Category: Employment Law

Clawing Back All Compensation From the “Faithless Servant” Under New York Law by Richard Friedman

Clawing Back All Compensation From the “Faithless Servant” Under New York Law

In a terse opinion, the Appellate Division of the Supreme Court of New York, First Department recently unanimously affirmed an arbitration award in favor of legal recruiting firm Major, Lindsey & Africa, LLC (“MLA”) pursuant to which MLA was awarded almost $1.8 million in compensation paid to a former employee during her four-year tenure at the firm as well as over $900,000 in attorneys’ fees and costs on the grounds that the former employee had stolen trade secrets from the firm and had disclosed confidential information to certain of MLA’s competitors. Mahn v. Major, Lindsey & Africa, LLC, 2018 N.Y. Slip Op. 01888 (March 20, 2018). Applying the faithless servant theory of liability, the First Department found that the decision to claw back all salary and commissions paid to the employee during her four-year tenure with the firm did not violate New York’s public policy. The decision is the most recent confirmation that the faithless servant doctrine remains a viable basis for liability in New York and offers a potentially powerful tool for employers to use against employees who have been unfaithful even where, as discussed below, the employer cannot prove damages

The faithless servant rule is grounded in the law of agency and provides a tool that employers can use to claw back all compensation paid to a former employee upon demonstrating that the employee repeatedly engaged in disloyal and unfaithful conduct during the term of his or her employment. The theory underlying the doctrine is quite simple: one who has acted unfaithfully or in bad faith in an employment context should not be entitled to retain his or her compensation. 

The faithless servant doctrine was first recognized by the New York Court of Appeals in Murray v. Bear, 102 N.Y. 505 (1886). New York’s highest court found that “[a]n agent is held to uberrima fides [utmost fidelity] in his dealings with his principal, and if he acts adversely to his employer in any part of the transaction or omits to disclose any interest which would naturally influence his conduct in dealing with the subject of employment, it amounts to such a fraud upon the principal as to forfeit any right to compensation for services.” Id. at 508. 

Over 90 years after Murray was decided, the Court of Appeals affirmed the doctrine’s survival in New York and held that forfeiture of compensation is compulsory even when some or all of “the employee’s services were beneficial to the principal or when the principal suffered no provable damage as a result of the breach of fidelity by the agent.” Feiger v. Iral Jewelry, Ltd., 41 N.Y.2d 928, 928-929 (1977). Under the Court’s analysis, a faithless employee can be ordered to forfeit all compensation paid during the entire course of the employee’s disloyalty, irrespective of the employer’s ability to prove concrete damages or harm. 

The faithless servant doctrine has been applied in New York to two scenarios: (1) where the employee’s disloyalty and wrongdoing substantially violated his employment contract such that it saturated the employee’s work on the most material and critical level; and (2) where the employee’s unfaithful conduct constituted a breach of the duty of loyalty. Actionable misconduct under a faithless servant theory can take many forms such as fraudulent misconduct, gross negligence, embezzlement, misappropriating trade secrets, behavior detrimental to the company, or misstating a company’s financial position. 

The Major Lindsey arbitration decision was based on the arbitrator’s finding that, in addition to the former employee having stolen trade secrets, she had intentionally shared confidential job postings with certain of MLA’s direct competitors. Although critics of the faithless servant doctrine have characterized it as overly punitive, the First Department obviously feels differently. It upheld the arbitrator’s award totaling $2.7 million, which included disgorgement of over four years of prior salary and commissions paid to the employee in the amount of $1.77 million and over $900,000 in attorneys’ fees and costs. The Court specifically held that such award was not punitive in nature and did not violate New York’s public policy. 

By forcing disgorgement of all compensation paid to an employee during the course of his or her misconduct, the faithless servant doctrine provides employers with a more clear-cut and calculable basis for damages than breach of contract and tortious interference claims. Such claims require that a plaintiff demonstrate the monetary value of the damages suffered from the prior employee’s misconduct. This requirement can often be difficult to satisfy since the actual scope and degree of the misconduct may not yet be entirely clear. 

Under the faithless servant doctrine, by contrast, as long as the plaintiff can make a sufficient showing of disloyalty by the former employee during his or her employment, the plaintiff can seek recovery of all compensation paid to the employee over the course of such employment.  Disgorgement may be required even if the employer suffered no damages from the employee’s disloyalty because one of the primary purposes of this doctrine is to remove all incentive for a servant, i.e., employee, to be faithless. South Pierre Assocs. v. Meyers, 12 Misc.3d 955, 960-61 (Civ. Ct. N.Y. 2006). The penalty for violating the doctrine is harsh and can be draconian to some: the employee must forfeit all compensation earned since the first date of employment even though the employee’s services may have otherwise benefitted the employer and even if the employer suffered no damages

In Beach v. Touradji Capital Management, LP, 144 A.D.3d 557 (1st Dep’t 2016), for example, the court held that the faithless servant doctrine could be used to recover the compensation paid to disloyal employees who formed a competing company regardless of whether the counterclaim plaintiff could prove damages occurring from its loss of investors. Beach confirmed the faithless servant doctrine’s place as a potent weapon for employers faced with an employee engaged in disloyalty during his or her employment. Like Beach, in Major Lindsey, the plaintiff may have sustained some harm to its good will from the defendant’s disclosure of trade secrets to its competitors. Rather than attempt to calculate the value of that harm, the faithless servant doctrine provided MLA with a tool to claw back all compensation paid to the former employee during her four years of employment. 

The affirmation of the Major Lindsey arbitration award by the First Department is an obvious win for employers and should serve as a reminder that the powerful faithless servant doctrine is alive and well in New York. In addition, the case should serve as a warning to potentially disloyal employees: the penalty for future misconduct may be much more than they “bargained for.” 

Richard B. Friedman
Richard Friedman PLLC

830 Third Avenue, 5th Floor
New York, New York 10022
TEL: 212-600-9539
rfriedman@richardfriedmanlaw.com
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Sexual Harassment Workplace Investigations in the #MeToo Movement Era* by Richard Friedman

Sexual Harassment Workplace Investigations in the #MeToo Movement Era*

Since the advent of the #MeToo Movement Era, anecdotal evidence suggests that there has been a spike in complaints of alleged sexual harassment in for-profit and non-profit companies throughout the country. It is now more important than ever that companies and other organizations deal with sexual harassment allegations head-on. This means investigating allegations promptly and thoroughly, protecting victims against retaliation, taking proper action when wrongful conduct is found to have occurred, and taking steps to try to prevent future harassment. This article will identify some best practices in this regard.  

What to Do When Harassment Claims Arise

One of the best ways of dealing with sexual harassment allegations is to address them in a timely manner. Organizations should implement a regimen pursuant to which managers at all levels are trained to identify inappropriate behavior and follow the established protocols for escalating issues for investigation. In almost any organization, written policies should require that harassment complaints be brought to the Human Resources or Compliance Departments or to an Ombudsman.

Commencing an Investigation: Determining Appropriate Goals, Authority, and Scope

Investigations of sexual harassment claims should be prompt, efficient, thorough, and fair and balanced. An investigation’s general focus and its goals depend in large part on timing. If it occurs pre-dispute, the investigation generally takes on a preventative focus; during the dispute, a fact-finding focus; post-dispute, a focus on what went wrong and how to try to prevent it from recurring.

