When an executive competes with a former employer by using its confidential information, the executive takes a substantial risk. We’ve previously covered how one Hallmark executive lost hundreds of thousands of dollars by using and then deleting confidential info.
David Nosal, the former head of executive search firm Korn/Ferry’s CEO recruiting practice in Silicon Valley, is about to find out whether he is going to suffer an even more severe punishment: time in federal prison.
We’ve written at length about the rapidly-changing landscape regarding covenants not to compete, including the first-in-the-nation law in California that essentially prohibits all such agreements, and we’ve kept you abreast of how various states have responded to the California statute, including New York and Massachusetts. (“The State-by-State Smackdown”)
Now, covenants not to compete typically arise in the context of an employment agreement, with the employee agreeing that if she leaves the company (or is fired), she will not flee to the company’s closest competitors. Typically, the question as to whether such agreements are enforceable turns on how narrowly-tailored the covenant is to serve its purpose, which means the determination is generally made on a case-by-case basis. This reflects a balancing of two goals: ensuring free and fair competition in the marketplace, and also protecting a company against rivals seeking to “poach” its employees and potentially steal secrets, practices, and other confidential information. It’s a tough balance to strike, and the parties typically only figure out exactly where the line should be drawn once one party sues the other.
One of the most important trends in the relationship between employers and employees is the proliferation of mandatory arbitration clauses in the employment contract. In particular, we’ve noted that once an employment contract contains an agreement to arbitrate, courts frequently send non-contractual claims to the arbitration forum as well under the theory that such claims “arise out of” the employment agreement.
Because arbitration is generally perceived as being employer-friendly – although we’ve cautioned employers that isn’t always the case – employee plaintiffs are on the lookout for ways to convince a court that their arbitration clauses should not apply.
One approach is for the employee to argue that the employer has waived his or her right to arbitrate because the employer has “acted inconsistently” with the right to arbitrate claims. We looked at the legal basis for this argument (as well as indulged in some trash TV) in a two-part series just a few months ago. (Part one, Part two)
Another approach is for plaintiffs to challenge the clause as unfair. The argument goes something like this: for many employees – although typically not executives – the employment contract is presented on a “take it or leave it” basis; that is, it is a contract of adhesion over which the employee has little to no ability to negotiate particular provisions. Accordingly, if an arbitration provision is drastically unfair to the employee, the court can strike it down under the doctrine of “unconscionability,” which permits a court to throw out a contractual provision that is so one-sided as to be “unusually harsh and shocking to the conscience.”
The latter approach is vividly illustrated by a recent California appellate decision, Compton v. American Management Services.
Here at SuitsbySuits Headquarters in Washington, the Nationals are blossoming and the fabled cherry trees are about to. Here’s what’s caught our eye between Bryce Harper’s home runs and the crowds on the National Mall:
Eric Murdock, who compiled the video showing former Rutgers’ basketball coach Mike Rice’s abusive behavior toward players, plans to sue Rutgers for wrongful termination. According to Murdock’s lawyer, Rutgers did not renew Murdock’s contract as director of player personnel after he reported Rice’s behavior to the school last summer.
Not the best negotiating strategy: Workers at a greeting card company in France have kidnapped their boss in a dispute over pay.
Non-compete agreements aren’t just for office workers: a St. Petersburg, Florida chef has been enjoined from working in any restaurant in Pinellas County because she signed one.
And in another food-type note, the U.S. Second Circuit Court of Appeals has ruled in favor of biscuit maker Stella D’Oro and against the National Labor Relations Board, overturning the NLRB’s finding that the company’s failure to provide a copy of its financial statement to an employee union was an unfair labor practice.
Time for our second tip of the week about employment agreements. We’re looking at things many of us think we should do about employment agreements but that, oddly enough, aren’t being done – at least in the two cases we profile this week, each of which made it to a state high court.
Our first tip was straightforward: if you have an employment agreement, or think you have one but aren’t sure – get it in writing.
