Crisis Management - Page 13 of 18

Ninth Circuit Calls Into Question “No Reemployment” Provisions In California Settlement Agreements

On April 8, 2015, in Golden v. California Emergency Physicians Medical Group, the Ninth Circuit Court of Appeals broadly interpreted California’s statutory provisions regarding restrictive covenants in the context of reviewing a common clause included by employers in settlement agreements. Though the Court declined to decide the ultimate issue – the validity of “no reemployment” clauses – the Court’s broad reading of California’s restrictive covenant statute is alarming.

After he was let go from his employment with California Emergency Physicians Medical Group (“CEPMG”), Dr. Robert Golden (“Golden”) filed a lawsuit in state court alleging a number of statutory wrongful termination claims. After CEPMG removed the case, the parties reached an oral settlement agreement. Later on, CEPMG memorialized the oral agreement into a written settlement agreement, which contained a provision that precluded Golden from returning to work at CEPMG – i.e., a “no reemployment” clause. Specifically, the no reemployment clause at issue provided, in relevant part, that Golden waived all rights to employment with CEPMG or at any facility that CEPMG may own or with which it may contract in the future. The no reemployment clause further provided that if CEPMG contracted to provide services to, or acquires rights in, a facility that is an emergency room at which Golden was employed, the company had the right to terminate Golden, without incurring any liability.

Golden refused to sign the written settlement agreement and CEPMG moved to enforce it. Ultimately, a District Court ordered Golden to sign the settlement agreement, finding that it did not run afoul California law because it was not a non-compete agreement. Golden appealed.

Before the Ninth Circuit, Golden argued that the no reemployment provision in the settlement agreement violated California Business and Professions Code section 16600 (“Section 16600”), which contains California’s statutory restrictions on restrictive covenants. CEPMG argued that because the no reemployment provision was not a non-compete agreement – i.e., it did not preclude Golden from working for one of CEPMG’s competitors – it was not unlawful.

The majority of the three-judge panel held that the District Court’s interpretation of Section 16600 was incorrect. The Court noted that the California Supreme Court had not specifically addressed whether Section 16600 applied only to “typical so-called ‘non-compete covenants.’” However, it noted that the language of Section 16600 was extremely broad – making unlawful “every contract by which anyone is restricted from engaging in a lawful profession, trade, or business of any kind.” Examining the few exceptions that the California Legislature had carved out to Section 16600, the Court found that the context of the statute suggested that California had intended it to apply more broadly because of the particularity of the exceptions. The Ninth Circuit, thus, held that “the crux of the inquiry under [S]ection 16600 is not whether the contract constituted a covenant not to compete, but rather whether it imposes ‘a restraint of a substantial character’ regardless of ‘the form in which it is cast.’” Although the Court declined to determine, for itself, the exact boundaries of Section 16600, it remanded the case to the District Court for it to determine the validity of the agreement using a broader interpretation of Section 16600.

Infamously, California has some of the toughest limitations on restrictive covenants in the nation. Yet, employers have routinely included the type of provision at issue in Golden in employment settlement agreements, without concern.

It is unclear how Golden will be interpreted over time, particularly what restrictions courts may determine to be “of a substantial character.” Notably, the potential restraint on Golden as a result of the agreement was arguably more expansive than is typically the case, given CEPMG’s large market share and the potential for the immediate termination of Golden’s employment if CEPMG expanded. Nonetheless, Golden is a clear declaration that Section 16600 is not limited solely to traditional non-compete agreements.

Golden follows other recent decisions, enforcement actions and agency opinions which collectively have challenged the assumption that various common settlement and separation provisions are valid and enforceable. For example, as noted here,the EEOC has been challenging the validity of cooperation, non-disparagement, non-disclosure, and release provisions in separation agreements, arguing that they interfered with employees’ rights to file administrative charges and participate in EEOC investigations. Similarly, as noted here, the SEC recently for the first time used its enforcement powers under Rule 21F-17 of the Whistleblower provisions of the Dodd-Frank Act to impose a civil penalty on an employer for using a confidentiality agreement during internal investigations which, in the SEC’s opinion, restricted an employee’s ability to report potential securities violations. Finally, as discussed here, the NLRB has recently opined that handbook confidentiality provisions intended to protect confidential information and trade secrets may have the effect of unlawfully inhibiting employees from engaging in protected activities under the NLRA, such as discussing wages, criticizing management, publicly communicating about working conditions and discussing unionization.

