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In Socko v. Mid-Atlantic Systems of CPA, Inc., the Pennsylvania Supreme Court held that the Uniform Written Obligations Act (“UWOA”) could not render a restrictive covenant not supported by adequate consideration enforceable nonetheless. In so doing, the Court emphasized that such restrictive covenants – agreements that restrict an employee’s ability to compete against an employer after termination - are disfavored restraints on trade. As the dissent noted, the opinion does appear contrary to the plain language of the UWOA, but this dissonance highlights the disfavored nature of restrictive covenants.
As part of his employment with Mid-Atlantic, Socko signed three restrictive covenants: one upon the beginning of his employment, a second upon return to Mid-Atlantic after terminating his employment, and a third, more restrictive, agreement signed during his employment. Along with the third restrictive covenant, Socko did not receive a bonus, promotion or other consideration. The document recited the magic words of the UWOA that “the parties intended to be legally bound.” Socko resigned from Mid-Atlantic and went to work for a competitor, and Mid-Atlantic filed suit for breach of the restrictive covenant.
Pennsylvania law requires that restrictive covenants must be accompanied by adequate consideration. To meet this requirement, the employee must sign the agreement at the commencement of employment, or the employer must supply new consideration for restrictive covenants signed after the commencement of employment. “New consideration” includes a benefit to the employee or a beneficial change to the employee’s status. Socko did not receive any new consideration for the new restrictive covenant that Mid-Atlantic sought to enforce. Importantly, the new restrictive covenant also included language superseding all previous restrictive covenants, thus rendering the second restrictive covenant, which was supported by sufficient consideration, ineffective.
To address this problem, Mid-Atlantic argued that Socko was barred from challenging the restrictive covenant on the basis that it was not supported by new consideration because it contained the UWOA language. Mid-Atlantic asserted that the “magic words” foreclosed the usual analysis of consideration for restrictive covenants signed after the commencement of employment. The Supreme Court, affirming the Superior Court’s holding, held that the UWOA language does not foreclose such an analysis as it relates to restrictive covenants. In so doing, the Supreme Court rejected Mid-Atlantic’s framing of the issue. The issue was not, as Mid-Atlantic asserted, that the UWOA foreclosed Socko from challenging the validity of the agreement based on a lack of consideration. Instead, the Supreme Court stated that the issue was whether the UWOA acted as a substitute for consideration.
The Supreme Court relied on principles of statutory construction and the body of case law holding that restrictive covenants are disfavored restraints of trade to find that the UWOA language would not act as a substitute for consideration to support a restrictive covenant. The Supreme Court noted that the unique treatment of restrictive covenants in the law, including rigorous judicial scrutiny, required this outcome.
While this holding will not shock employment lawyers, as it is consistent with the court’s jaundiced approach to restrictive covenants, it does highlight important considerations for the use of such documents. Employers strive to foster their entry level employees into valuable positions, and such a practice benefits employer and employee. Employers must consider when and whether to require those employees to execute restrictive covenants, the consideration they will provide for new restrictions, and whether there are other, more productive, ways to retain a valuable employee and protect the business. The Supreme Court’s decision does not change the analysis, but it does clarify that no mere technicality will encourage a court to set aside the rigorous scrutiny of restrictive covenants required by the case law.
By Thomas P. Donnelly, Esquire
Reprinted with permission from the November 23, 2015 issue of The Legal Intelligencer. (c) 2015 ALM Media Properties. Further duplication without permission is prohibited.
A high business “tide” does not necessarily float all boats. Often, when business is good and profits increasing, a business owner’s desire to avoid sharing those increasing profits with an underperforming partner can create an irreconcilable divide; particularly in the case of a partner not intimately involved in the day to day operations of the business. Similarly, more difficult economic times stress cash flow, and may motivate a performing partner to explore options to decrease or eliminate that portion of the business income flowing to those performing at a lower level. Of course, the lesser performing partner generally adopts a contrary perspective. In either case, the divergence between two or more partners can render the status quo unacceptable and threaten the business as a going concern.
