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.
Even if you’re only an occasional reader of Suits by Suits, you know that we’re committed to engaging in a practical discussion of the varying ways in which an employee’s covenant not to compete might be legal in one jurisdiction but unenforceable in another. It’s our view that both employers and employees need to know about these potential landmines where the employer operates in multiple U.S. states.
But knowing what the substantive law in each state is regarding noncompetes is only half of the battle. Affected parties need to know not only whether a court will determine that a particular noncompete clause is unenforceable as written, but also what that court will do after it makes such a determination. And that’s what this post is all about.
Broadly speaking, a court can do one of three things with a defective covenant not to compete:
Momentum continues to build in Massachusetts for that state to adopt the California model and ban the enforcement of employee covenants not to compete in the state. Last fall, we told you that Gregory Bialecki, Secretary of Housing and Economic Development under Gov. Deval Patrick (D), went on record as saying that the administration supports the “outright elimination of enforceability” of noncompetes in Massachusetts in a story broken by Scott Kirsner of the Boston Globe.
Of course, there is often a world of a difference between a politician “supporting” something and being willing to actually spend political capital to try and bring about actual legislation. At first, Gov. Patrick’s support was limited to 2013’s H.B. 1715, which (as we explained here, over a year ago) would not have prohibited noncompetes, but would have instead created a statutory regime that prohibited such clauses that exceeded six months in length. That bill failed to pass the legislature in 2013.
On Friday, we described a lawsuit brought recently by five Buffalo Jills cheerleaders claiming that they should have been paid the minimum wage for all of the hours that they worked for the squad but were not. We said that a key issue in the case is whether the Jills are employees or independent contractors for purposes of New York wage and hour law because employers are required by the law to pay employees – but not independent contractors – the minimum wage. The lawsuit raises another question: is it a valid defense to the Jills’ claims that the defendants required them to sign contracts expressly agreeing that they are "independent contractors"? Here is one of those rare legal issues with a simple answer, at least under the federal wage and hour law called the Fair Labor Standards Act: No. As recently as last year, the U.S. Supreme Court said of the Fair Labor Standards Act: "The FLSA establishes federal minimum-wage, maximum-hour, and overtime guarantees that cannot be modified by contract."
So companies should beware that having people who work for them agree in writing that they are independent contractors does not inoculate the companies from wage and hour claims. And people who work for companies should know that just because they signed something saying that they are independent contractors does not necessarily mean that they are for purposes of the wage and hour laws. They may in fact be entitled under the law to be paid the minimum wage and overtime.
Here as we approach the close of April, we’ve noticed (in something of our Moneyball moment) that three of the four cities where Zuckerman Spaeder has offices – New York, Baltimore, and Washington – host baseball teams that have won more than half their games thus far this season. Our colleagues in Tampa are the only ones with a team winning below .500. Maybe we can make up for that by opening an office in Milwaukee, where the Brewers have won nearly 75% of their games.
In any event, the items below came over our transom this work and are worthy of note in the world of executive employment disputes:
In a lawsuit filed on Tuesday, five Buffalo Jills cheerleaders claim that the Buffalo Bills NFL franchise and two companies that manage the squad are violating New York wage and hour laws. The Jills allege that they are "employees" for purposes of New York law and therefore must be paid the minimum wage - $8 per hour in New York – for their work as Jills. We have explored wage and hour laws – the federal Fair Labor Standards Act and similar state laws – here at Suits by Suits before but not the employee versus independent contractor distinction that is the key to many wage and hour cases and on which the Jills’ case could turn.
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.