How to Structure Effective and Enforceable Multinational Restrictive

How to Structure Effective and Enforceable Multinational Restrictive Covenants May 21, 2014

Presenters DLA Piper: Ranked in Band 1 by Chambers Global – 2010 to 2014 for Global Employment Jamie Konn Tim Brennan Associate, Atlanta Employment Group DLA Piper LLP (US) Associate, Chicago Employment Group DLA Piper LLP (US) Multinational Restrictive Covenants Presentation May 21, 2014 2

Selecting the Right Restrictive Covenant(s)

What Are You Protecting? Protection of legitimate business interests: § Trade secrets and other confidential information § Company goodwill § Clients / customers connections and relationships § Specialized training / unique talent § Stability of the workforce DLA Piper LLP (US) Multinational Restrictive Covenants Presentation May 21, 2014 4

What Are Your Options? Post-Employment Restrictions: § Noncompete § Nonsolicit of Customers / No Dealing with Customers § Nonsolicit of Employees / No Hire of Employees § Garden Leave § Confidentiality / Nondisclosure DLA Piper LLP (US) Multinational Restrictive Covenants Presentation May 21, 2014 5

Which Restriction(s) to Use? General Enforceability Requirements: § Post-employment restraint must be reasonable in scope, duration, and geographic reach § Post-employment restraint must serve a legitimate purpose Identify what you are trying to protect with the employee at issue, pick the least restrictive type of provision that will provide that protection, and draft narrowly § E. g. , to protect interference with customer relationships by sales employee, a one-year nonsolicit of customers solicited in past year. § E. g. , to protect use or disclosure of trade secrets by an engineer, an defined nondisclosure paired with a limited noncompete. DLA Piper LLP (US) Multinational Restrictive Covenants Presentation May 21, 2014 6

Practical Tip – Drafting 1. If employee operates in one area, circumscribe the covenant to that area. 2. For mid-level employees, qualify the restriction: “you may not work in a substantially similar position, ” or “in a role where you are likely to use Confidential Information. ” 3. Specifically define the “competitive business. ” Do not broadly prohibit competition “in any business the Company is engaged in. ” DLA Piper LLP (US) Multinational Restrictive Covenants Presentation May 21, 2014 7

Enforceability Across the Globe

The Globe at a Glance

US – General Enforceability of Noncompetes DLA Piper LLP (US) Multinational Restrictive Covenants Presentation May 21, 2014 10

North America: Generally enforceable if there is any legitimate purpose. Exception: California. Canada United States Limitation on enforcement or additional requirements, e. g. consideration beyond mere employment, limitations on blue penciling, or requirement that major business interests are in need of protection Simply unenforceable Mexico DLA Piper LLP (US) Multinational Restrictive Covenants Presentation May 21, 2014 11

North America: Temporal Limits Generally enforceable up to 2 years Canada Generally enforceable up to 1 year United States Simply unenforceable. Mexico DLA Piper LLP (US) Multinational Restrictive Covenants Presentation May 21, 2014 12

North America: Consideration Requirements New employment is sufficient consideration in majority of jurisdiction, and continued employment may be sufficient Canada Only new employment may be sufficient consideration; continued employment is insufficient. United States Simply unenforceable Mexico DLA Piper LLP (US) Multinational Restrictive Covenants Presentation May 21, 2014 13

Practical Tip – Consideration 1. Use salary increase or bonus as consideration; or 2. Make non-compete subject to company’s discretion DLA Piper LLP (US) Multinational Restrictive Covenants Presentation May 21, 2014 14

North America: Blue Penciling Blue penciling generally accepted, with exception Canada United States Blue penciling permitted sparingly, for “trivial” parts of covenant only Blue penciling not permitted Mexico DLA Piper LLP (US) Multinational Restrictive Covenants Presentation May 21, 2014 15

South America: Generally Columbia Brazil Generally enforceable if there is any legitimate purpose. Peru Limitation on enforcement or additional requirements, e. g. receipt of confidential information or consideration beyond mere employment, limitations on blue penciling Chile Argentina DLA Piper LLP (US) Multinational Restrictive Covenants Presentation Simply unenforceable May 21, 2014 16

South America: Temporal Limits Venezuela Columbia Generally enforceable up to 2 years Brazil Peru Generally enforceable up to 1 year Chile Argentina DLA Piper LLP (US) Multinational Restrictive Covenants Presentation Simply unenforceable. May 21, 2014 17

South America: Consideration Requirements Columbia Brazil New employment is sufficient consideration in majority of jurisdiction, and continued employment may be sufficient as well Consideration required Chile Argentina DLA Piper LLP (US) Multinational Restrictive Covenants Presentation Simply unenforceable May 21, 2014 18

South America: Blue Penciling Columbia Blue penciling generally accepted, with exception Brazil Court cannot blue pencil, but it can sever unenforceable terms. Chile Blue penciling not permitted Argentina DLA Piper LLP (US) Multinational Restrictive Covenants Presentation May 21, 2014 19

