In jurisdictions where non-competes are disallowed or infeasible, how do you keep former employees from undermining the company’s goals? According to attorney Sean Greaney, you might try a so-called “garden leave agreement.”
Sean joins us to tear down an Independent Services Agreement that appears to be a send-off for a senior employee. As standard as this type of agreement feels, many of the common clauses and language just don’t fit the context.
This contract reveals issues with:
- Confidentiality: Should exceptions be part of the definition or a separate sentence?
- Work product: Is there a way to sole licensing rights if IP can’t be assigned?
- Limit of liability: Is it worth negotiating in a garden leave agreement?
- Termination: Should you include termination for convenience when it risks a mutuality fight?
- And more.
THE GUEST: Sean Greaney has been practicing law for 15+ years and is currently the General Counsel of HyperDraft, a contract drafting solution. Before HyperDraft, he was a partner at Goodwin Procter LLP and also Corporate Counsel at Beats by Dr. Dre. He has practiced in BigLaw, a boutique firm, in-house, and even a two-person side hustle shop. His primary focus throughout has been startup/venture transactional work, M&A, and outside general counsel.
THE HOST: Mike Whelan is the author of Lawyer Forward: Finding Your Place in the Future of Law and host of the Lawyer Forward community. Learn more about his work for attorneys at www.lawyerforward.com.
If you are interested in being a guest on Contract Teardown, please email us at firstname.lastname@example.org.
Watch, listen, or read the transcript below for Sean’s helpful insights.
Mike Whelan In this episode, Hyper Drafts’ Sean Greaney talks about an independent contractor agreement with a twist. So let’s tear it down. Sean Greaney. Welcome to the Contract Tear Down show. How are you today, sir?
Sean Greaney Doing well, my good man. Thanks for having me, Mike.
Mike Whelan Absolutely. We are nerding out a bit about an independent contractor agreement. I want to share this for the folks at home. This is between Big 5 Corp and Rando Dude. Before we dig into this Sean, what is this document? When are we going to see this kind of thing?
Sean Greaney So you’re going to see this: this is an independent services agreement. It’s an agreement that most folks enter into on a daily basis. Basically, Big Five Corp, which is a sporting company, is paying rando dude to provide some services for him.
Mike Whelan Cool. And what about you? What brings you to documents like this?
Sean Greaney So, you know, I’m general counsel of Hyper Draft currently but I practiced law for 15 years: big law, boutique, solo practitioner. I’ve hit it from every single angle possible. And these are the type of agreements that you deal with on a day-to-day basis. So you come across it all the time. We’re going to be focused on some of the boilerplate provisions in the back. So things you see in every document that you maybe don’t think about from the angles we’re going to be talking about that.
Mike Whelan Yeah, unlike most documents we talk about on here, this is the kind of contract I’ve actually signed before. So I was supposed to read it first. Not saying I did that, but I’ve definitely signed one. So let’s move down to Section 8; confidentiality. These relationships… Before we dig into it, I just want to ask you about this kind of document, this kind of relationship. Tell me about what you’re seeing in this document in terms of who the parties are and what they’re after. And then we’ll start digging into the actual rules and principles in it.
Sean Greaney Yeah. Yeah. So if I had to guess right. Rando Dude was a senior vice president of buying for Big 5 Corp. My guess is this is what we would call a garden leave agreement is. Rando guy was getting up there in age maybe looking to retire or maybe just want to grind as hard as a younger person. And Big 5 comes, he says, Yo man, you’re a senior vice president of buying, you know, where all the bodies are buried. Probably put a couple of bodies in the ground yourself. We’re cool with you leaving, but we don’t want you to work for somebody else. And in the United States, we like people working; we like people making money. And so a lot of states like in California, you can’t have non-compete post-employment, right? So I can’t join a law firm in California and then say, yo, if you work for us for one day, you promise to never work for a law firm for two years after you quit here. We know that’s unenforceable. And even in like, you know, more employer-friendly states, it’s hard to do that. Right. And so what you do is you put them on garden leave. It’s like, listen, you don’t work here anymore. I’m just going to pay you to stay at home and tend to your garden. If I’m paying you, then I can say you can’t work for a competitor. So my guess is that’s what this is. So there’s services and all that stuff. He’s probably never going to show up a day in his life. He’s just going to collect paychecks for two years until whatever bodies he knew are no longer relevant or whatever information has kind of stale. That’s my guess to what we’re doing.
