Learning from this Company’s Mistake: Don’t Mishandle Employment Agreements

Noncompete mistakeAn interview with a successful CEO offers business owners a chance to learn from a costly mistake involving employment agreements. This mistake could have doomed her company before it became a billion-dollar business.

Specifically, Therese Tucker is the CEO of BlackLine, which provides automated finance and accounting software. She also founded BlackLine and brought it public. It was recently valued in excess of $1.5 billion. So Ms. Tucker knows a thing or two (times multiples of 10) for what it takes to run a successful company. But equally important is what can be learned from the mistakes Ms. Tucker’s business made in its early start-up days.

In this regard, Ms. Tucker recently gave an interview to Russ Banham, a contributing writer to Chief Executive. Excerpts of the interview appear in Mr. Banam’s article, Biggest Mistake: No Employee Non-Compete Clause, Says BlackLine CEO Therese Tucker. Ms. Tucker explained how a mistake gave rise to a competitor:

I learned a really valuable lesson about the critical importance of legally sound contracts with employees, one that I will never forget … In California, you’re not allowed to ask an employee to sign a non-compete contract, which are banned. The mistake we made was not having specific clauses in our employment contracts regarding confidentiality and reusability. Regrettably, an employee in our sales group had access to our source code in her laptop. She outsourced the code to India, created a competing product, and sold it.

Fortunately for Ms. Tucker and her business, the mistake was not fatal to BlackLine. But luckily for BlackLine, Ms. Tucker learned from this issue and re-focused on having employment contracts suitable for a national company. More specifically, BlackLine implemented agreements tailored to be enforceable with employees living in multiple locations across the U.S.

The Take-Away – Enforcing Employment Agreements Depend upon State Law.

For companies with national or international operations, having a “one-size-fits-all” employment or non-compete agreement runs the same risks BlackLine faced; it may not be enforceable where and when your company needs it most. For these reasons, in running a business it is essential to evaluate where your employees live and your business needs in relation to non-compete and similar post-employment provisions.

If you are responsible for your company, here are some questions to consider:

  1. Should your company use non-compete or non-solicitation provisions to protect its business?
  2. If so, what employees should be subject to post-employment restrictions?
  3. Can these restrictions comply with the law of one state or are individuals employed as residents of other states? If so, what does the law say about enforcing employment agreements in the employee’s home-state?

If you are an individual, similar attention must be given to what the employment agreements you are asked to sign:

  1. Specifically, what law applies to your employment agreement?
  2. If that law differs from where you live, is it more or less favorable to you?
  3. If it is less favorable, are you sufficiently compensated for giving up potential legal remedies or protections you would otherwise be entitled to?

For more information about this article or employment or non-compete agreements, contact employment attorney Jason Shinn. Since 2001, Mr. Shinn has focused on Michigan non-compete law, as well as non-compete disputes involving other state’s non-compete laws,  including California, North Carolina, Florida, Washington, Ohio, Delaware, New York, and Pennsylvania.

Untangling Confusion about FLSA Exemptions for Highly Compensated Employees

Confusion under FLSA and overtime payThe Sixth Circuit Court of Appeals recently issued an interesting Fair Labor Standards Act decision. The case focused on who is and is not exempt from overtime requirements. And the result – as the court noted – is likely to be counter-intuitive to many employers.

Case Background – FLSA and Highly Compensated Employees

The case, Hughes v Gulf  Interstate Field Services, involved welding inspectors for Gulf Interstate Field Services. In 2014, they and others similarly situated plaintiffs sued under the Fair Labor Standards Act (FLSA) and the comparable Ohio wage statute. The claim asserted the plaintiffs were entitled to overtime pay for weeks in which they worked more than forty hours.

Gulf Interstate argued that the plaintiffs were exempt from the overtime requirements because they qualified as “highly compensated employees” under the FLSA regulations. The lead plaintiffs made approximately $83,000 and $109,000.00. The district court agreed with Gulf Interstate and granted summary judgment in favor of the employer.

