Subscribe

RSSAdd blog to your RSS feed

Follow Us

Twitter LinkedIn

Contributing Editors

Disclaimer
© 2015 Zuckerman Spaeder LLP

Supreme Court Holds That TSA Whistleblower’s Disclosure Wasn’t “Prohibited by Law”

Last November, we covered the Supreme Court oral argument in the case of Department of Homeland Security v. MacLean.  As a refresher, MacLean was an air marshal who was fired by the Transportation Security Administration (TSA) after he blew the whistle to MSNBC on the agency’s plan to cancel marshal missions to Las Vegas.  After the argument, Prof. Steve Vladeck of American University predicted that the TSA would lose the case.

He was right.  On Wednesday, the Supreme Court issued its opinion, in which it held in favor of MacLean.  The TSA argued that it could fire MacLean because his disclosures were “specifically prohibited by law” in two ways: first, it had adopted regulations on sensitive security information, which applied to the information MacLean disclosed; second, a provision of the U.S. Code had authorized TSA to adopt those regulations.  Chief Justice Roberts, writing for the Court, rejected both arguments. 

As to the regulations, he wrote, Congress could have said that whistleblowers were not protected if their disclosures were “specifically prohibited by law, rule, or regulation,” but did not.  Thus, its choice to only use the word “law” appeared to be deliberate.  Further, interpreting the word “law” broadly “could defeat the purpose of the whistleblower statute,” because an agency could insulate itself from liability by promulgating a regulation that prohibited whistleblowing.  And as to the argument that Congress-passed “law” prohibited the disclosure, Chief Justice Roberts wrote that the statute in question did not prohibit MacLean’s disclosures.  Instead, it was the agency’s exercise of discretion, not the statute, that determined what disclosures were prohibited.  Read More ›

Individual Liability of Officers and Directors for a Corporate Data Breach

The hacking of Sony’s private data has been one of the biggest stories in the country over the past couple of months.  It won’t surprise anyone to learn that lawsuits have been filed over the breach.  Indeed, the plaintiffs in several class action lawsuits are seeking to consolidate their cases  into one massive Sony Data Breach Litigation case.

So far, the plaintiffs in those cases haven’t alleged claims against individual Sony officers or directors.  This begs a couple of questions: is that something that plaintiffs do?  And what kinds of allegations can they bring?

The answer is that a number of plaintiffs have brought claims against officers and directors who worked at companies that suffered data breaches.  Typically, they allege that the defendants did not properly manage the company’s cyber risks.

For example, in February 2014, Kevin LaCroix of D&O Diary brought to our attention lawsuits that Target shareholders filed against the company’s officers and directors, arising from the massive theft of Target’s private customer information.  The shareholders alleged that the company’s executives and board knew how important the security of private customer information was, and failed to take reasonable steps to put controls in order to detect and prevent a breach.  Further, they alleged, the defendants exacerbated the damage by publicly minimizing the breach. Read More ›

2015 Brings Significant Changes to Maryland’s Campaign Finance Laws

As an executive, there is a strong likelihood that at some point in your career, you will be asked to make a campaign contribution—especially if you work in an area with a close affiliation with government. The rules are complex, and there is wide variation among federal and state rules. In addition, those differing rules are constantly in flux. For instance, the Maryland General Assembly has made several changes to Maryland campaign finance law that took effect on January 1, 2015, the start of the State’s new four-year election cycle.

First, the Maryland legislature raised the individual contribution limit from $4,000 to $6,000. (The legislature also raised the so-called “aggregate limit” on all contributions from $10,000 to $24,000. But as a result of the Supreme Court’s intervening decision in McCutcheon v. FEC, Maryland’s aggregate contribution limit was unconstitutional and therefore unenforceable even before the change took effect.)

Second, the legislature addressed a peculiar aspect of pre-2015 Maryland campaign finance law. Under Maryland law, unlike federal law, corporations may make campaign contributions. But if a corporation is a wholly-owned subsidiary of another corporation, contributions from these entities are considered to be made by a single contributor. Likewise, if multiple corporations are owned by the same stockholder, they are deemed to be a single contributor. We’ll call this the corporate attribution rule. Read More ›

Five Issues in Executive Disputes to Watch in 2015

In our last post, we counted down our most popular posts of 2014, from A-Rod to Walgreen.  Now it’s time to take a look at the issues in executive disputes that are likely to draw plenty of attention in 2015.

1.            Dodd-Frank Bounties and Whistleblower Litigation on the Rise

In November 2014, the SEC released its annual report on its Dodd-Frank whistleblower award program.  The theme of the report is that Dodd-Frank is paying off – both for the SEC and for whistleblowing employees.  The SEC reported that it issued whistleblower awards to more people in its 2014 fiscal year than in all previous years combined, including a $30 million bounty to one whistleblower in a foreign country.  The number of whistleblower tips received continues to increase, and we expect news of more substantial awards in 2015.  Meanwhile, litigation over various Dodd-Frank issues, such as whether a whistleblower claim is subject to arbitration, whether the shield against whistleblower retaliation applies overseas, and whether a whistleblower must report to the SEC in order to bring a retaliation claim, will continue to percolate in the federal courts.

