ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Monday, April 9, 2018

New York court rules sexual harassment by itself is not against an employer's interest such that it breaches a fiduciary duty

A recent case out of New York, Pozner v. Fox Broadcasting Company, 652096/2017, is related to the growing spotlight on sexual harassment cases. In the case, Pozner was terminated from his employment based on sexual harassment complaints and sued for breach of his employment contract. Fox brought counterclaims for breach of contract and fiduciary duty. 

I'm blogging this case because it has an interesting ruling on the fiduciary duty claim in the context of sexual harassment cases (which I assume we might see more of; or maybe not if maybe people just stop sexually harassing others /end wide-eyed optimism). The court found that the employee handbooks were contracts whose terms Pozner had agreed to abide to, but the court dismissed Fox's breach of fiduciary duty claim, because the fiduciary duty of loyalty is about the employee acting against the employer's interests, and no court in New York has found sexual harassment on its own can serve as a basis for a breach of that duty of loyalty. Fox did not allege enough to convince the court that Pozner's sexual harassment was against Fox's interest. The court noted that other cases where sexual harassment was part of a breach of loyalty involved other financial improprieties or allegations of fraud. 

April 9, 2018 in Commentary, Labor Contracts, Recent Cases, True Contracts | Permalink | Comments (0)

Monday, April 2, 2018

When you're an at-will employee, if you don't quit, then you accept your new employment terms

A recent case out of Indiana, AmeriGlobe v. Althoff, Court of Appeals Case No. 46A05-1708-PL-1845, reminds all of us that, if you're an at-will employee, your terms of employment can change at any time. If you keep working instead of quitting, that constitutes your acceptance of those new terms. 

In the case, Althoff was employed by AmeriGlobe. He had a written employment contract that specified that his employment was terminable at will. When AmeriGlobe changed the commission rates it was paying Althoff, Althoff recognized that he had two choices: He could quit or continue to work. When he continued to work, he accepted his new terms of employment. An assertion that his commission should have been higher therefore failed. 

April 2, 2018 in Labor Contracts, Recent Cases, True Contracts | Permalink | Comments (0)

Monday, March 19, 2018

A termination provision that goes both ways isn't illusory

A recent case out of the Southern District of Texas, Henderson v. A & D Interests, Inc., Civil Action No. 3:17-CV-096, deals with arguments regarding illusory promises and unconscionability. 

The plaintiffs were exotic dancers at the defendant's adult entertainment club. They sued and the defendant moved to compel arbitration pursuant to the agreement between the parties. The plaintiffs argued that the agreement was unenforceable because it was illusory. The relevant termination provision allowed either party to terminate "at any time with or without notice." Because the termination provision provided such rights to both parties, the court found it wasn't illusory and the agreement was enforceable. 

The plaintiffs also argued that the arbitration provision in the agreement was unconscionable because it required the parties to split the cost of the arbitration, which the plaintiffs argued would be prohibitive. However, the court found unpersuasive the plaintiffs' evidence on the estimate of the cost of the arbitration, and there was no evidence of the plaintiffs' ability to pay for an arbitration at the time they agreed to the provision, which to the court was the relevant moment. 

March 19, 2018 in Labor Contracts, Recent Cases, True Contracts | Permalink | Comments (0)

Wednesday, March 7, 2018

Contract law: cool enough to be included in an Oscar acceptance speech

That's going to be the blog's new slogan. 

Frances McDormand briefly made contract law trend on Twitter by using "inclusion rider" as her important two-word closing. At the time, there was only one result for "inclusion rider" when you Googled it. Now, if you Google it, you get a million results of articles explaining what an "inclusion rider" is. But here's the original video from Stacy Smith which was the one result before McDormand made it a cultural conversation.

I've had a series of blog posts over the past few years discussing the ways in which private contract law has been used to obscure systemic discrimination and abuse and harassment (a bunch of them are linked in this post). This is a nice suggestion for a way to use private contract law to try to correct some of the problems we've now exposed. 

March 7, 2018 in Celebrity Contracts, Commentary, Current Affairs, Film Clips, In the News, Labor Contracts, True Contracts | Permalink | Comments (0)

Saturday, March 3, 2018

The conclusion of the thrilling non-compete trilogy!