On appeal, however, the Court reversed the federal district court but noted the unusual result:

It may seem strange, on its face, that employees who earned an annualized rate of more than $100,000 did not necessarily qualify as “highly compensated employees.” But regardless of whether good reasons exist, we must follow the legal meaning of the terms rather than our intuitive sense of the meaning of the words. Because [the regulations] make clear that it matters whether Hughes and McDonald were guaranteed a qualifying weekly salary and because a reasonable trier of fact could find that there was no guarantee we REVERSE the district court’s grant of summary judgment and REMAND for further proceedings.

Making Sense of the Result – Highly Compensated & Overtime Pay

For qualifying employees, the FLSA prohibits employment “for a workweek longer than forty hours unless such employee receives compensation for his employment in excess of the hours above specified at a rate not less than one and one-half times the regular rate at which he is employed.” 29 U.S.C. § 207(a)(1).

But not all employees are covered. For example, under 29 C.F.R. § 541.601, an employee qualifies as an exempt “[h]ighly compensated employee[]” if three tests are met: “(1) a duties test; (2) a salary-level test; and (3) a salary-basis test.”

In the Gulf Interstate case, only the ‘salary basis’ test” was in dispute. And in resolving that dispute, the Court determined that questions remained whether “their pay was calculated more frequently than weekly[,]” and “whether what they received weekly was in fact guaranteed.”

Closing Thoughts

The FLSA and overtime is an area of employment law that frequently confuses employers. And as this case illustrates, determining FLSA overtime requirements is not straightforward or immediately apparent.

For more information about complying with federal or Michigan employment law, or to understand your rights under both, contact employment attorney Jason Shinn. He has represented employers and employees since 2001 in employment disputes, workplace investigations, and negotiating severance packages.

Geography Increasingly Complicates Resolution of Non-compete Disputes

On January 8, 2018, the U.S. Supreme Court declined to consider an appeal from a former Stryker Corp. sales representative. The appeal arose from a case involving a non-compete agreement between a Louisiana employee and a Michigan employer.

The non-compete agreement contained a forum-selection clause stating that any dispute arising out of the agreement must be brought in a Michigan court—state or federal. The former Stryker employee, Christopher Ridgeway, argued the Sixth Circuit was wrong to find Michigan law — and not Louisiana law — applied. Michigan law favors non-compete agreements; Louisiana, where the sales representative lived and worked, severely restricts them.

After applying Michigan law over Louisiana law, a jury found Ridgeway had violated the non-compete agreement and awarded Stryker approximately $745,000 in damages. Ridgeway appealed the decision to the Sixth Circuit Court of Appeals, which agreed with the trial court (Ridgeway v. Stryker Corporation).

Whose State has a materially greater interest in enforcing the Noncompete Agreement

In affirming this decision, the Court reasoned the sales representative had consented to jurisdiction in Michigan through the agreement’s forum-selection clause. The Court also concluded the Federal District Court properly enforced the agreement’s Michigan choice-of-law provision.

The Court rejected Ridgeway’s argument that Louisiana’s interest in protecting its employees from unfair non-compete clauses was materially greater than Michigan’s interest in protecting its businesses from unfair competition:

On balance, Louisiana’s interest in protecting its employee from unfair non-compete clauses is not materially greater than Michigan’s interest in protecting its businesses from unfair competition.

* * *

Absent such evidence that Louisiana’s interest was not just greater but materially greater, there is no reason to disturb the parties’ choice of Michigan law.

As the above case illustrates, non-compete disputes are complicated by geography. This is because non-compete law is state dependent. And some states favor non-compete restrictions, while others do not, with significant variations between these two extremes.

To eliminate – or at least reduce – the uncertainty about what law will control, a best practice is to specifically identify it. Also, for employers operating in multiple states, know what is the most favorable law for enforcing non-compete restrictions.

For employees, it is important to understand whether your employment agreement has a forum selection clause (it probably does). This sort of provision will identify what law and where a dispute must be resolved. As the above case illustrates, even if you work exclusively in your home state and have no real connection with an outside state, you still may be required to litigate a dispute across the country.

For more information about non-compete law, and defending or pursuing non-compete litigation, contact attorney Jason Shinn. He routinely works with individuals and companies in non-compete disputes.

Before Accepting a new Position, are you Required to Sign a Non-compete Agreement?

Closely examine noncompete restrictionsA former employee recently sued MedMar Inc. and its related companies. The suit, Greenswag v MedMar Inc., pending in the Cook County Circuit Court, alleges the defendants made misrepresentations about the employment opportunity to induce him to sign a non-compete restriction.