In determining who would be appropriate to lead an investigation, it is essential that the choice be impartial, i.e., that the chosen investigators have no actual or perceived conflict of interest. The investigators should be credible, respected, and knowledgeable about company policies and, if feasible, relevant laws. Since a knowledge of employment law can be very helpful, in-house counsel and sometimes outside counsel are good choices for investigations of senior personnel at a minimum. In large organizations, routine investigation of lower level personnel is sometimes undertaken by a department devoted to that function.

The scope of an investigation is fact-specific and determined in large part by what it seeks to uncover. Initially, the investigation’s scope depends upon the nature of the complaints, but the scope may change as facts come to light. In some cases, an investigation may ultimately center on the credibility of the alleged harasser or that of the alleged victim; in others, it may develop into a systemic examination of the company’s or organization’s processes and practices.

Though an investigation will not always run according to course, a preliminary investigative plan is necessary. It should include: 

  • a description of the known facts and specific issues to be explored;
  • lists of individuals who may have relevant information and known or possible documentary evidence; and
  • a proposed timeline.

Handling Evidence and Witness Testimony

The following considerations apply to the handling of evidence in sexual harassment investigations. First, investigators must explore all types of evidence. Relevant information includes records of prior applicable complaints, witness interviews, personnel files, performance evaluations, compensation records, timekeeping records, emails, texts, voicemails, audio/video recordings, employee notes/logs, and background checks.

This information should be gathered and documented with care. Investigators should assume that all documentation and notes are discoverable. Therefore, all notes should be detailed, fact-based, accurate, and complete. They should not be destroyed upon completion of the investigation.

In selecting witnesses, the investigators must assess witness credibility before and after the interviews. One factor that should be considered in determining the credibility of testimony is the anxiety level of the witness (an anxious witness could lead to a spotty or exaggerated account of important events and information).

Investigators should generally not allow counsel or other representatives of witnesses to attend witness interviews. However, there are several possible exceptions to this general advice. Where the legal rights of a witness are implicated or where the employee has engaged in a workplace rules violation and holds an objectively reasonable belief that he or she faces discipline, it may be appropriate to allow a representative to attend. See NLRB v. Weingarten, 420 U.S. 251 (1975) (finding that employee was entitled to union representation where such factors were present). However, the lawyer or other representative should be told that she will be excluded if she disrupts the interview or answers questions on behalf of the witness.

Confidentiality and Privilege Issues

Despite the preferences of many employers for confidentiality, disclosure may be required by statute or administrative guidance. In Banner Health Systems, 362 NLRB No. 137 (June 26, 2015), the National Labor Relations Board (“NLRB”) disapproved of employers directing employees to keep information related to internal investigations confidential. The NLRB held that employers violate their employees’ rights under Section 7 of the National Labor Relations Act (“NLRA”) when they require or request their employees to keep interviews conducted as part of an internal investigation secret from other employees. An exception applies if the employer can clearly demonstrate “that confidentiality was necessary to maintain the integrity of any particular investigation or any particular interview.” But the Banner Health decision demands that employers be cautious of any categorical confidentiality policy.

Understanding the scope of the attorney-client privilege is critical to ensuring maximum confidentiality in any workplace investigation, including investigations of sexual harassment. The attorney-client privilege will apply if all of the following elements are present and asserted: a) a communication b) made in confidence c) to an attorney d) by a client e) for the purpose of seeking or obtaining legal advice. See Upjohn Co. v. United States, 449 U.S. 383 (1981).

In the context of workplace investigations, the attorney-client privilege protects communications between agents of an organization and the organization’s attorney(s). That privilege does not extend to third parties. Communications between in-house and external counsel are generally considered privileged unless the work performed by counsel is construed as having been performed as a fact-finder rather than as an attorney. Likewise, communications between counsel and the Human Resources Department are privileged unless the communications are construed as business, rather than legal, discussions.

With these potential pitfalls in mind, attorneys should include legal analysis in all interview memoranda so courts are less likely to see their work as unprivileged fact-finding and more likely to see it as privileged lawyering.

Preparing Investigative Reports

Summary reports should be prepared at the preliminary and interim stages of the investigation. They should include details regarding the complaint or event that prompted the investigation, including names and departments of any complainants or victims, the issues investigated, factual findings on each issue, and key facts supporting findings made. An investigation timetable from inception, including interviews conducted and other investigatory steps taken, may also be useful. Summary reports will serve as an introduction to decision makers seeking to determine, among other issues, whether and the extent to which remedial action should be taken.

A report of the findings should also be made at the conclusion of the investigation. It should include, in addition to information obtained from the witness interview memoranda, a summary of the critical information learned throughout the investigation, the identification of any injury, and recommendations made by the investigator(s).

Clear, accurate, and thorough reporting is especially important if the complainant ultimately brings suit, not only because it preserves evidential findings relevant to litigation, but also because it may help the company or organization maintain the Farragher/Ellerth affirmative defense. The Supreme Court articulated the defense in Faragher v. Boca Raton, 524 U.S. 775 (1998), and Burlington Industries, Inc. v. Ellerth, 524 U.S. 742 (1998), and it is available against claims under the Civil Rights Act of 1964 if an employer can prove:

  1. that the employer exercised reasonable care to prevent and correct promptly any sexually harassing behavior; and
  2. that the plaintiff employee unreasonably failed to take advantage of any preventive or corrective opportunities provided by the employer or to avoid harm otherwise.

Thus, summary reports and reports of the findings are essential to the employer’s use of the Farragher/Ellerth defense because they help show that the employer conducted the investigation promptly, thoroughly, and without bias.

Taking Remedial Action

When convincing evidence of harassment has been uncovered, employers should take remedial action against the harasser. Doing so fosters a zero-tolerance culture that is now widely regarded as necessary to a harassment-free workplace. See, e.g., Ask Aliya: Building a Work Culture that Prevents Sexual Harassment.” Potential remedial actions include:

  • termination of employment;
  • suspension without pay;
  • a warning or reprimand letter;
  • demotion;
  • requiring the harasser to forgo or give back discretionary compensation (bonus);
  • reissuing anti-harassment and anti-retaliation policies to the alleged harasser; and
  • requiring training for the harasser, the department, or the entire organization.

Any remedial actions should be documented as described above.

Minimizing the Risk of Retaliation Claims

In order to prevent future retaliation claims, companies and organizations must maintain a strict anti-retaliation policy. The subject of the investigation and all employees involved should be warned that retaliation is prohibited. All complaints should be initially treated equally, even though every complaint may not ultimately evolve into a full-fledged investigation. The equal treatment of complaints must apply regardless of the alleged victim’s position in the company or organization or the history of complaints, i.e., every complaint must be treated as if it were the first. Most importantly, investigators and management should never ask the complainant(s) to withdraw the complaint, express concern about how the complaint(s) will affect the company, or threaten the complainant(s). 

*This article will not address the changes in New York State law which went into effect on April 12, 2018 when Governor Cuomo signed the 2019 New York budget into law which, among other things, obligates New York employers to (i) distribute a written sexual harassment policy and (ii) perform annual sexual harassment training. Nor does the article address the “Stop Sexual Harassment in NYC Act” which was signed into law by Mayor de Blasio on May 9, 2018 and, among other things, extends the New York City Human Rights Law’s sexual harassment protections to all workers, including those at employers with fewer than five employees (which were previously exempt). Those laws will likely be the subject of an upcoming newsletter.

