Banana PeelCompanies commonly offer salary advances or financially invest in an employee’s education, training, or certification. But a recent decision by the Michigan Court of Appeals is a good reminder of how missteps in accurately documenting such advances or investments can be costly. In this case, an employer was out over $200,000 after investing in education and salary advances for its former employee because of the wording of its agreement.

The case in question, Riversbend Rehabilitation v Enos, involved Riversbend Rehabilitation, which provided physical therapy services. Riversbend, through its owner, Michael Wilson, entered into a written agreement with Enos whereby Riversbend would pay the full amount of Enos’s tuition and other educational expenses associated with obtaining a doctoral degree in physical therapy.

The agreement also provided that Riversbend would provide Enos with $40,000 per year as a “salary advance” while he was in school. In exchange, Enos after graduation would work for Riversbend for a salary less than what therapists are paid and the amount of that reduction would be credited against the salary advances until the full amount of the advances had been repaid.

However, the relationship between Wilson and Enos later deteriorated and Riversbend, in an email from Wilson, rescinded its employment offer to Enos. Wilson also emailed Enos a proposed amended agreement and promissory note reflecting that Enos would not work for Riversbend. However, Enos did not execute them. After that, Riversbend did not pay Enos’ tuition for the Fall 2012 and Spring 2013 terms. It also ceased paying Enos a salary in December 2012. Enos in turn refused to repay the salary that Riversbend advanced to him, and Riversbend eventually filed a lawsuit.

The trial court sided for Enos. Specifically, the court concluded that “the parties did not contemplate what would happen if Riversbend refused to employ Enos or refused to make the required payments.” The court, however, concluded that under the plain terms of Riversbend’s contract, Enos had no obligation to repay the advanced salary.

… Enos’ obligation to repay the advanced salary … did not include Riversbend’s refusal to employ Enos or make the contemplated payments … [Enos was obligated] to repay Riversbend by accepting employment with Riversbend, which repayment would be made through acceptance of a reduced salary for a period of time, or, in the event that Enos breached the agreement or elected not to work for Riversbend, he had an obligation to repay Riversbend with payments over time. … Enos did not refuse employment with Riversbend or otherwise engage in acts that would trigger his obligation to repay the advanced salary.

Riversbend also lost on appeal after the Michigan Court of Appeals affirmed the trial court’s decision.

Take Aways

One of the judges on the panel that affirmed the trial court’s decision filed a separate concurring opinion. That opinion expressed disappointment with the outcome, but nonetheless agreed with the result:

… I find myself compelled to concur in the result in this case, but I have serious doubts about whether we have served justice … In my view, the better outcome in this case would be to remand to the trial court to reform the contract so as to provide reasonable terms of repayment of the advance salary, but I do not believe we have the authority to do so.

Businesses rightfully expect a return on their investment, including investing in an employee’s education, training, certification, or when making an advance. But, as this case illustrates, it is important to have in place the proper agreements to protect such investments. And employers can’t (and honestly shouldn’t) expect judges to fix a situation that results in an unfair result like that experienced by Riversbend. Instead, employers need to have a well-written employment agreement or related contracts in place.

For more information about this article or documenting investments in employee training, education, certifications, as well as salary advances, contact Michigan attorney Jason Shinn. He routinely represents both employers and executive employees and sales representatives in documenting and, if necessary litigating contract claims arising out of such issues.

Mistakes that derail your company's HRAn employer’s defense to a lawsuit brought under the Family Medical and Leave Act (FMLA) was derailed after a judge agreed there was enough evidence for a jury to find that the employer investigated an employee’s work performance to find a “legitimate” reason to fire him after that employee requested leave.

The case, Lankford v. Reladyne, LLC (11/19/2015 ), involved a sales representative who worked for Reladyne and its affiliated companies beginning in 2008 until he was fired in February 2014.

On January 28, 2014, Lankford requested a 35-day leave to attend an alcohol treatment program. Before the requested FMLA leave, the plaintiff had received positive performance reviews and denied using alcohol during work or having any performance issues related to intoxication.

While plaintiff was on leave, Reladyne investigated a January 14, 2014, complaint made by a delivery driver that plaintiff had provided free supplies to a customer. Reladyne ultimately concluded that plaintiff had misappropriated products by providing free oil changes to some of his family members.

Reladyne made the decision to fire plaintiff while he was on leave but waited until he returned to work to discharge him. Plaintiff filed a lawsuit contending, among other things, that Reladyne interfered with his right to take FMLA leave and fired him because he took the leave.

