ContractsProf Blog

Exploitative Contracts for Foreign Care Workers in the UK

According to Kiran Stacey, reporting in The Guardian, there has been a sixfold increase in the past three years in the number of complaints by foreign care workers that they are trapped in exploitative contracts.  The number of such complaints is still small (134), but the nature of the exploitation is an interesting sign of the times. Working on what seems like an analogy to Training Reimbursement Agreement Provisions (TRAPs), employers are demanding large payments to cover "hiring costs,"  as high as £10,000, when workers try to leave their jobs.  

One consequence of Brexit was that it suddenly because much harder to find social care workers.  The Tory government tried to stop the bleeding with a band-aid, making it easier for foreign workers to serve in the sector, and the number of foreign workers increased from 10,000 to 94,000.  The sector grew too quickly for the government to monitor all of the practices involved.  According to The Guardian, "The Gangmasters and Labour Abuse Authority reported that it received 123 reports of modern slavery and human trafficking in the care sector in 2023 and that the sector accounted for more than half of all reports of forced labour."

I wish the story had provided some examples of the contractual language at issue. Does the contract have language indicating that there is an obligation to reimburse "hiring costs" in cases of early termination of the contract?  That is a tricky issue. I don't know what UK law has to say about the enforceability of such provisions.  If there is no provision and employers are using threats of deportation to extort payments, that seems much more clearly unlawful.

Eleventh Circuit Wrestles with Georgia's Non-Compete Statute

Georgia's law on non-competes is complicated, as we discussed in June (covering a case decided in September 2023.  Last December, the Eleventh Circuit tried its hand at interpreting Georgia's overlay of a statutory regime, the Georgia Restrictive Covenants Act (GRCA), on its common-law rules on non-competes. Like the Georgia case we discussed in June, this one resulted in a remand with somewhat complicated instructions.

In the Eleventh Circuit case, Charles Baldwin had worked for twenty years for franchisees of Express Oil Change, LLC (Express), beginning in 1998. Mr. Baldwin became a highly-trusted employee of two enterprising Express franchisees, Adam Fuller and Darrell Lamb. When Fuller and Lamb set up business entities, they hired Mr. Baldwin to manage them and gave him something like an equity interest in those businesses, even though he had no control over them and no ownership stake. When Fuller and Lamb sold their 29 stores back to Express, they offered Mr. Baldwin a roughly $2 million payment but required that he agree not to compete with express.  He also had to sign an asset purchase agreement which he was not allowed to see. Mr. Baldwin protested these conditions, but with 80% of his retirement hanging in the balance, he signed both documents and dated them March 8, 2021.

Under the terms of the restrictive covenant, Mr. Baldwin could not work for any competitor within five miles of any business owned by Express or related entities. Express and its affiliates owned over 1100 businesses in 29 states. The term competitor was defined broadly enough to preclude Mr. Baldwin from working in the automotive repair or maintenance industry. It was to last for four years, although the geographic scope was reduced after eighteen months.

Mr. Baldwin went to work for Express, but after twelve weeks, he parted ways with the business because the work conditions were not satisfactory. In August, 2021, Mr. Baldwin wanted to set up his own business, just under five miles from the nearest Express business. He wrote to the company asking for permission, which was denied. He sued to challenge the scope of the non-compete. After removal to federal court, the District Court found the non-compete unreasonable as to duration and scope. It reduced the duration to two years, and it reduced the scope to preclude Mr. Baldwin from work for a competitor within a five-mile radius of any of the Express franchises at which he had previously worked.

In Baldwin v. Express Oil Change, LLC, the  Eleventh first found that the passage of time had mooted part of the challenge to the non-compete.  Because eighteen months had passed, the geographic scope of the non-compete had, by its own terms, been reduced. 

Applying the GRCA to the surviving aspects of the non-compete, the Eleventh Circuit agreed with the District Court that the non-compete's geographic scope was unreasonable. While not adopting the District Court's reasoning in its entirely, the Eleventh Circuit found "not clearly erroneous" the District Court's conclusion that Express's restrictions on Baldwin went much further than necessary to protect its legitimate business interest in preventing Baldwin from “luring away its technicians and, vicariously, its customers.” 

However, the Eleventh Circuit found that the District Court applied the wrong standard under the GRCA for the reasonableness of the non-compete's duration. The District Court had applied a presumption that anything over two years was unreasonable, but here the appropriate presumption was that anything over five years was unreasonable. The longer durational standard applied here because, the Eleventh Circuit concluded, Mr. Baldwin was no ordinary employee, covered by O.C.G.A. § 13-8-57(b), but was a "seller" as defined in O.C.G.A. § 13-8- 57(d).  

The two courts reached different conclusions based on their differing deployments of the rule of construction that prohibits rendering any part of a statute "mere suplusage." The dispute was over whether the phrase "material part" relates to the sale or to the employee's part in that sale. The district court sought to avoid reading "material part"out of the statute by treating it as relating to the employee's part in the sale. The Eleventh Circuit thought the more harmonious reading of the statute resulted from treating "material part" as relating to the nature of the sale. My students would, I think, be happy to learn that courts also struggle in applying canons of construction.

Finally, the Eleventh Circuit rejected Express's challenge to the District Court's authority to take a "blue pencil" to its covenant -- that is, to revise it rather than to either uphold it or strike it down. It upheld the District Court's ruling on geographic scope and remanded the case for the District Court to determine whether Mr. Baldwin could overcome the statutory presumption that a five-year duration to the non-compete was reasonable.

Update from St. Thomas University School of Law

Two weeks ago, we reported on an attempt to dismiss a tenured law professor in a manner that did not accord with the procedural rights created by the university's faculty handbook.  She sued for wrongful termination.

Last Thursday, Julianne Hill, writing for the ABA Journal reported that St. Thomas University has now reinstated Professor Lauren Gilbert but also has initiated termination proceedings against her.  In its reinstatement letter, the University reiterated its view that Professor Gilbert's acts of "insubordination" justified termination, and it added a new, unspecified charge of an "inappropriate relationship" with a student.  In response, Professor Gilbert's attorney has promised to add a defamation claim to her suit against the university.

The University seems to have handled this episode with unique incompetence. The original termination letter cited a university handbook for staff that it claimed governed its relationship with Professor Gilbert in relevant part. Its decision to reinstate her and to follow the procedures set forth in the faculty handbook suggests a total abandonment of that position, which ought to be a matter of considerable embarrassment to university counsel or outside counsel or both. 

The charges added to the reinstatement letter are extraordinarily odd.  Her termination letter cited Professor Gilbert's failure to attend graduation (with notice but without permission) as another "act of insubordination by you."  If the University was going to cite petty offenses, it might have mentioned conduct that, standing alone, would justify for-cause termination.  If, as Professor Gilbert contends, there is no basis for the allegation, the University has, at the very least, created another legal issue that will increase its costs or perhaps increase what it will have to pay to settle the matter.  

Meanwhile, because Professor Gilbert has been reinstated, she will continue to draw her salary and benefits.  However, because of the University's rather outré claim that she constitutes a threat to endanger the community and/or students, she cannot teach or even set foot on campus.  Assuming that the grounds in the original termination letter were the best justifications that the University could concoct for the summary dismissal of a tenured professor, Professor Gilbert deserves a better academic home.  But because the University has now conceded that she is entitled to full salary and benefits until the appropriate termination process is completed, she has some time to find one.

Sidney DeLong on Contracts in Moby Dick -- Warning: Thar Be Spoilers!

Ahab’s Doubloon: A Contracts Analysis

Sidney W. DeLong

As he showed in Billy Budd, Herman Melville (right) knew his way around the law of the sea. Moby Dick is not generally thought of as a text on the common law but upon whales and whaling. Yet one of its central episodes invites a contract analysis.

Whaling Wage Contracts. Early in the novel Moby Dick, the narrator, Ishmael, describes the contract (“articles”) that a crew member of a whaling vessel signed with the owners of the vessel before beginning the voyage,

I was already aware that in the whaling business they paid no wages; but all hands, including the captain, received certain shares of the profits called lays, and that these lays were proportioned to the degree of importance pertaining to the respective duties of the ship’s company. I was also aware that being a green hand at whaling, my own lay would not be very large; but considering that I was used to the sea, could steer a ship, splice a rope, and all that, I made no doubt that from all I had heard I should be offered at least the 275th lay—that is, the 275th part of the clear net proceeds of the voyage, whatever that might eventually amount to. 

The lay of a crewmember was often so little that after two or three years voyage, it might not cover the cost of liquor and other articles purchased on credit from the ship.

Shortly after the Pequod had set sail, Captain Ahab appeared on deck and addressed the assembled crew, beginning with a sort of catechism:

“What do ye do when ye see a whale, men?”

“Sing out for him!” was the impulsive rejoinder from a score of clubbed voices. . . .

“And what do ye next, men?”

“Lower away, and after him!”

“And what tune is it ye pull to, men?”

“A dead whale or a stove boat!” . . . .

These answers faithfully recited the duties undertaken by all the crew, in return for which they were to be paid their modest lays.