Richard B. Friedman
Richard Friedman PLLC

830 Third Avenue, 5th Floor
New York, New York 10022
TEL: 212-600-9539
rfriedman@richardfriedmanlaw.com
www.richardfriedmanlaw.com
www.richardfriedmanlaw.com/blog
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Restrictive Covenants in Franchise Agreements Under New York Law by Richard Friedman

Restrictive Covenants in Franchise Agreements Under New York Law

What Are They?

Restrictive covenants are often found in agreements between franchisors and franchisees. The purpose of such covenants is to prevent franchisees—who are the owners and operators of businesses such as “chain-style” stores and restaurants—from harming franchisors by providing similar goods or services after the franchise agreement expires or is terminated. Restrictive covenants can serve to protect the good will of the franchisor after the franchise is reconveyed. See Jiffy Lube Int’l, Inc. v. Weiss Bros., 834 F. Supp. 683, 691 (D.N.J. 1993). 

A typical restrictive covenant clause in a franchise agreement provides that the franchisee may not own or operate a similar or competing entity in a specified area for a specified period of time after the franchise relationship expires or is terminated. 

When Are They Enforceable? 

In order to be enforceable in New York, restrictive covenants in franchise agreements must be:

1. reasonable in geographical and temporal scope; and

2. necessary to protect a franchisor’s legitimate interest. 

ServiceMaster Residential/Commercial Servs., L.P. v. Westchester Cleaning Servs., Inc., No. 01 CIV. 2229 (JSM), 2001 WL 396520, at *3 (S.D.N.Y. Apr. 19, 2001). 

In determining whether to grant an injunction to enforce a restrictive covenant, New York courts weigh the harm that such an injunction would likely cause to the franchisee and to the general public. Golden Krust Patties, Inc. v. Bullock, 957 F. Supp. 2d 186, 198 (E.D.N.Y. 2013) (citing BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 389, 690 N.Y.S.2d 854, 712 N.E.2d 1220 (N.Y.1999). 

New York courts have held franchise agreements akin to employment agreements. Am. Jur. 2d, Monopolies, Restraints of Trade, and Unfair Trade Practices §§ 511-521. Accordingly, the general rules and policies that govern restrictive covenants in employment agreements also apply in courts’ analyses of such covenants in franchise agreements. Id. We have written recently on the current state of restrictive covenants under New York law. That article can be found here

1) Reasonable in Geographical and Temporal Scope 

Under New York law, a restrictive covenant will be found enforceable where it is reasonable in geographic and temporal scope. Golden Krust Patties, Inc. at 198. Whether geographic and temporal scope is reasonable is acutely fact specific. Courts recognize franchisors’ interests in preventing ex-franchisees selling to customers of the former franchise, thereby profiting from and potentially damaging the franchisor’s good will. See ServiceMaster Residential/Commercial Servs., L.P. v. Westchester Cleaning Servs., Inc., No. 01 CIV. 2229 (JSM), 2001 WL 396520, at *3 (S.D.N.Y. Apr. 19, 2001); Carvel Corp. v. Eisenberg, 692 F.Supp. 182, 185–86 (S.D.N.Y.1988) (restriction against competing stores within two miles for three years was “reasonably related to Carvel’s interest in protecting its know-how and to its ability to install another franchise in the same territory”). However, courts will not enforce restrictions regarding when and where a former franchisee can compete when such restrictions are found to be overbroad and detrimental to the franchisee’s ability to earn a livelihood. 

In Singas Famous Pizza Brands Corp. v. New York Advertising LLC, 468 F. App’x 43 (2d Cir. 2012), the Second Circuit held that a restrictive covenant that prohibited a former pizza store franchisee from engaging in “the Italian food service business” within ten miles of the franchisee’s former location for a two-year period was reasonable. The Court based its conclusion on evidence that it had taken four years for the former franchisee to find a suitable location for the Singas. The Court also stated that the ten-mile geographical restriction was “reasonably calculated towards furthering [the franchisor’s] legitimate interests in protecting its ‘knowledge and reputation’ as well as its ‘customer goodwill.’” See Id. at 46–47. 

However, the court reached a somewhat different result in Golden Krust Patties, Inc. v. Bullock. In that matter, Golden Krust, a Caribbean fast-food chain, sought a preliminary injunction against a former franchisee whose franchise agreement was terminated after the franchisee was discovered to have been selling food products manufactured by Golden Krust’s competitors. The franchise agreement stated that, for two years after expiration or termination of the agreement, Golden Krust franchisees were restricted from opening any restaurant at or within ten miles of the franchise location, or within five miles of any other Golden Krust in operation or under construction.

The Eastern District Court ultimately granted the injunction but modified the geographic constraints of the non-compete provision to reflect “the densely populated nature of the New York Metropolitan area.”  Golden Krust Patties, Inc. at 199 (E.D.N.Y. 2013). Reasoning that “most consumers in that region will not travel ten miles—or even five miles—to a fast-food establishment,” the Court determined that a four-mile restriction from the franchise location was more appropriate than the original ten-mile restriction. Id. Additionally, the Court reduced from five miles to two and a half miles the required minimum distance of restaurants that could be opened by the former franchisee from any Golden Krust location. The Court cited the close proximity between Golden Krust locations (often less than one mile apart) as evidence that a broad non-compete zone was not necessary. Id. 

The Golden Krust Court distinguished the case from Singas, holding that Singas had only restricted franchisees from operating Italian food service businesses, whereas Golden Krust restricted former franchisees from operating any type of restaurant business. Id. It is reasonable to believe that the court would have been less inclined to modify the geographic scope of the non-compete had Golden Krust restricted franchisees only from serving Caribbean-style food. Thus, one major takeaway from these cases is that New York courts are more likely to find temporal and geographic restrictions to be reasonable if a franchise agreement’s non-compete clause is sufficiently narrow in other ways. 

2) Legitimate Business Interests 

New York courts have traditionally required that restrictive covenants in franchise agreements, in addition to being reasonable in time and scope, serve legitimate business interests. ServiceMaster Residential/Commercial Servs., L.P. at *3. As already noted above, courts recognize in franchisors a legitimate interest in guarding against former franchisees’ exploitation of i) the knowledge provided by the franchisor and ii) the franchisor’s customer base. In ServiceMaster Residential, the Court held there to be “a recognized danger that former franchisees will use the knowledge that they have gained from the franchisor to serve its former customers, and that continued operation under a different name may confuse customers and thereby damage the good will of the franchisor.” ServiceMaster Residential/Commercial Servs., L.P at *3 (citing Jiffy Lube Int’l, Inc. v. Weiss Bros., Inc., 834 F.Supp. 683, 691-92 (D .N.J.1993) (upholding ten-month, five-mile restriction on rapid lube operation); Economou v. Physicians Weight Loss Ctrs., 756 F.Supp. 1024, 1032 (N.D.Ohio 1991) (upholding one-year, fifty-mile restriction on diet center). 

