Suits by Suits

Tracy Chapman famously sang about needing “one reason to stay here.” But when severance is involved, employees may look for one reason to leave—one “Good Reason.”

While Ms. Chapman didn’t sing about them, many employment contracts include a “Good Reason” clause, which allows the employee to resign and still receive severance if certain conditions are met.

For example, many Good Reason clauses provide that an employee can receive severance upon resignation, so long as the employee has suffered from a reduction in salary or benefits, diminution of duties or responsibilities, or due to a forced relocation. In some cases, these Good Reason clauses only apply when an employee resigns following a change in control of the employer (for example, a merger or acquisition).

A party seeking to enforce a contract has to show mutual assent, also referred to as “a meeting of the minds.” In other words, both parties actually have to agree on the same thing. If the parties don’t agree, then a contract does not exist.

In a recent case, T3 Motion, Inc. (a Segway competitor) used a lack of mutual assent to avoid arbitration of its claims against its former CEO, William Tsumpes. This posture was somewhat unusual - typically, employers try to enforce arbitration agreements, and employees try to avoid them so that they can present their claims publicly in court, before a jury of their peers.

Thanksgiving is typically a time for gratitude, gathering with family, and acts of kindness among fellow men and women. But in one recent case, a bank used Thanksgiving to force-feed a separation agreement to its outgoing president.

The bank later claimed that the ex-officer had released his rights to benefits under a “top-hat” benefits plan, even though it was not mentioned in the separation agreement. In Buster v. Compensation Committee of the Board of Directors of Mechanics Bank, the plaintiff alleged, and the court agreed, that the bank’s interpretation of the separation agreement did not fly.

Steven Buster worked as president of Mechanics Bank between 2004 and 2012. During his tenure, Mechanics Bank had two retirement plans. The first was the Supplemental Executive Retirement Plan (SERP), a so-called “top-hat plan” because it was available only to a few, select senior employees. The accrual of benefits for the SERP was frozen in 2008. In that year, the bank adopted a separate Executive Retirement Plan (ERP).

What happens when an employer tries to change the basis for terminating an employee?

Recently, the Supreme Judicial Court of Massachusetts considered whether an employer could change the basis for the termination from “without cause” to “with cause” and withhold severance benefits otherwise owed the former employee. In EventMonitor, Inc. v. Leness, the employee won the battle, but the cost may have consumed the spoils of war.

When an executive has an employment agreement and his company doesn’t pay, the company might offer a number of excuses based on contract law. One of these contractual defenses is called “impossibility of performance.” Under this defense, when a party enters into a contract and circumstances later change such that the party can’t perform it, the party can be excused from performing.

The Virginia Supreme Court’s recent decision in Hampton Roads Bankshares, Inc. v. Harvard provides a timely example of how this defense actually works in practice. In the Hampton Roads case, the organization established a relationship with government regulators that affected its ability to pay severance. The court held that this change made it impossible for the company to perform an employment agreement, excusing performance.

The turn of the calendar is always a good time to reflect on what has come before and preview what lies ahead. In this post, we count down our most popular posts of 2015 about executive disputes. Later, we’ll look at what to expect in 2016.

When an executive and a company enter into a lucrative severance package, those benefits aren’t necessarily ironclad.

As we covered in this June 2014 post, when a company declares bankruptcy, its trustee can ask the court to allow the company to avoid its executives’ severance rights.

F-Squared Investments Inc. is now seeking to do precisely that. In late October, F-Squared moved to reject its separation agreement with former CEO Howard Present, seeking authority “to avoid the financial burden” of making a $500,000 payment to him and to cease the accrual of his COBRA payments.

Mr. Present and F-Squared have had a troubled couple of years.

Transition for corporate leadership is frequently complex.  When the transition involves a charismatic founder, this step can be even more stressful.  Planning well in advance for the inevitable segue between leaders and outlining the respective roles of both new and departing management can help, but may not fully resolve the issues.  A recent decision involving Crystal Cathedral Ministries, the megachurch founded by famed televangelist Dr. Robert H. Schuller, reflects how nuanced this process can be.  Because this case presents many issues of corporate succession, it provides a gateway for discussing various employment issues that may crop up in a corporate reorganization.  We will focus on the case in a series of articles designed to spotlight these issues.  