Ahab then made his offer:

“All ye mast-headers have before now heard me give orders about a white whale. Look ye! d’ye see this Spanish ounce of gold?”- holding up a broad bright coin to the sun- “it is a sixteen-dollar piece, men. D’ye see it? Mr. Starbuck, hand me yon top-maul.”

. . . Receiving the top-maul from Starbuck, he advanced towards the main-mast with the hammer uplifted in one hand, exhibiting the gold with the other, and with a high raised voice exclaiming: “Whosoever of ye raises me a white-headed whale with a wrinkled brow and a crooked jaw; whosoever of ye raises me that white-headed whale, with three holes punctured in his starboard fluke- look ye, whosoever of ye raises me that same white whale, he shall have this gold ounce, my boys!”

“Huzza! huzza!” cried the seamen, as with swinging tarpaulins they hailed the act of nailing the gold to the mast . . . .

As things turned out, it was Ahab himself who first sighted Moby Dick. But then, to keep the crew motivated, he enlarged his offer:

“[A]dvancing toward the doubloon in the main mast – ‘Men, this gold is mine, for I earned it; but I shall let it abide here till the white whale is dead; and then, whosoever of ye first raises him, upon the day he shall be killed, this gold is that man's; and if on that day I shall again raise him, then, ten times its sum shall be divided among all of ye! Away now!’”

Suppose it was not Ahab but a crew member who first raised Moby Dick: Could he have enforced the promise of the doubloon upon returning safely to port? Or suppose the conditions of the second promise had been fulfilled: Could the crew enforce the second promise of ten times the sum?

Alas, Melville made sure that we will never know whether the promises Ahab made to the crew of the Pequod would have stood up in a Nantucket courtroom at the end of the voyage. Moby Dick was “raised” but never killed. Ahab’s doubloon went to the bottom nailed to the main mast of the Pequod , while Ahab’s fate was to die affixed to the curse´d whale, entangled in his harpoon line, leaving the contracts questions unanswered.

Until now.

The Pre-Existing Duty Rule, Then and Now. There is a good reason that older contracts casebooks illustrate the law of contract modification with cases drawn from the 19^th century history of seafaring. After the crew members signed their employment contracts (“articles”), they embarked on a journey that could, in the case of whaling vessels, last for years. Once at sea, the parties were locked in a bilateral monopoly: the crew could not quit their jobs and the shipowner could not hire replacements. Under these conditions, a sea captain’s promise to raise the crew’s wages became especially suspect when they returned to port.

In The Death of Contract, Grant Gilmore discussed the law of contract modification, duress, and the pre-existing duty rule citing Harris v Watson 170 Eng. Rep. 94 (1791) and Stilk v Myrick 170 Eng. Rep. 851 (1809). Each decision refused to enforce a captain’s unsolicited offer to pay extra wages to crew members who were unexpectedly forced to work short-handed or in dangerous circumstances. The English courts cited both the pre-existing duty rule and grounds of public policy: The crew had a contractual duty to work under all conditions and so gave no additional consideration for the promised wage increase. More importantly, permitting crews to enforce promises for extra wages would tempt the crew, once at sea, to make extortionate demands or even threaten mutiny. For an empire built on control of the sea, public policy demanded that their claims receive no judicial support.

In America, judicial hostility to mid-course modifications of seamen’s wages continued into the 20^th Century and applied even when the crew was not at sea but only at a remote land location. In the familiar case of Alaska Packers Ass’n v Domenico, 117 F. 99 (9^th Cir. 1902) the court refused to enforce a contract modification raising the crew’s rate of compensation for salmon fishing after the crew complained of bad nets. Law and economics scholars later justified Alaska Packers by its tendency to forestall the “hold-up game” otherwise made possible in locations remote from labor markets. As an added bonus, the mechanical pre-existing duty rule was far less costly to administer than a rule requiring a finding of duress or bad faith as a condition to non-enforcement.

Alaska Packers also found seamen’s wage claims under modified contracts to be unenforceable under agency law. The captain or master of the ship did not have actual or apparent authority to make promises binding on the owners. The captain himself was only a higher-paid employee of the owners.

Thus, under the common law in effect when the Pequod sailed, Ahab’s promise of the doubloon was unenforceable because it was not supported by consideration: the Q&A that preceded the offer showed that the crew were already committed to raise and hunt any whale to the death. Ahab offered them a gift, a bonus for doing what they were legally obliged to do.

The crew might argue that their duty was owed to the Pequod’s owners, but the offer came from Ahab, to whom the crew owed no pre-existing duties. The doubloon represented a side deal. But this argument might have outraged the court even more than the modification argument and for stronger public policy reasons. McDevitt v Stokes 192 S.W. 681 (Ky. 1917) refused to enforce a bettor’s promise of extra pay to a jockey if his horse won a race. Kentucky judges didn’t fancy enforcing bribes of jockeys by racing touts. Likewise, a Nantucket court concerned with protecting the whaling industry would have refused enforcement of a captain’s promise of extra wages to achieve a personal vendetta as tending to divert the crew from their primary mission, as it disastrously did in the case of the Pequod.

The Pre-Existing Duty Rule Today.

The strong public policies associated with marine commerce that led courts to refuse enforcement of promises of extra pay made on the high seas did not persist into land-based commercial contracts in the 20^th Century. Employers’ fears of employee duress have been replaced by employers’ need for flexibility in the rapid modification of ongoing employee contracts. Employers now value the ability to make binding promises of extra compensation in circumstances in which they have a need to increase employee incentives. 

The application of the pre-existing duty rule to modifications was modified in Restatement (Second) of the Law: Contracts. Retrospectively applying modern law to Moby Dick, if the bonus offers had been made by the owners, they might well have passed muster as modifications of the crew’s articles.

Section 89 Modification of executory contract.

A promise modifying a duty under a contract not fully performed on either side is binding

1. a) If the modification is fair and equitable in view of circumstances not anticipated by the parties when the contract was made; or
2. b) to the extent provided by statute; or
3. c) to the extent that justice requires enforcement and view of material change of position in reliance on the promise.

The crew might have argued that, even though killing Moby Dick was within the literal definition of their duties, nevertheless the additional reward for raising Moby Dick was fair and equitable in light of the extraordinary risk involved, a risk that was not anticipated when they signed on. Indeed, Ahab’s mad quest for the whale destroyed the Pequod and cost the crew their lives. Moreover, once the Pequod had given chase to the deadly whale, the men had indeed incurred a “material change” in their safety in reliance on the promise of the doubloon.

Their reliance might also make Ahab’s later promise of ten times the original bonus enforceable as a gift promise under the modern principle of promissory estoppel, Their reliance was both foreseeable and detrimental. Refusal of enforcement would have been unjust in light of the risks the crew incurred in reliance on the promise.

The crew would still face the agency argument, however. But the claim for the doubloon against its owner, Ahab, should have been enforceable both as a unilateral contract and under the promissory estoppel principle. The crew foreseeably endangered themselves, as they were intended to do, in reliance on the promise and justice surely requires that their reliance made the promise enforceable.

But even if by some rationale the crew (or their survivors) should be deemed to have earned the doubloon, the problem would remain of collecting their bounty. In the literary undersea world, the doubloon remains forever affixed the mast of the Pequod.

Workers Allege Fraudulent Inducement After Disney Asked Them to Move to Florida

According to Mike Schneider writing for the Associated Press, The Disney Company asked 2000 of its employees to relocate from Southern California to Florida, as Disney was planning to build a new company campus near its theme park in Orlando.  The employees allege that Disney encouraged them to move through incentives and with the threat that their employment would be terminated if they did not move.

Even though some employees resisted the move, sometime between late 2021 and June 2022, when Disney announced that the move was delayed, plaintiffs sold their California homes and relocated to Florida.  They allege that, even after Disney announced that its new campus would not open until 2026, it encouraged workers to move by 2024.  

Enter a certain Florida governor (right), who started a culture war against Disney.  In 2023, Disney announced that it had scrapped plans for a relocation.  According to Mike Schneider's reporting, it instructed workers who had already moved to Florida that they could head back to California.  

But with Disney's decision to cancel its planned construction in Florida, the housing market there declined, while housing prices in California continued to climb.  Although employees worried about losing their jobs if they stayed in Florida, they also did not think they could afford to return to California.  They are suing Disney, alleging fraudulent inducement.

Seems like a tough claim to win on, especially against a very well-resourced company.  But all may still work out for the best in the Happiest Place on Earth.  Mike Schneider also reports for The Associated Press that The Disney Company and the Governor entered into a fifteen-year development agreement in May in which Disney committed to pump $17 billion into the local economy over the next two decades.  It is not clear what concessions Disney got in exchange for continuing its investment in the state.  It seems like the Governor  caused, or at least exacerbated, a lot of disruption in peoples' lives.  Suing him is not an option, and of course, he too can argue that much of his conduct was fraudulently induced.  He thought he was going to be President.

