Many non-union employers labor under the impression that the National Labor Relations Act (”Act”) does not apply to them. The decision of Loparex LLC v. NLRB  is a reminder of the Act’s broad reach.  In Loparex, the Seventh Circuit Court of Appeals upheld the National Labor Relations Board’s (”NLRB”) determination that a company violated the National Labor Relations Act (”Act”) by restricting union organizing activity at the workplace when it took the following actions: (i) after union supporters posted material on company bulletin boards, the company issued a policy that required employees to obtain approval before placing any material on the boards; (ii) stopping employees from distributing pro-union flyers in the company’s parking lot; (iii) informing employees that passing out union buttons on work premises violated company’s policy; (iv) informing all of the shift leaders that they qualified as supervisors under the Act and that therefore, they were prohibited from participating in union activities; and (v) discouraging employees from talking about any union organizing activities during working hours.  Loparex LLC v. NLRB, Case Nos. 09-2187, 09-2289, 2009 U.S. App. LEXIS 28754 (7th Cir. Dec. 31, 2009).  

Loparex is a reminder that non-union employees may commit unfair labor practices under the Act if their human resource policies discriminate against union activities.  Employers’ handbooks must be neutrally drafted and neutrally applied.  If they are tilted against union activity, an employer risks the result which occurred in Loparex.

After a three-day bench trial in Nashville, Tennessee, U.S. District Court Judge John T. Nixon found in favor of a female African-American plaintiff on her race and sex harassment claims and entered a judgment of $1,073,261.00 against her former employer, Whirlpool Corporation.  EEOC v. Freeman, Case No. 3:06-0593, 2009 U.S. Dist. LEXIS 118624 (M.D. Tenn. Dec. 21, 2009).   This case is a useful reminder that Title VII plaintiffs may be entitled to not only back pay but substantial front pay awards as well.  

In this case, Judge Nixon determined that as a result of the ongoing harassment, Plaintiff “suffer[ed] from chronic posttraumatic stress disorder rendering her unable to work.” Plaintiff’s expert witness, Dr. Mark Cohen, testified that, adjusted for present day value, Plaintiff experienced a range of wage loss between $415,772.00 (through age 57.6) and $623,541.00 (through social security retirement age).  In all, Dr. Cohen calculated Plaintiff’s net loss in earning capacity to be $773,261.00 to age 67.  Dr. Cohen’s testimony proved persuasive because this was the exact amount of Judge Nixon’s back pay and front pay award.  The remaining $300,000.00 of the award was for Plaintiff’s non-pecuniary losses, i.e., emotional injuries.   This amount was the statutory maximum that any Title VII plaintiff could recover for their compensatory and/or punitive damages.  See 42 U.S.C. § 1981(b)(3). 

Interestingly, the last sentence of Plaintiff’s post-trial brief read as follows: “Defendant’s Fourth-Quarter 2008 net earnings were $44 million dollars, and Defendant expects to generate free cash flow between $300 and $400 million in 2009.”  While the facts of the case were certainly egregious, Whirlpool’s size and financial earnings may also have played a role in the judge’s decision to generously compensate the Plaintiff with a high front pay award.

Stuck in between the investigation phase and the litigation phase, conciliation of a discrimination charge pending before the EEOC is akin to a middle child - often overlooked - but just as important as the other children.  The recent decision in EEOC v. Supervalu, Inc., 2009 U.S. Dist. LEXIS 116718 (Dec. 15, 2009)  demonstrates that conciliation should be given the same rigorous attention that defense counsel give to the investigation and ensuing litigation of an EEOC charge.  Further, if an employer is going to allege that the EEOC failed to conciliate in good faith, that employer must be ready to prove that it approached the conciliation process with a seriousness and good faith that was lacking from the EEOC.

           In Supervalu, Inc. the EEOC brought suit against Supervalu and Jewel-Osco alleging that they failed to provide their employee, Patricia Shied, with a reasonable accommodation in violation of the Title I of the Americans with Disabilities Act of 1990 (”ADA”), 42 U.S.C. § 12101 et seq. and Title I of the Civil Rights Act of 1991, 42 U.S.C. § 1981a.  Before any substantive issues were decided in the case, Supervalu and Jewel-Osco filed a Motion to Dismiss under the Federal Rules of Civil Procedure  on the grounds that the EEOC failed to make a sufficient effort to resolve the parties dispute through informal conciliatory means prior to filing suit.  The EEOC must attempt conciliation with employers when it finds reasonable cause to believe that the have engaged in discrimination under the ADA,  the ADEA,  and Title VII.  See 42 U.S.C. § 200e-5(b).

