Are Confidentiality Provisions in Severance Agreements Enforceable?

Many employers use severance agreements containing confidentiality provisions, but worry about how enforceable such provisions are.  According to a recent case, they are very enforceable.

The case of Hallmark Cards, Inc. v. Murley, 703 F.3d 456 (8th Cir. 2013), will be very helpful to employers seeking to enforce such confidentiality provisions.  In Hallmark Cards, the employer sued its former vice president of marketing, who received a severance package of $735,000 after her position was eliminated due to a corporate restructuring.  The jury found that the former employee had breached the confidentiality provision of the severance agreement by disclosing Hallmark’s confidential information to her new employer, a competitor.  The jury awarded Hallmark Cards the full value of the severance package and the employee’s compensation paid by her new employer.  The former employee appealed.

On appeal, the former employee argued that she had complied with some provisions of the severance agreement and therefore she should not have to pay back the full severance amount.  The former employee also argued her former employer was not entitled to any of her compensation from her new employer.

Hallmark argued that it was entitled to the full amount of damages awarded because the only reason the new employer paid her compensation was because she provided the new employer with Hallmark’s confidential information.

The Eighth Circuit Court of Appeals upheld the jury’s award of a full refund to Hallmark of its $735,000 severance payment, but held Hallmark was not entitled to the award of the former employee’s compensation from her new employer.  The court rejected the former employee’s argument that Hallmark got some value for the severance agreement and thus was not entitled to get all of its severance payment back.  The Eighth Circuit reasoned that the confidentiality provision was the primary purpose of the agreement and that the language of the agreement clearly indicated that preserving confidentiality was a priority.

The Eighth Circuit held, however, that Hallmark was not entitled to be put in a better position than it would have been in if the former employee had not breached the severance agreement.  Accordingly, Hallmark was not entitled to the former employee’s compensation from her new employer.

Takeaway:  The Hallmark Cards case shows employers can enforce properly drafted confidentiality agreements in severance agreements.  To have the best chance for success, employers should have their attorneys draft or review the confidentiality provisions prior to giving the severance agreement to the employee, and then call their attorneys if they obtain evidence that a former employee has breached the confidentiality provision.

About Ann Huntrods

Ann Huntrods is a Chambers-rated attorney and a MSBA Certified Specialist in Labor and Employment Law. Ann has over 25 years experience in advising and defending employers in all areas of employment law, including disability discrimination. Ann's practice focuses on a broad range of private and nonprofit employers and individual executives. For Ann's full bio, click here.

Posted on August 19, 2013, in Non-Competition and Confidentiality, Terminations. Bookmark the permalink. Leave a comment.

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