Show posts for: Civil Litigation

  • | O'Neill, Ashley

    Doug Parker, the Chairman and CEO of American Airlines, has just joined a small cadre of executives who earn no salaries. Before anyone starts a GoFundMe page for Mr. Parker, consider that his 2015 compensation consists of 207,672 restricted stock units, the value of which will depend upon the airline’s performance. According to the Wall Street Journal, the stock units could amount to compensation in the range of $10.7 million if calculated using the current stock price of $51.40. By comparison, Mr. Parker earned $12.3 million in 2014, 40% of which was cash in the form of a $700,000 base salary and annual cash incentives. Mark Reilly, head of Verisight, Inc., a firm of executive compensation consultants, told the Journal that this type of compensation structure is more often found in companies facing financial hardship, and the lack of salary is offset by more generous stock awards. In the case of an executive in an established, mature industry, the message seems to be that Mr. Parker believes in the stock and that he is willing to tie his compensation to its performance.  Given US Airways’ performance since its merger with American in 2013, this wouldn’t seem like an incredible risk on his part. The combined company “has soared to record profit and its stock has climbed 42% in the past year.”

  • | Jason M. Knott

    After firing its head patent attorney, Steven Trzaska, L’Oreal is now under fire from Trzaska in New Jersey federal court.  On April 16, 2015, Trzaska sued L’Oreal, claiming that his firing violated New Jersey’s Conscientious Employee Protection Act (“CEPA”).

    In his complaint (available at Law360), Trzaska alleges that L’Oreal had a quota for its New Jersey office of 40 filed patent applications in 2014.  But, Trzaska contends, an outside consultant had previously found that many of L’Oreal’s patent applications were purely cosmetic, saying that “the vast majority of its inventions were of low or poor quality.”  Trzaska alleges that his superiors pressured him to file applications to meet the quota.  However, he told them that “neither he nor the patent attorneys who reported to him were willing to file patent applications that the attorneys believed were not patentable.”  Soon after, L’Oreal terminated him, saying that it was hiring a new “head of patents of the Americas.”  Trzaska claims that this explanation was pretext and that the company in fact fired him because he refused to file applications that were not patentable.

    How do Trzaska’s claims line up with CEPA? 

  • |

    Companies buy directors & officers (“D&O”) insurance policies with the intention of providing protection for key individuals in a corporate structure.  The recent decision BioChemics, Inc. v. AXIS Reinsurance Co., from the U.S. District Court for the District of Massachusetts, illustrates the importance of the terms of the policy in determining what is covered, what is not, and when you should notify the insurer of a potential claim.

    As we’ve previously discussed, an insurance policy can provide more reliable protection for the indemnification rights of the directors and officers in times of financial distress, because corporations plagued by regulatory or other legal problems frequently suffer financial setbacks.  However, when a corporation is the subject of an official investigation, determining exactly what constitutes the start of a covered “claim” may be a matter of some delicacy. 

  • | O'Neill, Ashley

    Ellen Pao may not have won her gender discrimination case against Kleiner Perkins, but she may have inspired numerous women working in Silicon Valley who identified with her cause. According to Fortune, employment lawyers are seeing a heightened awareness among women that the workplace issues they face, and that Ms. Pao articulated in her case, are perhaps more widespread than not. This “Pao Effect” has Kay Lucas, a San Francisco-based employment law attorney, fielding twice as many calls each week from potential clients with workplace gender discrimination concerns. Kelly Dermody, a partner at Lieff Cabraser Heimann & Bernstein, has litigated gender discrimination cases for a decade, and told Fortune that her clients now have a heightened willingness to speak out. Lucas also said that companies are more inclined to settle instead of allowing information to become public, and as we observed with the Pao trial, highly publicized. Lucas noted that many of her clients’ complaints share similar themes involving exclusion from important meetings and denied access to the circles of influence. Yet, she said to Fortune, “these women are not particularly angry; they’re ambitious. They’re not victims; they want to be participants.”

