Employee Terminations: Delaying the Inevitable is Inevitably Bad for the Company

Post It - Waiting.jpgEmployee terminations are an unfortunate reality of every business. But that doesn't mean employers and their managers are good at carrying out terminations. 

Take for example a response Sir James Dyson (yes, the vacuum guy was knighted by Queen Elizabeth II in 2006) gave when he responded to Bloomberg Businessweek's "Ask a Billionaire" feature that asked what is the best way to fire someone:

It's terrifying. It took me six months to pluck up the courage to fire the first person.

I have not had the opportunity to represent too many billionaires, but in my experience in representing other business owners, this response is fairly typical and understandable. Often this reluctance is justified that "maybe" the employee will turn it around or that the employee will get the message and just quit. But whatever the reasons - real or manufactured - for delaying the firing will often make the situation worse for the employer and its operations. 

Waiting to terminate only compounds the problem.

When it comes to employee terminations, the fact is an employee may not work-out for a business for any number of reasons. Regardless of those reasons, at the end of the day the interests of the employee and the company are no longer (if they were ever) aligned. And it is a mistake for this misalignment to continue.  

But when the employer fails or otherwise delays in making the termination, now the employer is compounding the problem by continuing in a misaligned relationship. This situation is not good for anyone - the employee, the employer, and its operations or other employees, especially those who work along-side with the yet-to-be terminated employee. 

And another real concern employers should consider is that if an unhealthy employment relationship is allowed to fester, that employee may become disgruntled and actively undermine the business and its relationships with customers or vendors.   

But Haste Makes Waste(ful) Litigation. 

Nothing in this post should be read to mean that any termination should be a spontaneous decision. Instead, employers need to make sure every termination follows a well-reasoned and documented process. The better the process, the more likely the employer will be able to avoid a later claim the termination was unlawful.

See this link for an actual example of a manager's testimony is directly contradicted by emails and other documents. Also, see this link for considerations employers should examine with their employment attorneys.  

Conclusion

Ending a person's employment is a major event and it needs to be handled carefully and should be handled with dignity. But once it is determined an employee's performance or conduct is not acceptable, termination may be the only option. But once this is substantiated, the employer should not delay the carrying out the decision: The employee needs to be terminated no matter how terrifying the experience may be for the employer.  

For more information about investigating employee misconduct and terminating the employment relationship, contact employment attorney Jason Shinn. Mr. Shinn routinely collaborates with employers and human resource professionals to properly document issues involving employee misconduct and terminations. This documentation has proven invaluable in fending off claims for wrongful terminations.  

Requiring a Current Employee to Sign a Non-compete Agreement: Will it be Enforceable?

Signing Contract.jpgEmployers commonly require newly hired employees to sign a non-compete agreement as a condition of their employment. In this regard and under Michigan law, employers may obtain from an employee an agreement or covenant that protects an employer's reasonable competitive business interests and expressly prohibits an employee from engaging in employment or a line of business. MCL 445.774a(1).

Basics of Enforceable Non-compete Agreements under Michigan Law

Normally non-compete agreements are entered into at the beginning of the employment relationship. But what happens if a long-time, currently employed individual is required to enter into a non-compete agreement?

Before addressing this question, it is important to understand that to have an enforceable contract requires valid an element called "consideration," which is essentially "a bargained-for exchange." In other words, consideration consist of a benefit on one side, or a detriment suffered, or a service done on the other. 

In the employment context, when an individual is offered employment, the job offer and corresponding acceptance serves as the bargained-for exchange between the employer and employee. In other words, as consideration for executing a non-competition agreement, the applicant is offered employment; Without signing the non-compete agreement, the individual would not have been employed.

In contrast, when a person already employed is asked to sign a non-compete agreement, the question becomes is continued employment sufficient consideration to have an enforceable non-compete agreement?

Continued Employment and Michigan Non-compete Law

Employers and their attorneys often refer to a case called QIS, Inc. v. Industrial Quality Control, Inc. (2004) to support the conclusion that continuation of employment is sufficient consideration to support a non-compete agreement. However, there is an argument to be made that the QIS decision is based on shaky legal ground. This is because the QIS decision relied on a federal case (Robert Half Int'l, Inc. v. Van Steenis (1991)) to support the conclusion that continued employment will support a non-compete agreement. But the Robert Half decision cited to Iowa law - not Michigan law - to support this conclusion.  

