Last week, American Apparel announced that its board had decided to terminate Dov Charney, the company’s founder, CEO, and Chairman, “for cause.” (We’ve discussed the meaning of terminations “for cause” in prior posts here and here.) The board also immediately suspended Charney from his positions with the company. Although the board didn’t initially disclose the reasons for its action, Charney is not new to controversy; in recent years, he has faced allegations of sexual harassment and assault.
The reasons for Charney’s termination have now become public, and they aren’t pretty. In its termination letter, available here, the board accuses Charney of putting the company at significant litigation risk. It complains that he sexually harassed employees and allowed another employee to post false information online about a former employee, which led to a substantial lawsuit. The board also says that Charney misused corporate assets for “personal, non-business reasons,” including making severance payments to protect himself from personal liability. According to the board, Charney’s behavior has harmed the company’s “business reputation,” scaring away potential financing sources.
This has been a noteworthy week here at Suits by Suits for developments in the law concerning whistleblowers; in addition to our in-depth articles we published this week, we also saw the following developments:
Of course, not everything that happened this week involved whistleblowers; here are a few other Suits by Suits that may be of interest:
While we’re talking about whistleblowers, it’s worth noting that two days ago, the U.S. Court of Appeals for the Second Circuit heard oral argument on appeal from the a federal district court’s opinion in Meng-Lin Liu v. Siemens AG, 978 F.Supp.2d 325 (S.D.N.Y. 2013). This case raises the significant question as to whether the anti-retaliation provisions of the Dodd-Frank Act, 15 U.S.C. § 78u-6(h)(1)(a), apply to an employee who is terminated by a non-U.S. corporation that does business in (and is regulated by) the United States.
One recurring topic here at Suits by Suits is the default corporate practice of including mandatory arbitration clauses in employment contracts; we’ve written frequently about that practice. Such clauses typically specify that “the parties agree to submit any dispute arising out of this Agreement to binding arbitration.”
Non-competes are a frequent topic here on Suits by Suits. We have discussed how the laws of the 50 states vary - and boy do they. Some states (like California) flat out prohibit non-competes, while some states (like Delaware) not only permit non-competes but enforce broad restrictions on employment. Meanwhile, in boardrooms and statehouses (like Massachusetts's), a debate is raging about whether non-competes are in the public's interest - especially in today's world, where our work force is highly mobile and the states are in an arms race to attract start-up tech companies (and all those jobs). For those of us interested in the debate, three recent items in The New York Times should not be missed: an article reporting on the proliferation of non-competes in unexpected fields (such as summer camp counseling); a discussion among lawyers, professors and lobbyists about the merits or lack thereof of non-competes; and an opinion by New York Times Editorial Board that non-competes hurt workers - especially low-wage and unskilled workers lacking the bargaining power to resist entering into non-competes.
Summer humidity has arrived here in the mid-Atlantic, but the skies are blue and the thermometer isn’t creeping above 90 as of yet. Here are some tidbits of executive-employer news to print and read in the shade when it’s time to cool off:
In 2010, Congress passed the Dodd-Frank Act, strengthening legal protections for employees who report violations of the securities laws. However, as we’ve covered here, here, and here, the courts have diverged widely as to whether an employee must report directly to the SEC in order to be shielded from retaliation.
In Asadi v. GE Energy (USA), LLC, which we addressed in this post, the Fifth Circuit decided that to meet Dodd-Frank’s definition of a “whistleblower” – and to be protected by its anti-retaliation provision – an employee must in fact provide information to the SEC. However, most of the district courts that have addressed the issue have decided that an employee need not report to the SEC in order to be protected from adverse actions by his or her employer.
An executive’s right to severance payments isn’t always written in stone, even if his employer agrees to provide them. In this post, we described how one exec lost his severance pay after the Federal Reserve decided that his employer, a bank, was in a “troubled condition” at the time.