Completing the trilogy of non-compete cases this week, here's one out of the District of Maryland: Premier Rides, Inc. v. Stepanian, Civil Action No. MJG-17-3443. The industry this time is amusement park rides. The defendant is a structural engineer who worked for the plaintiff, mainly on roller coasters. He signed an employment agreement that contained a non-competition provision. When he decided that he wanted to resign his employment, he asked to be released from the non-competition provision. The plaintiff refused to release him. Subsequently, the defendant sought jobs that were non-competitive in nature, while apparently turning down a couple of employment offers from the plaintiff's competitors. He did, however, keep in touch with the plaintiff's customers, including interviewing for a job with at least one of them, before eventually accepting employment with DreamCraft. In his capacity at DreamCraft, the defendant worked on a project for one of the plaintiff's competitors and attended meetings with many of the plaintiff's customers. The plaintiff sued for breach of the non-compete. 

The defendant first tried to argue that the agreement did not have adequate consideration, but the court noted that Maryland law is clear that "continued employment of an at-will employee" is sufficient consideration for a non-compete, as long as there is no other evidence of bad faith. The defendant continued to work for the plaintiff for three years after signing the agreement, receiving raises and bonuses throughout that time. So the court found that there was adequate consideration to enforce the non-compete. 

The court also concluded that the non-compete had a valid corporate interest in that it prevented the defendant from exploiting the customer contacts he made while working for the plaintiff for the benefit of one of the plaintiff's competitors. The defendant, however, argued that the provision was not narrowly tailored to that interest. The time restriction of twelve months is routinely upheld in Maryland so the court focused on the fact that the non-compete was not limited in scope geographically. The court found that the plaintiff's market was global in scope, so the lack of geographic limitation was permissible. 

The court did, though, find that the non-compete prohibited more activity than necessary. The defendant was an engineer, not a salesman, so the plaintiff's concerns about the defendant's customer relationships seemed misplaced. The defendant necessarily had to meet the plaintiff's customers to perform his job, but the plaintiff admitted that this kind of personal relationship was not important for the customers, who made their purchasing decisions based on price and "impact"of the amusement park ride. The agreement in separate provisions prohibited the defendant from soliciting the plaintiff's customers on behalf of his new employer and from disclosing the plaintiff's confidential information. The plaintiff did not allege the defendant had violated these provisions; rather, the plaintiff focused on just the fact of the defendant's employment by DreamCraft being enough to violate the agreement. But since the plaintiff's non-compete interests had been solicitation of customers or disclosure of trade secrets, to the court it was telling that neither of those was at issue in this case. 

Accordingly, the court found the non-compete overbroad and unenforceable. It noted that it could rewrite the non-compete to be enforceable but it didn't know enough to edit it effectively at the moment. 

March 3, 2018 in Games, Labor Contracts, Recent Cases, True Contracts | Permalink | Comments (2)

Friday, March 2, 2018

More potential non-compete shenanigans

Yesterday I wrote about a non-compete clause, and here's another one out of New York: Cogint, Inc. v. Moraes, 159597/2017. Yesterday's concerned auction houses, this one concerns digital marketing and advertising, in which Moraes was prohibited from competing for one year after his employment. The non-compete here seems to be worded as broadly in scope as the one that yesterday's court found to be overbroad, but there is no discussion about janitorial capacity in this case. Rather, the court concluded that the non-compete here was necessary to protect the plaintiff's interest because Moraes was a key employee in possession of trade secrets. 

Not only was Moraes potentially in violation of the non-compete, but the court found that he potentially breached his employment agreement by terminating his employment before the term of the agreement concluded. The court found that the agreement did not provide him the right to terminate his employment at will. 

March 2, 2018 in Commentary, Labor Contracts, Recent Cases, True Contracts | Permalink | Comments (0)

Thursday, March 1, 2018

New York court rewrites auction house non-compete provision, applying Texas law

A recent case out of New York, Heritage Auctioneers & Galleries, Inc. v. Christie's, Inc., 651806/2014, deals with the world of luxury auctions. The plaintiff alleged, inter alia, that the defendant Rubinger breached the non-compete provision of his employment agreement when he resigned his position and went to work for Christie's Hong Kong office. The opinion is behind a paywall but the many points of contention between these companies has been documented in several places, including here, here, and here.

The employment agreement was governed by Texas law, so the court applied Texas law to determine that the non-compete provision was overly broad. The non-compete prohibited Rubinger from providing services for any business that participated, either directly or indirectly, in auctioning collectibles in North America in a manner competitive to the plaintiff's auction business. The problem was that the non-compete tried to prohibit Rubinger from providing any services for such business. As the court noted, Rubinger could have violated the agreement by working as a janitor at Sotheby's or in the mailroom at Christie's. The court therefore concluded that the non-compete was unreasonable. 

However, under Texas law, the court reformed the provision to be enforceable, rewriting the provision to prevent Rubinger from providing services to competitors identical to those he provided to the plaintiff. Because that was exactly what Rubinger was doing, he was in violation of this rewritten non-compete provision. 

