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2 Forget the Cut N Paste: Considerations for Your 2017 Employee Agreements November 21, 2017 Presented By: Michael C. Schmidt Vice Chair, Labor and Employment Department Cozen O Connor mschmidt@cozen.com

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4 Today s Menu Developments With Two Types of Agreements: 4 Ø Settlement and Severance Agreements (and the Government) Ø Restrictive Covenants and Compensation Agreements (and the Government)

5 2017 Employee Agreements Settlement and Severance Agreements: New Agency Rules of the Road

6 Increased Scrutiny for Settlement/Severance Agreements and Releases EEOC s Strategic Enforcement Plan Target release agreements that may chill the exercise of protected activity Preserve access to the legal system, which includes commencing proceedings against employers that engage in retaliatory practices or use overly broad settlement waivers. Reality: Systematic litigation will continue to make up a large % of EEOC s docket.

7 EEOC v. CVS Pharmacy, Inc. EEOC challenges employer s use of release agreements that condition the payment of severance benefits on the waiver of certain protected rights, including: The ability to bring a charge before the EEOC The ability to cooperate with an EEOC investigation The ability to communicate with the EEOC Notes: The EEOC s position was troubling, because the release being challenged is similar to releases used by many employers. Employers should ensure they have appropriate language in their releases that clearly preserves the individual s right to engage in protected activity.

8 Offending Provision No. 1 "I further agree never to institute any complaint, proceeding, grievance, or action of any kind at law, in equity, or otherwise in any court of the United States or in any state, or in any administrative agency of the United States or any state, country, or municipality, or before any other tribunal, public or private, against the Company arising from or relating to my employment with or my termination of employment from the Company, the Severance Pay Plan, and/ or any other occurrences up to and including the date of this Waiver and Release, other than for nonpayment of the above-described Severance Pay Plan."

9 Offending Provision No. 2 I agree that I will not make any disparaging remarks or take any other action that could reasonably be anticipated to damage the reputation and goodwill of Company or negatively reflect on Company. I will not discuss or comment upon the termination of my employment in any way that would reflect negatively on the Company. However, nothing in this Release will prevent me from truthfully responding to a subpoena or otherwise complying with a government investigation."

10 EEOC v. CollegeAmerica Denver Similar suit filed by the EEOC concerning a release agreement that conditioned the receipt of separation benefits on, among other things, the employee s promise not to file any complaint or grievance with any government agency or to disparage CollegeAmerica. Lawsuit was dismissed because the EEOC failed to properly conciliate before filing suit.

11 Practical Implications for Employers Effect on existing, executed settlement/separation agreements and releases Reformation of earlier agreements? Possible litigation? Simplicity v. comprehensiveness Review the length and complexity of the agreement Ensure that agreement adequately states employee s right to file a charge or participate in an investigation

12 United States Department of Labor - OSHA Memorandum New Policy Guidelines for Approving Settlement Agreements in Whistleblower Cases OSHA has issued very similar policy guidelines for its review of private settlement agreements presented to the agency for approval in whistleblowing actions. OSHA enforces more than 20 federal whistleblowing statutes including the Sarbanes-Oxley Act (SOX). The OSHA guidelines have a broader reach than the SEC s earlier action since OSHA governs employers who are not publicly traded companies.

13 OSHA OSHA will not approve a gag provision that prohibits, restricts, or otherwise discourages a complainant from participating in protected activity. Protected activity includes, but is not limited to, filing a complaint with a government agency, participating in an investigation, testifying in proceedings, or otherwise providing information to the government. These constraints often arise from broad confidentiality or non-disparagement clauses, which complainants may interpret as restricting their ability to engage in protected activity. Other times, these constraints are found in specific provisions, such as the following:

14 OSHA A provision that restricts the complainant's ability to provide information to the government, participate in investigations, file a complaint, or testify in proceedings based on a respondent's past or future conduct. For example, OSHA will not approve a provision that restricts a complainant's right to provide information to the government related to an occupational injury or exposure. A provision that requires a complainant to notify his or her employer before filing a complaint or voluntarily communicating with the government regarding the employer's past or future conduct. A provision that requires a complainant to affirm that he or she has not previously provided information to the government or engaged in other protected activity, or to disclaim any knowledge that the employer has violated the law. Such requirements may compromise statutory and regulatory mechanisms for allowing individuals to provide information confidentially to the government, and thereby discourage complainants from engaging in protected activity. A provision that requires a complainant to waive his or her right to receive a monetary award (sometimes referred to in settlement agreements as a "reward") from a government-administered whistleblower award program for providing information to a government agency. For example, OSHA will not approve a provision that requires a complainant to waive his or her right to receive a monetary award from the Securities and Exchange Commission, under Section 21F of the Securities Exchange Act, for providing information to the government related to a potential violation of securities laws.1 Such an award waiver may discourage a complainant from engaging in protected activity under the Sarbanes-Oxley Act, such as providing information to the Commission about a possible securities law violation. For the same reason, OSHA will also not approve a provision that requires a complainant to remit any portion of such an award to respondent. For example, OSHA will not approve a provision that requires a complainant to transfer award funds to respondent to offset payments made to the complainant under the settlement agreement.

