Patty Collins, a Partner with Antheil, Maslow & MacMinn, will be joined by Cindy Bergvall, CPA,  of Bee, Bergvall & Co. for a panel discussion on new Department of Labor overtime regulations and their impact on employers.  This informative breakfast seminar is hosted by The Catalyst Center for Nonprofit Management on October 7th at Aldie Mansion in Doylestown.  There is no charge for this event, but registration is required. 

These new regulations will require action from almost every for-profit and not-for-profit organization with employees earning less than $47, 476 per year. Participants will learn about the changes in the law and what organizations will need to do when the law goes into effect on December 1, 2016.

Employers are now using a new strategy in an effort to keep their employees from leaving the company and working in a competitive enterprise. Traditionally, employers used restrictive covenant agreements, almost always built in to the employee’s written employment agreement. These covenants prohibit employees from engaging in competition with a former employer. Courts tend not to favor restrictive covenants because they impinge on the ability of a worker to earn a living – they are a restraint of trade.

To limit the scope of restrictive covenants, courts impose a reasonableness standard. Restrictions for a limited time, such as a year, and a small geographical area, such as a five mile radius, were favored. Long-term and broad covenants were not. The employee’s skill set and knowledge of the original employer’s enterprise are also key factors in assessing the business need for any restrictions. The more skill needed to do the work, the more knowledge an employee has of the employer’s business strategies, the more justifiable the non-compete clause becomes.

Why Employers Like the Employee Choice Doctrine

The strategy that employers are now using in some states, including Pennsylvania, is a little more artful. Employers are offering employees post-employment benefits such as stock options and deferred compensation with a condition – a catch. The catch is that the benefits are only available if the employee who leaves the company does not compete with the employer providing the benefits. The employee is given a choice to either accept the benefits and not compete, or compete, but forfeit the benefits and be subject to repayment, or "clawbacks” of benefits already paid. The choice has become known as the employee choice doctrine.

The employee choice option works better for the employer than the typical restrictive covenant because it enables the employer to shift the burden to the employee. In the classic non-compete case, the employer's remedy was to seek an injunction against the competing former employee ordering him or her to cease the competition. In employee choice cases, the employer can still seek an injunction. Better still, the employer can just terminate the benefits (the stock option or other post-employment benefit) thus shifting the burden to the employee to seek redress in the courts by demanding payment of the benefit.

In some states, like New York, there is no review of the employee choice option to assure that the choice offered to the former employee is reasonable. That is not the case in Pennsylvania. Pennsylvania law currently does allow employees to craft employment benefits that are tied to non-competition, but the tie has to be reasonable. The cases in Pennsylvania are evolving. As with restrictive covenants, the more reasonable, meaning less strict, the choice is - the more likely Pennsylvania courts will uphold it.

Key Drafting Issues in Employee Choice Benefit Contracts

When drafting employee choice benefit provisions, employers should keep in mind the following points:

• The Employee must have a real choice. The choice between competing in the new position and forfeiting the benefit or not competing and keeping the benefit should be clear. In short, the employee should understand that there is a trade-off.

• The Employee has to leave voluntarily. The choice option is likely only valid if the employee controls the decision about leaving the current employer. Some courts reason that the employee choice doctrine is not really a choice if the employer fires the employee without cause. In such a circumstance, the employer has little or no legitimate business interest in enforcing the non-compete obligation.

• Consideration.  For the employee to be forced to make a choice between forfeiting assets and working with a competitor, the employer has to give the employee additional consideration over and above that which the employee would have been entitled to receive in the normal course of working for the employer, including severance or other payments normally paid upon termination.

Why Legal Counsel Can Help

Experienced business counsel understand the evolving nature of the employee choice doctrine.  In particular, they keep current with the Pennsylvania and federal court decisions so they can craft documents which have the best chance of surviving attack by employees who seek to avoid them by claiming that the choice is invalid as a restraint of trade.