Overview of FMLA Interference and Retaliation Claims

Under the FMLA, employers are prohibited from interfering with an employee’s right to take leave or discriminating against an employee for taking leave. An employee may allege violations of the FMLA under two theories:

  1. The entitlement theory, also known as the interference theory, arises from the provision that it is “unlawful for any employer to interfere with, restrain, or deny the exercise of or the attempt to exercise, any right provided” by the FMLA. 29 U.S.C. § 2615(a)(1); and
  2. The retaliation theory, sometimes referred to as the discrimination theory, is premised on Section 2615(a)(2) , which makes it “unlawful for any employer to discharge or in any other manner discriminate against any individual for opposing any practice made unlawful” by the FMLA.

Evidence Could Support Retaliation and Bias

The federal District Court denied the employer’s summary judgment motion to dismiss the FMLA lawsuit. In reaching this decision, the court focused in on the following:

First, Plaintiff produced evidence that the decision to investigate his employment may have been at least partially because he took FMLA leave. Under applicable federal law, the U.S. Court of Appeals for the Sixth Circuit has found that such decisions constitute the denial of a benefit to which an employee is entitled. Accordingly, the court rejected Reladyne’s argument that plaintiff’s interference claim failed because he wasn’t “entitled” to continued employment after the alleged misconduct was discovered.

Second, Reladyne’s upper managers made the decision to terminate him two days after they were informed of his leave. While the company offered a legitimate, nondiscriminatory reason for firing him (misappropriated company products), the court concluded that this reason may have been a pretext for discrimination. In reaching this decision, the court noted:

  • In response to an e-mail about plaintiff’s leave, a manager said, “[w]e have too many signs to ignore and not proactively address.” These e-mails about plaintiff’s FMLA leave were forwarded to the loss prevention director who investigated his alleged misappropriation. Thus, it could be inferred that the investigator “was tasked with proactively addressing [plaintiff’s] situation by providing a justification to fire him.”
  • Six weeks before this email was sent, Plaintiff received a positive employment review, which noted that he exceeded expectations in every category. And his manager further noted that plaintiff was “dependable and reliable.”
  • Furthermore, in a follow-up e-mail after the investigation, a manager wrote that they had “a nice Plan B.” And plaintiff’s supervisor stated that he wasn’t eligible for rehire because his personal life was “in ruins” and he appeared to be “high” in a meeting.

In sum, the court concluded that this evidence could allow a jury could conclude that the investigation and a related report “were part of a cover-up to make [plaintiff’s] termination appear legitimate.”

Take Aways

In light of this case, employers should zero-in on two points. First, FMLA leave issues are perhaps one the most challenging compliance issues employers face as this case illustrates. But the starting point for successfully managing such issues – as well as any employment related issues – is ensuring the integrity of an investigation. Here, however, too many “red flags” signaled that the employer’s investigation was only to support a decision to terminate the employee, as opposed to an independent, fact gathering endeavor.

Second, this case illustrates an issue we covered about employment reviews. See Rethinking Employee Performance Reviews. In that article, we noted that such reviews can be invaluable for showing an adverse employment decision was for legitimate reasons.

But failing to conduct meaningful employee evaluations can be used against an employer defending against a discrimination claim. That is what happened here – the employee went from being a “dependable” and “reliable” employee that exceeded expectations to being fired within a six-week period. Such circumstances, as they did here, can create questions of facts that allow a discrimination claim to go to trial.

For more information about the FMLA, including addressing leave issues or disciplining employees who have requested FMLA leave, contact Michigan attorney Jason Shinn.

shutterstock_247592956The Michigan Supreme Court ruled for a Saginaw nurse who filed a wrongful discharge claim alleging he was fired in violation of public policy. As we previously noted, this case raised a question of whether Michigan’s Whistleblowers’ Protection Act was the former employee’s exclusive remedy.

In sum, Mr. Landin was terminated from his job at HealthSource Saginaw after complaining that a co-worker’s negligence resulted in a patient dying in 2006. He sued claiming this firing was in violation of Michigan’s public policy as outlined in Michigan’s Public Health Code. That code prohibits a health facility from discharging an employee who in good faith reports the malpractice of a health professional. Landin did not file a claim under Michigan’s Whistleblower Protection Act.

The jury awarded him $1.2 million, which was affirmed on appeal. On April 3, 2015, the Michigan Supreme Court agreed to hear the case. And on November 4, 2015, the Court heard oral arguments from attorneys for HealthSource and Mr. Landin. However, on Nov. 13, 2015, the Supreme Court issued a one-page order vacating its 4/3/2015 decision to hear the case and consider the Michigan Court of Appeals’ June 2014 ruling (See order, Landin v HealthSource, 11-13-2015). The Michigan Supreme Court’s order provided little insight into its reasoning, noting only that the Court was “… no longer persuaded that the questions presented should be reviewed by this Court.” This means that the case is now over, and the $1.2 million jury verdict for the terminated employee will stand.