This is not an academic concern. For example, a former colleague recently asked me my thoughts on non-compete agreements and continued employment (he bought lunch so I didn't mind sharing the above insight). Apparently, his client, a company, received an adverse arbitration decision in a dispute involving the enforceability of a non-compete agreement that was entered into after the employment relationship began. One of the cases the company relied upon was QIS.

The arbitrator, however, rejected the contention that continued employment was sufficient consideration to support a non-compete agreement. The arbitrator's decision did not illuminate the reasons, including the shortcomings of the QIS decision for this conclusion. Nonetheless, it does illustrate what should be at least concern on every company's radar screen when it comes to requiring current employees to sign new non-compete agreements. 

The Take-Aways

I don't agree with the arbitrator's decision because I think the legal trend when it comes to non-compete agreements is that continued employment is sufficient consideration to support the agreement. But that doesn't change the result my friend's company got.

  1. Out of an abundance of caution I generally recommend that companies pay particular attention to the element of consideration when it comes to non-compete agreements. For example, we have come up with specific recommendations designed to eliminate an argument that the non-compete agreement is unenforceable for a lack of consideration.  
  2. Also, as an aside, I am often not a fan of arbitration for various reasons, especially in employment matters. One such reason is because of "rogue" decisions like the one referenced above. Unlike a lawsuit, the arbitration decision is not likely to be subject to being corrected by of a motion for reconsideration or on appeal. 
  3. From the perspective of a currently employed individual asked to sign a non-compete agreement, more often than not you be given the choice of signing it or being terminated. While this hardly seems like a "choice," if it is an employment at-will situation, i.e., there are no other employment contracts to consider, it is a choice that is lawful. For this reason, it is important to understand before signing the non-compete agreement what you are agreeing to and, if necessary, whether there are defenses against enforcing the restrictions ... perhaps a lack of consideration?  

Jason Shinn is a Michigan attorney who focuses on non-compete law and litigation. He works with companies to draft enforceable non-compete and other employment agreements. He also has extensive experience representing employers and employees in pursuing or defending against non-compete lawsuits.    

Governor Snyder - Michigan Will not Honor Lawfully Performed and Valid Same-Sex Marriages

Same-Sex MarriageMichigan's Governor Rick Snyder issued today a press release announcing that Michigan will not recognize any of the 300 plus same-sex marriages that were performed last weekend. These same-sex marriages were performed after a federal judge declared Michigan's ban on same-sex marriage to be unconstitutional.

Unwilling to accept this decision, Michigan Attorney General Bill Schuette decided to appeal the ruling to the federal court of appeals and further asked that this court stay the earlier decision to determine the matter. Mr. Schuette's request was in part granted and the earlier ruling was halted over the weekend.  

This left open, however, for Michigan residents and employers the question of what to do with the same sex-marriages that were performed between the ruling that Michigan's ban was unconstitutional and the staying of that decision. 

Governor Snyder answered that question today in a press release. But that answer suggest that Michigan is in the awkward position of talking out of both sides of its mouth.

Specifically, the Governor has taken the position that the same-sex marriages performed after Michigan's ban was found to be unconstitutional by a federal judge were legally performed and were valid. But because a federal circuit court later granted a stay of that ruling, the rights and liberties arising under those legally and valid marriages are not going to be recognized by the state and are suspended.

Governor Snyder's press release reads in part as follows:      

After comprehensive legal review of state law and all recent court rulings, we have concluded that same-sex couples were legally married at county clerk offices in the time period between U.S. District Judge Freidman’s ruling and the 6th U. S. Circuit Court of Appeals temporary stay of that ruling .... The couples with certificates of marriage from Michigan courthouses last Saturday were legally married and the marriage was valid when entered into. Because the stay brings Michigan law on this issue back into effect, the rights tied to these marriages are suspended until the stay is lifted or Judge Friedman’s decision is upheld on appeal.