The court found the time and geographic scope of the non-compete to be reasonable, and then found that the question of whether Rubinger's activities in Hong Kong violated it was a factual determination that could not be resolved. 

Rubinger's employment agreement also contained a non solicitation covenant. When Rubinger resigned from the plaintiff to move to Christie's, two of Rubinger's staff resigned on the same day to make the identical move. The court found the non solicitation covenant enforceable, but nevertheless dismissed the claim because the non solicitation covenant, by its terms, prohibited Rubinger from soliciting the plaintiff's employees after termination of his employment. Because Rubinger's solicitation of his staff took place prior to termination of his employment, it was not prohibited by the terms of the contract. 

There were many other claims in this complaint, including trade secret allegations and unjust enrichment. I focused on Rubinger's alleged breach of contract in this blog entry, but there were other aspects to the court's decision. 

March 1, 2018 in Current Affairs, In the News, Labor Contracts, Recent Cases, True Contracts, Web/Tech | Permalink | Comments (0)

Thursday, January 25, 2018

Adequate counsel and time to consider terms defeats claims of fraud and duress

A recent case out of the Northern District of Illinois, Washington v. Board of Education of the City of Chicago, No. 17 CV 2343 (behind paywall), tackles, among other things, fraud and duress in the context of enforcing a settlement agreement. Washington worked for the defendant. After a dispute arose between the parties, they entered into a settlement agreement. Washington now seeks to declare the settlement agreement unenforceable on a number of grounds. 

First, Washington alleged fraud on the part of the defendant, alleging a number of misrepresentations and intentional omissions in the agreement. But the defendant argued that Washington's reliance on the alleged statements and omissions wasn't reasonable and further that it had no duty to disclose any information to Washington, which the court agreed with. Washington had her own counsel; had three weeks to consider the agreement; and had seven days after signing within which she could revoke the agreement. Since she had adequate counsel and time to consider the terms, the court found that Washington could not allege that the settlement agreement was procured by fraud. 

Second, Washington alleged duress because she feared for the termination of her job and "a humiliating public hearing." The board argued that Washington had alternatives to signing the agreement, and in fact those alternatives would have entitled her to continue to receive her full salary while she pursued them, so there would have been no economic duress to those choices. Again, given her independent counsel and the amount of time she was given to consider her choices, the court found that Washington failed to allege duress. 

Washington made many other allegations, including illegality, mistake, and lack of consideration, all of which the court dismissed. 

 

January 25, 2018 in Labor Contracts, Recent Cases, True Contracts | Permalink | Comments (0)

Tuesday, January 23, 2018

Noncompete in the online-auction industry found unenforceable

A recent case out of Minnesota, Oberfoell v. Kyte, A17-0575, reminds all of us that noncompete agreements need to have a justification. Kyte worked for Oberfoell's online-auction business and signed a contract that contained a noncompete clause. He later left to start his own online-auction business and Oberfoell sued.

The lower court found the noncompete agreement to be unenforceable and this appellate court agreed. Oberfoell simply couldn't justify its necessity because he failed to assert a legitimate business interest protected by the noncompete clause. Oberfoell made general allegations that Kyte had personal relationships with many of Oberfoell's customers and thus possessed goodwill belonging to Oberfoell. But Oberfoell never identified any customers who he was worried about, nor did he ever introduce any evidence that Kyte had used any of Oberfoell's customer lists improperly. The court concluded that Kyte did not seem to be the "face" of the business nor was he the exclusive contact the customers had with the business. There was no evidence that any of Oberfoell's customers were concerned about Kyte leaving and no evidence that any of them followed Kyte to his new business. Therefore, Oberfoell failed to prove that the noncompete was protecting a legitimate business interest. 

Oberfoell also tried to assert that his customer lists and other materials were taken by Kyte and qualified as a violation of the noncompete. The court pointed out that the customer lists weren't secret and weren't treated as secrets by Oberfoell, and so couldn't qualify as trade secrets. The other materials suffered from the same lack of confidential protection. 

Finally, the noncompete also failed on the basis of reasonableness. It prohibited Kyte from competing in a radius of 150 miles for five years. The court found the 150-mile restriction to be "arbitrary," and Oberfoell produced no evidence justifying his choice of such a large radius. The five-year restriction was also unreasonable because the evidence showed Oberfoell could have replaced Kyte easily and quickly, so there was no reason to keep Kyte from competing for so long (in fact, Oberfoell apparently never hired anyone to replace Kyte, delegating his responsibilities to already-existing employees). There was no evidence that Kyte had received any extensive training that gave him an advantage in establishing his business, which took him a few months to get started. 