Recent scholarship by Jonathan Harris (left) suggests that there might also be an economic duress angle in cases like this.  Such cases are hard to win.  However, like a promissory estoppel claim, such a claim might improve the settlement value of the claim.  If the employment at issue is at will, damages might be limited to expenses incurred, which might not even cover the attorneys' fees involved in suing a company like Disney.  Hence, the need for a lawsuit that will be expensive enough for Disney to defend that it will be brought to the bargaining table.  Other recent work by Rachel Arnow-Richman (above right) and J.H. Verkerke (right) on Deconstructing Employment Law is also of note here on the problems with conceptualizing at-will employment as a form of contract under current doctrine.

As is so often the case, there was a flurry of media interest in this case back in June and now . . . crickets.  I was hoping to be able to provide an update, but I guess the reporters have all moved on to the next story.

Friday Frivolity: Constructive Firing in China

This isn't that frivolous, except that I learned of it through National Public Radio's comedic news quiz, "Wait, Wait, Don't Tell Me."

As reported by Yating Yang in the South China Morning Post, a company in China moved its headquarters from an urban center to a remote mountain top in order to get its employees to quit and avoid having to pay them severance.  The commute took two hours each way.  Employees who did not have their own vehicles had to take public transportation, a bus that ran only once every three hours, and then they had to climb a three-kilometer mountain path.  On their way home, often in the dark, they had to watch out for packs of stray dogs.  The facilities at the new location lacked basic amenities.  Female employees had to walk to the nearest village to use public toilets.

Image by Liuxingy, CC BY-SA 4.0  via Wikimedia Commons

Then, once 70% of the workers had quit, the company returned to its urban setting and began hiring new staff.  A company spokesperson claimed that the move was a cost-cutting measure and was always intended to be temporary so that the company could continue to operate while its main offices were being renovated.   Employees claim that they were told that the relocation would last an unspecified amount of time and could stretch into the new year.  The company claimed that it was considering legal action against the departing employees for damaging the firm's reputation. 

Although the story broke in January, I have found no updates.

Minnesota Moves to Make Its Laws Mirror New FTC Rule on Non-Competes

Sometimes we hear from real lawyers.  Brendan Kenny, a Minnesota attorney, reached out to let us know that his colleague, Mary Ellen Reihsen had written up a short piece on Minnesota's newly-adopted statute, § 181.9881, barring non-solicitation agreements in service agreements with customers.

In 2023, Minnesota adopted a fairly comprehensive ban on non-competes. Then, following the adopting of the new FTC rule, discussed here, they expanded the statute to sync Minnesota law with federal law.  The revision is set to go into effect next month, but Ms. Reihsen reports that business groups are seeking to narrow the rule.

The heart of the new statute reads as follows:

Restrictive employment covenants; void and unenforceable.

(a) No service provider may restrict, restrain, or prohibit in any way a customer from directly or indirectly soliciting or hiring an employee of a service provider.

(b) Any provision of an existing contract that violates paragraph (a) is void and unenforceable.

(c) When a provision in an existing contract violates this section, the service provider must provide notice to their employees of this section and the restrictive covenant in the existing contract that violates this section.

The statute provides for one carve out relating to computer software development services.  I wish I knew the lobblying story behind that bespoke exception.

Ms. Reihsen provides some great examples to illustrate whey this rule is important.  Perhaps you use a service to provide you with home health aids, cleaning services, 0r office temps.  You may like the person you've hired, and they may confide in you that half of what you pay them goes to their employers, not to them.  You decide to cut out the middleman and hire them directly.  They make 25% more; you pay 25% less. Service providers used to be able to prohibit their customers from suggesting such an arrangement, but as of July 1st, they will no longer be able to do so.

Ms. Reihsen's short piece begins by stating that the new law "will create uncertainty among employers." I don't know.  The new law seems pretty clear.  The law has allowed certain anti-competitive practices for decades.  Now it doesn't.

Uncertainty may still arise in the form of law suits. As we noted, the FTC rule is already subject to multi-pronged challenges. If the business interests affected by the new law are not successful in amending the law to narrow its scope, we may see litigation on the state level as well, but I'm not sure what legal theories are available.  The federal litigation is about the separation of powers: major questions doctrine, non-delegation doctrine, Article II's vesting clause.  But here the action is by a state legislature.  The new law is intended to have retroactive effect, but still a Contracts Clause claim would be a stretch.

University of California Sues Its Graduate Student Union

Just one week ago, I wrote about the University of California's union, which includes 48,000 graduate students and other employees engaged in teaching and research.  That post was about how the union has done amazing work winning significant wage increases for these workers who contribute with their minds rather than through physical labor.

But now, as Parker Purifoy reports here on Bloomberg, the University of California is suing its union to get them to stop rolling strikes on five of the University's campuses.  According to the complaint filed in the case (thanks, Parker, for including the link -- you are a model for your peers to emulate!), the collective bargaining agreement between the University and the Union prohibits strikes.  The Complaint alleges that the Union authorized the strike on May 17, and the strike began at the Santa Cruz campus on May 20.  Their mascot may be a banana slug, but they won this race!  The strike then expanded to UCLA, UC Davis, UC Santa Barbara, UC San Diego, and UCI.

The cause of the strike is itself a matter of dispute.  The Union communicated that it was to protest the University's unfair labor practices, but the strike communications almost all relate to the conflict in Gaza and demands that the University divest from Israeli companies.  With the UC system on the quarter system, and the quarter due to end in June, the strike threatens to interfere with the submission of grades, and thus the University alleges a threat of irreparable harm.  According to the Complaint, the UAW has stated that the aim of its strike is to “maximize chaos and confusion for the employer,” and a strike during the exam period is a good way to do so. Indeed, the complaint alleges that on each striking campus UAW members "have refused to teach classes, lead discussion sections, conduct research, or otherwise . . . perform their job duties." 

The complaint alleges only one cause of action, for breach of contract.  The University seeks an order enjoining all strike activities while the collective bargaining agreement is in effect.  It also seeks unspecified damages and attorneys' fees.

Tech Workers in Kenya Appeal to President Biden

We've been posting a lot late about OpenAI. Whether it is paying Reddit so they can mine our brains to feed their chatbot, purloining Scarlett Johansson's voice and pretending they hadn't, or just being generally creepy by wanting its audio assistant to sound like the sex-obsessed operating system at the center of a disturbing, quasi-dystopian fantasy movie, OpenAI is fast becoming a tech giant that I hate as much as all the other tech giants.

This open letter to President Biden from Kenyan tech workers gives me a new reason to hate OpenAI, as well as some new reasons to hate the other tech giants.  The Kenyan workers want President Biden to know that US tech giants are "systematically abusing and exploiting African workers," undermining local labor laws in Kenya, and violating international law standards, by imposing conditions tantamount to modern-day slavery.

Nairobi has very high unemployment.  People are desperate for work and eager to work in the tech sector. But the opportunity comes at too high a price.  The Kenyan workers perform content moderation for the platforms, labeling and training AI tools by "watching murder and beheadings, child abuse and rape, pornography and bestiality, often for more than 8 hours a day." For this work, some are paid less than $2/hour.  They allege that they were not informed of the nature of their work when they were hired and that their work has caused them to suffer from post-traumatic stress disorder.

According to the authors, when Kenyan workers try to organize, they are collectively sacked, and the two companies, Meta and ScaleAI, simply moved their content moderation operations to other states, without paying workers back wages, even when ordered by Kenyan courts to do so. The workers call on President Biden to live up to his commitment to labor rights and worker-centered trade. Kenyans want tech jobs, but not tech jobs that will ruin their lives.  

It doesn't seem like a big ask.  The U.S. government should have the power to pressure the tech giants into paying foreign workers living wages, fostering humane work conditions, and complying with the laws of the foreign states in which they operate. These companies are the face of the United States abroad, and we want that face to be associated with technological innovation and economic opportunity, not with worker oppression bordering on enslavement.

Speaking of the Crappification of Work . . .

On Tuesday, I posted about Barbara Ehrenreich and the professional managerial class (PMC).  in that post, I shared an anecdote from the Know Your Enemy Podcast episode devoted to Ehrenreich's legacy in which one of the podcasters shared a story about trying to organize graduate students into a union.  The students were resistant, in part because they didn't think themselves worthy of a union. 

Not so at the University of California, where graduate student organizing has led to salary increases to $36,000 in the Fall.  So I learned from this story from the Mother Ship, Paul Caron's TaxProf Blog.  According to the story, clipped from the Chronicle of Higher Education, Amanda Reiterman was hired as a Lecturer to teach two 120-student sections of classes covering classical texts and Greek history at the University of Santa Cruz.  She recommended that the history department hire as her T.A. a recent graduate who was pursuing a masters degree.  When the department copied her on its offer letter to her former student, Professor Reiterman learned that the student's salary to be her teaching assistant would be 10% higher than her salary to teach the course.  She responded by quitting one of her two sections, instead teaching a small history course for which she would not need a T.A. She experienced learning that her student was earning more than her as "a gut punch."

