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.
When we first examined Wade Miquelon’s suit against his former employer, Walgreen, we didn’t have access to his complaint. Now we do. The complaint sheds more light on Miquelon’s allegations, helping to explain why they are causing a spiral of problems for the drug company.
As you may recall from our last article on the case, Miquelon alleges that Walgreen defamed him (in layman’s terms, lied) when it told the Wall Street Journal and investors that he had botched the earnings forecast for the 2014 fiscal year, and that his finance unit was “weak” with “lax controls.” According to Miquelon’s complaint, Walgreen executives made these negative statements for an entirely different reason: they had an “unchecked desire” to push Walgreen’s merger with Alliance Boots to completion. Miquelon alleges that an activist investor had threatened him for being “too conservative,” and that rather than standing up for him, the company’s CEO and its largest shareholder decided to disparage him in order to “deflect investor disappointment” and push through the merger.
Miquelon’s complaint is also somewhat of a public relations document, because it praises his work and goes into his interactions with the CEO and shareholder in great detail. It even says that Miquelon was next in line to be CEO (although the complaint also says he turned down that chance, instead deciding to move on). As to the allegedly botched earnings forecast, the complaint says that Miquelon recognized the problem well in advance of the call in which the company announced it was withdrawing its earnings goal. It also says that he was pressured at the same time by the company’s CEO to raise his estimate of earnings per share that would result from the Alliance Boots merger. The most explosive allegation on this front is that the CEO told him that he had “no choice” but to approve a $6.00 earnings per share estimate, rather than a lower one that would hurt the merger.
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:
The Supreme Court of Washington’s recent decision in Failla v. FixtureOne Corporation is noteworthy on two levels.
First, it involved the surprising claim by a salesperson, Kristine Failla, that the CEO of her employer (FixtureOne) was personally liable for failing to pay her sales commissions. Typically, if an employee had a claim for unpaid commissions, you’d expect the employee to assert that claim against her company, not the chief. But under the wage laws of the state of Washington, an employee has a cause of action against “[a]ny employer or officer, vice principal or agent of any employer ... who ... [w]ilfully and with intent to deprive the employee of any part of his or her wages, [pays] any employee a lower wage than the wage such employer is obligated to pay such employee by any statute, ordinance, or contract.”
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.
The news hasn’t been great for Walgreen Co. over the past couple of months. According to the Wall Street Journal, in early July, chief financial officer Wade Miquelon slashed his forecast for pharmacy unit earnings to $7.4 billion from $8.5 billion. Miquelon left the company in early August. Shortly thereafter, the Journal ran an article stating that Miquelon’s “billion-dollar forecasting error” had cost Miquelon his job and alarmed Walgreen’s big investors.
Now, Walgreen is fighting a battle on another front – against Miquelon. Last week, Miquelon sued Walgreen in state court in Illinois, alleging that the company, its CEO, and its largest shareholder had defamed him. According to Miquelon, the company’s big investors were told that Walgreen’s finance department was “weak” and had “lax controls.”
The four things that a defamation plaintiff must typically prove to prevail are: (1) the defendant made a false statement about him; (2) the statement was published, i.e., made, to one or more other persons; (3) the defendant was at least negligent in making the statement; and (4) the publication damaged the plaintiff. Thus, if Walgreen and the other defendants can show that any harmful statements they made about Miquelon were true, they stand a good chance of defeating his claims. On the other hand, as we covered in this article, if Miquelon can prove that the defendants engaged in a “premeditated scheme” to do him harm by falsely criticizing his performance, he might be able to recover a substantial verdict.
A bankruptcy can be hazardous to the health of an executive’s bonus check. Sometimes, however, an executive can survive an attack on a bonus in a bankruptcy, and come out clean on the other side. For example, we covered here how one executive succeeded in keeping most of his incentive payments based on the timing of those payments.
Now, we have another lesson in how executives can keep their bonus checks despite a bankruptcy, from Judge Christopher S. Sontchi of the U.S. Bankruptcy Court for the District of Delaware. The company at issue in the case was Energy Future Holdings Corp. (EFH), a holding company with a portfolio of Texas electricity retailers. EFH filed for Chapter 11 bankruptcy in April of this year.
For my first foray into blog-writing, allow me to tell a cautionary tale intersecting two of my favorite topics: defending companies and individuals in government investigations and Directors and Officers (D&O) Liability Coverage. As a contract junkie who enjoys reading, interpreting, and arguing contract language, parsing through various interrelated D&O policy provisions to glean favorable language for my white collar clients offers hours of amusement (lest ye be worried about me, I do have other hobbies). D&O policies can be effectively used to defray defense costs incurred due to a government investigation. The trick is keeping the money.
