Ohio Appellate Court: It Takes More Than Sour Grapes To Prove Tortious Interference and Fiduciary Breach

Late last month, the Cuyahoga County Court of Appeals rejected the claims of a disappointed parts distributor against a former executive and his new employer (a used parts distributor). N. Coast Engines, Inc. v. Hercules Engine Co., 2008-Ohio-793 (2/28/08). In that case, the plaintiff company (the parts distributor) had an exclusive distribution agreement with a manufacturer. The plaintiff-company had promoted the defendant executive to president of the company because of his years of experience selling that manufacturer’s parts and because he had been an excellent employee for five years. The executive was employed at will for $50,000/year and, importantly, did not have any non-competition, confidentiality or non-solicitation agreements with the plaintiff company. The defendant-company was a used parts distributor, who hired the defendant executive (at the same salary, but subject to a non-compete agreement, and a three- year employment agreement with health insurance benefits) on January 10, 2005 and then shortly thereafter – on January 25, 2005 -- won the exclusive right to resell the manufacturer’s new parts. The plaintiff company ended up without a talented president and without its exclusive deal with the manufacturer.

The plaintiff company had considered selling itself to its former president during the prior year. However, when the defendant company learned of that possibility, it expressed its interest in buying the plaintiff instead. When the plaintiff presented the defendant with a confidentiality agreement before permitting due diligence, the defendant company realized that it did not want the business that much and withdrew its interest. Learning that the plaintiff company was for sale, the defendant executive then began exploring other employment opportunities, including going to work for defendant-company. He gave his notice of resignation to the plaintiff-company on January 17 and continued working for the plaintiff through January 28. The last few days were spent helping transfer its inventory to his new employer, which had won the exclusive distribution agreement from the manufacturer on January 25 when the manufacturer learned that it had hired defendant executive.

The Court rejected the breach of fiduciary duty claim against the executive because there was no evidence that the executive “sustained any financial gain, any kickback, or any promotion for joining: the defendant-company or showing that he “intentionally changed employment in order to divest the” plaintiff employer of its exclusive agreement with the manufacturer. As an at-will employee, he was free to resign at any time. In the absence of a restrictive covenant, he was also free to begin working for a competitor following his employment and to continue serving former business contacts also served by his new employer. There was no evidence of any secret dealing or conflict of interest.

The Court rejected the claim that the defendant-employer tortiously interfered with the executive’s fiduciary duty because there was no breach of fiduciary duty. Moreover, there was no tortuous interference with the plaintiff’s exclusive distributorship arrangement with the manufacturer because there was no evidence that the executive had been hired with the intent of inducing the manufacturer to terminate its relationship with the plaintiff company. Rather, the defendant company hired the executive because of his extensive knowledge of the manufacturer’s parts (which the defendant company sold used).

Insomniacs may read the full decision at http://www.sconet.state.oh.us/rod/docs/pdf/8/2008/2008-ohio-793.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.

Employee Who Quit Because Boss Frequently Yelled at Him and Others Is Awarded Unemployment Compensation

In late January, a divided Ohio Court of Appeals from Summit County affirmed the award of unemployment compensation to an employee who quit twelve days after being hired because his actual duties did not match his job description and because the boss frequently yelled at him and others over his protests. Ro-Mai Industries, Inc. v. Weinberg, 2008-Ohio-301 (1/30/08).

The employee accepted a position with the employer after interviewing with the owner. The employee, “who had extensive experience in sales,” testified that he was told that his position with the employer would involve sales work and would require him to be at the office only from approximately 8:00 a.m. to 5:00 p.m. The owner testified: "When I hired [the employee], I told him I'm probably the worst employer to ever work for[.] I'm difficult. I expect a lot. And I warned him in advance that I'm very difficult. *** [W]hen it comes to the business, I . . . I can yell. I did yell."

The employee began work on October 24, 2005. After a few days of work, however, he says that it became clear that “his actual duties differed from the job description that he received. He was not given any sales work and he often worked well over the nine hour shift that he was promised.” In addition, he discovered that the owner had a habit of yelling at the employees. Although the employee told the owner that he did not appreciate being treated in such a manner, the owner continued to yell.