            Dr. Schuller founded the Crystal Cathedral in the 1950s.  Later, Crystal Cathedral Ministries was formally incorporated in 1970 with Dr. Schuller as the senior pastor.  During his 36-year tenure in this position, Dr. Schuller wrote numerous books and gave countless sermons and other talks, particularly in his role as the executive creator and director of content for The Hour of Power, a weekly television show produced by Crystal Cathedral Ministries.  In exchange for these services, Dr. Schuller received a salary and benefits, including a housing allowance and health insurance.

Who doesn’t love the year-end countdown?  We’re here to offer you one of our own – our most-read posts in 2014 about executive disputes.  The posts run the gamut from A (Alex Rodriguez) to Z, or at least to W (Walgreen).  They cover subjects from sanctified (Buddhists and the Bible) to sultry (pornographic materials found in an executive’s email).  Later this week, we’ll bring you a look at what to expect in 2015.

Without further ado, let the countdown begin!

8.            The Basics: Dodd-Frank v. Sarbanes-Oxley

This post is an oldie but a goodie.  It includes a handy PDF chart that breaks down the differences in the Dodd-Frank and Sarbanes-Oxley whistleblower laws.  Each of these laws continues to be a hot-button issue for plaintiffs and employers.

7.            When Employment Relationships Break Bad

America may have bidden adieu to Walter White and his pals on Breaking Bad, but employment relationships continue to spin off in some very unpleasant ways.  Such was the case with Stephen Marty Ward, who ended up in federal prison after he threatened his employer with disclosure of its trade secrets, as we covered in this post.

Helen of Troy isn’t just a famous mythological beauty.  It’s also a publicly-traded maker of personal care products.  And now, it and its directors are defendants in a suit by Helen of Troy’s founder, Gerald “Jerry” Rubin.

Executives who bring suit against their former employers frequently want to show that they were terminated for reasons other than performance, and Rubin is no different.  In his complaint, as reported by El Paso Inc., Rubin describes the history of Helen of Troy and its staggering growth.  From humble origins – a “wig shop in El Paso, Texas” – Helen of Troy grew into a “global consumer products behemoth, generating revenues in excess of approximately 1.3 billion dollars.”  And then the roof caved in.  Rather than “celebrating [Rubin’s] extraordinary success,” Rubin alleges, Helen of Troy’s directors turned on him in order to save their own skins, and eventually forced him out of the company.

Why did the directors need to sacrifice Rubin to save their positions?  According to Rubin, the answer lies with an entity called Institutional Shareholder Services (“ISS”).  ISS is a proxy advisory firm that conducts analysis of corporate governance issues and advises shareholders on how to vote.  Because shareholders often follow ISS’s recommendations, it can have substantial influence over the affairs of publicly-traded companies.  Indeed, some participants in a recent SEC roundtable suggested that ISS could have “outsized influence on shareholder voting,” or even that it has the power of a “$4 trillion voter” because institutional investors rely on it to decide how to vote.

Rubin alleges that if ISS decides a CEO is making too much money, it will demand that the compensation be cut or that the CEO be fired.  If its demand isn’t followed, it will “engineer the removal of the board members through [a] negative vote recommendation.”  Board members then will cave to ISS’s wishes to preserve their own positions.

Rubin claims that this is what happened in his case.

In honor of Halloween, we are looking over our shoulder at some of the most frightening news that we have brought to you this year on Suits by Suits:

• Earlier this week, we told you the tale of a CEO who was hauled into court thousands of miles away and slapped with an employee’s wage bill.  That’s the kind of stuff executive nightmares are made of.

• Bonfires are part of what makes Halloween special.  Unless they involve torching a laptop, destroying evidence, and getting hit with an adverse inference for spoliation at trial, which is what happened to one unhappy executive.
• The SEC announced its presence as a boogeyman for employers who punish whistleblowers, filing its first Dodd-Frank anti-retaliation action against one company and ordering a $30 million bounty for another employee.
•  Terror babies are scary, as anyone who’s seen Rosemary, Chucky, and Damien on screen knows.  Now, we have more terror babies to add to the mix, thanks to the bizarre saga of Rep. Louis Gohmert and fired Texas art director Christian Cutler.
• Ever been lost in a hall of mirrors?  Just think how confused this executive was, after her employer told her that she wasn’t releasing her claims for a shareholder payment and then defeated those same claims based on … her release.
• And perhaps the scariest story of all: the company that lost a non-compete dispute and then had to pay $200,000 of its opponent’s legal fees.  That’s like finding a razor blade in your Mounds bar.

