Part 19 of “The Restricting Covenant” Series: Clickwrap Covenants Not to Compete

If you are one of the billions of smartphone users worldwide, I bet you recently downloaded a mobile app and clicked “I agree” to the app’s terms of use or service. Did you actually read all (any) of the terms before you agreed? Courts typically call these contracts (yes, they can be enforceable contracts) “clickwrap agreements.” A clickwrap agreement is formed when a user affirmatively clicks a button or checks a box that explicitly indicates that the user has accepted or agreed to the terms of an agreement upon viewing its terms.

It is becoming commonplace for employers to use web-based clickwrap agreements with their employees either as part of onboarding (e.g., employment agreements) or during the course of employment (e.g., stock award agreements). These clickwrap agreements can include important post-employment restrictive covenants. Are these covenants enforceable?

This nineteenth article of this Series discusses a few employment cases that have involved enforceability of non-competes in the context of clickwrap agreements, and provides some takeaways for employers and employees.

Click Here to Accept and Agree

On five separate occasions while employed at ADP, two employees (Lynch and Halpin) had accepted incentive stock awards by accessing an ADP webpage containing restricted stock award documents. The ADP webpage stated, “You must select the checkbox to indicate you have read all associated documents before you can proceed,” and provided a checkbox next to the statement, “I have read all the documents below.” Next to the checkbox was a hyperlink to open a PDF document, which included: (1) a stock award plan, (2) a stock award agreement, and (3) a non-compete agreement. The employees had 90 days to review and were advised in writing that their acceptance of the stock awards was conditioned on their agreement to 12-month non-compete and non-solicit restrictions.

The two employees resigned from ADP, joined a competitor, and were sued by ADP for improperly soliciting current and prospective ADP clients. The trial court enjoined the employees from soliciting ADP’s current clients and prospective clients if they knew of the prospects while employed at ADP.

In ADP, LLC v. Lynch (3d Cir. Feb. 2017), the U.S. Court of Appeals for the Third Circuit affirmed the trial court’s decision and rejected the employees’ primary argument that the clickwrap non-compete agreements were not valid and enforceable. The employees argued that ADP surreptitiously had slipped the non-competes into the stock award plans without providing adequate notice of their existence. They certified that they did not recall reading the non-compete provisions. They also argued that they were never required to check a box specifically stating, “I have read and agreed to or accept or acknowledge the terms” of the non-competes.

The appeals court and the trial judge both held that the restrictive covenants were part of enforceable clickwrap agreements that provided the employees with adequate notice of all relevant terms. The employees checked a box affirming that they had “read” the documents (which included the standalone non-compete agreements), and the stock award documents explicitly stated that the non-competes were a condition of accepting the stock awards. In addition, after they checked the “I have read” box, they clicked the “accept grant” button and entered their personal passwords. Lynch, for example, was physically unable to click the “Accept Grant” button unless he had affirmatively checked a prior box indicating that he had read all of the associated documents. Thus, the court determined that these affirmative steps provided reasonable and sufficient notice to the employees.

Hyperlink Hyperbole?

Similar to the ADP v. Lynch case, a Delaware Chancery judge found that restrictive covenants (confidentiality and non-solicitation provisions), which were part of a company’s restricted stock unit (RSUs) award agreements, were enforceable under Delaware law against a former sales and marketing employee who had been responsible for more than $100 million in annual sales for Rubbermaid. Newell Rubbermaid, Inc. v. Storm (Del. Ch. Ct. 2014).