Strange story, right? I mean how can it be that there are 240 students at UC Santa Cruz who want to attend a lecture course on ancient history? I wonder if any of them would be interested in taking contracts at the Oklahoma City University in the Fall, because I would love to have them.  The response is odd too. Learning that her T.A. is relatively well paid should not make Professor Reiterman want to quit.  She should just be happy that the union's efforts mean that her students can afford decent housing and meals other than packaged ramen noodles.  It should make her want to organize and demand the sort of remuneration she deserves. 

More generally, I wonder about the economics of the California state university system generally.  T.A's now earn four times what I earned when I was a graduate student at Cornell in the 1990s.  I did fine on my princely stipend, and when my wife and I both landed visiting professorships, bringing our household income over the $50,000 threshold, we felt financially secure in the moment (although prospects for future employment were gloomy).  

I understand that the cost of living in California is shockingly high, so I'm not sure $36,000/year in California goes any father than my $9000 in Ithaca, NY.  I just don't get where the money comes from.  According to the story from the Chronicle, there are 48,000 unionized graduate students, researchers and postdocs who work in the University of California system.  Their aggregate salary is now $1.728 billion, representing a $500 million increase over their aggregate salary from 2023.  The mind boggles.  If universities start spending that much money on graduate assistants, how do they have money left to recruit a football team? I mean, have the Santa Cruz Banana Slugs (above right) ever even played in bowl game? 

For Every New FTC Rule, There Is a Reaction in the Form of Regressive Legislation in Oklahoma

Oklahoma in the "progressive" camp on non-competes, along with California, Minnesota, and . . . North Dakota.  Well, it was in the motley crew of states that, for one reason or another, ban non-competes.

Image © Caleb Long, CC BY-SA 2.5 
via Wikimedia Commons

But Oklahoma's non-compete law, 15 O.S. § 219A, allows for competition, "as long as the former employee does not directly solicit the sale of goods, services or a combination of goods and services from the established customers of the former employer."  So the statute brought protection from non-competes, with a pretty narrow carve-out.  Apparently, there was some dissatisfaction with the terms "directly" and "established."

This year, with SB 1543, our legislature attempted to address that dissatisfaction, by making the carve out so broad as to pretty much swallow the rule.  According to the bill's sponsors, at least as represented here, the revisions enable entities to "protect[] their legitimate businesses interests" and resist "unfair competition."  How?  Well, here's the new version of the law, with additions highlighted and deletions in bold cross-out.

A person who makes an agreement with an employer, whether in writing or verbally, not to compete with the employer after the employment relationship has been terminated, shall be permitted to engage in the same business as that conducted by the former employer or in a similar business as that conducted by the former employer as long as the former employee does not directly solicit, directly or indirectly, actively or inactively, the sale of goods, services or a combination of goods and services from the established customers or independent contractors of the former employer.

This change is purportedly necessary because the language of the original statute was "vague" and caused "confusion." 

But Oklahoma courts had not so found.  Part B of the statute provides  "Any provision in a contract between an employer and an employee in conflict with the provisions of this section shall be void and unenforceable."  In Howard v. Nitro-Lift Techs., L.L.C., Oklahoma's Supreme Court read the statute to empower a court to strike down in its entirety any non-compete or non-solicitation provision that exceeded the limits permitted under the statute.  In Autry v. Acosta, the Oklahoma Court of Appeals similarly set aside an injunction in favor of an employer.  The employer could not succeed on the merits, as its non-solicitation provision, which purported to prohibit an employee from indirect solicitation of her employer's former clients, both current and previous, exceeded what was permissible under § 219A. A and was therefore unenforceable under § 219A. B.

Courts did not find the language of § 219A vague or confusing.  Perhaps the problem with the statutory provision lies elsewhere. Perhaps the law was too effective in prohibiting restraints on trade and employee mobility.

I am at a loss to understand what would remain of the ban on non-competes if the legislation became law.  I suppose that it still might offer some protections for people who just work for a competitor but are in no way involved in the solicitation of business.  However, "directly or indirectly, actively or inactively" could mean and likely is intended to mean that if your name even appears on your new
employer's website, you are engaged in a prohibited act of solicitation.  And because the word "established" has been eliminated, any solicitation of customers within the industry could be treated as a solicitation of the former employer's "customers," past, current, future, or potential.

In shocking news, although the reform bill sailed through the Oklahoma legislature, Oklahoma's Governor Stitt (left) vetoed the bill.  Here is his veto message:

Senate Bill 1543 would significantly expand employers' power to impede employees' ability to compete with their employer, post-employment, and worse, it would allow employers to restrict individuals' ability to earn a living, especially while using a learned trade or skillset. For these reasons, I have vetoed Enrolled Senate Bill 1543.

By the Governor of the State of Oklahoma
/s/ Kevin Stitt

Thanks, Governor Stitt.  This is something to keep an eye on for the next legislative session, but Governor Stitt will remain in office until 2027, so if he sticks to his guns, Oklahoma's workers are relatively safe from non-competes for a while.

The FTC's Rule Banning Non-Competes and the Response

The Federal Trade Commission (FTC) this week announced a new Final Rule on non-competes.  I was hoping for a short document that clearly and concisely lays out the new rule.  Instead, we got a a 570-page document that, truth be told, I will never read.  Here's the summary, which I did mange to read:

The final rule provides that it is an unfair method of competition—and therefore a violation of section 5—for persons to, among other things, enter into non-compete clauses (“non-competes”) with workers on or after the final rule’s effective date. With respect to existing non-competes—i.e., non-competes entered into before the effective date—the final rule adopts a different approach for senior executives than for other workers. For senior executives, existing non-competes can remain in force, while existing non-competes with other workers are not enforceable after the effective date.

According to the FTC's website, the new rule will "will generate over 8,500 new businesses each year, raise worker wages, lower health care costs, and boost innovation."  

Well, that sounds great.  Surely, nobody would oppose all that.

Well, nobody except Ryan, LLC, which was the first to file a federal lawsuit challenging the new rule in Ryan, LLC v. FTC.  The main argument relies on a favored weapon in the anti-regulatory arsenal, the newly minted "major questions doctrine."  The FTC lacks the authority, Ryan argues, under congressional statutes, to issue so sweeping a regulation.  In fact, Ryan argues, the FTC lacks power to regulate unfair competition.  It did not do so until 1962, and it never sought to regulate non-competes until 2022.

As to substance, Ryan argues, "Workers, firms, and the economy all benefit from reasonable non-compete agreements."  The key term here is "reasonable."  Ryan contends that courts have long assessed the reasonableness of non-compete agreements.  Regulation here is unnecessary, as the courts have already struck the right balance among competing interests. 

The causes of action are predictable.  Count I, citing the major questions doctrine, alleges that the FTC lacks authority to adopt the new rule.  Count II, citing the non-delegation doctrine, Schechter Poultry (that old chestnut!), and Justice Gorsuch's dissent in Gundy, alleges that allowing the FTC to regulate in this area would be an unconstitutional delegation of legislative powers to the executive branch.  Count III, citing the Vesting Clause thesis and the unitary executive, alleges that the FTC Act violates Article II, because its commissioners can only be terminated by the President for cause.  Count IV seeks a declaration: vacating the new rule; finding that the FTC has no authority to regulate unfair competition; that the FTC claim of authority to issue the rule violates the non-delegation doctrine; and that the structure of the FTC violates Article II.  

Sounds crazy right?  Not to these folks.

I mean, should the courts strike down an entire agency because they don't like one rule, for which the agency provided a 570-page explanation?  Needless to say, if an agency got out over its skis, Congress could yank it back by issuing its own clarifying instructions.  But in our world, apparently, the power to do so is vested not through Article I, and not through Article II, but through Article III.  We the people, in order to form a perfect juristocracy . . . 

SCOTUS Takes Another FAA Case

Image by DALL-E

A couple of years ago, we wrote about the Arbitration for All approach to the Federal Arbitration Act (FAA), which was given extreme expression in a recent Judge Easterbrook opinion.  That opinion builds on a series of SCOTUS cases from a decade ago (we barely took notice of Stolt-Nielsen; here's a guest post on Rent-A-Center; here's our post on Concepcion, and here's our post on Italian Colors).  Now, arbitration is in retreat on a number of fronts.

First, the Consumer Finance Protection Bureau attempted to prohibit class-action waivers in consumer lending agreements.  That regulation was nixed by the Republican-controlled Congress soon after Donald Trump took office.  Second, mass arbitration has lead some companies to remove compulsory arbitration from the their terms and conditions, a development that we most recently covered here.  Finally, SCOTUS recently issued two unanimous opinions limiting business entities' ability to compel arbitration on employees once the litigation has progressed for a while or if the employees are transportation workers.

The Supreme Court will now take another crack at the latter issue, having granted cert. in Bissonnette v. LePage Bakeries.  That case is a putative class action by people who deliver baked goods.  They are suing the company that makes those goods.  Defendant LePage Bakeries moved to dismiss the suit and compel arbitration.  Like the plaintiffs in Saxon, which SCOTUS decided in 2022, plaintiffs claimed that they are exempt from the FAA, because Section 1 of the FAA exempts workers involved in interstate commerce.  The district court granted the motion to compel.  A panel of the Second Circuit first decided the case in 2022 and affirmed over a dissent from the late Judge Rosemary Pooler (right).  

