Crisis Management - Page 15 of 18

Significant Illinois and Massachusetts Non-Compete Rulings

Two recent cases should give employers pause as to whether their restrictive covenants with their at-will employees are enforceable. On May 28, 2013, a United States District Court in Massachusetts held that under Massachusetts law, a confidentiality agreement signed by an at-will employee was unenforceable where the employee’s title, duties, remuneration and other terms of employment had materially changed since signing the agreement. Then, on June 24, 2013, an Illinois Appellate Court held that unless an at-will employee is employed for at least two years, restrictive covenants the employee signed at the beginning of employment are unenforceable for lack of adequate consideration. Moreover, the Illinois court held it was irrelevant whether the employee quits or is terminated before two years of employment. While the rulings rely on the applicable state law, they address important points that may have broader application than only in Massachusetts and Illinois.

In Smartsource Computer & Audio Visual Rentals v. Robert March et al, D. Mass. (May 28, 2013), Smartsource filed an action to enforce its noncompete agreements with its former employee, March. March was hired by Smartsource in 2006 as a Senior Account Executive, and signed an offer letter with a simple confidentiality agreement/restriction. In 2007, March was promoted to Branch Sales Manager, in 2008 to Regional Sales Manager, in 2010 to Regional General Manager, and again in 2012 to Regional Sales Manager. With each change his job responsibilities and compensation changed. Citing to Massachusetts law, the court denied the requested injunctive relief to Smartsource. Although stopping short of a definitive ruling on the merits, the court noted that “it may well be under [Massachusetts case authority], March’s 2006 confidentiality agreement has been abrogated, and he is not bound by any restrictive covenants.” March and the Massachusetts cases cited therein suggests that when material changes to an employment relationship are contemplated, the employer should consider revisiting the existing restrictive covenant agreement and consider whether a new agreement is advisable.

More recently, the Illinois Appellate Court for the First District (Cook County) in Eric D. Fiefield et al v. Premier Dealer Services, Inc., (Ill. App. Ct., 1st Dist. June 24, 2013), answered the question as yet definitively unanswered in Illinois: What additional employment period after the signing of a restrictive covenant agreement is sufficient consideration to make the agreement enforceable against an at-will employee? The Court answered at least two years, even where the employee signs the restrictive covenant at the outset of employment. Fiefield had worked for the predecessor company that was acquired by Premier. Fiefield was then hired by Premier in late October 2009, and as a condition of employment Fiefield was required to and did sign an employment agreement containing a two-year restrictive covenant. Fiefield signed the agreement on October 30, 2009 and started work on November 1, 2009. On February 12, 2010, Fifield resigned to go to work for a competitor. Fiefield and his new employer then filed suit against Premier seeking a declaratory judgment that the restrictive covenant agreement was unenforceable. The circuit court ruled the agreement was not enforceable because it lacked consideration. Premier appealed and the Appellate Court affirmed, agreeing that there was inadequate consideration. The court held that regardless of whether Fiefield had signed the agreement before he started work or after he started work, “Illinois courts have repeatedly held there must be at least two years or more of continuous employment to constitute adequate consideration in support of a restrictive covenant…This rule is maintained even if the employee resigns on his own instead of being terminated.”

The Premier decision will surely send employers in Illinois scrambling to reconsider the validity of their at-will employee restrictive covenant agreements in Illinois. However, help may be on the way as Premier has filed a petition for leave to appeal the decision to the Illinois Supreme Court. Granting review is within the Court’s discretion, and the Illinois Chamber of Commerce and other employer groups are backing Premier’s bid. Even if the case is not reviewed or reversed, however, there are a number of possible solutions to the Premier consideration problem. These include offering employees consideration for the non-compete in addition to simply offering at-will employment (such as a “bonus” payment or possibly elaborating on the consideration offered to include, for example, training, access to customers and valuable confidential information and trade secrets) or offering employees some form of term employment contract.

If you have at-will employees with restrictive covenants less than two years old, and you view confidentiality and restrictive covenant agreements important to your business, or if your agreements with your employees significantly predate their current job positions, compensation and other conditions, these cases should sound the alarm to review your competitive advantage protections.

