Ashwin Dandekar and Emily Hua live in California.  They worked for Campbell Alliance, a biopharma consulting group, in California.  Yet when Campbell Alliance sued Dandekar and Hua for violating their noncompete and confidentiality agreements, it sued them in federal court in North Carolina.  And the judge in New Bern has now denied the employees’ bid to send the case back to California, meaning they will have to litigate 3,000 miles away from home.  Campbell Alliance Group, Inc. v. Dandekar, No. 5:13-CV-00415-FL (Jan. 3, 2014).  What gives?

A forum selection clause, that’s what.  Typically, in federal court, a court has the discretion to transfer a case to any other district where it “might [otherwise] have been brought,” in order to serve “the convenience of the parties [and] the interest of justice.”  28 U.S.C. § 1404(a).  In making the transfer decision, courts consider the plaintiff’s choice of forum, the residence of the parties, the convenience of parties and witnesses, and other factors that involve whether it’s easier and makes more sense to litigate a case in one location over another.  But when there’s a forum selection clause – i.e., a provision in a contract that says a lawsuit over it shall be brought in a particular state – that clause can be a significant factor in the transfer analysis.  Indeed, in a decision one month ago, the Supreme Court confirmed that forum-selection clauses should typically decide the issue of which federal court should hear a case.  Atlantic Marine Construction Co. v. U.S. Dist. Ct. for the Dist. of Texas, No. 12-929 (Dec. 3, 2013).

• Breach of Contract
• Noncompete Agreements ‎

If you’re following our coverage of the Alex Rodriguez story at all (See our Part 1, a general primer; and Part 2 on the specifics of the 162-game suspension), you probably watched last night’s 60 Minutes, which contained interviews with Tony Bosch of Biogenesis, who claims that he personally administered banned Performance Enhancing Substances to Alex Rodriguez; MLB executive Rob Manfred; and one of Alex Rodriguez’s attorneys, Joseph Tacopina, Esq.

Concurrent with the airing of the program, sports journalists began reporting that the Major League Baseball Players Association (“MLBPA,” the players’ union) was “furious” at MLB’s participation in the TV program.  The MLBPA subsequently issued the following statement:

MLB's post-decision rush to the media is inconsistent with our collectively-bargained arbitration process, in general, as well as the confidentiality and credibility of the Joint Drug Agreement, in particular.  After learning of tonight's "60 Minutes" segment, Players have expressed anger over, among other things, MLB's inability to let the result of yesterday's decision speak for itself.  As a result, the Players Association is considering all legal options available to remedy any breaches committed by MLB.

Let’s evaluate those two arguments.

• Arbitration
• Breach of Contract

Picture an employee who finds himself in legal trouble or has a dispute with his employer, and hires a personal attorney to work through the issue.  The employee might think that his communications with his attorneys are privileged and immune from discovery in litigation.  But what if the employee uses his work computer to store those communications, and then hands over his computer to his employer upon resignation?  How does that affect the privilege?

A recent ruling from Judge Gardephe of the U.S. Southern District of New York answers this question in a way that employees in this situation won’t like.  The ruling involves the ongoing trial of Mathew Martoma of SAC Capital Advisors for alleged insider trading.  (For press coverage of the trial, see CNN and the New York Times.)  A key witness against Martoma will be Sidney Gilman, a former professor at the University of Michigan who says that he provided tips to Martoma about a failing drug trial.  In advance of trial, Martoma’s lawyers asked the court to order Gilman to produce his attorneys’ work product.  They argued that Gilman had knowingly waived any privilege over that work product because it was stored on hard drives that Gilman returned to the University when he resigned.