    A quick search of legal news gives this “Pao Effect” additional credibility.  According to Law 360, Heather McCloskey recently sued Paymentwall, Inc. for sexual harassment, discrimination, retaliation and failure to take reasonable steps to prevent harassment and discrimination. Ms. McCloskey alleged that executive Benoit Boisset routinely harassed her, calling attention to her physical appearance in a demeaning manner. As she became more vocal in her objections, Boisset used expletives when referring to her, and ultimately terminated her employment. McCloskey also described the workplace environment as young, predominantly male and lacking any formalized set of rules or policies. Kelly Dermody cited these kinds of workplace dynamics as partially to blame for the volume of complaints arising from Silicon Valley. She opined to Fortune that many tech companies take off “really quickly without a lot of attention to human resources.” Consequently, “you have a lot of young managers who make young managers’ mistakes,” which might encompass many of the alleged missteps in the Paymentwall case.

  • | Jason M. Knott

    Last summer, we covered in depth the resounding repercussions from American Apparel’s decision to terminate its CEO and founder, Dov Charney.  Now, the sequel has arrived – and it promises lots of action.

    Matt Townsend of Bloomberg Business reports that Charney has resumed his arbitration against his former employer, in which he is seeking $40 million from the clothing company.  Charney previously agreed to put his claims on hold while American Apparel made its final decision about whether to terminate him.  After an investigation, the board decided in December to cut Charney loose. 

  • |

                In the previous blog post, we discussed the ongoing bankruptcy litigation between Crystal Cathedral Ministries and its founder Dr. Robert Schuller over the rejection of his Transition Agreement.  That contract purported to spell out the relationship between the parties as Dr. Schuller stepped aside from his post as senior pastor.  The determination of whether that agreement was intended to be an employment agreement, and subject to the strict limitations of section 502(b)(7), or a retirement benefit which is not so limited, is pending before the Supreme Court.  However, Dr. Schuller’s case also presented other interesting issues that could be instructive for other employers.

                In addition to his claim for damages based on the rejection of the Transition Agreement, Dr. Schuller sought compensation from tCrystal Cathedral (the bankruptcy debtor) in an undetermined amount, for allegedly improper use of his intellectual property.  The intellectual property, which consisted of more than 35 years of books, sermons and other writings, had been produced by Dr. Schuller while he was employed by the debtor as its senior pastor.  Dr. Schuller, individually and through a wholly owned corporation, asserted a copyright to these materials.  Under the Transition Agreement between the debtor and Dr. Schuller, the intellectual property was made available to the debtor for use pursuant to a royalty free license. 

  • |

    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.

  • | Jason M. Knott

    The ongoing trial in Ellen Pao v. Kleiner Perkins Caufield and Byers has made headline news across the country.  It’s being covered by the Wall Street Journal and USA Today, among other national publications.  Those interested in following the trial can monitor the #ellenpao hashtag on Twitter, or watch liveblogs from Re/code or the San Jose Mercury-News.

    Why is the trial so newsworthy?  As we reported here, Pao claims that Kleiner Perkins, a prominent Silicon Valley venture capital firm, discriminated against her because of her gender and then retaliated because she complained.  She claims that she was not promoted to a plum senior partner position because she was a woman, and that the firm fired her because she complained and later sued it.  Her story involves sex, boorish behavior, and office intrigue that ranges from the mundane to the highly dramatic.

    With that introduction, here are some -- of many -- takeaways for employers from what has transpired thus far:

  • | John J. Connolly

    Should executives include an arbitration clause in their employment contracts? There’s no uniform answer, of course. Arbitration proponents cite its speed, cost, privacy, informality, minimal discovery, and limited appellate rights. Opponents cite pretty much the same list. Volumes have been written about whether arbitration is a better form of dispute resolution than litigation, and we can’t resolve that question here.

    But thanks to relatively new state laws requiring public disclosure of certain arbitration information, we can look at the question statistically. Even better, people who understand statistics can look at the question statistically, and we can report what they say.