2.            The Supreme Court Weighs in on Employment Issues

A couple of key Supreme Court cases will address employee rights that apply across the board, from the C-suite to the assembly line.  In Young v. United Parcel Service, the Court will decide whether, and in what circumstances, the Pregnancy Discrimination Act requires an employer that accommodates non-pregnant employees with work limitations to accommodate pregnant employees who have similar limitations.  And in EEOC v. Abercrombie & Fitch Stores, Inc., the Court will address whether an employer can be liable under the Civil Rights Act for refusing to hire an employee based on religion only if the employer actually knew that a religious accommodation was required based on knowledge received directly from the job applicant. Read More ›

Suits by Suits’ Greatest Hits of 2014

Who doesn’t love the year-end countdown?  We’re here to offer you one of our own – our most-read posts in 2014 about executive disputes.  The posts run the gamut from A (Alex Rodriguez) to Z, or at least to W (Walgreen).  They cover subjects from sanctified (Buddhists and the Bible) to sultry (pornographic materials found in an executive’s email).  Later this week, we’ll bring you a look at what to expect in 2015.

Without further ado, let the countdown begin!

8.            The Basics: Dodd-Frank v. Sarbanes-Oxley

This post is an oldie but a goodie.  It includes a handy PDF chart that breaks down the differences in the Dodd-Frank and Sarbanes-Oxley whistleblower laws.  Each of these laws continues to be a hot-button issue for plaintiffs and employers.

7.            When Employment Relationships Break Bad

America may have bidden adieu to Walter White and his pals on Breaking Bad, but employment relationships continue to spin off in some very unpleasant ways.  Such was the case with Stephen Marty Ward, who ended up in federal prison after he threatened his employer with disclosure of its trade secrets, as we covered in this post. Read More ›

Tune Up Your D&O Insurance Policy To Make Sure It Provides The Protection Corporate ‎Officers And Directors Need

A D&O liability policy protects key individuals in a corporate structure.  These individuals are likely targets for shareholder frustration if an entity is underperforming or suffering from other troubles.  In addition, they may be exposed to personal scrutiny from regulators if the corporation is investigated for any wrongdoing.  As previously discussed in this space, an insurance policy can provide more reliable protection for the indemnification rights of the officers and directors in times of financial distress because corporations plagued by regulatory or other legal problems frequently suffer financial setbacks.  However, when a bankruptcy results from the financial troubles, not all insurance policies offer the same protection for the payment of fees and expenses for its directors and officers. 

Under section 541 of the Bankruptcy Code, a debtor’s liability insurance policy is the property of a bankruptcy estate and is subject to the jurisdiction of the Bankruptcy Court, including the automatic stay.  There is considerable disagreement among the courts over whether the proceeds of the policy are also property of the estate.  The actual determination of whether the proceeds are property of the estate is made on a case by case basis and is controlled by the express language and scope of the policy. 

When the D&O policy only provides direct coverage to the debtor, there is little doubt that the proceeds are part of the debtor’s estate and are to be administered by the Bankruptcy Court for the benefit of all creditors.  Similarly, when the policies only provide direct coverage to the individuals for their indemnification claims courts generally hold that the bankruptcy estate has no interest in the proceeds.  However, when the policy provides direct coverage to both the debtor and the directors and officers, the proceeds will be property of the estate if depletion of the proceeds would have an adverse effect on the estate.  Depletion of the proceeds will be construed to have an adverse effect on the estate if the policy proceeds actually protect the estate’s other assets from diminution.  Read More ›

Yet Another Reason Why D&O Insurance Is Critical

Corporate directors and officers may think indemnification provisions are sufficient to protect them from claims asserted against them by shareholders or regulators.  However, if a director or officer chooses to rely solely on indemnification in bylaws or contracts, and ignores the availability of directors & officers (“D&O”) liability insurance, he or she could be making a significant mistake.  In particular, a D&O policy can offer these individuals more reliable protection in times of financial distress.  When corporations are plagued by regulatory or other legal problems, they may also suffer from financial setbacks, eventually leading to bankruptcy proceedings. The manner in which a bankrupt corporation has provided for the payment of fees and expenses for its directors and officers may be critical to the individuals affected. 

