We pride ourselves on being a nation governed by law—which most non-lawyers reasonably assume to be the statutes, rules and codes adopted by duly elected legislators or created by bureaucrats empowered by elected officials and the laws they passed.
In contrast to that expectation, I am amused, bemused and somewhat confused by the extent that “judge made common law” actually controls the disposition of contested issues. Three recent cases in the area of employment law illustrate my point; one deals with the “faithless servant” doctrine; a second with the “employee choice” rule; and a third with the “tangible expectancy test” – none of which are legislation-based.
Henry v. Concord Limousine, Inc., NYLJ 1202641851393, Eastern District of New York, January 24, 2014, Seybert D.J.
Henry, a dispatcher, sued his transportation business employer, Concord and others, under the Fair Labor Standards Act and the New York Labor Law for unpaid wages and overtime. Defendants counterclaimed “seeking to disgorge bribes [Henry] allegedly received during the course of his employment.” Id. at 2.
The Court described the original disgorgement counterclaim:
On January 28, 2013, Plaintiff, who formerly worked either as a dispatcher (according to Plaintiff) or an “executive managing others in the dispatch facility” (according to Defendants) at Defendants’ transportation business, commenced this action against Defendants to recover under the Fair Labor Standards Act and the New York Labor Law for alleged unpaid wages and overtime…On April 14, 2013, Defendants filed an Answer and Counterclaim asserting one counterclaim seeking to disgorge bribes Plaintiff allegedly received during the course of his employment (the “Disgorgement Counterclaim”)…On May 5, 2013, Plaintiff moved to dismiss Defendants’ Disgorgement Counterclaim and also asked the Court to strike paragraph 10 of the Disgorgement Counterclaim…Before the Court could address Plaintiff’s pending motion to dismiss and request to strike, however, Defendants filed a motion for leave to amend their Answer and Counterclaim on November 21, 2013. Id. at 2-3.
On or about September 1, 2009, Concord hired Plaintiff, and “thereafter he was elevated to the position of an executive managing others in the dispatch facility of Concord.”…Defendants allege that Plaintiff, in his role as an executive, violated Concord’s company policy of dispatching jobs on a first-come, first-served basis by giving drivers transportation jobs out of turn in exchange for financial kickbacks.…They further allege that Concord warned Plaintiff that “this was against the company policy, a theft against the non-participating [sic] drivers, and plaintiff was instructed not to do so by his supervisor, Vice President Atif Waheed.” Id. at 4-5.
Despite the warning, Plaintiff continued to award jobs out of turn in exchange for kickbacks.…On or about November 6, 2012, Concord terminated Plaintiff following Plaintiff’s admission that he was “taking these bribes from drivers to be given rides out of turn ….” Id. at 5.
Paragraph 10 of the Disgorgement Counterclaim alleges that Plaintiff applied for unemployment benefits after his separation from Concord but that the New York State Department of Labor determined that Plaintiff was indeed diverting transportation jobs for financial kickbacks. Paragraph 10 specifically alleges:
The plaintiff next applied for unemployment benefits after his separation from Concord. However after a review of the information by the Department of Labor of New York (“DOL”) by notice of determination to claimant the DOL determined that he was “accepting payments from drivers for jobs”, and that he admitted doing so. Based upon this finding the DOL held that his actions were detrimental to the employer’s interest and rose to the level of misconduct. The plaintiff has not appealed this determination. Upon information and belief the time to appeal this determination has passed.
Based on the foregoing allegations, Concord seeks as damages “the amounts of financial diversions the plaintiff has made.” Id.
Henry moved to dismiss, and Concord moved for leave to amend, the disgorgement counterclaim.
In holding that Concord had standing to assert the counterclaim, and the Court had subject matter jurisdiction thereover, Judge Seybert, as follows, adverted to the “faithless servant” doctrine:
New York law recognizes the “faithless servant” doctrine. Under this doctrine, which is grounded in the law of agency, an employee “is obligated ‘to be loyal to his employer and is prohibited from acting in any manner inconsistent with his agency or trust and is at all times bound to exercise the utmost good faith and loyalty in the performance of his duties.’” Phansalkar v. Anderson Weinroth & Co., L.P., 344 F.3d 184, 200 (2d Cir. 2003) (quoting W. Elec. Co. v. Brenner, 41 N.Y.2d 291, 295, 392 N.Y.S.2d 409, 360 N.E.2d 1091 (1977)). A faithless employee forfeits the right to compensation during the period of disloyalty even when “the services were beneficial to the principal or [when] the principal suffered no provable damage as a result of the breach of fidelity by the agent.” Id. (quoting Feiger v. Iral Jewelry, Ltd., 41 N.Y.2d 928, 929, 394 N.Y.S.2d 626, 363 N.E.2d 350 (1977)). Thus, “the act of being disloyal to one’s employer is itself sufficient grounds for disgorging all compensation received during the period of liability, and does not depend on actual harm to the employer.” Consol. Edison Co. v. Zebler, No. 603678/09, 2013 WL 4467291, at *2 (N.Y. Sup. Ct. Aug. 20, 2013). [boldface added] Id. at 11.