Are You Ready For Your Company’s Holiday Party?

Many companies start planning their holiday party now. Employers need to know that an employer can be held liable for accidents and injuries caused by their employees who over indulge themselves with alcohol at the party, even if the employee initially made it home safely! You read that correctly. The California Court of Appeal, in Purton v. Marriott International, Inc., recently held that the company was potentially liable for a fatal motor vehicle accident caused by one of its employees who had attended the company’s hosted party. While the employee arrived home safely, the employee left about 20 minutes later to drive another co-worker home. The co-worker was also intoxicated. During this trip the employee struck another car, killing its driver. The trial court granted summary judgment for the employer on the ground that the employer’s potential liability under the doctrine of respondeat superior ended when the employee arrived home.

The court of appeal reversed and held that an employer may be found liable for its employee’s tortious conduct “as long as the proximate cause of the injury occurred within the scope of employment. It is irrelevant that foreseeable effects of the employee’s negligent conduct occurred at a time the employee was no longer acting within the scope of his or her employment.” The court explained that a jury could conclude that the proximate cause of the injury, i.e., the employee’s alcohol consumption, and the negligent conduct, i.e., the car accident, occurred within the scope of his employment. The court further found that the going and coming rule, which generally exempts an employer from liability for the torts of its employees committed while going to or coming home from their work, was an “analytical distraction” because the “thrust of [plaintiff’s] claim for vicarious liability was that [the employee] was an `instrumentality of danger’ because of what had happened to her at work.” As such, the court focused on the “act on which vicarious liability is based and not on when the act results in injury.” The court also stated that the record presented sufficient evidence for a finding that the employee in question breached a duty of due care he owed to the public once he became intoxicated and that the employer “created the risk of harm at its party by allowing an employee to consume alcohol to the point of intoxication.”

This case certainly gives the definition of “within the course and scope of employment” a broader meaning. That said, the moral of the story: (1) don’t drink and drive; (2) don’t let your employees do so either; and (3) limit your employees’ consumption of alcohol at company events.

NJ Supreme Court Expands The Scope Of Retaliation Claims Under The New Jersey Law Against Discrimination

Under the guise of promoting the “broad remedial purposes” of the New Jersey Law Against Discrimination (“LAD”), the New Jersey Supreme Court recently decided that employees may be protected from retaliation under the LAD even when they complain about offensive sexual comments by a supervisor which would not violate the law because they were not heard by any female employee. In Battaglia v. United Parcel Service, Inc., the plaintiff objected to his supervisor’s repeated use of crude sexual language during discussions with other men about women in the workplace, and made a vague reference to that language in an anonymous letter of complaint to management. The employer investigated the complaints raised in that letter, but did not pursue the issue of offensive sexual comments because the letter was too vague to understand that the reference to “language you wouldn’t use [in] your worst nightmare” was about crude sexual comments. Management – including the supervisor in question – figured out that plaintiff wrote the letter. It subsequently conducted a separate investigation concerning certain inappropriate conduct by plaintiff and demoted him from his position as a manager. Plaintiff then sued for retaliation under the LAD, and included a separate cause of action for retaliation under the New Jersey Conscientious Employee Protection Act (“CEPA”) based on other complaints he had raised concerning alleged fraudulent use of corporate credit cards.

Following a jury verdict for plaintiff, the New Jersey Appellate Division affirmed the jury’s verdict for plaintiff under CEPA but reversed with respect to the cause of action for retaliation under the LAD. That court observed that the LAD only protects employees who reasonably believe that the employer is engaged in conduct which would be unlawful under the LAD, and that plaintiff had not engaged in protected activity because there was no discrimination or hostile work environment where the comments by the supervisor were not direct to, or heard by, any female employee.