Legitimate business interests are strengthened when the franchisor has provided the franchisee with unique access to training and clientele. In finding that ServiceMaster’s restrictive covenant served a legitimate interest, the Court emphasized that the franchisor had provided the franchisee with training and confidential manuals regarding how to launch a restoration cleaning business. ServiceMaster Residential/Commercial Servs., L.P at *3. 

Likewise, in RESCUECOM Corp. v. Mathews, No. 5:05CV1330 (FJS/GJD), 2006 WL 1742073, at *1 (N.D.N.Y. June 20, 2006), the Court found that the franchisor-plaintiff had provided the former franchisee with “training and manuals pertaining to the best methods for operating a successful computer sales and services business . . . [and] extended to the defendant the knowledge and ability to launch and successfully operate a computer sales and services business.” The franchisor had also provided the franchisee with access to clientele, evidenced by the fact that the franchisee successfully diverted at least five of the franchisor’s former customers. Id. at *2. The Court granted a preliminary injunction against the defendant, who had opened a computer sales company in the same location as the franchise he had previously operated. 

3) Weighing the Interests of the Franchisee and the Public 

In determining whether to grant injunctions based upon the restrictive covenants of franchise agreements, recent cases have emphasized the balancing of the franchisor’s interests against the interests of both the public and the franchisee. See Singas Famous Pizza Brands Corp. at *12; Golden Krust Patties, Inc. at 198. 

Singas and Golden Krust—two of the most recent leading New York decisions involving restrictive covenants in franchise agreements—explicitly consider the potential harm of enforcing the non-compete provisions at issue to both the former franchisees and the public interest. Both decisions ultimately found the covenants enforceable and granted injunctions (though the Golden Krust Court, as discussed above, modified the temporal and geographic scope of the provision). 

In Singas, the Court acknowledged that defendants invested significant time and money into restaurants they had hoped would be Singas franchises. However, according to the Court, “any hardship caused by an injunction was caused by the defendants’ own violation of the Agreement” when they opened a restaurant location as a purported franchise without having received permission from Singas. Singas Famous Pizza Brands Corp. at *12. 

In Golden Krust, the Court also found that any harm caused to defendants by an injunction would stem from their own wrongdoing, as the former franchisee had sought to pass off a competitor’s product as a Golden Krust product, and had continued to operate after termination in contravention of the franchise agreement. Golden Krust Patties, Inc, at 199–200. In addition, the Golden Krust Court found that the public would be harmed if the defendants were allowed to continue to use the franchisor’s trademarks and solicit Golden Krust customers. The Court stated as follows: “There is likely a greater harm to the public in the form of consumer confusion if defendants are not enjoined.” Golden Krust Patties, Inc. at 200. 

Conclusion 

The general rules and policies that govern restrictive covenants in employment agreements also apply in New York courts’ analyses of such covenants in franchise agreements. However, courts will give deference to franchisors which have provided unique access to training and other benefits to franchisees. Thus, as with such cases in the employment context, litigations involving the alleged breach of restrictive covenants in franchise agreements are very factually intensive and are best handled by counsel who regularly represent clients in such matters.

Richard B. Friedman
Richard Friedman PLLC

830 Third Avenue, 5th Floor
New York, New York 10022
TEL: 212-600-9539
rfriedman@richardfriedmanlaw.com
www.richardfriedmanlaw.com
www.richardfriedmanlaw.com/blog
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Current State of Restrictive Covenants Under New York Law by Richard Friedman

Current State of Restrictive Covenants Under New York Law

The Basics: What is a Restrictive Covenant?

As is well known, many employers include provisions in employment and severance agreements which are designed to limit former employees’ actions after the employment relationship has ceased. A restrictive covenant is a contractual provision restricting the activities of a former employee or agent or the former owner of a company for a fixed period after the cessation of the employment relationship or after the sale of the company in order to protect the employer’s legitimate business interests.

The following types of provisions, among others, are restrictive covenants:

•non-compete provisions;

•non-solicit provisions (employees, clients);

•no-hire provisions; and  

•“garden leave” provisions.  

Such covenants can be found in a variety of employment-related documents such as:

•employment contracts;

•stock option agreements;

•severance agreements;

•long-term compensation plans; and

•employee manuals.

They are also often contained in agreements governing the sale of a company.

Enforceability of Restrictive Covenants

Generally, restrictive covenants are disfavored due to “powerful considerations of public policy which militate against loss of a man’s livelihood.” Columbia Ribbon & Carbon Mfg. Co., Inc. v. A-1-A Corp., 369 N.E.2d 4, 6 (N.Y. 1977). However, such provisions will be enforced where there is a legitimate interest protected and the scope of the restrictions are narrowly tailored. 

In New York, the test to determine whether a restrictive covenant is reasonable and thus whether it will be enforceable is as follows: “A restraint is reasonable only if it (1) is no greater than is required for the protection of the legitimate interest of the employer; (2) does not impose undue hardship of the employee; and (3) is not injurious to the public.” BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1227 (N.Y. 1999). 

Legitimate Protectable Interests 

New York courts will enforce non-compete provisions only to the extent necessary to protect an employer’s legitimate interests and where they are reasonable in time and geographic area. Such courts consider the protection of the following kinds of information to be legitimate protectable interests and thus warranting enforcement of a restrictive covenant:

•Trade secrets and other confidential information;

•Protectable Client/Customer Relationships and Information; and

•“Unique and extraordinary” services (which is rarely found to be the case). 

The Scope of Restrictions 

New York courts enforce such restrictions only to the extent reasonable and necessary to protect legitimate interests. To determine whether a restrictive covenant is enforceable, courts analyze their scope along three criteria:

1. Geographic scope of the restriction;

2. Duration of the restriction; and

3. The scope of the business activity impacted.

1. Geographic Scope – To determine whether a non-compete provision is reasonable in geographic scope, courts in New York examine the particular facts and circumstances of each case. For example, in Natsource LLC v. Paribello, 151 F.Supp.2d 465, 471-72 (S.D.N.Y.2001), the court was willing to enforce very broad geographic restrictions on employees where the “nature of the business requires that the restriction be unlimited in geographic scope,” so long as the duration of those restrictions was short. (Emphasis added). However, in Pure Power Boot Camp, Inc. v. Warrior Fitness Boot Camp, LLC, 813 F. Supp. 2d 489 (S.D.N.Y. 2011), the court held that the non-compete provision in a fitness center operator’s employment agreement with prior employees, which prohibited employees from working at a competitor center anywhere in the world for ten years following employment at the center, was unenforceable since it was unreasonable in terms of duration and geographic scope. 

2. Duration – New York courts have repeatedly held that temporal restrictions of six months or less are reasonable. See Ticor Title Ins. Co. v. Cohen, 173 F.3d at 70 (2d Cir. 1999); Natsource LLC, 151 F.Supp.2d at 470-71 (three-month non-compete). However, courts have also enforced non-competes of three years or more, usually where the geographic restriction is limited. In Novendstern v. Mount Kisco Med. Grp., 177 A.D.2d 623, 576 N.Y.S.2d 329 (1991), for example, the court found that a covenant restricting a physician from competing with his previous employer was enforceable because the prohibition on the physicians practicing in his specialties for three years was in a limited geographic area. 