January 23, 2018 in E-commerce, Labor Contracts, Recent Cases, True Contracts, Web/Tech | Permalink | Comments (0)

Wednesday, December 6, 2017

Emails can be enforceable, even if a contemplated contract is never signed

A recent case out of the Southern District of New York, Nusbaum v. E-Lo Sportswear LLC, 17-cv-3646 (KBF) (behind paywall), granted summary judgment based on a chain of emails between an employer and employee. The emails were discussing a severance provision, and the last email in the chain read in relevant part, "I am agreeing to the below . . . . I will sign when I get back." The parties never executed any further document. 

The court nevertheless found an enforceable contract between them. Although it was true that the emails seemed to contemplate a final agreement, it was also true that both parties regarded the negotiations as concluded and the agreement reached at the time of the final email. The employee than spent nineteen months performing under this perceived agreement. It was clear from the emails that the parties had reached agreement on the material term, and the matter was not so complex that it needed to be reduced to a formal writing. Indeed, the employer admitted it usually did not reduce employment agreements to a formal writing. Therefore, the emails demonstrated that the parties had reached agreement and they were enforceable. 

December 6, 2017 in Labor Contracts, Recent Cases, True Contracts | Permalink | Comments (0)

Tuesday, November 28, 2017

Chip, Joanna, and Their HGTV Contract's Non-Compete Provision

I spent my Thanksgiving fretting about net neutrality, so I thought for my first blog entry back from the holiday I'd let us indulge in a bit of speculation about Chip and Joanna Gaines and their future plans. My love for HGTV is well-known to my Contracts students, as I am constantly mining it for hypos, so I read with interest this Vanity Fair piece stating that Chip and Joanna from "Fixer Upper" have pitched another show to other networks. The article notes that Chip and Joanna's contract with HGTV's parent company probably prohibits them from doing another home-improvement show for another network, so it speculates that they're pitching some other type of show, possibly a talk show. 

Would you watch Chip and Joanna do a non-home-improvement show? What kind of show? And do you think networks will successfully negotiate for broader non-competes to keep their stars off competing networks altogether in the future? 

November 28, 2017 in Celebrity Contracts, Current Affairs, In the News, Labor Contracts, Television, True Contracts | Permalink | Comments (0)

Thursday, November 9, 2017

The Weinstein Protection Machine Was Fueled by Contracts

I mean, our entire society is filled with contracts, so it's no surprise that Harvey Weinstein was surrounded by a web of contracts designed to protect himself from accusations. Not just the NDAs I've previously discussed, but also contracts with his lawyer and with the investigators they hired. Not to the mention the interaction between his contracts with the National Enquirer's publisher and the National Enquirer's information. Because Dylan Howard at the National Enquierer's publisher considered himself to have to act in Weinstein's best interests because of other business deals, it affected the way National Enquirer used the information gained by its reporters. 

You can read the whole story here. It's extremely lengthy and I have not done it justice at all in this tiny blog entry, but it's got a lot about contracts there: what they said, why they existed, what was being done under them, etc. Just...a lot of contracts. All of them to keep people silent. 

November 9, 2017 in Celebrity Contracts, Commentary, Current Affairs, In the News, Labor Contracts, True Contracts | Permalink | Comments (0)

Tuesday, October 31, 2017

Arbitration clause declared unconscionable because of its one-sidedness and limited discovery

A recent case out of California, Diaz v. Hutchinson Aerospace & Industry, Inc., B271563, has a nice, organized unconscionability analysis that leads to finding an arbitration clause unenforceable. 

The case concerns an employment agreement signed by Diaz with his employer Hutchinson. The employment contract was indisputably an adhesion contract, because it was distributed pre-printed to employees with no opportunity to negotiate. That does carry some degree of procedural unconscionability but the court characterized it as minimal, since it was not accompanied by any other elements of surprise or sharp dealing. Given the low degree of procedural unconscionability, the court required a high degree of substantive unconscionability. 

Unfortunately for Hutchinson, that high degree of substantive unconscionability was met. First, the arbitration provision was one-sided: only claims against the employer were required to go to arbitration, not claims against the employee. Second, the arbitration provision limited discovery in such a way as to make it impossible for the employees to vindicate their rights. 

Because this high degree of substantive unconscionability combined with the procedural unconscionability rendered the arbitration clause unenforceable, the court was justified in finding the entire agreement "permeated by an unlawful purpose" and refusing to enforce it. 

