In our recurring “State-by-State Smackdown” series on the evolving law with respect to covenants not to compete, we’ve described the traditional balancing-test approach that is the law in the majority of jurisdictions as the Legitimate Business Interest or “LBI” test.  In understanding this shifting landscape, we’ve typically highlighted statutes and/or judicial opinions in jurisdictions that have begun to shift away (or even depart entirely) from the classical LBI analysis.

Today, we’re doing something a little different, taking our cue from a recent New York state appellate decision:  Brown & Brown, Inc. v. Johnson, 980 N.Y.S. 2d 631 (App. Div., 4th Dep’t, February 7, 2014).  Read on.

• Breach of Contract
• Civil Litigation
• Noncompete Agreements ‎

It’s been a busy week here at the Suits-by-Suits Global Executive Employment Dispute Centre in Washington, D.C., what with interesting Supreme Court arguments being heard, the famous Cherry Blossoms about to blossom, our beloved Nationals putting final touches on their pitching rotation, and even some more snow from the winter without end. 

But none of that matters next to what’s really important about this week: which is that Monday marked thirty years (!) since the fabled “Breakfast Club” met for detention on a dreary Saturday, March 24, 1984, (at Shermer High School, Shermer, Illinois…).  In celebration of the great teen-angst classic, we’re using quotes from the film to introduce this week's collection of interesting news notes from the world of executive-level employment disputes.  So here they are, framed by the work of the movie’s writer and director, the late, great John Hughes: 

• Bankruptcy
• The Inbox

We see – and report on – plenty of whistleblower complaints here at Suits-by-Suits. We’re mostly interested in how those complaints play out legally, and what they can teach us about ways to avoid, or manage, whistleblower disputes and what leads to them.  But outside of the law, some complaints include alleged facts that just tell a compelling story in and of themselves. 

How about these allegations in Glenn Meeks’ wrongful termination complaint against Chicago State University: Financial mismanagement, a romantic relationship between top university executives, high-level posts filled with unqualified personnel, intrigue on the university’s board of trustees after Meeks complained of these things, and – a bonus, from a storytelling perspective – a suspicion of improper interference by the Governor of Illinois in the whole thing. 

And another bonus: Meeks filed his complaint in Illinois state court just two weeks after another whistleblower at the same university was awarded $2.5 million.   

• Whistleblowers
• Wrongful Termination

Did you hear the one about the Buddhist marketing director who refused an order to add Bible verses to the daily morning e-mail he sent to all employees – and then got fired the next day, after an otherwise successful eight-year career?

This is, of course, not an opening line to a joke, but another installment in our occasional series about the intersection of religious beliefs (of all types) and employment – also of all types.  Religion and employment issues – whether it’s an employee in the C-suite or someone further along the hierarchy – almost never mix well.  Just this week, of course, nine of our fellow lawyers who happen to sit on the Supreme Court are hearing arguments in two cases about whether a company with a religious belief about contraception is exempt from the Affordable Care Act’s requirements for employer-provided health insurance. 

Far away from the hallowed marble home of the Supreme Court (which, by the way, we think is in a fine building -- unlike former Justice Harlan Fiske Stone) and down in the Eastern District of Texas, a new suit raises an interesting question of prohibited religious discrimination under Title VII: namely, can a fired Buddhist employee win damages from a company that, he says, fired him after eight years because he refused to put Bible quotations in the daily e-mail his employer had him write and send to all of the company’s 500 employees? 

• Civil Litigation
• Discrimination
• Religious Discrimination‎
• Title VII

• 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

Regular readers of Suits by Suits know that employees – including executive-level employees with lucrative employment contracts and low-level employees who are at-will and have no contract – may claim wrongful termination against their former employers if the employees were fired in violation of “public policy.”  Recently, the former Executive Vice President of Louisiana College, Timothy Johnson – who had an employment contract with the College – filed a lawsuit alleging that the College retaliated against him after he raised concerns that the College’s President misdirected the contributions of a large donor to a project in Tanzania. A link to Johnson’s complaint is in this recent report about the lawsuit.  A photo taken in the Serengeti National Park in Tanzania is above.