Over the weekend and prior to this press release, our office was inundated with questions form HR professionals and Michigan employers about what the rulings would mean for their business operations and employee benefit programs. Such questions were especially important because Michigan's primary anti-discrimination employment statute prohibits discrimination based on an individual’s marital status. 

Well, Governor Snyder's press release answers those questions - absolutely nothing until further ordered.

Unfortunately and regardless of your politics or beliefs, the fact is that over 300 families have been stripped of their legal rights - rights that were lawfully provided by Michigan officials. And it is dangerous ground when that can happen simply because the government says it can, which, as noted by Judge Friedman, is something that should not happen under principles of equal protection:

Today’s decision ... affirms the enduring principle that regardless of whoever finds favor in the eyes of the most recent majority, the guarantee of equal protection must prevail.

For more information about Michigan employment law, including sexual orientation discrimination issues contact Jason Shinn. Mr. Shinn is a Michigan employment attorney who has represented employers and individuals since 2001. 

Trade Secret Saturday - Weekly Summary of Trade Secret Business Issues

Security_Computer_Laptop in Chain.jpegTrade Secret Saturdays is a new initiative for a weekly round-up of articles and blog posts focused on trade secrets that caught our attention or that should be on your company's radar screen. Enjoy.   

  • Trade Secrets Loss Could Be 3% of GDP: This article provides hard-data about the cost arising from trade secret misappropriation. The report also identifies one of the main culprits behind trade secret theft to be current and former employees, who are "familiar with a company’s systems, are acquainted with where and how information is stored and know specific details on the production or use of trade secrets are one of the greatest cybersecurity threats companies face." These findings are definitely consistent with my experience in representing companies in trade secret litigation. The findings also provide sufficient data for allocating company resources to implement or overhaul a trade secret protection plan.  
  • Filing for a Patent Versus Keeping Your Invention a Trade Secret. This article from Harvard Business Review is a great explanation about the advantages trade secret offers over patent protection. And it also provides compelling reasons for why entrepreneurs and businesses should not overlook the importance of trade secret protection. I love the example used; Wyeth maintained an exclusive monopoly on a drug long after the patents to the actual drug expired. It was able to do this because the extraction process that was critical to manufacturing the drug was not patented and, instead, protected as a trade secret. The secret sauce critical to making the multimillion drug - horse pee. 
  • Trade Secret Lawsuit Against DuPont dismissed by Federal Judge (PDF Order). A New York federal judge on 3/3/2014 dismissed a lawsuit brought against DuPont Company by a digital printing company that accused DuPont of breaching nondisclosure agreements and misappropriating trade secrets. The judge's decision was a virtual buffet of why the trade secret misappropriation claims failed. But it was primarily based on the fact that the plaintiff failed to treat the information as "confidential." And this failure is also a common theme when it comes to pursuing or defending against trade secret misappropriation claims. It is also a good reminder for any businesses who need to protect a competitive advantage to take the time to invest in a coherent and smart trade secret protection plan. 

For more information about trade secret protection or responding to issues involving trade secret theft, contact Jason Shinn. Jason is a Michigan licensed attorney who has addressed Michigan trade secret legal issues since 2001. He routinely collaborates with companies to establish or improve their trade secret protections by implementing best practices and, if necessary, litigates these issues.  

Pornography in the Workplace - One Employer's Response that You Don't Want to Follow

Porn Notice at KNBR.jpgOne employment law topic that never seems to go away is pornography in the workplace.

When the issue invariably arises, I remember my first attorney job out of law school. I began working at a medium-sized law firm. One partner I frequently worked with was a brilliant, chain-smoking, gruff, old white-collar defense and First Amendment attorney. A lot of his clients were in the "adult entertainment business." The work was interesting to say the least.  

One day, I swung by his office to talk about a case and he had some porn on his computer (honestly - I was there just to talk about a case). I jokingly told him he was going to be in trouble if the firm's IT director and the no nonsense firm president found out he was using company resources to indulge in such vices.