These developments collectively challenge many of the benefits and protections afforded to employers by resolving disputes or potential disputes through separation, severance, release and settlement agreements. Employers should thus reevaluate the provisions they have traditionally used, to ultimately determine whether utilizing such agreements is indeed an effective deterrent against future potential disputes, or worth the potential litigation that may result from using language that is unlawful under Section 16600.

Joint Employer Liability on the Rise

The Issue: Could my company be liable as a joint employer for California Labor Code violations of our subsidiary or third-party staffing company?

The Solution: Companies with subsidiaries and staffing companies in California should take steps to limit exposure.

Analysis: Parent corporations are generally presumed to be separate entities from their subsidiaries, and therefore not liable for the unlawful treatment of their subsidiary’s separate employees unless they exercise significant control over day-to-day operations. Recent developments, however, call this precedent into question.

In Castaneda v. Ensign, 229 Cal. App. 4th 1015 (2014) (review denied), the California Court of Appeal held: “an entity that controls the business enterprise may be an employer even if it did not ‘directly hire, fire, or supervise’ the employees.” (emphasis added). The parent company at issue claimed a lack of control over wages, hours and working conditions of its subsidiary operating companies’ employees. In reversing summary judgment for the parent and sending the case to be tried by a jury, the court highlighted evidence that the parent provided centralized human resources, accounting, payroll, and other key services to its subsidiary; controlled the mechanisms used to track subsidiary employees’ hours; handled subsidiary employee discipline, benefits and workers’ compensation claims; required subsidiary compliance with parent policies, practices, templates, forms, and training; and set the pay rate for some subsidiary employees.

Castaneda also resurfaced recent California Supreme Court precedent that “[m]ultiple entities may be employers where they control different aspects of the employment relationship…This occurs, for example, when one entity (such as a temporary employment agency) hires and pays a worker, and another entity supervises the work…Supervision of the work, in the specific sense of exercising control over how services are performed, is properly viewed as one of the ‘working conditions’…control over how services are performed is an important, perhaps even the principal, test for the existence of an employment relationship.” In other words, the worksite employer who supervises the worker may be liable to workers for Labor Code violations and other alleged wrongs even if it is not the employer of record who issues paychecks.

The California Legislature is not sitting on the sidelines, either. Effective January 1, 2015, AB 1897 imposed joint employer liability on many companies who engage labor contractors such as staffing agencies that fail to pay required wages to, or secure valid workers compensation insurance for, the workers they supply—regardless of the “control” test discussed above. Please see our prior blog post on this new law here.

Likewise, the California Department of Industrial Relations has clarified that California’s new paid sick leave law will apply equally to staffing agencies and their “joint employers.” Please see our prior blog post on this new law, here.

Given this upward trend in joint employer liability, companies with the help of counsel should evaluate their subsidiary and staffing relationships. Corporate structure—in name and in operations—should be separate and independent. Companies who prefer centralized corporate services by the parent company should weigh the risk that efficiency may indicate control over wages, hours, and working conditions. Careful selection and some oversight of, and indemnity agreements with, labor contractors should be considered.

How Safe Are Your Company’s Trade Secrets?

In a world where employee mobility is a business reality, companies should be taking proactive measures to guard trade secrets, retain competitive advantage and be ready for court if it comes to that. Click below to launch a video and hear from Labor & Employment partners Mark Terman and David Woolf on what they, and our other Labor & Employment group lawyers, are doing every day to protect companies.

UWOA Exception Does Not Apply to Noncompete Agreements in Pennsylvania

The Pennsylvania Superior Court recently reaffirmed Pennsylvania’s longstanding position that employers must provide valuable consideration to employees who enter into noncompete agreements. In a case of first impression, the court held that a statement in a noncompete agreement with an existing employee that the parties “intend to be legally bound,” as set forth in the Uniform Written Obligations Act (“UWOA”), does not constitute adequate consideration.

