Supreme Court: Individual Participants Can Sue for Breaches of Fiduciary Duty in 401(k) Accounts.

Last week, the Supreme Court issued a much anticipated decision involving the right of an individual benefit plan participant (i.e., an employee) to sue the plan administrator (i.e., the plaintiff’s employer) for breaches of fiduciary duty involving the participant’s individual defined contribution plan – (i.e., 401(k) account). LaRue v. DeWolff, Boberg & Associates, Inc., No. 06-856 (2/20/08). In that case, the plaintiff employee alleged that the failure of the employer to follow the plaintiff’s investment instructions “depleted” (or caused a loss in) his 401(k) account of approximately $150,000 and that this failure constituted a breach of fiduciary duty under ERISA. The Supreme Court agreed that ERISA would govern the plaintiff’s claim and could provide him with a remedy if he were to ultimately prevail at trial.

In Massachusetts Mutual Life Ins. Co. v. Russell, 473 U.S. 134 (1985), the Court had previously indicated that § 502(a)(2) of ERISA does not provide a remedy for individual injuries apart from injuries to the benefit plan, although the statute authorized recovery for breaches of fiduciary duties which impair the value of plan assets in a participant’s individual account. However, the Russell case involved a disability plan -- defined benefit plan – which was typical at the time – and LaRue raised questions about a defined contribution plan. The Russell plaintiff also eventually received her full contractual benefits under the benefit plan and sought through her lawsuit only consequential damages for the delay in processing her claim. When faced with a defined benefit plan, the participants are promised a fixed benefit. Remedying any breach of fiduciary duty involving a defined benefit plan will not affect an individual’s entitlement to the fixed benefit since the remedy to the plan will benefit all participants equally. However, in a defined contribution plan, breaches of fiduciary duties could reduce an individual’s benefits without threatening the solvency of the entire plan. As observed by the Court:

“Russell’s emphasis on protecting the “entire plan” from fiduciary misconduct reflects the former landscape of employee benefit plans. That landscape has changed. Defined contribution plans dominate the retirement plan scene today. In contrast, when ERISA was enacted, and when Russell was decided, ‘the [defined benefit] plan was the norm of American pension practice.’ . . . Unlike the defined contribution plan in this case, the disability plan at issue in Russell did not have individual accounts; it paid a fixed benefit based on a percentage of the employee’s salary. “

“For defined contribution plans, however, fiduciary misconduct need not threaten the solvency of the entire plan to reduce benefits below the amount that participants would otherwise receive. Whether a fiduciary breach diminishes plan assets payable to all participants and beneficiaries, or only to persons tied to particular individual accounts, it creates the kind of harms that concerned the draftsmen of §409. Consequently, our references to the “entire plan” in Russell, which accurately reflect the operation of §409 in the defined benefit context, are beside the point in the defined contribution context.”

“We therefore hold that although §502(a)(2) does not provide a remedy for individual injuries distinct from plan injuries, that provision does authorize recovery for fiduciary breaches that impair the value of plan assets in a participant’s individual account.”

Insomniacs may read the decision in full at: http://www.supremecourtus.gov/opinions/07pdf/06-856.pdf.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Franklin County Court of Appeals Reads Geographic Restriction Out of Non-Compete Agreement.

Late last month, the Franklin County Court of Appeals reversed a trial court and enforced a non-competition agreement against a hair stylist who did not solicit, but did continue to serve, customers of her former employer – outside the geographic scope of the non-competition clause. Penzone, Inc. v. Koster, 2008-Ohio-327. The court also extended the term of the non-compete by the amount of time which the stylist had continued to serve customers who sought her out at her new salon.

In that case, the stylist was hired directly from beauty school and worked for Penzone’s for 11 years until her resignation in 2006. When she was hired and when she was subsequently promoted, she signed a non-competition clause which prohibited her for eight months from serving any current or former customers of Penzone’s whom she had personally served during her employment “without regard to where those customers or the Employee's post-employment competition may be situated.” The agreement also contained a nine-mile geographic scope against competing against Penzone’s after her employment.