His response still makes me laugh: "Expletive them. This is expletive 'legal research' for me." As a First Amendment attorney with a substantial client base in the adult entertainment industry, he made a convincing point.

Most, if any, employees cannot make the same argument when it comes to accessing porn in the workplace. Yet often times employers fail to properly investigate instances of employees using company time or resources to access pornography.

For example, as originally reported by Deadspin, a San Francisco Radio station apparently posted the above notice in response to discovering workplace pornography (you can almost hear the exasperation in the notice by the KNBR's IT/management). KNBR's notice provides a number of points on what not to do when it comes to investigating workplace pornography:

  • To begin with, the first line of defense against viewing or accessing pornography using employer provided resources, e.g., company Internet, emails, computers, etc.) should not be in a (misspelled) posting. Instead, employers should first cover the issue in an employment policy manual and potentially in a separate technology policy agreement, with express prohibitions against it and explaining that violations may result in discipline, up to and including discipline.
  • Second, once pornography is discovered on or accessed through company provided computers or resources, then upper management and the company's attorney needs to become involved at the outset. Together, management and legal counsel can take the appropriate steps to reasonably investigate the issue. 
  • Third, taking the KNBR notice at face-value and building on the preceding point, KNBR did the right thing in taking the offending computer out of service. But it is a critical mistake for the company's IT professionals to tamper with that computer, e.g., "rebuild," reboot, or put it back into circulation. Such actions may result in destroying or altering evidence, which can undermine a company's evidence supporting its disciplinary action and even expose the company to legal liability (often referred to as "spoliation").
  • Fourth, a real concern that employers need to carefully evaluate is whether any pornography discovered in the workplace involves children. If so, the need to inform law enforcement should take immediate priority. See What Should An Employer Do if Child Pornography is Discovered in the Workplace? 

Workplace misconduct, including viewing or accessing pornography using employer-provided resources needs to be taken seriously and carefully investigated. For more information about best practices for preventing such misconduct or properly investigating employee misconduct, contact employment attorney Jason Shinn. Mr. Shinn routinely collaborates with businesses and their HR professionals to address federal and Michigan employment law issues, as well as planning and conducting workplace investigations of potential misconduct.  

Limiting Litigation Costs - Don't Overlook Your Legal Counsel's Contribution to the Problem

Gavel on Cash.jpgOne of the core considerations any CEO or general counsel makes when the company is sued is to assess the anticipated cost of litigation versus settling resolving the claim. While settlement is often a distasteful consideration, especially where a claim borders on frivolous, no company can credibly take the position that it will take any and all cases to trial given the significant costs involved in litigation. 

In that regard, Mr. Jon Kyle, a former Republican senator from Arizona and now a senior adviser to a prominent Washington, D.C law firm, penned an editorial for the Wall Street Journal (1/20/2014) discussing the problem litigation costs pose for U.S. companies.  

... excessive litigation costs erode U.S. companies' ability to compete in world markets and make foreign companies reluctant to invest here ... 

The primary culprit for excessive cost and delay is 'discovery'—the process of preserving, reviewing and disclosing vast amounts of corporate information. A 2010 survey of Fortune 200 companies by Lawyers for Civil Justice, the Civil Justice Reform Group and the U.S. Chamber Institute for Legal Reform found that in 2006-08 companies at the low end of the range were paying $620,000 per case, and those at the high end were paying almost $3 million per case in discovery costs. 

I don't disagree with Mr. Kyle's assessment. In representing business clients over the years, discovery costs consistently made up the largest portion of the litigation budget. And this is true regardless of the claims. And since beginning my legal career in 2001, those discovery costs have steadily increased, in large part due to the sheer amount of information businesses create and retain. 

But Mr. Kyle's assessment, however, ignores a dirty secret in the legal industry - there is an inherent incentive driving attorney compensation - often referred to as the billable hour - that drives up the cost of litigation defense. In other words, the very law firms that represent the companies "victimized" by the cost of litigation are often a significant contributor to the increased litigation costs that U.S. companies face.