The court sided with Martoma and against Gilman and the U.S. government, which joined Gilman in arguing against disclosure.  Judge Gardephe ruled that at the time Gilman returned his hard drives, he was in an “adversarial posture” with the University because it had announced that it was investigating his activities.  By “returning electronic devices” to his adversary that “contained alleged work product material, Dr. Gilman waived whatever work product protection might otherwise exist with respect to the materials stored on these devices.”  Gilman argued that his disclosure was involuntary because he was pressured to return the devices or lose his pension benefits.  But Judge Gardephe disagreed, writing that “pressure is not sufficient to demonstrate that production is involuntary.”  Rather, production through “compulsory legal process” is required in order to show that a disclosure was involuntary and not a waiver.

• Discovery

After writing a basic primer on Alex Rodriguez’s appeal, there’s one question I’ve gotten more than any other:

Q:  How does the arbitrator have the authority to impose a 162-game suspension on A-Rod?  Doesn’t the Joint Drug Agreement (titled “Major League Baseball’s Joint Drug Prevention and Treatment Program” and referred to as the “JDA”) specify that the punishment is a 50-day suspension for a first offense and 100 days for the second?

A:  Sort of.  Section 7.A. of the JDA provides that a player who “tests positive for a Performance Enhancing Substance, or otherwise violates the Program through the use or possession of a Performance Enhancing Substance, will be subject to the discipline set forth below,” and those punishments are the ones you see quoted in popular sports media; i.e., 50 days for a first offense, 100 for a second, and a “permanent suspension” from MLB subject to the right to apply for reinstatement for a third.  Id. at 22 (emphasis added).  There’s also a catch-all provision, Section 7.G.2, which provides that any player “may be subjected to disciplinary action for just cause by the Commissioner for any Player violation of Section 2 not referenced in Section 7.A through 7.F above,” and Section 2 in turn covers all Prohibited Substances.  Id. at 25.

Note those italics.  MLB didn’t charge A-Rod with one (or even multiple) test violations; it charged him with generally violating MLB’s Program through the alleged use of performance enhancing substances and suspended him for 211 games.  Now one could argue – and Alex Rodriguez’s lawyers almost certainly did argue during the arbitration – that MLB had no authority to impose a 211-game suspension under the JDA.  The arbitrator thus presumably heard and responded to those arguments; if he refused to hear them, A-Rod certainly has a great argument on his side on appeal pursuant to 9 U.S.C. § 10(a)(3), as I discuss in the previous post.  (I note that, so far, neither A-Rod nor his lawyers have suggested that they were denied the opportunity to make that or any other argument.)

But let’s assume A-Rod made that argument to the arbitrator and lost.  Now the question is:  what must the arbitrator do with it?  The arbitrator’s authority to address grievances comes from Article XI of the Basic Agreement, as previously discussed.  Subsection B, in turn, provides that the arbitrator, after hearing all evidence and argument relating to any grievance, “may affirm, modify, or reverse the decision from which the appeal is taken.”  Id. at 44.  MLB’s decision was to suspend A-Rod for 211 games, and the arbitrator thus modified it downward to 162 games.  A-Rod is free to argue that the arbitrator’s decision to do so was erroneous (or even arbitrary); I’ve already explained why that’s not likely to be a winning argument.

Could A-Rod characterize an argument that the arbitrator “exceeded [his] powers” in imposing a 162-game suspension in light of Section 7.A of the JDA?  He could, but in my experience, courts have generally not been receptive to such an argument.  See, e.g., Certain Underwriters at Lloyd’s, London v. Ashland, Inc., 967 A.2d 166 (D.C. 2009).  The bottom line is that even if the arbitrator disregarded the 50/100/lifetime structure set out in the JDA, that fact standing alone is unlikely to provide grounds for reversal of the award by a federal court.

• Arbitration

Breaking news:  An arbitrator for Major League Baseball (MLB) has issued a final decision determining that New York Yankee third baseman Alex Rodriguez should be suspended for 162 games – the complete 2014 MLB season – plus any and all postseason games.  This decision reduces the suspension initially imposed by MLB (211 games), and, because it will be without pay, costs A-Rod $25 million.  (Perversely, the suspension benefits the Yankees, who will not only be freed from their payroll obligations to A-Rod for 2014, but relieved of certain luxury tax obligations as well under MLB rules.)