Under section 502(e) of the Bankruptcy Code, a claim for indemnification is subordinated to the class of claims in which the underlying claim is placed.  This means that, to the extent that the directors and officers are jointly liable with the corporation to a third party on an adverse claim, they will not receive any distribution on their resulting indemnification claim unless, and until, all of the claims of the class in which the underlying obligation is placed have been paid in full.  This provision is intended to provide for equality of distributions in favor of all similarly situated creditors: if the underlying claim receives payments from both the corporation and the director and officer defendants and then the defendants receive payment on account of any contributions they made on the claim, that claim will have received a higher rate of distribution at the expense of other creditors. Read More ›

The Inbox – Netflix and the stream scheme

Netflix, the internet media giant, sued its former vice president of IT Operations, Mike Kail, in California Superior Court, claiming that he “streamed” kickbacks from vendors and funneled them into his personal consulting company. According to the complaint, Kail—who is currently the CIO of Yahoo—exercised broad latitude in both vendor selection and payment.  Netflix alleges that he took in kickbacks about 12-15% of the $3.7 million that Netflix paid in monthly fees to two IT service providers, VistaraIT Inc. and NetEnrich Inc. According to the Wall Street Journal, one line in particular from the complaint piqued experts’ interest: “Kail was a trusted, senior-level employee, with authority to enter into appropriate contracts and approve appropriate invoices.” According to Christopher McClean, an analyst at Forrester Research Inc., this suggests Netflix allowed Kail too much freedom. McClean opined that when individuals are empowered to both choose a vendor and then approve payment, corporate malfeasance can follow.  This is particularly important in the field of information technology, where tech companies vie for business in an ever-competitive market by lavishing incentives on CIOs. Companies that do not incorporate an audit function into vendor selection and payment should consider revisiting their policies going forward.

We recently discussed the hefty $185 million judgment against AutoZone in favor of a former store manager who alleged discrimination and retaliatory discharge following her pregnancy. While this case arose in California, it appears the auto parts retailer is zoned for another similarly-themed legal showdown, this time across the country in West Virginia. In the recent complaint, the plaintiff, Cindy DeLong, claimed that she was placed on a 30-day performance improvement plan for hiring too many women in the stores she managed. She was ultimately fired before the 30 days expired. As you may recall, in the California case, plaintiff Rosario Juarez claimed AutoZone enforced a “glass ceiling” for its female employees, denying them opportunities for promotion. It seems Ms. DeLong managed to chip away at the ceiling as a district manager. But, according to Courthouse News, she now alleges that her practice of hiring women rendered her “not a good fit for the company.” Read More ›

The Face That Launched A $50 Million Lawsuit

Helen of Troy isn’t just a famous mythological beauty.  It’s also a publicly-traded maker of personal care products.  And now, it and its directors are defendants in a suit by Helen of Troy’s founder, Gerald “Jerry” Rubin.

Executives who bring suit against their former employers frequently want to show that they were terminated for reasons other than performance, and Rubin is no different.  In his complaint, as reported by El Paso Inc., Rubin describes the history of Helen of Troy and its staggering growth.  From humble origins – a “wig shop in El Paso, Texas” – Helen of Troy grew into a “global consumer products behemoth, generating revenues in excess of approximately 1.3 billion dollars.”  And then the roof caved in.  Rather than “celebrating [Rubin’s] extraordinary success,” Rubin alleges, Helen of Troy’s directors turned on him in order to save their own skins, and eventually forced him out of the company.

Why did the directors need to sacrifice Rubin to save their positions?  According to Rubin, the answer lies with an entity called Institutional Shareholder Services (“ISS”).  ISS is a proxy advisory firm that conducts analysis of corporate governance issues and advises shareholders on how to vote.  Because shareholders often follow ISS’s recommendations, it can have substantial influence over the affairs of publicly-traded companies.  Indeed, some participants in a recent SEC roundtable suggested that ISS could have “outsized influence on shareholder voting,” or even that it has the power of a “$4 trillion voter” because institutional investors rely on it to decide how to vote.

Rubin alleges that if ISS decides a CEO is making too much money, it will demand that the compensation be cut or that the CEO be fired.  If its demand isn’t followed, it will “engineer the removal of the board members through [a] negative vote recommendation.”  Board members then will cave to ISS’s wishes to preserve their own positions.

Rubin claims that this is what happened in his case. Read More ›

Disgruntled Employee’s Alleged Parting Shot Leads to Federal Indictment

Computer VirusIt's no secret on this blog that when   employment relationships go sour,   criminal charges can be one potential     result.  Now we have another example, by way of the recent indictment of Arturas Samoilovas.  

According to the indictment, filed in Ohio federal district court, Samoilovas worked as a contract employee for Eaton Corporation as a financial analyst.  In April 2014, he applied for several full-time positions, but was told that he didn’t get the jobs.  Unhappy about the rejections, Samoilovas “accessed the Eaton Corporation’s computer system,” inserting “certain malicious computer codes … into six … financial spreadsheets.”  If executed, these codes would have resulted in deleted files.  In other words, they were malwareRead More ›