Today, we discuss taxes – specifically, the taxation of severance payments.  It has long been recognized that severance payments are “income” to an employee, and that employers must withhold federal income taxes from the payments.  Earlier this year, the Supreme Court made clear that severance payments also are “wages” subject to FICA taxes, and that an employer must withhold FICA taxes as well.  The case, United States v. Quality Stores, 134 S. Ct. 1395 (2014), resolved a split among two federal appellate courts that had led many employers to seek a refund of the employer share of FICA taxes paid to the IRS on severance payments.

FICA is the federal payroll tax on wages that funds Social Security and Medicare.  The tax is paid by both employers and employees.  Each pays 7.65% on the first $106,800 of the employee’s annual wages and then 1.45% on amounts exceeding that threshold.  Employees never see their share of the tax – employers are required to withhold and pay the employee’s share to the IRS. 

In the 2008 case of CSX Corporation v. United States, 518 F.3d 1328, the Federal Circuit agreed with the IRS that a form of severance called supplemental unemployment compensation benefits (or SUB payments) falls within the broad definition of “wages” subject to FICA taxes. But several years later in Quality Stores, the Sixth Circuit reached the opposite conclusion, holding that SUB payments are not wages subject to FICA taxes.  693 F.3d 605 (2012).  The court reasoned that because section 3402(o)(1) of the Internal Revenue Code states that SUB payments shall be treated “as if” they are wages for income-tax withholding, they are not in fact wages.

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.

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.

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.

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. 

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.)

• A Seattle judge has denied Relator.Com operator Move Inc.’s motion to prevent Errol Samuelson from working for its rival Zillow as Chief Industry Development Officer. Move Inc. argued that Mr. Samuelson will inevitably disclose trade secrets that he allegedly took from Move Inc. in his work for Zillow and therefore should not be allowed to work there. The theory of inevitable disclosure of trade secrets is one we have examined before.
• WaPo’s Jenna McGregor explains why Henrique de Castro’s severance pay for 15 months at Yahoo totals $58 million; it has to do with high stock prices.  We considered earlier how de Castro’s contract may have required Yahoo to pay him severance despite performance issues.
• Forbes blogger Todd Hixon welcomes efforts in Massachusetts to abolish non-competes because, in his view, non-competes hurt innovation. The differences in state laws on non-competes and shifting attitudes towards them have been a major focus of ours here at Suits by Suits.
• The Florida Supreme Court ruled yesterday that the Florida Civil Rights Act prohibits discrimination in the workplace for pregnancy, even though the Act does not explicitly say anything about pregnancy. The high court reasoned in a 6-1 decision that the Act’s prohibition against gender discrimination covers discrimination based on pregnancy. Peguy Delva claims in the case that real estate developer Continental Group denied her extra shifts and did not schedule her for work after she returned from maternity leave. Federal law expressly prohibits pregnancy discrimination.

• As part of its proposed acquisition by Comcast, Time Warner Cable will pay Chairman and CEO Robert Marcus (sadly, no relation), $79.8 million – including $20 million in cash – presumably because he is not expected to be in the C-suite at the new company.  We looked closely at a similar golden parachute for American Airlines’ CEO Tom Horton in its merger agreement with US Airways.
• By contrast, Wells Fargo’s CEO John Stumpf isn’t going anywhere.  He earned $19.3 million in salary and bonus last year – down 15% down from 2012, when Stumpf was the highest paid CEO of a large U.S. bank.
• A unit of Canon USA Inc. has sued  one of its competitors in the copier business – Ray Morgan Co. Inc. – in California federal court, claiming that Ray Morgan lured at least five account executives away from Canon and paid them incentives to convert Canon customers to Ray Morgan customers using Canon’s trade secrets.
• The Pennsylvania Game Commission has decided that it will not be paying its former Executive Director Carl Roe $220,000 in severance – despite the Commission’s initial agreement to pay Roe that amount after he threatened to sue.  The Commission’s change of heart came after the state’s governor and several legislators sent a letter urging the Commission not to pay Roe severance.  The governor’s legal counsel determined that Roe didn’t have valid legal claims against the Commission.
• The WSJ reported on a hearing last week organized by the EEOC on whether the use of social media by employees, job seekers and employers raises new issues for employment discrimination laws.  Among other things, participants discussed whether an employee posting negative remarks about another employee on Facebook could be grounds for a hostile work environment claim against the employer.