In honor of Halloween, we are looking over our shoulder at some of the most frightening news that we have brought to you this year on Suits by Suits:

• Earlier this week, we told you the tale of a CEO who was hauled into court thousands of miles away and slapped with an employee’s wage bill.  That’s the kind of stuff executive nightmares are made of.

• Bonfires are part of what makes Halloween special.  Unless they involve torching a laptop, destroying evidence, and getting hit with an adverse inference for spoliation at trial, which is what happened to one unhappy executive.
• The SEC announced its presence as a boogeyman for employers who punish whistleblowers, filing its first Dodd-Frank anti-retaliation action against one company and ordering a $30 million bounty for another employee.
•  Terror babies are scary, as anyone who’s seen Rosemary, Chucky, and Damien on screen knows.  Now, we have more terror babies to add to the mix, thanks to the bizarre saga of Rep. Louis Gohmert and fired Texas art director Christian Cutler.
• Ever been lost in a hall of mirrors?  Just think how confused this executive was, after her employer told her that she wasn’t releasing her claims for a shareholder payment and then defeated those same claims based on … her release.
• And perhaps the scariest story of all: the company that lost a non-compete dispute and then had to pay $200,000 of its opponent’s legal fees.  That’s like finding a razor blade in your Mounds bar.

• Civil Litigation
• Discovery
• Releases
• Severance Agreements
• Wage and Hour‎
• Wrongful Termination

Today, we discuss taxes – specifically, the taxation of severance payments.  It has long been recognized that severance payments are “income” to an employee, and that employers must withhold federal income taxes from the payments.  Earlier this year, the Supreme Court made clear that severance payments also are “wages” subject to FICA taxes, and that an employer must withhold FICA taxes as well.  The case, United States v. Quality Stores, 134 S. Ct. 1395 (2014), resolved a split among two federal appellate courts that had led many employers to seek a refund of the employer share of FICA taxes paid to the IRS on severance payments.

FICA is the federal payroll tax on wages that funds Social Security and Medicare.  The tax is paid by both employers and employees.  Each pays 7.65% on the first $106,800 of the employee’s annual wages and then 1.45% on amounts exceeding that threshold.  Employees never see their share of the tax – employers are required to withhold and pay the employee’s share to the IRS. 

In the 2008 case of CSX Corporation v. United States, 518 F.3d 1328, the Federal Circuit agreed with the IRS that a form of severance called supplemental unemployment compensation benefits (or SUB payments) falls within the broad definition of “wages” subject to FICA taxes. But several years later in Quality Stores, the Sixth Circuit reached the opposite conclusion, holding that SUB payments are not wages subject to FICA taxes.  693 F.3d 605 (2012).  The court reasoned that because section 3402(o)(1) of the Internal Revenue Code states that SUB payments shall be treated “as if” they are wages for income-tax withholding, they are not in fact wages.

• Civil Litigation
• Severance Agreements
• Taxes

Fire consumes all – including, perhaps, one CEO’s chance of winning his lawsuit.  Because G. Wesley Blankenship burned relevant evidence, the jury in his case will now be told that it should assume the lost documents were bad for him.  

Blankenship left his job as CEO of Security Controls, Inc. in early 2012.  He soon decided to put even more distance between himself and his employer by having a bonfire.  Into the flames went Blankenship’s laptop and his SCI paper files. 

This turned out to be a bad choice when Blankenship sued SCI and its directors in mid-2012, alleging that they weren’t giving him proper value for his shares in the company.  Blankenship’s lawyers eventually informed SCI of the fire, and SCI moved for sanctions, arguing that Blankenship had knowingly “spoliated” – i.e., destroyed – relevant evidence.  As we’ve previously discussed in this post, spoliation can have serious consequences for litigants.  Among these consequences are jury instructions that allow jurors to assume that the destroyed documents were detrimental to the party’s case.

• Discovery
• Severance Agreements

Most law students spend several weeks in a first-year contracts class studying the concept of consideration. Consideration, in essence, is what a contracting party receives in exchange for promising to do something. A promise without consideration is not an enforceable contract. If A promises to wash B’s car next Tuesday and fails to do so, B cannot sue A on Wednesday, because A’s promise lacked consideration. But if A promises to wash B’s car and B promises to give A $20, or $1, or a glass of water, the promise is enforceable and B can sue if A fails to perform. Courts generally do not examine the adequacy of consideration, only its existence.