Mike Whelan Just you’ve just identified my whole life, I’ve been trying to find the perfect job and you finally.
Sean Greaney Garden leave, bro.
Mike Whelan Career day advisors back in high school would just be salivating at this conversation. So speaking of bodies being buried, let’s talk about Section 8, the confidentiality section I’m noticing in this, it’s fairly long for confidentiality. So speaking to, you know, the kind of leave you’re talking about, tell me about what they’re doing in Section 8 with confidentiality.
Sean Greaney Yeah. So this confidentiality section is a little meaty and it’s your snake. So people watching this, I’m like, Sean, might see confidentiality provisions all the time. This looks pretty standard in there, right? Big 5 is going to give Rando Dude some sensitive information. They’re saying, hey, Rando guy, don’t tell nobody about it. And you can only use it for me. Right. And then they’ve got some exceptions like, hey, but we agree these things aren’t confidential information if it’s already out in the public, if it gets its way into the public through no fault of your own, that’s good. Right. But what I want to focus people on and there’s a mistake that a lot of lawyers make in their forms, and it’s about halfway down the section. There’s a sentence that starts and says, Additionally, contractor may disclose confidential information to the extent required by law. And you’re thinking yourself, hotshot, I don’t know what’s so special about that. That’s pretty reasonable, right? I can’t be in a situation where I’ve agreed not to disclose it. So on the one hand, I promise Big 5, I don’t tell anybody about it. But then Uncle Sam comes knocking and says, Hey, Sean, you got this information you got to share with me. I can’t choose between giving the finger at Uncle Sam or being in breach of this contract, right? So like, this provision is very standard. It’s in every document, but it’s where they put it, which is key. They have it as a separate sentence. What you see in a lot of forms is they’ll include this provision as an exception to the definition of confidential information totally, which means that confidential information does not include any information on required disclosed by law, which means if I suppose at one time by law, it’s no longer confidential information. So even though I only had to disclose that one time. It’s now free for me to use. I can blast it on the Internet. I can throw it up on the ground for everyone to use. And so you never want to include it in that litany of things that are exceptions to confidential information. It is a one-time exception to your obligation to not disclose it, and only for that one time once you give it to the IRS, whoever is asking for it, it goes back to being confidential information and you can’t use it. So a lot of forms out there. So I want everyone to hit pause on this right now. Go run and check your form NDAs; go run and check your form contractor agreements. Make sure that you’ve got this as a separate sentence and not part of that litany that just this isn’t confidential information at all.
Mike Whelan Because that’s really smart I’m thinking in terms not to get to current eventsy, but I’m thinking of certain individuals who used to be in positions of power who are now out of those positions of power. And what they knew and when and how they handled information is being looked at by certain other powers. And like thinking of the employees and what they signed and what, you know, whether there’s totally going to be a back door to fight. That’s super interesting. Well, let’s before I get myself into trouble with the YouTube commenters, let’s go down to ten to the work product. This sounds like work for hire. This is pretty typical you know, most of my contracts include that what I make is owned by whatever company hired LawyerForward to create media. What do you think about section ten here and the way they wrote that.
