Scope Trials: Draft Your Severance Agreements So They Won't Evolve On You

By Michael T. Pearson
April 2007

Separation agreements which contain a release of claims are an increasingly popular way for employers to buy some peace of mind against future liability risks. However, employers should not take a one-size-fits-all approach to these helpful agreements. If the scope of the agreement is too broad, it may jeopardize pre-existing contractual obligations that you want preserved. If it is too narrow, it may leave you vulnerable to claims you meant to preclude. Two recent court decisions teach why to pay attention to the scope of the severance and release agreements you draft.

In Kellogg Co. v. Sabhlok, Kellogg eliminated Sabhlok's job in a corporate restructuring. Sabhlok signed a release of claims to qualify for Kellogg's fortified severance benefits. While Sabhlok worked for a year on various special projects, Kellogg officials allegedly gave him repeated assurances that they would find him a permanent position, but no jobs were found. Kellogg and Sabhlok then signed an amendment to the severance agreement which gave Sabhlok six additional weeks of severance and a bonus in exchange for a broad non-compete clause, but kept all other terms of the original severance agreement in full force and effect.

A little over a year later, though, Sabhlok's lawyer started threatening to sue for breach of contract and age discrimination. Kellogg struck preemptively and asked the court for a declaratory judgment enforcing the terms of the release. Kellogg had little trouble enforcing it as to Sabhlok's termination claim. In addition, his claim that Kellogg breached promises to find him a permanent position failed because the severance agreement expressly stated Kellogg was under no obligation to offer employment to Sabhlok if he applied for a job. However, Kellogg found it a bit harder to digest Sabhlok's claim that he was not rehired because of his age.

Courts may have little patience for claims brought by former employees who signed knowing and voluntary waivers of their rights to bring a claim. On the other hand, courts will not enforce a release that purports to extinguish claims that may arise in the future, and almost by definition, a failure to rehire claim arises after the employee signs the separation agreement by which he agrees to his termination. The question is whether the "failure to rehire" is a new and discrete claim or merely an attempt to resurrect claims that the employee was paid to release.

For its part, the court in the Kellogg Co. case refused to draw a hard and fast rule. "Under some facts a general release will bar a subsequent failure to rehire claim and under other facts it will not. It depends on how closely related the rehire is to the original termination in terms of time and subject matter." Managers who are responsible for managing a business' risk are rarely satisfied when courts say, "It depends."

Kellogg was saved in this case, not by anything it did, but rather by the way that Sabhlok drafted his proposed claims. Sabhlok asserted that his age was a factor in the decision to terminate him from his position "and not transfer [him] to any of the other positions given to younger, less experienced and lower paid Kellogg employees." His complaint read like a challenge to his termination, rather than a discrete claim that Kellogg failed to rehire him because of his age. But a more artfully crafted complaint alleging a stronger case of discrimination might have survived under the terms of Sabhlok's agreement.

Things did not work out so well for Avery Dennison. Michael Naimo was a regional sales managers for Avery, working under the terms of an employment agreement with non-compete and nondisclosure provisions. Soon after Naimo's employment terminated, he began competing and meeting with customers he had called on as an Avery employee. When Avery went to court to enforce its non-compete, however, it ran into a problem.

Prior to Naimo's departure, Avery had him sign a separation agreement and general release "in full and final settlement of all matters relating to or arising out of Employee's employment and separation from employment." (emphasis added). The agreement had a "zipper clause" to preclude claims of unwritten side agreements.

This Agreement is the only and complete agreement between Employee and Avery on or in any way relating to the subject matter hereof, and supersedes all previous agreements, including, without limitation, the Employment Agreement ...

The agreement made no mention, however, of any obligation to refrain from competing against Avery.

Naimo argued that the separation agreement superseded the non-compete clause. Avery maintained that the scope of the separation agreement should be limited to the release of claims, but the court found this argument "untenable." "The Separation Agreement, which is a fully-integrated contract, unambiguously states that the Employment Agreement is superseded by the Separation Agreement without limitation except for Avery's obligation to make severance payments to Naimo." In its pursuit of an iron-clad release, Avery had lost sight of its interest in continuing Naimo's competitive restrictions.

The scope of Avery's separation agreement was too broad and evolved into an unsurpassable hurdle for the enforcement of its non-compete agreement. The Kellogg case, on the other hand, reminds us that the scope of separation agreements can also be too narrow and permit the evolution of a failure to re-hire claim. The next time you ask a departing employee to sign a release, make sure the scope of your separation agreement is just right.

Take care to account for all of the departing employee's existing agreements, including non-compete, non-solicitation and non-disclosure obligations, the return of company property, and for a manager or executive, perhaps, cooperation in future litigation related to his acts and omissions. In addition, head-off the failure to re-hire claim by having the employee acknowledge that his employment is ending, irrevocably, and promise not to apply for a job with the company in the future. If this is also acknowledged as a material inducement to the company to enter into the separation agreement, the employee cannot have his cake and eat it, too. If nothing else, he will at least step toward a failure to re-hire claim.

Michael Pearson focuses on employment and commercial litigation at the law firm of McLane, Graf, Raulerson & Middleton, P.A. He is licensed to practice in Maine and Ohio. The McLane Law Firm has offices in Manchester, Concord and Portsmouth.