The stylist set up shop in Pickerington -- outside the nine-mile geographic radius of the non-competition agreement. Although she denied soliciting any former Penzone customers, about 95 former customers sought her out. (She had previously served about 200 customers each year). Approximately six months later, Penzone’s filed suit, alleging a breach of the non-competition agreement and theft of trade secrets. After discovery and a hearing, the trial court denied injunctive relief to Penzone’s and the salon appealed.

The contract term at issue is neither a non-solicitation clause nor a pure non-compete clause. Because the stylist’s new shop was outside the agreement’s nine-mile radius (which the court found to be reasonable), she could continue to work as a hair stylist in competition with Penzone’s as early as the day after her resignation. Non-solicitation clauses are typically not subject to a geographic limitation, but there was no evidence that the stylist had solicited any former Penzone clients. However, even though she did not solicit former Penzone customers, she did serve almost 95 of them -- in violation of the clear terms of the agreement – but outside the nine-mile geographic limitation on competition. According the agreement, there was no geographic limitation of any kind on this restriction to serve former clients, but there was a temporal restriction of only eight months. Apparently confused, the trial court found this restriction to be unreasonable (since she was required to screen her appointments as they arrived) and/or treated it as a non-solicitation clause which she had not violated.

The Court of Appeals seemed to be oblivious to the real issue in the case. While, on one hand, it paid lip service to the fact that the nine-mile restriction on competition was reasonable on its face, on the other hand, it provided absolutely no analysis as to why it was reasonable to prohibit the stylist from serving customers outside that nine-mile radius. For instance, the court noted that the “agreement allows Penzone a time period and a distance restriction to allow Penzone to retain clients as loyal Penzone customers.” (emphasis added).

What’s troublesome about the court’s decision is that the clause at issue is more akin to a non-compete clause than a non-solicitation clause because its violation does not depend on the employee misusing the employer’s customer information against its financial interest. Rather, the employee can violate the agreement by passively serving whatever customer comes through her door. “[W]hen faced with a covenant not to compete that imposes restraints that exceed what is necessary to protect the employer's legitimate business interests, the courts are empowered to modify the terms to create a reasonable covenant between the parties.” Nonetheless, there was no finding by the Court of Appeals that it was reasonable to restrict the hairstylist from serving customers beyond the nine-mile radius of the non-compete clause. There was not even a discussion by the court of its intent to enforce the agreement as written despite any reasonableness requirement.

Rather, the Court focused on a lack of harm to the public because the agreement did not materially affect the availability of hairstylists in the area. Moreover, the court found the potential harm to the stylist was minimal in light of the short eight-month restriction. Finally, the court found that Penzone’s invested significant sums in developing and promoting relationships between its stylists and its customers. While it could not be quantified how long any of the lost customers would have remained with Penzone’s or how many services they would have purchased from Penzone’s if they had not followed the stylist to Pickerington, the court was satisfied that Penzone’s had shown irreparable harm.

So, your happiness with this decision will depend on whether you are an employer which is considering enforcement of a non-compete clause against a former employee with a loyal customer base or whether you are an employer which is considering whether it can accept new, unsolicited customers from a competitor after hiring a new employee from that same competitor. Employers who hire employees subject to such a non-compete clause will need to take extraordinary steps for the duration of the non-competition period to ensure that unsolicited customers were never served by the new employee during his or her prior employment.

Insomniacs may read the decision in full at: http://www.sconet.state.oh.us/rod/docs/pdf/10/2008/2008-ohio-327.pdf.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Sixth Circuit: Employers Can Now Be Liable for Off-Duty, Off-Site Retaliation by Co-Workers.

Yesterday, in Hawkins v. Anheuser-Busch, Inc., No., 07-3235 (6th Cir. 2/19/08), a unanimous Sixth Circuit Court reinstated the co-worker retaliation claims of one plaintiff and affirmed the denial of a similar claims by a non-complaining witness to the harassment. This case is significant because it is the first time the Sixth Circuit has recognized an employer's liability for retaliation by a co-worker. In addition, even though the most significant retaliatory acts took place after working hours and off the company's property, the employer was faulted for not conducting a more thorough investigation.