October 31, 2017 in Labor Contracts, Recent Cases, True Contracts | Permalink | Comments (0)

Monday, October 30, 2017

The Culpability of NDAs in Perpetuating Sexual Assault Culture

In the wake of the Weinstein revelations, everyone is talking about it: NDAs seem to be part of the problem. They were used consistently to silence people from speaking out. The NDA seemed to be how you could get away with it, as Weinstein's last-ditch offer to Rose McGowan to keep the lid on the story seems to illustrate. You can read criticisms of NDAs at Vox, Variety (and again), CNN (and again), the New York Daily News, Above the Law, and Forbes. And that was just my first page of Google results. I've been blogging about the danger of them for a while. It's not just the rich and powerful using them; college campuses are also using them in the sexual assault context. And they're not just being used to cover up sexual abuse; Amber Heard's NDA restricted her from apparently ever even mentioning domestic abuse at all. It's easy to see why NDAs are popular among the powerful (the President also loves them). They allow complete and total control of the narrative. An NDA can make it a legal breach for you to tell the truth; an NDA can indeed make it legally enforceable for you to lie, basically. And, in this way, the fuzzy line between truth and fiction becomes fuzzier and fuzzier. And people get victimized and feel alone and the culture of contractual silence makes them lonelier, depriving them of support systems. 

NDAs also exist for lots of valid and important reasons. But they are also being widely and abusively used and we as a society need to confront that. The question isn't why less powerful people sign these NDAs. Until we can fix power imbalances (and we're a long way from that), it's always going to happen. But we should really question the public policy justifications for NDAs in certain circumstances. These past couple of weeks have spotlighted lots of troubling systemic issues in our society. This is one of them. 

October 30, 2017 in Celebrity Contracts, Commentary, Current Affairs, In the News, Labor Contracts, Law Schools, True Contracts | Permalink | Comments (0)

Sunday, October 29, 2017

Whitefish Energy - Strongarming Puerto Rico into Contractual Acceptance and Compliance?

As reported on The Hill and in several other national and international news outlets, tiny Montana energy company Whitefish Energy – located in Interior Secretary Ryan Zinke’s very small hometown – stands to profit greatly from its contract with the Puerto Rico Electric Power Authority. That’s fine, of course. However, highly questionable issues about the contract have surfaced recently.   For example, Whitefish very famously prohibited various government bodies from “audit[ing] or review[ing] the cost and profit elements of the labor rates specified herein.” DNHKNDgW4AACWYJ

What were those? The Washington Post reports that under the contract, “the hourly rate was set at $330 for a site supervisor, and at $227.88 for a ‘journeyman lineman.’ The cost for subcontractors, which make up the bulk of Whitefish’s workforce, is $462 per hour for a supervisor and $319.04 for a lineman. Whitefish also charges nightly accommodation fees of $332 per worker and almost $80 per day for food.” Another news source notes that “[t]he lowest-paid workers, according to the contract, are making $140.26 an hour. By comparison, the minimum wage in Puerto Rico is $7.25 an hour … [T]he average salary for a journeyman electrical lineman is $39.03 per hour in the continental U.S. However, a journeyman lineman on Whitefish Energy's Puerto Rico project will earn $277.88 per hour.”

Little wonder why the company did not want anyone to “audit or review” its labor rates. If it wasn’t for the apparent “old boy”/geographical connections that seemed to have led to this contract to have been executed in the first place, hopefully no Puerto Rican official would have accepted this contract in the form in which it was drafted.

But it doesn’t end there. When the San Juan mayor called for the deal to be “voided” and investigated, Whitefish representatives tweeted to her, “We’ve got 44 linemen rebuilding power lines in your city & 40 more men just arrived. Do you want us to send them back or keep working?”

To me, this entire contract to violate several established notions of contract law such as, perhaps, undue influence or duress (in relation to contract formation but perhaps also, if possible, to continued contractual performance), bad faith, perhaps even unconscionability, which is a alive and well in many American jurisdictions.

This could work as an interesting and certainly relevant issue-spotter for our contracts students. It also gives one a bad taste in the mouth for very obvious reasons. It will be interesting to see how this new instance of potentially favoring contractual parties for personal reasons will pan out.

October 29, 2017 in Commentary, Contract Profs, Current Affairs, Famous Cases, Government Contracting, In the News, Labor Contracts, True Contracts | Permalink | Comments (0)

Wednesday, October 4, 2017

Fraud and Bad Faith No Excuse for Liability in Related Contract

The Eight Circuit Court of Appeals has held that conduct tending to show fraud and bad faith in relation to one contract is not an excuse for not performing in a closely related contract.