And, in granting the application for leave to amend, concluded that:
Of relevance here, under the faithless servant doctrine, an employer also is entitled to disgorge the value of any bribes or kickbacks received by a faithless employee. British Am. & E. Co. v. Wirth Ltd., 592 F.2d 75, 79 (2d Cir. 1979) (“[W]here there is an agency relationship, the principal is entitled to recover any monies paid as commercial bribes to his agent.”); W. Elec. Co., 41 N.Y.2d at 295, 392 N.Y.S.2d at 412, 360 N.E.2d at 1094 (“[A]ny compensation secretly or improperly received from others beyond the compensation to which the employee is entitled is deemed to be held by him on a constructive trust for his employer.”); Wechsler v. Bowman, 285 N.Y. 284, 292, 34 N.E.2d 322, 326 (1941) (holding that “the principal is entitled to recover from his unfaithful agent any commission paid by the principal and all moneys paid by a purchaser whether as a bribe to the agent of the seller or otherwise ….”); Zebler, 2013 WL 4467291, at *3-5 (granting employer’s motion to recover $50,000 obtained by employee through “bribery-kickback scheme”). Thus, contrary to Plaintiff’s argument, Concord clearly has standing to assert a claim against Plaintiff seeking disgorgement of the alleged kickbacks received by Plaintiff. Accordingly, Plaintiff’s motion to dismiss the Disgorgement Counterclaim for lack of standing is DENIED. Id. at 11-12.
International Business Machines Corp. v. Simonson, 2014 NY Slip Op 50268(U), Supreme Court, Westchester County, February 27, 2014, Connolly, J.
IBM sued Simonson, a former employee, “alleging that his violation of noncompete provisions entitled IBM to rescind or ‘clawback’ stock option awards [in the amount of $534,465.40] that Simonson received during the course of his employment.”(id at 2) Simonson counterclaimed for severance payments.
The Court described the stock option plan, in general, and the “clawback” provision, in particular:
While working for IBM, Simonson participated in the IBM 1999 and 2001 Long-Term Performance Plans (hereinafter the plans). The plans, which contain nearly identical language, permit awards of stock options and other incentives to employees for the stated purpose of attracting, motivating, and retaining select employees by providing the employees with a proprietary interest in the growth and development of the company. Both plans contain forfeiture clauses, or what are sometimes referred to as “clawback” provisions:
[T]he Committee [designated by IBM to administer the plan] may cancel, rescind, suspend, withhold or otherwise limit or restrict any unexpired, unpaid, or deferred Awards at any time if the Participant is not in compliance with all applicable provisions of the Award Agreement and the Plan, or if the Participant engages in any Detrimental Activity.” For purposes of this Section 13, “Detrimental Activity” shall include: (i) the rendering of services for any organization or engaging directly or indirectly in any business which is or becomes competitive with the Company, or which organization or business, or the rendering of services to such organization or business, is or becomes otherwise prejudicial to or in conflict with the interests of the Company. . . . .
Upon exercise, payment or delivery pursuant to an Award, the Participant shall certify in a manner acceptable to the Company that he or she is in compliance with the terms and conditions of the Plan. In the event a Participant fails to comply with the provisions of paragraphs (a)(i)-(viii) of this Section 13 prior to, or during the Rescission Period, then any exercise, payment or delivery, may be rescinded within two years of such exercise, payment or delivery. In the event of such rescission, the Participant shall pay to the Company the amount of any gain realized or payment received as a result of the rescinded exercise, payment, or delivery, in such manner and on such terms and conditions as may be required, and the Company shall be entitled to set-off against the amount of any such gain any amount owed to the Participant by the Company. As used herein, Rescission period shall mean that period of time established by the Committee which shall not be less than 6 months after any exercise, payment or delivery pursuant to the Award. Id. at 2-3.