I haven’t reviewed the complaint, but these sorts of claims are often unsuccessful. This is because employment agreements will contain (and if yours does not, you need to update it) an “integration” or “merger” clause. These clauses are intended to nullify all prior agreements and representations not included in the final agreement. There may be exceptions or arguments to avoid an integration/merger clause, but they are just that – exceptions to the general rule.

Consider Non-compete Issues Before Joining a New Employer 

However, this suit is more important as a reminder for individuals who may be considering a change in employment. In this regard, consider these points:

  1. It is not uncommon for a new position to be oversold – especially by recruiters financially motivated to fill positions. But when this sales pitch is made, remember none of the promises, representations, etc. will likely mean anything if they are not included in the final employment agreement.
  2. Ask early in the recruiting process if a non-compete or other post-employment restriction is required. If so, get a copy as soon as possible. You will want to scrutinize the non-compete restrictions to fully understand your obligations. Often, we review post-employment restrictions that are too overly broad to the point it is a “deal-breaker” for our clients. Sometimes these issues can be negotiated. Other times, it comes down to deciding if the risks of being sidelined by a non-compete restriction are outweighed by the benefits of the job.
  3. Evaluate the new employer’s litigation history when it comes to non-compete enforcement. For our non-compete clients, we conduct a comprehensive litigation review of the prospective employer. This often provides insight into a company’s non-compete enforcment history and litigation tactics. There are some companies that will aggressively enforce a non-compete restrictions across the board. Other companies will look for compromises. Either way, it is just good to know what to expect.

For more information about non-compete restrictions or to have your non-compete agreement reviewed, contact attorney Jason Shinn. Since 2001, Jason has represented companies and individuals in all aspects of non-compete law, e.g., drafting, negotiating and litigating non-compete disputes, and drafting or responding to cease and desist demands.

Michigan’s Minimum Wage Increases January 1, 2018

Michigan is one of 18 states where employees will receive an increase in paychecks beginning January 1. Specifically, Michigan’s minimum wage will increase $0.35, raising the minimum wage to $9.25. This is the last increase under the Workforce Opportunity Wage Act, which passed back in May 2014.

According to the Economic Policy Institute, the wage increase will directly benefit 257,000 employees. It will also result in a total increase in annual wages of $219,846,000 for Michigan employees. 

In contrast, the federal minimum wage, which is $7.25, has not increased since 2009. In inflation-adjusted terms, the federal minimum wage was highest in 1968, when it was equal to $11.18 in today’s dollars. Christopher Ingraham of the Washington Post reports puts the federal minimum wage in perspective.

Among the world’s wealthy nations, the United States is an outlier on this issue: Americans have the lowest national minimum wage, relative to the median wage, of any of the wealthy nations represented in the Organization for Economic Cooperation and Development.

It is also worth noting that America’s low minimum wage relative to other nations is further exacerbated when you consider workers in other countries often receive many benefits their US counterparts do not. Such benefits include universal health care, paid maternity leave, retirement pensions, and generous vacation leave.

For more information about Michigan employment and wage law, contact attorney Jason Shinn. Also, here is the link to Michigan’s Wage and Hour Division.

Weak Links in Trade Secret and Computer Fraud Litigation

Strengtening trade secret protectionsA company’s Federal Trade Secret Claim and Computer Fraud and Abuse Act claim were recently dismissed by a Michigan federal district judge. The dismissal was avoidable. But it also offers several key lessons for employers and employees when it comes to protecting and using confidential information.

The Trade Secret and Computer Fraud Litigation

The case, Ukranian Future Credit Union v Seikaly,  is somewhat convoluted. But the Cliff-note version is that the Ukrainian Future Credit Union sued its former employee, Lidia Shibanov, in Michigan State court. That suit alleged Shibanov improperly approved loan transactions.

While Shibanov was employed by the Credit Union, she emailed to her personal email address confidential Credit Union documents. In the state court litigation, the Credit Union argued Shibanov and her lawyers improperly obtained and used the confidential information. But the Michigan state court declined to protect that information as requested by the Credit Union.

