Employment Litigation Gets Personal for Managers

A story at law.com (http://www.law.com/jsp/article.jsp?id=1187168523180) reveals that an increasing number of managers and executives are being sued personally for work-related decisions. For example, a hotel president was held personally liable for wage-hour violations because he was more than just a supervisor - he "had ultimate control over the business's day-to-day operations," and thus was instrumental in causing the violations. A court also held a supervisor liable for retaliation against an employee. And there is a suit pending against ex-EPA chief Christine Todd Whitman in her personal capacity for allegedly misleading New Yorkers about air quality after the September 11 attacks. The judge refused to dismiss the suit on summary judgment because the allegations, if true, "shock the conscience."

Several federal laws have been interpreted to hold managers personally responsible, such as the Fair Labor Standards Act, the Equal Pay Act, and the Family and Medical Leave Act. The notable federal exception is Title VII of the Civil Rights Act (prohibiting sex and race discrimination), which expressly state that a plaintiff may only sue an employer and not an individual. That does not, however, mean that an individual cannot be sued for discrimination under state laws.

Many corporations and LLCs believe incorrectly that they are shielded from any personal liability for actions they take in their business. Plaintiffs' attorneys are hoping that these lawsuits will make executives and managers think twice before engaging in illegal conduct.

These suits are especially problematic for small businesses, whose owners and managers cannot rely on large legal coffers to bail them out of trouble. Thus, even if the individual is ultimately vindicated, there is still substantial cost to the business, in legal fees, emotional distress, and time away from the business.

Ultimately, these lawsuits highlight the importance of having your attorney actively involved in your business's employment issues. It is vital that your attorney be involved from the beginning - not only after a complaint has arisen. Your attorney should be responsible for periodically reviewing your employment policies for compliance with state and federal laws, and your attorney should be involved, if not actively responsible for, investigations of employee complaints.

Small Business Financing - Part I

Small business financing is a tough issue, especially knowing how many businesses will never succeed. Starting your own business often means quitting your job and thus losing a regular salary and benefits. You will need capital for overhead expenditures, and initial expenses will often be significantly higher than your regular monthly overhead.


Ideally, of course, you will draw on your savings to get off the ground. And you will be able to do that without using up your six-month emergency fund, cashing in your retirement savings, or using the equity in your house. Those three are the most common sources for self-financing, and a bad idea.

You need your emergency fund. Starting a business does not qualify as an emergency, though losing a paycheck is. So you may need that money for living expenses while your business gets off the ground. (And if you have a savings account but no emergency fund, then that's just semantics - your savings account is your emergency fund.) Your retirement savings are for retirement - period. This is true especially if you're young - retirement may seem like a long way off, but you also need to save more than you think. Use an online calculator if you are having a hard time seeing the long-term picture. You do not want to be in the habit of using your IRA or 401(k) like a savings account. Finally, if you've paid attention to all the news about sub-prime loans, you already know the importance of having an equity cushion in your house. If that's not enough discouragement - are you willing to bet your house on your business? Do your spouse and children agree?

Hopefully I have convinced you that there are certain forms of "financing" that you just shouldn't touch. Unfortunately, the savings rate in the United States is abysmal, and only a small percentage of people have an adequate emergency fund. So there is a good chance that anyone starting a business will need some financial help.

The average small business owner - or, especially, the average start-up - will not be able to call on private equity. Your spouse may only put up with a single-paycheck lifestyle for a few months, if you can even afford that. (Or if you're single like me, you're on your own!) And the unfortunate reality is, you will not make a lot of money right away. It could take years to break even.

This series of articles will examine some options for financing available to small business owners, and discuss the pros and cons of each. Obviously, the right option for your business will depend on your special situation. You will need to think about each option in the constraints of your resources available, lifestyle, and type of business. And when you're ready to get more information, you can reach me at www.emilyfingerlaw.com.

Record-Keeping

"Electronic discovery" is the topic du jour among many litigators. Electronic discovery refers to the collection and production of electronically-stored documents to the opposing party during litigation. And while it may be considered a hot topic, the rules and problems are essentially the same as those applicable to paper documents.