Because consideration can be minimal, many lawyers forget about it after that first year of law school. But it remains a necessary element of most contracts, and it recently arose in a peculiar way in a Connecticut case involving a dispute over an employment contract. See Thoma v. Oxford Performance Materials, Inc., 153 Conn. App. 50 (2014).

The plaintiff in the case, Lynne Thoma, was an employee of a manufacturing company. During her employment the company obtained new financing, and the investor insisted that Ms. Thoma enter into an employment agreement. This “first agreement” gave Ms. Thoma a fixed salary plus benefits for a 24-month period with automatic 12-month renewals. The company could fire her without cause on 60 days’ notice, but it would then be obligated to pay her salary for the remainder of the term plus six months. The first agreement also included a noncompete provision for the period of Ms. Thoma’s employment plus six months thereafter.

The company almost immediately decided it did not like certain terms of the first agreement and it required Ms. Thoma to enter a second agreement, which by its terms stated that it superseded any prior agreements. The second agreement did not discuss salary or severance, but it expressly stated that Ms. Thoma was an at-will employee. It also included a noncompete provision with apparently inconsistent terms: one section stated that she would not compete “during the period of her employment” and the other said that if she was terminated she would “continue to comply” with the noncompete provision.

The company fired Ms. Thoma about 16 months after the parties executed these agreements. Ms. Thoma sued, claiming that the company breached the first agreement by firing her without notice before her term ended and by failing to pay severance. The company claimed that the second agreement allowed it to fire her without notice at any time and did not require severance payments. But the trial court found, and the appellate court agreed, that the second agreement was not enforceable because it lacked consideration.

• Breach of Contract
• Noncompete Agreements ‎
• Severance Agreements

Firing a key executive can have repercussions beyond a severance dispute or a wrongful termination or discrimination claim by the executive.  American Apparel’s recent termination of its CEO, Dov Charney, provides the latest example of the wide-ranging consequences that can arise when a C-level employee is let go.  In American Apparel’s case, the consequences have included the threat of default on a $15 million loan and a resulting shareholder lawsuit.

How did this happen?  According to the New York Post, when Lion Capital LLC lent American Apparel the $15 million, the two entered into a lending agreement that said American Apparel would be in default if it fired Charney.  After American Apparel’s board told Charney it was going to fire him in 30 days, Lion Capital accelerated its demand for payment on the loan, threatening the company with bankruptcy.  American Apparel argued in an SEC filing that it wasn’t in default because Charney was still technically CEO.  However, it continued to work behind the scenes to remedy the situation.  Now, the company now appears to have struck a deal with a hedge fund to save it from Chapter 11.

• "Key Man" Provisions
• Bankruptcy
• Severance Agreements

Last week, American Apparel announced that its board had decided to terminate Dov Charney, the company’s founder, CEO, and Chairman, “for cause.”  (We’ve discussed the meaning of terminations “for cause” in prior posts here and here.)  The board also immediately suspended Charney from his positions with the company.  Although the board didn’t initially disclose the reasons for its action, Charney is not new to controversy; in recent years, he has faced allegations of sexual harassment and assault.

The reasons for Charney’s termination have now become public, and they aren’t pretty.  In its termination letter, available here, the board accuses Charney of putting the company at significant litigation risk.  It complains that he sexually harassed employees and allowed another employee to post false information online about a former employee, which led to a substantial lawsuit.  The board also says that Charney misused corporate assets for “personal, non-business reasons,” including making severance payments to protect himself from personal liability.  According to the board, Charney’s behavior has harmed the company’s “business reputation,” scaring away potential financing sources.

• Age Discrimination
• Breach of Contract
• Civil Litigation
• Executive Compensation
• Indemnification and Advancement
• Releases
• Severance Agreements
• Termination With or Without Cause
• Wrongful Termination

An executive’s right to severance payments isn’t always written in stone, even if his employer agrees to provide them.  In this post, we described how one exec lost his severance pay after the Federal Reserve decided that his employer, a bank, was in a “troubled condition” at the time.