Sean Greaney You’re dead on, right? This again, just like confidentiality. You know, our viewers are going like Sean, Mike, what the hell are you talking about? We see this all the time, and you’re right, but you don’t always see it complete. And they hit it just on the head. Right. So if you pay anybody to make something for you, I don’t care what it is, our code, marketing slogans, whatever, and you don’t have these provisions in there. You can end up in a world of hurt. And there’s three things I like to include and they nailed it. One, a statement is that I just own whatever you made for me, and that’s what’s called work product in this agreement. Work product is I’m paying you for services, rando dude, anything that you create out of those services, that’s mine. So one, I own it. Two whatever rights you might have in it, you assign it to me and that one is sometimes not always in there. And that’s where people get in trouble. And the third prong is the catch-all, not so much in the United States, but in international law. There’s just some IP rights that they don’t allow you to sign. And so you start with saying, I own it. Two, you assign it to me. And three, for whatever weird reason, you can’t assign it to me, you give me an exclusive license forever, so I technically don’t own it, but I’m the only one in the whole wide world, including you, that can use it. And when you couple those three together, it works beautifully. If you don’t have it, it will get flagged in diligence if you’re going to sell your company and you just can’t go running around. When I was by side in a deal one time and we saw it. They didn’t have that assignment provision. If they had like we owned it, they had the exclusive provision, but they didn’t have the assignment provision and they had this was in that contract. There may be like a thousand contractors on the same form. You can’t just go and get those contractors, sign an agreement saying, Oh yeah, by the way, I sign it. Hard to say, but you didn’t pay nothing for that. And you’re like, well, I paid on the agreement. Like, that’s a separate agreement. You have to pay something extra to get that enforced. So we had to go and make them pay 100 bucks to each one of those contractors. Huge pain in the ass. Just do yourself a favor. Drop those three things in there. I own it, you assign it, and if you can’t assign it, you exclusively license to me forever. You got to make sure that’s in every agreement.
Mike Whelan Yeah. And I can say for me as somebody who creates under an agreement like this, it makes me nervous in the part about reproducing and creating derivative works. Because a lot of times, you know, if you’re creating code or in my case you’re creating media or whatever it is, we saw this with a previous agreement, Shaquille O’Neal’s agreement with Papa John’s that he works with, you know, how they were using derivative works and he got to approve those derivative works. That’s actually a big decision because now you’ve taken the bit that Shaq made for hire, right? And if they get to just go do whatever the heck they want with it, I mean, they could really twist your image or your code or your whatever and use it for purposes that you never would have imagined. So it’s actually I think that’s a super important section. Well, let’s jump down to 13, the limitation of liability for the company. Here’s where it gets shorter and much more direct. The company knows exactly what it’s trying to say here. What do you think about 13?
Sean Greaney This is one of those provisions that is the most important clause in any commercial contract you ever do. And it’s funny because most law firm attorneys have zero clue what they’re doing here. If you ever did an M&A deal. Right. The most negotiated clause is indemnification because it includes deductibles and caps and all this stuff, and they’ll fight over that forever. That’s basically what this clause is. So think of it like a car insurance. Like you’ve got car insurance, right? Yeah. Yep. You know that insurance doesn’t cover all types of damages. Right. If you’re at a stoplight on the way to a job interview and somebody runs a red light, and hits you, they’re going to cover that. But you know, in my case at the Dodgers lose to the Braves in the playoffs and I took a sledgehammer to my truck. They’re not going to cover that. Right. There’s exclusions. There’s also a max on how much they’re going to cover for any damages. Right. If you get hit when you’re at that stoplight. You don’t get all the money in the world. Right. They might your policy not be 1 million, 2 million and any damages above that. So sorry. Not sorry. Like that’s that’s your out of pocket. That’s what this clause does. So you have negotiated this beautiful agreement. You’ve got your reps and warranties and your indemnification and all these obligations, and then you slip to this clause and it’s like, oh, by the way, I’m not paying you for nothing. And I’m capping it at the amount of fees that paid you on the agreement, which may be like 25, 50,000 bucks, you know, and so this one is huge, right? Because and it’s different contract to contract. And it’s one of those provisions that’s really a business provision that masquerades as the legal clause because it’s got all this legal crap in it. But really at the end of the day, you got to sit down with your finance team and say, hey, what are we getting out of this agreement, revenue, benefit, whatever, versus what are we what’s our risk liability? And they’ve got to make a decision. You know, maybe the aggregate amount of fees, which is the cap here, isn’t right. Maybe that’s too much. Like all this guy’s doing this painting the building, right? Like, I don’t want to be potentially on the hook front for billions of dollars. And so it’s one of those provisions where, you know, you got to have it and sit down with your finance team and make sure you get that risk profile just right.
Mike Whelan Let me ask you a child’s question as I’m wont to do so. Say in this situation, I am an engineer and I created some code and hey, high five, way to go us and then I leave. This company now has rights to use derivatives of that code, so they use that code to put it into a nuclear launch, hacking software or whatever. We blow up a planet and then there’s some liability associated with blowing up a planet. And so they come after me because I wrote the code. Is what they’re saying is like even though the company went and took the derivative work that used my code, like, their liability might be capped at the value of this particular contract after they use my code?