One big issue, for example, is limited storage space. While it is certainly possible to store more data in less space when documents are electronic, it is also true that there seems to be much more data (e.g., e-mails, multiple edits of documents) that needs to be stored on expensive servers and drives. Thus, we presume that like paper documents, it is inefficient and unnecessary to store electronic documents forever. (Sidebar: Yes, there are plenty of IT professionals who will disagree. Nonetheless, the courts have officially given companies permission to delete data under the right circumstances. And some people, like me, just like to keep their storage organized and up-to-date.) Further, and more problematic, some servers can automatically over-write some data without an employee's knowledge. And then there's the scariest situation of all - losing data from a hard drive that is now caput.

The problem with deleting electronic data is the same problem as with shredding documents - when you get rid of "incriminating" documents, you can be fined a lot of money. But when no lawsuits have been filed, how can you know which documents may be relevant in the future? So, the question is, when can a company comfortably remove electronic data without fear of sanctions?

In short, the key to avoiding sanctions is to have a systematic and documented records management policy in place. First, review the location of all documents relating to the operation of the company, and then assess all legal, regulatory, and business requirements regarding the company's operations and the retention of such documents.

Next, the company should have a plan for if/when they are served with litigation. They will need to be able to identify, locate, and preserve all relevant documents. If possible, the documents should be preserved in their original format (electronic or paper).

With this policy in place, the company will know when it is able to delete/shred documents "in the normal course of business," and thus will be protected from sanctions. Such a policy will also enable a company to respond to discovery requests with minimal expense.

Oh yes, and as for data that has been lost through no fault of your own - don't worry, the law protects you. But you should get in the habit of regularly running back-ups. Your business is your livelihood, and you don't want your livelihood in the hands of your fussy computer.

The Elephant in the Room - Fees

I'm sure by now that you have seen the news story that some attorneys have now raised their hourly rates to $1000 and beyond. (I think one partner quoted in the WSJ article said it well when he called that the "vomit point" for most clients.) Makes my $900 rate seem like a bargain, eh? Just kidding.

I imagine there is a time for a lawyer who charges $1000+ per hour - the bet-the-company scenario, and probably then only for the Fortune500. And, granted, that is generally what these attorneys do. Nonetheless, there has been a lot of upset over the last decade from general counsels who feel that their outside legal bills are being padded to pay the astronomical salaries of new associates (and the marble floors, skyline views, flatscreen TVs unwatched in the lobby, etc.).

I think the press given to this issue lately will be a good thing. I think law firms need to look at skyrocketing overhead and perhaps realize that they could be a lot more economical. I think clients need to insist that their attorneys work with them in setting a budget for the matter, while certainly understanding that some things can be difficult to anticipate. And I think that more clients - and legal departments - need to give more consideration to solo and small firm lawyers, who have the expertise to handle almost anything, and the overhead to handle it without billing a year's worth of revenue.

Update on Whole Foods/Wild Oats

The district court judge sided with Whole Foods and Wild Oats against the FTC in the FTC's attempt to block their merger. The court found that Whole Foods and Wild Oats are competing with most other supermarkets, rather than just with each other. But not so fast… The FTC filed an appeal, and the Court of Appeals issued a temporary injunction blocking the merger until the appeal can be heard.

Non-Compete Agreements for Existing Employees

Any small business owner who is thinking of hiring employees should consult with an attorney about the employment law issues he/she may face. It is a lot simpler - and cheaper - to advise a client on the correct steps to take than to deal with a problem after it has arisen. One such issue is a non-compete agreement. I recently faced the issue of a client who wanted to impose non-compete agreements on his existing employees.

The first question is, when does an employer need a non-compete agreement? Non-compete agreements are generally not favored by the courts and they should be used sparingly. The marketplace for highly skilled employees is extremely competitive, but that does not mean that non-compete agreements are the only - or even optimal - strategy for protecting trade secrets or holding onto valued employees. Remember that trade secret and confidentiality agreements may give an employer what he/she needs without the hassle of non-competes.

