ERISA and Global Benefits

Stock Award Web Process Works: Non-compete Enforced

February 13, 2017

Mark Poerio

As a general matter, employers “win” when they seek to enforce stock plan terms that have been fairly disclosed -- and accepted -- by award recipients. ADP recently had such a victory, through a 3rd Circuit decision granting a preliminary injunction against two former employees who had joined a competitor in violation of restrictive covenants set forth in their stock awards. They argued that ADP’s web-based system for issuing stock awards did not adequately alert them to the consequences of the stock awards they accepted.

The employees lost because ADP’s check-the-box award system involved the following key steps that led the court to bind them to the stock award agreements and the associated noncompetes:

  • Step 1: The employees accessed a webpage containing the award documents.

  • PH Comment: electronic issuances of stock awards can be more efficient and reliable (and green) than hard copy approaches which frequently challenge employers to find signed documents when they need them.

  • Step 2: The employees were able to link to a PDF presenting 19 pages of award documentation. The first page gave them up to 90 days to consider the documents.

  • PH Comment: It makes sense to impose a deadline by which employees must accept awards. 90 days seems long and could open the door for tax and accounting arguments that the grant date for stock options has been delayed until the employee accepts the award. A period of about 10-20 days would seem sufficient for employee review and acceptance (depending on the complexity of the documents).

  • Step 3: The employees checked a box indicating they had read the award documents.

  • PH Comment: The 3rd Circuit found proof of this significant to defeat arguments by the employees that they had not read the award or Noncompete agreements. The court cited precedent stating that “[w]hen a party enters a signed, written contract, that party is presumed to understand and assent to its terms.”

  • Step 4: On a linked webpage, the employees entered their personal password and clicked the “Accept Grant” button (rather than the “Reject Grant” button).

  • PH Comment: The 3rd Circuit concluded that this “sealed the deal” for binding the employees to the award agreements and associated Noncompete agreement.

Overall, ADP’s stock award process established that the employees had full access to the award documents and accepted their terms and conditions. The court pointed out that the first page of both the stock award and the noncompete agreement “specifically advise employees that the acceptance of the award was conditioned on the agreement to the noncompete.”

When making stock awards, employers have the opportunity to accomplish goals that range from —

  • providing stock-based incentives, to

  • imposing restrictive covenants such as non-competes, to

  • reserving clawback rights and other remedies that discourage (or end) violations; to

  • better positioning for litigation by using a new award as consideration for amending past awards, such as to require that all award claims be raised promptly, be decided with deference to employer determinations, and/or be litigated in a selected forum.

The discussion above is intended to suggest the corporate purposes and efficiencies that may be achieved through well-considered stock award programs and documents. Often underappreciated is the value of reviewing past awards, trade secret and restrictive covenants, and applicable state laws (because fine tuning could spell success). There is also an underappreciated potential to design awards so that ERISA preempts state noncompete laws that would otherwise invalidate a forfeiture-for-competition provision. Employers interested in “ERISA-fying” a stock plan face the challenging, but surmountable, task of triggering ERISA coverage, perhaps by deferring a portion of management’s stock awards into a top-hat retirement or severance plan. Finally, from a systems side, employers should be ready to demonstrate that employees have received adequate notice of award terms, and have personally accepted them. As ADP found in its litigation, it is worth giving attention to award program details.

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