The majority opinion kept things simple.  Following the Supreme Court precedent of Circuit City Stores v. Adams, the Court noted that only "transportation workers" come within the Section 1 exemption from the FAA.  The Second Circuit agreed with the district court that delivery workers are not "transportation workers."  Then, after SCOTUS decided Saxon, the panel reconsidered its opinion but arrived at the same conclusion.   

The Second Circuit first elected not to take the off-ramp available through arbitration under state law because the availability of arbitration under Connecticut law in this instance is unsettled.  Turning to the FAA, the majority noted that not everybody who works in the transportation industry is a transportation worker, but more to the point, just because you drive a truck to deliver baked goods does not mean that you are in the transportation industry.  Judge Pooler, citing courts from other jurisdictions, drew a different conclusion, "“[A] trucker is a  transportation worker regardless of whether he transports his employer’s goods or the goods of a third party.”  She sprinkled citations from Saxon liberally throughout her opinion, and she makes a compelling case that, if people who merely load baggage onto planes are "transportation workers," clearly a truck driver is a "transportation worker."  

In February, 2023, the Second Circuit denied rehearing en banc over the dissents of three judges.  Judge Jacobs, who wrote for the majority in the panel decision, and Judge Pooler take the gloves off in their statements regarding the denial of rehearing.  SCOTUS granted cert. back in September 2023.  The issue is "Whether, to be exempt from the Federal Arbitration Act, a class of workers that is actively engaged in interstate transportation must also be employed by a company in the transportation industry."

According to Ronald Mann, writing on SCOTUSblog, Justice Kavanaugh (left) took the lead in oral argument, making the case for a narrow reading of Section 1.  Somehow, Justice Kavanaugh believes that the Congress that passed the FAA didn't want anybody to be outside of arbitration.  Workers in the transportation industry were exempt because there was a separate arbitration scheme for them.   But look, if Congress intended for employees to be exempt from the FAA for any reason, including another arbitration scheme, then it intended them to be exempt from the FAA.  If Congress changed its mind about that, it is for Congress to amend the FAA to make it applicable to employees.  It is not for the courts to revise legislation.  SCOTUS should not update the non-delegation doctrine in the guise of the "major questions doctrine" while arrogating to itself the power to decide major questions of statutory interpretation through reference to non-textual sources. 

Moreover, I'm not sure what arbitration scheme he is referring to.  Counsel for the employees, Jennifer Bennett, ably showed that Justice Kavanaugh was just wrong about why seamen and transportation workers were exempted from Section 1. The arbitration schemes that he references were nothing like the FAA.  They provided only an option for arbitration as an alternative to litigation after a dispute arises.  She then goes on to argue that the FAA has no requirement that "transportation workers" be employed in the "transportation industry."

I have a different take.  On my reading of the legislative history of the FAA, the drafters expected it to apply exclusively among business people.  They never wanted it to apply to employment agreements and they never expected arbitration agreements to come in the form of contracts of adhesion.  As the drafters explained the purposes of the FAA to the Senate, “It is purely an act to give the merchants the right or the privilege of sitting down and agreeing with each other as to what their damages are, if they want to do it.  Now, that is all there is in this.”

Justice Kavanaugh is right that the drafters of the FAA assumed that there would be an alternative arbitration scheme for employment agreements.  It was state arbitration statutes such as Connecticut's.  Congress had no power in the 1920s to legislate on the subject of employment agreements that did not implicate interstate commerce as that phrase was understood at the time.  At the time, it was quite narrow.  So the exemption in Section 1 was not meant to protect employees in the transportation industry from arbitration in unique ways.  It addresses the only category of workers whose employment agreements might be subject to arbitration and provides that they are exempt.  Nobody thought in 1925 that the FAA would apply to other employment agreements.  That was a matter for state arbitration statutes.

However, if, as may be the case here, the employer has not properly provided for arbitration consistent with the state statute, well then, litigation it is!  Even if arbitration under state law is appropriate, not all states permit employers to ban class representation through arbitration clause bootstrapping, so a return to the original public meaning of the FAA (see what I did there!) could effect a substantive change in the arbitration law landscape.

Justice Kavanaugh worries that protecting employees from mandatory arbitration would be a major shift.  Indeed.  However, as SCOTUS recently recognized, sometimes a court has to revise its decisions when those decisions were "egregiously wrong from the start."  From that perspective, it should be very telling that the earliest cases that the employer's counsel can cite in support of their narrow understanding of the Section 1 exemption date from the 1970s.  To make matters worse, Chief Justice Roberts (right) asks where the test applied in those 1970s test came from.  He expresses his intuition, which seems spot on, that "they just kind of made [it] up."

Gina Carano Strikes Back!

Image by Gage Skidmore
CC BY-SA 3.0

This case was brought to my attention by our blog's Founder and Editor Emeritus Frank Snyder.  He posted a link to the case on the AALS Listserv for contracts professors, and discussion ensued.  I acknowledge that what follows is indebted to that discussion, and I thank my colleagues for alerting me to the issues raised in the litigation.  

ADDENDUM:  Just learned via Riddhi Setty writing on Bloomberg.com that Gina Carano's suit is being funded by Elon Musk.  This makes sense, given Mr. Musk's earlier offer to pay the legal bills of anyone who claims that they were unfairly treated by an employer due to Twitter posts.  Musk v. Disney seems like a good match-up.

On February 6th, mixed martial arts fighter, actor, and professional bad-ass Gina Carano (Ms. Carano, right) filed her complaint against The Disney Company (Disney) and others.  The case is of interest not only because of Ms. Carano's success in her role in the Star Wars/Disney series, The Mandalorian, among other boundary-breaking performances, but also because of the interesting legal issues raised by her complaint.

The Complaint alleges that Disney wrongfully terminated Ms. Carano based on the political content of her social media posts made while away from work.  She further alleges that Disney discriminated against her as a woman, as men who posted similar things on social media did not suffer the same adverse employment decisions.

According to the Complaint, Ms. Carano's character, Cara Dune, was a key element in the success of The Mandalorian.  Undoubtedly, she had more rizz than the faceless protagonist, but nobody on that show could compete with the adorable muppet, Grogu, known to fans as "Baby Yoda" (below left).  She was paid only the applicable minimum salary of $25,000 per episode.  Late in 2020, Jon Favreau, who created The Mandalorian, allegedly represented to Ms. Carano that she would be featured in a new spinoff series, for which her compensation would increase as much as tenfold.

Then, in February 2021, Defendant Lucasfilm made the following announcement:

Gina Carano is not currently employed by Lucasfilm and there are no plans for her to be in the future. Nevertheless, her social media posts denigrating people based on their cultural and religious identities are abhorrent and unacceptable.

Carano characterizes this and other statements by defendants as calculated, malicious, false, and knowingly in violation of California statutes that protect employees from persecution for their political beliefs.  She alleges that, based on such false allegations, Disney not only terminated her but also refused to hire her for additional projects. 

Issues:

Was Ms. Carano an Employee?

Ms. Carano's first cause of action is for wrongful discharge under California Labor Code §§ 1101, et seq, which prohibits employers from "[c]ontrolling or directing, or tending to control or direct the political activities or affiliations of employees."  One issue that may arise in the case is whether she comes within the ambit of the statute.  She may have not have been an employee at the time that Disney announced that her "termination."  After all, according to the Complaint , in announcing Ms. Carano's termination, defendant Lucasfilm said that she was not "currently employed." 

While her employment status might be relevant to her first cause of action, her second cause of action is for both wrongful discharge and refusal to hire.  So even if Ms. Carano was not an employee for the purposes of here §1101 claim, she would not need to be for her claim under California Labor Code § 98.6.  That section prohibits adverse employment actions against "any employee or applicant for employment" for conduct protected under §§ 1101 et seq.  

Ms. Carano cites to various projects of which she was going to be a part.  The problem is that, with the possible exception of a Mandalorian movie, the projects she mentions do not seem to ever have been made.  I think that might move her alleged harm into the realm of speculation.  If I had a dime for every time someone has approached me with a movie treatment based on this blog, well . . . you can do the math yourself.

Her third claim is sex discrimination, because male employees who engaged in expression similar to hers were not subject to termination.  I think the challenge here will be to show that the other expression is similar in legally relevant ways and to show that Disney had no non-discriminatory ground for deciding to end its relationship with Ms. Carano.  Ms. Carano cites to a social media post by Mark Hamill in which he linked to something from J.K. Rowling and "liked" it.  When people objected to the allegedly transphobic content of Ms. Rowling's post, Mr. Hamill issued a retraction of his "like" to the extent that it extended to that message.  Ms. Carano, by contrasts, insists that she has never, ever engaged in expression that was remotely objectionable.  To a company that cares about its image and disagrees with Ms. Carano's characterization of her social media posts, her refusal to acknowledge poor judgment may be a ground for treating her differently from those willing to recognize error.