A recent decision from the U.S. Bankruptcy Appellate Panel of the Tenth Circuit, In re Adam Aircraft Industries, Inc., illustrates another scenario in which an executive’s golden parachute can collapse around him. Joseph Walker was the president of Adam Aircraft, an airplane designer and manufacturer. He was terminated in February 2007, and was allowed to resign, after which he negotiated a healthy severance package. Over the next year, Adam Aircraft paid him $250,000 in severance, $100,002 to repurchase his stock, and $105,704 as a refund on a deposit he had made on a plane.
It's that time again... time to check in on the week's news in Suits by Suits:
As long-standing readers of Suits by Suits know, California is at the forefront of the “state-by-state smackdown” regarding covenants not to compete, having prohibited essentially all such clauses by statute. (You can refresh your recollection by reviewing our discussion of California law, here.)
Consequently, one of the arguments deployed by other states looking to restrict or ban noncompetes is that the business climate created in California encourages worker mobility, and that climate in turn is attractive to the technology sector (and in particular, to technology start-ups), who depend upon “poaching” away top talent that may be underpaid at a competitor. You can read these arguments in more depth here (part 1), here (part 2), and most recently here (part 3).
The common thread that runs through these arguments is that California encourages worker mobility, and that mobility, in turn, is good for Silicon Valley. The argument has some appeal.
While we’re a blog about disputes between executives and companies, we can’t overlook those significant days when those companies and executives pause for a national holiday. Through our first year, we’ve looked at how holidays – when most business stops and courts close (putting a brief halt to the disagreements we cover) – came to be, and their impact on the American workspace.
Regular readers will guess where we’re going today. Assuming you are not one of the 35 million-odd Americans traveling more than fifty miles for the traditional start to summer – and if you are, put down the device on which you’re reading this and watch the road, as someone is likely braking in front of you – read on for our look at how we got to enjoy Memorial Day.
Here at the Suits by Suits Executive Employment Dispute Resolution and Litigation Centre, we’re closing the door and shutting things down, to paraphrase Alan Jackson, as Memorial Day approaches (our history of that day is here, by the way). We’ve decided to walk to the beach this year because it may actually be faster than getting on the highway – given that fifteen percent of our Washington, D.C. home base clogs the roads to get out of town, while more than that come in to wander around the National Mall in search of restrooms.
Assuming you are not reading this while you’re driving, you may find this collection of developments in the world of executive employment disputes and related fields to be interesting:
We’ve written about this issue before, but it bears repeating: as a general matter, the more narrowly tailored and economically justifiable a non-compete agreement is, the more likely it is to be enforced (assuming state law allows it at all). The same standard applies to the closely related “non-contact” clause that keeps former employees from luring their old colleagues away to new positions.
An Arizona appellate court’s decision earlier this month reinforces this principle. That court held – in Quicken Loan v. Beale – that a “non-contact” clause that kept former Quicken loan managers from contacting current loan managers for two years wasn’t narrowly tailored to protect Quicken’s financial interests, and was an unreasonable restriction on the former employees’ speech rights. And, on a purely financial note, the court affirmed that Quicken had to pay its former employees’ attorney’s fees – as well as the fees the former employees’ new company, loanDepot, incurred when it jumped into Quicken’s suit.
Let me explain what that means: “vouching” is, for us members of the bar, both a technical term and a no-no. When it’s done at the trial of an executive employment dispute, it can unfairly prejudice the jury – and, ultimately, the “vouched-for” side can have its victory overturned by an appellate court. We’ll see how this happened in the case of one Mindy Gilster.
But first, more on “vouching.” In law, it means essentially what non-lawyers think it means: to give a personal assurance of the credibility or truth of something. All of us use this in our daily lives: “I know you’ll love that restaurant;” “trust me, you’re making the right decision;” and so on. Lawyers, though, can’t “vouch” for their clients or for a witnesses’ credibility. Not only is it considered a bad practice, but the Rules of Professional Conduct in most states forbid us from “assert[ing] personal knowledge of facts in issue…or stat[ing] a personal opinion as to the justness of a cause, the credibility of a witness, [or] the culpability of a civil litigant…” Put another way, lawyers need to build arguments from the facts that are actually entered into evidence, and not on what they personally think the facts should be. Vouching comes up most often in criminal cases – but, as in the case of our subject today, it can surface in civil litigation over employment disputes.
