The Executive Exit Agreement Audit

Question 76: The Executive Exit Agreement Audit

Your role

You represent Ava Soren, a departing executive negotiating severance with Meridian Forge. Review and correct the company's draft agreement and the predecessor lawyer's advice. Identify the redline priorities that protect Ava's earned compensation, future work, customer relationships, confidentiality obligations, and severance.

Governing law

Assume the following covenant and compensation rules apply:

1. An employee noncompetition covenant is enforceable only to the extent it is no longer than 12 months and is reasonably limited to the products, services, territory, and role in which the employee had material responsibility. A restriction covering unrelated business lines or all work for a competitor is overbroad.

2. A court may sever a distinct unlawful clause but may not rewrite a covenant's duration, territory, business scope, and prohibited role to create a reasonable restraint the parties did not draft.

3. A customer nonsolicitation covenant may last no more than 12 months and may cover only customers or active prospects with whom the employee had material contact or about whom the employee received material confidential information during the final year.

4. An employee nonsolicitation covenant may prohibit targeted recruitment for 12 months of employees the executive directly supervised or worked with materially. It may not prohibit general advertising, unsolicited applications, or hiring people unknown to the executive.

5. Trade secrets may be protected while they remain trade secrets. Other confidential business information may be restricted for two years. Confidentiality does not cover public information, general skill and experience, independently developed information, or information lawfully received from others.

6. An invention assignment may cover work created during employment using company time, systems, confidential information, or business opportunities. It may not claim inventions created after employment without company resources merely because they relate broadly to the industry.

7. Earned salary, vested bonus, and vested equity may not be forfeited for post-employment competition unless a separate lawful plan term expressly makes the compensation unvested. Severance may be conditioned on a release and prospective covenants.

8. A severance agreement may provide proportionate remedies for a material covenant breach. It may not permit the company, in its sole discretion and without notice, to declare any allegation a breach and claw back earned compensation.

9. A release becomes effective after the stated seven-day revocation period. The company may condition severance payments on effectiveness but may not delay already earned compensation.

Facts

Ava was Meridian Forge's president of the Industrial Sensors division. Meridian also operates unrelated medical-device and consumer-electronics divisions. Ava worked primarily in States Alder and Birch and managed industrial-sensor sales in those states. She had no responsibility for the other divisions or for sales outside Alder and Birch.

Ava's compensation includes:

• $360,000 annual salary.
• A $140,000 annual bonus that vested under the bonus plan on December 31 and is payable February 15.
• Vested equity not subject to any post-employment forfeiture term.

Meridian offers 12 months of salary as severance in exchange for a release. Its draft also provides:

• A 24-month worldwide bar on working in any capacity for any business that competes with any Meridian division.
• A 24-month bar on soliciting or accepting business from any Meridian customer or prospect.
• A 24-month prohibition on soliciting, hiring, or employing any current or former Meridian worker.
• Permanent confidentiality for all information learned during employment, including skills and experience.
• Assignment to Meridian of every invention Ava conceives within one year after departure if it “relates to Meridian's current or anticipated business.”
• Forfeiture of the $140,000 vested bonus and all severance if Meridian alleges any covenant breach.
• Meridian's sole discretion to stop payments and demand repayment, with no notice, cure period, materiality threshold, or adjudication.
• A release effective immediately on signing, with no revocation period.

A predecessor lawyer advised Ava:

“Because you are highly paid, all restraints are enforceable. A court will blue-pencil anything excessive. Take the severance and rely on the judge to narrow it later.”

Ava plans to join a company that competes only in industrial sensors, in a product role covering Alder and Birch. She is willing to protect trade secrets and avoid soliciting customers she personally served, but will not risk the vested bonus or accept a bar on working.

Assignment

Review and correct:

• The predecessor lawyer's advice.
• The noncompetition covenant's duration, territory, business line, and prohibited role.
• Customer and employee nonsolicitation.
• Confidentiality duration and exclusions.
• The post-employment invention assignment.
• Treatment of the vested bonus, vested equity, and severance.
• Breach, notice, cure, materiality, adjudication, repayment, and proportional remedies.
• Release effectiveness and revocation.
• A prioritized redline package and concrete negotiation position for Ava.

Q76 key (Executive Exit Agreement Audit)

1. The predecessor advice is wrong. High compensation does not validate an otherwise overbroad covenant, and the court may sever but may not rewrite all core dimensions. Ava should not sign in reliance on future rescue. Missed: she accepts a work ban the court may simply refuse to reconstruct while severance is withheld.
2. Delete the noncompete if possible. Fallback must be no more than 12 months and limited to industrial sensors, Alder and Birch, and a role materially similar to Ava's responsibility, with an express right to work for a diversified company outside the restricted business. The 24-month worldwide any-capacity, any-division bar is unenforceable. Missed: unrelated industries, territories, and jobs are surrendered.
3. Limit customer nonsolicitation to 12 months and to customers or active prospects Ava materially served or learned material confidential information about in the final year; delete the ban on accepting unsolicited business. Limit employee nonsolicitation to 12 months, targeted recruitment of people she supervised or materially worked with, with general-advertising and unsolicited-applicant exceptions. Missed: ordinary employment and passive customer choice become breach.
4. Protect trade secrets while they remain trade secrets, limit other confidential information to two years, and add public-information, general-skill, independent-development, and lawful-source exclusions. Missed: Ava's experience is assigned to Meridian permanently.
5. Delete the one-year post-employment invention assignment. Any surviving assignment should cover only employment-period work using Meridian resources, confidential information, or opportunities. Missed: Ava's future independent product work is captured without a lawful nexus.
6. The $140,000 bonus and vested equity are earned and must be paid regardless of release or future competition. Severance may begin after the release becomes effective but cannot be used to claw back earned compensation. Missed: Ava trades vested value for disputed restraints.
7. Breach remedies should require written notice, a reasonable cure where curable, material breach, and final adjudication or agreed neutral determination before prospective severance suspension; repayment should be limited to severance paid during a proven material breach, not bonus or equity. Delete sole discretion and allegation-based forfeiture. Missed: Meridian can stop all pay on an accusation.
8. Add the seven-day revocation period and make only severance effectiveness contingent on its expiry. Priorities are earned compensation first, work freedom second, narrowed solicitation and confidentiality third, and procedural protection for severance fourth. Missed: Ava signs a release immediately without the supplied effectiveness rule or negotiates minor wording before existential terms.