Conflict of Interest Agreements: What Are They?
A conflict of interest agreement is a binding legal contract between one party and another. It is put into place in order to prevent the actions of either entity causing harm to the other and serving as an informal settlement to a potential conflict that exists between people or entities concerned for their potential liable issues that may arise in future .
Such agreements are drawn up in an attempt to mitigate possible conflict that may arise in relation to personal financial loss or loss of business revenue due to exploitation of information unfairly and without due consent of either party concerned. It is a legally binding contract that restricts a party from participating in certain categories of activity – usually with a competitor where there is need to protect exclusive information. In effect, it is a means of protecting each party from impropriety in the future.
Essential Elements of a Conflict of Interest Agreement
One of the most common ways to ensure compliance with your conflict of interest policy is by requiring conflict of interest agreements from all employees. A conflict of interest agreement is a legal document that confirms your conflicts of interest policy and establishes the obligations of all employees to adhere to it. It should include the following provisions:
Disclosure of Material Interest
Conflict of Interest Policy Acknowledgment
Non-Exclusive Nature of Agreement
Duty of Loyalty
Duty of Disclosure
Consequences for Breaches of the Agreement
The Importance of Conflict of Interest Agreements for Businesses
Businesses implement conflict of interest agreements for several reasons, and they are critical tools for managing potential conflicts that may arise among key personnel. These agreements are generally used by companies to prevent and mitigate the risk of potential conflicts and to reduce potential legal liability that could result from such conflicts. By requiring employees, executives and business partners to sign a conflict of interest agreement, companies can explicitly set out prohibited behaviors and outline available remedies in the event that those behaviors do occur.
In some cases, a conflict of interest agreement is also required by law, such as when a licensed or regulated professional – such as a lawyer, doctor, accountant or executive of certain Publicly-Traded Companies – is deemed to have a conflict of interest unless he or she has disclosed the conflict and signed a disclosure statement.
If and when a conflict of interest does arise, there are a number of remedies that can be put in place, including:
Fostering an atmosphere of transparency and integrity in the workplace is a long-term goal for many businesses. Requiring employees and business partners to abide by a conflict of interest agreement is one step that can be taken to help achieve that goal.
Conflict of Interest Examples: Common Scenarios
Common conflict of interest situations include:
Accounts receivable. In any situation in which an employee’s position would give them access to a company’s accounts receivable, vendors should also be fully vetted to ensure that the employee cannot "double dip," as having financial obligations in addition to their salary may give an employee extra incentive to ignore their employer’s interest if given an opportunity to do so.
Government contracting. Depending on an agency’s regulations, it is possible for firms that are otherwise allowed to have multiple (or even overlapping) roles in a contract to be excluded from getting future contracts with that agency unless clear lines of separation are delineated, and its potential contractors are required to sign conflict of interest agreements committing themselves and their employees to not participating in such a way that creates a conflict of interest. In other words, there are certain cases in which specific contractual roles and responsibilities create conflicts of interest that would otherwise be allowed and might not need to be addressed through a conflict of interest agreement. However, agencies may insist on specially tailored agreements with those who meet this criterion, anyway.
Material financial interests and investments. A material financial interest may exist in industries in which companies pay commissions to agents. Even if the commission payment is disclosed, it is possible that a competing company willing to disclose less favorable terms to an agent can avoid paying commission and instead provide them by whatever measure necessary in order to win their business.
Legal Consequences for Conflict of Interest Violations
When an individual violates a conflict of interest agreement, consequences can be far reaching. First, there could be legal action taken, such as breach of contract if an agreement has been signed – or a negligence claim. If a person knew that he/she had a conflict of interest situation and did nothing to avoid it, and that situation caused harm for example, a negligence claim could apply.
Additionally, courts may impose a constructive trust over property or profits. This could be an award of profits or proceeds made during the conflicted matter, or a loss of money to restore the situation to where it would be had the conflict not existed. Disciplinary actions can be severe in licenses boards/complaint boards and come in the form of notices , fines, reprimands, revocation of license, disqualification to be on that board, etc.
