The Inbox - May 10, 2013

This week in Suits by Suits:

• Credit Suisse Group AG sued its former Vice President of Emerging Markets, Agostina Pechi, seeking a temporary restraining order barring Ms. Pechi from soliciting Credit Suisse clients.  According to the complaint, Ms. Pechi -- now employed by Credit Suisse's competitor, Goldman Sachs -- engaged in "an after-hours document raid" of confidential information from Credit Suisse which she allegedly emailed to her personal account before leaving the firm.  One interesting wrinkle here is that Ms. Pechi had an arbitration clause in her employment agreement requiring arbitration of all employment-related grievances, but Credit Suisse filed suit, claiming that "a court order was needed to prevent [it] from being harmed in the interim."  We've previously suggested that mandatory arbitration clauses may not always be a benefit to employers; and, if you're curious as to whether Credit Suisse's filing could be construed as a waiver of its right to arbitrate, you might want to check out our two-part series on waiver here (Part 1) and here (Part 2).
• We've previously analyzed the "say-on-pay" provisions of Dodd-Frank (and see also our this Inbox item); now we have a new wrinkle.  A few days ago, Heinz's shareholders passed a nonbinding vote to deny outgoing CEO Bill Johnson a $56 million golden parachute that includes accelerated stock options.  Advisors say that the vote "doesn't hold up the deal [to take Heinz private]" which we interpret to mean that Johnson will get his money.
• Residential Capital, LLC -- a bankrupt mortgage company owned by Ally Financial, Inc., which is in turn majority-owned by the U.S. Government -- has requested approval from a New York Bankruptcy judge to pay $7.8 million in severance pay to outgoing executives, with payments capped at $136,000 for two senior execs.  The motion notes that the employees would have been "entitled to sums well in excess of the $136,000 cap" had they remained with the company.
• A case study in why clawbacks are hard:  Anderson County, South Carolina is deciding whether to continue to pursue litigation to force its former county administrator, Joey Preston, to repay a $1.1 million severance package he received in 2008 in light of allegations of ethical violations, fraud, and breach of fiduciary duties.  However, a state court found in Preston's favor on Thursday and required the county to pay Preston $700,000 in attorneys' fees.  Anderson County now estimates that it has spent $3 million trying to recover the $1.1 million from Preston.
• Finally, Bloomberg BNA has posted a nice summary article analyzing the Supreme Court's April 24, 2013 decision in University of Texas Southwestern Medical Center v. Nassar, which addresses various evidentiary issues in the context of an employee's Title VII retaliation claim. 

Martensen v. Koch, Venue, and You

Yesterday we looked at a California federal court decision in Martensen v. Koch, in which ex-Oxbow executive Kirby Martensen has sued billionaire William Koch, alleging kidnapping, false imprisonment, conspiracy, and other claims related to his alleged treatment at the hands of Oxbow employees at the Bear Ranch in Colorado.  Specifically, we looked at what the decision means in terms of whether a court can maintain personal jurisdiction over an out-of-state defendant; in the Martensen case, the clear take-away is that committing any portion of an alleged wrong within a state counts as having committed the wrong within that jurisdiction.  So even though most of Kirby Martensen’s kidnapping and false imprisonment allegations relate to conduct that took place in Colorado, because he was allegedly placed on a private plane owned by Oxbow and flown to Oakland, California before being released, the court found that (for purposes of personal jurisdiction) Martensen’s alleged false imprisonment “that began on [Koch]’s private ranch by [Koch]’s agents [in Colorado] continued unbroken until [Martensen]’s release in Oakland, California,” and thus gave rise to personal jurisdiction over Koch in California.

Personal jurisdiction, however, is only the first step in the process of figuring out where you can and should be sued.  Personal jurisdiction determines whether a court has any power over you at all, and is based on the principle – expressed in depth in yesterday’s post – that if you have never set foot in the state of Wyoming, you cannot be compelled to appear in Court in Wyoming.(*)  But just because a state has personal jurisdiction over you doesn’t mean that state is the best place to handle a dispute.  This is the question of venue.  Read on. Read More ›

Martensen v. Koch, Personal Jurisdiction, and You

As you probably know, we here at Suits by Suits have been fascinated by the strange case of Kirby Martensen, the former Oxbow Group executive who alleged that he was kidnapped and falsely imprisoned by billionaire William Koch.  We teased for you last week that Koch’s motion to dismiss, to strike, and in the alternative to transfer venue of the case from California to Colorado was denied, and the case will proceed.

