, 2004).

 

INTERNAL REVENUE CODE SECTION 409A

 

BY G. A. FINCH

If your employment agreement has deferral of compensation provisions, you may very well see a section or paragraph captioned “Internal Revenue Code Section 409A” or simply “409A.”  Its official citation is 26 U.S. Code Section 409A – Inclusion in gross income of deferred compensation under nonqualified deferred compensation plans.

This section is too complex and tedious for most lay person executives to understand and figure out.  Your reading Section 409A of the IRS Code is certainly an instant cure for insomnia.080914_jmanscratchhead_tnb

At the outset, before you execute an employment agreement, your retaining an attorney is necessary to interpret and apply Section 409A to the various scenarios of deferral of compensation to ascertain whether such compensation adheres to Section 409A’s deferrals and distributions timing rules.

Failure to comply with the rules concerning deferred compensation has onerous consequences of 1) inclusion of such deferred compensation as gross income for the subject taxable year, 2) payment of the amount of interest on the underpayments, and 3) a penalty amount equal to 20% of the deferred compensation which is required to be included in gross income.IRS_tnb

Accordingly, employers often have a Section 409A provision in the employment agreement that allows the employer to adjust payments under the agreement to comply with Section 409A and allows the employer to disclaim any liability to the employee.

A typical provision can be lengthy paragraphs and include some language like the following:

 

“Anything in this Agreement to the contrary notwithstanding, the parties intend that   all payments and benefits under this Agreement comply with Section 409A of the Code and the regulations promulgated thereunder and, accordingly, to the maximum extent permitted by law, this Agreement shall be interpreted in a manner in compliance therewith.  To the extent that any provision hereof is modified in order to comply with Section 409A, such modification shall be made in good faith and shall, to the maximum extend reasonably possible, maintain the original intent and economic benefit to you  and the Employer of the applicable provision without violating the provisions of Section 409A.  Notwithstanding the foregoing, the Employer shall not be required to assume any increased economic burden in connection therewith.  Although the Employer intends to administer this Agreement so that it would be exempt or comply with the requirements of Code Section 409A, the Employer does not represent or warrant that this Agreement will be exempt from, or otherwise comply with, Code Section 409A or any other provision of applicable law.  Neither the Employer, its affiliates, nor their respective directors, officers, employees or advisers shall be liable to you (or any other individual claiming a benefit through you) for any tax, interest, or penalties you may owe as a result of compensation paid out pursuant hereto, and the Employer shall have no obligation to indemnify or otherwise protect you from the obligation to pay taxes pursuant to Code Section 409A.”

 

The point of this blog post is that your deferred compensation provisions could trigger 409A tax consequences and your employer, through its employment contract with you, is shifting the risk to you as employee.

I WROTE IT SO WHY CAN’T I USE IT?

BY G. A. FINCH

You are leaving your job or you have already left. After you leave, you want to use all of your power point presentations, white papers, newsletter articles, and blog posts that you did for your employer. Not so fast. Are you allowed to do that? Who owns the written work that you produced? Increasingly I am called to advise incoming or departing executives and professionals on how to preserve and protect their intellectual property rights or understand how to avoid violating the intellectual property rights of their former employers. This post focuses on copyrights, not trademarks or patents or trade secrets.

quill_writingYou need to know the copyright laws. You also need to know what confidentiality/intellectual property agreements you may have signed either in an employment agreement or in a separation/severance agreement or both.

The basics for a copyright are:

  • A work must be original
  • A work must be completed and in tangible form like a written article
  • A copyright holder has the right to reproduce, to distribute, to modify the work, and to perform or display it
  • A copyright holder does not have to register his\her\its work to gain copyright protection and does not have to display the copyright symbol

An employee should note well that ordinarily the employee’s work authored within the defined scope of employee’s employment constitutes a work made for hire. Although the employee physically created the work, the employee may not own it, rather the employer does. Most savvy employers will eliminate any legal ambiguity of copyright ownership by having the employee sign intellectual property and invention assignment agreements.