In approaching disputes among shareholders several factors must be considered. First, does the attorney represent the company, the majority interest, or the minority interest? The practitioner’s potential strategies must be informed by the relative position of the parties. Second, what are the respective goals of the parties? Certainly, the long term goal of extracting the most gain in income or the value of the investment is the goal of all the parties, but short terms strategies can have a dramatic and sometimes unintended consequence. Third, what is the impact of the potential short term strategies, not only on the business, but also on the individuals? Financing arrangements and personal guarantees must be considered. Finally, the respective rights and obligations of the shareholders post dissolution must guide the process.
When approached by a client considering business divorce, the attorney must consider potential conflicts of interest. Often, the majority owner’s first call is to corporate counsel. However, Rules of Professional Conduct 1.7, 1.8 and 1.9 bear upon whether corporate counsel can represent the interests of only one shareholder/member. In summary, representation of the “company” in the same or substantially related matter, or receipt of confidential information which may bear upon the representation of the party not seeking to be represented by corporate counsel, would preclude corporate counsel from undertaking the representation of a single shareholder/member. In some circumstances, it may be appropriate for the company to have separate counsel, such as where the company is a potential defendant in litigation commenced by either a third party or a shareholder. However, such representation is complicated by divergence among board members and can present difficult issues in corporate governance and communication between counsel and the corporate client.
Representation of the majority interest provides for the implementation of whatever remedies may be available under the terms of written agreements among the shareholders or by means of corporate action as to a non-performer. Significantly, there is no statutory right or method for the involuntary removal of a shareholder (arguably, such a remedy may be available in a partnership or Limited Liability Company setting). Potential courses of action include severance of employment or reduction in employment benefits for the non-performer, voluntary dissolution if provided and appropriate pursuant to the agreements between the parties, and modification of corporate governance. Of course, such potential courses of action do not come without risk, and the potential for litigation alleging minority oppression should be anticipated. In such a case, documentation of non-performance and job duties is compelling.
Representation of the minority owner is more difficult. Many times, the minority owner is left with litigation alternatives such as actions for the appointment of a custodian or liquidating receiver pursuant to 15 Pa.C.S.A. Sections 1767 or 1985, respectively. While these litigation remedies can be compelling, it should not be expected that litigation would result in continuation of the status quo indefinitely. Litigation rarely restores a broken relationship. Further, as recently noted by the United States District Court in Spina v. Refrigeration Service and Engineering, Inc. 2014 WL 4632427, a shareholder seeking the appointment of a receiver or a custodian bears a heavy burden and such appointment is at the discretion of the Court.
In addition, litigation alternatives necessarily incorporate business risk. Can the company survive the appointment of a custodian? By definition, a custodian is designed to continue the business as opposed to liquidation. The impact of a custodian on customer relationships, the entity’s capacity to contract and the willingness of business partners to engage in long term planning or projects may render liquidation inevitable. Certainly, the appointment of a custodian or receiver results in a loss of control on the part of the shareholders. All policy and management decisions fall within the purview of the court appointee. Such loss of control can be particularly problematic as it pertains to the case of tax reporting.
That same loss of control must be considered in a liquidation scenario. Liquidation contemplates an orderly winding down and distribution of assets which should be anticipated to include intellectual property and customer lists in addition to any fixed or hard assets possessed by the entity. As noted in Spina, liquidation is generally carried out by public auction so as to ensure fairness among shareholders. In the event of a liquidating receiver, a marketing campaign designed to enhance the value of the assets and maximize the selling price should be anticipated. In such circumstance, neither party may be in a position to acquire the liquidated assets or may be forced to over-pay, thereby rendering such acquisition economically unfeasible. Accordingly, while the goal at the outset of a liquidation proceeding may be to force a buy out of a shareholder, the end result may be that no party is in a position to acquire assets and engage in continued business operations.