The Credit Union then sued Shibanov and her attorneys in federal court. The federal suit asserted violations of the Computer Fraud Abuse Act (CFAA) and later tried to amend to add a claim under the federal Defend Trade Secret Act (DTSA).

Against this backdrop, the Michigan Federal Court dismissed the Credit Union’s suit and denied its request to amend to add a DTSA claim. The Court reasoned:

  • The Credit Union did not allege its former employee emailed confidential information to herself intending to defraud the Credit Union. This intent was required to state Computer Fraud and Abuse Act claim.
  • The Credit Union failed to assert the information emailed by the employee to herself qualified as “trade secret” as required under the Defend Trade Secrets Act.

On this last point, the Court rejected the Credit Union’s claim that two policies (Employee Fraud Policy and “ECommerce Policies and Procedures) showed it took reasonable steps to protect the secrecy of the alleged trade secret. These policies, as the Court noted, were not directed toward protecting confidentiality, but merely set forth general parameters for the operation of the Credit Union’s e-commerce and computer systems and general prohibitions against engaging in fraudulent acts.

Why this Matters to Employees and Employers

Again, this was a procedurally complicated case. But a few points are worth emphasizing for employers and employees:

  • First, no matter the reason, employees face litigation risks if they email or download information from an employer. We frequently encounter this issue in litigation between companies and their former employers. Just because there is a “smoking gun” email or document that favors your claims or defenses does not mean you have a right to take it.
  • Second, employers must make sure business reality matches up with litigation reality. In other words, if your company has not taken steps to meet the threshold requirements for a “trade secret,” i.e., maintaining the secrecy of information that is economically valuable, then a claim for trade secret misappropriation will not be successful.
  • Third, employers must evaluate how confidential information is protected. And careful scrutiny must be applied where such information consists of “trade secrets;” Simply having general policies about the use of technology or prohibited conduct means your company may forfeit down the road a trade secret claim.

For more information about federal or Michigan trade secret misappropriation and claims relating to these issues, contact attorney Jason Shinn. On behalf of his clients, Mr. Shinn has pursued and defended against these claims in Michigan and federal courts since 2001.

When it Comes to Enforcing a Noncompete Agreement is Timing Everything?

Enforcing noncompete agreement A recent noncompete case from Minnesota offers a cautionary tale for employers and cause for celebration for employees.

The case, Safety Center, Inc. v. Stier, (11/6/17), involved an employer that ran a treatment center for special-needs sex offenders. The employer sought to enforce its noncompete agreement against a former program director (Stier).

The noncompete agreement would have limited Stier’s ability to “provide services to [Safety Center’s] clients in any competitive capacity for … one year commencing from the termination of employment,” along with other post-employment restrictions.

Stier applied to the Safety Center on May 19, 2003. She also interviewed that day for a position. The next day, Stier was mailed a letter “to confirm [Stier’s] acceptance of the position [the Safety Center] offered [her].” The letter made no mention of a noncompete agreement. On Steir’s first day of employment in May 2003, she was presented for the first time a noncompete agreement, which she signed.

Fast forward to 2014 and Steir incorporated what would become a competing business. She later resigned from the Safety Center in 2015 to run her competing business.

The Noncompete Lawsuit

The Safety Center sued Steir and her business for various claims arising out of the breaching the noncompete agreement. Enforcement of the noncompete agreement, however, came down to when Stier signed it and whether continued employment provided sufficient consideration to enforce it.

The Court concluded the noncompete agreement was not enforceable. The Court reasoned that because Stier was not presented with or given notice of the noncompete agreement at the time the employment agreement was established, the noncompete agreement was not ancillary to the employment agreement. Further, the employer did not provide any independent “consideration” to support enforcement of the noncompete agreement.

Pay Attention to When Noncompetes are Signed

In our experience in representing both businesses and individuals in noncompete disputes, the circumstances presented in the above case happen all too often. For employers looking to avoid the circumstances, it is critical to closely examine your company’s process for making job offers and obtaining noncompete restrictions.

While this case addresses Minnesota law, it is also a cautionary tale for Michigan businesses as to whether additional consideration (beyond continued employment) is required to enforce a noncompete agreement. Or put another way, did the employee receive anything of value in exchange for signing the noncompete agreement? If not, then the agreement may not be enforceable. Michigan’s highest court has yet to speak on this issue, leaving the issue open for debate.