Although they can vary in length from three sentences to two pages, an assignment of intellectual property provision typically looks like the following:

“ASSIGNMENT OF INVENTIONS. I agree that I will promptly make full written          disclosure to the Company, will hold in trust for the sole right and benefit of the Company, and hereby assign to the Company, or its designee, all my right, title, and interest in and to any and all inventions, original works of authorship, developments, concepts, improvements, designs, discoveries, ideas, trademarks or trade secrets, whether or not patentable or registrable under copyright or similar laws, which I may solely or jointly conceive or develop or reduce to practice, or cause to be conceived or developed or reduced to practice, during the period of time I am in the employ of the Company ….”

no_copyrightPrior to commencing employment, an employee would do well to carve out in a written agreement any invention, original works of authorship, etc. to ensure such work product or invention is not assigned or deemed owned by employee’s new employer. Also prior to any departure, the employee should set out in an agreement what works employee created that were not created on the job or are not assigned to the company.

When the employee does not own the written work employee created, the most obvious and practical thing to do is simply ask permission from the previous employer.

Lastly, there is a limited way to use copyrighted material without permission and not infringe. This way is called “fair use.” For example, if you fairly and reasonably use a short quote and credit it for commentary and criticism, news reporting, teaching, research or parody, you are probably okay. The evaluation includes whether your use adversely affects the market for or value of the work. When in doubt, consult an attorney.

POTTY MOUTH IN THE WORKPLACE

By G. A. FINCH

Does boorish behavior matter? As part of our daily work routine, we all experience instances where co-workers, bosses, clients, customers, and vendors use profanity, recount indelicate stories, tell off-color jokes, or over share personal information. It seems that decorum and verbal restraint are neither required nor in vogue anymore. Verbal boundaries have all but disappeared.angry-boss-cursing-grimacing-5343683

Does anybody else miss polite conversation in the work world that used to be the norm? I am not a prude and have myself used profanity on occasion in work-related situations. I would like to think that the few times I use profanity, it is to emphasize a point or to provide colorful context to a story or an experience; maybe my perceived degree of use is a distinction without a difference and I am rationalizing my own verbal indiscretions no matter how limited they may be.angry-cursing-phone-concept-20381448
I know that I am turned off by an excessive use of profanity or habitual tellers of dirty or ethnic jokes. I also get uncomfortable when a work-related person over shares personal information or unusual circumstances, when it is clearly not appropriate to the circumstance or the relationship.  The initial entertainment value of an over sharing story begins to lose its appeal pretty quickly, especially from repeat offenders.  What may have seemed funny or salacious can then make us cringe.

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Despite the increasing coarseness of our popular culture, I think there is something to be said for etiquette – it makes people more comfortable and it reduces the likelihood of offending people. I think those executives and professionals who use no or little profanity, who do not over share, and who resist off-color humor do set themselves apart in a positive way. Crude behavior does have consequences.

POWER WORD PLAY (A Term, Word, or Concept an Executive Ought to Know): UNIT APPRECIATION RIGHTS

BY G. A. FINCH

Unit Appreciation Rights (for limited liability companies and known as Stock Appreciation Rights for corporations) are a form of executive compensation tied to the performance of a set amount of units or shares within a set time period.  They could include only compensation tied to the amount of increase in the value of equity,  or compensation that comprises both such increase and the original value of the equity.

The compensation may be cash payments or equity equivalent based on the original full value of a number of units that an executive holds and/or any increase in value (the difference between the price of the units at the time of grant and the price of the units upon exercisability). When an executive exercises his right, a company’s Unit Appreciation Rights Plan may allow the company to pay in cash or real common equity of the company or a combination thereof.

The units granted under Unit Appreciation Rights are not real units of ownership in a company entity, but rather are hypothetical “Phantom Units”. The company will grant an executive a number of units, e.g. 3,000 which will have an initial price per Phantom Unit, e.g. $30.00. The units will vest after a set period, e.g. two years after the date of grant while the executive is still employed. After vesting and before any expiration date, the Unit Appreciation Right becomes exercisable by the executive either in partial amounts or in the full amount depending on the terms and conditions of the company’s Unit Appreciation Rights Plan. If not exercised during the executive’s lifetime and assuming that an expiration date has not occurred, then any person empowered under the deceased executive’s estate ordinarily could exercise the Unit Appreciation Right.