Take Aways

In our prior post on this case, we stopped short of making a prediction about what the Michigan Supreme Court would do, but we explained why we believed the decision eventually reached by the Michigan Supreme Court was the right result:

  • The Michigan’s Whistleblower Protection Act’s (WPA) was intended to protect employees who reported or were about to report certain categories of wrongdoing on the part of an employer, but those protections can be far from straightforward with respect to meeting the statutory elements for WPA protections; and
  • The HealthSource case illustrates, protections under the WPA can easily be eviscerated where an employer terminates the employee before he or she has a chance to report a violation.

One legal cliche goes that “bad facts” make “bad law.” From the employer’s perspective, this case presented horrendously “bad facts,” i.e., negligence in patient care that was believed to have resulted in a patient dying. But this is one situation where you can’t argue that these facts led to “bad law.”

Otherwise, the Michigan Supreme Court would have essentially created an insurmountable hurdle for wrongful terminations involving public policy violations. In other words, if the Michigan Supreme Court was not going to recognize a wrongful termination in violation of public policy where an employee reports on negligent patient care that resulted in a patient dying, what would be left?

However, what this does mean for employers is that a statutory remedy, here Michigan’s Whistleblower Protection Act, is not an employee’s only remedy as argued by HealthSource. This could also mean that lurking behind every statutory claim, e.g., Michigan Elliott-Larsen Civil Rights, Americans with Disabilities Act, etc. is a violation of public policy. Accordingly, employers and their human resource departments will need to expand their scope in evaluating employee discipline beyond compliance with the applicable employment laws and regulations and consider other sources that may give rise to a violation of public policy (for a summary of such sources, see our prior discussion here).

For more information about this case or Whistleblower Protections under Michigan law, contact attorney Jason Shinn. He has practiced in the area of federal and Michigan employment law, including investigating and responding to whistleblower claims, since 2001.

Balancing ConsiderationsOn November 4, 2015, the Michigan Supreme Court heard oral argument in a wrongful discharge in violation of public policy claim under Michigan law.  The central issue to be decided is whether that claim could be asserted or – as the employer contends – was the discharged employee limited exclusively to bringing a claim under Michigan’s Whistleblower Protection Act.

The stakes are especially high because the plaintiff, Roberto Landin, was awarded a $1.2 million judgment in 2008 against HealthSource Saginaw for his violation of public policy claim and that judgment was later affirmed on appeal in 2014. Reporter Mark Tower of MLive has a great summary here, including video excerpts from the actual argument.

At the time of his wrongful termination, Landin worked for HealthSource Saginaw as a nurse. He was employed by the hospital as an at-will employee. His employment was terminated in April 2006. Landin claimed he was terminated because he reported to a supervisor the negligence of a co-worker that Landin believed directly led to the death of a patient. After Landin reported the negligence, he was retaliated against by HealthSource and the retaliation ultimately culminated in his termination. In his complaint against HealthSource, Landin alleged wrongful discharge in violation of public policy.

HealthSource argued to the trial court, then to the Court of Appeals and now to the Michigan Supreme Court that Landin’s “exclusive remedy” for the alleged retaliation was under Michigan’s Whistleblowers’ Protection Act (the “Act” or “WPA”). As such, the public policy claim failed as a matter of law. The WPA prohibits retaliation against someone reporting a violation of state law. Landin, however, argued that he could not have reported the incident under the Whistleblower’s Protection Act because he was terminated before he could report it to a public body, a requirement under the WPA. Nonetheless, Landin argued, and the trial court and court of appeals agreed, that Landin stated a valid wrongful discharge in violation of public policy claim and the WPA was not his only remedy.

Michigan, like most states, presume  an employment relationships are terminable at the will of either party. But, Michigan has an exception to the at-will employment doctrine if the discharge was in violation of public policy. The idea being that some grounds for discharging an employee are so contrary to public policy as to be actionable. However, such instances are limited under Michigan law to the following:

  • Explicit legislative statements prohibiting the discharge, discipline, or other adverse treatment of employees who act in accordance with a statutory right or duty (e.g., the Civil Rights Act, MCL 37.2701; the Whistleblowers’ Protection Act, MCL 15.362; the Persons With Disabilities Civil Rights Act, MCL 37.1602);
  • Where the alleged reason for the discharge was the failure or refusal of the employee to violate a law in the course of employment (e.g., refusal to falsify pollution reports; refusal to give false testimony before a legislative committee; -3- refusal to participate in a price-fixing scheme); and
  • Where the reason for the discharge was the employee’s exercise of a right conferred by a well-established legislative enactment (e.g., retaliation for filing workers’ compensation claims).