On November 3, 2005, the employee informed the head of human resources that he intended to quit and was told: "[O]h, it[] gets worse. That's the way he is." However, before the employee left the office the owner sought him out, promised to stop yelling at him, and convinced him to stay. The employee returned to work the next day, but the owner resumed his habit of yelling at him. Accordingly, the employee quit the following day.

In opposing the unemployment claim, the employer argued that the employee voluntarily quit without just cause because he did not want to work more than eight hours a day, as a salaried employee sometimes must do, and he did not enjoy the type of work that the employer assigned him. It also argued that the employee was overly sensitive to the owner’s yelling, in that such yelling had never caused any other employee to quit. The dissent was persuaded by this argument and expressed concern that an employee could obtain unemployment compensation anytime he or she quit after being yelled at by a manager or supervisor. “No other . . . employee quit because of the yelling. This, therefore, obviates the hearing officer's determination that a reasonable person would quit in such a situation. While it may be uncomfortable for an employee to have an employer yell at him or her, if we were to take the reasoning of the hearing officer to its ultimate conclusion, there would be reasonable ground for quitting just because one employee simply raised his voice at another. I would find being yelled at, as a matter of law, is not just cause to qualify for unemployment benefits.”

The hearing officer determined that a reasonable person in the employee’s position would have quit his employment. Noting that the employer had misrepresented the employee’s job duties and the number of hours that he would be expected to work as a salaried employee, the hearing officer and the majority of the Court were also influenced because the “yelling was not a single, isolated incident.” Had it been a single, isolated incident, the employee would not have had just cause to resign. Rather, it “was a repetitive problem that [the employee] unsuccessfully tried to address with [the employer’s] human resources department prior to quitting. [The employee] even agreed to resume work the first time that he intended to quit because [the owner] asked him to stay and promised to stop yelling. He did not abandon his employment without warning, or leave with utter disregard for the good of the business.”

Insomniacs may read the full decision at http://www.sconet.state.oh.us/rod/docs/pdf/9/2008/2008-ohio-301.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.

When Non-Disclosure Agreements Can Hinder Employees From Going to Work for a Customer.

In late January, the Cuyahoga County Court of Appeals upheld a preliminary injunction against the plaintiff-employer’s former employee from using knowledge he gained from the plaintiff-employer when – instead of forming his own business or going to work for a competitor -- he went to work for a customer of the plaintiff-employer (which “coincidentally” stopped using the services of the plaintiff-employer). KLN Logistics Corp. v. Norton, 2008-Ohio-212. Rather than require the employee to sign a non-compete agreement when he was hired, the employer instead required a Non-Disclosure and Non-Circumvention Agreement. In that Agreement, the employee agreed to safeguard proprietary information – including trade secrets, methodologies, personal and business contacts or business plans – and to not in any way whatsoever circumvent the employer or to use the proprietary information for personal gain or otherwise for three years following his employment without prior written permission from the employer.

The plaintiff-employer introduced the employee to several of its customers, including Customer H. The employer began negotiating an expansion of their business relationship, and towards that end, the employer went to great expense to lease warehouse space and engage in other preparatory activities in anticipation of an expansion of the relationship with Customer H. Unknown to the employer, the employee began using the employer’s resources for about a month to conduct his own research about how he could meet the needs of Customer H less expensively and was telling other customers that he could ship their freight less expensively than the employer. Customer H then terminated its relationship with the employer and hired the employee with a salary and profit-sharing bonus. Within a few weeks, the employer sought a temporary restraining order and preliminary injunction, which the trail court granted in December 2006 along with finding the employee in contempt of the TRO for continuing to work for Customer H. In particular, the trial court had enjoined the employee from using the proprietary information – including business contacts – and from having other communications with Customer H, “including without limitation by serving as an employee . . . or otherwise consulting with, any competing individual or group, and/or by soliciting any business from . . customer of [employer] (including without limitation, [Customer H] by using the proprietary information . . ..). . . “

On appeal, the court noted that both the employer and employee admitted that the Agreement was not a non-compete agreement and did not prevent the employee from becoming an employee of Customer H. Rather, the Agreement only prevented the employee from using the employer’s proprietary information, which included the names of business contacts, including Customer H, and the names of other “numerous vendors, suppliers, and customers in the freight forwarding industry, . . . and . . . the specialized services [the employer] provided. [The employer] explained that [the employee] was given access to [the employer’s] confidential information including customer lists, rates, profit margins and other business information” as well as the rates of insuring freight shipments.

