Bill Strengthens Enforcement Powers of Philadelphia Commission on Human Relations

By Matthew A. Fontana

Philadelphia is poised to strengthen the enforcement powers of the Philadelphia Commission on Human Relations (“PCHR”), the City’s primary civil rights and anti-discrimination agency.  Under legislation that passed City Council on May 8, 2017, the PCHR would have the authority to issue cease and desist orders—closing a business’s operations for an unspecified length of time—if the agency determines the business has engaged in “severe or repeated violations” of the Philadelphia Fair Practices Ordinance (“the Ordinance”).  The authority to shut down a business’s operation is an unheard of remedy for employment related civil rights violation and—given the significant ramification for employers— it is critical for Philadelphia employers to be aware of the potential consequences of the PCHR’s enhanced powers for  their business operations

The Ordinance prohibits discrimination based on age, ancestry, color, disability, ethnicity, gender identity, sexual orientation, national origin, race, religion, and sex.  The Ordinance is enforced by the PCHR.  The PCHR’s enforcement powers are limited to traditional remedies for employment discrimination, including back pay, emotional distress damages, punitive damages and orders to eliminate or redraft a policy found to be discriminatory.  Prior to using its enforcement powers, the PCHR encourages parties to mediate their dispute or to reach a voluntary settlement.

In response to concerns about a pattern and practice of racial discrimination at bars and restaurants in the gayborhood—a neighborhood in Philadelphia that derives its name from its historic association with LGBTQ residents—Councilman Derek Green proposed legislation that would strengthen penalties against Philadelphia businesses found to discriminate against their employees, as well as against tenants or customers.  The bill gives the PCHR the authority to order a business to cease operations for an undefined “period of time” when the PCHR has issued a finding that the business has engaged in severe or repeated violations of the Ordinance and the business has refused to resolve the case by mediation or settlement.  While Rue Landau, executive director of the PCHR, provided some solace to employers by stating that “it would only be implemented under egregious circumstances after a full hearing by the PCHR,” he also stated that “[t]he law sends a strong message to business that the City will not tolerate discrimination … .”

The bill, which Philadelphia’s Mayor signaled he will sign into law, certainly sends a strong message.  The authority to shut down the operations of a business as a remedy for employment related civil rights violations is unprecedented.  No other employment civil rights agency has this type of authority.  Given the unique power being vested in the PCHR and its lack of any precedent, it is likely that the measure will be challenged in court.  However, until that happens, Philadelphia businesses need to be aware that a PCHR investigation can lead to serious consequences, particularly if the PCHR believes a pattern of discrimination is present.

The employment lawyers at Drinker Biddle will continue to monitor the implementation of the PCHR’s new cease and desist powers and provide any updates so that you can stay ahead.

 

The Most Important Questions to Ask During Internal Investigations Into Employment-Related Issues

Bill Horwitz published an article for HR Dive titled, “The most important questions to ask during internal investigations into employment-related issues.” In the article, Bill discusses internal investigations and the key questions an investigator should always ask.

Bill states the most important questions in a witness interview come toward the end and suggests an investigator always ask, “Is there any other information that you think would be helpful for my investigation?” as well as “Other than what you’ve already identified, are you aware of any documents bearing on any of the issues we discussed?”

When interviewing the accuser, Bill encourages asking if he or she has any other complaints, allegations or concerns, while tailoring the question to the situation. If the individual provides any response other than “no,” he advises repeating the question before concluding the interview.

“An individual who has a full and fair opportunity to voice all of his or her concerns to the investigator cannot credibly raise additional allegations in the future, such as in a lawsuit,” Bill writes.

Read “The most important questions to ask during internal investigations into employment-related issues.”

Suit Shopping: Deceptive Pricing Class Actions Persist

Kate Gold published an article, along with Kathryn Deal, Meredith Slawe, Kate Villanueva, Dan Brewer and Ashley Super titled, “Suit Shopping: Deceptive Pricing Class Actions Persist” for the California Retailers Association’s Golden State Report.

