Employment Law Attorneys

"Claw Back" Provisions in Executive Contracts1 min read

Companies often negotiate “claw back” provisions in executive employment agreements. A claw back is a device that penalizes the executive for violating any provision of employment, severance or other compensation agreements. These provisions are also known as “bad boy” and “forfeiture” provisions.
Records filed with the Security & Exchange Commission reveal the following companies negotiate claw back provisions in executive contracts: May Department Stores; Sears; Sprint; Synovus Financial; Anadarko Petroleum; Biogen; Great Lakes Chemical; International Flavors and Fragrances; MedImmune; Pfizer; Quintiles; Tyco; Kmart and IBM.
The following events can trigger claw back provisions: 1) material breach of employment agreement; 2) violation of a restrictive covenant not to compete; 3) violation of company trade secrets; 4) engaging in tortious interference with the former company after termination; 5) breach of a confidentiality agreement. The Courts have resolved claw back disputes mainly in the area non-compete violations. See Lucente v. International Bus. Mach. Corp., 310 F.3d 243 (2d Cir.2002) and Bajorek v. International Bus. Mach. Corp., 191 F.3d 1033 (9th Cir.1999).
Claw back provisions seek to recoup compensation, stock option awards, bonuses, severance and other deferred compensation awards. So long as the provision is reasonably set forth in the agreement, it will be upheld later during litigation. Executives negotiating such agreements should be very cautious when dealing with claw back provisions, and attempt to frame the contract language in a neutral but favorable manner.
Mark P. Carey
Carey & Associates P.C.
71 Old Post Road, Suite One
Southport, CT 06890
(203) 255-4150 tel.
(203) 255-0380 fax.