Employment Litigation Roundup: June 2024

July 2, 2024

June 2024

CFTC charges employer with failing to include whistleblower carveout in agreements with employees

Commodities trading firm Trafigura Trading LLC agreed to pay a $55 million fine to settle charges from the Commodity Futures Trading Commission (“CFTC”).  Among other things, the CFTC charged the company with using non-disclosure provisions that impeded employee whistleblower communications with the CFTC in violation of the Commodity Exchange Act and accompanying regulations.

According to the Order, from 2017 to 2020, Trafigura required employees and departing employees to sign employment agreements and separation agreements containing non-disclosure provisions that prohibited employees from disclosing Trafigura’s confidential information to third parties.  The non-disclosure provisions did not contain carveout language expressly permitting communications with law enforcement or regulators like the CFTC, which the CFTC asserted violated regulations that make it unlawful to “take any action to impede an individual from communicating directly with the [CFTC]’s staff about a possible violation of the Commodity Exchange Act, including by enforcing, or threatening to enforce, a confidentiality agreement or predispute arbitration agreement with respect to such communications.”

As part of the settlement, Trafigura agreed to modify its non-disclosure provisions to “include language making clear that no term in any such Agreement should be understood to limit or prevent the filing of a complaint with; or voluntary, lawful communication with; or disclosure of information to any federal, state, or local governmental regulatory or law enforcement agency.”

S&K Take: This settlement marks the CFTC’s first enforcement action against an employer for interfering with whistleblower communications.  The CFTC appears to be following in the footsteps of the Securities and Exchange Commission, which has been targeting this issue for some time.  Employers should review any non-disclosure or confidentiality provisions in employment-related documents to ensure they contain the necessary carveout language.

NLRB judge orders rescission of noncompete and non-solicitation provisions

An administrative law judge for the National Labor Relations Board (“NLRB”) recently held that noncompete and non-solicitation provisions unlawfully chilled employees’ rights to engage in union and other protected concerted activity under Section 7 of the National Labor Relations Act (“NLRA”) and ordered the employer to rescind the offending provisions and notify current and former employees that the provisions were no longer in effect.

At issue were three provisions: (1) a post-employment non-solicit of employees; (2) a post-employment noncompete; and (3) a requirement that employees must, during their employment, “keep Employer informed concerning any and all offers or solicitations of employment that Employee may receive from third-parties so that Employer may protect its rights under this Agreement.”

The judge found that all three provisions would dissuade a reasonable employee from engaging in activities protected by the NLRA, including discussing wages or benefits, bargaining for improved working conditions, or joining a union.  The judge deemed the noncompete’s scope, covering any “similar or competitive” business, as “ridiculously broad” given the risk of retaliation:

If an employee knows they are barred from being involved in any capacity with any company that operates a similar business to [the employer], they will logically be more fearful of being fired and less willing to rock the boat because they face the prospect of being unable to find any work in their geographic area if they are fired or forced to leave their job.

Finally, the judge held that more narrowly tailored provisions in the agreements, including provisions which required employees to turn over confidential and proprietary information and prohibited employees from attempting to divert customers, adequately protected the employer’s interests.

S&K Take:  As previously reported, the NLRB’s General Counsel made clear her intention to target noncompete and non-solicitation provisions as chilling NLRA-protected activity.  This is the first time we’re aware of that a judge invalidated such provisions under this theory.  Notably, however, the judge did not go so far as to state that restrictive covenants are per se unlawful under the NLRA and distinguished this case from others where the restrictions were not so broadly prohibitive of protected conduct.  Employers should carefully review and narrowly tailor their restrictive covenants with appropriate carveout language.

Eighth Circuit enforces two-year noncompete against departing executive

The U.S. Court of Appeals for the Eighth Circuit, reviewing a Missouri district court’s ruling, affirmed a preliminary injunction enforcing a two-year noncompete to prevent Cigna Corp.’s former executive from joining CVS Health Corp.

The court noted that the executive signed the noncompete with the advice of counsel when promoted to president of Cigna, and that since she voluntarily resigned from Cigna to join CVS, the consequences are “of her own making.”  The court also held the noncompete was reasonable and necessary to protect Cigna’s business interests because the executive had “intimate knowledge about Cigna’s inner workings,” including knowledge of at least one trade secret, and that her employment with CVS posed a serious threat to Cigna because it and CVS were each other’s largest direct competitors and identical in “virtually every aspect” of their businesses.  The court found further that the relative harm to Cigna in striking the noncompete outweighed the harm to the executive and CVS in enforcing it because CVS had agreed to pay the executive’s full salary for the full two-year duration of the noncompete, even if she performed no work for CVS.

S&K Take: This case reminds that non-competes can (in most states) be enforced under the right circumstances.  In addition, this decision cautions that while a new employer may agree to pay an employee during the duration of any noncompete with the employee’s prior employer even though the noncompete restrictions may prevent the employee from performing any work for the company during the restricted period, in the event a lawsuit is later brought by the former employer to enforce the noncompete, such an arrangement may make it more difficult for the new employer to argue that they will suffer harm if a preliminary injunction is granted.

Second Circuit rejects SOX whistleblower retaliation claims where there was no evidence the employee subjectively believed he reported illegal conduct

In a summary order, the U.S. Court of Appeals for the Second Circuit upheld summary judgment for American International Group, Inc. (“AIG”) on a former employee’s whistleblower retaliation claims under the Sarbanes-Oxley Act (“SOX”).

The former head of AIG’s Legal Operations Center alleged that he was fired for raising concerns that AIG was colluding with an outside consulting firm in rejecting his proposal to spinoff his group into its own consulting firm.  The Second Circuit agreed with the lower court that summary judgment was appropriate absent evidence the employee reasonably believed he was reporting a violation of Securities and Exchange Commission rules or regulations when he complained.

The employee also alleged that AIG retaliated against him for filing his SOX complaint with the Occupational Safety and Health Administration (“OSHA”)—five months after his termination—by “cut[ting] off” his access to an account holding his unvested shares in AIG.  The shares were granted pursuant to the company’s Long-Term Incentive Plan (“LTIP”), which required the employee to sign a release within 90 days of his termination to receive any equity scheduled to vest after his termination.  Since the employee did not sign a release in the 90-day period, the court held that the OSHA complaint, which the employee filed after those 90 days, could not have been a “contributing factor” to the employee losing his shares.  The employee already had lost his rights to the unvested shares when he filed his OSHA complaint.

S&K Take: The court’s decision reinforces that to state a viable SOX retaliation claim, an employee must have evidence establishing they subjectively believed they were reporting illegal conduct.  The case also reiterates that employers can condition certain post-termination benefits on the timely execution of a release.