A morals clause (or “bad boy” or “bad girl” clause) is a provision in a contract which proscribes certain behavior of an individual to that contract. A morals clause is different from, and usually covers other wrongdoing beyond, a moral turpitude clause which allows a party to terminate a contract for cause if the other party is convicted of, confesses to, or enters a guilty or nolo contendere plea concerning a crime involving depravity.
Morals clauses are often employed in endorsement contracts. Lance Armstrong and Tiger Woods come readily to mind. It is no longer enough to state that a company can terminate the contract for any “action involving moral turpitude.” Morals clauses should be drafted broadly to cover any situation or occurrence including, but not limited to, the use of drugs or alcohol, sexual harassment or assault, or otherwise tending to bring the party into public disrepute, contempt, scandal or ridicule, which may embarrass, offend, insult or denigrate individuals or groups, or that my shock, insult or offend the public.
Often morals clauses are contained in agreements that also have arbitration provisions. Employers may wish to designate in such an agreement who will be the arbitrator if it knows how that arbitrator might feel about certain inappropriate conduct. According to the separation agreement between CBS Corp. and its former President, CEO and Chairman, Leslie Moonves, filed with the SEC, the parties agreed to arbitrate whether he was terminated for “cause” under his employment agreement and, therefore, whether he forfeited his $120 million severance package.
Morality clauses can also be too broad. In the 1950s, they were used against actors thought to be communists, resulting to this day in the Directors and Writers Guilds of America banning them. The Screen Actors Guild – American Federation of Radio and Television Artists does not contain such a ban.
Courts have long held morality clauses valid and enforceable. Nader v. ABC Television, 150 Fed. Appx. 54, 56 (2d Cir. 2005). Courts uniformly enforce morality clauses based upon the express terms of a contract and also under common law based upon the implied duty of good conduct, which calls for the employee to conduct himself with decency so as not to injure the employer’s business. In fact, morality clauses supplement, rather than supplant, the common law. Scott v. RKO Radio Pictures, 240 F.2d 87, 88 (9th Cir. 1957); Twentieth Century Fox Film Corp. v. Lardner, 216 F.2d 844, 847 (9th Cir. 1954).
Morality clauses are not enough to protect a company. They enable a company to terminate the contractual relationship and to save money prospectively but fail to grant a company the ability to recoup its prior investment in the individual. Team Gordon v. Fruit of the Loom, 2009 WL 426555 at *4 (W.D.N.C. Feb. 19, 2009). Clawback clauses and/or liquidated damage provisions are, therefore, necessary.
The use of clawback provisions in the securities industry is beyond the scope of this article. The Sarbanes-Oxley Act of 2002, which was implemented in response to the Enron and WorldCom scandals, and the American Recovery and Reinvestment Act of 2009 and Dodd-Frank Wall Street Reform Act of 2010, both enacted after the 2008-09 financial crisis, should be consulted. As to liquidated damage provisions, certain requirements must be met for them to be enforceable. The damages must be difficult to estimate. The liquidated amount also cannot be intended to penalize the breaching party nor be disproportionate to the probable damages incurred. Corona v. Stryker Golf, 2017 N.J. Super. Unpub. LEXIS 690 (App. Div. March 20, 2017); Wasserman’s v. Twp. of Middletown, 137 N.J. 238, 249 (1994). Voluntary contractual clawback clauses, therefore, provide better protection, although they still are subject to contractual defenses, such as unconscionability, and may violate wage-and-hour laws unless the payment being clawed back is compensation not considered wages under wage-and-hour laws. Truelove v. Northeast Capital & Advisory, 738 N.E. 2d 770, 771-72 (N.Y. 2000); N.J.S.A. §34:11-4.4 (2010).
The Moonves case is interesting for a number of reasons. He had been paid more than $1 billion during his career as a television executive, and had a $120 million severance package under his employment agreement if he was terminated by CBS without “cause” or if he left “for good reason.” There was no clawback provision. Had there been, CBS would have had more leverage when it decided to terminate him for cause and deny him his severance. In other words, Moonves has nothing to lose should he challenge the decision denying him his severance. None of his earlier compensation will be at risk. Moreover, “cause” is defined in his employment agreement as “willful misfeasance,” “willful and material violation of any policy of the Company,” “willful failure to cooperate” and “willful and material breach of the provisions of the Agreement.” Acts or omissions are considered “willful” in the employment agreement only if done, or omitted to be done, with knowledge and intent. This may, at least, give Moonves an argument as to why he is due his severance. Moreover, CBS will need to tread lightly in the arbitration as there surely are victims ready to sue CBS for Moonves’ alleged actions.
All companies with executive employment agreements should have them reviewed to make sure that the company is not paying victims of sexual harassment and the like while remaining liable to the alleged harasser who created the exposure in the first place. Including morality, clawback and/or liquidated damage clauses in employment agreements also sends a clear message to executives that they better not engage in such behavior.
Steven I. Adler is the Co-Chair of Mandelbaum Salsburg’s Labor and Employment Group and Co-Chair Elect of its Litigation Department.