    We started by looking at the data set disclosed by the American Arbitration Association (AAA) concerning employment-based arbitrations. (A detailed explanation of the data, and the data itself, is available on this page of the AAA’s website.) One field of the data reports the employee’s salary in four categories: $250,000 or greater; $100,000 to $250,000; $0 to $100,000; and, regrettably, “not provided by parties.” Over the past five years, the AAA database reports about 7700 employment arbitrations (not necessarily separate “cases”; some cases have multiple records, usually reflecting multiple respondents), but only 2912 of these included data for the employee’s salary range. The following table shows the breakout of records by salary range:

    Emp. Salary

    Number

    Pct of Total

    $0 to $100,000

    2284

    78.4

    $100,000 to $250,000

    412

    14.1

    $250,000+

    216

    7.4

    Total (excl. no data)

    2912

    100.0

  • | Jason M. Knott

    LSU is used to battling with its Southeastern Conference (SEC) foes on the gridiron.  Now, it’s fighting in court with a former assistant who jumped ship to conference rival Texas A&M. 

    John Chavis, LSU’s ballyhooed former defensive coordinator, left LSU for A&M at the beginning of this year, sparking headlines about “winning big” at his new home in College Station.  But storm clouds were brewing – LSU’s athletic director, Joe Alleva, said that he expected Chavis to comply with a $400,000 contractual buyout. 

    On February 27, Chavis sued LSU in Texas state court, seeking to avoid the buyout.  He named A&M as a defendant as well, but only as an “indispensable party,” reported Jerry Hinnen of cbssports.com.  The Associated Press reported that A&M agreed to pay the buyout for Chavis if he was found to owe it.

    LSU, seeking a home field against Chavis, quickly filed a separate case against him in Baton Rouge, claiming that it is entitled to receive the buyout money.

     Chavis’s contract reportedly said that if Chavis left in the first 11 months of his contract, before January 31, 2015, he would have to pay the buyout.   The sequence of events appears to be that Chavis gave a required 30-day notice on January 5 that he was resigning and terminating his contract.  Chavis says that he left LSU by February 4 – after the January 31 end to the buyout period – and didn’t join the Aggie payroll until February 13. 

  • | Jason M. Knott

    Yesterday, the Supreme Court heard argument in the religious discrimination case of EEOC v. Abercrombie & Fitch Stores, Inc., which made our list as one of our five issues to watch for 2015.  The case arises under Title VII, the federal law that makes it illegal for an employer “to discriminate against any individual with respect to h[er] compensation, terms, conditions, or privileges of employment, because of such individual’s . . . religion.”  The EEOC alleges that Abercrombie, purveyor of “authentic American clothing,” discriminated against Samantha Elauf on religious grounds.  The company refused to hire Elauf because she wore a headscarf, or hijab, to her job interview, and the company’s “Look Policy” prohibited employees from wearing “caps.” 

    In earlier depositions in the case, Elauf’s interviewer at Abercrombie testified that she “assumed that [Elauf] was Muslim,” and “figured that was the religious reason why she wore her head scarf.”  The interviewer said that she went to her district manager to discuss the headscarf issue, and told him that “[Elauf] wears the head scarf for religious reasons, I believe.”  The interviewer testified that the district manager then told her not to hire Elauf because of the headscarf and said, “[S]omeone can come in and paint themselves green and say they were doing it for religious reasons, and we can’t hire them.”  As a result, the interviewer lowered Elauf’s “appearance” score on her evaluation, and Elauf didn’t get the job.

    Despite this testimony, the Tenth Circuit still entered summary judgment for Abercrombie, holding that the EEOC’s discrimination claim could not proceed to trial because Elauf “never informed Abercrombie prior to its hiring decision that she wore her headscarf or ‘hijab’  for religious reasons and that she needed an accommodation for that practice, due to a conflict between the practice and Abercrombie’s clothing policy.” 