Recent years have seen a considerable increase in deceptive pricing litigation, with plaintiffs’ attorneys turning to untried theories to help advance their cases. As a result, retailers are facing more high-risk class action suits that could lead to significant exposure, reputational damage, and considerable litigation costs. The article details two potential sources of suits—compare-at pricing and shipping charges—and how courts and agencies have thus far responded to such matters.

Read “Suit Shopping: Deceptive Pricing Class Actions Persist.”

Part III of “The Restricting Covenant” Series: Recipes and Restaurants

By Lawrence J. Del Rossi

This is the third article in a continuing series, “The Restricting Covenant.” In restrictive covenant cases, a company’s trade secrets are sometimes referred to as its “secret sauce” or “secret recipe.”  The “secret formula” of Coca-Cola soda is an analogy used to help explain the uniqueness of a company’s protectable interest and the need to prevent unauthorized disclosure, misappropriation or unlawful competition.  This talk about secret sauces and recipes not only made me hungry, but it also relates to the subject of this article – restrictive covenants, trade secrets and the food and restaurant industry.

What’s in Your Secret Sauce?

Food recipes can constitute trade secrets.  In Tavern Restaurant v. Brandow, for example, the Supreme Court of Iowa held that a restaurant had successfully demonstrated at trial that its former manager and his new employer (a competing restaurant) had misappropriated “secret recipes” for pizza sauce, pizza crust and grinder sandwiches.  To win at trial, the plaintiff had to show that its recipes derived independent economic value and that it took reasonable steps to maintain their secrecy.

As to the independent economic value requirement, the plaintiff’s owner testified that he had purchased the restaurant (including its recipes) for almost half a million dollars, and that his restaurant had won several “highly-prized local food awards.”  In addition, the plaintiff presented an expert from the Culinary Institute of America, who concluded that he could not determine the exact amount of specific ingredients found in the recipes “without access to prohibitively expensive chemical analysis machinery.”  Even the defendants’ expert conceded that he could not determine the underlying process by which the pizza and grinders were assembled.  The court explained that, “[w]hile the core ingredients were determinable with the resort to a rare and expensive machine, the exact assembly and baking processes used could not be determined.”

With respect to secrecy requirement, the plaintiff-restaurant presented evidence that its recipes were not generally known or ascertainable in the public domain.  The owner told its employees that the recipes were confidential.  All recipes, including the crust recipe, were locked in a safe deposit box.  Even though the kitchen employees who prepared the dough knew the crust recipe, the court found that the restaurant’s secrecy procedures were “reasonable under the circumstances.”

Based on this evidence, the Iowa Supreme Court upheld the jury’s award of money damages, as well as the restaurant’s request for a permanent injunction that prevented the defendants from “using, divulging, and communicating to anyone else any of the trade secrets or confidential information which includes all or any part of the plaintiff’s recipes for pizza sauce, pizza dough or grinders or any substantially similar recipes thereto.”

That’s the Way the Cookie Crumbles?

Courts will enjoin a competitor from using a food recipe if it is a trade secret and the holder of the secret has taken steps to protect it from the public.  The opening two sentences of the Massachusetts appeal court’s opinion in Peggy Lawton Kitchens, Inc. v. Hogan is priceless.  The court begins:  “Nothing is sacred.  We have before us a case of theft of a recipe for baking chocolate chip cookies.”

The owner of Peggy Lawton Kitchens (“Kitchens”) had mixed the chaff from walnuts, which he called “chaff, nut meal, nut dust, and nut crunch” in his chocolate chip cookie batter.  This produced “a unique and distinctive flavor.”  The appeals court found that while the basic ingredients of flour, sugar, shortening, chocolate chips, eggs, and salt, would be common in any chocolate chip cookie, and therefore not a trade secret, “the insertion of the nut dust served to add that modicum of originality which separates a process from the every day and so characterizes a trade secret.”  This cookie recipe led to immediate commercial success for Kitchens, and according to its creator, “did to the cookies what butter does to popcorn or salt to a pretzel.  It really made the flavor sing.”

