Don’t Let Your Integration Clause Bite You: How Employers Sometimes Unintentionally Cancel Restrictive Covenants

3 min

This article was originally published in Venable's Trade Secrets & Transitions Blog.

Integration clauses are common boilerplate in employee separation agreements. These clauses, sometimes also referred to as "merger clauses," set forth the parties' understanding that their entire agreement is set forth within the four corners of the document they’ve signed. If properly drafted, an integration clause helps nip in the bud a future claim arising from something the employer allegedly said during negotiations of the separation agreement. Think promissory estoppel and claims to enforce oral promises, among other causes of action. This is why employers usually want integration clauses.

Sometimes, however, the integration clause does more harm than good. If the terminated employee is subject to a previously executed non-competition or non-solicitation agreement, the integration clause in the separation agreement may bar enforcement of the restrictive covenant. Many integration clauses, for example, expressly state that the separation agreement "supersedes" all prior agreements or other understandings between the parties. A previously executed non-competition/non-solicitation agreement is one of those "prior agreements or other understandings." If improperly drafted, the integration clause can have disastrous consequences for the employer seeking to prevent a former employee from working for a competitor or poaching clients.

One employer learned this lesson the hard way in Carboline Co. v. Lebeck. The parties signed a non-competition agreement at the beginning of the employment relationship. Years later, when the employment relationship ended, the parties executed a separation agreement containing the following relatively standard integration clause: "This Termination Agreement and Mutual Release constitutes the entire agreement between Employer and Mr. Lebeck and supersedes all prior understandings, whether oral or written, between Employer and Mr. Lebeck." 990 F. Supp. 762, 765 (E.D. Mo. 1997). When the employer later sought a preliminary injunction for enforcement of the non-competition agreement, the court said no can do. The “supersedes” language within the integration clause had wiped out the non-competition agreement. Ouch.

Fortunately, there are some easy ways to avoid this scenario. The first way is obvious – see if the employee is subject to a restrictive covenant before signing a separation agreement. If so, expressly carve it out from the integration clause.

The second solution is good practice for when there is trouble learning whether a prior restrictive covenant even exists (yes, sometimes a human resources department "misplaces" a file). Simply include language in the integration clause such as: "Nothing herein extinguishes any post-employment obligation of Employee, whether based in contract, statute, or common law." At worst, then, if no restrictive covenant exists, the separation agreement will merely include some inapplicable language. No harm done.

Finally, after adding the carve-out above, change the company’s separation agreement template so that all integration clauses are expressly limited to the subject matter of the separation agreement itself. This will help an employer avoid the same fate as the employer in Carboline. See, e.g., CreditSights, Inc. v. Caisullo, Case No. 05-CV-9345, 2007 WL 943352, at *7-9 (S.D.N.Y. Mar. 29, 2007). Although nothing is as good as expressly incorporating the restrictive covenant into the separation agreement, adding language such as "this agreement supersedes all agreements related to the subject matter hereof and does not affect the Employee’s post-employment obligations to the Company" is an easy fix that may convince a court the parties did not intend to tear up their restrictive covenant.