15 OSHA When the above types of provisions are encountered, or settlements have broad confidentiality and non-disparagement clauses that apply "except as provided by law," employees may not understand their rights under the settlement. Accordingly, OSHA will ask parties to remove the offending provision(s) and/or add the following language prominently positioned within the settlement: "Nothing in this Agreement is intended to or shall prevent, impede or interfere with complainant's non-waivable right, without prior notice to Respondent, to provide information to the government, participate in investigations, file a complaint, testify in proceedings regarding Respondent's past or future conduct, or engage in any future activities protected under the whistleblower statutes administered by OSHA, or to receive and fully retain a monetary award from a government-administered whistleblower award program for providing information directly to a government agency.

16 Recommendations Consider revising provisions that mandate cooperation with the employer in connection with litigation and proceedings in light of the EEOC s (and other agencies ) now more aggressive posture on these issues. Consider otherwise modifying terms that might spark concern from the government.

17 Perils of Violating Terms of Severance Agreements A Silver Lining for Employers

18 Settlement Agreements Gone Wrong For the Employee Deprivation of benefits of employees who breach their obligations under these arrangements. Case examples of employees who engaged in postemployment wrongdoing after the agreements were negotiated and executed who lost their rights to severance payments. St. Louis Produce Market v. Hughes, 753 F.3d 829 (8th Cir. 2013). Hallmark Cards, Inc., v. Murley, 703 F.3d 456 (8th Cir. 2013). Gulliver Sch., Inc. v. Snay, 137 So. 3d 1045 (Fla. Dist. Ct. App. 2014).

19 St. Louis Produce Market v. Hughes Facts: Employee received a severance agreement with lump-sum payment equivalent to 14 weeks of pay. Unbeknownst to the employer, employee and his attorney unilaterally changed payment period to 104 weeks. The head of the company, signed it without knowing that the amount had been changed. Plaintiff violated agreement by failing to return a lap top (i.e. company property) and agreement was invalidated.

20 Hallmark Cards, Inc., v. Murley Facts: Vice president of marketing for Hallmark Cards received a $735,000 severance payment upon leaving the company, coupled with an agreement that she would maintain confidentiality of certain proprietary data. She then began working as a consultant for a competitor, for which she was paid $125,000, while revealing certain confidential data to the competitor in violation of the terms of the severance agreement. Hallmark sued and obtained a jury verdict of $860,000, comprising a refund of the $735,000 severance payment and an additional $125,000 for the consulting fees.

21 Gulliver Sch., Inc. v. Snay Facts: In November 2011, the school and Snay came to an agreement in which Snay would be paid $10,000 in back pay, and an $80,000 settlement. Gulliver Schools also agreed to cut Snay's attorneys a check for $60,000. Shortly thereafter, Snay's daughter posted on Facebook, boasting, "Mama and Papa Snay won the case against Gulliver. Gulliver is now officially paying for my vacation to Europe this summer. SUCK IT." Within a few days, Gulliver Schools sent a letter to Snay's attorneys stating that Snay had broken a confidentiality agreement and that he would not be receiving the $80,000 settlement. The agreement stated that neither Snay nor his wife could speak about the settlement to anyone except for his attorneys and other professional advisers. Snay filed a motion to enforce the settlement and won in a Circuit Court ruling. The school appealed. Third District Court of Appeal for the State of Florida agreed that Snay had, in fact, violated confidentiality and reversed the Circuit Court ruling.

22 2017 Employee Agreements Restrictive Covenants and Compensation Agreements

23 Terminology General Types of Restrictive Covenants: Ø Confidentiality Ø Non-Compete Ø Non-Solicit: Customers/Clients Ø Non-Solicit: Employees

24 Benefits of Restrictive Covenants ü Deterrent Employees from joining competitors ü Deterrent Competitors from hiring employees ü Protect Competitively-Sensitive Information ü Legal Basis for Deterring and Protecting Through Lawsuit

25 Costs of Restrictive Covenants o Negative Impact Recruiting and Morale o Burden Administrative Effort in Securing and Reminding o Cost Creating and Enforcing o Precedent Inconsistent Application... AND...