Europe Noncompete Enforceability Finland Netherlands Sweden Norway Red if employer terminated due to redundancy Ireland Denmark UK Belgium Germany Poland Switzerland France Portugal Austria Romania Hungary Italy Spain Czech Rep. Croatia Greece Yellow for employer termination Generally enforceable if there is a legitimate purpose (subject to reasonableness restrictions) Compensation required for enforcement of the non-compete Non-compete not enforceable or requires compensation if employer terminates employment or terminates without cause DLA Piper LLP (US) Multinational Restrictive Covenants Presentation May 21, 2014 20

Europe Noncompete Compensation DLA Piper LLP (US) Multinational Restrictive Covenants Presentation May 21, 2014 21

Europe Noncompete Temporal Limit DLA Piper LLP (US) Multinational Restrictive Covenants Presentation May 21, 2014 22

Asia Noncompete Enforceability Hong Kong Singapore DLA Piper LLP (US) Multinational Restrictive Covenants Presentation May 21, 2014 23

Asia Noncompete Compensation DLA Piper LLP (US) Multinational Restrictive Covenants Presentation May 21, 2014 24

Asia – Blue Penciling for Post Termination Non-Competes Russia Turkey North Korea Israel Japan South Korea Saudi Arabia China U. A. E. Taiwan Hong Kong India Thailand Vietnam Philippines Malaysia Singapore Indonesia Generally allowed but with restrictions Unclear Severability allowed, but no blue-penciling Generally unenforceable 25

Australia Noncompete Enforceability Australia New Zealand Generally unenforceable Enforceable, but with limitations Generally enforceable if there is a legitimate purpose (subject to reasonableness restrictions) DLA Piper LLP (US) Multinational Restrictive Covenants Presentation May 21, 2014 26

Australia Noncompete Temporal Limit DLA Piper LLP (US) Multinational Restrictive Covenants Presentation May 21, 2014 27

Australia Nonsolicit Enforceability DLA Piper LLP (US) Multinational Restrictive Covenants Presentation May 21, 2014 28

International Enforcement

Enforcement – Venue and Jurisdiction Choosing where to file is a critical decision Identifying the Right Forum § Domicile of EU employee § Employment Tribunals Alternatives to Court § Mandatory arbitration rare outside of US § Statutory alternatives DLA Piper LLP (US) Multinational Restrictive Covenants Presentation May 21, 2014 30

US – Conflict/Choice of Law DLA Piper LLP (US) Multinational Restrictive Covenants Presentation May 21, 2014 31

International – Conflict/Choice of Law Parties may choose governing law, but often rejected § European Union regulations § Public policy considerations When drafting, consider variations in potentially applicable countries’ law governing post-employment restrictions as well as jurisdictional, venue, and related procedural issues that can make enforcement of such covenants particularly challenging

Enforcement – Injunctive Relief Temporary restraining orders and preliminary injunctive relief § Generally available in US (start and end of many cases) § Impossible in some countries because not permitted under applicable law (e. g. , Spain) or not practical because civil procedure mitigates effectiveness § Similar process in foreign jurisdictions § Follow irreparable harm standard § Often must also show probability of prevailing on the merits DLA Piper LLP (US) Multinational Restrictive Covenants Presentation May 21, 2014 33

Enforcement – Other Damages/Relief § Monetary damages available in United States § Unusual remedy in many countries § Lost profits § Declaratory relief § Caution: counterclaims! DLA Piper LLP (US) Multinational Restrictive Covenants Presentation May 21, 2014 34

Practical Tip – International Service of Process § Federal Rules of Civil Procedure § Hague Service Convention § Letters Rogatory DLA Piper LLP (US) Multinational Restrictive Covenants Presentation May 21, 2014 35

Enforcement – Foreign Judgments May be enforceable, but case-by-case analysis Generally unenforceable DLA Piper LLP (US) Multinational Restrictive Covenants Presentation May 21, 2014 36

Practical Alternatives to Litigation

Embedding Restrictive Covenants Into Deferred Compensation Plans Stock Option Plan Severance Plan ERISA Plan “I agree that if I violate the restrictive covenant provisions of this Agreement, I forfeit my [Options; Severance; Deferred Compensation]” DLA Piper LLP (US) Multinational Restrictive Covenants Presentation May 21, 2014 38

Practical Tip – Forfeiture Why Use Golden Handcuffs? Company has little presence in area Unfavorable foreign judicial systems Hostile foreign courts Overseas employees are often have strong deferred comp anyway Possession is 9/10 of the law Lastly: economics… DLA Piper LLP (US) Multinational Restrictive Covenants Presentation May 21, 2014 39

The Economics Litigating Vs. Savings = Benefit of (Possible) Successful Enforcement Using Forfeiture Savings = Deferred Compensation Forfeiture MINUS Cost of Litigation DLA Piper LLP (US) Multinational Restrictive Covenants Presentation May 21, 2014 40

Caveat to Forfeiture § Many jurisdictions provide mandatory statutory severance. This cannot be ransomed for covenant compliance. § Many also have statutory tax-qualified pension rules that limit forfeiture (like ERISA). DLA Piper LLP (US) Multinational Restrictive Covenants Presentation May 21, 2014 41