The court rejected the employee’s argument that the Agreement only prevented him from disclosing the proprietary information to the employer’s competitors. “Circumvent means “to avoid or get around by artful maneuvering.” [The employer] presented evidence at the hearing to show that [the employee], while employed by [the employer] and in a fiduciary relationship, spent considerable time researching how to go into business with [Customer H]. As a result of his actions, [the employee] shares in [Customer H’s] business profits while [the employer] no longer has [Customer H’s] shipping or warehousing business.” Therefore, the trial court had not abused its discretion in enjoining the employee from using the employer’s proprietary business contact information and from using the proprietary information to perform competitive services for the employer’s customer at the employer’s expense.

Nonetheless, despite the terms of the Preliminary Injunction and the Agreement, the Court did not believe that the employee had necessarily violated the TRO in contempt of court by merely continuing to work for Customer H. The employee testified that after the TRO was entered, he stopped using shipping companies utilized by the employer, and instead, returned to using shipping companies with Customer H had utilized prior to working with the employer, such as UPS and FedEx. The employer did not identify any other proprietary information which the employee was using in violation of the Agreement. “Without evidence of something more than mere continued employment with [Customer H], which [the employer] has conceded is not precluded [by the Agreement], there is no evidence that appellant violated the terms of the TRO as written.” The Court does not explain why the business contact with Customer H was not sufficiently proprietary to justify enjoining the employee from working there (as found by the trial court), but it appears to be based on the employer’s concession that the Agreement did not preclude the employee from working for Customer H. Had the employer not made such a concession, it remains an open question whether such an agreement would permit an employee from using business contact information for his own personal benefit by obtaining employment with a customer of the employer at the expense of the customer. Considering that this is a common practice, courts may well require more specific contractual language before inferring or enforcing such an intent by the parties.
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There is no word on whether Customer H ever considered using the employer’s services again after the employee sued Customer H’s employee.

Employers should be aware that recruiting and hiring an employee subject to a Non-Disclosure Agreement could result in the employer being sued for tortuous interference with contract, among other things. In this case, the employee admitted that he had not informed Customer H about the Agreement beforehand because he did not think it applied to his working for a customer. Moreover, had the employer not conceded that the Agreement did not preclude employment with Customer H, it remains an open question whether such an agreement would permit an employee from using business contact information for his own personal benefit by obtaining employment with a customer of the employer at the expense of the employer. Considering that this is a common practice, courts may well require more specific contractual language before inferring or enforcing such an intent by the parties.

Insomniacs can read the full decision at http://www.sconet.state.oh.us/rod/docs/pdf/8/2008/2008-ohio-212.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.

EEOC Reports Record Number of Charges Being Filed by, and Financial Recoveries for, Employees in 2007

Yesterday, the EEOC announced that it “received a total of 82,792 private sector discrimination charge filings last fiscal year, the highest volume of incoming charges since 2002 and the largest annual increase (9%) since the early 1990s. . . . The data, available online at www.eeoc.gov/stats/charges.html, also show that the EEOC recovered $345 million in monetary relief for job bias victims.” The monetary relief is also a record high.

Rather than attributing the increased volume in Charges – which are only unproven allegations -- to a slowing economy and employment insecurity, the EEOC attributes the uptick to a resurgence in employment discrimination: “Corporate America needs to do a better job of proactively preventing discrimination and addressing complaints promptly and effectively,” said Commission Chair Naomi C. Earp. “To ensure that equality of opportunity becomes a reality in the 21st century workplace, employers need to place a premium on fostering inclusive and discrimination-free work environments for all individuals.” Nonetheless, the EEOC conceded that “[t]he jump in charge filings may be due to a combination of factors, including greater awareness of the law, changing economic conditions, and increased diversity and demographic shifts in the labor force.”

“According to the EEOC’s FY 2007 data, allegations of discrimination based on race, retaliation, and sex were the most frequently filed charges, continuing a long-term trend. Additionally, nearly all major charge categories showed double digit percentage increases from the prior year -- a rare occurrence.