The Supreme Court reinstated the LAD verdict, but vacated the verdict under CEPA because, among other things, the plaintiff admitted he did not believe the credit card use had been fraudulent. With respect to the LAD cause of action for retaliation, the Court rejected the appellate court’s “narrow interpretation” that the Act only protects employees who complain about “demonstrable acts of discrimination.” Instead, once again invoking the broad remedial purposes of the Act, the Court found that the jury had sufficient evidence to find that the plaintiff had a “good faith belief” that the supervisor’s crude sexual references to women in the workplace was unlawful under the LAD. In this regard, the Court observed: “when an employee voices a complaint about behavior or activities in the workplace that he or she thinks are discriminatory, we do not demand that he or she accurately understand the nuances of the LAD or that he or she be able to prove that there was an identifiable discriminatory impact upon someone of the requisite protected class.”

It has long been clear that an employee may pursue a cause of action for retaliation under the LAD even where the underlying complaint of discrimination has no merit. What is not clear is how an employee could have a reasonable belief that he was complaining about unlawful conduct where that conduct – offensive comments about women made to a group of men – could not possibly be unlawful. That is compounded in this case by the fact that management could hardly be expected to understand that the plaintiff was complaining about unlawful conduct from the vague reference in his letter. The opinion reflects the Court’s determination to continue to read the LAD expansively to protect employees from retaliation. Indeed, the driving factor in this case may be reflected in the Court’s observation that the jury had evidence to support a finding that management not only gave short shrift to the complaints, but responded by imposing discipline against the complainer.

WHO IS A SUPERVISOR UNDER TITLE VII?

In its 1998 opinions in Faragher v. Boca Raton and Burlington Industries v. Ellerth, the Supreme Court held that harassment by a supervisor can result in liability against an employer, but that an employer would only be liable for harassment by a non-supervisory employee if it knew or should have known of the harassment and was negligent in failing to correct it. It has remained unclear, however, exactly who is a supervisor for purposes of vicarious harassment liability under Title VII. The First, Seventh and Eighth Circuits have held that an individual is a supervisor for purposes of harassment liability only if he/she has been given the authority to take tangible employment actions – to hire, fire, demote, transfer or discipline – against the victim of harassment. The Second, Fourth and Ninth Circuits have adopted the definition set forth by the EEOC in its Enforcement Guidance where it defines supervisory status by the ability to exercise significant direction of an employee’s work activities irrespective of the power to take substantial or tangible employment actions. The Supreme Court’s opinion this week in Vance v. Ball State University resolves that split by making clear that Title VII imposes vicarious liability on the employer only for the harassment by a member of management who has been given the power by the employer to significantly impact the employment of a subordinate victim.

In Vance, Plaintiff Maetta Vance complained on a number of occasions to the University that she had been subjected to racial harassment by Saundra Davis, who she claimed was her supervisor, as well as by a number of co-workers and other supervisors. The University investigated each complaint and imposed discipline when it found the complaint had merit. Nevertheless, Vance filed charges with the EEOC and ultimately initiated a Title VII action for race harassment and hostile environment discrimination in the United States District Court for the Southern District of Indiana. The district court granted the employer’s motion for summary judgment based on its finding that the University was not strictly liable for the alleged harassment by Davis because Davis was not Vance’s supervisor, and that the University was not liable under a negligence theory because it acted promptly to investigate and resolve the complaints filed by Vance.

The Seventh Circuit Court of Appeals affirmed. The Appeals Court determined that summary judgment was warranted in part because Vance had failed to establish a basis to impose liability against the employer. In this respect, the court found that Davis was not a supervisor under Title VII because she did not have the power to take tangible employment actions, i.e., Davis had no authority to hire, fire, promote, demote or discipline Vance. The court rejected the argument by Vance that Davis was a supervisor merely because she told Vance what to do and refused to adopt the definition of supervisor advanced by the EEOC that it was sufficient under Title VII if the supervisor directed the day-to-day activities of an employee even without authority to take significant or tangible employment actions.