The recent suit between Protection Strategies, Inc. (PSI) and Starr Indemnity & Liability Co. in the Eastern District of Virginia, case 1:13-cv-00763-LO-IDD, illustrates how difficult keeping the money can be. PSI is an Arlington, Va.-based defense contractor. In January 2012, PSI received a subpoena from the NASA Office of the Inspector General and a search warrant issued by the United States District Court for the Eastern District of Virginia. On February 1, 2012, the NASA OIG executed the search warrant at PSI’s headquarters. In addition to the company itself, several of PSI’s current and former officers were informed that they were also targets of the NASA OIG investigation. PSI retained Dickstein Shapiro to represent it and hired separate counsel to represent the individual targets and other company employees.
Last week, we covered the Third Circuit’s decision that Goldman Sachs bylaws didn’t clearly establish a vice president’s right to advancement of his legal fees for his criminal travails. The vice president, software programmer Sergey Aleynikov, isn’t giving up easily, however.
Law360 reports that Aleynikov has filed a petition for panel rehearing or rehearing en banc. In the federal appellate courts, this is a step that parties can take when they disagree with the decision of the three-judge panel that heard their case. In a panel rehearing, the panel can revisit and vacate its original decision; in a rehearing en banc, the entire Third Circuit could consider the issue.
Aleynikov contends in his petition that the panel misapplied a doctrine of contractual interpretation called contra proferentem. In plain English, contra proferentem means that a court will read the written words of a contract against the party that drafted it. The panel in Aleynikov’s case disagreed as to whether under Delaware law (which governs his dispute), the doctrine can be used to determine whether a person has any rights under a contract. The two-judge majority said that it can’t, and therefore refused to use the doctrine when it decided whether Aleynikov – as a Goldman vice-president – fell within the definition of an “officer” entitled to advancement under the company’s bylaws. In dissent, Judge Fuentes asserted that “Delaware has never suggested that there is an exception to its contra proferentem rule where the ambiguity concerns whether a plaintiff is a party to or beneficiary of a contract.”
In his petition, Aleynikov asks the whole Third Circuit to decide who is right: Judge Fuentes or the majority. He also cites additional Delaware cases that he says support his position, including one “unreported case” that was brought to his counsel’s attention “unbidden by a member of the Delaware bar who read an article commenting on the panel’s decision in The New York Times on Sunday, September 7, 2014.” Sometimes, to establish a right to advancement rights, it takes a village.
The case of Sergey Aleynikov, a former vice president at Goldman Sachs, has drawn a lot of media attention, including these prior posts here at Suits by Suits. Aleynikov was arrested and jailed for allegedly taking programming code from Goldman Sachs that he had helped create at the firm. His story even inspired parts of Michael Lewis’s book Flash Boys. A federal jury convicted him of economic espionage and theft, but the Second Circuit reversed his conviction, holding that his conduct did not violate federal law. Now, Aleynikov is under indictment by a state grand jury in New York.
Unsurprisingly, Aleynikov wants someone else to pay his legal bills – Goldman Sachs. And it is no surprise that Goldman, which accused him of stealing and had him arrested, doesn’t want to bear the cost of his defense. In 2012, Aleynikov sued Goldman in New Jersey federal court for indemnification and advancement of his legal fees, along with his “fees on fees” for the lawsuit to enforce his claimed right to fees. As we discussed in this post, indemnification means reimbursing fees after they are incurred, and advancement means paying the fees in advance. Advancement is particularly important for those employees who cannot float an expensive legal defense on their own dime.
Taiwan and Manhattan’s Foley Square are separated by 7,874 miles, and Taiwanese citizen Meng-Lin Liu couldn’t bridge the distance in federal court. Liu sought to recover in Manhattan under the Dodd-Frank Act’s anti-retaliation provision (15 U.S.C. § 78u‐6(h)(1)). However, on August 14, the Second Circuit, which sits in Foley Square, affirmed the dismissal of his whistleblower retaliation claim. Liu v. Siemens AG, No. 13-4385-cv (2d Cir. Aug. 14, 2014).
As we previously described here, Liu’s case was relatively simple. He alleged that he repeatedly told his superiors at Siemens in Asia, and the public, that Siemens was violating the Foreign Corrupt Practices Act (FCPA). As a result, he claimed, Siemens demoted him, stripped him of his responsibilities, and eventually fired him with three months left on his contract.
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.
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.
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.
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.
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.
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.
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.
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].”
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.