Dr. Halterman signed a recruitment agreement, an employment contract, and a promissory note in the amount of $50,000 as a “signing advance” – a loan - for his upcoming work as a doctor with the Johnson Regional Medical Center (“JRMC”). The recruitment agreement stipulated that the monthly payments on the signing advance would be forgiven so long as Dr. Halterman’s employment at JRMC “continued.” It did not. Five months into his employment, Dr. Halterman quit, citing to, i.a., JRMC’s fraudulent misrepresentations in negotiating his call-coverage obligations and bad faith in that respect. Dr. Halterman had also suffered a shoulder injury that both parties at one point agreed would result in him not being able to do all the work for JRMC that the parties had originally agreed upon.

JRMC claimed repayment of $37,894 still owed by Dr. Halterman when he resigned without, in the hospital’s opinion, a “legal defense.” Dr. Halterman sought to excuse himself from having to repay the remainder of the loan.

The appellate court agreed with JRMC that Dr. Halterman’s obligations to pay the remaining debt were not excused by his allegations (or eventual proof) of fraud or breach of the duty of good faith in the employment contract. An executory contract procured by fraud is not binding on the party against whom the fraud has been perpetrated. Here, Dr. Halterman sought not to perform under the employment contract, but the court found that the loan agreement was an entirely separate contract that thus still had to be performed.

This situation could have been avoided with more legally apt language, of course. Such language could have included express conditions stating that the loan was not to be repaid under a set of circumstances covering, for example, fraud. However, I find it troublesome that the legal effects of three contracts that clearly were meant to relate to and arguably depend on each other were separated decisively as the court did here. In fact, the parties disagreed on whether the three executed documents should be considered separately or as one single contract. The court analyzed the employment contract as separate from the recruitment agreement and note, which were treated as one. That may or may not make sense. Granted, it may make sense that sophisticated parties such as these could simply, if they had intended one single legally binding contract to arise, have worded their documents accordingly. On the other hand, it does not make much common sense to find that a “recruitment” contract is entirely different from an “employment” contract; the two are clearly connected. If fraud has arisen, is not the result of the above that the party acting fraudulently – the hospital, allegedly – can if not outright recover from a fraud, then at least avoid losses from it? Although I do agree with the outcome here, it seems like it to me that some troublesome aspects of this finding remain, namely that an employer apparently got away with broken employment promises fairly scot-free. That’s not fair.

The case is Johnson Regional Medical Center v. Dr. Robert Halterman, 867 F.3d 1013 (Eighth Cir. Ct. of App. 2017).

October 4, 2017 in Current Affairs, Labor Contracts, Miscellaneous, Recent Cases, True Contracts | Permalink | Comments (0)

Friday, September 15, 2017

California court finds broad arbitration clause unconscionable

A recent case out of California, Pimpo v. Fitness International, LLC, D071140 (behind paywall), finds an arbitration clause in a contract unenforceable due to unconscionability. 

In the case, Pimpo worked at one of Fitness International's fitness centers, where another employee sexually harassed her. Pimpo made several reports about the other employee's behavior and ultimately ended up suing over the sexual harassment. Fitness International responded by moving to compel arbitration based on a contract Pimpo electronically signed when she submitted her application for employment with Fitness International. However, the very terms of that agreement said it was only effective for 45 days, so it had expired by the time Pimpo filed suit. Fitness International tried to argue that Pimpo had signed a different arbitration agreement upon accepting employment but the trial court found no evidence of such agreement and the appellate court said that Fitness International's statement that it moved to compel arbitration based on this other agreement for which there was no evidence "border[ed] on a misrepresentation to this court."

So the appellate court already wasn't too happy with Fitness International as it began its unconscionability analysis, which it turned to in the interest of thoroughness. The arbitration clause that Pimpo signed when she applied for employment, the court concluded, was unenforceable due to unconscionability. Because the contract was a contract of adhesion presented to Pimpo on a take-it-of-leave-it basis, the court found that it was "by definition procedurally unconscionable." The court then went on to note, though, that Pimpo was in the usual position of someone applying for a job: She needed money to survive and did not have the resources to hire an attorney to look over the contracts for every application that she submitted. 

The court also found substantive unconscionability because the clause was drafted to be breathtakingly broad. It explicitly required Pimpo to give up her right to a jury trial on all claims, "even those unrelated to the application or her employment," against Fitness International and "its officers, directors, employees, agent, affiliates, entities, and successors," forever. The court noted that this language meant that if Pimpo got into a car accident with a Fitness International employee, it was covered by this arbitration clause. Fitness International tried to argue that the clause should be read more narrowly than that but the court noted that that was not how it was drafted (and Fitness International had drafted it). In addition, the discovery procedure that the arbitration clause allowed for placed Pimpo at such a disadvantage that the court agreed that was substantivaly unconscionable, too. 