• 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

The biggest news of the week in Suits by Suits is the Supreme Court’s decision in Lawson v. FMR LLC, which was handed down on Tuesday.  Our Jason Knott weighed in with two excellent, in-depth pieces examining both the majority opinion as well as the concurring and dissenting opinions (including the very unusual dissenting lineup of Sotomayor, Kennedy, and Alito).  We think this is a groundbreaking decision for whistleblowers and employers that will continue to affect the legal landscape for years.  Other analysts have weighed in on Lawson, including the ABA and The Wall Street Journal (subscription required).

Of course, that’s not all that happened in the news this week:

• We’re monitoring a recently-filed lawsuit by AK Steel Corp., alleging that its former employee, Thomas Miskovich, violated his noncompete contract and tortiously interfered with AK Steel’s business when he jumped ship for Novelis Corp.  Norvelis has responded that it is in the aluminum business – not the steel business – and thus is not a “competitor” of AK Steel.  A federal district court in Ohio rejected AK Steel’s request for a TRO but will hear arguments for a preliminary injunction in two weeks; we’ll be sure to keep you posted.
• Writing for Forbes, Steve Parrish has some practical advice for employers in crafting executive compensation packages that reduce tax burdens on employees, including the issuance of restricted stock that employees forfeit if they leave the company as a kind of “golden handcuff.”
• But wait!  Before you rush out and draft lucrative new compensation packages, keep in mind that such packages remain a touchy subject among shareholders.  We’ve talked about the “say-on-pay” provisions of the Dodd-Frank Act on multiple occasions; this week, we saw something similar happen across the Atlantic.  After shareholders rejected a more lucrative compensation package, Julius Baer – a private bank based in Switzerland – reduced CEO Boris Collardi’s pay by nearly 11% in 2013.  And Rolls-Royce announced a plan to claw back any executive bonuses paid out to employees who subsequently come under investigation (“in the case of serious non-compliance with the Rolls-Royce code of conduct, reputational damage or gross misconduct”).
• On balance, though, such reductions in executive compensation remain the exception, rather than the norm.  So while eyebrows were raised, we weren’t surprised to learn that GlaxoSmithKline PLC increased CEO Andrew Witty’s 2013 compensation by 63% despite ongoing investigations by the Chinese government into alleged kickbacks and fraud that have led to the arrest of four Glaxo executives in China.
• And Witty isn’t the only executive to bring home the bacon; Wells Fargo’s CEO John Stumpf – already the highest-paid bank CEO in the U.S. – was awarded $1 million in restricted stock as part of his 2013 compensation, and, just days after RadioShack announced that it may close as many as 1,100 retail stores in light of its second straight annual loss, the company announced raises and bonuses for top executives, including a half-million-dollar retention bonus for CEO Joseph Magnacca.
• Relatedly:  Excellus BlueCross Blue Shield – the largest not-for-profit insurer in New York – revealed earlier this week that it had paid outgoing CEO David Klein a $12.9 million retirement bonus and former CFO Emil Duda $10.95 million in retirement pay, which it says were “industry norms at the time the agreements were made.”  Key to the packages were noncompete clauses that were said to have kept the officers from working for Excellus’s competitors.
• Putting it all together:  MoneyNews’s Dan Weil, analyzing a study performed for The Wall Street Journal, suggests that for purposes of awarding compensation bonuses, many companies are using non-standard methods of computing their earnings – particularly by excluding certain expenses that would otherwise affect the company’s bottom line under generally accepted accounting principles – in ways that reward executives for the upside but fail to calculate downside risks.  And Antony Jenkins, CEO of international financial giant Barclays PLC, suggests that executive bonuses are necessary to retain key staff; after Barclays cut compensation in 2012, nearly 700 high-level U.S. employees left, presumably for richer pastures.  Barclays reversed course and awarded increased bonuses in 2013 to avoid a “death spiral” of further departures.

• The Inbox