And the “clawback” agreement:
Pursuant to the plans, Simonson was granted five stock option awards in the years 2000, 2001, 2002, 2004, and 2005 (hereinafter the awards). The final award, granted to Simonson on March 8, 2005, contains a “Cancellation and Rescission” clause establishing a 12-month rescission period for the options granted pursuant to the award…The award further states: “In consideration of this award, you agree . . . that by your acceptance of this award, all awards and options previously granted to you under the Plan or prior IBM plans are subject to the terms set forth above under Cancellation and Rescission…” Thus, IBM contends—and Simonson does not dispute—that the rescission period for all the stock option awards at issue in this case was extended to 12 months from the date of the exercise of the option. Id. at 3.
IBM and Simonson disputed whether Simonson was “downsized” out of his position or left voluntarily to work for a competitor.
IBM “contend[ed] that the dispute [was] governed by the so-called ‘employee choice’ doctrine, whereas Simonson contend[ed] that the doctrine [did] not apply.” Id. at 5.
The Court described the doctrine:
Under New York law, “noncompete clauses in employment contracts are not favored and will only be enforced to the extent reasonable and necessary to protect valid business interests” (Morris v Schroder Capital Mgmt. Intl, 7 NY3d 616, 620 ). The test for enforcing a noncompetition covenant is generally one of reasonableness (see BDO Seidman v Hirshberg, 93 NY2d 382, 388-389 ; Reed, Roberts Associates, Inc. v Strauman, 40 NY2d 303, 307 ).
However, the “employee choice” doctrine, which “applies in cases where an employer conditions receipt of postemployment benefits upon compliance with a restrictive covenant,” constitutes a recognized exception to the general disfavor of noncompete provisions (Morris v Schroder Capital Mgmt. Int’l, 7 NY3d at 620-621). “The employee choice’ doctrine is applicable in cases involving economic relief, rather than injunctive relief’…Pursuant to the doctrine, a noncompete provision will be found to be reasonable “if the employee is given the choice of preserving his rights under his contract by refraining from competition or risking forfeiture of such rights by exercising his right to compete”…The employee choice doctrine “assumes that an employee who leaves his employer makes an informed choice between forfeiting his benefit or retaining the benefit by avoiding competitive employment”…Stated another way, “[i]t is no unreasonable restriction of the liberty of a man to earn his living if he may be relieved of the restriction by forfeiting a contract right or by adhering to the provisions of his contract” (Kristt v Whelan, 4 AD2d 195, 199 [1st Dept 1957]affd 5 NY2d 807 ). [boldface added] Id. at 6.
“An essential element to the doctrine is the employer’s continued willingness to employ the employee” (Morris v. Schroder Capital Mgmt. Int’l, 7 NY3d at 621 [internal quotation marks omitted]). “Where the employer terminates the employment relationship without cause, his action necessarily destroys the mutuality of obligation on which the covenant rests as well as the employer’s ability to impose a forfeiture’ (id, citing Post v Merrill Lynch, Pierce, Fenner & Smith, Inc., 48 NY2d 84, 89 ). “[A]lthough a restrictive covenant will be enforceable without regard to reasonableness if an employee left his employer voluntarily, a court must determine whether forfeiture is reasonable’ if the employee was terminated involuntarily and without cause” (Morris v Schroder Capital Mgmt. Int’l, 7 NY3d at 621). Id.
Justice Connolly held that “the question of whether to apply the employee choice doctrine in this case rest[ed] on whether Simonson’s termination from IBM was voluntary.” Id.
And the Court concluded that:
Accordingly, to determine whether the employee choice doctrine applies, the Court must look to whether Simonson freely chose to leave IBM in 2008 after his Skills for Growth leave of absence had concluded. It is clear from the record that his separation from employment with IBM in July 2008 was not voluntary, but was the result of IBM’s inability or unwillingness to offer him a position at that time. Therefore, viewing the evidence in the light most favorable to IBM, since Simonson’s separation from IBM was not his own choice, the employee choice doctrine is inapplicable and the Court must examine the reasonableness of the noncompete provisions in the clawback provisions (see Post v MerrilLynch, Pierce, Fenner & Smith, Inc., 48 NY2d at 89 [“in the case of an involuntary discharge, the [employee choice doctrine] does not apply”]; see also Morris v Schroder Capital Mgmt. Intl, 7 NY3d at 621). Id. at 7.
The Court then found that:
In this case, Simonson has met his prima facie burden for summary judgment by establishing that the forfeiture provision at issue does not protect a legitimate interest of IBM, specifically, that he is not privy to trade secrets or confidential customer information, and that his skill set is not extraordinary or unique (see Zuckerman v New York, 49 NY2d 557, 562 ). Id. at 8.