The owner had carefully guarded the cookie recipe by locking the only copies in an office safe and in his desk drawer.  The baking process for the cookies was divided into three separate components and was written on three separate cards.  Access to the cards was limited to long-time trusted employees, including the defendant, Terence Hogan.  The appeals court found that Kitchens had taken “reasonable steps to maintain its mystery and to narrow the circle of those privy to its essentials.”  The court also concluded that the “absence of admonitions about secrecy or the failure to emphasize secrecy in employment contracts (if there were any in this relatively small business)” was not fatal to the plaintiff.

The defendant Hogan, who had no prior experience in volume baking before working at Kitchens, left Kitchens and established a competing bakery business under the trade name “Hogie Bear.”  Hogie Bear’s first product was chocolate chip cookies, which included the “miraculous nut dust” and looked “similar in appearance, color, cell construction, texture, flavor and taste.”  At that time, about 40 brands of chocolate chip cookies were sold in New England.  Except those made by Kitchens and Hogie Bear, no two of them were alike.  The record established that Hogan had “employed a ruse to examine the ingredients cards and may have helped himself to a look at the formula tucked away in Kitchens’ safe or [its owner’s] desk.”  The trial court did not award Kitchens damages because the evidence was “too vague and speculative.”  However, Hogan was enjoined permanently from “making, baking, and selling chocolate chip cookies which use the plaintiff’s formula.”

Inevitable Disclosure of the Secret Formula?

The Third Circuit’s decision in Bimbo Bakeries USA, Inc. v. Botticella is another interesting case discussing the intersection between food recipes, trade secrets, restrictive covenants, and injunctive relief.

Bimbo Bakeries is one of the largest baking companies in the United States, producing and distributing baked goods under popular brand names including Thomas’ and Entenmann’s.  The defendant, Chris Botticella, was responsible for five of Bimbo’s production facilities and oversaw a variety of areas including product quality and cost, labor issues, and new product development.  As one of Bimbo’s senior executives, Botticella had access to and acquired a broad range of confidential information about Bimbo, its products, and its business strategy.  For example, he was one of only seven people who possessed all of the knowledge necessary to replicate independently Bimbo’s popular line of Thomas’ English Muffins, including the secret behind the muffins’ unique “nooks and crannies” texture.  He signed a “Confidentiality, Non-Solicitation and Inventions Assignment Agreement,” in which he agreed not to compete directly with Bimbo during his employment, not to use or disclose any of Bimbo’s confidential or proprietary information during or after his employment, and to return every document he received from Bimbo after his employment.  The agreement, however, did not include a covenant restricting where Botticella could work after he left Bimbo.

Botticella accepted a job at one of Bimbo’s primary competitors in the baking industry – Hostess Brands, Inc.  However, he did not disclose his plans to work for Hostess for several months, continued to engage fully in his work at Bimbo, and had access to Bimbo’s confidential, proprietary and trade secret information after he accepted the job with Hostess.  After Botticella’s departure, a computer forensics expert concluded that the person logging in as Botticella had accessed confidential documents during the final weeks and days of his employment at Bimbo, including 12 documents in 13 seconds on his last day within just minutes after Botticella had disclosed to Bimbo his plans to work for Hostess.

Bimbo brought a lawsuit in Pennsylvania federal court against Botticella seeking to protect its trade secrets and to enjoin him from working for Hostess.  Even though Botticella did not have a post-employment non-compete in his employment agreement with Bimbo, the District Court granted Bimbo’s motion and preliminarily enjoined Botticella from working with Hostess and from divulging to Hostess any confidential or proprietary information belonging to Bimbo.  The court found there was “substantial likelihood, if not an inevitability, that [Botticella] will disclose or use Bimbo’s trade secrets in the course of his employment with Hostess.”

On appeal, the Court of Appeals for the Third Circuit affirmed the District Court’s rulings.  After discussing the contours of the “inevitable disclosure” doctrine under Pennsylvania law, the court concluded that “(1) a determination of whether to grant injunctive relief in a trade secrets case and, if so, the proper scope of the relief, depends on a highly fact-specific inquiry into the situation in the case the court is considering[,] and (2) a court conducting this inquiry has discretion to enjoin a defendant from beginning new employment if the facts of the case demonstrate a substantial threat of trade secret misappropriation.”  Proof of actual misappropriation was not required.  Note that many states do not recognize or have rejected the inevitable disclosure doctrine.

