Morality Clauses, Part II: The Family Law Edition

When couples divorce, often the most difficult part is how the children are affected by the process and the behavior of the divorcing parents.  No one wants someone else raising their children.  However, that can be a very harsh reality to face for divorced people with minor children. 

Previously in this space, we looked at employment contracts for executives and high visibility employees or representatives, and how a company can manage the risk of illegal or otherwise improper behavior of those key persons.  With some foresight, and smart contractual drafting, the company can protect itself from bad behavior through morality clauses.   

Surprisingly, this very same issue - guarding against the poor judgment of others - appears in many, many divorce cases, particularly when there are minor children and custody issues involved. These issues can have a profound impact on many people, regardless of social status, wealth, religion or any other demographic category.

Even the most amicable divorce matter can be psychologically and emotionally challenging at times.  More often than not, those challenges can become extreme when mixed with the financial pressures that divorcing couples also face.  Add to that the difficulty of navigating custody issues, and the parties’ differing perceptions of what is in the child’s best interest, and you have a powder keg waiting for ignition.  Eventually, more often than not, this issue explodes into conflict.

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Morality Clauses & Employment Agreements: What Employers Need to Know

Employers take risks every day with the people that the company hires - including top level managers and CEOs.  So do brands and sports teams when they hire spokespeople or athletes on multi-year, multi-million dollar contracts.  Anytime there are significant dollars committed to a single person over a long period of time, real risk exists.  

One of the most impactful traits of the people you hire is their moral character.  This is especially true when the person you hire is your spokesperson, or your chief executive, or otherwise is the face of your organization.  One of the most impactful tools you have to control your contractual relationships are called morality clauses.

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Key Documents to Protect Your Business: Restrictive Covenants

Often when I speak with a business owner about their business, their co-founders or their workforce, the topic of whether or not anyone has signed a restrictive covenant comes up.  Surprisingly, many businesses don’t have these agreements in place when they should, and trouble results.

Everything described in this post depends on the individual facts and circumstances of the matter – specifically the exact language of the document.  This is for general background knowledge only and if you have any questions regarding restrictive covenants in your specific situation, please email me or call me at (610) 393-6763.

What’s a restrictive covenant?  Good question.  A restrictive covenant is an agreement between the company and an individual employee that prevents the company from the individual from taking action that may injure the company when the individual’s employment is over.  Of these covenants can occur either in stand-alone document or as provisions in an employment contract.

Restrictive covenants are appropriate for companies in any industry that have sales people, key employees, co-founders, or anyone who has an intimate knowledge of the business (such as the ingredients in the “secret sauce”).  If it’s a restaurant, it could be key recipes.  For sales or service oriented companies, protectable information could be customer lists and contact information.  For tech companies, there could be software code that needs to be protected.  Restrictive covenants are also extremely important for professional services businesses such as medical practices and engineering firms.

There is also a statute in Pennsylvania that protects certain trade secrets that has some degree of overlap, but we’ll cover that in a separate post.

Generally, the term “restrictive covenant” encompasses three separate types of restrictions.

The first type of restriction is certainly the most widely known: the non-competition agreement.  In the non-competition covenant– commonly known as a “noncompete agreement” – the parties agree that the employee following the end his or her employment with a company will not take any action to compete with the company within the relevant market.  The actual geographic or market restrictions have to be specifically described in the contract itself.  The language used in the noncompetition covenant must be precise. This is generally not a task that I advise my clients to do by themselves without counsel.

If the language contained in the noncompetition covenant is  unclear, and the noncompetition covenant has to be enforced in court, know that trial court judges in Pennsylvania have tremendous discretion to modify the terms of the agreement according to the judges on equitable principles. In other words,  if you were involved in a dispute over a vaguely worded noncompetition agreement, ultimately the trial court judge can essentially rewrite the terms of the noncompetition covenant according to that judge’s sense of fairness, and perhaps not the same thing that the company intended.

The second type of restrictive covenant is usually a nonsolicitation covenant relating to the company’s customers or prospects.  What this provision in the contract does is prevents the departing employee from contacting we’re soliciting any of the companies customer base.  In some cases, the covenant also can protect the company’s prospects that have been contacted by the employee  in the recent past.  It should be noted that courts in Pennsylvania often interpret this as a one-way restriction: the former employee may not contact customers or prospects in violation of the agreement.  However, if those customers or prospects initiate the contact with the employee, then that often is not seen as a violation of the agreement.

The third and final type of restrictive covenant commonly used is a nonsolicitation covenant relating to the company’s employees.  This provision is designed to prevent a single departing employee from recruiting other company employees to also leave the company. This is designed to prevent the nightmare scenario where all of the company’s top sales people leave at the same time, potentially crippling the business.

In a future post, more detail to come on the enforceability of these agreements.  Stay tuned…