For more information about Michigan noncompete law, contact attorney Jason Shinn. Since 2001, Mr. Shinn routinely represents businesses and individuals in drafting, negotiating, and litigating noncompete disputes.

Last Day On the Job and Employee Decides to Take Down the President

Not every company has to worry that an employee’s last day on the job will be the day the employee takes down the President (more on this below). But all companies should have policies and procedures in place to prevent a departing employee from doing harm to the company.

So this happened today, for about 11 minutes Donald Trump ceased to exist … at least on Twitter (and coincidentally, a lot of celebratory noise was coming from Chief of Staff John Kelly’s office for those same 11 minutes). According to reports, Mr. Trump’s account was intentionally deactivated by someone on their last day on the job.

Mr. Trump’s Twitter account was replaced with Twitter’s standard error message, which read “Sorry, that page doesn’t exist!” Twitter’s official account later reported that Mr. Trump’s account had been temporarily deactivated due to a “human error.” This “error” was later attributed to a rogue Twitter employee who was working his or her last day.

President Trump TwitterHandling departing employees.

Terminating the employment relationship often happens because of a resignation by an employee or discharge by the employer. And how an employer handles different terminations may vary, depending on the reason employees are departing, the employees’ length of service or performance record, and the employee’s role in the company.

But regardless of why the employment relationship ended, all employers should have a plan in place for how the employment will wind down.

The end of the employment relationship is often where the trouble starts for employers.

An important decision for employers arises when an employee gives some notice of resignation, perhaps the standard two-weeks notice. Should your company continue the employment for the entire notice or something less? The example provided by the Twitter employee who took down Mr. Trump (and everyone thought it would be Robert Mueller) shows why you may not want a departing employee to remain actively employed after giving his or her notice of resignation.

Similarly, I’m representing a company in a trade secret misappropriation case. The lawsuit involves a former high-ranking manager initiated discussions with his manager about leaving the company. This discussion took place in early September 2016 with a resignation effective on September 28, 2016. In the interim, the employee misappropriated over 5 gigabytes of data from the company’s network. This misappropriation happened (or as the defendant explained it, the employer simply “misunderstood my intention”) because the individual continued to be employed after giving notice of his resignation.

Recommendations for handling employees leaving the company. 

Here are a few additional items your company may want to consider for departing employees:

  • Exit interviews. Many employers ask their departing employees to participate in an exit interview, either in person or by completing a written questionnaire. That’s fine. But it is also a good idea to conduct a pre-exit investigation to make sure there has been no suspicious downloads or transfers of company information.
  • Reminder about post-employment restrictions. If the departing employee signed a noncompete agreement, non-disclosure restriction, or other post-employment restriction, the employee should be reminded of those obligations.
  • Employer property. You should have a policy for reminding employees to return all property belonging to employers before their last day.

Contact employment attorney Jason Shinn for more information about this post, employee terminations, or HR best practices. Since 2001, Mr. Shinn has represented employers and employees in the areas of employment laws, wrongful terminations, and noncompete and trade secret claims.

Changes to the Michigan Business Court

Amendments to the Michigan Business Court SRevising Michigan Business Court Disputestatute go into effect today, October 11, 2017. These amendments primarily focus on clarifying the cases that are to be assigned to business courts.

Also, the statute was amended to clarify a Business Court’s jurisdiction to hear business disputes involving equitable or declaratory relief. The amendment now clarifies that a Business Court has jurisdiction over business and commercial disputes where equitable or declaratory relief is sought or in which the matter otherwise meets circuit court jurisdictional requirements, i.e., the amount in controversy exceeds $25,000.

Here is a link the amendments to the Business Court statute.

An action meeting the definition of a “business or commercial dispute” that is filed in a court with a business docket must be filed with the Business Court.

It is important for employers and individuals to understand that Business Court jurisdiction includes and excludes two frequent areas of litigation.

First, Business Court’s will have jurisdiction over disputes involving noncompete agreements.

Second, excluded from the jurisdiction of the Business Court are claims involving:

  1. Any employment discrimination;
  2. Any claims involving civil rights under Michigan’s Elliott-Larsen Civil Rights Act and Michigan’s Persons With Disabilities Civil Rights Act;
  3. Wrongful Discharge (except for those actions involving corporate officers or directors; and
  4. Worker’s Compensation Claims.