There are both civil and criminal penalties. There can be civil enforcement actions brought by regulatory and/or enforcement bodies and private damages claims. In criminal law, anti-corruption acts and statutes can affect both public officials and corporations. Criminal law counts can include fraud, breach of the Elections Act, etc. Penalties under the Criminal Code include imprisonment, fines, restitution and forfeiture of property, community service, prohibition orders and absolute or conditional discharges.
How to Draft a Conflict of Interest Agreement
If you are at the stage of deciding whether to use a conflict of interest agreement you should first obtain legal advice on how best to proceed to ensure your contract is enforceable. A supplier should not be involved: he has his own interests to consider.
If practicable, before executing a conflict of interest agreement, a party should give the other details of his other relationships with a full disclosure of the risks he perceives, even if he does so only in general terms, in order to test the faith of the other party in his loyalty. The party seeking the information should ask for it. He cannot make an informed decision without it.
The conflict of interest agreement should be drafted or approved by a lawyer because it is a legally binding promise on the part of a party and creates a legal risk for him if the contract proves unenforceable for a technical reason: he can’t use his own trade secrets against him.
There are specific drafting issues that must be addressed. First, it must be clear what relationship is covered. If a supplier has promised to keep confidential information arising from a particular contract, the parties should spell that out.
Second, the promise must only cover the information that is a trade secret. Setting a standard of "no disclosure" is too high for a supplier to meet. He has to have some access to confidential information in order to do his work.
Third, the supplier must be entitled to show the information to his employees. It has to be someone he trusts.
Fourth, the supplier should be entitled to make a copy. That should then be marked "confidential". The supplier should make no other copies.
Fifth, the facilitator who executes the agreement on behalf of a supplier should not comment on any of his relationships which don’t involve a party or threaten its competitive stand.
Sixth, the supplier should have the right to publish his relationship with the party after the contract has been completed. Many businesses promote the fact that they are "pre-qualified" to work with a large business. If that is prohibited for two years from the end of the relationship, it could threaten him.
Enforceability of Conflict of Interest Agreements
Effective enforcement of conflict of interest agreements is an important component of any company’s compliance strategy. There are a number of methods to monitor compliance with such provisions, including conducting compliance checks, monitoring outside activities and reviewing financial disclosures. Compliance with conflict of interest provisions can also be achieved through a coding process in performance evaluations and through training. When violations do occur, they need to be addressed in an appropriate manner to avoid any appearance of improper favoritism and inconsistent treatment of employees. Remedial measures should focus on ensuring that such violations are not repeated and may include informal counseling or discipline. In particularly egregious cases, an investigation may be warranted.
Company policies generally require employees to report any outside employment or outside business activities to the company for review and approval, typically through a written disclosure. Companies often conduct periodic compliance checks, typically once a year, asking employees to provide certified disclosures of any outside activities not already reported. Such checks are typically conducted through a simple certification, but companies may also use more formal or sophisticated methods to review disclosures and monitor compliance with provision. This can include performing conflict checks (typically within a database) or reviewing outside activities with various departments or groups, such as human resources, legal, corporate compliance, security, medical affairs , finance and business development. Professional and trade industry groups or associations may provide templates or guidelines for conducting these types of compliance checks.
A common method for monitoring compliance on the sales and marketing end is auditing the accuracy of expense reports submitted by sales representatives. This can include checking whether any expenses were incurred pursuant to an outside relationship or as a result of an undisclosed conflict. In addition, companies may monitor employee travel to compare it against other employees within the same group or market in order to identify any unusual patterns.
The company’s code of conduct may also be reviewed or distributed in order to identify potential violations. This can include reviewing and emailing all employees impacted by a particular NRA to confirm that they have no conflict with that person, examining records from symposiums or meetings or considering the participation of a specific employee in advisory boards.
Monitoring compliance with conflict of interest agreements is important in order to ensure that the company does not become liable for some type of improper conduct or impropriety. For example, under the Sunshine Act, the manufacturer must report to the Centers for Medicare and Medicaid Services (CMS) any payments to physicians, such as speaker fees or consulting fees, that exceed a de minimus threshold of $100 per year. These payments can serve as the basis for claims under the Anti-Kickback Act and Federal Tort Claims Act.
Conflicts of interest that are not properly monitored can also lead to potential enforcement actions by the Food and Drug Administration (FDA), including actions against sales representatives for improper inducements.