In a 5-4 decision written by Justice Samuel Alito, the Supreme Court affirmed. The Court resolved the split among the circuits by refusing to defer to the expertise of the EEOC, and by rejecting the Agency’s vague and “nebulous” definition of supervisor in favor of a bright line standard which could easily be applied by the parties and courts to establish the status of an alleged harasser. The majority determined that it was appropriate to focus on the framework established in Faragher and Ellerth – that employers will be vicariously and strictly liable for harassment by a supervisor which results in a tangible adverse action such as a significant change in the victim’s employment status – in order to understand and determine the proper definition of a supervisor in the context of a claim for harassment under Title VII. Applying the Faragher and Ellerth analysis, the Court found that the defining characteristic of a supervisor in such a case is the power to cause “direct economic harm” by virtue of “the authority to effect a tangible change in a victim’s terms and conditions of employment.” Accordingly, the Court held that to be a supervisor for purposes of imposing vicarious liability in a Title VII harassment case, a person must have the power to make a “significant change” in the working status of the alleged victim, such as the ability to hire, fire, promote, demote, discipline or impose “significantly different responsibilities” on the employee.

The dissent, written by Justice Ruth Bader Ginsburg, argued that the majority opinion ignores the workplace reality where the power to control work assignments – no less than the power to fire or discipline – is used as an intimidating factor to aid in the harassment of a subordinate. Justice Ginsburg would have deferred to the informed expertise of the EEOC, and suggested that the majority opinion will allow employers to escape liability for the harassment of their employees and undermine the effort “to stamp out discrimination in the workplace.”

The Vance opinion will not only have a significant impact on how harassment cases are approached in litigation, but will also promote the use of internal complaint procedures by forcing employees to report incidents of harassment by co-workers, and by encouraging employers to investigate and resolve such complaints in order to avoid liability in court. Not surprisingly, the opinion has been lauded by defense counsel for bringing clarity to a significant issue of importance and as a victory for employers. The General Counsel of the EEOC, however, has expressed his disappointment in the ruling and in the Court’s failure to defer to the Agency’s long standing interpretation of the law, and employee organizations have parroted the concern expressed in the dissenting opinion that the standard adopted by the Court will make it harder for victims to hold their employers accountable for harassment in the workplace. However, as noted by Justice Alito, there has been no indication from any of the 14 states which comprise the First, Seventh and Eighth Circuits – which have long applied the test adopted by the Court – to support that fear.

Employee’s Deactivation Of Facebook Account Leads To Sanctions

The latest Facebook case highlights how courts now intend to hold parties accountable when it comes to preserving their personal social media accounts during litigation. Recently, a federal court ruled that a plaintiff’s deletion of his Facebook account during discovery constituted spoliation of evidence and warranted an “adverse inference” instruction against him at trial. Gatto v. United Airlines and Allied Aviation Servs., et al. , No. 10-CV-1090 (D.N.J. March 25, 2013).

The plaintiff, a ground operations supervisor at JFK Airport, allegedly suffered permanent disabling injuries from an accident at work which he claimed limited his physical and social activities. Defendants sought discovery related to Plaintiff’s damages, including documents related to his social media accounts.

Although Plaintiff provided Defendants with the signed authorization for release of information from certain social networking sites and other online services such as eBay, he failed to provide an authorization for his Facebook account. The magistrate judge ultimately ordered Plaintiff to execute the Facebook authorization, and Plaintiff agreed to change his Facebook password and to disclose the password to defense counsel for the purpose of accessing documents and information from Facebook. Defense counsel briefly accessed the account and printed some portion of the Facebook home page. Facebook then notified Plaintiff that an unfamiliar IP address had accessed his account. Shortly thereafter, Plaintiff “deactivated” his account, causing Facebook to permanently delete the account 14 days later in accordance with its policy.

Defendants moved for spoliation of evidence sanctions, claiming that the lost Facebook postings contradicted Plaintiff’s claims about his restricted social activities. In response, Plaintiff argued that he had acted reasonably in deactivating his account because he did know it was defense counsel accessing his page. Moreover, the permanent deletion was the result of Facebook’s “automatically” deleting it. The court, however, found that the Facebook account was within Plaintiff’s control, and that “[e]ven if Plaintiff did not intend to deprive the defendants of the information associated with his Facebook account, there is no dispute that plaintiff intentionally deactivated the account,” which resulted in the permanent loss of relevant evidence. Thus, the court granted Defendants’ request for an “adverse inference” instruction (but declined to award legal fees as a further sanction).

