Jason M. Knott

On this blog, we frequently cover employment relationships that go wrong.  Sometimes, really wrong.  But only rarely do we cover events that could land someone in the slammer.

The recent case of Stephen Marty Ward is one of those rare events.  Ward’s case shows that employment relationships gone sour can result in more than hurt feelings and lawsuits – they can result in jail time. 

As reported by Law360, Ward worked for Corsair Engineering, Inc.  During a three-month project for Insitu, a Boeing subsidiary, he gathered information about a “small tactical unmanned aircraft system” – i.e., a drone – that the Navy was working on.  In particular, Ward had access to a “maintenance manual for an integrator system” that had flown over 500,000 combat flight hours.  Here’s a link to some nifty pics of the “integrator system” from the Insitu website, if you’re curious. 

When Ward was fired in October 2011, he called a Corsair employee and said that he had a lot of information and wanted a “healthy settlement” to go away quietly.  In a ruse worthy of Hank Schrader and Jesse Pinkman, Corsair executives negotiated a $400,000 settlement with Ward.  Ward came to pick up his down payment of $10,000, and found himself in handcuffs. 

• Confidentiality
• Whistleblowers

Jerry Kowal doesn’t have a lot of nice things to say about his former employer, Netflix.  In a recent lawsuit filed in California Superior Court, he claims that Netflix was a “cold and hostile company,” with a “cutthroat environment.”

According to Courthouse News’s description of Kowal’s complaint, Netflix didn’t have very nice things to say about Kowal, its former content acquisition executive, either.  Kowal alleges that when he told Netflix he was leaving for Amazon, Netflix lashed out by accusing him of stealing confidential information and passing it on to Amazon.  As a result of these accusations and Amazon’s “strict liability policy,” he was fired.

Now, Kowal has sued Netflix, its CEO Reed Hastings, executive Ted Sarandos, and Amazon, alleging a number of torts including defamation, false light invasion of privacy, civil conspiracy, intentional interference with employment relationship, blacklisting and wrongful termination.  Kowal’s suit shows that an employer’s decision to accuse a departed employee of wrongdoing carries with it a significant litigation risk, especially if the employee loses his job as a result of the accusation.

• Civil Litigation
• Confidentiality
• Defamation
• Wrongful Termination

Top ‘o the mornin’ to ya!  In honor of St. Patrick’s Day, we considered writing today’s inbox entirely in Irish-speak.  We could have told you to sit down and wet the tea, or sip on a pint of Gat, while we spun tales of how an executive’s suit put the heart crossways in his employer.  But because we didn’t want anyone feeling the fear tomorrow, we decided to stick with our tried-and-true approach of (somewhat) plain American English.

• Bonuses on Wall Street are flowing like Guinness, says The Age.  New York’s state comptroller says that firms paid their highest bonuses since 2007, with an average of $164,530.  However, for those looking to get a piece of that pot of gold, the news wasn’t all good: jobs in finance declined.

• Glenn Kessler of the Washington Post’s Fact Checker put together this interesting piece on Edward Snowden’s claim that federal law did not protect him from whistleblower retaliation.  Kessler concluded by awarding Snowden only one Pinocchio for “some shading of the facts.”  Snowden has many Pinocchios to go if he wants to reach the levels achieved by many illustrious citizens of Washington, D.C.

• Andrew Burrell of The Australian reports that BHP Billiton’s decision to pay large bonuses has boomeranged on the executives of the resources giant, with shareholders voicing their disapproval (subscription required).  Yes, we included this news solely to use the pun.  No, we do not have a subscription to The Australian.

• TheTownTalk.com brings us news of a Louisiana College VP’s lawsuit against his employer in state court.  The vice president, Tim Johnson, claims that the Baptist school and its president retaliated against him for blowing the whistle on the president’s diversion of funds.  An outside law firm has already advised the college that the president “misrepresented material information to the Board of Trustees on countless occasions,” but a committee appointed by the board rejected that conclusion.

• A New York trial judge questioned a hedge fund’s efforts to have a former analyst jailed for stealing trade secrets, reported Stewart Bishop of Law360 (subscription required, and yes, we do have one).  Justice Jeffrey Oing told lawyers for Two Sigma Investments LLC that it might be “going over the top” by pursuing jail time for Kang Gao, who is accused of illegally accessing and copying Two Sigma’s confidential information.

• Civil Litigation
• Confidentiality
• Executive Compensation
• Whistleblowers

Earlier this week, we outlined the rights of indemnification and advancement, and discussed how those rights can hinge on the statutory law governing a corporation and the private agreements that companies enter into with their officials.  In this post, we review a recent decision to see how these principles apply in real life.

The decision comes from Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery.  Because many companies are incorporated in Delaware, the Delaware courts handle some of the most preeminent disputes involving corporate law, and they have significant experience addressing issues of indemnification and advancement. 