A recent decision from the U.S. Bankruptcy Appellate Panel of the Tenth Circuit, In re Adam Aircraft Industries, Inc., illustrates another scenario in which an executive’s golden parachute can collapse around him.  Joseph Walker was the president of Adam Aircraft, an airplane designer and manufacturer.  He was terminated in February 2007, and was allowed to resign, after which he negotiated a healthy severance package.  Over the next year, Adam Aircraft paid him $250,000 in severance, $100,002 to repurchase his stock, and $105,704 as a refund on a deposit he had made on a plane. 

• Bankruptcy
• Civil Litigation
• Severance Agreements

Bon-Ton Stores, Inc. alleges in a lawsuit that it recently filed against its former Senior Vice President, Director of Sales Gary Pralle that – after the company fired Mr. Pralle – it discovered “pornographic materials” and “documents containing racial slurs” in his e-mails.  According to Bon-Ton, had it known about this “after-acquired evidence” before it fired Mr. Pralle, it would have had “cause” for firing him under its “Executive Severance Pay Plan” such that Mr. Pralle would not be entitled to severance.  In other words, Bon-Ton v. Pralle is an example of a company invoking the after-acquired evidence doctrine to overcome a breach of contract claim.  (Bon-Ton also alleges that bad behavior by Mr. Pralle that the company knew about before it fired him also gave the company “cause,” but those allegations mess up the example so we’re ignoring them.)

• After-Acquired Evidence
• Executive Compensation
• Severance Agreements
• Termination With or Without Cause

• A Seattle judge has denied Relator.Com operator Move Inc.’s motion to prevent Errol Samuelson from working for its rival Zillow as Chief Industry Development Officer. Move Inc. argued that Mr. Samuelson will inevitably disclose trade secrets that he allegedly took from Move Inc. in his work for Zillow and therefore should not be allowed to work there. The theory of inevitable disclosure of trade secrets is one we have examined before.
• WaPo’s Jenna McGregor explains why Henrique de Castro’s severance pay for 15 months at Yahoo totals $58 million; it has to do with high stock prices.  We considered earlier how de Castro’s contract may have required Yahoo to pay him severance despite performance issues.
• Forbes blogger Todd Hixon welcomes efforts in Massachusetts to abolish non-competes because, in his view, non-competes hurt innovation. The differences in state laws on non-competes and shifting attitudes towards them have been a major focus of ours here at Suits by Suits.
• The Florida Supreme Court ruled yesterday that the Florida Civil Rights Act prohibits discrimination in the workplace for pregnancy, even though the Act does not explicitly say anything about pregnancy. The high court reasoned in a 6-1 decision that the Act’s prohibition against gender discrimination covers discrimination based on pregnancy. Peguy Delva claims in the case that real estate developer Continental Group denied her extra shifts and did not schedule her for work after she returned from maternity leave. Federal law expressly prohibits pregnancy discrimination.

• Severance Agreements

• As part of its proposed acquisition by Comcast, Time Warner Cable will pay Chairman and CEO Robert Marcus (sadly, no relation), $79.8 million – including $20 million in cash – presumably because he is not expected to be in the C-suite at the new company.  We looked closely at a similar golden parachute for American Airlines’ CEO Tom Horton in its merger agreement with US Airways.
• By contrast, Wells Fargo’s CEO John Stumpf isn’t going anywhere.  He earned $19.3 million in salary and bonus last year – down 15% down from 2012, when Stumpf was the highest paid CEO of a large U.S. bank.
• A unit of Canon USA Inc. has sued  one of its competitors in the copier business – Ray Morgan Co. Inc. – in California federal court, claiming that Ray Morgan lured at least five account executives away from Canon and paid them incentives to convert Canon customers to Ray Morgan customers using Canon’s trade secrets.
• The Pennsylvania Game Commission has decided that it will not be paying its former Executive Director Carl Roe $220,000 in severance – despite the Commission’s initial agreement to pay Roe that amount after he threatened to sue.  The Commission’s change of heart came after the state’s governor and several legislators sent a letter urging the Commission not to pay Roe severance.  The governor’s legal counsel determined that Roe didn’t have valid legal claims against the Commission.
• The WSJ reported on a hearing last week organized by the EEOC on whether the use of social media by employees, job seekers and employers raises new issues for employment discrimination laws.  Among other things, participants discussed whether an employee posting negative remarks about another employee on Facebook could be grounds for a hostile work environment claim against the employer.

• Severance Agreements
• The Inbox