For my first foray into blog-writing, allow me to tell a cautionary tale intersecting two of my favorite topics: defending companies and individuals in government investigations and Directors and Officers (D&O) Liability Coverage. As a contract junkie who enjoys reading, interpreting, and arguing contract language, parsing through various interrelated D&O policy provisions to glean favorable language for my white collar clients offers hours of amusement (lest ye be worried about me, I do have other hobbies). D&O policies can be effectively used to defray defense costs incurred due to a government investigation. The trick is keeping the money.
The recent suit between Protection Strategies, Inc. (PSI) and Starr Indemnity & Liability Co. in the Eastern District of Virginia, case 1:13-cv-00763-LO-IDD, illustrates how difficult keeping the money can be. PSI is an Arlington, Va.-based defense contractor. In January 2012, PSI received a subpoena from the NASA Office of the Inspector General and a search warrant issued by the United States District Court for the Eastern District of Virginia. On February 1, 2012, the NASA OIG executed the search warrant at PSI’s headquarters. In addition to the company itself, several of PSI’s current and former officers were informed that they were also targets of the NASA OIG investigation. PSI retained Dickstein Shapiro to represent it and hired separate counsel to represent the individual targets and other company employees.
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.
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.
If executives lie and fudge credentials on their resumes, they may find their pantsuits on fire when falsehoods are discovered. For example, the Wall Street Journal recently reported that David Tovar, a top Wal-Mart spokesperson, was terminated recently when a bogus credential was discovered through the company’s promotion-vetting process. According to the Journal, liars and resume-fakers should beware of embellishing their credentials given the increased digitization of transcripts and diplomas. A company named Parchment, for example, houses these credentials in a secure database, allowing employers and employees to substantiate resume claims. Additionally, Pearson PLC has developed a digital platform whereby recipients of licenses and certifications can post “badges” to their profiles on websites like LinkedIn. It’s all in an effort to keep everyone honest, especially those who need a little nudging in that direction.
The University of Detroit Mercy’s Titans athletic department has seen its share of controversy stemming from a lawsuit filed by former assistant basketball coach, Carlos Briggs. According to The Varsity News, Briggs claimed he was terminated for blowing the whistle on an affair between the athletic director and another assistant coach. A federal judge dismissed the case, asserting that no recognized cause of action arose from his colleagues’ extramarital relationship. Briggs is appealing with the hopes that an oral argument on the merits will give weight to his claims.
On September 22, the Securities and Exchange Commission announced its largest award to date under its whistleblower program: $30 million. The SEC said that the whistleblower, who lives in a foreign country, came to it with valuable information about a “difficult to detect” fraud.
In the order determining the award (which is heavily redacted to protect the identity of the whistleblower), the SEC commented that the claimant’s “delay in reporting the violations” was “unreasonable.” In arguing for a higher bounty, the claimant contended that he or she was “uncertain whether the Commission would in fact take action.” This argument, however, didn’t support a “lengthy reporting delay while investors continued to suffer losses.”
Every once in a while published legal opinions and pop culture intersect in such a cheeky, unexpected way as to cause minor ripples in the otherwise relatively calm waters of legal writing and reporting. In what some have described as the footnote of the year according to Business Insider, a Texas Supreme Court Justice gave a wink and nod to a Coen Brothers’ favorite, The Big Lebowski, in a recent opinion. The events in the underlying case might not have been as convoluted as The Big Lebowski’s plot, but it is worth noting. The appellant, Robert Kinney, was a legal recruiter for BCG Attorney Search until 2004 when he left to create his own firm. Some years later, Andrew Barnes, President of BCG, claimed that Kinney engaged in a kickback scheme while an employee of BCG. Kinney then sued Barnes, accusing him of defamation and asking for permanent injunctive relief. The trial court granted (and the appeals court affirmed) summary judgment, agreeing with Barnes that a permanent injunction would constitute impermissible prior restraint of free speech. Now in the hands of the Texas Supreme Court and Justice Debra Lehrmann, the high court ultimately agreed with the finding. As Justice Lehrmann dove into First Amendment law and jurisprudence in the opinion, she noted:
Last week, we covered the Third Circuit’s decision that Goldman Sachs bylaws didn’t clearly establish a vice president’s right to advancement of his legal fees for his criminal travails. The vice president, software programmer Sergey Aleynikov, isn’t giving up easily, however.
