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.
This has been a noteworthy week here at Suits by Suits for developments in the law concerning whistleblowers; in addition to our in-depth articles we published this week, we also saw the following developments:
Of course, not everything that happened this week involved whistleblowers; here are a few other Suits by Suits that may be of interest:
While we’re talking about whistleblowers, it’s worth noting that two days ago, the U.S. Court of Appeals for the Second Circuit heard oral argument on appeal from the a federal district court’s opinion in Meng-Lin Liu v. Siemens AG, 978 F.Supp.2d 325 (S.D.N.Y. 2013). This case raises the significant question as to whether the anti-retaliation provisions of the Dodd-Frank Act, 15 U.S.C. § 78u-6(h)(1)(a), apply to an employee who is terminated by a non-U.S. corporation that does business in (and is regulated by) the United States.
One recurring topic here at Suits by Suits is the default corporate practice of including mandatory arbitration clauses in employment contracts; we’ve written frequently about that practice. Such clauses typically specify that “the parties agree to submit any dispute arising out of this Agreement to binding arbitration.”
Non-competes are a frequent topic here on Suits by Suits. We have discussed how the laws of the 50 states vary - and boy do they. Some states (like California) flat out prohibit non-competes, while some states (like Delaware) not only permit non-competes but enforce broad restrictions on employment. Meanwhile, in boardrooms and statehouses (like Massachusetts's), a debate is raging about whether non-competes are in the public's interest - especially in today's world, where our work force is highly mobile and the states are in an arms race to attract start-up tech companies (and all those jobs). For those of us interested in the debate, three recent items in The New York Times should not be missed: an article reporting on the proliferation of non-competes in unexpected fields (such as summer camp counseling); a discussion among lawyers, professors and lobbyists about the merits or lack thereof of non-competes; and an opinion by New York Times Editorial Board that non-competes hurt workers - especially low-wage and unskilled workers lacking the bargaining power to resist entering into non-competes.
Summer humidity has arrived here in the mid-Atlantic, but the skies are blue and the thermometer isn’t creeping above 90 as of yet. Here are some tidbits of executive-employer news to print and read in the shade when it’s time to cool off:
In 2010, Congress passed the Dodd-Frank Act, strengthening legal protections for employees who report violations of the securities laws. However, as we’ve covered here, here, and here, the courts have diverged widely as to whether an employee must report directly to the SEC in order to be shielded from retaliation.
In Asadi v. GE Energy (USA), LLC, which we addressed in this post, the Fifth Circuit decided that to meet Dodd-Frank’s definition of a “whistleblower” – and to be protected by its anti-retaliation provision – an employee must in fact provide information to the SEC. However, most of the district courts that have addressed the issue have decided that an employee need not report to the SEC in order to be protected from adverse actions by his or her employer.
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.
As long-standing readers of Suits by Suits know, California is at the forefront of the “state-by-state smackdown” regarding covenants not to compete, having prohibited essentially all such clauses by statute. (You can refresh your recollection by reviewing our discussion of California law, here.)
Consequently, one of the arguments deployed by other states looking to restrict or ban noncompetes is that the business climate created in California encourages worker mobility, and that climate in turn is attractive to the technology sector (and in particular, to technology start-ups), who depend upon “poaching” away top talent that may be underpaid at a competitor. You can read these arguments in more depth here (part 1), here (part 2), and most recently here (part 3).
The common thread that runs through these arguments is that California encourages worker mobility, and that mobility, in turn, is good for Silicon Valley. The argument has some appeal.
As the regulatory and business environments in which our clients operate grow increasingly complex, we identify and offer perspectives on significant legal developments affecting businesses, organizations, and individuals. Each post aims to address timely issues and trends by evaluating impactful decisions, sharing observations of key enforcement changes, or distilling best practices drawn from experience. InsightZS also features personal interest pieces about the impact of our legal work in our communities and about associate life at Zuckerman Spaeder.
Information provided on InsightZS should not be considered legal advice and expressed views are those of the authors alone. Readers should seek specific legal guidance before acting in any particular circumstance.
John J. Connolly
Partner
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Andrew N. Goldfarb
Partner
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Sara Alpert Lawson
Partner
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Nicholas M. DiCarlo
Associate
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