Sean Greaney First, Mike, that is not a child’s question. That is advanced options because you nailed it. If we read this agreement, there’s only one party’s liability that’s capped in this agreement. The engineer’s is not. And so the company, their max liability out of this thing is just whatever I paid you, right? But if you promised me that your engineering code wouldn’t blow up anything or that it was like, you know, didn’t fringe anything, and you leave and you’re done, and someone hits me with a lawsuit. I’m taking your house. I’m taking everything because it’s not a mutual provision, right? Now, maybe rando guy’s lawyer goes like, Hey, wait a minute. Like, no, no, no, no, no, no, it’s not. We got to make this mutual, right? Like, why am I getting uncapped liability? I’m writing an insurance policy that covers all damages into the Moon and fees, so let’s cap it. And then the company comes back on like, look, crap, man, our only obligations to pay you in this agreement. So it makes sense to cap our liability. You’re writing code that’s going to run the Death Star. Maybe we want more liability, right? Like we’re at greater risk here. And it’s a negotiation back and forth. You don’t have to have the same cap. You know, you can have a bigger cap for the engineer, something that makes them feel better to keep working on the Death Star, maybe a lower for the company in this situation. Something I want our listeners of this one to think about: when you put a clause in an agreement, the common thing that the other side’s lawyers can do is just make it neutral. Zero thought. They’re like, Oh, the company gets a liability cap. I don’t. Let’s make it mutual. Because in this situation, all we’re really doing is paying rando dude. That’s our only obligation. He’s got a bunch of crap coming to us, but we’re just paying him money. Maybe you sit down with your business team to make sure they’re cool, that maybe I delete the liability cap because my risk profile here is small to begin with, and I don’t even want them thinking about, Oh, let’s make it mutual, right? I want engineer guy maybe to have on cap liability just in case, right? He had a design flaw where there’s a vent where if you happen to shoot, you know, one bullet and you blow the whole.
Mike Whelan My gosh, I was totally going down a road and Jyn or so’s dad story. You know, I think we pulled this back to the important stuff. All right, let’s jump down to termination 15.1 by the company. What do you think about the termination section?
Sean Greaney So in this one, right, the only way termination is a huge, huge part of any contract. Right? This is how you turn the agreement off if for whatever reason you want. If you notice this one, the company only can get out of this agreement if there’s breach by rando guys around you guys not doing this job. That’s it. Right? So they have a four-cause termination. This one I highlighted because it’s what’s not stated. Right. And they don’t put in a termination for convenience, which means I can shut this agreement off for any time, for any reason. Maybe I’ll give you some notice kind of deal. And I want people to think about like maybe sometimes you don’t want to include it or maybe they try to including it and it got negotiated out because you know rando guy this is a garden leave agreement. I don’t really care about a termination for convenience because my whole goal is to keep you locked up in this agreement, paying you so you can just tend to like soybean and corn instead of going roll into a competitor and telling them all my pricing and customers and things like that. And so but I want people to think that sometimes though, you do want a termination for convenience in there. Maybe it’s in my favor of like, I don’t want to wait for you to breach. Maybe sometimes I need to get out. But then just like limitation liability, if you drop that in there, you’re going to get the other side thinking like, well, maybe we want to get out as well. And you have to think about how vital is this contract to me. I can’t have you terminate for 30 days because you’re not just guardedly if you like, you basically made like the financial software system and if you shut me off in 30 days, I’m screwed. So maybe I need six months to roll out to find another vendor. So this one was highlighted, there’s a couple of ways to come about a termination for convenience, termination for clause if you can get it. Throw termination in for convenience and for you, because it’s always nice to get out of a contract. But think about what they’re going to ask for it, too. And are you willing to have that negotiation? Are you willing to have that fight, you know, and just make a good decision?
Mike Whelan All right. Finally, let’s jump down to 16.6. This is in sort of the general points. It says no assignment. What does that mean in this situation? Who would he be assigning to, like an LLC he owns or something?
