Our “Top Five to Ten” List of Important Recent Cases
In order to keep our readers abreast of recent developments and legal trends, we are continuing our “top five to ten” list of cases and topics of importance to executives and professionals. This time, we are addressing cases and topics in the following fields: executive compensation; contract modification; evaluating damages; and invasion of privacy. Our list also includes a “heads up” regarding an important case about executive compensation, likely to be decided soon.
(1) Beware of the Clawback;
Hertz v. Frissora et al., C.A. No. 19-cv-08927 (D.N.J.)
Whoever coined the old adage, “possession is nine-tenths of the law,” was clearly not talking about executive compensation. Professionals and executives must always be mindful of their potential exposure to their employer (e.g., liability for monetary damages and/or having to return some portion of their compensation). A recent case out of New Jersey serves as a valuable reminder.
In Hertz v. Frissora, et al., after being investigated and penalized by the SEC for filing inflated financial reports, Hertz filed suit against three senior executives. The suit did not allege intentional fraud. Instead, Hertz cited “gross negligence” and “inconsistent and inappropriate tone at the top” (e.g., pressuring subordinates to meet internal budgets) as a basis for seeking the contractual clawback of $70 million in incentive compensation, and approximately $200 million as monetary damages to cover the company’s costs relative to the SEC proceedings. This case is still being litigated, and its outcome remains unclear.
In Massachusetts, clawback agreements may be enforceable, such as those relating to stock awards or deferred compensation payments. See e.g., Balles v. Babcock Power, Inc., 476 Mass. 565 (2017), and our article on that case: “Termination for Cause, Office Romance and Unexpected Forgiveness in the Courts.” In Massachusetts, executives can also be subject to “equitable forfeiture,” where an employer recovers compensation that was paid to an employee during the time period that the employee was breaching his or her fiduciary or contractual obligations to the employer. See e.g., Chelsea Indus., Inc. v. Gaffney, 389 Mass. 1 (1983). Notably, executives and professionals may be subject to equitable forfeiture even when the employer cannot show actual injury. Id.
Many of these issues can be addressed with sound drafting and negotiating at the outset of employment. However, where misconduct is involved, counsel can help you assess your exposure, along with your leverage, to help develop a clear picture of your situation.
(2) Is Your Incentive Compensation a Wage?
Levesque v. Schroder Inv. Mgmt. N. Am., Inc., 368 F.Supp.3d 302 (D. Mass. 2019)
An employer who fails to pay an employee all “wages earned” can be held liable for three times that amount plus interest and attorneys’ fees under the Massachusetts Wage Act (the “Wage Act”). However, not all compensation promised to an employee is an “earned wage.” For example, commissions that are “definitively determined and … due and payable” are considered “wages earned,” but purely discretionary bonuses are not. Whether such incentive compensation constitutes “wages earned” is always fact-specific, as a recent federal decision illustrates.
In Levesque v. Schroder Inv. Mgmt. N. Am., Inc., an incentive compensation plan provided employees with a “quantitative bonus” shortly after the close of the fiscal year, based on an employee’s sales numbers as compared to his or her sales goal. When the east coast director of institutional sales was terminated without being paid his quantitative bonus – despite having sufficient sales numbers – he filed suit under the Wage Act.
The Court quickly looked past the “bonus” label and analyzed whether the incentive compensation was “definitively determined and … due and payable.” The employer contended that, because the plan required “continued employment” through payday, it was not an “earned wage.” The Court, however, rejected that argument and stated that the terminated executive stated a valid claim under the Wage Act. Specifically, the Court reasoned that the employee “earned” the compensation when the sales were completed; the incentive compensation was still “definitively determined,” even if the payment calculation took place at some point in the future, and was still “due and payable” even if the pay-date fell after termination.
(3) Your Contract is Subject to Change;
Shachoy v. Conrades, 35 Mass.L.Rptr. 445 (2019)
It is a basic tenant of contract law that contracts may be modified, whether explicitly or implicitly, orally, in writing, or through the course of conduct. Many professionals intuitively understand this. Less intuitive, however, is that even those portions of a contract which define how the contract can be modified, are subject to the same principles of modification.
That was the case in Shachoy v. Conrades, where a dispute arose over an oral modification of a written agreement. There was no dispute that an oral understanding was reached to modify the written agreement. Instead, the Defendant argued that the oral understanding was unenforceable because the written agreement stated: “modification must be in writing and signed” by the parties.