    The fact that the Tenth Circuit granted summary judgment, even though the interviewer admitted that she assumed that Elauf wore the scarf for religious reasons, helps explain the concerns, and potential solutions, that the Justices raised in yesterday’s argument. 

  • | Jason M. Knott

    Silicon Valley is buzzing about the trial in Ellen Pao v. Kleiner Perkins Caufield and Byers LLP, which got underway on Tuesday.  According to USA Today, a UC-Berkeley professor says that you “can’t be within a stone’s throw of the Valley without hearing” about the case.

    The cast of characters (described here by the San Francisco Business Times) includes a number of heavy hitters, including Pao herself.  Pao, a graduate of Princeton, Harvard Law, and Harvard Business School, is now the CEO of Reddit.  Kleiner Perkins is a well-known venture capital firm in Menlo Park, a city that has been described as the “center of the venture capital universe.”

    Pao’s allegations are explosive.  She contends that she had a brief affair with a married junior partner who continued to harass her after she broke off their relationship.  Her claims about the firm go deeper than just this harassment; she contends that the firm had an overarching culture of discrimination against women, culminating in her dismissal in October 2012. 

  • | John J. Connolly

    An earlier generation of Baltimore lawyers used to say that the outcome of a case should not depend on which side of Calvert Street it was filed. This made sense when the federal court was on the east side of Calvert and the state court on the west. The statement was a colloquial expression of the Erie doctrine, which requires federal courts to apply state law when federal jurisdiction depends on diversity of the parties’ citizenship.

    The Erie doctrine requires federal judges to figure out how state judges would rule in certain matters. You might imagine a federal judge strolling across Calvert Street to ask for some advice. But that’s not how state and federal judges speak to one another (and not just because the federal court long ago moved to a dismal building on Lombard Street).

    Instead, federal judges read the published judicial decisions from the state whose law applies. Under Erie, federal judges are required to follow the holding of decisions from the state’s highest court. They are not required to follow “dicta” – statements in a judicial opinion that are not necessary to the outcome. In many cases, the state’s highest court has not ruled on the particular legal question at issue. In that event, the federal court must predict how the state court would rule based on other sources of state law. One of those sources is “considered dicta” (or well-reasoned dicta) from the decisions of the state’s highest court.

  • | Jason M. Knott

    The Sarbanes-Oxley Act’s whistleblower protection provision, 18 U.S.C. § 1514A, allows a wrongfully terminated whistleblower to recover “all relief necessary to make [her] whole.”  18 U.S.C. § 1514A(c)(1).  The statute then goes on to say that compensatory damages include reinstatement, back pay, and “special damages,” including expert fees and reasonable attorneys fees.  In an opinion issued this week, the Fourth Circuit held that Sarbanes-Oxley damages don’t just include these enumerated damages.  Rather, an employee can obtain other compensation for harm, including emotional distress damages.  Jones v. SouthPeak Interactive Corp. of Delaware, Nos. 13-2399, 14-1765 (4th Cir. Jan. 26, 2015).

    The plaintiff in the case, Andrea Gail Jones, was the former chief financial officer of SouthPeak, a video game manufacturer.  According to the opinion, in 2009, SouthPeak wanted to buy copies of a video game for distribution, but didn’t have the cash to buy the games up front.  Instead, SouthPeak’s chairman, Terry Phillips, personally fronted Nintendo over $300,000.  When SouthPeak didn’t record this debt, Jones raised a stink, eventually telling the company’s outside counsel that the company was committing fraud.  The same day, the company’s board fired her. 

  • | Jason M. Knott

    Last November, we covered the Supreme Court oral argument in the case of Department of Homeland Security v. MacLean.  As a refresher, MacLean was an air marshal who was fired by the Transportation Security Administration (TSA) after he blew the whistle to MSNBC on the agency’s plan to cancel marshal missions to Las Vegas.  After the argument, Prof. Steve Vladeck of American University predicted that the TSA would lose the case.

