Think Twice About Your Severance Agreement

March 1st, 2013 by JBWK

moneyIn a probably-common but always-preventable situation, a former Hallmark executive was forced to return her entire $735,000 severance payment after she disclosed Hallmark’s confidential information under a consulting agreement several years after her non-compete expired.

When Hallmark eliminated Janet Murley’s job, VP of Marketing, it offered her a fairly generous severance package: $735,000; health insurance; outplacement services; and tax services. In exchange, Murley agreed to an 18-month non-compete and agreed not to disclose Hallmark’s confidential information.

Fast forward four years. After Murley’s non-compete expired, she got a consulting contract with a Hallmark competitor. Turns out she never actually got around to returning all of Hallmark’s confidential information like she promised; instead, it ended up on her consulting client’s computers. Hallmark, predictably unhappy, sued Murley.

The jury held her responsible and ordered her to repay her entire $735,000 severance payment. The federal Eighth Circuit Court of Appeals upheld the award, finding that it wasn’t “grossly excessive” or “unwarranted by the evidence.” The appeals court also rejected her argument that she was entitled to keep some of the severance because she fulfilled some terms of the agreement, like abiding by the non-compete provision.

A Virginia court would most likely reach the same result, especially if it was incorporated into the severance agreement. Virginia law allows parties to a contract to stipulate “liquidated damages,” or the amount a breaching party has to pay, as long as the exact amount of actual damages is difficult to determine and the agreed amount of liquidated damages is not “grossly in excess of the actual damages.”

So it’s very possible for a severance agreement to require the employee to return the entire payment if they breach. As long as the amount is not grossly excessive compared to the actual damages the breach causes, it will be enforceable.

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