            U.S. District Judge Elaine E. Bucklo  rejected Supervalu’s argument that the EEOC failed to conciliate in good faith.  In particular, she identified three deficiencies with Supervalu’s position.  First, Judge Bucklo noted that the record before her was factually inadequate so there was no way she could determine whether the EEOC made a good faith effort to conciliate or not.  Second, based on the scant record before her, Judge Bucklo noted that the EEOC invited Supervalu to submit a settlement offer on December 13, 2007, yet Supervalu did not respond to this invitation until nearly two years later on March 17, 2009.

             Finally, Judge Bucklo held that the EEOC was entitled to conclude that further conciliation efforts would be futile since Supervalu’s settlement offer was $10,000 with no equitable relief.  In closing, Judge Bucklo stated: 

Under these circumstances, I cannot say that the EEOC failed to carry out its obligation to engage in good-faith conciliation efforts.  The EEOC invited the defendants to engage in the conciliation process.  However, the defendants responded long after the deadline indicated by the Commission.  And when the defendants finally did respond, their offer was underwhelming.

The takeaway from the Supervalu decision is clear.  If an employer is going to make the argument that the EEOC did not approach conciliation in good faith, it must present the court with: 1) a complete record, 2) evidence that the employer timely responded to the EEOC’s invitation to conciliate, and 3) evidence that any settlement offer made by the employer accounts for non-monetary or “equitable” forms of relief along with monetary relief.  Put another way, before an employer seeks to dismiss or stay a federal case based on the EEOC’s failure to conciliate in good faith, that employer better be able to prove that it approached the process in good faith.

Congress and the President brought a little bit of holiday cheer to unemployed Americans struggling to pay for health insurance.  As predicted by this blog in February, President Obama signed the Department of Defense Appropriations Act of 2010 yesterday which extends the federal COBRA health coverage subsidy for involuntarily terminated employees an additional 6 months.  Readers will recall that the COBRA subsidy allows laid off employees to continue their employer’s group health insurance provided they pay 35% of the monthly premium instead of the 102% that many employees had to pay in the past.

Now, employees involuntarily terminated from their employment will have the COBRA subsidy available to them for up to 15 months.  For example, if an individual was  laid off on July 15, 2009 with their health coverage ending on July 31^st, this individual is eligible for a COBRA subsidy from the period of August 2009 through October 31, 2010.

Under the new legislation, employees who experience a “qualifying event” up through February 28, 2010 will be eligible for the 15 month COBRA subsidy.  Further, the new legislation requires employers to notify former employees who were eligible for the COBRA subsidy on or after October 31, 2009, that they may continue to pay for their health insurance at subsidized rates for up to 15 months,  and that they may reinstate their COBRA coverage if they had stopped paying their COBRA premiums after their subsidy expired.

Putting aside the cost, the COBRA subsidy has been an unqualified success.  According to Hewitt & Associates,  only 19% of eligible employees made use of their COBRA rights before the ARRA.  Now, that figure rests at 38%.   Finally, we expect the Department of Labor and the IRS to have model notices ready for employers before the end of the year.

Illinois may not get a resolution any time soon to whether an employer is required to prove that a non-compete covenant must support a recognized, legitimate business interest. By now, lawyers and commentators are fully aware of the Fourth District’s ruling in Sunbelt Rentals, Inc. v. Ehlers and its repudiation of a decades-long test used to determine the validity of non-competes. Though that test had a somewhat bizarre development, courts throughout Illinois recognized it.

Applying the test in practice perversely has made litigation more expensive for employees, as cases frequently devolved into lengthy discovery disputes over the so-called protectable interest and whether it was threatened. Often times the concept of “reasonableness” gets lost in the shuffle. Still, many employers lost cases after failing to prove a legitimate business interest was at stake.

But Ehlers settled his case with Sunbelt Rentals, and so there won’t be a decision from the Illinois Supreme Court any time soon on the inter-district conflict. For now, that means that outside of the Fourth District, courts are still applying the legitimate business interest test. District Judge Gettleman recognized as such this week in Aspen Marketing Services v. Russell, when he denied a motion to dismiss a non-compete suit. Gettleman expressly noted the ruling in Sunbelt Rentals and declined to apply it, noting that the Illinois Supreme Court and other Illinois courts outside the Fourth District haven’t weighed in.