Beware of drafting your clauses too broadly. Such can be the outcome. Even arbitration clauses can have their limits. 

September 15, 2017 in Commentary, Labor Contracts, Recent Cases, True Contracts | Permalink | Comments (0)

Friday, September 8, 2017

Conversations left open-ended don't rise to the level of an offer

In my head it's still the beginning of the school year, even though at my school we just finished our third week of classes already. This means that, because we only have a one-semester Contracts course, I'm just finishing up contract formation and moving on, and this case is kind of a nice little reminder review about the principles surrounding offers.

The case out of New Jersey, Kristine Deer, Inc. v. Booth, No. C-29-16 (behind paywall), involved a luxury active wear company, K-DEER, for which the defendant, Booth, worked. Booth had several conversations over the course of her employment with K-DEER's sole shareholder, Kristine Deer, about Booth receiving possible equity interest in the company. However, every one of those conversations was fairly vague. Deer seemed to always finish the conversations with some kind of demurral: that she had to "think about" it more, or that she wasn't "ready to have the conversation." Eventually, Booth resigned with an e-mail that read "If you are not willing to pursue an active dialog about ownership I am not interested in working at K-DEER." 

The parties are now involved in litigation, which included, among other things, Booth's counterclaim for breach of contract. She alleged that "Deer led [her] to believe she was a partner and had a right to equity in K-DEER," because she "did not explicitly deny her requests for equity" and called her a "partner" at times. However, the court quoted at length from Booth's deposition, where she admitted that Deer did not offer her any equity and that, in fact, her unwillingness to do so was why she resigned. Under these circumstances, it was impossible to find an offer from Deer to Booth. There was no expression of commitment on Deer's part. In fact, all of Deer's statements seemed to evince the opposite. So the court found no contract existed between the parties. 

As I am teaching my students to do now, the court then moved on, examining Booth's claim for quantum meruit. However, Booth never alleged that she wasn't adequately compensated, just that she would have left K-DEER earlier had she realized Deer wasn't going to give her equity. That did not justify quantum meruit. The court found that Booth had been compensated for all the work she had performed, so there was no unjust enrichment on K-DEER's part.

September 8, 2017 in Labor Contracts, Law Schools, Recent Cases, Teaching, True Contracts | Permalink | Comments (2)

Sunday, August 20, 2017

Beauty Salon's Customer Lists Weren't Confidential When They Were on Social Media (and more beauty salon rulings)

A recent case out of New York, Eva Scrivo Fifth Avenue, Inc. v. Rush, 656723/2016, stems from the defendant, Rush, being discovered working for a rival beauty salon, Marie Robinson, while still employed by the plaintiff, Scrivo. Scrivo terminated Rush upon learning of this. Rush spoke to two clients in the Scrivo salon before exiting the salon, allegedly saying she would get in touch with them, and at least one of the clients left the salon, refusing to be serviced by anyone but Rush. Rush also posted a note on her personal Instagram saying that she would be moving to Marie Robinson and people should get in touch with her for appointments. 

Scrivo sued alleging, among other things, breach of contract, based on the restrictive covenant contained in the Employment Agreement, which prohibited Rush from, among other things, soliciting Scrivo's clients and disclosing confidential information and trade secrets. Scrivo sought to enjoin Rush from soliciting, communicating with, or providing services to anyone she serviced while working for Scrivo, for a period of one year. 

Unfortunately for Scrivo, the court denied its motion. The court noted that the noncompete needed to protect Scrivo's legitimate interests, avoid undue hardship on Rush, and be in the public interest. The court found that Scrivo failed to demonstrate the that noncompete was necessary to protect its interests. There was nothing about Rush's services that were "unique or extraordinary," and Rush was replaceable. Scrivo's customer lists were not confidential information, because the identity of its customers was pretty readily available online in social media posts and Scrivo never attempted to hide any of it. None of the skills Rush used in cutting hair were confidential, either. Rush claimed to be self-taught, claimed not to have taken any customer lists, and claimed that any clients that followed her did so of their own accord and initiative and that she did not solicit them. 

Not only was the court dubious that Scrivo had legitimate interest to protect, the court also thought the sought injunction was unduly burdensome on Rush. Scrivo provided evidence that Rush had serviced 900 clients over the course of six years at Scrivo. Rush would surely have to therefore affirmatively ask each person who came to Marie Robinson if they had ever been serviced at Scrivo in order to ascertain if there was a possibility Rush had worked on them. Scrivo wanted Rush to turn away clients who came in independently, and the noncompete had only required Rush to refrain from soliciting clients. 