Here, the Court of Appeals concluded that Landin’s discharge claim could fall under the first and third bullet point and, therefore, he stated a viable claim for wrongful termination in violation of public policy. In reaching this decision, the Court of Appeals cited the trial court’s reasoning in making a “judgment call:”

The life and health of hospital patients depend upon the skill and competency of the professional medical staff—physicians, registered nurses, and licensed practical nurses, like plaintiff Landin and Nurse Johnson. To hold that Landin has no claim against the Defendant, is in essence, to hold that no good deed shall go unpunished. That cannot be the law. The Court therefore denies the motion to dismiss.

However, the Michigan Supreme Court will have the last word on this issue and whether the lower courts made the right judgment.

Concluding Thoughts

From a practical standpoint, the WPA was a statute that was intended to protect employees who reported or were about to report certain categories of wrongdoing on the part of an employer. However, obtaining protections under the WPA can be far from straightforward with respect to meeting the statutory elements for WPA protections.

And as the HealthSource case illustrates, those protections under the WPA can easily be eviscerated where an employer terminates the employee before he or she has a chance to report a violation. This creates, in our experience in representing both employers and employees in WPA claims, a perverse incentive to rush to judgment to obtain WPA protections or to terminate to avoid WPA liability. It will be interesting how the Michigan Supreme Court will resolve these policy issues in this case.

For more information about complying with the Michigan’s Whistleblower Protection Act, as well as minimizing the risks of wrongful termination claims under federal and Michigan law, contact employment attorney Jason Shinn.

Identifying Next ChallengeEarlier this year we wrote about the EEOC’s decision that sexual orientation discrimination is a form of sex discrimination, which is made unlawful under Title VII. See Sexual Orientation Discrimination is Unlawful under Federal Law … For Now?

On 10/29/2015, this issue was before a district court judge who agreed with the agency’s opinion, but ultimately dismissed the employee’s claim. However, as explained below, this decision is not likely to be the last word on whether other courts, including those in Michigan, will agree that sexual orientation discrimination is actionable under federal anti-discrimination laws.

As to the case, Isaacs v. Felder Servs., LLC (10-29-15) involved a gay dietitian working for an Alabama health-care service provider. Isaacs, the plaintiff, was fired and brought a federal discrimination lawsuit asserting that in violation of Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. § 2000e et seq., he was:

  1. Discriminated against by being fired on the basis of his sex, gender non-conformity, and sexual orientation;
  2. Subjected to sexual harassment that created a hostile-work-environment; and
  3. Retaliated against for complaining about that harassment.

On the issue of involving the EEOC’s policy decision that sexual orientation discrimination is prohibited by Title VII, the magistrate judge rejected the EEOC’s decision and recommended that the case be dismissed. However, the District Court judge rejected the magistrate judge’s conclusion that sexual orientation discrimination was not included in or contemplated by Title VII.

In other words, the District Court judge agreed with the EEOC that an allegation of sexual orientation discrimination, i.e., bias based on an employee’s romantic or sexual attraction to or involvement with people of the same sex is “necessarily an allegation of sex discrimination under Title VII.” The Judge further reason that if sexual orientation bias occurs based on an employee’s “perceived deviations” from “heterosexually defined gender norms,” such bias is “sex discrimination of the gender-stereotyping variety.” Ultimately, however, the District Court judge found that the former employee failed to support his sexual orientation claim because he was not able to offer evidence to suggest he was fired because of his orientation. Accordingly, the case was dismissed in favor of the employer.

Take-Aways

In siding with the EEOC, the District Court judge noted that the U.S. Court of Appeals for the Eleventh Circuit, the jurisdiction that oversaw the District Court Judge, had yet to weigh in on the issue. The Sixth Circuit Court Appeals, the jurisdiction that includes Michigan, also has yet to weigh in on this issue.

Normally, federal courts are to give “great deference” to EEOC guidelines ” if there are aren’t compelling indications that the guidelines are wrong. The district court judge in the Isaacs lawsuit saw no reason to not follow the EEOC position, even though that was the recommendation of the magistrate.

Accordingly, if one was inclined to gamble, the safe bet is likely that as more courts address the issue of whether Title VII, in fact, covers sexual orientation, a few judges will decline to depart from the EEOC’s lead, resulting in circuit splits. This means that sexual orientation discrimination could be heading to the U.S. Supreme Court in the next couple of years.

Alternatively, Congress could come together and amend Title VII to expressly include sexual orientation. But a legislative solution concerning sexual orientation discrimination is almost certainly not likely – at least if political history has any predictive value.