Now, we’ve gotten our hands on the judge’s decision and had a chance to review it in depth; particularly if you’re a civ pro geek like me, it’s worth a read.  Even if you’re not, the decision helps any potential litigant -- and really, isn’t that all of us? -- understand where we can expect to sue or be sued.  Read on.... Read More ›

April 2013 Monthly Roundup

April showers bring May flowers, which, as the old joke goes, usually bring these. At ‎Suits by Suits, however, April brought a mix of interesting stories involving non-‎compete agreements, the mechanics of employment contracts, and all sorts of other ‎topics:‎

• Third Circuit Rejects Narrow Construction of Sarbanes-Oxley Whistleblower Claim
  Jason M. Knott | April 30, 2013
• Recent Breach of Contract Lawsuit Against Michael Keaton Illustrates Measuring Expectation Damages
  Ellen D. Marcus | April 24, 2013
• Why Didn't Rutgers Fire Basketball Coach Mike Rice for Cause?
  Ellen D. Marcus | April 23, 2013
• “You’ve Got…a  Non-Compete!”
  William A. Schreiner, Jr. | April 17, 2013
• Criminal Trial Begins in Case Against Former Executive Search Head
  Jason M. Knott | April 15, 2013
• California Continues to Go After Non-Competes
  P. Andrew Torrez | April 11, 2013
• California Strikes Down An Employee’s Agreement to Arbitrate on Substantive ‎Unconscionability Grounds (As “One-Sided”)‎
  P. Andrew Torrez | April 8, 2013
• Employment Agreement Tip of the Week No. 2: Once You Get It in Writing, Put Out Future Fires by Making Sure the Writing Is Clear
  William A. Schreiner, Jr. | April 5, 2013
• Employment Agreement Tip of the Week No. 1: Get It in Writing
  William A. Schreiner, Jr. | April 3, 2013

The Inbox - April 19, 2013

Today's super-sized Inbox covers all the recent news in suits by suits:

• "Show me the money!"  Tom Cruise may have said it most memorably, but we all live it every day.  And this week, we've got CNN's profile of the 20 highest-paid CEOs, along with the Wall Street Journal's coverage of a report issued by the AFL-CIO showing that in 2012, U.S. CEOs received, on average, 354 times the compensation of the average worker.
• In the same vein, news outlets remarked on several high-dollar executive severance packages ("golden parachutes"), including a $212.6 million payout for outgoing Heinz CEO Bill Johnson (that the Pittsburgh Post-Gazette called "ridiculous"), a $2.25 million payout to outgoing Genworth Financial, Inc. CEO Michael Frazier, who resigned after Genworth's stock lost 80% of its value, and a comparatively modest $100,000 severance package to former Holly Hill, Florida city manager Oel Wingo, who was fired in 2010 amidst allegations of falsifying documents and destroying records.  Similarly, Office Depot Inc. announced that it had "amended" its employment agreement with CEO Neil Austrian after Office Depot's recent merger with OfficeMax; the new agreement would provide Austrian with up to 650,000 shares of Office Depot's stock (currently trading at just over $4 per share).
• Oh, and while we're still showing you the money:  a federal bankruptcy judge has thrown out a controversial proposed $20 million severance payment to outgoing American Airlines CEO Tom Horton (that we previously covered here, here, and here) on the grounds that the payout exceeds Congressional maximums for companies in bankruptcy.  Not to toot our own horn, but the judge's rationale for throwing out the severance package -- that Horton's value added accrued to American Airlines and not to the new company, and therefore that the bankruptcy rules applied -- is pretty much what we said back in February.
• Still, there's one company in the news that's bucking the "golden parachute" trend: retailer J.C. Penney, which tied former CEO Ron Johnson's compensation to the company's performance.  As a result Johnson was essentially not paid at all for his tenure as Penney's CEO, given that he invested $50 million of his own money in the company and exchanged $107 million in Apple Computer stock for stock in J.C. Penney currently worth approximately $12 million (along with millions of "underwater" options to purchase shares at a price two to three times the going market rate).
• We've written a lot about Facebook and the emerging role that social media play in today's workplace.  But some wonder if Facebook's management and hiring practices are as cutting-edge as its technology.  In particular, Beth A. Stewart, CEO of Trewstar, an executive search firm that specializes in placing female executives, helped organize a protest at Facebook's New York headquarters over the lack of diversity on Facebook's board of directors.  In June of 2012, Facebook named its first-ever female director, COO Sheryl Sandberg; since then, it has added another female to its nine-member board of directors.
• A brief foray into international law:  After Rina Bovrisse sued her former employer Prada Japan (alleging, among other things, that the Prada Japan CEO had demoted or transferred fifteen female employees for being "old, fat, ugly, disgusting, or [who] did not have the Prada look"), the shoe giant responded by countersuing Bovrisse for $780,000, alleging that her public accusations "damaged the Prada brand."  A Japanese court has finally ruled on Bovrisse's lawsuit, finding that although harassment occurred, "the company's behavior was acceptable and employees of a certain rank should be able to handle it."  Prada Japan's countersuit remains active -- although an online petition is circulating urging the company to drop it -- and Ms. Bovrisse will appear at the United Nations in Geneva later this month to appeal for equal rights in the workplace.
• SEIU Healthcare Pennsylvania, a subchapter of the Service Employees International Union, announced that it will return to the National Labor Relations Board with new allegations against the University of Pittsburgh Medical Center ("UPMC"), alleging that UPMC has "unlawfully disciplined or threaten to discipline over 17 employees" for supporting the SEIU.  UPMC had previously reached a settlement with the NLRB in which it agreed to rescind policies that retaliated against employees who supported unionizing.
• Whistleblower Paul Blakeslee was awarded $3.4 million from an Alaska federal court jury in his retaliation and age discrimination claims against Shaw Environment & Infrastructure, Inc.  Blakeslee informed Shaw managment in 2008 that a project manager had allegedly defrauded both Shaw and the government in connection with various equipment leases; 17 days later, Blakeslee was fired.
• As always, we'll continue to bring you all the recent developments in legal disputes over covenants not to compete (and surely you're reading our "State by State Smackdown series, right?).  First up:  companies that allegedly have tried to circumvent uncertainty over noncompetes -- particularly in California -- by agreeing amongst themselves not to recruit each others' employees.  Recently, we discussed the antitrust implications over eBay's alleged "handshake" deal with software manufacturer Intuit not to recruit each other's employees; last week, a federal district court judge in California ruled that thousands of employees could not proceed as a class action with similar allegations against goliaths Apple and Google for precisely the same reasons -- that the plaintiffs could not show a class-wide injury as a result of any alleged agreement between Apple and Google not to poach each other's employees.
• Second:  four Renown Health executives, including CEO Jim Miller, have resigned from the Nevada-based nonprofit after the hospital system attempted to force them to sign non-compete agreements.  Miller and other executives successfully sued Renown over the practice, and in December, the FTC ruled that Renown could not enforce the contractual provisions under antitrust law (because Renown controlled up to 97% of the market).
• Next:  Medical company Kinetic Concepts, Inc. (KCI) of San Antonio has reached a settlement with former executive Israel Vierma, who left KCI for rival Smith & Nephew; the confidential deal resolves the parties' dispute over Vierma's noncompete agreement.
• And in a new one for us:  Houston-based food group Landry's, Inc. has sued to block the opening of a new Houston restaurant, "Mr. Peeples Seafood + Steaks," on the grounds that the restaurant's GM, Tim Kohler, is violating a noncompete agreement he signed with his former employer, Vic & Anthony's Steakhouse (which, in turn, is owned by Landry's).  Turnover is common in the restaurant industry, so this will be an interesting case to watch.
• Finally:  Mondaq has a very nice summary of the Fifth Circuit's recent opinion in Avalon Legal Information Svcs. v. Keating, which discusses the evidence a court may consider when enforcing a noncompete clause in Florida.
• Remember Kirby Martensen, the former Oxbow Group executive who alleged that he was kidnapped and falsely imprisoned by billionaire William Koch?  We sure do.  Koch has now moved to dismiss Martensen's California lawsuit for lack of personal jurisdiction; Martensen claims that Koch has sufficient contacts with the jurisdiction and, in the alternative, seeks leave of court to conduct jurisdictional discovery, a rare practice in federal court.
• Former Fox Sports music director Jerry Davis has sued Fox Sports, alleging that the company "has never employed a black person as vice president or higher" -- which covers 34 executive positions -- in its nineteen-year history.
• We've covered the emergence of "say-on-pay" lawsuits pursuant to Section 951 of the Dodd-Frank Act in light of the "business judgment rule"; this week, our friends at the Harvard Law School Forum on Corporate Governance and Financial Regulation also weigh in this week with a summary piece highlighting the lack of success "say-on-pay" plaintiffs have had in both state and federal court.  (We also recommend this article from the Social Science Research Network entitled "Should Shareholders Have a Say on Executive Compensation?")
• Music and television producer Lisa Sanderson sued Garth Brooks and his production company, Red Strokes Entertainment, alleging that the country music star used his "infectious charisma" to fraudulently induce Sanderson to abandon her lucrative TV career in favor of pitching crazy promotional ideas (such as attempting to get Brooks to star in Stephen Spielberg's Saving Private Ryan).  We have two words for Ms. Sanderson:  Chris Gaines.

