A recent decision by the Delaware Chancery Court in the clawback litigation between McDonald’s Corporation and its former CEO highlights the meaning and impact of a common contractual provision: the “integration clause.” Such provisions (sometimes also called “entire agreement” clauses) state that the contract at issue embodies the entire agreement of the parties and supersedes all prior agreements and understandings between them. The Delaware court rebuffed an effort by the former CEO to argue that the integration clause in his separation agreement precludes McDonald’s from asserting that the CEO’s false statements made while negotiating that agreement provide a basis for seeking repayment of severance benefits he received. The court’s opinion lays out the requirements that a contract must satisfy in order to prevent a party from using the other party’s deceptive or fraudulent statements made prior to entering the contract to seek repayment of the consideration provided. The case is McDonald’s Corporation v. Stephen J. Easterbrook.
Background of the McDonald’s Litigation
In 2019, McDonald’s Corporation parted company with its then-CEO, Stephen Easterbrook, finding that he had engaged in an inappropriate relationship with an employee. McDonald’s and Mr. Easterbrook negotiated and entered into an agreement that treated his separation as “without cause” and paid him significant severance benefits. Several months after Mr. Easterbrook’s departure, additional improprieties were brought to the attention of McDonald’s Board, resulting in McDonald’s filing a lawsuit to claw back the severance benefits previously paid. McDonald’s argues that it would not have agreed to the terms of the separation agreement if Mr. Easterbrook had not covered up the extent of his indiscretions.
The Court’s Decision—Integration Clauses Are Not Necessarily Anti-Reliance Clauses
Earlier this month, the Delaware Chancery Court rejected Mr. Easterbrook’s motion to have McDonald’s lawsuit dismissed. One of the two arguments made by Mr. Easterbrook to support his motion was that the “integration clause” in the separation agreement prevents the company from asserting claims based upon promises or statements that were made prior to execution of the agreement. This integration clause at issue reads as follows:
“This Agreement contains the full agreement between [Easterbrook] and McDonald’s and completely supersedes any prior written or oral agreements or representations concerning the subject matter thereof.”
As the court explained, under Delaware law, parties may agree to limit claims of fraud allegedly occurring outside of a contract by using an “anti-reliance” clause. Such a clause explicitly provides that the parties are not relying upon representations made by each other that are not set forth in the agreement. Where such a clause exists, a party cannot complain that it relied upon prior false statements and seek to undo the agreement. On the other hand, however, where such a clause is not included and the contract contains only an integration clause (like the above one), the complaining party is not precluded from using such fraud to void the contract and (as is the case here) pursue refund of amounts paid by the complaining party.
The Delaware court concluded that the integration clause in Mr. Easterbrook’s separation agreement could not be read to clearly evidence an understanding that the company had agreed to not rely upon his prior false or deceptive statements.
Interestingly, though, the court stated in a footnote that, even if the agreement contained an anti-reliance clause, it would not prevent McDonald’s from pursuing a claim that Mr. Easterbrook “breached his fiduciary duty of candor and good faith, inter alia, by hiding and misrepresenting material facts during the Company’s investigation of his misconduct.”
Lessons from the Court’s Decision
“Integration clauses” aren’t the same as “anti-reliance” clauses. Under Delaware law, an integration clause alone is insufficient to prevent the use of prior fraudulent statements to seek repayment of severance (or other consideration provided). Specifically, a mere statement that the contract supersedes all prior agreements and understandings will not suffice. If a party wants that broader protection, it must include an explicit anti-reliance clause, providing that the parties, in entering into the contract, are not relying upon statements and promises not explicitly stated in the contract.
However, even absent an anti-reliance clause, an alternative path may exist to pursue a claim. Statements made outside of a contract, which breach a duty that one party owes the other party, present a possible alternative to invalidating the contract because one party misled the other party in entering into the contract. The Delaware court’s footnote highlights that concept, indicating that McDonald’s may have a basis for proceeding against Mr. Easterbrook on the ground that he breached fiduciary duties to the company when he lied to the company about his conduct.
From a practical drafting standpoint, every employer should intently weigh both the positive and negative implications of including integration clauses and anti-reliance clauses in an agreement. More broadly, as every lawyer knows, each word in a contract has meaning—so make sure you think through what you intend to accomplish and what protections are most important, before you finalize an agreement with an employee or departing employee.