The impact of a custodian or receivership on the individual business owners must also be considered. Business owners frequently guaranty corporate debt. The commencement of an action for the appointment of a custodian or receiver is almost always defined as an event of default with regard to the entity’s financing arrangements and could also trigger liability under the personal guaranty.
Finally, post liquidation obligations, or the lack thereof, should also be considered. It should be anticipated that former partners would compete post liquidation. The liquidation of the entity by definition precludes any claim for breach of fiduciary duty on the part of the company to the extent based on post liquidation acts or omissions and any right to enforce a post termination of employment restriction against competition. However, arguably, the sale of the entity’s assets, including confidential information such as customer lists, may implicate the Uniform Trade Secrets Act and preclude use of information known to the shareholders in competition with the buyer. While no case decided under Pennsylvania law addresses the application of the Act to such circumstance, the Act appears to be applicable where a shareholder retains possession of information which was subject to transfer in liquidation.
The complexities of business divorce through litigation mandate that the parties consider and pursue all avenues of amicable dissolution and consider all proposals for voluntary consolidation of ownership before pursuing litigation with uncertain results.
Tom Donnelly is a Partner with Antheil, Maslow & MacMinn. His practice focuses primarily on commercial litigation and transactions, employment disputes and personal injury.
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.
Reprinted with permission from the September 28, 2015 issue of The Legal Intelligencer. (c) 2015 ALM Media Properties. Further duplication without permission is prohibited.
In a precedential opinion, the U.S. Court of Appeals for the Third Circuit affirmed an award of punitive damages awarded by a jury in a dispute between two businesses. Brand Marketing Group LLC v. Intertek Testing Services, No. 14-3010 (Sept. 10, 2015), addressed two issues of first or limited impression relating to punitive damages. First, the Third Circuit held that juries may award punitive damages in negligent misrepresentation claims. Second, the Third Circuit considered whether courts may consider harm to the public, rather than harm to the plaintiff only, in awarding punitive damages. As the dissent in Brand Marketing noted, the Third Circuit's decision creates some interesting risks and strategies for commercial disputes.
Brand Marketing Group LLC developed vent-free heaters known as Thermablasters. Brand contracted with a manufacturing company to manufacture the heaters, and a testing company, Intertek Testing Services N.A. Inc., to perform testing for the Thermablasters pursuant to American National Standards Institute (ANSI) standards. Brand entered into a contract with Ace Hardware Corp. to buy 3,980 Thermablasters for $467,000. Intertek then performed the testing on the heaters and found that they met the applicable ANSI standard. The heaters were delivered to Ace Hardware. Ace halted sales after discovering that the heaters, in fact, failed to meet the applicable ANSI standard. Ace sued Brand and obtained a judgment for $611,060. Brand then filed a claim against Intertek.
Brand prevailed on its negligent misrepresentation claim after a three-day trial. The jury awarded $725,000 in past compensatory damages, $320,000 in future compensatory damages, and $5 million in punitive damages. The jury found that Intertek negligently misrepresented it had the necessary expertise to test the heaters. Relevant to the issue of punitive damages, the jury found, after instruction by the court, that Intertek acted with reckless disregard for the safety of others.
The Third Circuit affirmed the trial court's denial of Intertek's post-trial motions, and thus the jury award of $5 million in punitive damages. In so doing, the Third Circuit predicted that the Pennsylvania Supreme Court would allow an award of punitive damages for negligent misrepresentation claims, noting there existed no precedent for treating negligent misrepresentation claims differently from general negligence claims for purposes of awarding punitive damages.