The court in Newell rejected the employee’s argument that the covenants were not enforceable because she did not read them, and held that the process by which she had received and accepted the grants included “clear terms that would place a user on actual notice that she was assenting to an agreement.” The trial judge explained the approval process as follows:

Screenshots of the Fidelity website which explain how an employee could accept award grants demonstrate that for a person to accept them, she must first [1] select that she will accept the grant from a list of “Unaccepted Grants.” She would then [2] navigate to a page which explained more fully how to accept them. Therein, a box, titled “Grant Terms and Agreement,” states that “[y]ou must read your Grant Agreement and review the terms to continue.” Below that is a [3] hyperlink to a “Grant Agreement (PDF)” which the user can click to review the agreement. Underneath that hyperlink, [4] a checkbox is accompanied by text which reads: “I have read and agree to the terms of the Grant Agreement.” Below that, bold text provides: “To complete your Grant Agreement online, you must read and accept the terms outlined in the document posted above…. Your grant acceptance will be final once you click Accept. To cancel the transaction, click the Cancel link.” “Previous” and “Accept” buttons appear below as does a link allowing the user to “Cancel.” Text under the “Accept” button reads “Submit Grant Acceptance.”

The court rejected Storm’s argument that her history of reviewing RSU agreements on Fidelity’s website did not put her on notice that employment-related covenants might be contained in future agreements and that she had reasonable expectations that the subject matter of such agreements would be limited in scope to matters concerning RSUs. While noting that Newell’s method of seeking Storm’s agreement to post-employment restrictive covenants was “certainly not the model of transparency and openness with its employees,” the court found that this method was not improper because Storm was given a “fair opportunity” to read the confidentiality and non-solicitation provisions in the RSU agreements and she indicated through an electronic “checkbox” that stated, “I have read and agree to the terms of the Grant Agreement.”

Another case involving a non-compete clause in stock award agreements is Western Union Co. v. Tom Kula & Paymentus Group, Inc. (N.D. Ill. 2017). Western Union argued that its former employee had agreed to clickwrap stock grants that contained restrictive covenant provisions. The employee argued that he never agreed to them and that Western Union did not have any evidence that he assented to their terms. The court found that factual issues existed regarding enforceability of these clickwrap restrictive covenant agreements and denied the employee’s motion to dismiss Western Union’s breach of the restrictive covenant claims.

Takeaways

When structured properly, courts in many jurisdictions regularly uphold clickwrap agreements in the employment context.[1] I predict that employers will increasingly use this method to secure acceptance of employment agreements and other employment-related documents (e.g., NDAs, non-competition agreements, and arbitration agreements).

To employers: To secure a non-compete agreement through a clickwrap agreement, consider including the following elements in the electronic notice and acceptance process: First, provide a clear, prominent, and separate notice that the document contains a non-compete or other applicable restrictive covenant. Second, provide a reasonable amount of time for the employee to review the non-compete before accepting it (e.g., 24 hours is not likely reasonable whereas 30 days is likely reasonable). Third, require the employee to affirmatively manifest his or her agreement by clicking a box that states, “I have read and agree to and accept the terms of [DOCUMENT NAME],” or words to that effect, before proceeding to the next step of the process. Fourth, provide a full electronic copy of the documents to the employee, and consider having the restrictive covenants in a standalone document as opposed to incorporating them into other agreements.

To employees: Read, read, and then read again, all of the terms and conditions in the clickwrap agreement before you click “I agree.” While this might seem onerous, these documents likely contain very important restrictions that could impact your business activities during and after the end of the employment relationship. In addition, these documents might contain other important provisions such as arbitration, jury trial waiver, indemnification, and fee-shifting provisions. Courts presume that parties who sign agreements, whether electronically or in hard copy, understand and agree to the terms, and therefore, ignorance would not be a defense for not complying with contractual obligations.

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The goal of this Series is to provide a brief overview and some interesting insights and practical pointers when dealing with unique issues that might arise in the context of restrictive covenants. It is not intended to provide and should not be construed as providing legal advice. Each situation is different, including the governing state law. If legal advice is needed, you should seek the services of a qualified attorney who is knowledgeable and experienced in this area of the law to address your specific issues or needs.


[1] For an instructive discussion regarding the differences between clickwrap, browsewrap, sign-in-wrap, and other versions of these web-based “wrap” agreements in the context of restrictive covenant disputes, see TopstepTrader, LLC v. OneUp Trader, LLC (N.D. Ill. 4/18/2018), and generally for contracts, see Berkson v. Gogo LLC, 97 F. Supp. 3d 359, 394-402 (E.D.N.Y. 2015).