Via a statement released earlier today, A-Rod says that he and his lawyers are headed to federal court.  What awaits him there?  To understand that, we need to understand the legal landscape that applies to major league baseball players.

The relationship between Alex Rodriguez, the New York Yankees, and MLB is governed by the Basic Agreement, a contract that was negotiated in 2012 between the existing MLB teams and the players’ union, called the Major League Baseball Players Association (“MLBPA”).  The current Basic Agreement runs until 2016, at which point the union and MLB will sit down and collectively bargain for a new one.

Under the Basic Agreement, disputes between a player and his team are governed by Article XI (the “Grievance Procedure”).  Id. at 38.  Those disputes, in turn, are ultimately settled by arbitration pursuant to XI.B.  Id. at 44.  The Basic Agreement provides that the “decision of the Arbitration Panel shall constitute full, final and complete disposition of the Grievance appealed to it.”  Id.

That’s where we are now; A-Rod has followed the Grievance procedures and has now obtained a “full, final and complete disposition” of his Grievance, reducing his suspension from 211 to 162 games.  How does he get from there into federal court?

The answers are two-fold:  first, because the Basic Agreement is a product of private collective bargaining, it is subject to the federal Labor-Management Relations Act, which in turn provides for federal jurisdiction over disputes regarding rights created by or substantially dependent upon a collective bargaining agreement (such as the Basic Agreement).  29 U.S.C. § 185(a); see also Caterpillar, Inc. v. Williams, 482 U.S. 386 (1987).  So that means A-Rod can file suit in federal court based on federal law, regardless of what the Basic Agreement or any state laws happen to say.

But what does that federal law say?  As it turns out, this is a topic we’ve discussed frequently here at Suits by Suits; the same law that governs virtually all individual arbitration clauses contained in employment agreements also governs here:  the Federal Arbitration Act (“FAA”), 9 U.S.C. § 1 et seq.  The FAA, in turn, provides four ways in which a litigant can vacate an arbitration award:

(1) where the award was procured by corruption, fraud, or undue means;

(2) where there was evident partiality or corruption in the arbitrators, or either of them;

(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or

(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

9 U.S.C. § 10(a).  If you want to skip to the punch line, our own Jason Knott summarized it perfectly a few months ago:  “When a federal court confirms an arbitration award, it isn’t newsworthy, because that’s what everyone expects will happen.  But when a court tosses an arbitrator’s decision, it creates headlines.”  So why exactly does A-Rod face such an uphill scenario?

The biggest reason isn't what the FAA says; it's what it doesn't say.  Note that those four statutory grounds for reversing an arbitration award do not include “mistake of law” or even “gross mistake of law.”  They don’t include incompetence, stupidity, or carelessness.  As the U.S. Supreme Court has noted, when a collective bargaining agreement specifies that an arbitrator’s award is “final,” a court may not evaluate whether the arbitrator applied “correct principles of law” or not.  United Steelworkers of America v. Enterprise Wheel & Car Corp., 363 U.S. 593, 598-99 (1960).  Thus, even if the arbitrator had no basis for imposing a 162-game suspension on A-Rod, that fact standing alone would not be sufficient to permit a federal court to overturn the arbitration award under the FAA.

Summarizing this (and other) holdings, we lawyers typically describe the FAA’s standards for vacating an arbitration award as procedural rather than substantive; that means that a successful challenge must show that there was something wrong with the way in which the arbitration was conducted, and not just the result the arbitrator reached.  This is the dual-edged nature of binding arbitration; like it or not, you’re usually stuck with even an egregiously wrong outcome.  (For this reason, we told you how some employers are reconsidering whether mandatory arbitration clauses with their executives are good business policy.)