3. The Scope of the Business Activity Impacted – Under New York law, assuming a covenant by an employee not to compete surmounts its first hurdles, that is, that it is reasonable in time and geographic scope, enforcement will be granted only to the extent necessary:

a. to prevent an employee’s solicitation or disclosure of trade secrets;

b. to prevent an employee’s release of confidential information regarding the employer’s customers; or 

c. in those rare cases where the employee’s services to the employer are deemed special or unique. Ticor Title Ins. Co. v. Cohen, 173 F.3d 63 (2d Cir. 1999). 

Factors Considered by New York Courts 

New York courts have also examined whether there was sufficient consideration, whether the agreement was incidental to the sale of a business, and whether an employee was preparing to compete to determine if a non-compete was reasonable. Such courts have found that future employment constitutes sufficient consideration to support a covenant not to compete. See Poller v. BioScrip, Inc., 974 F. Supp. 2d 204 (S.D.N.Y. 2013) (holding that “the fact that a restrictive covenant agreement is a condition of future employment does not automatically render such an agreement coercive and unenforceable”). Similarly, in Ikon Office Solutions v. Leichtnam, 2003 U.S. Dist. LEXIS 1469, *1, 2003 WL 251954 (W.D.N.Y. Jan. 3, 2003), the court found that the non-compete covenant was enforceable because the employee was an at-will employee who received continued employment as consideration. Moreover, financial benefits and an employee’s receipt of intangibles such as knowledge, skill, or professional status are also sufficient consideration to support a non-compete provision under New York law. See Arthur Young & Co. v. Galasso, 142 Misc. 2d 738, 741 (Sup. Ct. N.Y. County 1989). 

The Future of Restrictive Covenants in New York State 

In May 2017, New York Attorney General Eric Schneiderman arranged for legislation to be proposed in the New York legislature which would limit non-competes as follows: 

•Non-competes would be void for employees with earnings of less than $75,000/year (to be increased each year for inflation);

•Non-competes must be provided to prospective employees by the earlier of a formal offer of employment or 30 days before the non-compete goes into effect;

•Non-competes would be unenforceable upon a termination without cause; and

•Employees would have a private cause of action seeking to invalidate non-competes which violate the statute. 

New York City Proposes Partial Ban on Non-Compete Agreements

On July 20, 2017, the New York City Council proposed new legislation that would prohibit New York City employers from entering into a non-competition agreement with any “low-wage employee.” The proposed bill defines “low-wage employee” as any non-exempt employee, other than manual workers, railroad workers, and salespersons on commission. To be properly classified as exempt under the New York Labor Law, employees must be employed in a bona fide executive, administrative, or professional capacity and receive earnings in excess of $900 per week. 

The proposed bill would also prohibit New York City employers from requiring any potential employees to enter into non-compete agreements unless, at the outset of the hiring process, the employer discloses in writing that the prospective employee may be subject to such an agreement. If passed by the New York City Council, the bill is expected to be signed by the Mayor and would take effect 120 days after being signed into law.   

Richard B. Friedman
Richard Friedman PLLC

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Are Non-Compete Provisions Enforceable in New York When the Employee is Terminated Involuntarily Without Cause? by Richard Friedman

Enforceability of Non-Compete Provisions in NY When Involuntary Termination Is Without Cause

A question that is or should be important to employers and employees alike is whether non-compete provisions in an employment agreement can be enforced in New York when the employee is terminated involuntarily without cause. As is well known, the law regarding restrictive covenant provisions such as non-competes is a matter of state law. Although disfavored in the typical employment context under New York law on the grounds that they interfere with a person’s right to earn a living, non-compete provisions are enforced if the terms are:

  1. no greater than required to protect an employer’s legitimate protectable interests and
  2. reasonable in temporal and geographic scope.

See Johnson Controls, Inc. v. A.P.T. Critical Sys. Inc., 323 F.Supp. 2d 525,533 (S.D.N.Y. 2004).

Some New York courts have concluded that non-compete clauses are per se unenforceable when the employee in question was terminated involuntarily without cause. However, other courts have concluded that this is not necessarily so. A Court of Appeals decision often cited to support both of these conclusions is Post v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 48 N.Y. 2d 84, rearg. denied, 48 N.Y.2d 975 (1979). In that matter, two employees who were involuntarily terminated without cause by Merrill Lynch subsequently joined a competing firm. Having agreed to forfeiture-for-competition clauses in their agreements with Merrill Lynch, the employees were told fifteen months after their termination that, pursuant to a provision of the firm’s pension and profit sharing plan which permitted forfeiture if an employee directly or indirectly competed with the firm, their accrued pension benefits had been revoked. The Court of Appeals, New York’s highest court, held that such a forfeiture-for-competition clause was unenforceable where an employee had been discharged without cause, stating that “[an] employer should not be permitted to use offensively an anti-competition clause coupled with a forfeiture provision to economically cripple a former employee and simultaneously deny other potential employers his services.” 48 N.Y.2d at 89.

As mentioned, New York courts have interpreted Post inconsistently. Some have applied it to all non-compete agreements and others have applied its rule more narrowly, i.e., only to forfeiture-for-competition clauses in a context where the employee was terminated without cause. For example, the Second Department and at least three judges in the Southern District of New York have similarly ruled that Post stands for the proposition that non-compete clauses are categorically precluded from enforcement when an employee has been involuntarily discharged without cause. See, e.g., Grassi & Co., CPAs, P.C. v. Janover Rubinroit, LLC, 82 A.D.3d 700 (2d Dep’t 2011); Arakelian v. Omnicare, Inc., 735 F. Supp. 2d 22 (S.D.N.Y. 2010).

Other New York courts have ruled that Post does not stand for a per se rule applicable to all restrictive covenants. Most notably, in Morris v. Schroder Capital Management International, 7 N.Y.3d 616, 621 (2006), the Court of Appeals itself, citing Post, stated that “a court must determine whether forfeiture is ‘reasonable’ if the employee was terminated involuntarily without cause.” See also Hyde v. KLS Professional Advisors Group, LLC, 500 Fed.Appx. 24 (2d Cir. 2012); Brown & Brown, Inc. v. Johnson, 115 A.D.3d 162 (4th Dep’t 2014), rev’d on other grounds, 2015 WL 3616181 (2015).

In Hyde, the Second Circuit concluded that Post should be interpreted narrowly, cautioning that the Court of Appeals addressed only a forfeiture-for-competition clause in that matter, and that the district court should not “[extend] Post beyond its holding.” 500 Fed.Appx. 24 at 26.

In Brown, Justice Whalen of the Fourth Department wrote that “even assuming, arguendo, that [the employee] was terminated without cause, we conclude that such termination would not render the restrictive covenants in the [agreement] unenforceable.” 115 A.D.3d 162 at 170. Justice Whalen went on to emphasize that the court in Post dealt only with a forfeiture-for-competition clause; i.e. he concluded that Post does not create a per se rule applicable to all restrictive covenants. Id at 170.

While there is admittedly confusion in this area of the law in New York, the most recent cases support the view that non-compete provisions are not per se unenforceable in New York solely because an employee has been terminated involuntarily without cause.

Central to a correct prediction of a court’s ruling regarding the enforceability of a non-compete provision is a determination of what exactly the covenant purports to restrict and what the penalties for noncompliance are to be. Based upon the New York case law that has developed since Post, there can be no doubt that a forfeiture-for-competition clause, which stipulates that an employee will lose certain entitlements, such as pension benefits, upon involuntary termination without cause will not be upheld. However, we cannot have the same certainty when the non-compete provision does not involve the forfeiture of pension or other benefits.