However, this holding is not the most interesting part of the case. The Third Circuit next examined whether courts could consider harm to the public in general in awarding punitive damages, or whether the court must limit its analysis to damage to the plaintiff. In this case, Brand experienced financial harm only (Intertek did assert, without success, that the economic loss doctrine barred Brand's claim). No consumer experienced an accident or injury as a result of the testing failure. Intertek argued that an award of punitive damages violated the due process clause under these facts because the jury should not consider potential harm to consumers, and must only consider harm to Brand, in awarding punitive damages. The court found that this issue was "not settled by precedent." The Third Circuit analyzed the case law to conclude that courts may only consider instances of misconduct by the defendant in evaluating a punitive damages award where the conduct is of the same sort as the conduct that injured the plaintiff. The court rejected Intertek's argument that applicable law prohibited consideration of potential public harm in reviewing an award of punitive damages, and found that, in this case, potential public harm was "directly tied" to the harm to the plaintiff. The Third Circuit likewise found that the fact that no one was physically injured by the Thermablasters did not matter, stating that Intertek "should not be rewarded" for the fact the risk did not come to fruition. Thus, Brand stands for the proposition that a court may consider potential harm to the public in reviewing an award of punitive damages as long as the potential harm is directly tied to the injury to the plaintiff.
In his dissent, Judge D. Michael Fisher opined that if an "admission of imperfection" or a "lack of absolute uniformity" allows for an award of punitive damages whenever something goes wrong, "Pennsylvania companies may be in for a rude awakening." Indeed, as Fisher notes, the Brand decision will create new strategies and areas of risk for businesses involved in commercial disputes. Brand represents, at its most basic level, a commercial dispute—a dispute between businesses regarding a failure of one party to do what that entity contractually agreed to do. Interestingly, Brand did not assert that it was entitled to punitive damages as a result of intentional and outrageous conduct of Intertek, but instead proved to the jury that Intertek's "reckless disregard" for a known risk to safety justified punitive damages. Of course, the jury heard evidence that it concluded met the standard, but the application of the standard to a business dispute is an interesting one. Presumably, this standard would have relevance in any business tort case where a failure occurs in, for example, manufacturing or testing products.
Procedurally, Brand allows for the issue of punitive damages to go to the jury, and, arguably, expands the factors a jury may consider in awarding punitive damages in the context of a business tort, but Brand does not mean that a plaintiff will prevail on the issue. It goes without saying that the threat alone may be enough. Brand's strategy in asserting a claim for negligent misrepresentation (and not, for example, breach of contract) created the opportunity to plead and prove punitive damages. Brand was also fortunate to have sufficient facts to overcome the application of the economic loss doctrine. The Third Circuit's opinion in this case supports that strategy by allowing punitive damages in a negligent misrepresentation case and by allowing the consideration of potential (related) harm to the public. In this way, the Third Circuit has created another tool in the commercial litigation arsenal. It will be interesting to see whether courts in the future limit the application of this case to its facts, or if it marks a dramatic change in the available remedies for business torts. •
By Bill MacMinn
A client Googled the name of his own retail store. When he saw the results he was alarmed to learn that the result returned his store name with the name and telephone number of his biggest competitor, and a link to the competitor’s website, appeared in the top three search results and before the link to his own site. My client’s business name included a trademarked national brand. Surely, this must be unlawful?
Google searches return a natural or organic list of results produced by the keywords entered by the user. In addition, Google’s search engine also displays paid advertisements known as “Sponsored Links”. Google’s AdWords advertising platform permits a sponsor to purchase keywords that trigger the appearance of the sponsor’s advertisement and link when the keyword is entered as a search term. My client’s crafty competitor purchased the name of my client’s business as a “keyword” so that when a user searched on my client’s business name his competitor’s name was displayed as a “Sponsored Link” within the top three results and before the information and link to my client’s website. Google, which earns significant revenue from the AdWords platform, permits the use of trademarks as keywords.