Law360 reports that Aleynikov has filed a petition for panel rehearing or rehearing en banc. In the federal appellate courts, this is a step that parties can take when they disagree with the decision of the three-judge panel that heard their case. In a panel rehearing, the panel can revisit and vacate its original decision; in a rehearing en banc, the entire Third Circuit could consider the issue.
Aleynikov contends in his petition that the panel misapplied a doctrine of contractual interpretation called contra proferentem. In plain English, contra proferentem means that a court will read the written words of a contract against the party that drafted it. The panel in Aleynikov’s case disagreed as to whether under Delaware law (which governs his dispute), the doctrine can be used to determine whether a person has any rights under a contract. The two-judge majority said that it can’t, and therefore refused to use the doctrine when it decided whether Aleynikov – as a Goldman vice-president – fell within the definition of an “officer” entitled to advancement under the company’s bylaws. In dissent, Judge Fuentes asserted that “Delaware has never suggested that there is an exception to its contra proferentem rule where the ambiguity concerns whether a plaintiff is a party to or beneficiary of a contract.”
In his petition, Aleynikov asks the whole Third Circuit to decide who is right: Judge Fuentes or the majority. He also cites additional Delaware cases that he says support his position, including one “unreported case” that was brought to his counsel’s attention “unbidden by a member of the Delaware bar who read an article commenting on the panel’s decision in The New York Times on Sunday, September 7, 2014.” Sometimes, to establish a right to advancement rights, it takes a village.
The court of public opinion giveth, and taketh away. You may recall that we reported on the reinstatement of Arthur T. Demoulis as Market Basket’s CEO, following weeks of customer and employee advocacy for the chief. Public opinion, in the case of Desmond Hague, cut the other way in unrelenting fashion. Mr. Hague, president and chief executive of Centerplate, a catering company servicing sports and entertainment venues, was captured on video kicking and abusing an otherwise docile Doberman Pinscher puppy. The Washington Post reports that when the footage made its way to the SPCA of British Columbia, it quickly went viral and users of social media demanded his resignation. Initially, Centerplate dismissed the incident as a personal matter. As media attention increased, Centerplate announced that Mr. Hague would undergo counseling and community service. The masses remained unimpressed, and as the pressure mounted, Mr. Hague was ultimately removed from his position. Given the power of social media, it appears that the court of public opinion has rendered its verdict.
The National Law Review, citing the recent lawsuit filed by TrialGraphix Inc. against its competitor FTI Consulting, Inc. in the New York Supreme Court, offered helpful tips to employers on both sides of the battle over poached employees. In this case, four high-ranking employees conspicuously left TrialGraphix for FTI Consulting. As in similar suits filed by Booz Allen and Arthur J Gallagher Co. (which we discussed here), claims of corporate poaching usually involve claims of trade secret theft and interference with client business relationships. The article highlights the importance of clearly-worded, reasonably-framed restrictive covenant agreements, safeguarding data upon the employee’s departure, and requiring employees to formally acknowledge the return of all company proprietary information and devices. Similarly, employers seeking to hire these employees should review any non-compete agreements to ensure compliance while also requiring the employee to refrain from using the previous employer’s confidential information or trade secrets. Non-disparagement agreements can also go a long way to prevent ill will between the old and the new employers.
The case of Sergey Aleynikov, a former vice president at Goldman Sachs, has drawn a lot of media attention, including these prior posts here at Suits by Suits. Aleynikov was arrested and jailed for allegedly taking programming code from Goldman Sachs that he had helped create at the firm. His story even inspired parts of Michael Lewis’s book Flash Boys. A federal jury convicted him of economic espionage and theft, but the Second Circuit reversed his conviction, holding that his conduct did not violate federal law. Now, Aleynikov is under indictment by a state grand jury in New York.
Unsurprisingly, Aleynikov wants someone else to pay his legal bills – Goldman Sachs. And it is no surprise that Goldman, which accused him of stealing and had him arrested, doesn’t want to bear the cost of his defense. In 2012, Aleynikov sued Goldman in New Jersey federal court for indemnification and advancement of his legal fees, along with his “fees on fees” for the lawsuit to enforce his claimed right to fees. As we discussed in this post, indemnification means reimbursing fees after they are incurred, and advancement means paying the fees in advance. Advancement is particularly important for those employees who cannot float an expensive legal defense on their own dime.