Before drafting, and certainly before presenting an employee benefit with a forfeiture provision – employers should seek to have their business counsel review the language of the benefit contract.

In Roman v. McGuire Memorial, the Pennsylvania Superior Court announced a new basis for challenging terminations of at-will employees.  While Pennsylvania law has always recognized a “public policy” exception to at-will employment, the case law has limited that exception.  Roman expands the exception to include terminations of health-care workers who refuse to work mandatory overtime.
 
Roman worked as a direct care worker, subject to McGuire Memorial’s mandatory overtime requirement.  She was an at-will employee.  The mandatory overtime policy allowed for termination of employees who refused to work mandatory overtime on four occasions. McGuire terminated Roman’s employment after her (disputed) fourth refusal, and Roman sued for wrongful termination in violation of public policy.  After a nonjury trial, the trial court found in Roman’s favor, awarded her $121,869.93 in back pay and lost benefits, and ordered reinstatement to her former position.
 
Relevant to the dispute is Pennsylvania’s Prohibition of Excessive Overtime Act (43 P.S. § 932.1 et seq.).  The Act prohibits a health care facility from requiring employees to work in excess of an “agreed to or previously determined and regularly scheduled daily work shift.”  43 P.S. § 932.3(a)(1).  Further, the Act prohibits retaliation against an employee who refuses to accept work in excess of those limitations.  43 P.S. § 932.3(b).  The Act does not provide for a remedy for employees terminated in violation of its requirements.  It does contemplate a regulatory scheme to address complaints by employees, but those regulations are not yet final.
 
The Superior Court held that the Act established a public policy that healthcare facilities should not require its direct care workers to work overtime hours, and, as such, Roman’s termination for refusing to work overtime hours amounted to wrongful termination in violation of public policy.  Further, the Court distinguished cases in which it had refused to recognize a public policy exception to the at-will doctrine because a statute had already created a remedial scheme to address violations of the particular policy identified in that statute, such as the Pennsylvania Human Relations Act.  In the case of the Prohibition of Excessive Overtime in Health Care Act, there existed no remedial scheme to address the wrong.
 
The Superior Court has thus used The Act to identify a new public policy exception to the at-will doctrine.  Health care entities should be mindful of this exception in creating and enforcing overtime policies for direct care workers. 

By Patricia C. Collins, Esquire, Reprinted with permission from the March 23, 2015 issue of The Legal Intelligencer. (c) 2015 ALM Media Properties. Further duplication without permission is prohibited.

Recently, the United States District Court for the Eastern District of Pennsylvania, in Mathis v. Christian Heating and Air Conditioning, Inc., 13-3747 (March 12, 2015), examined the effect of factual findings in unemployment compensation proceedings in Pennsylvania on discrimination claims filed in federal court.  The conclusion?  The discrimination case is a “do over,” and nothing determined by the tribunal (including the Unemployment Compensation Board of Review and the Commonwealth Court) will collaterally estop either party, presumably, from taking a contrary position in the subsequent wrongful termination suit. 

 The facts are these:  Mr. Mathis was employed at Christian Heating and Air Conditioning (“Christian Heating”) for nearly two years.  During that time, Mr. Mathis had placed black tape over part of his identification badge.  The objectionable part of the card professed the company’s mission statement to, inter alia, run the business in a way that was “pleasing to the lord [sic]….”  Mr. Mathis’s supervisor and the owner of the business required him to remove the tape from the back of his badge.  Mr. Mathis refused to do so, and contended that he was terminated as a result. 

By Thomas P. Donnelly, Esquire, Reprinted with permission from the November 24, 2014 issue of The Legal Intelligencer. (c) 2014 ALM Media Properties. Further duplication without permission is prohibited.