The EEOC also reported that “for the first time, retaliation was the second highest charge category (behind race), surpassing sex-based charges in total filings with EEOC offices nationwide. Historically, race has been the most frequently filed charge since the EEOC became operational in 1965. In addition to the statutory bases of discrimination, charges filed with the EEOC and state and local Fair Employment Practices Agencies (combined) also trended upward for the high visibility issues of pregnancy discrimination and sexual harassment.”

“During FY 2007, pregnancy charges surged to a record high level of 5,587, up 14% from the prior fiscal year’s record of 4,901. Sexual harassment filings increased for the first time since FY 2000, numbering 12,510 – up 4% from the prior fiscal year’s total of 12,025. Additionally, a record 16% of sexual harassment charges were filed by men, up from 9% in the early 1990s. Other year-end statistics released today show that the EEOC:
· Recovered approximately $345 million in total monetary relief for charging parties, up 26% from the prior year’s total of $274 million. Nearly $55 million was obtained through EEOC litigation and more than $290 million through administrative enforcement, including mediation. Additionally, the agency obtained substantial non-monetary relief, such as employer training, policy implementation, reasonable accommodations, and other measures to promote discrimination-free workplaces.
· Resolved 72,442 private sector charges, with a historically high merit factor rate of 23%. Merit factor resolutions include mediation and other settlements and cause findings, which, if not successfully conciliated, are considered for litigation. Most meritorious charges are resolved voluntarily with employers prior to any EEOC litigation.
· Filed 336 merits lawsuits (direct suits, interventions and other enforcement actions), including 116 class cases involving multiple aggrieved parties or victims of discriminatory policies. Significant injunctive and remedial relief was also achieved through litigation settlements, jury trials and court rulings. The agency’s litigation program increasingly focused on class and systemic cases as part of its national law firm model.
Insomniacs can read the full press release at http://www.eeoc.gov/press/3-5-08.html.

Divided Supreme Court: Does a Charge by Any Other Name Still Smell As Sweet?

On Wednesday, a divided Supreme Court ruled that the ADEA requirement for filing a Charge with the EEOC at least 60 days before initiating an ADEA lawsuit can be satisfied by the mere filing of an intake questionnaire and affidavit with the EEOC even when the EEOC never created a Charge form, never notified or served a Charge or other document with the Charging Party’s allegations to the employer and the plaintiff never signed or filed an actual Charge form with the EEOC. Federal Express Corp. v. Holowecki, No. 06-1322 (2/27/08).

The ADEA – at 29 U.S.C. § 626(d) – provides that “[n]o civil action may be commenced by an individual under this section until 60 days after a charge alleging unlawful discrimination has been filed with the” EEOC. The ADEA also requires the charge to be filed by the employee within so many days of the unlawful employment practice. Once the Charge has been filed, the ADEA requires the EEOC to “promptly notify all persons named in such charge as prospective defendants in the action and shall promptly seek to eliminate any alleged unlawful practice by informal methods of conciliation, conference, and persuasion." 29 U. S. C. §626(d). However, the ADEA does not define “charge.”

In this case, the plaintiff employee completed and submitted an Intake Questionnaire to the EEOC on December 11, 2001, along with a signed affidavit setting forth her allegations in more detail. The EEOC did not promptly process the Intake Questionnaire, prepare a formal Charge form or notify the employer of the plaintiff’s allegations or serve it with a Charge. Nonetheless, the plaintiff -- along with several other employees – filed her ADEA lawsuit on April 30, 2002. Only then did the EEOC prepare, file and serve a Charge on the employer. The trial court dismissed the plaintiff’s claims on the grounds that her Intake Questionnaire was not a “charge” as required by the ADEA. The Second Circuit Court of Appeals reversed and, recognizing a conflict among the various Circuits on this issue, the Supreme Court affirmed the appellate court.