Until these issues are firmly resolved, however, companies and their HR professionals need to proactively address sexual orientation discrimination as part of their overall HR risk management efforts.

For more information about complying with federal or Michigan employment laws, including proactively minimizing issues that often give rise to employment discrimination claims, contact attorney Jason Shinn.

Shark_AboveI recently ran across a great article about noncompete agreements, which touch upon two important issues that threaten the success of every non-compete lawsuit: the role choice of law provisions play in noncompete litigation and damages at the preliminary injunction stage of a non-compete lawsuit.

As to the article by Paul O. Lopez, Can Noncompete Agreements Be Enforced If They Cause Substantial Economic Harm, it discusses a noncompete dispute that involved Florida law. Mr. Lopez notes that Florida has a non-compete statute that expressly provides “in determining the enforceability of a restrictive covenant, a court … shall not consider any individualized economic or other hardship that might be caused to the person against whom enforcement is sought.” The purpose of this statutory provision, as Mr. Lopez explains, was to “essentially do away with the economic hardship defense and to make it clear that a well-drafted non-compete agreement could be enforced against employees, regardless of the financial burden that it caused the employee.”

However, the viability of this sort of statute was called into question in TransUnion Risk & Alternative Data Solutions v. MacLachlan. In this case, the employer filed suit against its former employee who joined a competitor. The suit sought to enforce TransUnion’s noncompete agreement under Florida’s non-compete statute. Initially, the district court entered a preliminary injunction after finding that the agreement was enforceable, and the employee violated it.

But on appeal, a unanimous panel of the U.S. Court of Appeals for the Eleventh Circuit agreed with the former employee. Accordingly, it reversed the preliminary injunction granted for TransUnion Risk because the trial court did not consider the economic impact to the employee if the injunction was issued and failed to balance that harm against the company’s need to have an injunction in place. This balancing is required under the federal court rules that apply to issuing injunctions (Rule 65 of the Federal Rules of Civil Procedure). In other words, the Eleventh Circuit ruled that regardless of what Florida state law, the federal trial court was required to evaluate the economic impact to the employee if an injunction were issued and to balance that against the company’s need to have an injunction in place.

Choice of Law and Damage Issues Pose Risks in Every Non-compete lawsuit

The issues of sort of choice of law and damage issues involved in the TransUnion Risk case were also recently discussed on this blog:

  1. Turning to choice of law issues, we recently explained that differences in state law may create enforcement issues for employers seeking to enforce non-compete restrictions where the company is in one state, and the employee is in another. See Differences in State Law Create Hurdles for Enforcing Non-Compete Restrictions, which discussed a non-compete lawsuit involving Texas law and former employees who lived in Oklahoma. In that case, the court refused to issue a preliminary injunction based on the application of Oklahoma law and even though the non-compete agreement in question provided that Texas law would govern the relationship. The TransUnion Risk case discussed above involves the same conflict, except it is between state and federal law.
  2. Turning to the issue of damages at the preliminary injunction phase of a non-compete lawsuit, we recently obtained an order denying a former employer’s motion for preliminary injunction. One of the arguments we made in defeating this motion was that the economic harm to the employee if the injunction was issued outweighed the harm against the company’s need to have an injunction in place. See Focusing on Legitimate Business Interests Still Key to Enforcing Non-compete Agreements. Regarding this argument, Michigan non-compete law, unlike Florida non-compete law, closely resembles the federal court rules concerning preliminary injunctions concerning balancing the harm of issuing an injunction versus not issuing it.

Take Aways

Personally, I take a lot of interest and professional enjoyment negotiating the competing interests and multiple legal considerations that go into resolving noncompete litigation. And the cases discussed above highlight two challenges that often lurk in every noncompete dispute – damages and choice of law.

Both issues can significantly alter the course of an action to enforce or defendant against a noncompete restriction. And for these reasons, it is critical for employers to have a carefully drafted noncompete restriction that is tailored to their particular situation. From the perspective of the employee, it is equally important to understand – before agreeing to any noncompete restriction – how future employment opportunities may be affected.

For more information about enforcing or disputing non-compete restrictions, contact Michigan attorney Jason Shinn. Mr. Shinn routinely represents both companies and individuals in non-compete lawsuits.

Employee Performance ReviewsDoes your company rely on performance reviews for evaluating and managing employees? Probably; performance reviews are a staple for human resource professionals when it comes to evaluating employee performance. Neuroscience, however, is calling into question the value of such reviews.