California Continues To Go After Non-Competes

We’ve written at length about the rapidly-changing landscape regarding covenants not to compete, including the first-in-the-nation law in California that essentially prohibits all such agreements, and we’ve kept you abreast of how various states have responded to the California statute, including New York and Massachusetts.  (“The State-by-State Smackdown”)

Now, covenants not to compete typically arise in the context of an employment agreement, with the employee agreeing that if she leaves the company (or is fired), she will not flee to the company’s closest competitors.  Typically, the question as to whether such agreements are enforceable turns on how narrowly-tailored the covenant is to serve its purpose, which means the determination is generally made on a case-by-case basis.  This reflects a balancing of two goals:  ensuring free and fair competition in the marketplace, and also protecting a company against rivals seeking to “poach” its employees and potentially steal secrets, practices, and other confidential information.  It’s a tough balance to strike, and the parties typically only figure out exactly where the line should be drawn once one party sues the other. Read More ›

California Strikes Down An Employee’s Agreement to Arbitrate on Substantive ‎Unconscionability Grounds (As “One-Sided”)‎

One of the most important trends in the relationship between employers and employees is the proliferation of mandatory arbitration clauses in the employment contract.  In particular, we’ve noted that once an employment contract contains an agreement to arbitrate, courts frequently send non-contractual claims to the arbitration forum as well under the theory that such claims “arise out of” the employment agreement.

Because arbitration is generally perceived as being employer-friendly – although we’ve cautioned employers that isn’t always the case – employee plaintiffs are on the lookout for ways to convince a court that their arbitration clauses should not apply.

One approach is for the employee to argue that the employer has waived his or her right to arbitrate because the employer has “acted inconsistently” with the right to arbitrate claims.  We looked at the legal basis for this argument (as well as indulged in some trash TV) in a two-part series just a few months ago.  (Part one, Part two)

Another approach is for plaintiffs to challenge the clause as unfair.  The argument goes something like this:  for many employees – although typically not executives – the employment contract is presented on a “take it or leave it” basis; that is, it is a contract of adhesion over which the employee has little to no ability to negotiate particular provisions.  Accordingly, if an arbitration provision is drastically unfair to the employee, the court can strike it down under the doctrine of “unconscionability,” which permits a court to throw out a contractual provision that is so one-sided as to be “unusually harsh and shocking to the conscience.”

The latter approach is vividly illustrated by a recent California appellate decision, Compton v. American Management Services. Read More ›

March 2013 Monthly Roundup

For us here in the greater Baltimore/Washington metropolitan area, March was true to form – or at least, the Farmer’s Almanac – and came in like a lion (with city-closing snow and everything!) but has gone out like a lamb, as today is beautifully sunny with highs in the mid-60s.