I repeatedly saw the paradoxical results of inefficient legal services resulting in increased law firm profits while I was a member of a national trial counsel team for a manufacturer involved in national product liability litigation. Prior to the client implementing a national trial team approach, local counsel were largely left to plan discovery with little oversight. While most attorneys implemented reasonable litigation plans, others did not. In those situations, litigation costs soared with little value to the overall trial strategy. But in both situations, we were able to bring down discovery costs by designing and implementing a coordinated discovery plan.  

More recently, I was legal counsel in a contract dispute between a company and its former executive. The details of the litigation are not particular sexy or complex: Party "A" enters into an executive employment with Party "B;" Party B pays under that contract for months; Party B decides it would like to pay less for same scope of work; Party A says thanks, but no thanks, I'll keep what we agreed to; and Party B stops paying claiming there is a disagreement as to what the contract actually provides.

Despite this garden-variety claim, the company (Party B) was represented by a large Detroit law firm. It staffed this case with three partners (not associate attorneys) and then proceeded to tag team the depositions with one of these partners and then another associate attorney. Additionally, the defendant law firm pushed for forensic inspections of laptops - one acquired years after the time-period relevant to the formation of the contract and the actual breach of the contract. In sum, the defense counsel took a scorched earth approach. However, it is hard to imagine any CEO signing off on such an approach given the questionable value and limited damages.  

Attorney Patrick Lamb of the Valorem Law Group is a prominent thought leader on guarding against these sorts of self-induced out-of-control litigation costs. He recently commented on these perverse incentives when it comes to rewarding law firm inefficiency: 

Another law firm has motivated its associates to spend more time rather than less getting their work done. Kaye Scholer is paying upwards of $20,000 in additional bonuses to those who exceed 2,200 hours per year.

Mr. Lamb succinctly paraphrases what this means to clients: 

We haven’t figured out how to do work other than on an hourly basis, so we need lots more hours for the firm’s partners to take home their millions. So to squeeze out those hours from our clients, we’ll motivate our associates to spend more time on their matters. So even though our clients would benefit from a focus on efficiency and outcomes, that doesn’t help us–the partners–so we’ll just ignore that and keep doing what we’ve doing.

Closing Thoughts

Is Mr. Kyle correct in his assessment about the cost of litigation being too high and it takes too long in the United States? Yes. But his assessment overlooks the fact that the very attorneys representing those most affected by these problems are often the chief contributors or, at least, complacent co-conspirators.

For this reason, it is critical for CEOs and in-house counsel to diligently monitor legal fees, as well as having meaningful budgets and discussions with defense counsel about the company's litigation strategy and this discussion needs to take place early in the litigation process. 

For more information about business and employment lawsuits, contact attorney Jason Shinn. Mr. Shinn has been representing businesses and executives in defending and pursuing litigation since 2001. The bulk of this experience involves employment discrimination, breach of contracts, trade secret and noncompete litigation, and other commercial litigation matters. 

Has the Michigan Department of Civil Rights Changed its Discrimination Investigation Process?

Discrimination Underlined.jpgThis may be premature speculation, but it appears the Michigan Department of Civil Rights - the agency responsible for handling charges of discrimination against Michigan employers - has slightly revised its claims handling procedures.

Employment Discrimination Claims and the Michigan Department of Civil Rights

Specifically, an employee or job applicant may file a complaint with the Michigan Department of Civil Rights offices if the alleged act of discrimination occurred within the past 180 days. The Department is responsible for investigating such claims and enforcing Michigan’s Elliott-Larsen Civil Rights Act (ELCRA). This statute prohibits discrimination against an employee or job applicant based upon that person’s race, color, religion, national origin, age, sex, height, weight, or marital status; sex discrimination includes sexual harassment or discrimination based on pregnancy.

At the conclusion of the investigation, the investigator often prepared a report containing detailed factual findings, even if the investigation did not disclose sufficient evidence to support the claimant’s allegations. In such an instance, the claimant would be issued a "Notice of Disposition and Order of Dismissal."  