The Third Circuit found that the trial court had not abused its discretion in concluding, at the preliminary stage of the case, that Bimbo would suffer irreparable harm absent injunctive relief because the disclosure of its trade secrets to Hostess would put Bimbo at a competitive disadvantage that a legal remedy could not redress.  Additionally, the private and public interests in preventing the misappropriation of Bimbo’s trade secrets outweighed the temporary restrictions on Botticella’s choice of employment with Hostess.

Caught with Your Hand in the Cookie Jar?

Although trade secret and non-compete laws are state-by-state specific, there are some common ingredients that are baked into most state laws.  The three cases discussed above highlight some recurring themes and common ingredients found in food recipe restrictive covenant cases (and many non-foody non-compete cases).  First, unique and distinctive recipes that derive independent value can constitute trade secrets and are protectable secrets from unauthorized use and disclosure.  Second, the holder of the recipe is expected to take reasonable steps to keep it secret and out of the public domain.  And third, bad actors get punished when their hand is caught in the preverbal cookie jar (sorry, that one was too easy).

No One Size Fits All

Finally, on a somewhat foody-related/restrictive covenant note, there has been a recent uptick in enforcement efforts by certain states related to non-competes, particularly for low-wage workers in the fast food industry.  The trend is based on the ability of non-executive and non-supervisory employees’ ability to earn a living as long as they do not steal and use trade secrets.  For example, in June 2016, the Illinois Attorney General’s Office filed a lawsuit against Jimmy John’s franchises “for imposing highly restrictive non-compete agreements on its employees, including low-wage sandwich shop employees and delivery drivers whose primary job tasks are to take food orders and make and deliver sandwiches.”  The agreements barred departing employees from taking jobs with competitors for two years and from working within two miles of a Jimmy John’s store.  In December 2016, Jimmy John’s reached a settlement, agreeing to pay $100,000 and to remove non-compete clauses from its new-hire agreements.  This deal was reached after Jimmy John’s had settled with the New York Attorney General’s Office and agreed not to use non-compete agreements for most of its workers in New York.

The goal of this Series is to provide a brief overview and some interesting insights and practical pointers when dealing with unique issues that might arise in the context of restrictive covenants and a particular occupation or industry.  It is not intended to provide and should not be construed as providing legal advice.  Each situation is different, and if legal advice is needed, you should seek the services of a qualified attorney who is knowledgeable and experienced in this area of the law to address your specific issues or needs.  Stay tuned for future articles in this Series, which will discuss the restrictive covenant landscape for other occupations and industries, including computer engineers, carpenters, car salespersons, and more.

Click here to view all posts in “The Restricting Covenant” series.

California Cracks Down on Employers’ Use of Criminal Background Information

By Kate S. Gold and Jessica A. Burt

California employers using employees’ criminal convictions to make employment-related decisions should be aware of the recent flurry of new regulations and pending state legislation that place increased limitations on employers’ use of such information.

New FEHC Regulations Prohibit Consideration of Criminal History When Doing So Has An Adverse Impact On Individuals in A Protected Class

California’s Fair Employment and Housing Commission (FEHC) issued new regulations on employers’ use of criminal background information when making employment decisions, including hiring, promotion, discipline, and termination. The new regulations take effect on July 1, 2017, and are intended to clarify how the use of criminal background information may violate the provisions of the Fair Employment and Housing Act (“FEHA”).  The regulations prohibit employers from seeking or using any criminal history information that has an adverse impact on an individual within a protected class, such as race, national origin or gender. The new regulations provide that an adverse impact may be established through the use of state or national level statistics or by offering “any other evidence” that establishes an adverse impact.