The Court found that the EEOC regulatory definition of Charge was scattered among several regulations and was vague. For instance, “one of the regulations, 29 CFR §1626.3 . . . says: "charge shall mean a statement filed with the Commission by or on behalf of an aggrieved person which alleges that the named prospective defendant has engaged in or is about to engage in actions in violation of the Act." Another regulation – § 1626.8(a) indicates that a "charge should contain": (1)-(2) the names, addresses, and telephone numbers of the Charging Party and the Respondent; (3) a statement of facts describing the alleged discriminatory act; (4) the number of employees of the charged employer; and (5) a statement indicating whether the charging party has initiated state proceedings. Yet another regulation -- §1626.8(b) – limits the prior requirements “by stating that a charge is ‘sufficient’ if it meets the requirements of §1626.6--i.e., if it is ‘in writing and ... name[s] the prospective respondent and ... generally allege[s] the discriminatory act(s).’" The EEOC asserted on its own behalf that the regulations governed only the filing of a Charge and did not define Charge itself or what it must contain. While the EEOC asserted that the plaintiff’s document satisfied the requirement of a Charge, not all documents necessarily would or should do so. In particular, the EEOC expressed concern with interpreting all documents as Charges if they contain the name of an employer and allegations of discrimination because some employees merely want information from the EEOC and do not want their employer to be notified of the allegations.

While the Court recognized the EEOC’s deficiencies in administering the ADEA, it still deferred to the EEOC’s greater familiarity with the statute. The Court concluded “In addition to the information required by the regulations, i.e., an allegation and the name of the charged party, if a filing is to be deemed a charge it must be reasonably construed as a request for the agency to take remedial action to protect the employee's rights or otherwise settle a dispute between the employer and the employee.”

The Court refused to condition “charge” on being served on the employer and giving the employer the chance to conciliate or mediate the allegations before the employee gained the right to file an ADEA lawsuit. “The statute requires the aggrieved individual to file a charge before filing a lawsuit; it does not condition the individual's right to sue upon the agency taking any action.” Moreover, it would be impractical and unfair to the employee to condition a “charge” on the EEOC taking action after the employee has done everything he or she is required to do by the statute when the employee has no control over the EEOC.

Applying this new standard to the facts of the lawsuit, the Court found that the plaintiff’s Intake Questionnaire by itself did not satisfy the new test because, although it provided most of the necessary information, it did not request the EEOC to remedy the alleged discrimination. However, the affidavit which was attached to the Intake Questionnaire ended with the sentence: "[p]lease force Federal Express to end their age discrimination plan so we can finish out our careers absent the unfairness and hostile work environment created within their application of Best Practice/High-Velocity Culture Change." Taken together, the Court construed the Intake Questionnaire and attached affidavit as satisfying the “charge” requirement. The Court did so even though the plaintiff had specifically requested the EEOC to keep the affidavit confidential until formal proceedings were commenced because the plaintiff had also authorized the EEOC in the Intake Questionnaire to notify her employer.

Even though the Court deferred to the EEOC’s administration of the plaintiff’s claim, it also found that the EEOC gave “short shrift” to the employer’s interests as set forth in the ADEA because it was given no notice of the employee’s Charge before she filed suit. “The court that hears the merits of this litigation can attempt to remedy this deficiency by staying the proceedings to allow an opportunity for conciliation and settlement. True, that remedy would be imperfect. Once the adversary process has begun a dispute may be in a more rigid cast than if conciliation had been attempted at the outset.” Of course, that is an understatement since any employer faced with a lawsuit knows that it is much easier to resolve the dispute at the agency stage than after the employee’s attorney had taken control and has expended significant sums in preparing the lawsuit. The Court also encouraged the EEOC to improve its regulations to avoid similar miscommunications in the future.

Employers may find little consolation in the dissent:

“Today the Court decides that a “charge” of age discrimination under the Age Discrimination in Employment Act of 1967 (ADEA) is whatever the Equal Employment Opportunity Commission (EEOC) says it is. The filing at issue in this case did not state that it was a charge and did not include a charge form; to the contrary, it included a form that expressly stated it was for the purpose of ‘precharge’ counseling. What is more, the EEOC did not assign it a charge number, notify the employer of the complainant’s allegations, or commence enforcement proceedings. Notwithstanding these facts, the Court concludes, counterintuitively, that respondent’s filing is a charge because it manifests an intent for the EEOC to take ‘some action.’”

Insomniacs can read the full decision (and dissent by Justices Thomas and Scalia) at http://www.supremecourtus.gov/opinions/07pdf/06-1322.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.