On a separate note, the idea of challenging the validity of a non-compete on a motion to dismiss is rarely a good one. Almost invariably, this results in an early loss for the defendant, since the concept of “reasonableness” cannot be examined under the pleadings alone. Unless there is some obvious defect (such as a nationwide covenant when the contract specifies a very limited area of responsibility), lawyers ought not to count on dismissal of a non-compete claim until at least summary judgment.

The Chicago Tribune’s business reporter, Ameet Sachdev, writes this morning on the hotly contested dispute between Kathleen Lawlor and North American Corp. of Illinois, a case recently tried to judgment in the Circuit Court of Cook County.

The dispute touches on a number of hair-trigger employment law issues, including rights to privacy, unpaid commissions, theft of confidential information and threats to steal customers. It also makes an oblique reference to another issue that always underscores the difficulty of employment litigation: Lawlor’s attorneys’ fees have approached $1 million.

The case involves the marketing services industry, and the dispute arose right after Lawlor, a successful salesperson, left in 2005. She claimed she was owed accrued commissions, and her employer feared she would steal customers. It also had her followed by a somewhat amateur gumshoe, a fact that would later prove to be damaging to North American.

There was no hint in Sachdev’s article that Lawlor was bound by a non-compete contract, so North American was left to pursue common-law remedies. It found potential smoking guns when a North American consutant swore out an affidavit that Lawlor offered to introduce him to a competitor before she quit, and when Lawlor disclosed historical sales and margin data to a competitor on a job interview.

This conduct directly implicated Lawlor’s duty of loyalty to her then-employer. That duty prohibits an employee from disclosing confidential information, facilitating a mass exodus of co-workers, and diverting business opportunities away from the employer. Employees must take this duty seriously - a violation can result in salary forfeiture during a period of disloyalty, an injunction against competitive conduct (even in the absence of a non-compete agreement), and punitive damages.

At trial, the parties appeared to split their claims against one another. Lawlor ended up prevailing on her invasion of privacy claim, after North American’s overzealous investigators improperly obtained Lawlor’s phone records and gave them to the company. North American, on the other hand, was able to obtain some measure of compensation forfeiture, presumably based on Lawlor’s pre-termination activity with existing customers or improper disclosure of North American financial data. Despite relatively low actual damages ($78,781), the trial judge imposed punitive damages of $551,467 - a multiple of seven.

Aside from the enormous fees generated in this case, the litigation serves as a reminder that the absence of a non-compete agreement does not - by any stretch - sanitize an employee’s conduct on the way out the door. Breach of the common law duty of loyalty provides for extensive legal and equitable remedies. Proving such a claim can be difficult for an employer, but if the employer is able to marshall evidence of improper pre-termination activity (often learned through a forensic examination of the ex-employee’s computer), it may be able to put a halt to anti-competitive conduct and obtain significant monetary relief.

One of the most high-profile non-compete disputes in the Chicago area has resulted in a victory for Citadel Investment Group and a set-back for two executives who defected to start their own high-frequency trading firm.

In a 36-page memorandum opinion and order Judge Mary K. Rochford enjoined Mikhail Malyshev and Jace Kohlmeier from violating non-compete restrictions contained in their Citadel employment agreements for the balance of the nine-month term. Effectively, this means that both Malyshev and Kohlmeier may be free to compete as soon as February of 2010, since the court refused to extend the non-compete term on an equitable basis for the period in which the defendants were in breach.

The case involves a shadowy, but highly profitable, business known as high-frequency trading (HFT). In essence, HFT relies on powerful computers to enter trade orders (often without human intervention), with algorithms deciding on specific aspects of the trade such as how much to buy, when, and at what price. HFT is a relatively new phenomenon, but it yields enormous profits. A disproportionate amount of equity trading volume is conducted by HFT firms.

Citadel itself invested heavily in HFT. It paid off - Citadel’s HFT unit reaped earnings of $1.15 billion in 2008. Malyshev and Kohlmeier were instrumental, key employees for Citadel’s HFT group. Neither had HFT experience prior to joining Citadel. For quite some time, each considered leaving to start his own proprietary trading firm. And each had a non-compete agreement, barring employment with a “Competitive Enterprise” for a period to be selected by Citadel upon departure, ranging from 0 to 9 months.

Upon their departure, Citadel elected the maximum 9-month period and paid Malyshev and Kohlmeier to sit on the sidelines. No surprise, there, given their access to proprietary information and involvement in recruiting R&D talent to Citadel. However, both ex-employees formed Teza Technologies and hired 15 employees, essentially daring Citadel to file suit.