Michigan Department of Civil Rights and its Discrimination Investigation Process 

However, recently I've been receiving rather "vanilla" findings that are more similar to those issued by the Equal Employment Opportunity Commission when it closes a discrimination charge and issues a right to sue letter. And in one of the discrimination charges I was handling, opposing counsel also confirmed the same. Specifically, the following excerpt Michigan Department of Civil Rights 

Based upon all the evidence in the file, e.g. any applicable statements of witnesses, analysis of comparatives and review of documents, the department determined that there is insufficient evidence to proceed.     

The dismissal by the Michigan Department of Civil Rights does not restrict the employee who filed the claim from pursuing discrimination claims in court. But the apparent change in the department's policy can have a practical impact with respect to settlement negotiations. 

What Changes May Mean to Employers and Employees

From an employer's perspective, opening up a detailed finding from the Michigan Department of Civil Rights setting forth why a claim of employment discrimination was found to have no merit was like opening up presents on Christmas day - exciting (in a geeky, employment attorney kind of way)! Conversely, no plaintiff's attorney wants to spend time and effort on a case riddled with the equivalent of legal and evidentiary potholes.

So when these issues were identified in the findings, they provided significant leverage for negotiating a resolution favorable to the employer. And while no employer wants to make it a business practice of paying out on questionable claims, there are certainly cost savings to be explored in resolving employment discrimination claims prior to a lawsuit being filed.

While I certainly appreciate my anecdotal observations about the apparent change in the claim an investigation process by the Michigan Department of Civil Rights may not provide a scientifically relevant data set, it is something that we will continue to monitor and employers and employees involved in charges of employment discrimination should be aware of.  

For more information about federal or Michigan employment discrimination, including responding to EEOC or state agency discrimination charges, contact  Jason Shinn who is a Michigan employment law attorney. Mr. Shinn routinely represents clients with respect to complying with employment related laws and, if necessary, handling charges of employment discrimination.

Enforcing Noncompete Agreements - What Law Will Apply?

Contract Documents.jpgWhen it comes to non-compete agreements, one of the most important provisions to consider is what is referred to as a "choice of law" provision. This is because a non-compete agreement's choice of law provision will often determine whether a non-compete will be enforceable and to what extent. 

Choice of Law and Noncompete Agreements

If a non-compete agreement dispute occurs, a choice of law provision determines the law to be applied to resolve the dispute. Such provisions are especially important where companies have employees dispersed across different states. This is because each state varies when it comes to enforcing non-compete agreements. For example, an employer seeking to enforce a non-compete agreement in Michigan will generally fair better than trying to enforce that same non-compete agreement under California law.    

A recent non-compete dispute discussed by Richard Tuschman illustrates this point. Specifically, in a non-compete lawsuit filed by Synthes USA Sales, LLC against its former employee and his new employer, an issue arose as to whether Pennsylvania or California law applied to a non-compete agreement.

The defendant and former employee lived and worked in California, but his non-compete agreement had a choice of law provision that read: ”This agreement will be governed by Pennsylvania law applicable to contracts entered into and performed in Pennsylvania.

The trial court took the view that the non-compete's choice of law provision applied only to contracts actually performed in Pennsylvania. Under this view, the court determined California law applied and under that law, post-employment non-compete agreements are generally not enforceable except in limited circumstances, e.g., in the context of the sale of a business or to prevent the disclosure of trade secrets.

On appeal, however, the appellate court reversed the trial court's decision and concluded that Pennsylvania law should apply. This ruling was a huge "win" for the former employer because in contrast to California's unfavorable non-compete law, non-compete agreements under Pennsylvania law may be enforceable if the restrictions are reasonably necessary for the protection of the employer and are reasonably limited in duration and geographic area.

Michigan Law and Noncompete Agreements

Similar to Pennsylvania non-compete law, an employer and employee are free to enter into a non-compete agreement to protect the employer’s “reasonable competitive business interests” and to prevent post employment competition by the employee, as long as the agreement is reasonable in duration, geographical scope, and the type of activity restrained. For a more detailed discussion on whether a non-compete agreement is reasonable see My former employer can't prevent me from working, right? Dissecting the Enforceability of a Non-compete Agreement.