Because of the uncertainty in this area of the law, capable management side employment counsel should participate in drafting or revising all non-compete provisions so that they can be crafted in such a way as to make enforceability more likely. The lawyers at Richard Friedman PLLC regularly counsel corporate clients in connection with such provisions as well as other provisions that are part of employment agreements, severance agreements, and consulting agreements and litigate concerning those provisions when appropriate.

Richard B. Friedman
Richard Friedman PLLC
830 Third Avenue, 5th Floor
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Seeking to Enforce Vested Restricted Stock Units and Other Earned Compensation by Richard Friedman

Seeking to Enforce Vested Restricted Stock Awards and Other Earned Compensation

In New York, a promise of good faith and fair dealing is implicit in every contract. 511 W. 232nd CORP v. Jennifer Realty Co., 98 N.Y.2d 144, 153 (2002); Smith v. General Acc. Inc. Co., 91 N.Y.2d 648, 652-653 (1998); Dalton v. Educational Testing Serv., 87 N.Y.2d 384, 389 (1995) A contract is breached when a party acts in a manner that deprives the other party of the right to receive the benefits to which it is entitled under the agreement even if such action is not expressly forbidden by any contractual provision. The implied covenant protects the reasonable expectations of each party arising out of the written agreement it entered into. Jennifer Realty Co., 98 N.Y.2d 144, 153; accord M/A-COM Sec. Corp. v. Galesi, 904 F.2d 134, 136 (2d Cir. 1990). 

The purpose of an implied covenant of good faith and fair dealing is to further the parties’ agreement by protecting each party against a breach of the parties’ respective reasonable expectations derived from the agreement. It is intended to remedy the situation of one party’s attempts to undermine the contract by taking actions inconsistent with the contract that is not explicitly addressed in the language of the contract. (See Glen Banks, New York Contract Law (Vol. 28, New York Practice Series) (2005)) Thus, a breach of the covenant is a breach of the contract itself, the covenant being part and parcel of the contract. Boscorale Operating, LLC v. Nautica Apparel, Inc. 298 A.D.2d 330, 331 (1st Dept. 2002).

In the financial services industry, the implied covenant of good faith and fair dealing applies to vested restricted stock units (RSUs) awarded as part of many compensation packages (i) on the annual “Compensation Day” that numerous investment and commercial banks have and (ii) at other times. When an employee resigns from his employment, the employer’s forfeiture of an employee’s vested RSUs is a breach of contract if the employer acts in bad faith in order to deprive the employee of his vested options. Although companies have discretion in interpreting, applying, and performing the terms of the applicable stock options agreement, that discretion cannot be exercised arbitrarily. 

It is axiomatic under New York law that, where a contract contemplates the exercise of discretion, the implied covenant includes a promise not to act arbitrarily or irrationally in exercising that discretion. Sorensen v. Bridge Capital Corp., 52 A.D.3d 265, 267 (1st Dept 2008) New York courts have repeatedly recognized even an explicitly discretionary contract right may not be exercised in bad faith so as to frustrate the other party’s right to the benefit of the agreement. Hirsch v. Food Resources, Inc., 24 A.D.3d 293, 296 (1st Dept 2005); Richbell Information Services, Inc. v. Jupiter Partners, L.P., 309 A.D.2d 288, 302 (1st Dept 2003). 

For example, in Johns v. International Business Machines Corp. (“IBM”), 361 F. Supp. 2d 184 (S.D.N.Y. 2005), an employee claimed that the employer wrongfully classified his termination as one “for cause” so as to require his forfeiture of stock options. The court stated that, under New York law, “a corporation’s decision regarding a classification of departing employee affecting his benefits could be set aside by the court only if the appellant could sustain the heavy burden of establishing that the challenged benefit decision was the result of bad faith, fraud, or arbitrary action.” Id. at 189 The court went on to hold that there were disputed facts warranting a trial as to whether the decision to forfeit the vested options was made “honestly and in good faith.” Id. at 190. 

Therefore, if an employee can show that the forfeiture of his or her vested stock options was exercised in bad faith, he or she is entitled to an award of monetary damages to compensate for the injury he or she suffered as a result of the employer’s breach of contract. 

Besides a claim for breach of the implied covenant of good faith and fair dealing, a former employee whose vested RSUs or other earned compensation was terminated or rescinded can also bring certain alternative claims under principles of New York law. For instance, an employee can bring a claim for damages under unjust enrichment. The underlying principle of unjust enrichment is that the employer, although guilty of no underlying wrongdoing, has received money to which he or she is not entitled. To state a cause of action for unjust enrichment, an employee must allege that he or she conferred a benefit upon the employer and the employer obtained such benefit without adequately compensating the employee. The employee needs to establish the following three elements: 

  1. the employer received services provided by the employee;
  2. the employer benefited from the receipt of such services; and
  3. under principles of equity and good conscience, the employer should not be permitted to retain the value of such services without payment for services. 

At a minimum, under the doctrine of unjust enrichment, an employee should be paid the monetary damages equivalent of the value of the vested RSUs.  

If there are issues concerning the existence or enforceability of a contract, an employee can bring a claim under the doctrine of quantum meruit (meaning “as much as he deserved” in Latin). Here, the law typically implies a promise from the employer to the employee that the employee will be paid the reasonable value of the services he or she rendered or the benefit conferred upon the employer. In order to successfully state a claim under this doctrine, the individual who rendered services (the “Individual”) needs to establish four elements: 

  1. the Individual performed the services in good faith;
  2. the services were accepted by the person or organizations;
  3. the Individual expected to be compensated for his or her services; and
  4. the amount of damages that are recoverable, including the costs properly and reasonably incurred by the Individual and a reasonable allowance for profit. 

Therefore, when an Individual finds himself or herself in a situation where there may be no enforceable contract, there are some steps he or she can take in order to preserve a possible quantum meruit claim. Since the burden is on the Individual to demonstrate damages, i.e.,  the reasonable value of services he or she rendered, it is always a good idea for people to try to keep detailed records of the work performed and any costs incurred. Furthermore, the Individual should make clear his or her expectation to be paid for the work he or she performed and make a written demand for payment. If it appears that the organization is attempting to avoid its obligation to pay the Individual for the services he performed, he should immediately seek legal advice in how to properly preserve his quantum meruit claim so he can seek to receive the compensation he believes he deserves.

Richard B. Friedman
Richard Friedman PLLC
830 Third Avenue, 5th Floor
New York, New York 10022
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Data Privacy and Security: An Introduction for In-house and Outside Counsel by Richard Friedman

Data Privacy and Security: An Introduction for In-House and Outside Counsel

As is widely recognized, the attorney-client privilege is one of the most important fundamental principles in the legal profession. Every attorney has an obligation to protect his or her clients’ information and to keep attorney-client communications confidential. Of course, this principle applies to in-house counsel as well as outside counsel. Accordingly, it is crucial for both corporate legal departments and law firms to adopt and implement safeguards in order to protect client information. Although all lawyers presumably know that they have a duty to protect privileged client communications and information, many do not know how to do so. This article will briefly introduce the complex related topics of data privacy and security and provide some helpful initial steps that in-house and outside counsel should take in developing a plan to safeguard client information.