Was Her Speech Covered by the Statute?

Disney may claim that her conduct was not "political activity" in the sense of the statute.  Here, the Complaint has to walk a rather narrow line.  On the one hand, Ms. Carano insists that her social media posts did not have the meaning ascribed to them by her detractors.  She insists that there was nothing in her posts that was racist, anti LBGTQ+, or transphobic.  On the contrary, she communicated only messages of love and support for people who are targeted for bullying.  Based on her own account of the events, it is a little hard to identify her political activities. 

She notes that other Disney employees engaged in more overt political statements and suffered no adverse employment effects.  But that may be a product not of whether Ms. Carano or her co-workers were people who were associated with the Star Wars brand were engaging in political activity but whether they were engaging in speech that the audience for Star Wars found objectionable.  Which brings us to our next topic . . . .

If Her Contract Has a Morals Clause, What Impact Does that Have on the California Statute at Issue?

This was the topic that Frank Snyder first broached on the AALS Contracts Listserv, and I, having no expertise in employment law, admit that I do not know the answer.  One would think that a morals clause would have to be interpreted in a manner consistent with California's Labor Code.  My hunch is that the case should turn on whether Disney's interest in enforcing its morals clause involved reasons unrelated to the allegation that Ms. Carano was engaged in political activity.  She was attracting a lot of negative attention on social media at the same time as she was emerging as the human face of The Mandalorian. The series' eponymous character (right) never shows his face (except for that one time when he did).  He is, according to the actor who plays him, "of questionable moral character." We don't even learn his name until episode 8.  Grogu is cute and all, but he's not human.  Ms. Carano's notoriety on social media may just be bad for business, bad for the brand, and they may have distracted attention from the heartwarming story of an isolated intergalactic mercenary with an inexplicable attachment to a child of an alien species with potentially gnarly powers but, if his predecessor is any indication, no hope of ever mastering standard English usage.

The Style of the Complaint

The Complaint's Introduction begins as follows:

A short time ago in a galaxy not so far away, Defendants made it clear that only one orthodoxy in thought, speech, or action was acceptable in their empire, and that those who dared to question or failed to fully comply would not be tolerated. And so it was with Carano. After two highly acclaimed seasons on The Mandalorian as Rebel ranger Cara Dune, Carano was terminated from her role as swiftly as her character’s peaceful home planet of Alderaan had been destroyed by the Death Star in an earlier Star Wars film. 

I have two problems with this way of introducing legal claims to a court.  First, the lame jokes and references to Star Wars themes undermine the seriousness of the document and of Ms. Carano's claims.  Of course, this blog is not above lame jokes and references, but we're a blog.  There's a time and a place.  Second, by casting the defendants in the role of the evil "empire "seeking to enforce "orthodoxy in thought, speech, or action" Ms. Carano risks having this lawsuit dismissed (by the public, if not by the court) as a chapter in the culture wars rather than an attempt to vindicate her legal rights.

The problems go beyond the introduction.  Pages 10-25, 28-30 of the Complaint consist of long-winded  detours into alleged online harassment of Ms. Carano by people other than defendants.  As far as I can tell, all of this information serves only to show why Disney might have had apolitical concerns about Ms. Carano's activities on social media.  It is not clear that any of this is otherwise relevant to the legal narrative Ms. Carano is trying to tell if she is seeking to vindicate her legal rights. It is highly relevant to the narrative she is trying to tell if she is attempting to burnish her credentials as a victim of the culture wars.  I don't think it is helpful in a Complaint to make the court feel like it is a platform for an agenda.

What's Not in the Complaint

Given the allegations in the Complaint, I'm not sure why there aren't more causes of action.  It seems like Ms. Carano thinks that the defendants have said and published statements about her that she believes are malicious lies.  That seems like a claim right there.  She also alleges that defendants not only wrongfully terminated her and refused to hire her for future projects; they also interfered with her efforts to procure other employment in the industry, including perhaps by pressuring her agents to sever ties with her.  That too, seems like a claim.  Perhaps an amended complaint is coming.  Perhaps I don't know what I'm talking about.

Et tu, Trader Joe's?

SpaceX-Man, Image by DALL-E

We posted recently about an attempt by SpaceX (represented at left) to perpetuate its union-busting activities by throwing a hissy fit in a Texas District Court and screaming at the National Labor Relations Board (NLRB) and its administrative law judges (ALJs), "You're not the boss of me!"  Now, we learn, via Josh Eidelson, writing for Bloomberg News, that Trader Joe's has adopted SpaceX's arguments at an NLRB hearing in Connecticut. 

So first, I just can't believe that Trader Joe's is in a labor dispute.  I go to Trader Joe's to shop, sure, but mostly I go to hang out with the young, diverse, tattooed and pierced young people who work there.  The cashiers engage me in conversation.  The people stocking shelves are always happy to help me find stuff and to tell me how much they like the product I'm looking for and to recommend others.  The real happiest place on earth is a Trader Joe's at 8 AM on a Saturday morning.  Nobody is shopping then, so the workers have the store all to themselves, and they are loving it!  The tunes are cranked up, EVERYBODY in the building is wearing tie-dye, and they are working and gabbing, gabbing and working, talking about whatever young people talk about in their dialect that a boomer like me has little chance of following.  They are the happiest work force I have ever seen anywhere outside of Disneyland, but in this case I didn't think the Trader Joe's people were putting on an act.  Now I don't know what to think.  Does the store force them to pierce and color their hair in festive colors not found in nature?  Is that store-issued tie-dye? Are those even real tattoos?  Will I re-visit the childhood trauma of watching Micky Mouse remove his head the next time I visit my local Trader Joe's?

It turns out that Trader Joe's United has organized unions at four Trader Joe's stores.  Its attorney is quoted in Bloomberg as follows: “Customers of Trader Joe’s would have serious problems with a company that has rejected the New Deal.”  You got that right.  Trader Joe's concedes that the NLRB is unlikely to find itself unconstitutional.  The company is just preserving the argument for later proceedings.  Let's hope that the company comes to its senses and drops this nonsense.  It's fine.  I'll just shop at Sprouts.

Breach of a Non-Disparagement Clause After Employment Discrimination Claim Settles

In October 2019, after serving for two years as Vice President of Program and Community at the Eugene and Agnes E. Meyer Foundation, Dr. Terri Wright was fired by the Foundation's CEO, Nicola Goren (Ms. Goren).   Dr. Wright, who is Black, claimed that the reasons given for her termination were pretextual and that the real grounds were discriminatory animus.  The parties entered into a settlement agreement with a mutual non-disparagement clause.    About a month later, Ms. Goren told a colleague that Dr. Wright was  “toxic” and that two-thirds of the Foundation staff would have quit if Wright had not been terminated.  

Dr. Wright sued both the Foundation and Ms. Goren, alleging breach of the severance agreement, discrimination in violation of 42 U.S.C. § 1981, and defamation.  The district court dismissed all three actions, but in Wright v. Eugene and Agnes E. Meyer Foundation, the D.C. Circuit reinstated all three claims.

The district court dismissed the breach of contract claim on the ground that the non-disparagement clause in the severance agreement only bound the Foundation to direct its employees not to disparage Dr. Wright.  If an employee nonetheless did so, even if that employee was the CEO acting on behalf of the Foundation, that conduct did not create a breach.  The D.C. Circuit majority concluded that the provision in question was ambiguous and susceptible to Dr. Wright's reading, which would make the provision an effective prohibition on disparagement by either the Foundation or its agents.  In response to a dissenting opinion, which adopted the district court's reading, the majority gently suggested that its own reading was not only permissible but likely and that the contrary reading could only be arrived at by ignoring canons of construction as well as common sense.  

The district court dismissed Dr. Wright's § 1981 action because it could not be maintained once her breach of contract claim was dismissed.   The D.C. Circuit looked at the claim more carefully.  A § 1981 claimant must establish: membership in a protected class, an adverse employment action, and an inference of that the latter was a product of discrimination.  The first two are not contested.  Dr. Wright sufficiently alleged discriminatory intent for the purpose of surviving a motion to dismiss by alleging that she had had positive performance evaluations that were quite specific in listing Dr. Wright's accomplishments, while she was terminated without notice or warning based on "vague and subjective" criticisms.

The D.C. Circuit upheld the dismissal of the first two claims against Ms. Goren, who was not a party to Dr. Wright's severance agreement.  Dr. Wright's defamation claim was brought only against Ms. Goren.  That's a tort claim, so you can read about in some other blog.  It survived.  That suffices for us.

Judge Justin Walker (left), writing in dissent, argued that the severance agreement required the Foundation to direct its employees not to disparage Dr. Wright.  As Dr. Wright did not allege that Foundation failed in that duty, she has no claim.  If she wanted to impose a greater obligation on the Foundation, she should have negotiated for different language.  However, the dissent contends that the Foundation would have difficulty policing the on and off-duty statements of its employees. 