We do not yet know what transpired during A-Rod’s arbitration.  But what we do know is that, if Rodriguez is going to prevail in federal court, he’s almost certainly going to need to show that the process itself was unfair in some way.  Maybe he can do this; perhaps there were key pieces of evidence that the arbitrator refused to admit (9 U.S.C. § 10(a)(3)).  So far, however, A-Rod’s allegation is that the arbitrator “blatantly disregarded the law and the facts.”  That allegation – even if true – is probably not enough for him to succeed in overturning the arbitration award.

As more details are forthcoming – and if Alex Rodriguez and/or his lawyers detail allegations that fit more closely within the four grounds set forth for vacatur under the FAA – we’ll continue to update and evaluate.

• Arbitration

Neither snow nor rain nor heat nor gloom of night – and certainly not a batch of freezing rain and ice that’s currently paralyzing the greater Baltimore-Washington area right now – stays your trusty editors from the swift completion of their appointed rounds; namely, bringing you the weekly roundup of Suits by Suits:

• It may not make the headlines on cable news channels, but next Tuesday, the Supreme Court will hear oral argument in United States v. Quality Stores, Inc. to determine whether severance payments made by employers to involuntarily-terminated employees are subject to FICA taxes.  The U.S. Court of Appeals for the 6^th Circuit says such payments are not “wages” and thus not subject to FICA tax; a prior IRS ruling disagrees.  The Human Resource Executive Online estimates that businesses may qualify for $1 billion or more in refunds if the 6^th Circuit opinion is upheld.
• The Occupational Safety and Health Administration (OSHA) issued a ruling requiring a trucking company, Oak Harbor Freight Lines, Inc., to compensate a driver who refused to work while taking a prescribed narcotic cough suppressant while sick in violation of OSHA regulations.  The order also requires the company to cease retaliating against workers who refuse to operate vehicles while ill or fatigued in derogation of safety regulations.

• Speaking of which, the Wall Street Journal describes a series of new whistleblower protection laws that just went into effect in California, creating an entirely different legal regime.  As the story notes:  “Instead of establishing a specific program for individuals to submit tips, like the Securities and Exchange Commission’s whistleblower program, these laws broaden an individual’s right to pursue action if retaliated against for reporting suspected wrongdoing. The potential civil fine is up to $10,000 per violation, among other potential sanctions.  (We’ve writen extensively about whistleblowers, usually in the federal context.)

• Of course, no issue of the Inbox would be complete without the usual roundup of complaints over golden parachutes.  This week, we learned that Paterson, NJ was continuing to study the legality of a $74,000 payment to former mayor Jose “Joey” Torres in connection with accrued but unused sick days and vacation time; and that a U.S. trustee has objected to a proposed $650,000 in severance payments to two outgoing executives of discount fashion retailer Loehmann’s, currently in Chapter 11 bankruptcy.  Despite the public controversy that often surrounds such payments, it hasn’t affected the boardroom:  a study reveals that shareholders have approved a higher percentage of so-called golden parachutes in 2013 (86%) than they did in 2012 (82%), even as third-party advisers are increasingly advising shareholders to vote no.

• And finally:  there’s been much coverage of Colorado’s law legalizing recreational use of marijuana – my personal favorite story is “I just bought pot for the first time with my boss’s money!” – but, as those killjoys at the Wall Street Journal note, Colorado employers remain free to prohibit marijuana use by their employees and back up such prohibitions with regular, mandatory drug tests.  (The same story does note that drug use at the workplace has been on the decline for a decade, and that marijuana use accounted for just 2% of positive tests in 2012.)

• Bankruptcy
• The Inbox

An interesting ruling is hot off the press from the U.S. District Court for the Southern District of Alabama.  Earlier this week, a federal judge in Dawson v. Ameritox, Ltd. denied Ameritox’s motion for a preliminary injunction seeking to enforce its noncompete agreement with Eric Dawson, a former employee of Ameritox.  Ameritox had been seeking an injunction to prevent Dr. Dawson from taking a position as the National Director of Clinical Affairs with Millennium Laboratories, Inc., one of Ameritox’s direct competitors.