In Hawkins, four women complained of sexual harassment by the same nefarious serial sexual harasser, who then allegedly retaliated against one of them and a witness by, among other things, slashing their tires at their home and in the company parking lot, scratching their cars, threatening to kill them, setting the car on fire of one of the women, and, burning down the home of the non-complaining witness. After the first sexual harassment complaint in 1993, the defendant employers fired the harasser, but he was reinstated following a union grievance arbitration. Apparently thinking that it would never be rid of the harasser following that arbitration, the employer failed to take significant action when they continued to receive complaints from female employees about the harasser’s lewd comments and touching. Rather, the employer generally responded by transferring the women to other production lines. After receiving additional complaints about more harassment and violent retaliation, the employer in July 2003 again fired the harasser, who lost his union grievance in arbitration. The following month, the harasser killed his girlfriend and committed suicide.

The Court noted that it had never previously recognized a claim for co-worker retaliation under Title VII. Indeed, the District Court had dismissed the retaliation claims on summary judgment on that basis. However, the Court recognized that a majority of the federal circuit courts to have addressed the issue determined that “Title VII protects against co-worker retaliatory harassment that is known to but not restrained by the employer.” Therefore, an employer can be liable for co-worker retaliation” if its response manifests indifference or unreasonableness in light of the facts the employer knew or should have known.”

In particular, the Sixth Circuit held that “an employer will be liable for the co-worker’s actions if:
(1) the co-worker’s retaliatory conduct is sufficiently severe so as to dissuade a reasonable worker from making or support a charge of discrimination;
(2) supervisors or members of management have actual or constructive knowledge of the co-worker’s retaliatory behavior; AND
(3) supervisors or members of management have condoned, tolerated, or encouraged the acts of retaliation, or have responded to the plaintiff’s complaints so inadequately that the response manifests indifference or unreasonableness under the circumstances."

The Court had no difficulty in finding liability in one case. In that situation, the employer never conducted an investigation because the retaliation (i.e., torching the victim’s car in driveway of her home) took place off company property and after working hours, but the employer nonetheless suspected the allegation of violence was true. The woman’s manager even told the Licking County Prosecutor's Office during the police investigation that the harasser had insinuated to him that he started the fire and that he was personally afraid of him and would not participate in the investigation. Another senior member of management had heard rumors that the harasser set the fire and that the victim believed the fire was set by the harasser. More importantly, the harasser had admitted to three co-workers that he set the fire. Although the employer was unaware of the admissions, this evidence created an inference “that [the harasser’s] threatening behavior and violent acts of retaliation were common knowledge to both coworkers and supervisors . . . and might have been substantiated by a more complete investigation.” “The [employer] never bothered to investigate the incident, monitor [the harasser], or create a safe environment for harassment complaints. A jury could find that, given what management knew about the fire, the [employer] had an obligation to investigate the incident.” This is one of the only cases by a federal court to fault an employer for not conducting a more complete investigation.

The Court affirmed the dismissal of the retaliation claim by the non-complaining witness even though the harasser had poured gasoline down her basement and set fire to her house after he was fired. The Court found the employer’s response to her concerns of retaliation were sufficient: The employer fired the harasser, coordinated with law enforcement to have the harasser monitored, hired a security guard to follow him and offered the victim the protection of a security guard – which she refused.

Insomniacs may read the decision in full at: http://www.ca6.uscourts.gov/opinions.pdf/08a0081p-06.pdf.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Sixth Circuit: Dooming Employers With Serial Sexual Harassers and Rumor Mills.

Yesterday, in Hawkins v. Anheuser-Busch, Inc., No., 07-3235 (6th Cir. 2/19/08), a unanimous Sixth Circuit Court reinstated the co-worker sexual harassment claims of two women and affirmed the denial of the similar claims of two others. The women were subjected to lewd comments and offensive touching by the same nefarious individual. The Court imposed a higher standard of responsibility on an employer when faced with a serial harasser: “An employer’s responsibility to prevent future harassment is heightened where it is dealing with a known serial harasser and is therefore on clear notice that the same employee has engaged in inappropriate behavior in the past.”