Our second tip follows the first. Once you’ve reduced your employment agreement to writing, make sure it’s clear – or at least, as clear as possible. Clarity will reduce the time and money you’ll spend if you get into a dispute over the agreement.
Whether you’re an executive or a hiring manager, here’s a tip: if you think you have an employment agreement, or if you want to have an employment agreement, get the agreement in writing.
Sounds basic, right? Most of us know that. But a recent decision from New York’s highest court in Gelman v. Buehler suggests that not everyone does, and illustrates the consequences of not having a written agreement.
For us here in the greater Baltimore/Washington metropolitan area, March was true to form – or at least, the Farmer’s Almanac – and came in like a lion (with city-closing snow and everything!) but has gone out like a lamb, as today is beautifully sunny with highs in the mid-60s.
As the Farmer’s Almanac tells us, that saying was rooted in the ancient belief that weather would seek a balance, and that good events would cancel out bad ones. That sense of balance held true for your Suits by Suits editors this month as well, as Ellen Marcus documented the unique ability of shareholders to protest “golden parachutes” for companies emerging from Chapter 11 bankruptcy – as contrasted with their general inability to do much else. Bill Schreiner explained how the average executive can protect herself from incurring certain legal expenses through directors & officers’ (“D&O”) insurance policies, while noting the limits of those D&O policies especially in high-profile cases like former Penn State coach Jerry Sandusky. Andrew Torrez continued to document the push-and-pull in the legislative arena over whether and to what extent courts should uphold covenants not to compete contained in employment contracts, and warned Gov. Deval Patrick that the proposed new law in Massachusetts may not do what he expects it to do. And Jason Knott warned us that only 2% of Sarbanes-Oxley whistleblowers succeed on their claims, while walking us through a comprehensive recent decision by the Second Circuit that maps out how future whistleblowers can prove the elements necessary to assert their cases.
A full list of all of our articles from March follows. And remember, Suits by Suits is now on Twitter – and that’s no April Fools!
Grab your matzoh or Scotch cream eggs or whatever your favorite snack is this time of year and settle in for this week’s Inbox on Suits by Suits:
Earlier this week, we noted that, when shareholders go to court to challenge executive compensation as excessive, they are often unsuccessful because courts generally defer to the business judgments of corporate boards. So, what’s a shareholder who strongly disagrees with how much a company is paying management to do? The shareholder could vote with her feet by selling her shares. Or, she could propose that the company’s executive compensation practices or the board that approved them be put to a vote at the next shareholders’ meeting. Shareholder proposals like these often face stiff opposition by management, and could be left off the agenda all together if management obtains permission from the SEC to exclude them.
The U.S. Trustee in American’s Chapter 11 bankruptcy proceedings is challenging American’s $19.8 million golden parachute for its CEO Tom Horton. The Trustee contends that the $19.8 million payment is too much under Section 503(c) of the Bankruptcy Code because $19.8 million is more than 10 times the mean severance payment to non-management employees. American responds that Section 503(c) and its limit on severance payments does not even apply because American – the debtor in the bankruptcy – won’t be paying Horton’s severance. Rather, the $19.8 million will be paid after the proposed merger between American and US Airways is completed by the new company that will be formed in the merger. According to American, because Section 503(c) doesn’t apply, the bankruptcy court should defer to the company’s business judgment regarding Horton’s severance.
As the regulatory and business environments in which our clients operate grow increasingly complex, we identify and offer perspectives on significant legal developments affecting businesses, organizations, and individuals. Each post aims to address timely issues and trends by evaluating impactful decisions, sharing observations of key enforcement changes, or distilling best practices drawn from experience. InsightZS also features personal interest pieces about the impact of our legal work in our communities and about associate life at Zuckerman Spaeder.
Information provided on InsightZS should not be considered legal advice and expressed views are those of the authors alone. Readers should seek specific legal guidance before acting in any particular circumstance.
John J. Connolly
Partner
Email | +1 410.949.1149
Andrew N. Goldfarb
Partner
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Sara Alpert Lawson
Partner
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Nicholas M. DiCarlo
Associate
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