I do not generally characterize myself as a fan of arbitration.  While proponents argue arbitration is a superior form of dispute resolution and more efficient than litigation, my personal experience in the representation of privately held businesses and individuals is otherwise.  In many situations, the sheer cost to initiate an arbitration proceeding may be prohibitive.  For a claimant, even if that initial cost is not an effective deterrent, the budget of ongoing hourly fees required of a qualified arbitrator in addition to the parties’ own anticipated legal fees, can quickly impair the potential recovery. For a Respondent, many times the cost of proceeding was not considered at the time of execution of an agreement which compels arbitration; thus the obligation to make payment for a service technically rendered by the courts without cost comes as a surprise. In either case, the parties must realize that at arbitration each is compensating not only its own lawyer, but, at least partially, another lawyer and a private dispute resolution industry as well. While arguably profitable for the legal profession, the realities of proceeding can result in difficult client discussions.

The above being said, there are situations where arbitration clauses can be of substantive, procedural and, consequently, financial benefit.  In such cases, even a skeptic of arbitration must recognize the benefits of the bargained for exchange which is an arbitration agreement.  Under the current state of the law, and given the trends in the enforcement of the right to contract, a carefully considered and artfully drafted arbitration agreement can be an essential aspect to certain business relationships and an important term of negotiation.

Employers should almost always include the broadest possible arbitration clause in any employment agreement and, generally, as a term of employment.  In most cases, an action arising in an employment situation concerns a claim raised by an employee, or worse, a class of employees against the employer.  The employer is generally a defendant.  In such cases, arbitration clauses can serve several functions.  First, an employee initiating the action must satisfy the initial fee if mandated by the prevailing agreement. As such fees are often determined by the amount at issue, the larger the claim, the higher the fee, and the greater deterrent toward commencement of the action.  As of November 1, 2014, the filing fee for the commencement of an American Arbitration Association claim involving more than one million but less than ten million dollars was $7,000.00.  Note there is no refund of the filing fee should the matter resolve.  Certainly, the requisite fee is a deterrent to the filing of a border line claim, but could also be a deterrent to a claimant’s joinder of additional even less viable claims which include different damage components.  Under any circumstances, the employee faces an early branch to the decision tree.

The flexibility of arbitration clauses within employment agreements may prove even more critical.  With careful drafting, an employer can effectively insulate itself from certain employment related class actions.   In Quillion v. Tenet HealthSystem Philadelphia, Inc. the United States Court of Appeals for the Third Circuit compelled arbitration of a Fair Labor Standards Act claim and, more importantly, declined to strike down a provision of an employment agreement requiring such claims be brought on an individual basis precluding proceedings as a class.  The Quillion Court indicated that such a class action waiver was consistent with the Federal Arbitration Act and suggested in the strongest of terms that Pennsylvania’s preclusion of class action waiver in the employment context was preempted by Federal Law.  Certainly, the equities of any such situation, including preservation of remedies and additional recovery of fees and costs are important to the court’s inquiry, but the current trend is to support the rights of the parties to contract, even to their own peril.

The flexibility of the arbitration agreement also allows for exclusions from the scope and reservation of certain matters for litigation.  Matters of equity such as enforcement of restrictions against competition or solicitation can be reserved for the courts, thereby preserving immediate access to judicial process for enforcement of employer remedies.  Interestingly, the reverse may not necessarily be true.  The Montgomery County Court of Common Pleas recently dismissed a complaint for declaratory judgment seeking a judicial determination voiding certain restrictions against competition determining that such equity claim was within the scope of the arbitration agreement and, therefore, for the arbitrator to decide.                 

Arbitration also plays a vital role in the ever broadening world economy.  In 2014, international business is the norm rather than the exception.  The courts of the United States and the signatories to the New York Convention on Arbitration have routinely enforced arbitration clauses establishing the parameters of dispute resolution as consistent with the parties’ right to contract.  Critically, the arbitration clause can protect a company operating in this country from the many pitfalls, incremental expenses and inconsistencies of litigating in a foreign country or even against a sovereign nation in its own judicial system by selecting a choice of law and a situs of the arbitration proceeding.  Such forum selection also provides a certain substantive component not only as to applicable law, but also in the qualification of fact finders as the roles of qualified arbitrators available for commercial disputes continue to grow.   Finally, arbitration may be preferable to litigation in the United States District Courts as the parties may be granted greater flexibility and input to the development of the schedule of proceedings rather than subject to the rule of the federal judge, who may or may not be familiar with often complex substantive issues.           Finally, arbitration may also be preferable in any relationship where confidentiality is key.  In some cases, the simple fact of a public filing is of concern.  In many others, the factual allegations of a complaint, even if eventually proven unfounded, can be damaging.  While an arbitration clause cannot prevent a claimant from filing an initial public complaint in court, an enforceable arbitration clause can bring an abrupt end to the public aspect of the dispute.