It’s only a matter of time before the traffic swells return to D.C. after a blissful summer of light, breezy roadway locomotion. As the holiday weekend begins to take hold, ushering in the anticipated congestion, here are a few highlights from around the web to ease you into the long weekend.
Departing employees leaving for the greener pastures of a rival in their industry might see red when the former employer suspects foul play and takes action. Such was possibly the case when Arthur J. Gallagher Co. sued three of its former insurance executives in New York federal court as well as Howden Insurance Services Inc., the rival that inherited the trio. According to Law 360, AJG claims that the executives conspired to stagger their departure dates, steal proprietary information, and lure clients away to Howden. AJG attributes the projected $700 million loss in revenue in 2014 to business redirected to Howden upon their departures. AJG first seeks to enjoin Howden from soliciting or working with 13 of AJG current and former clients, and to bar the use of trade secrets allegedly taken from them.
Booz Allen Hamilton Inc., a Virginia-based consulting firm known for its lucrative government contracts business, sued former employees last year in a New Jersey district court for conspiring to steal proprietary information from the company. According to Washington Business Journal, Booz Allen recently amended its complaint to name Deloitte and some of its senior executives in the suit, claiming that they obtained proprietary information about salaries, roles, and security clearances of key employees for the purpose of luring them, their intellectual capital, and the potential business stream to Deloitte. The Booz Allen team was devoted to the Instructional Development and Immersive Learning (IDIL) capability which invested in and developed 3-D modeling, animations, and interactive simulations.
Taiwan and Manhattan’s Foley Square are separated by 7,874 miles, and Taiwanese citizen Meng-Lin Liu couldn’t bridge the distance in federal court. Liu sought to recover in Manhattan under the Dodd-Frank Act’s anti-retaliation provision (15 U.S.C. § 78u‐6(h)(1)). However, on August 14, the Second Circuit, which sits in Foley Square, affirmed the dismissal of his whistleblower retaliation claim. Liu v. Siemens AG, No. 13-4385-cv (2d Cir. Aug. 14, 2014).
As we previously described here, Liu’s case was relatively simple. He alleged that he repeatedly told his superiors at Siemens in Asia, and the public, that Siemens was violating the Foreign Corrupt Practices Act (FCPA). As a result, he claimed, Siemens demoted him, stripped him of his responsibilities, and eventually fired him with three months left on his contract.
Over the past few days, we’ve been covering the non-compete dispute between American Realty Capital Properties, Inc. (ARCP) and the Carlyle Group LP and Jeffrey Holland. (Here are Part 1 and Part 2 of our series in case you need to catch up). It’s time to end the suspense and tell you how the judge, the Honorable David Campbell of the U.S. District Court for the District of Arizona, resolved the dispute.
Judge Campbell issued his ruling on the same day as the oral argument, denying ARCP’s request for a temporary restraining order against Carlyle and Holland. He decided that ARCP had not made the necessary showing of a “likelihood of success on the merits” of its claim that Holland would violate his employment agreements by marketing Carlyle’s investment products. It said that Holland’s “non-solicitation provisions appear[ed] to be unreasonably broad,” because “read literally, they would prevent Defendant Holland from soliciting any form of business from any client of Plaintiff, anywhere in the world.” Further, the applicable Maryland and Arizona law did not allow the court to “blue pencil” these provisions – i.e., to rewrite them to be legally enforceable. Similarly, the confidentiality provisions in Holland’s agreements were also too broad to enforce, because they would have forever prohibited Holland from using any information related to ARCP’s customers.
The ARCP-Carlyle-Holland saga involves a couple of additional twists. Soon after the ruling, ARCP dismissed its Arizona case without prejudice. It then filed an identical case in New York for breach of contract. Carlyle and Holland moved for attorneys’ fees in Arizona, relying on an Arizona statute that allows a successful party to recover “reasonable attorneys’ fees in any contested action arising out of contract.” The court awarded Carlyle and Holland $46,140 for five days of attorney work (of the $134,182 they sought).
Thus, Carlyle and Holland won the battle, with some additional compensation for their troubles thanks to Arizona law. However, the war over Holland’s work for Carlyle is now raging in a different forum.
Last week, we introduced you to a non-compete dispute between American Realty Capital Properties, Inc. (ARCP), on one side, and the Carlyle Group LP and Jeffrey Holland, on the other side. Now, it’s time to find out more about the parties’ arguments.