After the first complaint in 1993, the defendant employers fired the harasser, but he was reinstated following a union grievance arbitration. Apparently thinking that they would never be rid of the harasser following that arbitration, the employer failed to take significant action when they continued to receive complaints from female employees about the harasser’s lewd comments and touching. Rather, the employer generally responded by transferring the women to other production lines. After receiving additional complaints about more harassment and violent retaliation, the employer in July 2003 again fired the harasser, who lost his union grievance in arbitration. The following month, the harasser killed his girlfriend and committed suicide.

The district court granted the employer summary judgment on the harassment claims, but the Court of Appeals reinstated two of the claims because it found (1) sufficient evidence of a hostile work environment and (2) insufficient action by the employer to stop the harassment.

One of the allegations involved the harasser setting fire to one of the women’s car at her home after work. The Court noted that it had “not decided whether off-premises harassment by a co-worker may be considered as part of the severe or pervasive test under Title VII’s sexual harassment provisions” and deferred that issue to the retaliation claims.

The district court refused to consider evidence of the harasser’s conduct towards other women unless they were also directed to or in the presence of the particular plaintiff. The Court, however, held that the court and jury should have considered “evidence of other acts of harassment of which a plaintiff becomes aware during the period his or her employment, even if the other acts were directed at others and occurred outside of the plaintiff’s presence.” The Court believed that such evidence was relevant to show that the plaintiff subjectively found the work environment to be hostile. In other words, mere rumors of sexual harassment constitute evidence of harassment if the plaintiff had ever heard about them.

The degree to which these other acts should be relevant depends on a variety of factors, including the act’s proximity in time to the harassment at issue. “The further back in time the prior at occurred, in other words, the weaker the inference that the act bears a relationship to the current working environment. On the other hand, more weight should be given to acts committed by a serial harasser if the plaintiff knows that the same individual committed offending acts in the past. This is because a serial harasser left free to harass again leaves the impression that acts of harassment are tolerated at the workplace and supports a plaintiff’s claim that the workplace is both objectively and subjectively hostile.”

Even if the plaintiff proves the existence of a hostile work environment, the employer is only liable if it knew or should have known of the harassment yet failed to take prompt and appropriate corrective action. The employer is not liable for “mere negligence, but is liable if its response manifest indifference or unreasonableness in light of the facts the employer knew or should have known.”

With that in mind, the Court found that the employer’s response was unreasonable when a female employee asked to be transferred because the harasser was making her life miserable even though she never provided any details or described the harasser’s behavior. The fact that the harasser had harassed in the past was enough to put the employer on notice that it should investigate further.

The Court also refused to absolve the employer for liability when it transferred each of the complaining employees away from the harasser. “Although some courts have indeed found that simply removing a harasser from a victim’s work environment is sufficient to preclude liability, none of these cited cases involved a serial harasser.” “An employer’s responsibility to prevent future harassment is heightened where it is dealing with a known serial harasser and is therefore on clear notice that the same employee has engaged in inappropriate behavior in the past.” Employers “that take affirmative steps reasonably calculated to prevent and put an end to a pattern of harassment – such as personally counseling harassers, sending them letters emphasizing the company’s policies and the seriousness of the allegations against them, and threatening harassers with serious discipline if future allegations are substantiated – are more likely to be deemed to have responded appropriately.” In one case, an employer avoided liability by formulating an observation network to monitor the harasser, checked with the victim daily to ensure that she had not been further bothered by the harasser and warned the harasser after another complaint that he would be fired if there were any further substantiated complaints. In this case, there was evidence that the employer never counseled the serial harasser after his arbitration reinstatement or even put a letter of warning in his personnel file.

As for the employer’s feeling of helplessness after the arbitration reinstatement, the employer’s “inability to permanently discharge [the harasser] the first time that he sexually harassed an employee . . . does not excuse its failure to take appropriate action in response to subsequent incidents. Even if the [employer’s] determination that it had insufficient evidence to sustain a charge of harassment . . . was reasonable, that does not mean that it had no responsibilities to take other remedial steps to ensure [the harasser] did not harass other women. The remedies of Title VII would be rendered impotent if employers dealing with serial harassers were allowed to throw up their hands after their first effort to deal with the harasser provided unsuccessful. A company faced with a pattern of harassment must both respond appropriately and take increasingly effective steps designed to end the harassment. The failure to do so suggests indifference and permissiveness on the part of management,” although a jury may later sympathize.