As the Farmer’s Almanac tells us, that saying was rooted in the ancient belief that weather would seek a balance, and that good events would cancel out bad ones.  That sense of balance held true for your Suits by Suits editors this month as well, as Ellen Marcus documented the unique ability of shareholders to protest “golden parachutes” for companies emerging from Chapter 11 bankruptcy – as contrasted with their general inability to do much else.  Bill Schreiner explained how the average executive can protect herself from incurring certain legal expenses through directors & officers’ (“D&O”) insurance policies, while noting the limits of those D&O policies especially in high-profile cases like former Penn State coach Jerry Sandusky.  Andrew Torrez continued to document the push-and-pull in the legislative arena over whether and to what extent courts should uphold covenants not to compete contained in employment contracts, and warned Gov. Deval Patrick that the proposed new law in Massachusetts may not do what he expects it to do.  And Jason Knott warned us that only 2% of Sarbanes-Oxley whistleblowers succeed on their claims, while walking us through a comprehensive recent decision by the Second Circuit that maps out how future whistleblowers can prove the elements necessary to assert their cases.

A full list of all of our articles from March follows.  And remember, Suits by Suits is now on Twitter – and that’s no April Fools!

• Shareholders Can Have Their Say on Executive Pay, But Not Much Else
  Ellen D. Marcus | March 28, 2013
• Tom Horton's Severance is Probably in the Golden Parachute Bag if the Court Applies the Business Judgment Rule Rather than Section 503(c) of the Bankruptcy Code
  Ellen D. Marcus | March 26, 2013
• How Does that Burden of Proof Work Again? The Second Circuit’s Recent Sarbanes-Oxley Decision Explains
  Jason M. Knott | March 20, 2013
• You’ve Got (Unprivileged) Mail: Court Rules that Prosecutors Can Use E-mail Sent by Personal Attorney to Employee’s Work Account
  Jason M. Knott | March 18, 2013
• More on Covenants Not to Compete: A Proposed Massachusetts Law Gets a Big Endorsement
  P. Andrew Torrez | March 13, 2013
• The Basics: "Hacking," the Computer Fraud and Abuse Act, and You 
  P. Andrew Torrez | March 11, 2013
• Federal Court of Appeals Rejects Sarbanes-Oxley Whistleblower’s Challenge to Department of Labor Ruling
  Jason M. Knott | March 7, 2013
• Everything Has a Limit, Jerry Sandusky Edition – Part 2
  William A. Schreiner, Jr. | March 7, 2013
• Everything Has a Limit, Jerry Sandusky Edition – Part 1
  William A. Schreiner, Jr. | March 7, 2013
• Wow! A $56 Million Golden Parachute for the Heinz CEO. Well, that Depends on What You Mean by "Golden Parachute."
  Ellen D. Marcus | March 6, 2013
• Groupon CEO's Departure Memo: Watch What You Say, Even if You Say it Nicely
  William A. Schreiner, Jr. | March 4, 2013

The Inbox - March 15, 2013

Send up the white smoke!  After a week spent locked inside our offices -- or, for some of us, inside courtrooms -- your (usually) infallible Suits by Suits lawyers have finally voted on this week's Inbox:

