New District of New Jersey Case Shows Importance of Requiring Drivers to Form Corporate Entities in Misclassification Cases

Late last month, District of New Jersey Judge Robert B. Kugler partially granted FedEx Ground Package Systems Inc. (“FedEx”)’s Motion to Dismiss in a trucking misclassification case.  The court dismissed several claims but preserved the plaintiff’s wage claim.  One key in getting several of the claims dismissed for FedEx was that it had required the plaintiffs to form LLCs or corporations prior to contracting with them.

In Carrow v. FedEx Group Package Systems, Inc., No.: 16-3026, plaintiffs brought claims against FedEx arising under the New Jersey Consumer Fraud Act (“NJCFA”), misrepresentation, rescission, New Jersey Wage Payment Law (“NJWPL”), and breach of the covenant of good faith and fair dealing. The contract between the driver plaintiffs and FedEx classified the drivers as independent contractors and, for some agreements, first required the drivers to create a limited liability company or corporation and sign the agreement through the business entity.  Plaintiffs argued that despite language in the operating agreements, they were treated as employees as the agreements regulated the vehicle appearance, vehicle maintenance, liability insurance, driver reports, driver uniforms, and driver service areas.  FedEx was also responsible for determining the prices charged for services, route schedules, electronic equipment used, forms for paperwork, and approval of substitutes and assistants. It also actively monitored how drivers operated their vehicles, carry packages, and completed paperwork to ensure adherence to company policies.

Based on the fact that the name plaintiffs had formed corporate entities at FedEx’s request and therefore as individuals were not direct parties to the operating agreements with FedEx, the court dismissed the plaintiffs’ claims of breach of the covenant of good faith and fair dealing and rescission.  The court also dismissed the plaintiff’s NJCFA claim because the plaintiffs’ theory was that the fraud related to FedEx’s employment of the plaintiffs which is not a basis for a NJCFA claim.  Further, the court held that plaintiffs could not state a cognizable claim under the NJCFA because business opportunities are not covered by the NJCFA.  The court did, however, allow several claims to proceed, most importantly, the plaintiff’s NJWPL wage claim finding that the fact that the plaintiffs were not parties to the operating agreements was not in and of itself enough on a motion to dismiss to determine if an employment relationship existed between the plaintiffs and FedEx.

For our clients in the transportation, trucking, and logistics industries, requiring that drivers form LLCs or corporations before entering into contracts with them helps to defeat misclassification claims.  However, as this case shows, corporate status is not enough by itself to definitively defeat a misclassification claim as it is one of many factors that a court will consider.

For questions about employment issues involving the trucking and logistics industries, please contact John Vreeland, Esq., Chair of the Transportation, Trucking & Logistics Group and Partner in the Labor Law Practice Group at jvreeland@nullgenovaburns.com or (973) 535-7118, or, Harris S. Freier, Esq., Partner in the Firm’s Employment Law and Appellate Practice Groups, at hfreier@nullgenovaburns.com or (973) 533-0777.  Please also sign-up for our free Labor & Employment Law Blog at www.labor-law-blog.com to keep up-to-date on the latest news and legal developments effecting your workforce.

The D.C. Circuit Vacates NLRB Ruling on Driver Status in FedEx Case

In early March 2017, the D.C. Circuit in FedEx Home Delivery v. NLRB, 2017 U.S. App. LEXIS 3826 (D.C. Cir. 2017) vacated a National Labor Relations Board (“NLRB” or “the Board”) ruling that Connecticut FedEx drivers constitute employees under the National Labor Relations Act (“NLRA”). The D.C. court said that the case was indistinguishable from a 2009 case before the panel involving a group of Massachusetts drivers.

In 2007, single-route FedEx drivers based in Hartford, CT elected Teamsters Local 671 (“Union”) to represent them which lead to FedEx filing subsequent objections to the NLRB. While the appeal was pending, the D.C. Circuit decided FedEx Home Delivery v. NLRB (FedEx I), 563 F.3d 492 (D.C. Cir. 2009), finding that FedEx drivers based out of the company’s Wilmington, MA terminal constituted independent contractors under the NLRA. In its holding, the court vacated the NLRB’s order to engage with the union and denied the Board’s cross-motion for enforcement. The court held that the NLRB was bound to apply the common-law ten factor agency test as set forth in the Restatement (Second of Agency), but explained that rather than a control inquiry, that the emphasis of these factors should be on  “entrepreneurial opportunity” for gain or for loss as it relates to the determination of a worker’s status.  FedEx identified three specific entrepreneurial opportunities available to the drivers: (1) drivers’ ability to hire other drivers; (2) drivers’ ability to sell routes; and (3) drivers’ ability to operate multiple routes.  Persuaded by these arguments, the court held that the FedEx drivers were independent contractors.