In opposition to Simonson’s prima facie showing, IBM failed to raise a triable issue of fact (see Zuckerman v New York, 49 NY2d at 562). Although IBM argues that Simonson”had access to sensitive information not known to people outside of IBM”… it has failed to support that claim through admissible evidence identifying the type or quality of information it claims Simonson possesses (see Zuckerman v New York, 49 NY2d at 562 [“unsubstantiated allegations or assertions are insufficient” to raise a triable issue of fact]). Critically, “[t]he use of information about an employer’s customers which is based on casual memory is not actionable” (Levine v Bochner, 132 AD2d 532, 533 [2d Dept 1987]). Id. at 9.
In summary, the Court finds that the noncompete provisions in the stock option plans and awards are, in this case, unreasonable as a matter of law as applied to Simonson.
This result comports with New York’s long-standing policy that “no restrictions should fetter an employee’s right to apply to his own best advantage the skills and knowledge acquired by the overall experience of his previous employment”(Reed, Roberts Associates, Inc. v Strauman, 40 NY2d at 307). “[O]ur economy is premised on the competition engendered by the uninhibited flow of services, talent, and ideas” (id.). Accordingly, since Simonson’s employment with Unisys does not threaten one of IBM’s recognized protected interests, Simonson is not required to return the $534,465.40 in gains he derived from the exercise of his stock options. Id.
Lee v. Manchester Real Estate and Construction, LLC, 2014 NY Slip Op 30675(U), Supreme Court, New York County, March 12, 2014, Madden, J
Lee “[sought] employment compensation allegedly owed to her, [by] a real estate company where she was employed from August 2002 through February 2008, as Chief Investment Officer.” (Id. at 1) Manchester counterclaimed “to recover compensation previously paid to [Lee] based on allegations that [she] breached her fiduciary duty by competing with Manchester. (Id.)” The Court denied Manchester’s motion for summary judgment on it counterclaim and denied (in part) Lee’s cross-motion. Manchester made a motion to reargue and renew.
Manchester was “in the business of servicing real estate debt on properties of considerable value—and “to some extent, in the business of buying properties for investment purposes.” (id. at 1-2) Lee’s “job was to evaluate business opportunities offered to Manchester, which came to her attention solely as CIO of Manchester.” (Id.)
Manchester was to receive:
10% of any collected gross profit earned on deals initiated by Manchester after start date, after a 12% preferred return on equity to N. Richard Kalikow and affiliates. These payments will be distributed on a quarterly basis. .. Additionally, you shall be eligible to co-invest in the firm’s proprietary transactions up to 10% of the equity and/or participate in the equity of the firm after your first anniversary of employment with Manchester. Id. at 2.
The Employment Agreement further provided that, in the event of plaintiff’s termination, she was to:
(a) continue to receive, as they are received by Manchester, 10% of any collected cash income earned on deals initiated by Manchester from your start date to your termination date, or (b) receive a lump sum payment, in an amount to be mutually determined by you and Manchester, for any such collected cash income due to you after the date of termination. Id.
And the Court noted that:
The Employment Agreement did not contain any restriction on plaintiff’s ability to compete with Manchester during her period of Employment. Id. at 2-3.
In order to facilitate plaintiff’s right to co-invest under the Employment Agreement, Manchester’s principal, N Richard Kalikow (Kalikow) incorporated two entities, Alpha Capital LLC and Alpha Manhattan LLC (the Alpha LLC’s). Plaintiff was a member of the Alpha LLC’s, along with Kalikow and others, and, according to plaintiff, all Manchester’s deals were funded by the Alpha LLC’s. Id. at 3.
Section 6.4 of the Alpha LLC’s operating agreements provide[d] that all members may “engage, directly or indirectly, in any other business venture or ventures of any nature and description, independently or with others, including, without limitation, the real estate business in all its respects (whether or not competing with, relating to, or in any manner connected with, the business of (the Alpha LLC’s) … .” Lee avers that the Alpha LLC’S were “affiliates of Manchester/Kalikow.”… Id.
The Court summarized the undisputed facts:
[W]hile employed by Manchester, plaintiff, starting in 2006, forwarded numerous emails to her husband, Robair Reichenstein (Reichenstein), which contained offers which had been sent to Manchester by real estate brokers to purchase various properties. It is alleged by Manchester that plaintiff incorporated a company, Royalton Capital, Inc.…in September 2007, with its principal place of business at the address plaintiff shares with Reichenstein, apparently for the purpose of purchasing investment properties. However, plaintiff claims that Reichenstein, and not she, incorporated Royalton, and that she only took over Royalton in 2008, after she left Manchester, in order to pursue her own business. Id. at 3-4.