Roadmap to Litigation Alternatives Forfeiture under International law Forfeiture under ERISA DLA Piper LLP (US) Multinational Restrictive Covenants Presentation May 21, 2014 42

Roadmap to Litigation Alternatives Forfeiture under International law Forfeiture under ERISA DLA Piper LLP (US) Multinational Restrictive Covenants Presentation May 21, 2014 43

If ERISA Does Not Apply Different Rules Regarding Forfeiture of Benefits

North America: Forfeiture of Equity or Severance Forfeiture of non-mandatory benefits permitted; claw-backs permitted; court may consider the reason for termination Canada United States Forfeiture of non-mandatory benefits may be permitted, but reason for termination is significant factor and/or the standard is similar to that for injunctive relief. Mexico DLA Piper LLP (US) Multinational Restrictive Covenants Presentation May 21, 2014 45

South America: Forfeiture of Equity or Severance Venezuela Columbia Brazil Chile Forfeiture of non-mandatory benefits permitted; claw-backs permitted; court may consider the reason for termination Forfeiture of non-mandatory benefits may be permitted, but reason for termination is significant factor and/or the standard is similar to that for injunctive relief. Argentina Forfeiture unavailable or inapplicable. DLA Piper LLP (US) Multinational Restrictive Covenants Presentation May 21, 2014 46

Europe: Forfeiture of Equity or Severance Forfeiture of non-mandatory benefits permitted; claw-backs permitted; court may consider the reason for termination U. K. Germany France Spain Italy DLA Piper LLP (US) Multinational Restrictive Covenants Presentation Forfeiture of non-mandatory benefits may be permitted, but reason for termination is significant factor and/or the standard is similar to that for injunctive relief. Forfeiture unavailable or inapplicable. May 21, 2014 47

Asia: Forfeiture of Equity or Severance Forfeiture of non-mandatory benefits permitted; claw-backs permitted; court may consider the reason for termination Russia Japan Forfeiture of non-mandatory benefits may be permitted, subject to limitations, such as reason for termination or the benefits involved. China Forfeiture unavailable or inapplicable. Taiwan India Thailand Vietnam Philippines Malaysia Indonesia DLA Piper LLP (US) Multinational Restrictive Covenants Presentation May 21, 2014 48

Australia: Forfeiture of Equity or Severance Australia Forfeiture of non-mandatory benefits permitted; claw-backs permitted; court may consider the reason for termination DLA Piper LLP (US) Multinational Restrictive Covenants Presentation May 21, 2014 49

Practical Tip – Forfeiture 1. Make compensation is exclusively in exchange for restrictive covenant. Tullett Prebon plc v. BGC Brokers LP & others [2010] EWHC 484 (QB) (U. K. ) 2. Beware statutory severance 3. Harder to enforce if terminated without cause 4. Forfeiture vs. clawbacks DLA Piper LLP (US) Multinational Restrictive Covenants Presentation May 21, 2014 50

Roadmap to Litigation Alternatives Forfeiture under international law Forfeiture under ERISA DLA Piper LLP (US) Multinational Restrictive May 21, 2014 51

Arbitrary and Capricious Standard Ensure that your “benefit plan gives the administrator or fiduciary discretionary authority to determine eligibility for benefits or to construe the terms of the plan. ” Firestone Tire & Rubber v. Bruch, 489 U. S. 101, 115 (1989) This generally ensures the forfeiture of employee’s deferred compensation is only overruled if “arbitrary and capricious. ” DLA Piper LLP (US) Multinational Restrictive Covenants Presentation May 21, 2014 52

ERISA Extraterritoriality ERISA?

ERISA Extraterritoriality ERISA applies if: 1. Plan maintained in U. S. ; OR 2. Plan is primarily for U. S. citizens. 29 U. S. C. § 1003(b)(4). Lefkowitz v. Arcadia Trading Co. Ltd. Ben. Pension Plan, 996 F. 2 d 600, 602 (2 d Cir. , 1993) (ERISA applied to plan covering a U. S. citizen, even though plan was established by Hong Kong entity).

Pros & Cons: Embedding The Covenant Into An ERISA Preempts State Law Benefits to ERISA Plan: 1. Arbitrary and capricious standard 2. Preemption of state law Limitations On ERISA Plan: 1. To qualify as an ERISA plan, the plan must systematically defer compensation until “termination” or “retirement. ” It cannot be tied to an incentive plan that pays out money or equity during the term of employment. 2. Participation is limited to highly compensated employees—rule of thumb is top 15%. Some key people whom you wish to bind may not fit into this category. 3. The plan must be unfunded. 4. May not independently provide for injunction

Practical Tip – Plan Language § Even if no ERISA, give Company or administrator discretion § “Arbitrary and capricious” standard may still apply even outside ERISA. See, e. g. Weir v. Anaconda Co. 773 F. 2 d 1073, 1079 (10 th Cir. 1985); Noonan v. Staples, Inc. , 556 F. 3 d 20, 34 (1 st Cir. 2009). § Be careful providing for damages. DLA Piper LLP (US) Multinational Restrictive Covenants Presentation May 21, 2014 56

Questions DLA Piper LLP (US) Multinational Restrictive Covenants Presentation May 21, 2014 57