In 2014, the NLRB issued a revised decision in FedEx Home Delivery, 361 N.L.R.B. No. 55 (Sept. 30, 2014) which found that the facts pertaining to the Hartford drivers and those discussed in FedEx I were “virtually identical.” Still, however, the NLRB declined to adopt the D.C. Circuit’s 2009 interpretation of the NLRA because it disagreed with the court’s emphasis on “entrepreneurial opportunity” as the key factor in determining a worker’s status. Specifically, it said that the Board should give weight to actual, not merely theoretical, entrepreneurial opportunity, and it should evaluate the constraints imposed by a company on the individual’s ability to pursue that opportunity. Moreover, it noted that FedEx unilaterally drafts, promulgates, and changes the terms of its agreements with drivers, a feature that weighs “heavily in favor of employee status” along with the Board’s view that the drivers lacked independence and were disallowed the initiative and decision-making authority normally associated with an independent contractor   The Board also found that FedEx engaged in unfair labor practices affecting commerce under the NLRA by refusing to recognize and bargain with the union.

In the present case, FedEx argued that the question had already been argued before the D.C. Circuit in FedEx I and involved the same parties, thus the same result should follow. The court agreed and denied the Board’s cross-application for enforcement, granted FedEx’s petitions for review, and vacated the Board’s orders. The D.C. Circuit noted that in FedEx I, the Board considered all common-law factors and was still persuaded that the drivers were independent contractors. The court also noted that the U.S. Supreme Court previously held that that the question whether a worker is an “employee” or “independent contractor” under the NLRA is a question of “pure” common-law agency principles that a court can review and does not require special administrative expertise.

The takeaway for employers is that in determining whether workers are employees or independent contractors, employers must remember that despite significant overlap, there are in fact different tests as related to the NLRA, federal taxes, the Fair Labor Standards Act, state wage and hour law, ERISA, the Affordable Care Act, and various other circumstances.  While the D.C. Circuit has for the moment clarified (or rather reinforced) its view as to the proper test under the NLRA, employers should always focus on where their greatest liability is and attempt to cater to the relevant test as much as possible.

For questions about independent contractors or trucking and logistics, please contact John Vreeland, Esq., Chair of the Transportation, Trucking & Logistics Group and a Partner in the Labor Law Practice Group at jvreeland@nullgenovaburns.com or (973) 535-7118, or, Harris S. Freier, Esq., a Partner in the Firm’s Employment Law and Appellate Practice Groups, at hfreier@nullgenovaburns.com or (973) 533-0777. Please also sign-up our free Labor & Employment Blog at www.labor-law-blog.com to keep up-to-date on the latest news and legal developments effecting your workforce.

How to Avoid Disney’s Not-So-Fairy Tale $3.8 Million Payment of Employee Back Wages

On Friday, March 17, 2017, the U.S. Department of Labor (“DOL”) and two subsidiaries of The Walt Disney Co. (“Disney”), the Disney Vacation Club Management Corp., and the Walt Disney Parks and Resorts U.S. Inc., reached an agreement to resolve claims under the Fair Labor Standards Act (“FLSA”), requiring the payment of back wages of over $3.8 million to more than 16,000 employees of the two Florida-based Disney companies.

According to the DOL, Disney deducted a uniform (or “costume”) expense from employee pay, which lead some employees’ hourly rate to fall below the federal minimum wage rate of $7.25 per hour. The subsidiaries also did not compensate the employees for performing pre- and post-shift duties while additionally failing to maintain required time and payroll records.

As part of the agreement, Disney agreed to start training all Florida-based managers, supervisors, and non-exempt employees on what constitutes compensable worktime and emphasizing the need to record all records pertaining to time accurately.

There are certain steps that employers can do to avoid the significant damages Disney incurred including:

  • Maintain accurate payroll, time, and schedule related records. This is particularly important to our hospitality and restaurant clients where record keeping can be especially difficult.  Also, remember that under the FLSA, the records must be  maintained for a minimum of three years for payroll records and six years under New Jersey and New York law.
  • Deductions are an easy target for the plaintiffs’ bar. Employers must make sure that any deductions are legal under state law and that the deductions if permissible do not bring the affected employee below the state or federal minimum wage;
  • Perform a wage and hour self-audit every two years to avoid misclassification issues and to ensure your recordkeeping and pay practices are consistent with the law;
  • To avoid donning and duffing claims (claims involving changing into and out of uniforms, costumes, and protective equipment for example), employers must take care to distinguish between non-compensable time when changing into and out of the uniform is merely for the employees’ convenience as opposed to compensable time when the job cannot be accomplished without wearing the designated uniform or costume or safety equipment and it is impractical to arrive at work wearing same.