It did. Citadel pursued each aggressively and sought preliminary injunctive relief. The court dispatched with a number of the arguments raised by the defense. Given that one of the defendants deleted a fair amount of Citadel information (despite a court order not to do so), the court really did not have to address whether a legitimate business interest supported the non-compete. The adverse inference it could draw about the document deletion was more than enough to demonstrate the defendants had access to and attempted to use Citadel’s confidential information.

The defendants also seemed to challenge the non-compete due to the fact that they really weren’t actively trading, but merely preparing the firm’s trading infrastructure to compete eventually. However, nothing in the non-compete allowed the defendants to wash their hands of liability based on this “preparing to compete” theory, and the theory itself ignored the fact that HFT firms depend heavily on building infrastructure. By getting a headstart in developing a trading platform, the defendants were essentially entering the market much faster than they agreed to under their employment contracts.

The most important feature of the decision, though, concerned the length of the injunction. And it is here where the defendants probably were able to take some solace in defeat. The court refused to extend, or equitably toll, the non-compete period for the time in which the defendants were in breach. The court looked at the Second District Appellate Court’s decision from two years ago to hold that, under Illinois law, a contract must specifically provide for an equitable tolling, or extension, remedy. Otherwise, the court will not imply the term under the contract.

This, of course, does nothing to mitigate the defendants’ damages during the non-compete period. But it does serve as a cautionary tale for counsel in drafting non-compete clauses. Unless an equitable tolling remedy is clearly contained in the contract, the court will not agree to extend it even if the defendants were in breach leading up to the injunction order.

The Fourth District Appellate Court of Illinois has just made it substantially more difficult for employees to break their non-compete agreements.

Justice Steigmann authored an opinion that built upon his special concurrence two years ago in Lifetec, Inc. v. Edwards, a case where he called into question the applicability of the so-called “legitimate business interest” test used by Illinois courts to analyze restrictive covenants. This time around, Steigmann succeeded in convincing his robed colleagues to abandon the test altogether, overturning a number of Fourth District cases in the process. The decision does nothing to alter the test in other districts, and each of those still uses the test which is widely believed to be employee friendly.

By way of brief background, Illinois courts have essentially used a two-part analysis to determine whether a non-compete agreement is valid. First, it must be reasonable in scope. Second, it must protect a legitimate business interest. The second part of the test demanded an employer show that it had an interest in misuse of confidential information or near-permanent customer relationships acquired through the employee’s association with the employer. This is not a marked departure from what other states require, though some would argue Illinois is fairly narrow in not recognizing other types of business interests, such as special training. However, Justice Steigmann could not find Illinois Supreme Court authority for part two of the test.

By reviewing Supreme Court precedent, Steigmann is correct in that the Court never formally adopted the test which has been used for years by all five district appellate courts. He casually neglects to mention that in the past 60 years, the Court has taken on a grand total of six non-compete cases, and several of those looked at covenants outside the employment context. His analysis is not entirely accurate because his discussion also neglects to confront one of the Court’s leading precedents, House of Vision v. Hiyane. That case was authored by Justice Schaefer, probably Illinois’ most famous jurist.

In House of Vision, the Court specifically discussed at length the interest of a business in protecting customer relationships. It even distinguished prior precedents (also cited by Justice Steigmann) where the Court noted that in a sale-of-business non-compete, the legitimate interest to be protected concerned intangible goodwill. Covenants ancillary to a sale of a business are always easier to uphold, and it may well be true that a legitimate business interest is virtually presumed in such circumstances. But it seems illogical that the Court would discuss a legitimate business interest in connection with a sale-of-business covenant, and then deem the test inapplicable to more problematic employment covenants. Steigmann has assured us the Court will have to take an employment non-compete case soon to resolve the tension between the Fourth District and the rest of the state’s appellate courts.

Justice Steigmann’s analysis defaults to the reasonablenes test he cites from what he considers binding precedent: an employer must show that the covenant is no greater than is necessary for its protection. As applied to the facts involving Sunbelt Rentals and Neil Ehlers, the court concluded the 50-mile non-compete was reasonable even though the employment agreement also contained a well-drafted client non-solicitation clause.

It’s hard to see, though, how a court can determine whether a covenant is “no greater than is necessary for its protection” without analyzing what business interest it seeks to protect in the first place. The legitimate business interest test fills that vacuum and allows a court to fashion an appropriate restraint, or strike one entirely if the employer can’t articulate the need for a restriction.