26 Costs of Restrictive Covenants Government Involvement: The National Trend Favoring Employee Mobility and Free Choice

27 Government Involvement Frequency of Use and Blanket Use + Government Pro- Employee Stance = Restrictions and Bans

28 Government Involvement The White House May 2016

29 Government Involvement The White House May Evidence indicates that non-competes are also being used in instances where the benefit is likely to be low... But the cost is still high to the worker. Worker bargaining power is reduced after a non-compete is signed, possibly leading to lower wages. The broad geographic and time scope of non-compete contracts can limit the mobility of workers in a long-lasting way, harming both the workers and the overall efficiency of labor markets. Non-competes that stifle mobility of workers who can disseminate knowledge and ideas to new startups or companies moving to a region can limit the process that leads to agglomeration economies.

30 Government Involvement... The White House May 2016 Low wage workers are compelled to sign noncompetes. Workers have less bargaining power when asked to sign non-competes after accepting a job offer. Implications and enforceability of non-competes are unclear to workers. Employers draft overly broad or patently unenforceable non-competes. No additional consideration is provided for noncompetes beyond new or continued employment.

31 Government Involvement The White House October 2016 A call to action to encourage states to ban non-competes for low-wage earners, workers who do not possess any trade secrets, workers who are employed in certain public health or safety occupations. In adopting these strategies, states can help ensure that workers can move freely from job to job, without fear of being sued[.]... Even in states that choose to enforce noncompetes, we have heard from experts that only in rare cases is a noncompete the best option for an employer to use, over and above the host of other legal frameworks including trade secret protections, nonsolicitation agreements and nondisclosure agreements.

32 State Action: Employer à Employee Ø MA Passed bill limiting length of non-competes to 12 months, and banned them for minimum wage workers and college students Ø IL Passed law banning non-competes with low wage workers Ø NY Examination Management Services, Inc. Jimmy John s Law360 Coming in 2017/

33 Antitrust 101 Section 1 of the Sherman Act outlaws unreasonable agreements in restraint of trade or commerce. State AGs have standing to enforce the civil provisions of the Sherman Act in federal court. States have enacted state antitrust statutes that are patterned after the Sherman Act.

34 FTC and DOJ Antitrust Guidance for HR Professionals FTC and DOJ jointly released antitrust compliance guidance regarding practices related to the hiring and setting of compensation for employees. Firms that compete for employees are competitors in the employment market even if those firms do not compete in the products and services that they offer.

35 Potential Criminal Liability DOJ intends to criminally investigate companies who: Agree with competitor(s) to fix wages or other terms of employment; or Enter into so-called no-poaching agreements by agreeing not to recruit each other s employees. Wage-fixing and no-poaching agreements eliminate competition in the same irredeemable way as agreements to fix the price of goods or allocate customers. Agreements that do not rise to criminal violations may nevertheless lead to civil liability.

36 Examples of Alleged Unlawful Agreements DOJ brought three civil enforcement actions against technology companies (ebay and Intuit, Lucasfilm and Pixar, and Adobe, Apple, Google, Intel, Intuit and Pixar), accusing them of entering into agreements not to cold call each other s employees. All of these enforcement actions resulted in consent judgments. FTC brought a case against Debes Corp. for allegedly entering into agreements to boycott temporary nurses registries in order to eliminate competition among the nursing homes for the purchase of nursing services. The case ended in a consent judgment.

37 Exchange of Sensitive Information The sharing of sensitive information with competitors about terms and conditions of employment also can run afoul of antitrust laws. Such agreements to share information can serve as evidence of an implicit illegal agreement. Agreements to share information are not per se illegal, but may be subject to civil antitrust liability when they have, or are likely to have, an anticompetitive effect.

38 Permissible Information Exchanges Not all information exchanges are illegal. For example, an information exchange may be lawful if: A neutral third party manages the exchange; The exchange involves information that is relatively old; The information is aggregated to protect the identity of the underlying sources; and Enough sources are aggregated to prevent competitors from linking particular data to an individual source.

39 Forget the Cut N Paste: Considerations for Your 2017 Employee Agreements November 21, 2017 THANK YOU! Michael C. Schmidt, Esq. Vice Chair, Labor and Employment Department Cozen O Connor mschmidt@cozen.com (212)