In this digital era, massive amounts of data are stored and transmitted electronically across a sea of systems and devices. In almost every kind of matter involving an organization, in-house and outside counsel have access to clients’ and employees’ personal information. It is no longer sufficient for in-house and outside counsel to rely solely on a company’s or a law firm’s IT department to handle cyber security issues. Indeed, many large companies, particularly in the financial services sector, are now conducting audits of their law firms’ data security protocols. A comprehensive data security plan needs to be developed in every organization and law firm by one or more lawyers in conjunction with the IT Department or an IT consultant and other stakeholders, if any, as described below.

1. Statutes and Regulations

The very first step that in-house and outside counsel should generally take on behalf of their client organization with regard to data privacy is to determine the governing state statutes and regulations regarding data privacy and security protection. Some states have data privacy laws that require companies to develop written policies and procedures to provide administrative, physical, and technological safeguards for sensitive client information. By way of example only, here are a few statutes and regulations that counsel charged with participating in the development of cyber security policies and practices should be mindful of: 

•Statutes that Protect Social Security Numbers: New York, New Jersey, Connecticut, and Michigan have statutes that require written policies to limit access to employees’ Social Security numbers. In Michigan and Connecticut, companies need to maintain and publish a specific corporate policy in order to require Social Security numbers from customers.

•Comprehensive Data Security Program RequirementsAn increasing number of states, such as California, Connecticut, Florida, Illinois, Indiana, Massachusetts, Maryland, Oregon, and Texas, require companies to take affirmative actions to protect personal information that belongs to the residents of those states, including driver’s license numbers, bank account numbers, Social Security numbers, and medical information.  

•Payment Card Industry Data Security Standards: Many corporations receive payments from clients and therefore have access to clients’ credit card information. These corporations need to make sure that they comply with the Payment Card Industry Data Security Standards.

•Breach Notification Requirements: All but three states require companies to provide notice when there has been a breach of “personal information” accessible to the organization.

2. Identify Personal Client Information

State statutes and regulations should be just the starting point in seeking to ensure data privacy protection. In-house and outside counsel should consider, for instance, the types of personal client information to which the organization in question has access; whether the organization maintains such personal information indefinitely; whether the organization sponsors or provides services to health care plans; and whether the organization has a comprehensive plan to respond to data privacy breaches.

3. Establish Internal Group to Coordinate Data Privacy Issues

Virtually every legal department should consider establishing an internal group to coordinate data privacy issues. This group should generally include personnel from the IT Department, the Accounting Department, the Human Resources Department, and the Legal Department—the areas where client personal information is often accessed the most. The group should be empowered to establish detailed steps to protect client data. For example, the group should consider:

Identifying all hardware, software, and devices such as laptops and cellphones that could store client information;

Classifying all digitally stored information by levels of sensitivity;

Determining which departments and which employees are most likely to have access to sensitive client information and how the information flows through the organization;

Identifying vendors and other third parties who maintain confidential client information; and

Reviewing existing agreements which require the organization to safeguard client information.

4. Protocol for Data Breach Response

Counsel should also develop a protocol for responding to data breaches, including, among other things, who will lead the response teams, and which templates to use for various types of data security-related communications.

5. Training

Law firms and legal departments should provide periodic training for employees who have access to client information and keep them informed about state regulations and charges in the company’s data privacy policies. In-house and outside counsel need to be thorough and thoughtful in helping their organizations identify, maintain, and safeguard all client information that their organizations maintain.

CONCLUSION

It is essential for in-house and outside counsel to take the foregoing steps in order to protect client information. Since individual and business clients increasingly demand heightened privacy protection, companies and law firms that fail to implement comprehensive data security policies will risk losing competitive advantage in the marketplace. In-house and outside counsel should share a leadership role with IT and other personnel in developing and implementing detailed internal policies and procedures for collecting, using, and disclosing the information that is needed to provide the services that their organizations render.  

Richard B. Friedman
Richard Friedman PLLC
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Social Media Policies and the NLRB by Richard Friedman

Social Media Policies and the NLRB

The National Labor Relations Board (“NLRB”) has continued to shape social media policies and practices at work for both employers and employees through recent decisions. This article will briefly discuss several such decisions which shed light on National Labor Relations Act (“NLRA”)-protected union activities, the standards for employees’ disloyalty, and the standards for appropriate social media policies implemented by employers.

In Pier Sixty, LLC, Nos. 02-CA-068612 and 02-CA-070797, an employee of a catering company posted “obscene vulgarities” on his Facebook page regarding a manager’s mistreatment of certain employees two days before a union representation election and was fired soon thereafter. The Board adopted the decision of the administrative law judge who had applied the totality of circumstances test to evaluate the employee’s post. The judge considered the following factors:

1. whether the record contained any evidence of the Respondent’s anti-union hostility;

2. whether the Respondent provoked Perez’ conduct;

3. whether Perez’ conduct was impulsive or deliberate;

4. the location of Perez’ Facebook post;

5. the subject matter of the post;

6. the nature of the post;

7. whether the Respondent considered language similar to that used by Perez to be offensive;

8. whether the employer maintained a specific rule prohibiting the language at issue; and

9. whether the discipline imposed upon Perez was typical of that imposed for similar violations or disproportionate to his offense. 

In consideration of the above, the judge found that the employee’s conduct was not so egregious as to lose the protection under the Act and that the employer had violated the Act by discharging the employee for his protected, concerted comments made on social media two days before the election for union representation. This decision has been appealed to the Second Circuit. 

Similarly, in Novelis Corporation, No. 03-CA-121293, et al., the Board affirmed an administrative law judge’s finding that the employer was in violation of the NLRA by demoting an employee for his protected, concerted comments on Facebook. In this instance, the employee had merely expressed discontent regarding the conditions of his employment without disparaging the employer or demonstrating disloyalty. 

An evaluation of employees’ disloyalty occurred in a subsequent decision made in September 2016 in DirecTV, Inc. v. NLRB, No. 11-1273. After a group of technicians interviewed with a local television news station and complained about their company’s new pay policy scheme, they were fired for participating in the interview. The Board found that the interview was a protected activity under the NLRA, the employees’ statements being within the Act’s protection. The D.C. Circuit Court of Appeals affirmed the Board’s ruling, finding that the employees’ complaints were protected under the following NLRA two-prong test: 1) the complaints were related to an ongoing labor dispute; and 2) the employees’ actions were not disloyal or maliciously untrue. The Board concluded that the technicians had little, if any, control over the editing of the interview, their statements were not untrue, and the statements were not made “recklessly without regard for the financial consequences to” the company. 

The Board continues to push back on overly restrictive social media policies put in place by certain employers. In Chipotle Services LLC d/b/a Chipotle Mexican Grill, Nos. 04-CA-147314 and 04-CA-149551, an employee was asked to delete some tweets he had posted on his personal Twitter account through which he communicated with customers and discussed negative working conditions. The Board found that the employer had violated NLRA §8(a)(1) by maintaining a rule entitled “Social Media Code of Conduct” which prohibited employees from posting “incomplete, confidential, or inaccurate information” and making “disparaging, false, or misleading” statements. The Board noted that when rules are overly broad in scope or restrictive, they may interfere with employees’ lawful exercise of their rights under Section 7 of the NLRA, i.e., protected concerted activities. 