According to Kalikow, plaintiff never informed him that she was forwarding offers to purchase real property, received by her in her capacity as Manchester’s CIO, to Royalton and Reichenstein. Reichenstein never closed on any opportunity forwarded to him by plaintiff, although the emails between plaintiff and Reichenstein indicate that the couple seriously considered investing in some of the properties. Id. at 4.
At the same time, plaintiff maintains that she often spoke to Kalikow, and informed him that Reichenstein’s company was searching for properties, and that Kalikow never informed her that this was a problem. In addition, there is evidence that at one point, Reichenstein approached Kalikow seeking to have Kalikow co-invest with Reichenstein in an opportunity which had been originally sent to Manchester, but which had been forwarded by plaintiff to her husband. There is also evidence that Reichenstein approached Kalikow on several occasions about various deals, none of which came to fruition. Id.
Manchester assert that plaintiff unfairly competed against Manchester from 2006 through 2008, by co-opting investment opportunities which Manchester would have considered had the opportunities been presented to it, rather than being intercepted and surreptitiously forwarded to Reichenstein. Id. at 5.
Plaintiff, on the other hand, maintains that the investment opportunities forwarded by her did not constitute corporate opportunities belonging to Manchester as they were based on public information and, in any event, were not the type of investment that plaintiff was to acquire for Manchester. In fact, plaintiff maintains that there was nothing secretive or disloyal about providing the investment opportunities to Royalton since Manchester’s business was primarily to lend money to purchasers of real estate, which was what Royalton was seeking, she was actually discharging her corporate duty rather than breaching it by bringing Reichenstein and Kalikow together. Id.
In addition, plaintiff asserts that she was not restricted in the opportunities that she was permitted to pursue and notes that the Employment Agreement did not include a non-compete provisions and that the Alpha LLC’s operating agreements expressly permitted her to engage in business ventures, even if in competition with Manchester. Id.
Justice Madden adverted to the Court’s original decision on the cross-motions for summary judgment:
In denying Manchester’s motion, the court found triable issues of fact existed as to whether the properties identified by plaintiff in the emails to Reichenstein were diverted corporate opportunities. In reaching this conclusion, the court relied primarily on the “tangible expectancy” test propounded by the First Department in Alexander & Alexander of N.Y. v Fritzen (147 AD2d 241 [1st Dept 1989]. As noted in the original decision, while discussing several tests utilized by the courts to determine the issue of what constitutes a corporate opportunity, the Alexander Court settled mainly on the concepts of the employer’s “expectancy, tangible or otherwise” in the business diverted, as well as the finding that “such business was essential or necessary to [the corporation’s] success … .” Alexander, at 249; see also Matter of Greenberg (Madison Cabinets& Interiors), 206 AD2d 963, 964 (4th Dept 1994) (defining corporate opportunity as “any property, information or prospective business dealing in which the corporation has an interest or tangible expectancy or which is essential to the existence or logically and naturally adaptable to its business”). [boldface added] Id. at 6-7.
And reprised the findings of the prior decision:
After applying this test, the court found factual questions as to whether the property at issue was a corporate opportunity. The court wrote that:
it cannot be said as a matter of law that Manchester had an interest or tangible expectancy in the properties identified in the emails sent by plaintiff to her husband. While the record shows that Manchester dealt in equity as well as debt transactions, plaintiff maintains that the properties were not of the kind that in which Manchester would invest. In this connection, plaintiff provides evidence that the equity deals bid on by Manchester were for large properties in which its bid was, for at least $100 million and in one case $2.5 billion, whereas the highest asking price of the deals sent by plaintiff to Reichenstein was $18 million. Plaintiff states that for the smaller investments like the ones she sent to Reichenstein, Manchester wanted another investor, to purchase the properties, while it loaned a portion of the investment money. Furthermore, while not dispositive, it is relevant that the offers were sent to other members in the industry, or even to Reichenstein. Id. at 7.
And concluded that:
For the reasons below, the court grants reargument to explicate the legal principles underlying the original decision in light of Manchester’s arguments. However, upon reargument, except for clarifying that the Alpha LLC operating agreements do not expressly allow plaintiff to compete with Manchester, the court adheres to its original decision and denies Manchester’s motion for summary judgment. Id. at 9-10.
The “faithless servant doctrine”, the “employee choice doctrine” and the “tangible expectancy test” were all initially manufactured by the Courts to address specific facts and circumstances. Over time, these doctrines morphed into a complicated set of ground rules – and exceptions – based upon the same, analogous or distinguishable story lines.
In a word, to a substantial and remarkable extent, our judicial system continues to resolve disputes on a case-by-case basis over time by using, applying, expanding or distinguishing the “common law” as developed by our courts.