Finally, the court didn't think Scrivo would suffer any irreparable harm without injunctive relief. If Scrivo could prove Rush violated the noncompete, then Scrivo could get the value of the services the client didn't purchase from Scrivo. 

August 20, 2017 in Labor Contracts, Recent Cases, True Contracts, Web/Tech | Permalink | Comments (0)

Wednesday, August 16, 2017

Duress in Demotion and Termination Case: Not so Fast, Employers

In times when it seems that employers often not only attempt to, but also often get away with, unreasonable demotion and/or termination attempts, the Eighth Circuit Court of Appeals has upheld the rights of employees not to be forced into unreasonable demotion “agreements.”

The crucial facts of the case are as follows: In 2011, Timothy Gilkerson was hired by Nebraska Colocation Centers (“NCC”) as a Vice President and General Manager in an IT function that also included Gilkerson’s expanding the company’s customer base. Among other things, the employment contract stated that Mr. Gilkerson could only be fired for cause defined as the “willful misconduct in carrying out Executive’s duties which causes economic harm” to NCC or the “persistent failure to perform the duties and responsibilities of his employment hereunder….” The contract also specified various generous sales and retirement bonuses.

NCC subsequently became dissatisfied with Gilkerson’s sales-related performance. Gilkerson received an employee performance review with an “Unsatisfactory” rating for “Achieved Sales Goals” and “Fulfills the terms of his contract.” Gilkerson signed the review document, but noted his dissatisfaction with the sales goal rating. NCC ultimately determined that Gilkerson was not “effective” in his role, announced the hiring of a new Vice President and, the same day, told Gilkerson that 1) the new employee would be moving into Gilkerson’s office and 2) that Gilkerson’s job ti Unknown
tle was changed to something less desirable from his point of view.

Crucially to the case, Gilkerson was presented with a “Mutual Rescission” to rescind the employment contract and a “Term Sheet” which set forth new and much less desirable terms of Gilkerson’s employment. In other words” NCC sought to demote Gilkerson. Importantly, the “mutual rescission” sought to convert Gilkerson’s contractual status to be an at-will employee. Gilkerson smartly consulted with an attorney who told him not to sign the Mutual Rescission. At a subsequent meeting with the NCC president, Gilkerson was told he had two choices: Accept the rescission and term sheet or be fired for cause; an obvious Hobson’s choice. Gilkerson signed. You guessed it: he was then also fired.

Gilkerson filed suit, claiming contractual duress which, in Nebraska, involves a two-part test: First, the agreement obtained must have been obtained by means of pressure. Second, the agreement itself must be unjust, unconscionable, or illegal. Whether particular facts are sufficient to constitute duress is, in Nebraska, a matter of law.

The duress test sounds like a high standard to meet. Sure enough: on a motion for summary judgment, the trial court found that “had the revised terms … been given to a newly-hired employee, they would certainly have been seen as fair, or even generous.” However, as the Court of Appeals pointed out: Gilkerson was not a new employee. It was just wrong for the employer and court to treat him as such. The Court found the new “term sheet” unjust because, after analyzing case precedent, there was no economic justification for requiring Gilkerson to accept an at-will employment agreement, other than “it allowed NCC to avoid the provisions of the Contract that were most favorable to Gilkerson.” No kidding. The court also specifically took issue with the provision that made Gilkerson an at-will employee after having served in a contractually better position for quite some time. The appellate court thus found duress to lie. Images

Contracts are, of course, negotiable at the outset. However, in times of fierce competition in many job markets, it is good to see that courts standing up for employees presented with clearly unreasonable employment “choices” and decisions by employers well into an employment situation. It is one thing if an employee is at working will. It is quite another if he/she is not, as this case clearly demonstrates. Contracts must be performed in good faith by both parties. That, of course, includes the employer as well. In times when unemployment rates are dropping, hopefully employees will obtain stronger bargaining positions both at the outset of and during the employment relationship. Nonetheless, presenting employees with unreasonable “choices” such as the above. Of course, employees should rise to the reasonable expectations of employers. But employers do not and should not have carte blanche to do whatever they wish to contractually bound employees. This can hardly come as a surprise to any reasonable employer.

The case is Gilkerson v. Nebraska Colocation Centers LLC., 2017 WL 2656073.

August 16, 2017 in Labor Contracts, True Contracts | Permalink | Comments (0)