If you have any questions or would like to discuss best practices in complying with federal wage regulations, please contact John R. Vreeland, Esq., Partner & Chair of the  Wage and Hour Compliance Practice Group at jvreeland@nullgenovaburns.com or call 973-533-0777 or Harris S. Freier, Esq., a Partner in the Employment Law and Appellate practice groups, at hfreier@nullgenovaburns.com, or call 973-533-0777.  Mr. Vreeland and Mr. Freier routinely work together in defending wage and hour class actions.  Please visit our free Labor & Employment Blog at www.labor-law-blog.com to stay up-to-date on the latest news and legal developments affecting your workforce.

District of New Jersey Ruling Leaves Employers High and Dry as to Guidance on Dealing with Medical Marijuana Users

On February 21, 2017, the District of New Jersey dismissed a wrongful termination lawsuit by a medical marijuana user who claimed that the employer failed to accommodate his disability in violation of the New Jersey Law Against Discrimination (“NJLAD”).  See Thomas Barrett v. Robert Half Corporation, et al., No. 15-624.  The case raises key issues for New Jersey employers whose employees are legally using medical marijuana, however, the court avoided dealing with the significant substantive issues for employers and their employees raised by medical marijuana, including preemption issues, by focusing on a defect in how the complaint was plead.

The New Jersey Compassionate Use Medical Marijuana Act (“NJCUMMA”), protects medical marijuana patients “from arrest, prosecution, property forfeiture, and criminal and other penalties” for using medical marijuana to alleviate suffering from debilitating medical conditions.  Since the law was passed in 2010, ambiguities remain regarding the rights of employees who use medical marijuana.  Currently, the NJCUMMA does not require employers to provide reasonable accommodations for “the use of marijuana in any workplace.”  However, the statute is silent on use of medical marijuana outside of the workplace, and there is currently no case law clarifying this provision.  Employers who drug test their employees are obviously left in limbo because if an employee tests positive for marijuana, the employer will be hard pressed to prove that the positive test results from workplace use of marijuana as opposed to use outside of the workplace.

In Thomas Barrett v. Robert Half Corporation, et al., No. 15-6245, the plaintiff suffered chronic pain resulting from a car accident and was issued a license from the State of New Jersey Department of Health’s Medicinal Marijuana Program.  Mr. Barrett alleged that he notified his employer, Robert Half Corp., a staffing company, that he was issued a medical marijuana license and that it was for treatment of his disability.  Prior to a new work assignment, his supervisor required him to submit to a drug test, to which Mr. Barrett alleges he responded by again informing his employer that he was licensed to use medicinal marijuana.  He claimed that his employer responded by telling him not to worry about failing and to simply present his license at the time of the test.  Nevertheless, about a week after starting his new work assignment, Mr. Barret was terminated due to a positive drug test.

In moving to dismiss, the employer argued (i) the plaintiff failed to request accommodation with enough specificity, (ii) the NJCUMMA is preempted by the federal Controlled Substances Act (“CSA”) and should not prohibit employers from terminating employees whose conduct violates federal law, and (iii) even if not preempted by federal law, the NJCUMMA does not confer employment protections.

In the order dismissing the action, the court only ruled that Mr. Barrett failed to plead a request for accommodation of his disability, and therefore failed to state a claim.  The court held that it was insufficient for the plaintiff to simply notify his employer that he was licensed to use medical marijuana as treatment for his disability.  Instead, a plaintiff must allege that he requested an accommodation in connection with his disability.  By ruling strictly on whether the plaintiff requested an accommodation, the court left the other points raised in the employer’s motion to dismiss unaddressed – particularly, whether an employee who does properly request an accommodation has a right to such an accommodation under the NJLAD for medical marijuana use, assuming that any marijuana use takes places outside of the workplace.  Currently, there is legislation pending in the New Jersey State Senate and Assembly, Bill S-2161, that would make it unlawful for an employer to take adverse employment action (e.g., termination) against an employee for being enrolled in the State medical marijuana program or failing a drug test.  However, the bill has yet to come out of committee.  Moreover, even if the bill does become the law in New Jersey, it is an open question as to whether the law and the NJCUMMA are preempted under federal law by the CSA, especially with a new federal Department of Justice which has issued public comments indicating a desire to continue to strictly enforce marijuana prohibition.