The courts remain the preferred forum for dispute resolution in many circumstances.  However, with the growing trend of contract enforcement to the terms of arbitration agreements even a skeptic must admit that the inclusion of an arbitration clause in certain circumstances can provide a substantive advantage and dramatically impact the landscape of dispute resolution to your client’s benefit.

Plan B:  Litigating Non-Solicitation Provisions

By Patricia C. Collins, Esquire
Reprinted with permission from December 12, 2013 issue of The Legal Intelligencer. (c)
2013 ALM Media Propeties. Further duplication without permission is prohibited.

Increasingly, employers and their attorneys meet resistance when seeking to enforce covenants not to compete.  States such as Georgia and California continue to refuse to honor those restrictions. Even in states that recognize the validity of such agreements, Courts can restrict the geographic or temporal scope of the agreement, refuse to find sufficient irreparable harm to permit the entry of a temporary or preliminary injunction, or find other equitable grounds to refuse to enforce the covenant not to compete.  Employers do have a back-up plan, however.  Recent cases illustrate that the court will enforce agreements not to solicit customers and clients after termination.  These cases also illustrate that courts will look to the nature of the contacts with clients or employees to determine if there is a breach of a non-solicitation provision.

In Corporate Technologies Inc. v. Harnett, the United States Court of Appeals for the First Circuit affirmed the district court’s grant of a preliminary injunction against a former employee of Corporate Technologies Inc. and his new employer.  The preliminary injunction restricted the employee from doing business with certain customers of Corporate Technologies with whom he worked during his employment, and required the new employer to withdraw bids which the employee prepared during his employment with the new employer.  The First Circuit court noted that the district court was specifically applying the non-solicitation and not the non-compete provisions of the agreement.  Accordingly, both courts engaged in a discussion of the applicable requirements for the entry of a preliminary injunction (which are the same under Massachusetts and Pennsylvania law).  Notably, the First Circuit did not engage in a discussion of the reasonableness of the geographic or temporal scope of the agreement, or whether the employer had a “protectable interest” served by the non-solicitation provision.  The district court found that the employee breached the non-solicitation provisions of the agreement, and the First Circuit affirmed the grant of the preliminary injunction.

By William T. MacMinn, Esquire Reprinted with permission from August 13, 2013 issue of The Legal Intelligencer. (c)
2013 ALM Media Properties. Further duplication without permission is prohibited.

But He Asked Me First!

Is that a good defense to an alleged breach of a non-solicitation agreement?  In a recent decision a Pennsylvania trial court said that it was.

In Marino, Robinson & Associates, Inc. v. Robinson, 2013 Pa. Dist. & Cnty. Dec LEXIS 18 (Jan 2013) Judge Wettick of the Allegheny County Court of Common Pleas entered summary judgment dismissing the case against Defendant who allegedly violated a non-solicitation clause.  Plaintiff acquired Defendant’s accounting practice.  The contract signed by the parties included clauses prohibiting Defendant from competing with the Plaintiff or soliciting any of her former clients.  The non-compete was not implicated in the case because, while the Defendant provided competing accounting services, she did so outside of the geographic limits imposed by the covenant.  However, she provided those services to several of her former clients, each of whom unilaterally approached her and asked her to continue on as their accountant. Plaintiff alleged that by providing services to these former clients, the Defendant violated the non-solicitation clause of the contract which prohibited Defendant from “Solicit(ing) in any manner any past clients … for a period of ten (10) years from closing”.  The Court, following cases decided in other states, agreed with the Defendant that she was not required to turn away former clients who, unsolicited, approached her to request that she provide services. The Court held that solicitation required conduct on the part of the Defendant designed to awaken or incite the desired action in the former client. Where, as in this case, the former client approached the Defendant unilaterally, the Defendant did not violate the non-solicitation clause.