The Vice Chancellor’s opinion illustrates a judicial view that companies sometimes agree to broad rights at the outset of an employment relationship, but then seek to back away from those agreements once a dispute arises.  He wrote:

It is far from uncommon that an entity finds it useful to offer broad advancement rights when encouraging an employee to enter a contract, and then finds it financially unpalatable, even morally repugnant, to perform that contract once it alleges wrongdoing against the employee.

Vice Chancellor Glasscock’s ruling also shows how courts will review the governing statutes and agreements in order to decide whether a company’s denial of advancement is legally justified.

This particular dispute, Fillip v. Centerstone Linen Services, LLC, 2014 WL 793123 (Del. Ch. Feb. 20, 2014), involved Karl Fillip, the former CEO of Centerstone.  Fillip resigned, claiming that he had “Good Reason” for the resignation under his employment agreement and therefore was entitled to receive certain bonuses and severance pay.  When Centerstone wouldn’t pay up, Fillip sued it in Georgia state court, alleging breach of contract and also seeking a declaratory judgment that restrictions in his employment agreement were invalid.  Centerstone then filed counterclaims, which triggered a response from Fillip for advancement of funds to defend against those claims.

Centerstone, as you might imagine, was not happy about this turn of events.  It refused his request, but also said it would withdraw certain counterclaims because it didn’t want to pursue claims “that could potentially trigger an obligation by Centerstone to pay Mr. Fillip’s attorney’s fees and costs in defending them.”  Dissatisfied, Fillip sued in Delaware for advancement of his fees.

• Breach of Contract
• Civil Litigation
• Executive Compensation
• Indemnification and Advancement
• Severance Agreements

Imagine sitting on the board of directors of a Fortune 500 company.  You might think it’s a life of corporate jets, cushy board meetings, and prestige.  (Although, the press will tell us, it’s not really that way anymore, thanks to Enron.)  But even if corporate service would truly be the good life, what would happen to you if an aggrieved shareholder sued you for allegedly breaching your fiduciary duties to the company?  Would you have to deplete your bank account to pay expensive lawyers for years of costly litigation?

The answer is found in the rights of indemnification and advancement (which we have previously discussed here, here, and here in connection with a trade secret case against a Goldman Sachs employee).  Indemnification and advancement are two overlapping, yet different, rights that corporate directors, officers, and employees may have when it comes to the payment of their legal fees in lawsuits brought against them because of their corporate service. 

Indemnification is the reimbursement of fees after those fees have been incurred.  This right, as the Delaware Supreme Court has written, “allows corporate officials to defend themselves in legal proceedings secure in the knowledge that, if vindicated, the corporation will bear the expense of litigation.”  The words “if vindicated” cannot be emphasized enough – they show that in order to establish a right to indemnification, the officer may have to prevail in the proceeding.

Advancement, meanwhile, is exactly what it sounds like: payment of fees by the company in advance of the final resolution of the proceeding.  Advancement is an important companion to the right of indemnification, because it provides officials with immediate relief from the financial burden of investigations and legal proceedings.  No vindication required – although the official may have to pay back what she receives if the final decision doesn’t go her way.

To determine an individual’s right to indemnification or advancement, courts will first look to the statutes governing the business, which may either require or permit those rights.  Because many companies are incorporated in Delaware, we’ll take a look at what Delaware law has to say on this subject.

• Executive Compensation
• Indemnification and Advancement
• The Basics

In yesterday's post, we covered the background of Tuesday's Supreme Court decision in Lawson v. FMR, LLC, and took an in-depth look at Justice Ginsburg's majority opinion.  Today, we look at what the other Justices had to say.

Justice Scalia, joined by Justice Thomas, signed on to Justice Ginsburg's opinion in principal part, but also authored his own opinion.  Justice Scalia and Justice Thomas subscribe to the position that a judge, in reading and interpreting a statute, should not examine what Congress said in places other than the statutory language, such as in committee reports and floor speeches.  Based on that judicial philosophy, Justice Scalia criticized Justice Ginsburg for her “occasional excursions beyond the interpretative terra firma of text and context, into the swamps of legislative history.” 

• Civil Litigation
• Sarbanes-Oxley Act
• Whistleblowers

On Tuesday, the Supreme Court issued an opinion that may have sweeping implications for whistleblowers and employers.  In Lawson v. FMR LLC, the Court decided that the anti-retaliation provision of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1514A) allows an employee to bring a claim even if that employee works for a private contractor or subcontractor of a public company.  The Court’s decision could lead to a wide range of Sarbanes-Oxley lawsuits by outside counsel, private accountants, cleaning services, and others.