However, there are situations where employees will lose the protection of the Act when they post certain types of information on social media. For example, if an employee posts insubordination plans in great detail on social media, the employee will lose the protection of the Act. In Richmond District Neighborhood Center, Nos. 20-CA-091748, two employees, who led after school activities for students, exchanged information on Facebook regarding planned insubordination in specific detail, including what kind of people they would invite to their events and what type of things they would teach the kids the following year. The Board found that the employees’ Facebook postings described specific insubordinate acts that were objectively so egregious as to lose the Act’s protection and concluded that the Center’s rescission of the employees’ job offers for the following year was justified because they were unfit to work there. 

Richard B. Friedman
Richard Friedman PLLC
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Issues Arising in Negotiating Severance Agreements by Richard B. Friedman

Issues Arising in Negotiating Severance Agreements

At the risk of stating the very obvious, a severance agreement should contain releases which protect the former employer from potential lawsuits brought by the former employee and his or her heirs. Severance compensation can serve as an important transition financial resource for a former employee. Thus, it is often in both parties’ interests to reach an agreement. This article will briefly identify some of the provisions that should be considered for possible inclusion in a severance agreement. 

Provisions for Consideration in a Severance Agreement 

Of course, the agreement should set forth the amount of severance compensation to be paid to the former employee as well as the timing of such payments. Some companies have severance policies which tie severance payment amounts to the length of an employee’s service. Many companies leave such terms for negotiation on an individual basis after an employee’s employment is terminated.

Some of the other financial terms often addressed in severance agreements, which will vary depending on the seniority of the employee, are the following:

  • health insurance;
  • unused vacation time and/or sick leave pay;
  • earned and unpaid “bonus” payments; and
  • vested and non-vested stock options.  

Severance agreements of senior personnel often provide the former employee with a certain period of outplacement services to assist him or her in securing his or her next position. A severance agreement should provide that the company will respond to inquiries from prospective employers by solely providing the former employee’s dates of employment and the last position he or she held.  

In exchange for receiving various types of severance compensation, the former employee should always be required to release all claims, whether known or unknown, on behalf of himself or herself and all heirs against the former employer. The former employee should also be required to agree to a covenant not to sue the company or to become a member of any class seeking to sue the company or to provide any assistance to any persons suing the company.  

From the employee’s perspective, ideally the former employer should also agree to release the former employee from all known claims (at a minimum) up to the date of the release. However, companies should be very reluctant to release claims against former employees that are not already known to the company since doing so would relegate the company if it subsequently learned of such a claim to an allegation that, mindful of his improper conduct, the former employee fraudulently induced the company into signing the severance agreement. Of course, a dispute could eventually ensue as to whether a particular claim was known by the company at the time the agreement was executed. One way to try to avoid that dispute is for the former employee’s counsel to try to persuade the company’s counsel to have all possible claims known by the company identified in the severance agreement if the company is unwilling to waive all known and unknown claims.  

Employers should give serious consideration to including some or all of the following provisions in severance agreements: 

  • A new non-compete provision or the reaffirmation or expansion of an existing such provision.
  • A provision whereby the former employee agrees to make himself or herself reasonably available to, and cooperate with, company personnel with respect to claims threatened or brought against the company or its officers, directors, and employees.
  • A provision requiring the former employee to notify the company if he or she is contacted by someone who is or may be legally adverse to the company and if he or she receives a subpoena relating to the company.
  • A confidentiality provision.
  • A non-disparagement clause.
  • A provision whereby the former employee waives all rights to future employment with the company and any affiliates.
  • A provision whereby the former employee represents that he or she has returned all tangible property of the company regardless of whether it contains trade secrets or other proprietary information of the company.  

In my view, all severance agreements, indeed all agreements, should have choice of law and choice of venue provisions. A severance agreement should also provide that it is the entire agreement between the parties and supersedes any prior agreements between them.  

Potential Severance-Related Issues 

Employers should give serious consideration to establishing standard severance policies with specified severance compensation packages for employees at different levels of seniority within the organization.  

If an employee is asked to agree to what he or she considers to be overly restrictive non-compete provisions, he or she should seek additional monetary compensation. However, employers should defer payment of some severance compensation to try to ensure the former employee’s compliance with his or her obligations under the agreement.  

Importance of Severance Agreements to Employers 

If there is a possibility that an employee has one or more causes of action against his or her former employer for any reason, he or she may be able to build a strong case in reliance upon his or her in-depth knowledge of the company. Of course, this is one of the main reasons why an employer would want assurance that the employee cannot sue the employer. Avoiding potential lawsuits and the concomitant distraction to management and inevitable legal fees is generally of great benefit to a company and will often override the additional monetary and other compensation that former employees and their counsel will seek through negotiation. Severance agreements are also a useful way for an employer to bolster an existing non-compete provision when it is considered desirable to do so in view of changed circumstances.  

Of course, every situation is different. We regularly counsel mid-level and senior executives as well as companies in connection with their respective unique circumstances.

Richard B. Friedman
Richard Friedman PLLC
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Defend Trade Secrets Act of 2016 by Richard Friedman

Defend Trade Secrets Act of 2016

In the Digital Information Age, where electronic data containing confidential information is so easily transferable, employers face a dilemma. On the one hand, they generally want to allow employees as much access to information as possible to promote efficient and uninterrupted workflow. On the other hand, there is always the risk that employees with access to highly sensitive information may misplace hard copies and/or flash drives containing such information or purposefully take key information to use on behalf of a competing future employer, for a business they have started or intend to start, or to damage the company because of a personal vendetta.  

Defend Trade Secrets Act of 2016 

To address this dilemma, the Defend Trade Secrets Act of 2016 (DTSA) was signed into law by President Obama on May 11, 2016, and became effective immediately. It provides for enhanced remedies for misappropriation of information deemed to be trade secrets and creates a number of new remedies for plaintiffs. The Act creates a federal civil cause of action for trade secret misappropriation for the first time and provides for the following remedies: injunctions; damages awards for economic loss arising from the misappropriation; and “in extraordinary circumstances” issuance of “an order providing for the seizure of property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.” Further, if a court finds that the “trade secret is willfully and maliciously misappropriated,” it may “award exemplary damages” up to twice the amount of the damages awarded. 

Employers’ Responsibilities Under the Act 

In order to avail themselves of the Act’s remedies, trade secret owners must inform their employees that they will not be held liable for disclosures of information deemed to be trade secrets that “(A) [are] made (i) in confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney; and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or (B) [are] made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.” Once employees are on such notice vis-a-vis a written policy in a company code of conduct or otherwise, employers may seek remedies under the DTSA. 

But the DTSA is not intended to blindly empower employers against employees. “If a claim…is made in bad faith, which may be established by circumstantial evidence,” or “a motion to terminate an injunction is made or opposed in bad faith,” a court can award reasonable attorney’s fees to the prevailing party. In addition, if the court finds that the seizure order was “wrongful or excessive,” the defendant “has a cause of action against the applicant for the order under which such seizure was made….” 

The foregoing measures were included to protect individuals against wrongful claims. Needless to say, trade secret owners and their counsel must carefully evaluate possible claims under the DTSA before commencing legal action.

Richard B. Friedman
Richard Friedman PLLC
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