There have been a multitude of lawsuits alleging trademark infringement over this practice. Few result in published decisions and of these; nearly all were losses for the trademark owner. Typical of these is 1–800 CONTACTS, INC. vs. LENS.COM, INC., a 2013 case from the Tenth Circuit, involving two internet sellers of contact lenses and related merchandise. At the time the case was filed, 1–800 Contacts, Inc. was the world’s leading retailer of replacement contact lenses, selling them by telephone, by mail order, and over the Internet. It was the owner of the service mark “1800CONTACTS”. Lens.com is one of 1–800’s competitors in the replacement-lens retail market, selling its products almost exclusively on line. Lens.com purchased the keyword 1800 CONTACTS which caused its “Sponsored Links” to appear when a Google user searched for that phrase. The Court ruled that Lens.com did not violate trademark laws. As with most such cases, the legal analysis turned on whether the alleged infringer’s use of the mark was likely to cause confusion to consumers. In ruling that such confusion was unlikely, the Court examined several factors, including the relatively few users who used the Lens.com link generated by the keyword “1800CONTACTS” to click through to the Lens.com site and the dissimilarity between the two companies websites which the Court concluded would minimize the likelihood of confusion. In other cases Courts have held that such factors as the sophistication of the Google users and the fact that the sponsored links generated by the keyword search appeared in boxes and were visually dissimilar from the organic links were sufficient to avoid user confusion.
Efforts to curtail this practice using state trademark common law and laws regulating unfair competition have also failed as these legal theories rely heavily on Federal trademark law requiring plaintiffs to meet the same likelihood of confusion requirement.
One commentator has observed that in many of the cases the sponsored links generated very few visits to the competitors’ site from users “clicking through” on keyword generated links. The economic value of those visits was small. For example, in the 1 800 Contacts case, the most optimistic estimate of damages was in the range of $40,000, much less than the cost of prosecuting the case.
Although the advice was counter-intuitive, I had to inform my client that any action based on his competitor’s use of his trademarked name as a keyword was not likely to succeed. The silver lining, if there is one, is that the strategy doesn’t appear to result in significant loss of revenue.
By William T. MacMinn, Esquire Reprinted with permission from the July 27, 2015 issue of The Legal Intelligencer. (c) 2015 ALM Media Properties. Further duplication without permission is prohibited.
The Superior Court confirmed in the recent decision of Drake Manufacturing Company, Inc. v. Polyflow, Inc., 109 A.3d 250 (Pa. Super. 2015), that a foreign corporation doing business in Pennsylvania must be registered pursuant to 15 Pa.C.S.A. §4141(a) in order to maintain any litigation or recover any damages in the Commonwealth (15 Pa.C.S.A. §4141(a) is now enacted at 15 Pa.C.S.A. §411(a)). The Drake case is an instructive and cautionary tale because the Defendant in that case admitted contractual liability for non-payment, but defended the case solely on the lack of capacity issue. There was no doubt that the Plaintiff was a foreign corporation doing business in Pennsylvania and had not registered as required by Pennsylvania’s Business Corporation Law. Nevertheless, even after many years and several opportunities to obtain the Certificate of Registration, Plaintiff failed to do so until three weeks after winning a verdict in the case.
Defendant properly pled the lack of capacity defense in its Answer, renewed the argument in a motion for non-suit at the close of Plaintiff’s case, and filed post-trial motions requesting judgment n.o.v. Three and a half years passed from the time of Plaintiff’s complaint until verdict, during which time Plaintiff did not make any effort to obtain the required Certificate. Plaintiff presented no evidence on the capacity issue at trial, nor could it since it did not comply with the statute until three weeks later. Further, at the conclusion of the trial Plaintiff allowed the record to close instead of requesting that it be kept open to allow time to obtain and offer into evidence its Certificate of Registration. Plaintiff only submitted its registration as a part of its rebuttal to Defendant’s Motion for Judgment N.O.V. The trial court denied Defendant’s Motion finding that submitting the certificate during post-trial proceedings was permissible. It entered judgment against Defendant in the amount of nearly $300,000.00.