    He was right.  On Wednesday, the Supreme Court issued its opinion, in which it held in favor of MacLean.  The TSA argued that it could fire MacLean because his disclosures were “specifically prohibited by law” in two ways: first, it had adopted regulations on sensitive security information, which applied to the information MacLean disclosed; second, a provision of the U.S. Code had authorized TSA to adopt those regulations.  Chief Justice Roberts, writing for the Court, rejected both arguments. 

    As to the regulations, he wrote, Congress could have said that whistleblowers were not protected if their disclosures were “specifically prohibited by law, rule, or regulation,” but did not.  Thus, its choice to only use the word “law” appeared to be deliberate.  Further, interpreting the word “law” broadly “could defeat the purpose of the whistleblower statute,” because an agency could insulate itself from liability by promulgating a regulation that prohibited whistleblowing.  And as to the argument that Congress-passed “law” prohibited the disclosure, Chief Justice Roberts wrote that the statute in question did not prohibit MacLean’s disclosures.  Instead, it was the agency’s exercise of discretion, not the statute, that determined what disclosures were prohibited. 

  • | Jason M. Knott

    The hacking of Sony’s private data has been one of the biggest stories in the country over the past couple of months.  It won’t surprise anyone to learn that lawsuits have been filed over the breach.  Indeed, the plaintiffs in several class action lawsuits are seeking to consolidate their cases  into one massive Sony Data Breach Litigation case.

    So far, the plaintiffs in those cases haven’t alleged claims against individual Sony officers or directors.  This begs a couple of questions: is that something that plaintiffs do?  And what kinds of allegations can they bring?

    The answer is that a number of plaintiffs have brought claims against officers and directors who worked at companies that suffered data breaches.  Typically, they allege that the defendants did not properly manage the company’s cyber risks.

    For example, in February 2014, Kevin LaCroix of D&O Diary brought to our attention lawsuits that Target shareholders filed against the company’s officers and directors, arising from the massive theft of Target’s private customer information.  The shareholders alleged that the company’s executives and board knew how important the security of private customer information was, and failed to take reasonable steps to put controls in order to detect and prevent a breach.  Further, they alleged, the defendants exacerbated the damage by publicly minimizing the breach.

  • |

    A D&O liability policy protects key individuals in a corporate structure.  These individuals are likely targets for shareholder frustration if an entity is underperforming or suffering from other troubles.  In addition, they may be exposed to personal scrutiny from regulators if the corporation is investigated for any wrongdoing.  As previously discussed in this space, an insurance policy can provide more reliable protection for the indemnification rights of the officers and directors in times of financial distress because corporations plagued by regulatory or other legal problems frequently suffer financial setbacks.  However, when a bankruptcy results from the financial troubles, not all insurance policies offer the same protection for the payment of fees and expenses for its directors and officers. 

    Under section 541 of the Bankruptcy Code, a debtor’s liability insurance policy is the property of a bankruptcy estate and is subject to the jurisdiction of the Bankruptcy Court, including the automatic stay.  There is considerable disagreement among the courts over whether the proceeds of the policy are also property of the estate.  The actual determination of whether the proceeds are property of the estate is made on a case by case basis and is controlled by the express language and scope of the policy. 

    When the D&O policy only provides direct coverage to the debtor, there is little doubt that the proceeds are part of the debtor’s estate and are to be administered by the Bankruptcy Court for the benefit of all creditors.  Similarly, when the policies only provide direct coverage to the individuals for their indemnification claims courts generally hold that the bankruptcy estate has no interest in the proceeds.  However, when the policy provides direct coverage to both the debtor and the directors and officers, the proceeds will be property of the estate if depletion of the proceeds would have an adverse effect on the estate.  Depletion of the proceeds will be construed to have an adverse effect on the estate if the policy proceeds actually protect the estate’s other assets from diminution. 