In defense of his claim that the severance argument is unambiguous, Judge Walker spends an unseemly amount of space addressing the patent ambiguities of the provision.  It is a mutual non-disparagement provision.  After laying out Dr. Wright's obligations under the provision, the provision provides that the Foundation "likewise" will not disparage Dr. Wright.  But "likewise," Judge Walker informs us "often does not mean 'identically.'"  Bravo.  Does it sometimes mean "identically"?  If so, why we've got ourselves some ambiguity, don't we?  He cites a dictionary.  My Google search turns up a definition that says it means "in the same way."  First hit.  Oxford Dictionary.  Boom!  Ambiguity.

Judge Walker also finds that Dr. Wright did not sufficiently allege that her firing was motivated by racial animus.  Thus, even if she could state a breach of contract claim, he would reject her §1981 claim.  And he rejects the torts claim for torty reasons that we need not concern ourselves with here.

I have been able to find no subsequent history on the case, and the Internet is silent on the matter.  I note that Ms. Goren has moved on.  Perhaps the parties reached a settlement.  The Meyer Foundation, committed to supporting organizations that work "to achieve a racially and economically just Greater Washington" likely does not benefit from continued litigation.

SpaceX Takes Aim at the NLRB

SpaceX is facing an administrative hearing before a National Labor Relations Board (NLRB) administrative law judge (ALJ) on March 5. 2024.  Last week, SpaceX launched its latest projectile, a motion for a preliminary injunction in the District Court for the Southern District of Texas, alleging that it will be irreparably harmed if that hearing takes place.  The argument is that both the NLRB and the ALJ system are unconstitutional because both the NLRB and the ALJs are insulated from removal by the President.  Moreover, seizing on what must have been a very encouraging oral argument before the Supreme Court in SEC v. Jarkesy, SpaceX claims that administrative proceedings such as this violate the Seventh Amendment right to a jury trial. The brief leans heavily on the Fifth Circuit's ruling in Jarkesy, which is a  precedent binding on the District Court. 

The case arose because some SpaceX employees circulated an open letter, soliciting employees to fill out a hyperlinked survey and indicate their level of support for the letter's demands and provide feedback.  SpaceX fired some of the employees responsible for the open letter, alleging that they violated company policy and that their manner of circulating the open letter disrupted SpaceX's operations.  The fired employees filed a complaint with the NLRB, alleging unfair labor practices.   The NLRB was apparently not convinced by SpaceX's 700-page response and notified SpaceX that it had authorized an administrative complaint.  SpaceX's suit followed.

When Jarkesy was argued, people noted that if SCOTUS upheld the Fifth Circuit, the struture of many other executive agencies or their practices could also be attacked as unconstitutional, on either separation of powers or Seventh Amendment grounds.  And here we are.  The motion places the District Court in an awkward position.  It is bound by Fifth Circuit precedent, so denying the injunction might be hard unless there are arguments that the NLRB is in some relevant way different from the SEC.  Ordinarily, the District Court might hold off on ruling, given that SCOTUS is unlikely to rule in Sarkesy until June.  Without such a ruling, it is hard to know which side has the better argument for irreparable harm.   Perhaps the safest solution is to stay the administrative hearing until SCOTUS decides whether to kneecap the administrative state in whole or just in part in Sarkesy.

Stay tuned.

Training Repayment Agreements in the News

Just yesterday, we posted about the debate over the FTC's plans to rein in non-competes.  One response has been Training Repayment Agreements (TRAs) or better still, Training Repayment Agreement Provisions (TRAPs). Thanks to guest contributions from Jonathan Harris (below left) here and here, as well as Miriam Cherry's review of Jonathan's work over at Jotwell, we have already been able to introduce readers to the topic.  Last week, H. Claire Brown published an article in The New York Times indicating how TRAPs work.

The article begins with an illustration.  A physician assistant signed a TRAP when she began work, as part of the first day of work ritual at which your employer presents you with the take-it-or-be-unemployed terms of your employment.  The TRAP provided that she would be required to reimburse her employer $50,000 for on-the-job trainings she received if she left the job before 2025.  She left, providing four-months notice, and her former employer sued, seeking to recover $38,000 in training fees (a ridiculous valuation for the training the employee received) plus $100,000 (a suspiciously round and therefore almost certainly made-up number) supposedly representing loss of business.   One wonders on what theory they think they can recover such lost profits.

In a second illustration, we learn of another medical professional who took a job that paid $35,000/year.  After more than two years on the job, she tried to leave, and her employer sued her for $30,000 in training costs.

According to The Times, nearly 40% of nurses who joined the profession in the last decade have to sign a TRAP.  In California, TRAPs are already unenforceable if they amount to an attempt to shift training costs to employees.  They are only enforceable if designed to allow employees to improve their skills sets in ways that will benefit them throughout their careers.  Even so, The Times notes, the FTC has proposed rules that will ban TRAPs to the extent that they function as non-compete clauses.    Some states have already banned TRAPs.  

Jonathan Harris's spidey sense must have been tingling, because he just shared with us news of this story about the National Labor Relations Board suing an employer that allegedly subjects its employees to unlawful confidentiality, non-disparagement, non-compete, no-solicitation, and training repayment provisions.

The Short and and the Long of the Debate on Non-Competes

The Federal Trade Commission has proposed a ban on virtually all non-compete agreements.  Similarly bans are already in effect in California and other states.  Back in January, Rachel Arnow-Richman (left) and Orly Lobel (right) published The Business Case for a Nationwide Ban on Noncompetes in The Hill.  The piece is now available on SSRN, and that's how I got wind of it. 

As their title suggests, Professors Arnow-Richman and Lobel argue that non-competes are bad for business. They cite to a decade's worth of empirical evidence to back their claim. Noncompetes suppress wages and exacerbate pay gaps based on race and gender.  But they are not just bad for workers; non-competes also stifle entrepreneurship and innovation.  It is no coincidence that Silicon Valley, a center for economic dynamism and technological innovation, is located in California, which bans non-competes.  Eliminating non-competes can be especially helpful as we emerge from the Great Resignation associated with the COVID economy.  Medical professionals in particular need to have the ability to offer their services where those services are needed, notwithstanding competition with past employers. 

That is the short.  Now for the long.  

Alan J. Meese (right) has posted on SSRN his 136-page article, Are Employee Noncompete Agreements Coercive? Why the FTC's Wrong Answer Disqualifies It from Rulemaking (For Now).  I will not attempt to summarize his work.  Here is the abstract: 

The Federal Trade Commission recently proposed a rule banning nearly all employee noncompete agreement (“NCAs”) as unfair methods of competition under Section 5 of the Federal Trade Commission Act. The proposed rule reflects two complementary pillars of an aggressive new enforcement agenda championed by Commission Chair Lina Khan, a leading voice in the NeoBrandeisian antitrust movement. First, such a rule depends on the assumption, rejected by most prior Commissions, that the Act empowers the Commission to issue legislative rules. Proceeding by rulemaking is essential, the Commission has said, to fight a “hyperconcentrated economy” that injures employees and consumers alike. Second, the content of the rule reflects the Commission’s repudiation of consumer welfare and the Sherman Act’s Rule of Reason as guides to implementing Section 5.

Affected parties will no doubt challenge the Commission’s assertion of authority to issue legislative rules. This article assumes for the sake of argument that the Commission possesses the authority to issue such rules enforcing Section 5. Still, prudence can counsel that an agency refrain from issuing rules before it has fully educated itself about the nature of the economic phenomena it hopes to regulate. Such prudence seems particularly appropriate when the Commission has very recently adopted an entirely new substantive standard governing such conduct. Deferring a rulemaking does not mean inaction. The Commission could develop competition policy regarding NCAs the old-fashioned way, investigating and challenging such agreements on a case-by-case basis.

The Commission rejected these prudential concerns and proceeded to ban nearly all NCAs, assuring the public that it had educated itself sufficiently about the origin and impact of NCAs to conduct a global assessment of such agreements. The Notice of Proposed Rulemaking (“NPRM”) offered three rationales for the proposed rule, drawn from a late 2022 Statement of Section 5 Enforcement Policy. First, the Commission opined that NCAs are “restrictive” because they prevent employees from selling their labor to other employers or starting their own business in competition with their employer. Second, NCAs result from procedural coercion, because employers use a “particularly acute bargaining advantage” to impose such agreements. Third, NCAs are substantively coercive, because they burden the employee’s right to quit and pursue a more lucrative opportunity.

The first rationale applied to all NCAs. The second and third applied to all NCAs except those binding senior executives. Such executives, the Commission said, bargain for such agreements with the assistance of counsel and presumably receive higher salary and/or more generous severance in return for entering such NCAs. Because NCAs also have a “negative impact on competitive conditions,” the NPRM also concluded that they are presumptively unfair methods of competition.

The Commission conceded that NCAs can create cognizable benefits. Nonetheless, the Commission concluded that such benefits do not justify NCAs, for two reasons. First, less restrictive means can “reasonably achieve” such benefits. Second, such benefits do not exceed the harms that NCAs produce.