Sean Greaney Right. So so as written here. Right. It’s one way makes sense. This is Big 5’s agreement, right? They’re going to shove it down random guy’s throat. It says, Hey, random guy, you’re the one who knows where the bodies are buried. I want to get to a contract with you and you can’t assign this agreement to anybody else. And this clause alone works because rando guy signing is individual capacity, right? If Mike Corp enters into an agreement with me for these services and you just want me to do it because I’m the best at it, I can’t then go you know, sign it to my boy Tank and be like, Yo, Mike, you talk to this guy now. Tank’s a beautiful human being. He’s really smart, but he can’t do what I can do, right? So it works in this context. But what if Mike Corp enters into me and I say, Yo, run it through my LLC? So now you’ve entered into an agreement with Mike Corp and Sean LLC and I agree, the agreement with Sean LLC, I won’t let anybody else have it, but I sell Sean LLC to my boy Tank and you come to me and say, Sean, what happened, man? Like, you know, you signed agreements like, no, I didn’t. The contract is still with Sean LLC. It’s just under new management. And so what I wanted to point out here is most courts, we call that a change of control. I didn’t assign the agreement. It’s still with my company. I just don’t own it anymore. So what we call it a change of control. My company wonder when a change of control. Courts will hold that if you want your no assignment clause to apply to change your controls, you need to say change control. So this alone would not cover you. So you would need to say you can’t assign it without my permission. Oh, and by the way, we agree that change of control, that’s an assignment. And so you want to drop that in there without it, there’s a loophole, right? But when you’re dealing with companies. So again, maybe you don’t need it, maybe you don’t care about it. But I just want everyone to be thinking that there’s different ways to come at provisions that you just kind of when you get to this part, you’re at the end of the agreement you’re rifling through because you want to be done. Stop for 2 seconds and say, Yo, do I need to drop a change of control provision in here? Because I don’t want this guy; I don’t want to be dealing with under new management because they may not be providing what I need them to provide.
Mike Whelan All right. I’m going to ask you a pop quiz, hotshot question. Who do you think after reading this contract and of course, we’re extrapolating and guessing: Who would you say was probably the party with the power in the negotiations and why?
Sean Greaney This is Big 5 a 100%. And my guess is, this dude, I’m guessing was retiring. Right. And they said, hey, rando guy, man, listen, let us pay you, you know, 150 grand each year for two years for you to sell in your garden. But you got to sign this really, really one-sided agreement. But you don’t care because you’re not actually providing services. There’s really risk. So I just take the money and tend to your garden. And so that’s why. But usually, for contract agreements with individuals, it’s always the company has it because the individual is probably a solo shop and they just want to make money. And so they eat a lot of risk that either they don’t know about or they just don’t care. At the end of the day, they just want to make you paid. But yeah, this is Big 5, ten out of ten times.
Mike Whelan Well, and you assume the company is probably drafting it because they’ve got the in-house legal team and rando guy does not. So unless you know he could hire me, I could like garden by day and then, you know, draft contracts by night. I might do that for him. Call me Rando Guy. Well, this is great. I appreciate you, Sean. We will post this document as well as your contact information over at LawInsider.com/resources. Just tell people at home if they want to reach out to you, what’s the best way to connect with you? To learn more about what you do.
Sean Greaney Yeah. Hit me up on our website we’re www.hyperdraft.ai. Best in class doc gen solution just a quick shameless plug Mike. I like to ask permission first. Listen, so you got this contractor agreement maybe you’ve got your own form of garden leave agreement. The way you normally do is you got a template, a bunch of blanks, insert name here, insert date here, delete this paragraph if you’re using this paragraph. I got time to go through that. We’ve got a software, we take your forms, you make them smart, we automate them. So all we’re doing is just clicking buttons. Filling the numbers generates beautifully formatted word documents. We integrate with your doc management system, your email outlook, what usually takes you hours, takes you minutes. So now you got more free time to do more biz dev, you know, spend time with your kids or, you know, tend to your garden like rando guy you know any time.
Mike Whelan Well I appreciate that. We’ll make sure to link to information on hyper draft and on Sean. Like I said over at lawinsider.com/resources and if you want to be a guest on the Contract Teardown show just email us. We are at email@example.com. Thank you again, Sean. We’ll see you guys next time.
Sean Greaney Absolutely. Take care.