The Science Undermining the Value of Performance Reviews

Specifically, in “Risks of Reviews,” (article by Chana Schoenberger of the Wall Street Journal) discusses research that suggests performance reviews are detrimental to employee performance:

… researchers concluded that the very act of giving employees a rating jolts them into a ‘fight or flight’ scenario … the same type of ‘brain hijack’ that occurs when there is an imminent physical threat like a confrontation with a wild animal. The employee may not say anything overtly but he or she feels disregarded and undermined–and thus intensely inclined to ignore feedback …

But before your company decides to scrap its use of performance reviews, it is important to remember that employment discrimination claims often turn on an employer’s ability to demonstrate performance deficiencies that predate the alleged discriminatory conduct. In this regard, performance reviews are invaluable:

  • Performance reviews frequently are the best source for showing that the plaintiff had a documented history of poor work performance that predated any initial allegation of discrimination.
  • Poor performance reviews may dispel any inference of causation between the alleged discriminatory activity and the adverse employment action; and
  • A strong showing of a plaintiff’s poor work performance can show that the employer did not have a retaliatory motive.

But performance reviews are a double-edged sword in that failing to conduct meaningful evaluations can be used against an employer defending against a discrimination claim. This is because a plaintiff could contest an employer’s legitimate reason for its actions by showing that the plaintiff had received only positive performance reviews before the discriminatory conduct or engaging in protected activity.

We recently represented a manager in a reverse race discrimination lawsuit and used this strategy to successfully defeat the defendant employer’s motion to dismiss the claims. Specifically, we were able to show through records and deposition testimony that for the five years before the plaintiff’s termination, he was an exceptional employee. This was evidenced by the former employee having received good to great performance reviews, promotions, multiple raises, and performance related bonuses arising out of the performance of his team. In short, the employer’s reason for terminating this manager for poor performance was not credible when contrasted to the personnel file and associated performance reviews.  

Should Your Company Use Employee Performance Reviews

I don’t think employee performance reviews will go away. If done properly, such reviews can prove valuable to employers. This value is in the form of improving employee performance and providing objective evidence to counter allegations that an adverse employment decision was the result of unlawful discrimination.

But the value comes from conducting an honest and meaningful assessment of employee performance. Simply going through the motions is not enough. Worse, ignoring performance issues may provide ammunition in favor of the employee in a subsequent employment discrimination lawsuit.

For more information about conducting performance reviews or complying with federal and Michigan employment laws, contact employment attorney Jason Shinn. He routinely works with employers for implementing HR best practices for complying with employment laws and regulations. This work further includes providing recommendations when it comes to high-risk terminations.

Legal HurdlesA Court ruled that a company didn’t show a substantial likelihood that it would succeed in enforcing noncompetition restrictions against four former employees. This failure, however, is an important reminder for companies with multi-state operations or employees who may live in a state where non-compete restrictions are not favored or otherwise enforceable.

Turning to the particular case (Cardoni v Prosperity Bank), Prosperity Bank is a Texas-based bank. It had previously purchased a rival bank that was located in Oklahoma. After this purchase, it sought to enforce its three-year noncompete restrictions against four former bankers. These bankers were previously employed in the Oklahoma branch that Prosperity had acquired and they left to work for another bank also in Oklahoma.

Enforcement of Non-Compete Restrictions – What State Law Controls?

In support of its position, Prosperity cited to the employment agreements, which called for the application of Texas law. Non-compete restrictions are generally enforceable under Texas law. The former employees, however, argued that Oklahoma law – which does not generally enforce noncompete restrictions – should be applied to the lawsuit.

The Court agreed that Oklahoma had more of a significant relationship with the case and the parties than Texas. Specifically, the lawsuit affected employees in Oklahoma and both Prosperity and its competitor, the new employer, operated within Oklahoma.

But the Court noted that the contracts’ choice-of-law provision could still govern the parties’ relationship unless applying Texas law would contravene a fundamental Oklahoma policy. And this is where Prosperity’s lawsuit fell off the tracks.

The court offered this colorful characterization about the differences between Texas and Oklahoma when it came to enforcing non-compete restrictions:

In addition to their well-known disagreements over boundaries and football, Texas and Oklahoma do not see eye to eye on a less prominent issue: covenants not to compete. Texas generally allows them so long as they are limited both geographically and temporally … Oklahoma generally does not … These different policy choices—Texas’s view which prioritizes parties’ freedom to contract and Oklahoma’s which emphasizes the right to earn a living and competition—came to a head …

In other words, unlike Texas, Oklahoma has a statutory provision that voids most restrictions on practicing a lawful profession, trade or business. This significant legal distinction combined with the close connection Oklahoma had with the case resulted in the appeals court finding that the choice-of-law provision was not likely to be enforceable concerning the noncompetition provision.

Take Aways – Assessing Non-compete Restrictions Critical in Multi-State Operations and when Purchasing a Business.