If an employee or job applicant can demonstrate that an employer’s criminal background check policy or practice creates an adverse impact, the burden shifts to the employer to prove that the policy or practice is nonetheless justifiable because it is: (1) job-related and (2) consistent with business necessity. The criminal conviction policy or practice must bear a demonstrable relationship to successful performance on the job and measure the person’s fitness for the specific position, not merely evaluate the person in the abstract.  An employer must demonstrate that the criminal background check policy is “appropriately tailored” to the job, taking into account: (i) the nature and gravity of the offense; (ii) the amount of time that has passed since the offense and/or since the sentence for the offense was completed; and (iii) the nature of the job the employee holds or seeks.

An employer can demonstrate that its policies or practices are “appropriately tailored” to the job by either: (1) conducting an individualized assessment of the circumstances and qualifications of the applicant or employee and providing the individual with notice (before any adverse action is taken) that he or she has been excluded based on a conviction and affording the individual an opportunity to show that the criminal history exclusion should not apply due to their particular circumstances; or (2) demonstrating that a “bright line” rule regarding conviction disqualification can distinguish between those employees who actually pose an unacceptable risk and that the convictions being used to disqualify, or otherwise adversely impact the status of the employee or applicant, have a direct and specific negative bearing on the person’s ability to perform the duties or responsibilities necessarily related to the position.

The new regulations further provide that any bright-line policy that includes conviction-related information that is seven or more years old is subject to a rebuttable presumption that the policy is not specifically tailored to meet the job-related and consistent with business necessity defense.

Under the new regulations, even if an employer’s background check policy meets the new stringent standard, employers may still be liable if an individual employee can demonstrate that there is a less discriminatory policy or practice that serves the employer’s goals as effectively, such as a more narrowly targeted list of convictions or another form of inquiry that evaluates job qualification or risk as accurately.

Employers that are required to comply with federal or state laws or other regulations that mandate a criminal history screening process or require an employee or applicant to possess or obtain a required occupational license can rely on the applicable laws as a defense to an adverse impact claim.

The Regulations Require Employee Notification of an Adverse Action and Opportunity to Present Evidence of Factual Inaccuracy

The federal Fair Credit Reporting Act currently requires employers to provide notice to employees or job applicants when an adverse employment decision is made based on information obtained by an employer through a background check. In addition, the FEHC’s new regulations require that employers notify an employee or applicant of the disqualifying criminal conviction if the information was obtained from any source other than the applicant or employee (e.g., through a consumer report or internally generated search).

Under the regulations, the employee or applicant must be given a “reasonable opportunity to present evidence that the information is factually inaccurate,” and the criminal record may not be considered if the employee establishes that the information is inaccurate.

Similar Pending California Legislation

Employers should also note that pending Assembly Bill (AB) 1008 goes even further than the FEHC regulations and would make it unlawful for a California employer to: (1) include on any job application questions that seek the disclosure of an applicant’s criminal history; (2) inquire or consider an applicant’s prior convictions before extending a conditional offer of employment; and (3) when conducting a criminal background check, to consider, distribute, or disseminate information on (i) an arrest not followed by conviction, (ii) referral to or participation in a pretrial diversion program, (iii) convictions that have been sealed, dismissed, expunged, or statutorily eradicated pursuant to law, (iv) misdemeanor convictions for which no jail sentence can be imposed, or (v) misdemeanor convictions for which three years have passed since the date of conviction or felony convictions for which seven years have passed since the date of conviction.

If passed, AB 1008 would also require California employers that intend to deny employment to an applicant because of prior convictions to perform an individualized assessment of whether the applicant’s criminal history has a direct and adverse relationship to the specific job duties. The employer must then notify the applicant of the reasons for the decision and provide the applicant with 10 days to respond and challenge the accuracy of the information or provide evidence of rehabilitation, which the employer must then consider before making a final employment decision.

The bill is scheduled for a hearing before the California Committee on Labor and Employment on May 3, 2017.

Best Practices for California Employers Conducting Criminal History Checks

California employers that screen applicants and employees for criminal convictions should review and evaluate their criminal conviction policies, background check policies, and job applications for compliance with the new regulations and, potentially, for compliance with pending AB 1008.