The claims of the women who complained of harassment shortly before the harasser was fired were dismissed since the termination of the harasser constituted sufficient remedial action by the employer.

Insomniacs may read the decision in full at http://www.ca6.uscourts.gov/opinions.pdf/08a0081p-06.pdf.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Sixth Circuit Affirms $435K Verdict in Retaliatory Termination Case.

In Imwalle v. Reliance Medical Products, Inc., No. 06-4619 (6th Cir. 2/8/08), the plaintiff argued that he was unlawfully terminated by a Swiss conglomerate as President and corporate Chief Operations Officer only three months after he filed a Charge of Discrimination with the EEOC alleging discrimination on account of his age (62) and national origin (American). The jury awarded $185,000 to the plaintiff on the retaliation claims and the Court added another $250,000 for attorney fees, court costs and pre-judgment interest. The Sixth Circuit affirmed on appeal.

The plaintiff had produced evidence that the Swiss company had proposed several cost-cutting measures, including a corporate-level powerpoint presentation by his boss (a Swiss citizen) which suggested the termination of “elderly” employees. He testified that he had been phased out of the corporate decisionmaking process and his boss also suggested in May 2003 that he hoped to retire and volunteer in the community at plaintiff’s age and then asked for the plaintiff’s resignation. The plaintiff also testified that his Swiss boss had complained to him in 1996 about it being the biggest mistake of his career to hire an American manager (i.e., the plaintiff), said he would never repeat that mistake and, in fact, never hired another American manager thereafter. His boss admitted that age discrimination is not illegal in Switzerland and did not understand U.S. employment laws or how they applied to the plaintiff. Nonetheless, the jury rejected the plaintiff’s discrimination claims.

When the plaintiff refused to retire as requested, he hired an attorney and accused the employer of both illegal discrimination and breaching his employment agreement. The employer then agreed to retain him in his current position, but never brought him back into the corporate decisionmaking process. The plaintiff then filed an EEOC Charge alleging age and national origin discrimination. Three months later, his boss met with him and, as described by both the plaintiff and the employer’s human resources director, fired him in January 2004 after reading the following statement:

“‘Dennis, I know that you know [the defendant employer] never committed discrimination in the past, at present, and will not in the future. I therefore canot [sic] understand why you raise such a claim.’ We are not discriminatory, just not.”

The defendant submitted a plausible explanation of poor performance as a non-retaliatory reason why it terminated the plaintiff. For example, the employer contended that it was unhappy with how the plaintiff had managed a particular division and had managed his own division during the brief 2001 recession. The employer also showed that it had pretty much excluded the plaintiff from the corporate decisionmaking process before he made his first allegation of discrimination in May 2003. However, the Court held that the jury could disbelieve the employer’s explanation of poor performance on the grounds that other individuals were more responsible for the corporate failures according to the outside auditors (and yet were not similarly held accountable) and because other managers were not similarly held responsible for the recession. Once a jury rejects the employer’s explanation as false or insufficient, it may infer that discrimination or retaliation was the actual reason or motivation. More importantly, the Court found that the employer’s pre-discharge statement -- denying any unlawful discrimination and wondering how the plaintiff could make such an accusation -- could reasonably be interpreted as evidence that the plaintiff’s EEOC allegations were at the forefront of the employer’s mind when it decided to terminate him.

The Court acknowledged that temporal proximity alone can rarely prove a retaliation claim and the plaintiff lacked direct evidence of retaliation. Indeed, the Court had previously ruled that the passage of four months between protected conduct (i.e., an EEOC Charge) and a discharge created an insufficient inference of retaliation. However, with the passage of only three months, the jury’s disbelief of the employer’s explanation for its conduct and – most importantly -- the employer’s pre-discharge statement, the plaintiff had produced sufficient circumstantial evidence of a retaliatory discharge to support the jury’s verdict. It probably would have been a different result had the employer not protested the discrimination allegations moments before firing the plaintiff.

Insomniacs can read the decision in full at http://www.ca6.uscourts.gov/opinions.pdf/08a0066p-06.pdf.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.