  • |

    Corporate directors and officers may think indemnification provisions are sufficient to protect them from claims asserted against them by shareholders or regulators.  However, if a director or officer chooses to rely solely on indemnification in bylaws or contracts, and ignores the availability of directors & officers (“D&O”) liability insurance, he or she could be making a significant mistake.  In particular, a D&O policy can offer these individuals more reliable protection in times of financial distress.  When corporations are plagued by regulatory or other legal problems, they may also suffer from financial setbacks, eventually leading to bankruptcy proceedings. The manner in which a bankrupt corporation has provided for the payment of fees and expenses for its directors and officers may be critical to the individuals affected. 

    Under section 502(e) of the Bankruptcy Code, a claim for indemnification is subordinated to the class of claims in which the underlying claim is placed.  This means that, to the extent that the directors and officers are jointly liable with the corporation to a third party on an adverse claim, they will not receive any distribution on their resulting indemnification claim unless, and until, all of the claims of the class in which the underlying obligation is placed have been paid in full.  This provision is intended to provide for equality of distributions in favor of all similarly situated creditors: if the underlying claim receives payments from both the corporation and the director and officer defendants and then the defendants receive payment on account of any contributions they made on the claim, that claim will have received a higher rate of distribution at the expense of other creditors.

  • | Jason M. Knott

    On Monday, AutoZone found itself on the wrong end of a $185 million verdict in favor of a former store manager, Rosario Juarez.  Yes, you read that right.  $185 million.  This stunning verdict appears to have been the result of Juarez’s allegations of discrimination and retaliatory discharge, combined with an insider turned witness who provided extremely damaging testimony against the auto parts retailer.

    In her complaint, Juarez alleged that AutoZone had a “glass ceiling” for women employees, which it kept in place through a hidden promotion process where open positions were not posted.  According to Juarez, she succeeded in cracking the glass ceiling, securing a store manager position, but when she became pregnant, she was treated differently by her district manager.  After giving birth, she complained about the unfair treatment and was soon demoted by the manager, who told her that she could not be a mother and handle her job.  Later, she was terminated as the result of a loss prevention inquiry, in which she refused to participate in a “Q&A” statement about a theft at the store.  Juarez alleged that the loss prevention department’s request for a statement was a pretext to fire her. 

    We’ve spent a lot of time on this blog discussing allegations of pregnancy discrimination like these (see, for example, here, here and here).  The short of it is that a company can’t treat pregnant women, or women who have  given birth, differently than it treats other employees.  But we’ve never covered a verdict for pregnancy discrimination that looked more like a Powerball win than a litigation result.

  • | Jason M. Knott

    A whistleblower generally shouldn’t break the law in order to prove his claims.  Indeed, the Whistleblowers Protection Blog says that this is a “basic rule,” and cautions that an employee who breaks the law while whistleblowing in order to get evidence will suffer from attacks on his credibility and may even be referred for criminal prosecution.  However, the parameters of this rule aren’t always so easy to follow, as the Supreme Court heard last week in the case of Department of Homeland Security v. MacLean

    The MacLean case arose from a warning and text message.  In July 2003, the Transportation Security Administration (TSA) warned MacLean, a former air marshal, and his colleagues about a potential plot to hijack U.S. airliners.  Soon after, however, the TSA sent the marshals an unencrypted text message, canceling all missions on overnight flights from Las Vegas.  MacLean was concerned about this reduction in security, and eventually told MSNBC about it.  The TSA then issued an order stating that the text message was sensitive security information (SSI).  When it found out that MacLean was the one who disclosed the message to MSNBC, it fired him. 

    MacLean didn’t take this while reclining; he challenged his dismissal before the Merit Systems Protection Board.  But he lost.  The Board decided that TSA didn’t violate the federal Whistleblower Protection Act by firing MacLean for his disclosure, because MacLean’s disclosure violated a TSA regulation that prohibited employees from publicly disclosing SSI.       

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.

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Jason M. Knott
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Andrew N. Goldfarb
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