Contract Killers

Procter & Gamble is taking former employee Paul Stoneham to court after he broke a three-year restrictive clause in his contract to work for rival Alberto Culver. Is it reasonable to enforce unrealistic contracts? US law is against individuals

After this week, sleepy Hamilton County Court in Ohio is unlikely to see such a procession of corporate big guns passing through its doors for a very long time. For the courthouse on Main Street Cincinnati will be centre stage for two of the most powerful businessmen in the world.

Durk Jager, chief executive of Procter & Gamble, the world’s largest household goods company, and the company’s former chief executive Ed Artzt will take the witness stand against former employee Paul Stoneham.

Stoneham, a former managing director for P&G Germany, had the temerity to defect to rival Alberto Culver as international president. P&G is not happy and this week starts its case against Stoneham (MW October 7).

P&G alleges that Stoneham has detailed knowledge of the company’s haircare and skincare business, including technological developments and strategic plans. It also asserts that Stoneham signed a non-compete agreement which precludes his employment on competitive brands for three years. P&G claims that its business will be damaged by his employment at Alberto Culver.

Jim Johnson, P&G chief counsel, says: “We regret having to do this, but we have a responsibility to our employees and our shareholders to protect our intellectual assets. We can’t sit by and watch the hard work and creative thinking of so many of our employees walk out the door to a direct competitor.”

On the surface, the story looks like one of wounded corporate pride for a company unaccustomed to losing. Even P&G, with its access to the best legal brains in the business, will have difficulty enforcing Stoneham’s contract.

Indeed, it is possible that the whole case could be thrown out on the grounds that the time-frame is too restrictive, in which case Jager’s and Artzt’s expensive time may have been wasted.

But observers argue that the point being made is worth the executive time and expenditure involved and that there is more at stake here than corporate pride.

David Wheldon, UK chief executive of CIA Medianetwork, former Coca-Cola head of global advertising, and former president of BBDO Europe, which handles the Pepsi account, supports the moves by P&G, saying that many employees do not take contracts seriously enough. “It is good that P&G is doing this. The general view is that contracts are not worth the paper they are written on and the law is a very tough thing to enforce.”

Wheldon believes P&G has a point to make because most of its products are “eminently copyable”.

“Here you have someone who is moving to its competitor with all the facts and figures. I’m surprised P&G is doing this so publicly. I wonder how people within P&G feel about it.”

These kinds of situations, where employees leave with confidential information, are prevalent in the marketing services industry. Most famously, the so-called “three amigos” – former Saatchi & Saatchi chiefs David Kershaw, Bill Muirhead and Jeremy Sinclair – went on “gardening leave” for five months after they left the company. They walked out after Maurice Saatchi was ousted in a boardroom coup in December 1994. During this time, they produced a video ridiculing the whole gardening leave issue.

Wheldon says: “M&C made overt fun of it all and took a substantial slice of business with impunity. It’s amazing that they were able to do that.”

Other famous names in the media industry include Mike Tunnicliffe, former UK managing director of CIA Medianetwork , who was obliged to spend just over six months mowing his lawn before he joined rival company Western International Media as its managing director.

Christine Walker had a similar contractual agreement with Zenith when she left in January 1997 and was barred from approaching former clients for a year before she set up Walker Media in 1998.

Had three-year clauses been successfully upheld on these individuals, M&C Saatchi would be just under two years old and Walker and Tunnicliffe would still be regulars at Homebase.

Those in the executive search business argue that holding people to unrealistic contracts is unworkable. They take the view that companies looking for executives are usually seeking individuals with relevant experience, more often than not with a rival.

Allan O’Neill, UK operations director of Horton International, says: “The whole of the executive search market is based on finding individuals who are likely to come from a direct competitor. If we were looking for an executive for any company, we would be speaking to the top 20 companies in that sector.”

O’Neill cites football as an example of a job sector where this type of restrictive clause does not apply. A footballer has information about tactics and strategy which could be damaging to the team he is leaving and there are no restrictive clauses in footballers’ contracts.

Problems for individuals and companies are further exacerbated when filling a position involves recruiting someone from another country. A UK company may have to wait up to three years if it headhunts an employee from Germany or the Netherlands, for example, both of which tend to have longer-term contracts. Most companies are surprised at how long they have to wait for an employee to take up a position.

The P&G case is being tried under US law which, like the the UK, tends to favour the individual rather than the company. The law takes into account public policy, which is against the idea of an individual spending three years biding his or her time instead of working. Any move to prevent an individual working for a competitor can also be interpreted as a restrictive practice.

It is therefore doubtful that P&G will be able to bar Stoneham from working at Alberto for three years.

Yvonne Gallagher, a specialist in employment law and partner at Lawrence Graham solicitors, says: “The US rarely tries to apply restrictive clauses. There is no statutory provision for a notice period – in fact, it is very common for senior contracts to be terminated immediately. I would be amazed if a three-year restriction is upheld. Up to a year is probably reasonable. “

This is a view echoed by Miles Broadbent, chairman of executive recruitment consultancy the Miles Partnership, who believes that the incorporation of a three-year restrictive clause could mean that the whole case risks being thrown out.

“I think that three years is probably excessive and there is the possibility that the case will be struck out altogether. Had P&G put in six months or a year, I’m sure it would have more of a chance.”

P&G will also have a significant job on its hands trying to prove that its business will be damaged by Stoneham’s departure.

“This is terribly difficult to prove,” says Gallagher. “The issue is that he knows what P&G is planning to do next. He can give undertakings that he will not use that information. But what you have to remember is that Stoneham can’t un-know things.”

The odds do not appear to be stacked in P&G’s favour. Some argue that pride is the prime motivating forces behind these kinds of cases. Gallagher says: “In cases such as this, the proceedings are often akin to divorce and you often get a load of emotional baggage. People can feel let down and be very hurt by what has happened.

Others argue that it is simply the hawkish way P&G operates. One agency source says: “It’s the P&G way. As soon as it gets into any conflict, its policy is to continue attacking until the other person blinks. P&G may just want to intimidate the hell out of Stoneham.”

Whether P&G’s action is a calculated bid to throw a spanner in Alberto Culver’s works or strike fear in the hearts of those who are thinking of defecting – or both – is unclear.

Whatever the outcome, this case will have implications. If P&G is successful, it could make executives more cautious about what they sign up for when they take a new job. The possibility of facing your former employer in a courtroom, particularly if that employer is a giant like P&G, is not for the faint-hearted.

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