On appeal, the Superior Court reversed the lower court and remanded for entry of Judgment N.O.V. in favor of the Defendant. Holding that registration is an absolute pre-requisite for a foreign Plaintiff doing business in Pennsylvania to maintain a suit and recover damages, the Court further reasoned that the after-acquired certificate could not be accepted during post-trial proceedings, nor could the record be re-opened to accept it because it was evidence that could and should have been presented during trial. The Court further noted that the issue of lack of capacity to sue may be raised either by Preliminary Objection or, as was done here, by Answer and New Matter and cautioned that failure to do either waives the defense.
However, the question remains, is there an earlier time period at which waiver may attach? Notwithstanding Pa.R.C.P. 1028, there may be. In International Inventors Incorporated, East v. Berger, 363 A.2d 1262 (Pa. Super. 1976) the Plaintiff sought a preliminary injunction and damages. There the Defendant properly raised the issue of Plaintiff’s incapacity at the preliminary injunction hearing but the preliminary injunction was nevertheless granted. On appeal, the Superior Court held this was error. The Court explained that the trial court should have denied Plaintiff’s request for an injunction, but should also have stayed the proceedings to give Plaintiff an opportunity to register and thereby cure its lack of capacity. Instead, the Court granted the injunction and is so doing decided “an issue” (i.e. injunctive relief) in the case and thereby allowed Plaintiff to “maintain a suit” in violation of the statute. The Court reversed the grant of the injunction. Although Berger analyzed the issue of timeliness in the context of the Plaintiff’s compliance with registration requirements, the Court’s reasoning also supports the argument that a Defendant, who does not raise the capacity issue prior to preliminary injunctive relief being granted, similarly may have waived the issue for the life of the suit even though the time for responsive pleadings under the Rules of Civil Procedure had not expired. Thus, while the question of the Plaintiff’s capacity may not be at the forefront of case strategy analysis, Berger and Drake are a caution to counsel that the issue cannot be ignored.
By Thomas P. Donnelly, Esquire Reprinted with permission from the May 29, 2015 issue of The Legal Intelligencer. (c) 2015 ALM Media Properties. Further duplication without permission is prohibited.
Confidentiality agreements have become commonplace in commercial litigation. The purpose of a confidentiality agreement as the protection from disclosure of either private personal or sensitive business information which gives a party a competitive advantage is certainly a noble one and one which mandates an agreement against such disclosure in a wide variety of circumstances. Often, the parties seek the imprimatur of the court by requesting the court adopt the agreement of the parties as an order thereby incorporating the court’s power to impose sanctions in the event of breach. The entry of such an order, whether intentionally or as an unintended consequence, may change the nature of a third party, foreign to the dispute with respect to which the confidentiality order was entered, to obtain information produced in the prior litigation.
Federal law (Title VII of the Civil Rights Act of 1964) prohibits, among other matters, a covered employer, from discriminating against an employee because of such individual’s sex. Generally, a private employer with 15 or more employees, engaging in interstate commerce, is covered by Title VII. The Pregnancy Discrimination Act (PDA) passed in 1978, added discrimination based on “pregnancy, childbirth, or related medical conditions” to this prohibition.
The PDA also provides that employers are required to treat “women affected by pregnancy… the same for all employment-related purposes … as other persons not so affected but similar in their ability or inability to work” .
In the recent case of Young v. UPS, the Supreme Court, in interpreting the provision above, announced a new test for analyzing pregnancy discrimination claims. The relevant facts of the case are as follows:
Plaintiff Young worked as a part-time driver for defendant United Parcel Service (UPS). Her duties included pickup and delivery of packages. While employed by UPS she became pregnant and was told by her doctor that she should not lift more than 20 pounds during her first 20 weeks of pregnancy and no more than 10 pounds thereafter. Drivers in Young’s position were required to lift up to 70 pounds. UPS therefore advised Young that she could not work while under a lifting restriction. As a result Young remained home without pay during most of her pregnancy and ultimately lost her employee medical coverage.
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.