As a non-compete attorney, and also similar to the Pennsylvania case discussed above, I know first-hand the critical role a choice of law provision plays in non-compete litigation. Specifically, I had a case where a former employer sued its former computer engineers and their new employer for alleged violations of a non-compete agreement and trade secret misappropriation. One of the central legal battles came down to the choice of law provision, which called for the application of California law. However, the former employer essentially argued against applying the contractual choice of law provision because California law was not favorable to its position. Trying to make this argument, however, turned the litigation into something analogous to Alice in Wonderland where up is down and down is up. At the end of the day the application of California law significantly undercut the former employer's claims. 

The Take-Away for Employers

A non-compete agreement is a critical sword when it comes to protecting a company's competitive interests. See Enforceable Non-compete Agreement Key to $2 Million Judgment Against Former Employee. But a poorly written non-compete agreement can also shield former employees from potential liability when it comes to non-compete disputes or, as was the situation in the trial court's decision in the Synthes USA Sales litigation, give a court a reason to limit the scope of a non-compete agreement in favor of an employee. Accordingly, employers do not want to be penny wise, but a and pound foolish when it comes to non-compete agreements. 

And for employers with operations throughout the United States, it is absolutely critical to have a national non-compete strategy in response for differing state law treatment of non-compete agreements.

Jason Shinn is a Michigan non-compete attorney. Since 2001, he has worked with employers to draft enforceable non-compete agreements and to implement national non-compete programs. He has also represented companies, sales-representatives, executives, and other employees in litigating non-compete disputes in Michigan, Ohio, and federal courts, including obtaining or defending against preliminary injunctions. For more information about Michigan non-compete law, contact Mr. Shinn.

Former Employee Sentenced to Prison for Trade Secret Misappropriation and Computer Fraud Related Misconduct

Computer Crime HandcuffsOne of the more noteworthy employer/employee trade-secret misappropriation and Computer Fraud and Abuse Act  (CFAA) cases came to an end earlier this week. Specifically, Mr. David Nosal wa sentenced on January 8, 2014 to one year and one day in prison. He was convicted for misappropriating his former employer's trade secrets and improperly accessing the employer's computer network.

We previously reported upon a trade secret misappropriation case and violation of the federal Computer Fraud and Abuse Act (CFAA) arising out of the employment relationship between David Nosal and his former employer. At the time we reported on this case, it was unusual in that the charges against Mr. Nosal essentially amounted to criminalization of violations of an employers' computer use policy.

Specifically, Mr. Nosal had been charged by U.S. prosecutors with one count of conspiracy, three counts of unauthorized access to a computer used in interstate or foreign commerce or communication, one count of unauthorized downloading and copying of trade secrets, and one count of unauthorized receipt and possession of stolen trade secrets.

Mr. Nosal had challenged these criminal charges primarily arguing that the CFAA was "aimed primarily at computer hackers" and that it "does not cover employees who misappropriate information or who violate contractual confidentiality agreements." This challenge resulted in an extensive and sometimes complicated procedural trail that saw the district court initially rejecting Mr.Nosal's arguments only to later accept the arguments and dismissing five counts of the six count indictment. From here the government appealed this decision to the Ninth Circuit Court of Appeals and later to an en banc appeal (an appeal to the full bench as opposed to a panel selected to hear the appeal) followed. Follow this link for a full explanation of the trial and appellate time-line.

Ultimately after dust from the the trial and appeals settled, the jury returned a guilty verdict against Mr. Nosal on all six counts of the indictment finding that he had conspired to gain unauthorized access to the computer system of his former employer, the executive search firm Korn/Ferry International, and to illegally obtain trade secrets belonging to Korn/Ferry. The jury also found Nosal guilty of three substantive computer intrusions in April and July 2005 and two substantives trade secret offenses that occurred in April 2005. 

The Take-Away for Employers and Employees

The sentencing of Mr. Nosal is stark reminder to employees about the serious consequences that may result from trade secret misappropriation and engaging in unauthorized access to an employer's computer system.

The Nosal decision also eventually resulted in "clarifying" the scope of the CFAA (at least for employers and employees within the jurisdiction of the Ninth Circuit Court of Appeals) in that the Court held under the CFAA, "an employee accesses a computer in excess of his or her authorization when that access violates the employer’s access restrictions, which may include restrictions on the employee’s use of the computer or of the information contained in that computer." 