A similar result obtained in Meyer-Chatfield v. Century Bus. Servicing, Inc., 732 F. Supp. 2d 514, 517-518 (E.D. Pa. 2010)  where the Court decided that the meaning of the word “solicit” was not ambiguous and applied the parole evidence rule to bar evidence regarding the meaning of the term.  In Meyer-Chatfield, Plaintiff’s Vice-President of Sales and Marketing left his employment with Plaintiff and accepted a similar position with Defendant.  An agreement, which included non-solicitation provisions, was negotiated between the parties.  Shortly thereafter the parties engaged in negotiations for the acquisition of Plaintiff by Defendant.  Those negotiations failed.  Subsequently (and after he was terminated by Plaintiff) one of Plaintiff’s sales persons accepted employment with Defendant and took with him other employees (who were part of his sales team) with the result that several significant customers of the Plaintiff eventually began doing business with Defendant. Plaintiff brought suit alleging violation of the non-solicit provisions in the solicitation of both the employees and the customers.

The language at issue prohibited the direct or indirect “…solicit(ation) of any of Plaintiff's employees, agents, representatives, strategic partnerships, [or] affiliations.” The contract did not define the word “solicit.”  The Court looked to the common meaning of the term, citing the Black's Law Dictionary definition:

"To appeal for something; to apply to for obtaining something; to ask earnestly; to ask for the purpose of receiving; to endeavor to obtain by asking or pleading; to entreat, implore, or importune; to make  petition to; to plead for; to try to obtain; and though the word implies a serious request, it requires no particular degree of importunity, entreaty, imploration, or supplication. To awake or incite to action by acts or conduct intended to and calculated to incite the act of giving. The term implies personal petition and importunity addressed to a particular individual to do some particular thing."

The Court also cited the Webster’s definition of the word: “to entreat, importune . . . to endeavor to obtain by asking or pleading . . . to urge.”

The issue before the Court was whether the word “solicit” was ambiguous permitting parole evidence of its meaning.  In holding that it was not, the Court reviewed Akron Pest Control v. Radar Exterminating Co., Inc. 216 Ga. App. 495, 455 S.E.2d 601 (Ga. App. 1995), in which the Court held that an agreement “not to solicit, either directly or indirectly, any current or past customers” requires more than “[m]erely accepting business [to] constitute a solicitation of that business.” A party is not required to turn away uninvited contacts of former customers. The Court also cited Maintenance Co. v. West, 39 Cal. 2d 198, 246 P.2d 11 (Cal. 1952) in which it was held that neither the act of informing former customers of one’s change of employment, nor the discussion of business upon the invitation of the former customer constitutes solicitation.  Finding no ambiguity, the Court prohibited testimony regarding the parties’ understanding of the term. 

It seems clear that the Court will apply the ordinary meaning of the word “solicit” which has been repeatedly found to require some overt act of entreaty on the part of the former employee designed to induce the former customer to action.  Responding to an uninvited inquiry from a former customer, even where that inquiry is for the purpose of discussing business, and where that inquiry ultimately results in doing business with that former customer, will not be sufficient to support a finding of a breach of a non-solicitation agreement. Of course, doing business with a former customer may well violate the provisions of a non-compete clause and, in such cases, the Courts have not been reluctant to enforce such provisions.  Although research has found no cases directly on point, the reasoning of the cases suggests that advertisements or social media posts informing the general public or one’s social media circle of new employment circumstances would also not constitute the type of targeted action required to support a finding that a non-solicitation agreement has been breached.