We have written before here on Suits by Suits about the risk to a company hiring an executive from a competitor of being sued by the competitor for tortiously interfering with the executive’s non-compete agreement. A recent decision from a federal court in Pennsylvania sheds light on another facet of that risk: being forced to defend the lawsuit in a faraway court favored by the competitor because the executive agreed to be sued there.
Bon-Ton Stores, Inc. alleges in a lawsuit that it recently filed against its former Senior Vice President, Director of Sales Gary Pralle that – after the company fired Mr. Pralle – it discovered “pornographic materials” and “documents containing racial slurs” in his e-mails. According to Bon-Ton, had it known about this “after-acquired evidence” before it fired Mr. Pralle, it would have had “cause” for firing him under its “Executive Severance Pay Plan” such that Mr. Pralle would not be entitled to severance. In other words, Bon-Ton v. Pralle is an example of a company invoking the after-acquired evidence doctrine to overcome a breach of contract claim. (Bon-Ton also alleges that bad behavior by Mr. Pralle that the company knew about before it fired him also gave the company “cause,” but those allegations mess up the example so we’re ignoring them.)
I thought April showers brought May flowers, but the month of May has brought both showers and flowers to the DC-Baltimore area. Luckily, our colleague Andrew Torrez was not parked on the Baltimore street that was swept away by the recent deluge. As for this week’s news in employer-executive disputes, we’ve managed to pluck a few tidbits that have bloomed despite the storms:
If you’re confused by this headline, you’re not alone. But you can’t be as confused as Debourah Mattatall must be after losing her lawsuit against her former employer, Transdermal Corporation.
The origin of Mattatall’s lawsuit, appropriately enough, was another lawsuit. Mattatall used to own a company called DPM Therapeutics Corporation. DPM’s minority shareholders sued her to prevent her from selling the company to Transdermal. She went ahead with the sale anyway, and signed a Stock Purchase Agreement and Employment Agreement with Transdermal. According to Mattatall, Transdermal didn’t fulfill its obligations under those deals, citing a lack of funds.
After Mattatall’s sale to Transdermal was final, Transdermal brought its own suit against the DPM minority shareholders. All parties, including Mattatall, eventually settled the two shareholder cases. Before agreeing to the settlement, Mattatall complained about the money that she was owed under the Stock Purchase Agreement and Employment Agreement. Transdermal’s counsel assured her that her claims were “wholly extraneous” and she would be “free to pursue” her claims against Transdermal.
In the written settlement, however, everyone released the claims that they “had, has or hereafter may have” against any other party. Thus, even though Transdermal hadn’t sued Mattatall, according to the language of the release, she was giving up her claims against it. The settlement also included a “merger clause,” under which all prior understandings were “merged” and “supersede[d].”
The recent case of Stephen Marty Ward is one of those rare events. Ward’s case shows that employment relationships gone sour can result in more than hurt feelings and lawsuits – they can result in jail time.
As reported by Law360, Ward worked for Corsair Engineering, Inc. During a three-month project for Insitu, a Boeing subsidiary, he gathered information about a “small tactical unmanned aircraft system” – i.e., a drone – that the Navy was working on. In particular, Ward had access to a “maintenance manual for an integrator system” that had flown over 500,000 combat flight hours. Here’s a link to some nifty pics of the “integrator system” from the Insitu website, if you’re curious.
When Ward was fired in October 2011, he called a Corsair employee and said that he had a lot of information and wanted a “healthy settlement” to go away quietly. In a ruse worthy of Hank Schrader and Jesse Pinkman, Corsair executives negotiated a $400,000 settlement with Ward. Ward came to pick up his down payment of $10,000, and found himself in handcuffs.
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.