The court held that Ameritox’s noncompete agreement was void as against the public policy of Alabama under state law; we unpack exactly how the court reached that conclusion – and what lessons all of us can draw from this ruling.

• Noncompete Agreements ‎

As Massachusetts continues to consider whether to eliminate the enforceability of employee covenants not to compete in that state, we’ve brought you not only the legal standards at issue, but some of the public policy issues that underlie the debate as well.  The two people who are probably at the forefront of this research are Professors On Amir of the Rady School of Management at the University of California San Diego and Orly Lobel of the University of San Diego School of Law.  Last year, Amir and Lobel wrote an insightful piece for the Stanford Technology Law Review entitled “Driving Performance:  A Growth Theory of Noncompete Law,” which argued that reducing constraints on employee mobility increased economic growth and innovation. [1]  (And if you follow our Twitter feed, we directed you to Prof. Lobel's new book, Talent Wants to Be Free, back in November.) 

Amir and Lobel are back at it, with a piece published a few days ago for the Harvard Business Review entitled “How Noncompetes Stifle Performance.”  They pull no punches, concluding that “limits on future employment not only dim workers’ external prospects but also decrease their perceived ownership of their jobs, sapping their desire to exert themselves and develop their skills.”

• Noncompete Agreements ‎

Happy 2014!  We'll be resuming our usual schedule of bringing you cutting-edge insights into legal disputes between high-level employees and their companies next week.  Meanwhiile, for those of you who found yourselves watching the holiday movie classics for the umpteenth time last week (and loving it), you may appreciate revisiting these Suits by Suits oldies-but-goodies: 

Cratchit v. Scrooge - Holiday Adventures in Employment Law

Cratchit v. Scrooge - Further Holiday Adventures in Employment Law

It's a Wonderful Life . . . Assuming George Bailey and Uncle Billy Can Get the Legal Bills Paid

It's A Wonderful Life...Or It Will Be If George And Uncle Billy Can Get Their Legal Fees Paid, Part 2

This past holiday week, many moviegoers took in The Wolf of Wall Street, which is the latest glamorization of Wall Street misdeeds to hit the big screen.  Of course, the most famous moment from a financial flick is still Gordon Gekko’s “Greed is good” speech in 1987’s Wall Street.

Greed isn’t always good, as Joseph F. “Skip” Skowron III, a former portfolio manager for Morgan Stanley, could probably tell you.   Skowron’s admitted misconduct has cost him not only his freedom, but also $31,067,356.76 that he must pay back to his employer.  Morgan Stanley v. Skowron, No. 12 Civ. 8016(SAS), 2013 WL 6704884 (S.D.N.Y. Dec. 19, 2013).

The big judgment arises from Skowron’s August 2011 plea agreement with the government, in which he admitted that he participated in a three-year insider trading conspiracy.  As news reports described, Skowron used insider tips from a French doctor to avoid losses in hedge funds he managed, and then lied to the SEC about the tips.  The judge in Skowron’s criminal case sentenced him to five years in jail, and ordered him to pay restitution to Morgan Stanley of 20% of his compensation over the time of the conspiracy. 

Morgan Stanley then sued him to recoup the rest.  In that lawsuit, it moved for summary judgment based on New York’s “faithless servant” doctrine.  Under that doctrine, if an employer can show that an employee was disloyal – either because he engaged in “conduct and unfaithfulness” that “permeate[d] [his] service in its most material and substantial part, or because he breached “a duty of loyalty or good faith” – it can recover all of the compensation that the employee was paid during the period of disloyalty.  Phansalkar v. Andersen Weinroth & Co., 344 F. 3d 184 (2d Cir. 2003).

• Breach of Contract
• Summary Judgment