While this case involved Oklahoma and Texas, the issues are equally critical for Michigan businesses that operate in other states or employ individuals who live outside of Michigan. See Enforcing Noncompete Agreements – What Law Will Apply?

The Prosperity case also illustrates why when buying a business it is critical for your due diligence to extend to employment matters that include determining non-compete restrictions.

Consider for example the court records noted that Prosperity “considered the retention of these employees critical to the merger’s successful completion.” Accordingly, before completing the merger, Prosperity offered employment contracts to the individuals involved in the litigation. Hopefully, Prosperity considered whether it would be able to retain these key employees before pulling the trigger on the acquisition. If not, it is likely the value that drove Prosperity to complete the acquisition is not going to be there – at least concerning these key bankers.

Where non-compete issues extend into multiple states, we recommend analyzing each the applicable states’ non-compete laws to assess potential enforceability issues. Or as we tell our clients, it is important to know the “good, the bad, and the ugly” about your company’s non-compete agreements and whether they will be enforceable before you need to enforce them.

Contact attorney Jason Shinn for questions about this post or about non-compete law.

Military Reemployment RightsEmployers won a victory at the expense of a surgeon deployed to Iraq for military service in a lawsuit concerning re-employment rights under the Uniformed Services Employment and Reemployment Rights Act (USERRA). Slusher v. Shelbyville Hosp. Corp., (10/26/15).

In January 2011, Richard Slusher, an orthopedic surgeon, signed a one-year contract with Shelbyville Hospital Corporation, d/b/a Heritage Medical Center. Under the contract, which began on February 28, 2011, Slusher was to be employed as Heritage’s orthopedic surgeon. The agreement did not provide for renewal or extension.

Approximately four months into the contract, Slusher learned he would be deployed to Iraq on active military duty. This deployment was to last for four months starting in June 2011. During Slusher’s deployment to Iraq, Heritage informed him that his employment with Heritage would end on October 26, 2011, because it had hired another physician as his replacement.

The USERRA Lawsuit

Slusher filed his claim for discrimination under the USERRA for violations of his reemployment rights under the Act, and for breach of contract. His claim, however, was not successful at the district court level or later at the Court of Appeals.

Specifically, the U.S. Court of Appeals panel for the Sixth Circuit (the federal circuit covering Michigan and surrounding states) agreed with the district court’s decision to dismiss the claim in favor of Heritage. The Court of Appeals panel ruled that Slusher had no expectation of employment for a significant period that could trigger his re-employment protection under USERRA when he returned from deployment.

In this regard, under 38 U.S.C. §4312(a), “any person whose absence from a position of employment is necessitated by reason of service in the uniformed services shall be entitled to the reemployment rights and benefits and other employment benefits” of the Act, so long as he gave notice to his employer in advance of his deployment, was absent for five years or less, and seeks reemployment. Id. But there is no statutory right to reemployment if “the employment from which the person leaves to serve in the uniformed services is for a brief, nonrecurrent period and there is no reasonable expectation that such employment will continue indefinitely or for a significant period.” 38 U.S.C. §4312(d)(1)(C).

No USERRA Violation

Applying this statute, the Court readily determined Slusher’s employment was not indefinite.

That Slusher’s contract was for one year and did not provide for renewal or extension plainly means that his employment was for a ‘nonrecurrent period’ and that he could not have had a ‘reasonable expectation’ that his employment would ‘continue indefinitely’ … Practically speaking, he had a temporary job ending … Slusher could not have reasonably expected his employment with Heritage to continue for a significant period.

As to the question of whether the employment from which Slusher left to serve in the uniformed services was for a “brief” period, the Court noted that the Act does not provide a definition of “brief.” Even so, the district court concluded that a one-year employment term was brief.

The Court of Appeals, however, was not ready to endorse this bright line rule of one year. Instead, it agreed that under the facts and circumstances one year was “brief,” but it expressly declined to decide whether a one-year employment term is necessarily brief in all cases.

Personally, I think the dissenting judge, Helene White, offered a better-reasoned analysis, which was supported by the statute and applicable case law. Her entire opinion is worth reading, but in sum, she noted:

In concluding that Slusher had no reasonable expectation of employment for a significant period, the majority explains, without citation to authority, that ‘a significant period is one that would provide an employee with some semblance of security or offer the ability to engage in long-term planning.’ Even assuming this definition of ‘significant period’ is correct, if Slusher had a reasonable expectation of serving out the remainder of his contract, that would undoubtedly provide him with a semblance of security and offer him the ability to engage in long-term planning … More importantly, no matter the salary, knowing where one’s next several months of income will be coming from after returning home from serving one’s country would certainly provide at least a semblance of security to a uniformed service member.

