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’re in the midst of summer and the news outlets are replete with anti-compete and whistleblower developments. But before we get to those, let’s turn our attention to China:
If the dog days of summer here in the U.S. aren’t sweltering enough, imagine what they must feel like in the bustling, smog-laden cities of China. The Wall Street Journal reports that Coca- Cola Co. offers “environmental hardship pay” to some employees as a condition for relocating to some of China’s cities. Ed Hannibal of the HR consulting firm, Mercer LLC, indicates that it is not uncommon for multinational companies to offer the extra pay to incentivize workers to relocate to polluted cities. It helps to offset severe living conditions and ensure the company’s continued presence on the ground.
These days it seems employers face an uphill battle to see non-compete agreements prevail in court. Recently, a Louisiana state court carefully examined the terms of a non-compete in Gulf Industries, Inc. v. Boylan (La. App. 1 Cir. June 6, 2014). The National Law Review reports that the employer in this case inserted a two year non-compete provision into a one-year employment contract. According to the Court, even though Boylan’s employment extended two years past the date specified in the employment contract, the non-compete provision kicked in when the one year employment term was satisfied. The employer sought to extend the non-compete, arguing that it did not take effect until Boylan resigned. The Court disagreed and held that the non-compete had run during Boylan’s continued employment with the company. Little did he realize at the time, but Boylan was quite the multi-tasker.
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.
Happy 4th of July! While many Americans enjoy a festive day of parades, barbecues and fireworks, let’s see if this week’s highlights spark your interest:
No one likes to be wrong, and being proven wrong stinks. And that’s especially true for folks in my profession – we’re not known for being gracious losers.
But even worse than just being proven wrong is having to pay the other side what they spent to prove you wrong. This is a relatively rare thing in the United States: the “American Rule” means that each side pays its own attorney’s fees, unless a contract or statute shifts the winner’s fees to the losing party’s side of the ledger.
But those fees – over $200,000 of them – were shifted to the loser in Stuart Irby Co. v. Tipton, et al., an Arkansas case involving a non-compete clause that the plaintiff said prevented three of its former salesmen from going to work for another business in the electrical supply industry. As we’ve noted, Arkansas can be a tough place for businesses trying to enforce non-competes: for example, its courts won’t rewrite them for the parties if they’re overly broad or otherwise unenforceable.
On Thursday, even though the United States lost to Germany, they moved on from the Group of Death to take on Belgium in the World Cup round of 16. In honor of US Soccer’s achievement, we are glad to present this footy-themed edition of the Inbox.
The Securities & Exchange Commission gained significant new enforcement powers in the Dodd-Frank Act of 2010. Under the Act, the SEC can award bounties to whistleblowers who provide information leading to successful enforcement actions. It has already exercised this power, making eight whistleblower awards since starting its whistleblower program in late 2011. The Dodd-Frank Act also allows the SEC to sue an employer who retaliates against a whistleblower, but the SEC hasn’t previously taken that step.
Ten days ago, that changed. The SEC announced that it had charged Paradigm Capital Management and owner Candace King Weir with engaging in prohibited trades and retaliating against a head trader who reported the trades to the SEC, and that Paradigm and Weir had settled the charges for $2.2 million. Without its new enforcement authority under Dodd-Frank, the SEC wouldn’t have been able to bring the retaliation charge.
According to the SEC’s press release, Paradigm “removed [the whistleblower] from his head trader position, tasked him with investigating the very conduct he reported to the SEC, changed his job function from head trader to a full-time compliance assistant, stripped him of his supervisory responsibilities, and otherwise marginalized him.”
The formal order issued by the SEC further describes what happened to the whistleblower. The day after the trader told Paradigm that he had reported these particular trades to the SEC, Paradigm removed him from his position. The trader and Paradigm tried to negotiate a severance package, but when that fell through, Paradigm brought him back to investigate trades and work on compliance policies – but not to resume his head trading responsibilities.
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.”
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.