ANALYSIS: Employee Contracts - Firms must tread carefully to avoidcontract disputes - Non-solicitation and non-compete clauses arestandard, but recent cases are underscoring the need for such agreementsto be fair on all sides

The lawsuits that erupt from the fine print of PR employment contracts are like the embarrassing relative that everybody in the agency world shares: Nearly everyone has dealt with him, yet no one wants to acknowledge his existence out in the open.

The lawsuits that erupt from the fine print of PR employment contracts are like the embarrassing relative that everybody in the agency world shares: Nearly everyone has dealt with him, yet no one wants to acknowledge his existence out in the open.

"It's not something people like talking about, says a partner at a top-50 firm who has settled two employment-contract-related suits in recent years. "It often involves losing key people and clients. It doesn't show the firm in its best light."

Indeed, perhaps the only thing unusual about the current employee-contract suit between Morgen-Walke and its former MD Lisbeth Brod is that it is seeing the light of day.

The issues involved in the case of Brod v. Morgen-Walke seem to adhere to the basic pattern of such cases - as did the case between Katie Paine and Medialink, to whom she sold her research business and subsequently left to start again on her own. Last year, Cohn & Wolfe suffered through a similar episode when a group of dissidents left the Atlanta office to start Titan Network. That case was settled out of court after Titan and C&W apparently settled their differences.

The pattern in all of these cases has become standard. One or more executives (usually at the MD level) leave the firm where they have worked for years.

They then set up their own firm, and are accused of poaching clients and talent from their former employer. Such behavior almost always infringes on the labor agreement the former employee signed when he worked for his previous employer.

According to lawyers, it is now nearly standard in many service industries - including PR - to include what could be termed a non-solicitation or "anti-poach provision in employee agreements. This contract provision attempts to bar employees from poaching clients and other employees once the employee leaves the firm, usually for six months or a year. Experts say that on the whole, the courts have enforced this type of provision, although the precedents can vary in different jurisdictions.

"The provision essentially says that you can't service or solicit those clients from the firm - this is the easiest type of agreement to enforce, says attorney Geoffry Handler. "The one exception that the provision often makes is for when an employee introduces new clients to the firm. That exception makes the whole agreement seem more reasonable, and therefore more likely to be enforced."

Experts say that agencies are increasingly requiring nearly all employees with substantial client contact to sign such non-solicitation agreements regardless of where they sit in the firm's hierarchy.

"These agreements are very common in service-oriented industries, like PR says attorney Peter Herman. "It helps guard against employees striking out on their own and taking clients with them."

Non-compete agreements

A second - and seemingly more onerous - provision in some employee contracts is a non-compete agreement. Such provisions are designed to prohibit PR execs from competing with their previous firms for a given length of time after they leave. Attorneys say that these agreements have become very difficult to enforce, as courts are hesitant to uphold a provision that essentially bars someone from practicing their livelihood.

Non-compete agreements have become rare in PR, and are now mostly found within the context of an acquisition, or when tied to substantial severance packages. Such agreements are almost always limited to highest-ranking employees. Experts say that linking the agreement to an acquisition gives the agreement a better chance to withstand a legal challenge because the principals of the acquired firm are often compensated handsomely as part of the transaction.

For instance, one attorney used the example of a two-year non-compete agreement linked to the $5 million buyout of a PR firm as an agreement that would likely be enforced by the court. In contrast, attempting to enforce a five-year non-compete agreement not linked to a substantial payment would stand a good chance of being struck down by the court.

Despite the fact that the courts seem ready to enforce many non-solicitation agreements, firms rarely show an interest in taking these suits to trial.

Instead, attorneys say many cases are resolved out of court with the parties often agreeing to a monetary settlement. A common resolution has the parties agreeing to split a percentage of future fees from the poached clients over the duration of the non-solicitation agreement.

Indeed, when the agreements are crafted, they are as likely to be viewed as a starting point in a future negotiation than as a contract that will be brought into evidence in a court proceeding.

Lawyers say that as the bargaining begins, it is important for the plaintiff that the agreements are reasonable in both scope and duration. Provisions that may be viewed as curtailing a former employee's ability to pursue his livelihood, or agreements that are binding for an exceptionally long period of time (say, beyond two years) may be viewed as unreasonable.

If the agreement appears to be especially onerous, it could weaken the plaintiff's bargaining position because the former employee's lawyers would have a better chance of having the contract invalidated by the court.

Therefore, it makes sense to craft provisions that are moderate in scope.

"It's a balancing act, says Handler. "If it's reasonable, it will be enforced. Whether it's a reasonable agreement will be important when the parties sit down to work out a settlement. If the provision seems unreasonable, the defendant can threaten to challenge the validity of the agreement."

There is also the threat of litigation itself as a deterrent to poaching.

Legal bills can bury a start-up just as it begins to build a viable practice. Some employee agreements deter poaching by adding a so-called "loser-pays provision that forces the losing party to pay the winner's legal bills. Nevertheless, despite the obvious incentives to settle, sometimes a suit can become very personal.

"Each case tends to have its own personality, says Herman. "Often, the cases can get very personal. The employers are often very mad at the former employee, and vice versa."

To poach or not to poach

There are many stories about the intrigue involved in employees leaving a firm to begin a start-up from scratch with some poached clients.

One story details a start-up founded by a group of dissident employees of a major shop. The employees, who had poached some accounts from their previous employer, developed a grid system during their first months of operation to make sure none of them were servicing the same accounts they had worked on at the previous firm. It was designed to be a subtle shortcut around the non-solicitation agreement. It's unclear whether the tactic would have stood up in court, as the previous employer never brought a suit for non-solicitation.

Yet there are those in PR who feel strongly that poaching is unethical and detrimental to the industry. Elliot Sloane, who left a top post at industry giant Edelman to found his own firm, Sloane & Company, takes pride in the fact that he honored the terms of his contract when he decided to go out on his own. Sloane, among the industry's recent entrepreneurial success stories, says he was never tempted to poach clients from his previous employer, and has strong words for those who do.

"I think our industry is rife with people who break their word, says Sloane. "I felt very strongly that the agreement I had with Edelman was one I was going to keep. A six-month non-solicitation is not onerous, and I think ethics stand for something."

Have you registered with us yet?

Register now to enjoy more articles and free email bulletins

Already registered?
Sign in