In light of the sacrifices military personnel and their families make for you and me and the rest of the country, I agree with Judge White – in a close factual or legal call, the tie should go to the soldier, not the corporate employer.

For more information about complying with military re-employment rights under the Uniformed Services Employment and Reemployment Rights Act or other federal and Michigan employment laws, contact attorney Jason Shinn.

Trade secretsAliphcom, Inc. d/b/a Jawbone won an early legal battle in a lawsuit filed against five of its former employees and its rival Fitbit, Inc.

Specifically, in a preliminary injunction hearing held on 10/20/2015, the individual defendant were ordered by a federal judge to return any confidential information they took and to allow their computers and online accounts to be searched.

To be honest, lawsuits accusing individuals of misappropriating trade secrets and confidential information before joining a competitor is so commonplace that it is easy to become tone-deaf to such claims. This is true even when a litigant like Jawbone dresses up such claims as a “clandestine” efforts to “steal trade secrets”  and “systematically plundering Jawbone” in order to “decimate Jawbone.” See Jawbone v Fitbit complaint (PDF).

But what is often overlooked in trade secret misappropriation cases the sort of computer inspection ordered by the court. What this means is that the individual defendants are ordered to turn over their personal computers and access to their online accounts, which could be email, social media, or other online storage accounts so that those sources may be searched.

As to the search, you are essentially giving a stranger, usually a court appointed computer forensic expert or your adversary’s expert direct access to your personal computers. Such access may include every file that was ever saved, accessed, or otherwise opened with that computer, along with any email you sent, received, and even deleted.

Further, computer forensic inspections of personal computers and on-line accounts, as well as any other computer storage devices (USB drives, portable hard drives, etc.) is an expensive pain in the ass for attorneys. And it is an expensive pain whether you represent the party’s whose computer is to be searched or the party asking for the search. Here’s why:

  • First, there legal fees for filing emergency motions or protective orders to limit the scope of the computer forensic inspection. For example, in a trade secret misappropriation lawsuit filed in federal court, the plaintiff obtained an “ex parte” order (meaning the order was obtained without giving notice or opportunity for the defendant to respond) for complete and unfettered access to my client’s computers and emails with no protections or limitations whatsoever. We were able to set aside the order but only after filing an emergency motion for protective order and having a hearing before the judge as to why the order was problematic and inconsistent with applicable case law.
  • Second, there is the cost of the actual computer forensic expert subsequent inspection. In my experience, this could cost a few thousand dollars all the way up to tens of thousands of dollars depending upon the number of devices, email accounts, computers, and the amount of data involved in the litigation.
  • Third, there is the attorney time for negotiating and drafting the search and retrieval protocol under which the computer forensic inspection will take place. And once these issues are taken care of, there is the cost of actually processing and reviewing the results. Even a limited forensic inspection of a single computer often lead to multiple gigabytes of information to be processed and ultimately analyzed.

Take Aways – Don’t Misappropriate Trade Secrets

Personally, computer forensic inspections are one of my least favorite things about representing clients involved in trade secret disputes – regardless of what side I’m representing. So for the sake of making my life and the lives of attorneys everywhere a little easier, please consider the following:

  • When ending your employment, don’t take any information from your employer, especially trade secret, confidential business information, or customer contacts. Taking one or any combination of these categories of information will almost guarantee a lawsuit against you.
  • Don’t mix enterprise data with your personal computers, portable storage devices, email accounts, or any personal online storage accounts, even if you return any such data. Invariably there will be a “digital fingerprint” showing that at some point you saved/transferred company data to such personal items. More than likely, that transfer was for legitimate business reasons (e.g., you were working outside of the office, you wanted to have a backup in case your laptop died, etc.) But you will eventually be in a position of having to show that whatever was transferred is no longer available to you and most employers want more than, “trust me, I deleted that customer list.” That something more is almost always a forensic inspection.
  • If you absolutely must misappropriate your employer’s trade secrets or confidential business information, limit the collateral damage by restricting your ill-gotten digital gains to a single device or a single computer that is segregated from the rest of your personal digital universe. Along with this last point, be sure to set aside in the range of $20,000.00 for a retainer that you’ll likely need to pay your attorney to defend you in the eventual lawsuit your employer will file.

For more information about protecting trade secrets or investigating potential trade secret misappropriation, contact attorney Jason Shinn. Since 2001, he has collaborated with companies to implement trade secret and intellectual property protection plans, as well as pursuing or defending against lawsuits involving trade secret misappropriation issues. Such matters routinely include responsibility for managing computer inspections, as well as interfacing with law enforcement agencies investigating the theft of trade secrets.