In its application for a preliminary injunction, filed on April 1 of this year, ARCP made two main arguments. First, it argued that it could legitimately enforce the provisions in Holland’s agreements that precluded him from using its confidential information and from soliciting its investors. Second, it argued that by marketing Carlyle’s investments, Holland was breaching these provisions.
In the hearing on the motion, held a week later on April 8, the court summarized the dispute as follows:
It seems to me that the key question is this: [ARCP] is concerned that Mr. Holland’s work for Carlyle … will be in direct competition with the plaintiff’s business of marketing REITs … to financial advisors because that was the business Mr. Holland oversaw while he was with Cole, the predecessor to ARCP, and that that business is highly dependent upon relationships with independent financial advisors or financial advisors with firms.
Holland, ARCP said, would be exploiting these relationships in violation of his agreements if he was allowed to market Carlyle’s products to Cole’s investors. It counsel argued that ARCP would be “irreparably harmed by that because he will be preying upon . . . my client's confidential information and on its good will.”
Holland, meanwhile, argued that Carlyle did not market REITs, that he would be marketing Carlyle’s products mostly to a different class of purchasers, and that if his agreements covered these activities, they would be too broad to be enforceable. As his counsel summarized: “It cannot be the case that because you learn how to build a retail relationship in one financial product, that you can’t do it in another if you’re not competing.”
Tomorrow, we’ll talk about the court’s resolution of the dispute, as well as an interesting side-effect of its ruling.
A recent decision from the Third Circuit proved a boon to employers facing the dangers of class arbitration in costly wage/hour disputes. In its decision, the Third Circuit determined that courts, rather than arbitrators, should decide whether class arbitration exists in the absence of specific language in the arbitration agreement. Employers generally oppose class arbitration because of arbitrators’ tendency to allow them, and the low prospects of overturning an unfavorable arbitration decision. The longer-term consequences of the decision also bode well for employers who seek to insert class waivers in their arbitration agreements. Law 360 interviewed Steven Suflas, a Ballard Spahr partner, who opined that employers can now take solace in the fact that a court will likely enforce class waivers found in arbitration agreements.
Speaking of upholding class waivers in arbitration agreements, the California Supreme Court’s recent Iskanian decision did just that. However, the court did carve out a general exception to the rule, stating that employers may not bar arbitration of claims brought under the Private Attorneys General Act (PAGA) as a matter of California public policy. As if on cue, plaintiffs in a federal putative wage class action against CarMax Auto Superstores California LLC filed new state claims under PAGA, claiming they could not be arbitrated despite being ordered to arbitrate other claims on July 2. As reported by Law 360, CarMax argues that plaintiffs are seeking to avoid the arbitration order with the state PAGA claims while plaintiffs maintain that the suits are substantially different.
“Nasty, brutish, and short” isn’t just Hobbes’s famous explanation of human life in the state of nature. It also hits close to the mark in describing how litigation over non-compete provisions often proceeds, as a recent case illustrates.
The plaintiff in the case was American Realty Capital Properties, Inc. (ARCP), a publicly-traded REIT (a real estate investment trust). Allied on the other side were the Carlyle Group LP and Jeffrey Holland. Holland used to work for Cole Real Estate Investments, a company that ARCP bought in February of 2014. According to ARCP’s court filings, it paid Holland handsomely when it acquired Cole, giving him $7.1 million in connection with the change. Holland then told ARCP that he wanted to take some time off. ARCP was comfortable with that, given that Holland had previously signed both an employment agreement and a consulting agreement in which he agreed not to solicit Cole’s or ARCP’s investors for 12 months.
Within a couple of months, Holland joined Carlyle, one of the world’s largest investment firms, to raise funds for its products. To put it mildly, ARCP was not pleased with this development. At the beginning of April, it sued both Holland and Carlyle and filed an application for a preliminary injunction and temporary restraining order (TRO).
A recent decision from an appeals court in Pennsylvania is a warning to companies that the non-compete agreement they think they have with their top executive could be unintentionally wiped out with a few words in a later agreement. In law-speak, the words are called an “integration clause” or a “merger clause.” Through them, the parties agree that their agreement is their “entire” agreement and that it wipes out any earlier agreements.
In the Pennsylvania case, Randy Baker was the President and CEO of Diskriter when Diskriter was acquired by Joansville Holdings, Inc. The terms of the acquisition were memorialized in a stock purchase agreement (“SPA”), which had non-compete and non-solicitation clauses that apparently bound Baker.