The Commission also rejected the alternative remedy of mandatory precontractual disclosure of NCAs for two interrelated reasons. First, such disclosure would not prevent employers from using overwhelming bargaining power to impose such restraints. Second, disclosure would not alter the number or scope of NCAs and thus would not reduce their aggregate negative economic impact.

The procedural coercion rationale played an outsized role in the Commission’s Section 5 analysis, informing the findings that NCAs are also “restrictive” and substantively coercive. Moreover, the outsized emphasis on procedural coercion dovetailed nicely with the NeoBrandeisian claim that ordinary Americans are routinely helpless before large concentrations of private economic power. Indeed, when the Commission released the NPRM, Chair Khan separately tweeted that NCAs reduced core economic liberties.

Still, the Commission offered no definition of “coercion” or explanation of how to determine whether employers have used coercion to impose NCAs on employees. Instead, the Commission articulated several subsidiary determinations regarding the characteristics of employers and employees that, taken together, established that employers always possess and use an acutely overwhelming bargaining advantage to impose nonexecutive NCAs. Thus, the Commission emphasized that labor market power is widespread, due in part to labor market concentration, most employees are unaware of NCAs before they enter such agreements, NCAs generally appear in standard form contracts, employees rarely bargain over such agreements, most employees live paycheck-to-paycheck and thus have no choice but to accept NCAs, and individuals negotiating over terms of employment discount or ignore the possibility that they will depart from the job they are about to accept and thus downplay the potential impact of an NCA on their future employment autonomy.

This article contends that the Commission’s procedural coercion rationale for condemning nonexecutive NCAs does not withstand analysis. In particular, the Commission’s various subsidiary determinations that support the procedural coercion rationale have no basis in the evidence before the Commission, contradict such evidence and/or disregard modern economic theory regarding contract formation. For instance, a recent study by two Department of Labor economists finds that the average Herfindahl-Hirschman Index in American labor markets is 333, the equivalent of 30 equally-sized firms, each with a 3.33 percent market share, competing for labor in the same market. A previous version of the study was published on the Department of Labor’s website several months before the Commission issued the proposed rule. The NPRM offers no contrary evidence regarding the proportion of labor markets that are concentrated. “Hyperconcentration of labor markets” is apparently a myth.

Moreover, the NPRM ignores record evidence that 61 percent of employees know of NCAs before they accept the offer of employment. The NPRM’s failure to address these data is particularly strange, insofar as the NPRM cites the very same page of the academic article where these data appear three different times for other propositions. The Commission also erred when it assumed that employers with labor market power will use such power coercively to impose even beneficial NCAs. This assumption would have made perfect sense in 1965. However, since the 1980s, scholars practicing Transaction Cost Economics have explained how firms with market power, including labor market power, will not use that power to impose beneficial nonstandard agreements, including NCAs. The Commission was apparently unaware of this literature.

Nor does the lack of individualized bargaining and reliance on form contracts suggest that employers use power coercively to impose NCAs. Form contracts often arise in competitive markets and reduce transaction costs. Background rules governing contract formation, robust state court review of NCAs and exit by potential employees can constrain employers’ ability to obtain unreasonable provisions and induce employers to pay premium wages to compensate employees for agreeing to NCAs. These considerations may explain why a majority of employees who had advanced knowledge of NCAs considered the agreements reasonable, a finding the NPRM ignores.

Nor does it matter that most employees work paycheck-to-paycheck. The Commission ignored the possibility that such individuals may be employed when seeking a new job, bargain from a position of relative security and can thus “walk away” from onerous NCAs. The Commission also ignored economic literature establishing that the presence of some such individuals in a labor market can ensure that employers offer reasonable terms to all potential employees, including unemployed job seekers.

Refutation of the procedural coercion rationale for banning nonexecutive NCAs requires reconsideration of the other two rationales as well. For instance, nonexecutive NCAs are the result of voluntary integration and thus not procedurally coercive or substantively coercive, either. Moreover, because some nonexecutive NCAs are voluntary, the Commission must abandon its erroneous assumption that the beneficial impacts of NCAs necessarily coexist with coercive harms. Proper assessment of business justifications requires the Commission to ascertain the proportion of NCAs that constitute voluntary integration, revise downward its estimate of coercive harms and reassess NCAs’ relative harms and benefits. This revision could result in a determination that NCAs’ benefits in fact exceed their harms. Finally, recognition that beneficial NCAs are the result of voluntary integration requires the Commission to reconsider the mandatory disclosure remedy, which the Commission rejected based on the erroneous belief that employers use bargaining power to impose even fully-disclosed and beneficial NCAs. Such reconsideration could of course lead to revising the scope of the proposed ban or rejection of any ban.

The Commission may well be entirely capable of assessing the global impact of NCAs on economic variables such as price, output, and wages. However, the Commission rejected such a rule of reason approach in favor of a standard that turns in part on the process of contract formation. Thus, the Commission necessarily took on the task of gathering information regarding the process of forming NCAs and of assessing that data in light of applicable economic theory. The Commission’s demonstrably poor execution of this task reveals that it lacks the capacity to conduct a generalized assessment of NCAs under a governing standard that treats procedural coercion as legally significant.

Because it lacks the capacity to assess the process of forming nonexecutive NCAs, the Commission should withdraw the NPRM and start over. There are two alternative paths the Commission may take to develop well-considered competition policy governing NCAs. First, the Commission could revert to the rule of reason approach it rejected in 2021. The Commission could draw upon its considerable study of the impact of NCAs on wages, prices and employee training and promulgate a rule that bans those agreements the Commission believes produce net harm, after reconsidering regulatory alternatives such as mandatory disclosure.

Second, the Commission could continue to embrace its new Section 5 standard but take an “adjudication only” approach to implementation. The Commission could simultaneously take other steps through various forms of public engagement to educate itself about contract formation in general and the formation of NCAs in particular. The Commission could build on data it has to this point ignored regarding various attributes of employers, employees and labor markets more generally. Adjudication and self-education could be mutually reinforcing. Self-education could inform the Commission’s determination of which NCAs to challenge, while information generated in adjudication could improve the Commission’s knowledge base about NCAs. Ultimately this two-track approach could generate sufficient information to justify a well-considered rule governing NCAs.

The SAG-AFTRA Strike

We wrote last week about the auto workers strike.  We have been remiss in not having covered the strike of the Screen Actors Guild and American Federation of Television and Radio Artists (SAG-AFTRA) against the Alliance of Motion Picture and Television Producers (AMPTP), and the related strike of the Writers Guild of America (WGA) that began in May and just concluded this week. 

Although when I first drafted this post, there was no hint that the WGA strike was about to end, I will not claim that I alone fixed it. 

But did I?  I'm just asking questions.

In any case, it is time to catch up.

The WGA strike was the longest work-stoppage involving that group since 1988.  One of the main issues in the strike was the writers' access to residuals from streaming media.  Writers, like all of us, are also concerned that the studios might replace them with some new version of artificial intelligence.   The parties started off pretty far apart, with the WGA saying that its proposals would yield benefits of $429 million a year; the AMPTP's offer would yield $86 million. For months, there seemed to be no prospect of a resolution.  This month, negotiations seemed to make promising progress.

Suddenly, over the weekend, there was a breakthrough.  A tentative deal has been signed and, as Brooks Barnes of The New York Times reports, writers began returning to work this week.  The parties are expected to enter into a new three-year agreement, and most reporting suggests that the writers got most of what they were seeking, including 

• a 76% increase in residuals payments;
• a bonus to writers from streaming services; 
• guarantees of minimal staffing; and 
• no AI encroachment on writers' credits and compensation.

So now the writers can write.  But who will perform what they have written?

SAG-AFTRA joined the strike in July.  This is the first such industry strike since the actors' strike in 1980, and it is the first time writers and actors have gone on strike simultaneously since 1960.  The actors' concerns are similar to those of the writers.  They seek residuals from broadcasts over streaming services, and they too have worries about being replaced through artificial intelligence.

\According to Wikipedia, actors can still appear on podcasts, micro-budget independent films, student films, unscripted television work such as game shows, reality competition shows, documentaries, and talk shows.  This might be a boon to podcasts, and I assume that if the casts of Oppenheimer and Barbie want to make a video appearance on this blog, that would be no problem.  

So, for example, there has been at least one positive externality of all of this.  Jeri Ryan, unable to work due to the strike, has more time to spend on social media.  Two weeks ago, she used some of that time to like something I posted on BlueSky.  

I have followed Ms. Ryan's career since getting to know her as 7 of 9 on Star Trek Voyager.   Let's just say I am a fan.  I wanted to name my daughter "Seven," but my wife, also a fan, won that battle.  Still, twenty years later, one "like" from Jeri Ryan was mind blowing.  I asked my Associate Dean if I could cancel class due to being on Cloud 7 of 9.  She suggested that I instead share my joy with my students.  Which I did.  They had no idea who Jeri Ryan is, but that is their loss.  Also, as Seven would say, irrelevant.

Edited with helpful corrections from David August.