The Gatto decision not only affirms that social media is discoverable by employers, but also teaches that plaintiffs who fail to preserve relevant social media data will face harsh penalties. Employers are reminded to specifically seek relevant social media (Facebook, Twitter, blogs, LinkedIn accounts) in their discovery requests since such sources may provide employers with sufficient evidence to rebut an employee’s claims. This case also serves as a reminder and a warning to employers that the principles of evidence preservation apply to social media, and employers should take steps very early in the litigation to preserve its own social media content as it pertains to the matter.

Former Executive’s Race to California Hits a Roadblock in New York

Like many things in life, there is a perceived formula for success in non-compete cases: If you are the former employee or his or her new or would-be new employer, conventional wisdom dictates that you identify the restrictions early and consider filing a preemptive declaratory judgment action in a state that is hostile to such agreements (provided the facts permit). California is the most well-known example, but there are others. The plan works best if the former employee lives in California (or similarly hostile state) or has other significant connections by virtue of his past or intended future employment. But now, a New York appellate court has thrown conventional wisdom a curve.

Michael Cusack and Peter Arkley were former Aon executives. They left Aon on June 13, 2011 to pursue lucrative opportunities with a competitor, Alliant Insurance Services. The same day, 38 other Aon employees also left, and 22 more followed shortly thereafter. Aon’s clients came too, with over $20 million in client revenue allegedly flowing from Aon to Alliant.

Arkley and Cusak, along with Alliant, following the familiar formula, filed for a declaratory judgment to invalidate their restrictive covenant agreements in California federal court on the same day they resigned. Arkley’s chances of success in California seemed particularly good because, although his employment agreement was governed by Illinois law, he both lived and worked in California, and he planned to continue to do so with Alliant.

Aon responded by filing suits in Illinois and New York state courts, and found success in New York in particular. The New York trial judge, undeterred by the action in California and Arkley’s California connections, enjoined him soliciting business from, and entering into any business relationship with, any of Aon’s clients whom he either procured or whose accounts he worked on in the 24 months prior to his departure. She also enjoined him from soliciting any Aon employees to work for Alliant.

In January, a New York appellate court affirmed. The court rejected Arkley’s calls to defer to the first-filed California action, calling it “a preemptive measure undertaken to gain a tactical advantage so as to negate the force and effect of the restrictive covenants, which the parties had freely agreed upon.” The New York court seized upon the fact that the parties’ agreement had selected Illinois law to govern and held that Illinois law provided for enforcement.

Although the outcome was arguably an unusual one insofar as a New York court entered an injunction against someone who lived and worked in California and intended to do so in his new employment, so too were the facts involved, on many levels. First, the conduct at issue was particularly egregious in that it involved, among other things, former employees allegedly taking the equivalent of hundreds of thousands of printed pages of documents, including highly-sensitive documents; a coordinated departure strategy that included filing a declaratory judgment action in California within an hour of the key executives’ resignations; a mass exodus of both employees and clients; and alleged violations of an earlier-issued temporary restraining order. Second, the executives involved were high-level employees, who received seven-figure compensation from Aon, at least in part in consideration of the very restrictions they sought to avoid. Third, the restrictive covenants at issue were not blanket non-competes, but rather restricted the executives from disclosing confidential information, from calling on the customers that they serviced for Aon, and from soliciting other Aon employees for employment. In different circumstances, involving lower-level employees, who are alleged to have engaged in less egregious conduct and/or who are subject to broader restrictive covenants, the former employer may not fare as well.

Still, the takeaways are unmistakable. First, choice of law is critical, and an employer loses a tactical advantage when it fails to select a state law that, if not favorable to it, at least gives it a fair shot. Second, living and working in California is not the end all be all, and racing into a California court does not guarantee the former employee and his new employer freedom from the employee’s post-separation obligations. Solid facts and a solid agreement, presented in a jurisdiction that follows a more traditional approach to restrictive covenants, can still result in success for the former employer.