Just when government whistleblowers hoped retaliation was on the decline following the passage of the Whistleblower Protection Enhancement Act, there appears to be a 2.0 version out, and it’s coming with a vengeance. The latest wave in retaliation comes in the form of criminal investigations lodged by government agencies against truth-telling employees. Rather than risk detection with a baseless termination or demotion, these employers have increasingly begun to wage criminal investigations, said Tom Devine, legal director for the Government Accountability Project in an interview with Government Executive. Devine stated that such actions are a scary, dangerous trend, and that forcing someone out of a government position through criminal investigations could forever damage the employee’s prospects for future employment.
NYG Capital LLC made two headlines this week when a former intern accused its CEO, Benjamin Wey, of sexual harassment and wrongful termination, among other things. The plaintiff, Hanna Bouveng, a Swedish native, was working in the US on a J-1 visa when the alleged actions took place. Upon her termination, Bouveng alleges that Wey continued to stalk, harass and malign her reputation. Meanwhile, as also reported by Law 360, a former graphic design artist was terminated shortly after cooperating with attorneys investigating Bouveng’s charges against Wey. Yonatan Weiss lent credence to Bouveng’s accusations and claims he was fired for being truthful during interviews on the subject.
We at Suits by Suits are so excited by American Apparel’s dispute with its recently-fired CEO and founder Dov Charney that we can barely keep our shirts on. After all, the dispute between the clothing manufacturer and its controversial former leader is bursting at the seams with takeaway points for feuding companies and C-suite employees (and those wanting to avoid having feuds). For example, as we described in an earlier post, the dispute illustrates that terminating a key company officer may jeopardize company financing. The dispute also presents the question: can a company like American Apparel, which knew that Charney was apparently known for not being able to keep his pants on, decrease its exposure to the inevitable sexual harassment lawsuit by having all of its employees acknowledge in writing that the company’s workplace is sexually charged? It depends.
Harold “Skip” Garner is a tenured professor at Virginia Tech who makes $342,000 a year, according to this article in the Roanoke Times. Yet he is still suing university officials, including former president Charles Steger, for $11 million. Why?
He says that the officials violated his constitutional rights when they removed him from his position as Executive Director of the Virginia Bioinformatics Institute (VBI). In his complaint, available here, he claims that he was demoted without “advance notice of his removal or demotion” and without any “opportunity whatsoever to contest the merits of the action.” He alleges that this lack of procedural protections “deprived [him] of property and liberty without due process of law.” This kind of claim is known as a “Section 1983” claim: i.e., a claim brought under 42 U.S.C. § 1983, which provides a federal cause of action to individuals who are deprived of constitutional rights by the actions of state officials. In the employment context, Section 1983 claims can arise when state officials discipline employees without affording them notice and an opportunity to be heard. See, e.g., Ridpath v. Board of Governors Marshall University, 447 F.3d 292 (4th Cir. 2006). That’s the kind of claim Garner is alleging here.
Talk about your inter-family disputes: one federal agency – the Department of Labor – has filed suit against the United States Postal Service, an independent federal agency (but one of the few explicitly authorized by the Constitution). The reason for the federal lawsuit, filed in Missouri: the Postal Service’s alleged poor treatment, firing, and alleged harassment of an employee who claims he blew the whistle on safety hazards in a mail facility.
Here’s the background, delivered despite any contrary weather: Thomas Purviance worked for the Postal Service for 35 years, most recently as a maintenance supervisor at a mail distribution center near St. Louis. He had no record of disciplinary or performance issues. In late December 2009, Purviance complained to his supervisors about what he perceived to be carbon monoxide and fuel oil leaks from some of the equipment at the center, as well as a pile of oil-soaked rags which he thought was a safety hazard. Getting no response, Purviance eventually called the local fire marshal and made a 911 call to report the carbon monoxide leak.
We cover a broad range of issues that arise in employment disputes. Occasionally, we also spotlight other topics of relevant legal interest, ranging from health care to white-collar defense to sports, just to keep things interesting.
Led by Jason Knott and Andrew Goldfarb, and featuring attorneys with deep knowledge and expertise in their fields, Suits by Suits seeks to engage its readers on these relevant and often complicated topics. Comments and special requests are welcome and invited. Before reading, please view the disclaimer.