In Socko v. Mid-Atlantic Systems of CPA, Inc., the employer argued that its noncompete agreement with a former employee was enforceable because the agreement expressly stated that the parties “intend to be legally bound.” The former employee entered into the agreement after he began working for Mid-Atlantic Systems of CPA, and he did not receive any benefit or change in job status in exchange for signing the noncompete. The employer argued that the language itself sufficed to enforce the agreement because Section 6 of Pennsylvania’s UWOA prevents the avoidance of a written agreement for lack of consideration if the agreement contains an express statement that the signer intends to be legally bound.

The court rejected the employer’s argument, pointing to Pennsylvania’s established view of restrictive covenants as a disfavored restraint of trade and significant hardship on bound employees. Accordingly, Pennsylvania courts have long held that noncompete agreements must be supported by valuable consideration, even though other types of contracts may be upheld by continuation of at-will employment, contracts under seal, or nominal consideration.

Employers seeking to enforce noncompete agreements in Pennsylvania are now on notice that language stating that “the parties intend to be legally bound” will not relieve them of the requirement to provide actual and valuable consideration to employees in exchange for execution of the agreement. If an employee signs the agreement at the start of employment, then the consideration is the job itself. When the employment relationship already exists, however, employers must provide consideration in the form of benefits—such as raises or bonuses—or a change in job status, i.e., a promotion.

Daughter’s Facebook Post Leads to Costly Breach by Father of a Confidentiality Clause in His Settlement Agreement With Former Employer

A recent decision by a Florida appeals court, Gulliver Schools, Inc. v. Snay, stands as a stark reminder of the perils of trying to maintain confidentiality in the age of social media where news can travel faster than the speed of sound and inadvertent dissemination of information that is intended to be “confidential” can be difficult, if not impossible, to prevent.

Patrick Snay sued his former employer, Gulliver Schools, for age discrimination and retaliation under the Florida Civil Rights Act after his contract as the school’s headmaster was not renewed. The parties reached a settlement in the amount of $150,000 ($10,000 in back pay, $80,000 for non-wage damages, and $60,000 in attorney’s fees), and agreed that the “existence or terms” of the agreement were to be kept strictly confidential. The confidentiality provision prohibited Snay from “directly or indirectly” disclosing or discussing the case or the settlement with anyone except “his attorneys or other professional advisors or spouse.” It contained a clawback or liquidated damages provision allowing for the disgorgement of plaintiff’s portion of the settlement payments in the event of a breach.

Only four days after the parties had signed the settlement agreement, the school notified Snay that he had materially breached the agreement based on a Facebook posting of Snay’s college-age daughter, who boasted to approximately 1200 Facebook friends (many of whom were either current or past Gulliver students): “Mama and Papa Snay won the case against Gulliver. Gulliver is now officially paying for my vacation to Europe this summer. SUCK IT.”

Mr. Snay testified that he believed his daughter was retaliated against at Gulliver, that she was “very concerned about” the lawsuit, and that after the settlement was reached he and his wife decided to tell their daughter that the case had settled and that they were happy with the result. They apparently did not tell her that the settlement was confidential or that she should not disclose such information to anyone else. The trial court found that neither Snay’s comments to his daughter nor his daughter’s Facebook comment constituted a breach. The appeals court disagreed and reversed, ruling that Mr. Snay “violated the agreement by doing exactly what he had promised not to do,” and “[h]is daughter then did precisely what the confidentiality agreement was designed to prevent, advertising to the Gulliver community that Snay had been successful in his age discrimination and retaliation case against the school.”

Confidentiality clauses like the one in the Snay/Gulliver settlement agreement are common and should be enforced when they are clear, unambiguous and voluntarily and knowingly agreed to. From a drafting standpoint, if it was important for Mr. Snay to have disclosed certain information about the settlement to his daughter (as he had claimed at his deposition), then the confidentiality provision could have included “immediate family” as permissible recipients of confidential information and have subjected those family members to the same confidentiality obligations as Mr. and Mrs. Snay.

In addition, attorneys should take heed of this opinion in light of their ethical and legal obligations to protect client confidences. The duty to protect privileged and confidential client information extends to current clients (RPC 1.6), former clients (RPC 1.9), and prospective clients (RPC 1.18). Zealous representation and confidentiality are at the foundation of the attorney-client relationship, but if an attorney’s spouse, family member, or co-worker, inadvertently or otherwise posts on social media client or case information that is confidential (e.g., “mom just settled big toxic tort case, off to Mexico for much needed family vacation!”), such disclosure could be disastrous.