Lawson was a split decision.  Justice Ginsburg, joined by Chief Justice Roberts, Justice Breyer, and Justice Kagan, and by Justices Scalia and Thomas “in principal part,” wrote for the majority.  Justice Scalia wrote a separate concurrence, joined by Justice Thomas.  And in an unusual grouping, Justice Sotomayor authored the dissent, joined by Chief Justice Roberts and Justice Alito.  Today, we'll tackle Justice Ginsburg's opinion; tomorrow, we'll take a look at what Justices Scalia and Sotomayor had to say.

But first, a little background.

• Civil Litigation
• Motions to Dismiss
• Sarbanes-Oxley Act
• Whistleblowers

Love is in the air as couples celebrate Valentine’s Day with chocolates, flowers and romantic dinners.  But there’s no love lost between some employers and their executives, as this week’s Inbox shows:

• BLR.com reports on a fascinating case involving Bruce Kirby, former CEO of Frontier Medex.  In a lawsuit in Maryland federal district court, Kirby alleged that he was the beneficiary of a change-in-control severance plan and that Frontier kept him on for over a year solely for the purpose of defeating his severance benefits, even though it told him it was going to terminate him before that.  The court ruled that he was not contractually entitled to severance, but could pursue a claim that Frontier interfered with his benefits, violating ERISA.
• Retired Ohio Bureau of Workers’ Compensation attorney Joe Sommer is asking the Ohio Supreme Court to review a decision that limited the application of whistleblower protections in that state.  He believes that the Franklin County Court of Appeals overly limited whistleblower claims when it ruled that an employee had to report criminal conduct in order to be protected from retaliation.
• According to Benefits Pro, the EEOC “slammed” CVS over its severance deals in a lawsuit against the company in Illinois federal court.  The lawsuit alleges that CVS required employees to sign severance agreements with five pages of small print, some of which bargained away the employees’ rights to communicate to agencies about practices that violated the law.  CVS says that nothing in those agreements barred employees from going to the EEOC with complaints.
• Hook ‘em, Mack!  Former Texas football coach Mack Brown, who resigned after this season, did get some love from his employer, as the San Francisco Chronicle reports that he will receive $2.75 million that he was owed under his contract in event of termination.  He will also get a cushy $500k job this year as special assistant to the president for athletics.
• John O’Brien of Legal News Line reports that a California appellate court will allow a whistleblower’s claim of retaliation under the False Claims Act to be heard in state court.  Dr. Scott Driscoll, a radiologist, claims that he was fired for complaining that his employer was committing Medicare fraud.  When the employer sued him in state court, Driscoll counterclaimed for FCA violations.  The California court decided that it had jurisdiction to hear the claim, rejecting the employer’s argument that federal courts have exclusive jurisdiction over FCA retaliation claims.

• Change-in-Control Provisions
• Executive Compensation
• The Inbox
• Whistleblowers
• Wrongful Termination

For those of us who follow whistleblower law, Wednesday was a big day – and a good one for employers.  In two separate federal appellate decisions, courts affirmed the dismissal of whistleblower actions based on very different issues.  For potential whistleblowers and employers alike, the decisions demonstrate yet again the importance of the particular requirements and scope of the law that a whistleblower relies on to support his claim.

The first decision, Villanueva v. Department of Labor, No. 12-60122 (5th Cir. Feb. 12, 2014), comes to us from the Fifth Circuit. It involves William Villanueva, a Colombian national who worked for a Colombian affiliate of Core Labs, a Netherlands company whose stock is publicly traded in the U.S.  Villanueva claimed that he blew the whistle on a transfer-pricing scheme by his employer to reduce its Colombian tax burden, and that his employer passed him over for a pay raise and fired him in retaliation for his whistleblowing.

• Dodd-Frank Act
• Sarbanes-Oxley Act
• Whistleblowers
• Wrongful Termination

Our state and federal courts generally have two levels of courts: trial and appellate courts.  The archetypal trial court is the knock-down, drag-out venue of TV drama, where judges issue quick rulings and juries weigh the testimony and documents to make their mysterious decisions.  Appellate courts are much more monastic (and thus, much less entertaining for TV’s purposes).  There, learned panels of esteemed judges review cold court records and legal tomes, reviewing the parties’ arguments and applying the law in order to reach their thoughtful and detailed decisions.

Appellate courts may not even entertain every argument that a party seeks to make.  For the most part, to argue in the appellate court that the trial court made a mistake, a litigant has to “preserve” the error below – meaning that the litigant must give the trial court the opportunity to rule on the issue in the first instance.  The failure to preserve error has tripped up many an appeal.

The case of Jeff Gennarelli, the former regional vice president of American Bank and Trust Company (ABT), gives us yet another example of this stumbling block. 

• Breach of Contract
• Civil Litigation
• Confidentiality
• Noncompete Agreements ‎