For more information about trade secret protections or investigating trade secret misappropriation issues, including matters involving the Computer Fraud and Abuse Act, contact attorney Jason Shinn. He is a legal-technology nerd and has been retained as an expert in various legal matters involving computers and misconduct. He also routinely investigates employment-based workplace computer issues and misconduct, as well as making sure employer's meet their obligations when law enforcement needs to investigate suspected computer crimes involving employer provided computers and technology.

Opt-out Employee Arbitration Agreement Upheld But At What Cost?

Contract Documents.jpgArbitration agreements are common in the employment relationship. And employers understand that normally an employee must sign such an agreement in order for it to be enforceable. But what happens if your company's policy is to require employees to arbitrate a dispute unless the employee takes some action to opt-out of the employment arbitration agreement?

A recent employment dispute arising out of a Michigan federal district court answers this question and is a reminder that sometimes simpler is - if not better - more cost effective. 

Employment Discrimination Lawsuit Filed and Employer Moves to Arbitrate it.

Specifically, in Tillman v Macy’s, Inc (2013), the former employee represented herself in filing an employment discrimination lawsuit alleging that Macy's discriminated against her on the basis of her race in violation of Title VII when it terminated her employment in 2009.

Macy's responded by filing a motion to compel arbitration and stay the lawsuit pending arbitration, based on what Macy's claimed was an agreement entered into by the parties to participate in a binding dispute-resolution program.  Macy's argued that Tillman assented to participation in the program and therefore that suit in federal court was impermissible. 

The problem Macy's faced in making this argument, however, was that Tillman did not sign an agreement to resolve employment disputes through binding arbitration or to otherwise waive her right to a jury trial. Instead, Macy's had communicated to Tillman an offer to enter into a binding arbitration agreement and communicated that it was up to her to take certain steps to opt out of the arbitration agreement.

District Court's Order Denying Arbitration is Reversed.

The district court rejected Macy's position. However, on appeal, the Court reversed the decision and compelled Macy's and its former employee to arbitrate the dispute.    

In reaching this decision, the court found that the employer had provided sufficient notice of its offer to enter into an arbitration agreement and plaintiff had accepted by continuing her employment and by not following the steps to opt out of the arbitration. Thus, arbitration should have been required, even in the absence of an agreement to arbitrate that was signed by the plaintiff-employee.

The Take-away for Employers

In reading the Macy's opinion one point that jumped out was the convoluted nature of its process for binding employees to arbitration; A lot of paper and HR efforts went into putting employees like Tillman on notice that unless they opted out of the arbitration agreement, she would be bound by it.

On top of that effort, Macy's ending up spending significant legal fees in order to convince a court - which it failed to do at the trial level - that its efforts and procedures applicable to its arbitration process were, taken together, sufficient to create an enforceable arbitration agreement despite having no signed arbitration agreement.  

While Macy's employment arbitration opt-out procedure was ultimately upheld in favor of the employer, the legal fees and effort at the HR level can't be ignored. In fact, the court noted that the employer could have avoided expending those resources as well as avoiding the risks inherent in the opt-out arbitration procedure:  

Tillman's conduct following the communication of the offer objectively suggests that she accepted the arbitration agreement by continuing her employment without returning an opt-out form.

We recognize that opt-out schemes for accepting arbitration contain a risk greater than in opt-in systems that some employees do not know what they have agreed to. Cases like this one would likely be fewer if companies like Macy's would use an opt-in system. But we cannot say that under Michigan law an opt-out system is inherently insufficient, and under the facts of this case a contract was created.

Is arbitration right for your company? Maybe not with recent changes to Michigan courts that are resulting in shorter litigation time-lines and measures intended to reduce the cost of litigation. 

For more information about these changes, as well as arbitrating employment disputes or implementing an arbitration procedure into your company's HR procedures, contact Jason Shinn. Mr. Shinn is a Michigan employment attorney. Since 2001, he has represented manufacturers and closely held businesses in complying with or, if necessary, litigating federal and Michigan employment laws.