But let us assume that a business owner would benefit from a non-compete agreement. The next issue will be structuring the agreement for the "mid-stream employee" who is currently employed by the business. For these employees, a non-compete agreement will only be enforceable if it is supported by independent consideration. Indeed, Minnesota courts have also required independent consideration where the employee has accepted an offer of employment but not yet begun work, and where the employee knew he would have to sign a non-compete agreement but did not know the terms until it was presented two him two weeks after he began work.

Independent consideration must consist of "real benefits" which are bargained for between employer and employee. They must be benefits beyond anything the employee is already entitled to receive, either by virtue of his employment or by a separate agreement. Some examples include a cash payment, promotion, a stock option or grant, or participation in a bonus plan. When choosing consideration for a non-compete agreement, it is important to remember that the courts require the consideration to be unique to employees who sign the non-compete agreement. In other words, if an employer offers the same benefit to other employees who do not sign a non-compete agreement, then the consideration is illusory and will not be sufficient.

Sarbanes-Oxley Turns 5

(Sorry for the brief hiatus, folks. I'm taking the GMAT in a month and I need to re-learn all the math from K-12 that I have forced out of my brain. As Bart would say, ay caramba.)

Sarbanes-Oxley celebrated its fifth anniversary last week - July 30th, to be precise. No business law blog would be complete without a comment on this momentous legislation. On the other hand, I have been struggling all week with how to give the law proper treatment (without treading on the WSJ's phenomenal report, "Critics See Some Good in Sarbanes-Oxley," http://online.wsj.com/article/SB118575565116581776.html?mod=politics_primary_hs).

So, I'll begin by rehashing the article. Sarbanes-Oxley, which was passed overwhelmingly by Congress, demands rigorous internal controls, requires executives to certify the accuracy of financial reports, requires companies to investigate whistleblower complaints, and created a watchdog for auditing firms. In the boardroom, it expands the role of audit committees and requires regular private sessions of independent directors.

AMR Research estimates that, by the end of 2007, public companies in the US will have spent more than $26 billion to comply with SOX. This is certainly more than executives would like to spend, but it has not all been in vain. Many companies are reporting that SOX has prompted changes that are ultimately making them better-run businesses. Some examples from California company Invitrogen: "Directors meet more often without executives present. Multiple ombudsmen field employee complaints. Ethics training is more rigorous. And Chief Executive Greg Lucier requires his lieutenants to take more responsibility for their results." There is also more accountability in the boardroom. "More boards resolve potential problems 'before they fester and explode.'"

SEC Chairman Christopher Cox believes that SOX has helped restore confidence in the financial markets and helps to ensure that financial reports are reliable. He also points out that compliance costs are falling (which makes sense because many of these costs were incurred when companies designed and instituted the necessary review processes).

In the first few years after SOX, hundreds of companies disclosed "material weaknesses" in their accounting and were forced to restate previous financial results. As companies fix problems and avoid new issues, less and less of them are doing this.

So there you have it - opinions from those in the know. But the policy question is, will the costs saved from preventing fraud and the increased confidence in the financial markets outweigh the expenses of instituting SOX reforms? This is a difficult question, because confidence in the financial markets cannot be quantified. And costs saved from potential securities litigation can only be estimated - after all, while Enron et al. were abominations, they were indeed incredibly rare. It also worth bearing in mind that the least costs were incurred by companies who already had excellent accountability practices in place. Further, many companies are reporting better business practices arising from SOX changes, which can ultimately help them perform better.

To best answer the question, I suggest looking at SOX another way. Let's compare the expenses companies incurred as a result of SOX to the expenses society incurs in maintaining a police force. Both are intended to stop problems before they start. After all, if the police were only supposed to catch criminals and investigate after a crime occurred, then they are grossly overstaffed. Both are also intended to give a certain peace of mind that cannot be valued or quantified. And in both cases, the costs are borne by those seeking the benefits – local citizens pay for police, and companies seeking funding from investors pay for SOX safeguards. Looking at SOX in this light, I hope you would agree that it’s worth the expense.