• Wednesday, three top multinational banks -- Citigroup, Capital One, and Wells Fargo -- all agreed to broaden their clawback policies after requests by the New York City Comptroller's Office.  Clawback policies enable an employer to recover compensation, stock options, bonuses, and other monies from former high-ranking executives who are later determined to have engaged in financial misconduct.  We are going to review the specific policies when released and will keep you updated.  The City Comptroller's press release can be read here.
• We've said it before and we'll say it again:  your corporate emails are not private!  In one of a series of rulings in U.S. v. Finazzo, the U.S. District Court for the Eastern District of New York ruled that an executive "has no reasonable expectation of privacy or confidentiality in any communications" made through a work email account where the employer disclosed that it reserved the right to monitor an employee's usage of the system.
• On Wednesday, Steve Jacobs, the former CEO of the Las Vegas Sands outpost in China, sued casino magnate Sheldon Adelson, alleging (among other things) that Adelson ordered him to threaten the head of Macau's government, Chief Executive Edmund Ho, for "not playing ball" in connection with condominiums that the Sands was trying to sell in Macau.  Jacobs was fired from Sands China in July of 2010 and subsequently filed a wrongful termination suit in October of that year.  On a totally unrelated note, Casino is one of our favorite movies.
• Coincidentally, a former housekeeper sued Casino actress Sharon Stone -- co-star of the aforementioned film, as well as -- and do you really need to be told this? -- Total Recall, Basic Instinct, and many others, accusing Ms. Stone of retaliatory termination after the maid requested paid medical leave for injuries allegedly sustained while carrying Ms. Stone's groceries.  A spokesperson for Ms. Stone claims that the charges are "utterly baseless."
• This one isn't a movie starring Arnold Schwarzenegger -- but perhaps it should be.  A 62-year-old man wrestled a shark out to sea in order to save children on a beach in Australia.  That's the good part.  The bad part?  Someone videotaped the heroic shark-wrestling; it went viral (because of course it did), and was viewed by the hero's employer -- a children's charity, no less -- who had been told the man and his wife were on sick leave.  The shark-wrestler (and his wife, who had been employed by the same charity) were subsequently fired.  As Rick Perry might say:  "oops."  (Side note for the eventual movie adaptation:  According to Wikipedia, the Governator is 65.)
• Reporter Bryant Ruiz Switzky of the Washington Business Journal brought our attention to a very interesting report issued by Ernst & Young, and now we pass that along to you:  the Big Four firm warns corporate directors that they are "being watched" carefully by shareholders and should tweak executive compensation and other issues accordingly.  If you're involved in pay issues, you need to read this report.
• On Monday, Dr. David Naarian of Philadelphia, PA sued his former partners in 3B Orthopaedics PC over the sale of their medical practice to Aria Health, claiming that he had been defrauded out of more than $800,000 in the $4 million sale.
• Our friends at the Harvard Law School Forum on Corporate Governance and Financial Regulation have published yet another relevant article, this one by Noam Noked, "Dealing with the SEC's Focus on Protecting Whistleblowers."
• Relatedly:  just this week, a federal judge drastically reduced a jury's award to a whistleblower.  In 2009, Weihua Huang was terminated by the University of Virginia in retaliation for reporting U.Va's alleged mismanagement of grant money and a jury awarded him $160,000 in back pay and $500,000 in compensatory damages.  Earlier this week, the trial judge granted U.Va's motion to reduce the compensatory damages awarded by the jury by 80% -- from $500,000 to $100,000 -- on the grounds that the award was "not proportional" to the injury suffered.  As is typical in these cases, the court compared the award to other jury awards within the district.
• Troubles continue for the venture capital industry; we've discussed the case of Ellen Pao in considerable depth (here and here, for starters), but this week, we learned that another venture capital firm, CMEA Capital, is facing allegations of sexual and racial misconduct in the workplace, including sexually explicit behavior towards three former female employees.
• Career development coach Stacey Hawley, writing for Forbes, has penned an article entitled "Negotiating An Employment Agreement," that offers some practical tips to the executive on the move.
• And finally:  who says CEOs aren't human?  When VeriFone ousted CEO Doug Bergeron on Monday, he penned a weepy goodbye letter, telling staff "I will always love you and I will always love VeriFone."  No word if he read the letter aloud while playing Celine Dion music softly in the background, but apparently he read our advice to departing CEOs (unlike outgoing Groupon CEO Andrew Mason).

More on Covenants Not To Compete: A Proposed Massachusetts Law Gets A Big ‎Endorsement

If you’re a regular Suits by Suits reader – and if you aren’t, why not? – you know that we think California’s first-in-the-nation law prohibiting essentially all covenants not to compete in employment contracts is going to be a major factor in future executive employment agreements and disputes across the country.  Indeed, we’ve been keeping track as other states respond in various ways to the California law.  (For details on the California law and its implications, see our prior piece, the “State by State Smackdown.”)

In our March 1 Inbox, we flagged a bill under consideration by the Massachusetts state legislature, House Bill No. 1715, which would establish that noncompete clauses of six months or less are presumptively reasonable, and clauses exceeding six months can be enforced if the court finds that the employee has (a) breached a fiduciary duty, (b) taken company property, or (c) earned at least $250,000 per year in annualized compensation.

The status quo in Massachusetts (and the majority of states) permits covenants not to compete, subject to a case-by-case judicial balancing test that considers the interests of the former employer against the hardships to the employee and the public.

It is tempting, then, to view House Bill No. 1715 as a “halfway point” between the existing law in Massachusetts and California’s outright ban.  Under this view, the new proposed legislation would be seen, politically, as moving Massachusetts in the direction of California and away from upholding noncompete agreements.  And indeed, thanks to some excellent reporting by Don Seiffert, an Associate Editor at the Boston Business Journal, we’ve discovered that’s precisely the view of Massachusetts Governor Deval Patrick (D).

Read on.... Read More ›