September 2023: Enjoining competitive employment, advisor mobility, reverse discrimination, the low bar for retaliation, and litigating “Cause”
Connecticut Court Issues Temporary Restraining Order Enforcing Noncompete
Description: A federal court in Connecticut recently issued a temporary injunction to prevent a former employee of Charter Communications from joining a competitor, a role which Charter argued violated the employee’s non-compete. In its decision, the court seems to hold that the risk the employee might disclose trade secrets to his new employer was sufficient to warrant the injunction. The court found significant that the Charter and its competitor were vying for the same finite set of government subsidies.
S&K take: Non-competes are not dead yet, and protecting trade secrets continues to be a viable basis to enforce them. It’s interesting that the court found irreparable harm based on the finite availability of certain government subsidies. Asset managers may want to consider whether the same logic could be used to leverage irreparable harm to investment capacity as a basis to enforce non-competes.
Financial Advisor Mobility and Restrictive Covenants Tested in Georgia Litigation
Description: In Georgia, a financial services entity sued three former financial advisors after they jumped to a competitor, induced, according to the complaint, by a ~$70M payday. The complaint asserts that the advisors solicited clients and employees—and in the weeks before they resigned printed thousands of pages of confidential client and prospect information—all in violation of their restrictive covenants. The plaintiff claims that hundreds of millions in assets have transferred or are expected to transfer. Notably, the new employer is not named as a defendant in the complaint.
S&K Take: We’ll be monitoring. The mobility of financial advisors and who “owns” which client relationships have been hot topics recently, and the outcome here could have ripple effects in that space.
”Reverse Discrimination” Claims Seem to Proliferate
Description: In late August, a white former executive services director filed a “reverse discrimination” claim against an investment bank in New York federal court alleging that he was terminated because of his race. To support his claims, the plaintiff alleged that (a) his former employer replaced him with a Black woman with less experience and (b) he’d been told that the company made employment decisions in a prior layoff based on employees’ “status as diverse.”
S&K Take: There has been an uptick in “reverse discrimination” claims, and we expect that to continue following a series of similar and sometimes successful high-profile cases, as well as the U.S. Supreme Court’s decision in Students for Fair Admissions, Inc. v. University of North Carolina. For example, last month alone, VC firm Fearless Fund was sued for investing in Black women, and two large law firms were sued by plaintiffs who claimed that their diversity fellowship programs for underrepresented individuals in the legal industry violated civil rights laws. These cases are a reminder to companies with Diversity, Equity and Inclusion initiatives that they may be subject to scrutiny more than ever before, and to consider whether to evaluate those programs to hedge against these increasingly common claims.
Illinois Court Takes a Broad View of “Protected Activity”
Description: A federal judge in Illinois recently denied a motion to dismiss racial discrimination and retaliation claims against McDonald’s and its CEO. The plaintiff, a former executive, alleged that he had been marginalized and ultimately fired because of his race and in retaliation for criticizing the CEO during a staff meeting about text messages the CEO sent to the then-mayor of Chicago. The texts were made public, were “branded…as racist” and sparked outrage. The defendants moved to dismiss. They argued among other things that the plaintiff’s comments at the staff meeting were not protected activity. The court disagreed, holding that the plaintiff’s “rebuke” at the staff meeting “referenced the effects that [the CEO’s] comments and the attitudes underlying them could have on ‘their fellow employees who are in the room’ who may ‘live in tough communities’ but ‘work hard to provide for their family and keep them safe.’” “In context,” said the court, “it is reasonable to infer the [the plaintiff] was attempting to speak up for African American employees who believed [that the CEO’s comments about the text messages] failed to condemn certain attitudes that might have been held by other McDonald’s employees,” and that the plaintiff therefore plausibly complained about “conduct that he reasonably and in good faith believed to be unlawful discrimination.” In other words, the court found that the plaintiff’s comments at the staff meeting were protected activity, and allowed the retaliation claim to proceed.
S&K Take: This is a reminder to employers that, especially in the early stages of a litigation, courts may take a broad view of what constitutes protected complaints about discrimination. There are two takeaways. First, this decision illustrates a potential downside of an unsuccessful pre-answer motion to dismiss: McDonald’s is now stuck with a decision holding that the allegations in the complaint, if proven, are sufficient to establish protected activity. Second, this is a reminder to employers that when making termination decisions, it is crucial to consider whether the employee made internal complaints or remarks that can plausibly constitute protected activity.
Vet Your Executive “Cause” Designations
Description: On August 29, the CEO of a New Jersey hospital sued for breach of contract, claiming the hospital fabricated a “cause” basis to terminate his employment to avoid paying his severance. The basis, according to the complaint, was that the CEO intentionally violated the hospital’s sexual harassment policy by allowing a body paint exhibit at a fundraiser. The CEO asserts in his complaint that he was not involved in planning the event, that other executives were involved and that no one complained during the event about the exhibit.
S&K Take: We’re asked often to draft and negotiate “cause” definitions in executive agreements, and to advise on whether certain conduct gives rise to cause. This lawsuit is a reminder to think critically about what constitutes cause when negotiating executive agreements and other employment contracts, and to evaluate termination decisions critically before designating an employee as a good or bad leaver, with a view toward potential litigation. This claim is also a reminder—for entities concerned with publicity—to consider arbitration provisions in executive agreements to the extent permissible.
If you have any questions, please contact David Baron, Anne Patin, or your primary Seward & Kissel attorney.