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Compensation Litigation - Bonuses Under the Microscope

Executive compensation is under attack. It's an easy target for politicians when $20 billion in bonuses were handed out while the economy was in free fall. New York AG Andrew Cuomo has indicated he may attempt to claw back bonuses paid to Merrill Lynch executives in late 2008 that came to light during John Thain's recent ouster from BofA. Some execs are even foregoing their 2008 bonus. If you're an executive in the US right now there are 2 things you should avoid, bonuses and private jet travel. This is especially true if your company has received federal bailout money.

So what can Cuomo do? Apparently the strategy is to attack the Merrill Lynch payments as untimely (they were paid in December as opposed to the normal January) and explore whether shareholders were misled concerning the payments, i.e. securities fraud. A class action has already been filed in the Southern District of New York regarding the BofA/Merrill merger where the 2008 bonuses will likely be scrutinized.

Obviously, publicly traded companies are under heightened scrutiny and standards, but what about private companies? In Texas, companies can choose from a number of business forms, the typical corporation, a partnership, a limited partnership, or even a limited liability company. Often times a limited partnership will have a corporation as its general partner. There are pros and cons for each choice, usually tax considerations drive the decision of what entity to use.

The officers of those entities will owe fiduciary duties to the entity and in some cases, like a general partnership, to their partners. Thus, unreasonable bonuses or compensation are actionable, like a publicly traded company, through a derivative lawsuit or in some cases through a direct lawsuit against the offender usually based on a breach of fiduciary duty claim. The typical defense is the assertion of the business judgment rule, a topic for another day, but what is sound business judgment in these economic times differs from what was acceptable during upswings in the economy.

Does the payment pass the smell test? Payments should not be out of the ordinary. They should be consistent with historical payments tied to personal and company performance criteria. In many cases payments will be contractually mandated. In the case of a private company it would be wise to make sure other owners are informed of any bonuses paid out and the basis for such payments. In other words, avoid any claims of surprise. No matter what, it smells when a company hemorrhaging cash pays big bonuses.

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IBM/Papermaster Settle Non-Compete Suit

As with most lawsuits, the previously discussed IBM/Mark Papermaster lawsuit has settled.

Papermaster will not go to work with Apple until April and must certify to IBM he is not using any of its trade-secrets in the course and scope of his employment. Bottom-line, most non-compete cases are resolved after an injunction hearing (like this case) and after a significant amount of attorneys' fees are expended by both sides.

Non-Competes and College Football

When University of Arkansas Coach Bobby Petrino suggested non-compete agreements for assistant coaches might be on the horizon, the irony was apparent. Petrino left Louisville for the NFL's Atlanta Falcons in December 2007 then bolted 13 games into his tenure with Atlanta for Arkansas. Nevertheless, Petrino was upset defensive coach Lorenzo Ward was leaving for South Carolina. Petrino's own contract restricts him from accepting employment with a South Eastern Conference school in the western division until 2012, but non-competes are not common for assistants. This week Petrino announced the hiring of a new assistant coach with no mention of a non-compete.

The enforceability of non-compete agreements varies from state to state. Would an assistant coach non-compete be enforceable in Texas? Texas non-competes must comply with Section 15.50 of the Texas Business and Commerce Code.

Typically an employment based non-compete is used to prevent former employees from using company trade-secrets in a competing venture. What would the trade secret be for a coach? Strategies and plays are evident during every game. There is no secret Coke-like formula, though I'm sure a creative lawyer could find something to hang their client's hat on for purposes of filing suit. Mark Cuban claimed former coach Don Nelson used Mavericks' secrets when the Warriors defeated his team in the first round of the 2006 playoffs.

For now, Petrino will have to get used to assistant coaches leaving. Of course, Lorenzo Ward didn't leave his team during the middle of the season.

Clients, Competitors, and Employers are Watching Facebook

Chances are you or someone you know is on Facebook, MySpace, or LinkedIn. Google yourself and you'll probably see a LinkedIn or Facebook biography. Potential employers and recruiters will see the same information during the hiring process.

When I prepare for a deposition I always do basic Internet research on a witness. It's probably a safe assumption that business prospects and competitors are doing the same thing. This type of screening is cheap, quick, and turns up all sorts of information from previous employment, education, civic involvement, and even your time in the neighborhood fun run.

The reality is the Internet now documents all aspects of our lives. An Internet biography is being updated in real time for each of us and has a wide range of content. Social networking tools are wonderful in theory, but they contribute to our Internet biography.

There is no reason to quit updating your Facebook status. But as with anything in writing, assume it will be seen by all, not just your Facebook friends. Welcome to the reality of Web 2.0.

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Recruiters: Poach at your peril.

Most placement professionals try to stay away from taking employees from their company clients and in many instances it is prohibited by contract. More importantly, it can be bad business.

In a lawsuit filed in New York, JP Morgan Chase Bank v. IDW Group, Inc., JP Morgan brought suit against a firm that previously provided placement services and allegedly poached JP Morgan employees. It claims this was in violation of its contract with IDW and a breach of fiduciary duty. Here's blogger Kenneth Vanko's take on the case. It seems hard to believe that a business relationship evolved into a fiduciary duty relationship (very difficult to prove in Texas) but nevertheless, it is a claim.

Assuming there is no contractual provision in place, there is little a client can do to prevent a placement professional from soliciting its employees. Nevertheless, do you really want to have a reputation for poaching? Obviously, the facts and circumstances will vary and require individual analysis. Remember, there is little barrier to filing a lawsuit, basically a lawyer and a filing fee, and an irate client may seek legal redress like JP Morgan.

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The Inevitable Disclosure of Trade Secrets Under Texas Law

Commentators have described inevitable disclosure as the following:

There are circumstances in which trade secrets inevitably will be used or disclosed, even if the defendant swears that he or she will keep the information confidential. Courts applying the doctrine have differed over its reach and the circumstances required for its application, but, generally speaking, the doctrine applies when a defendant has had access to trade secrets and then defects to the trade secret owner's competition to perform duties so similar that the court believes that those duties cannot be performed without making use of trade secrets relating to the previous affiliation.

Linda K. Stevens, Trade Secrets & Inevitable Disclosure, 36 TORT & INS. L. J. 917, 929 (Summer 2001).

Some form of an inevitable disclosure argument is usually made when a Plaintiff is attempting to obtain a temporary restraining order or injunction to enforce a non-compete. The Texas Supreme Court has never recognized the doctrine.

In 1999, the Dallas Court of Appeals in an unpublished opinion stated: "this Court has recognized that a former employee may be enjoined from using or disclosing the former employer's confidential or proprietary information if the employee is in a situation where use or disclosure is probable." Conley v. DSC Communs. Corp., No. 05-98-01051-CV, 1999 Tex. App. LEXIS 1321 (Tex. App. Dallas --- 1999, no pet.)(not published).

That opinion stated the Dallas court was not adopting the inevitable disclosure doctrine. Whether "probable disclosure" is actually a viable theory under Texas law remains unresolved by the the Texas Supreme Court.

Read David Knight's analysis of a recent Ohio inevitable disclosure case here.

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