In 2012, the Michigan Legislature enacted the Business Court statute. The purpose of creating a specialized business Court docket was to provide a case management structure that facilitates more timely, effective, and predictable resolution of complex business cases. Our law firm routinely litigates in the Michigan business courts throughout the state. With this experience, the business court docket has been effective in meeting the goals of achieving efficient and predictable outcomes. This is especially true when it comes to noncompete litigation because judges may – but are not required to – revise a noncompete agreement for the circumstances presented by a particular case.

For these reasons, when selecting an attorney for a matter that involves a business or noncompete dispute, it is important to understand that attorney’s experience in the applicable Business Court.

For more information about Michigan Business Court litigation, including noncompete disputes, contact Jason Shinn. He has represented companies and individuals in matters involving business disputes and noncompete litigation since 2001.

Running out the Clock in Non-compete Disputes: A Frustrating Reality for Employees

Noncompete Litigation Strategy

One advantage employers often have when it comes to non-compete disputes is time; Employers may win the war without ever doing battle simply by running out the clock. This point was a central issue in a case pending before the Michigan Court of Appeals that our law firm recently argued.

Specifically, on October 4, 2017, I argued a case before the Michigan Court of Appeals about a noncompete dispute. The underlying lawsuit (filed in Circuit Court in Detroit) was somewhat unusual in that the plaintiff had sued to challenge the enforceability of the non-compete. The challenge was both to whether it was enforceable and as applied to the particular position with the new employer.

The non-compete agreement was between the individual and one company. A subsidiary company that was not a party to the contract sought to enforce it the restrictions. This subsidiary, however, was not a party or identified – directly or indirectly – in the agreement.

The case was aggressively positioned to be decided on motions. And the trial judge had expressed agreement that the new position likely did not violate the non-compete agreement; it involved a private-sector employer and a university. While this case was pending, the prospective employer initially agreed to keep the position open. However, business needs eventually intervened and the employment offer was withdrawn.

In this regard, the defendant (the prior employer/subsidiary) argued that because the job offer that sparked the suit was rescinded the case was now moot — or close to being moot. So in essence, the employer argued that it didn’t matter whether the non-compete was enforceable or, if so, whether it would have been violated by the new position because the job offer was withdrawn. Unfortunately, the trial judge agreed. And since the enforceability of the noncompete formed the foundation of the remaining claims, the judge also dismissed those claims.

The Court of Appeals

On appeal, we made several arguments for reversal and remand. One argument was that because of other provisions found in non-compete agreement – namely an invention/intellectual property assignment – the rights, or lack thereof, of the parties continued beyond the expiration of the non-compete agreement. We also argued there was no factual or legal basis for the subsidiary – a non-party to the agreement – to threaten legal action against the prospective employer for hiring my client. So this interference was not permissible under Michigan law.

Normally, one can get a feel for the outcome based on the questions and statements from the panel. But not this time; the panel gave no indication on which way their decision was leaning and only a few questions to both sides were asked.

Time is on the Employer’s Side 

Regardless of the outcome, this appeal illustrates the significant advantage employers have over individuals with non-compete enforcement. Often sending correspondence (commonly called a cease and desist letter) to a prospective employer advising them the person about to be hired is under a non-compete restriction is enough to sabotage the employment offer. Or, an employer can just run out the clock until the offer is withdrawn.

On this point, if I could wave my magic legislative wand, I would add a bad-faith provision to Michigan’s non-compete statute. Some protections are needed to guard against frivolous or overreaching threats of litigation by employers.

As a side note, Judge Henry Saad was one judge on my panel for this appeal. This would be his last day hearing appeals before retiring at the end of next month. Judge Saad has been a Court of Appeals judge since 1994. He was also my ethics professor in law school. As a judge, one thing you could count on from Judge Saad was preparation. He was always prepared with cases he decided. That preparation will be missed.

For more information about Michigan non-compete law, contact attorney Jason Shinn. Mr. Shinn routinely represents parties involved in non-compete matters. This experience includes drafting, negotiating, and representing parties trying to enforce non-compete restrictions or accused of breaching such agreements.