The court disagreed with the defendants, and issued an important reminder: “A ‘prohibition against amendment except by written change may be waived or modified in the same way in which any other provision of a written agreement may be waived or modified.’” Id. (Citing Delaware law). See also Wells Fargo Business Credit v. Environamics Corp., 77 Mass.App.Ct. 812 (2010), applying Massachusetts law. Keep in mind that your words and conduct matter and may serve to modify the terms and conditions of your employment, notwithstanding a prior written agreement that states otherwise.
(4) The Value of a Claim;
Hall-Brewster v. Boston Police Department, C.A. No. 18-P-260 (Mass. App. Ct. Sept. 5, 2019)
As lawyers, when assessing potential claims, we look not only at liability, i.e., whether the client can establish the defendant’s unlawful conduct, but also at damages, i.e., what the client will recover if he or she prevails. There are many circumstances where litigation may not be advisable, even where an individual may have a strong likelihood of success on the merits because the cost of pursuing the claim outweighs the potential recovery.
That is precisely what happened to a former detective with the Boston Police Department. The officer alleged a violation of his constitutional due process rights, in that he was reassigned from detective to patrol officer without a hearing. Over six years, the former detective litigated his case – first to the Commissioner of the Boston Police Department, and ultimately to the Massachusetts Court of Appeals, where finally on September 5, 2019, he won a ruling that his constitutional rights had been violated. However, the Appeals Court awarded him $1, holding that the hearing of which he was unlawfully deprived would not have changed the outcome.
Litigation is only one of many tools available to an effective attorney. With the assistance of counsel, you can assess not only the strength, but the value of potential claims, and then chart a strategy that most effectively furthers your goals.
(5) The Duty to Mitigate and Unemployment Benefits at the MCAD;
Serrano v. Cataldo Ambulance, MCAD No. 14-BEM-02913 (June 27, 2019)
In many cases, plaintiffs are required to “mitigate” their damages by, for example, actively seeking new employment after what the employee believes was an unlawful termination. Such amounts earned in the new job are ultimately deducted from any lost wages and benefits the plaintiff may later recover as damages in a successful legal action.
It had been the longstanding practice at the Massachusetts Commission Against Discrimination (“MCAD”) to reduce an award of lost wages by any amount the employee received in unemployment insurance benefits. That practice, however, is finally changing. In 2017, the MCAD issued a decision that adopted the “collateral source rule,” holding that damage awards should not be reduced by benefits received, such as insurance and welfare. See Schillace v. Enos Home Oxygen Therapy, Inc., 12-NEM-01742 (Apr. 21, 2017) (MCAD Full Commission). Specifically, the Schillace decision addressed welfare benefits. In June, the MCAD issued a decision applying that reasoning to unemployment insurance and declined to reduce an award of lost wages by the amount the employee received from unemployment insurance. Serrano v. Cataldo Ambulance Service, Inc., 2019 WL 3065910 *16 (MCAD June 27, 2019). There are many reasons that people should file for unemployment insurance if and when able, and this trend from the MCAD serves to add to the list.
Privacy Rights in the Workplace
(6) Your Right to Workplace Privacy – IT Edition;
Fredericks v. Markel CATCo Investment Management LTD et al ., No. 1:19-cv-10331 in the U.S. District Court for the District of Massachusetts;
Belisle vs. Markel CATCo Investment Management LTD et al., No. 1:19-cv-00189, in the U.S. District Court for the District of New Hampshire.
As we have noted before, under Massachusetts law, G.L. c. 214, § 1B employers may be held liable for “unreasonable, substantial, or serious” invasions of employee privacy. See Employees Don’t Leave the Right to Privacy at the Office Door. One employer recently found themselves defending such a claim after conducting allegedly improper cellphone searches.
In response to a governmental investigation into financial recordkeeping, a company demanded that its entire staff surrender personal cell phones to facilitate an “internal review.” Two executives complied, believing they had no choice – and expecting that only company accounts would be searched. The company, however, also searched personal communications and discovered that the two executives were in a relationship, which the company used as a basis for termination.
The executives filed suit for, among other things, invasion of privacy. A mere five months after filing, the parties announced a settlement, the terms of which remain confidential.
(7) Beyond the Contract – the Covenant of Good Faith and Fair Dealing
Suzuki v. Abiomed, Inc., Case No. 19-1233
In 2017, we wrote about a decision in Suzuki v. Abiomed, Inc., where the court rejected the employers’ motion to dismiss the executive’s claim for payment of his unvested performance shares. See Protecting Executive Compensation: Unvested Equity and the Covenant of Good Faith and Fair Dealing. After that decision (and our article), the parties conducted discovery, after which the employer filed a motion for summary judgment – again seeking to have the case dismissed as a matter of law – which the court granted. The executive appealed and oral arguments were heard in early September. We will keep an eye on this decision, expected soon, and you should too.