As a practical matter, employers are in a bind because anyone who has a license to legally use medical marijuana is likely going to have a disability under the NJLAD (and possibly the Americans with Disabilities Act).  Plaintiff employees may try to conflate any adverse employment action as being related to the underlying disability as opposed to marijuana use.  As  a result, the standard advice to employers that they must have anti-discrimination policies in place, policies regarding reasonable accommodations, and training on these policies, is more important than ever.  Any adverse action against an employee based upon performance should always be backed up with the appropriate paper trail of performance reviews and/or employee discipline documents to help to show that the termination was not based upon a protected characteristic such as disability.

As to potential adverse action that an employer takes against legal medical marijuana users based solely on failing a drug test for marijuana, employers are in a difficult position.  For employers in the transportation and logistics industry where the federal Department of Transportation mandates drug testing and does not allow exceptions for medical marijuana, an employer is going to have a strong legal defense if a fired truck driver attempts to sue after being terminated for testing positive for marijuana, even if he or she has a license to use medical marijuana.  However, in other industries where there is no federal drug testing requirement, employers must carefully weigh the benefits and risks before taking adverse action against an employee for a failed drug test based upon marijuana if the employee has a legal license for medical marijuana.  Any employers dealing with issues involving medical marijuana should consult with an attorney as the law is constantly evolving in this area.

If you have any questions or would like to discuss employers’ obligations regarding medical marijuana users, please contact Harris S. Freier, Esq., of the firm’s Employment Law and Appellate practice groups, at hfreier@nullgenovaburns.com, or call 973-533-0777.  Please visit our free Labor & Employment Blog at www.labor-law-blog.com to stay up-to-date on the latest news and legal developments affecting your workforce.

What Pretext? The Tenth Circuit Shows the Value in Trucking & Transportation Employers Citing to Safety and Customer Complaints to Justify Discharge

On March 10, 2017, the Tenth Circuit in Henson v. AmeriGas Propane, Inc., no.: 16-7057, declined to revive a discrimination and wrongful discharge lawsuit in finding that the lower court was correct in its holding that that the former AmeriGas Propane, Inc. delivery driver who brought the claims had not shown that his termination was pretextual.  While this case originated out of Oklahoma, it provides beneficial guidance for our transportation trucking, and logistic clients.

In his initial complaint, filed in May 2015, Plaintiff Isaac Henson alleged that AmeriGas Propane, Inc. (“AmeriGas”) violated the Americans with Disabilities Act of 1990 (and subsequent Amendment) as well as Oklahoma’s Retaliatory Discharge Act for terminating his employment because his disabilities and/or because AmeriGas regarded him as disabled. Henson also asserted that he was terminated because he engaged in statutorily protected activity under Oklahoma’s workers’ compensation law.

Henson began working as a delivery driver for AmeriGas in May 2011. His responsibilities included filling and delivering propane tanks to commercial and residential customers. While executing those tasks in August 2012, he injured the middle finger of his right hand. AmeriGas attempted to accommodate him by assigning light work duties as needed. Despite this, Henson still required over sixty medical and occupational-therapy appointments and underwent hand surgery in April 2013. In September 2013, he advised AmeriGas that his doctors recommended a second surgery. During this time, Henson’s performance declined, though his initial performance appraisal was generally positive. There were repeated safety violations, including three separate incidents of Henson driving too fast and running a stop sign. In November 2012, he received a formal written warning in an employee disciplinary report for the safety violations. Also in April 2013, Henson received a second written warning and a four-day suspension for insubordination, a negative attitude, and customer service deficiencies. In May 2013, his performance appraisal reiterated AmeriGas’s safety concerns and advised him to be more positive toward the company. Ultimately, Henson was terminated in October 2013, with AmeriGas citing insubordination along with another safety violation: leaving the gauge open on a customer’s propane tank.

Dissatisfied with the termination, Henson filed a complaint with the Equal Employment Opportunity Commission (“EEOC”) and with the Oklahoma Employment Security Commission. He exhausted his administrative remedies but secured a right-to-sue letter, prompting him to file suit asserting that (1) AmeriGas violated the federal law when it fired him because of his hand impairment; and (2) AmeriGas violated the Oklahoma state law when it fired him in retaliation for engaging in statutorily protected activity. The district court found that Henson established a prima facie claim of discrimination under both federal and state law, however, it also found that AmeriGas established a legitimate and nondiscriminatory reason for termination. Moreover, the court said that AmeriGas was aware of Henson’s injury and its impact on his ability to perform his duties well before the need to go for a second surgery.

On appeal, the Tenth Circuit rejected Henson’s pretext argument using a standard similar to the Third Circuit and found that Henson’s performance history outweighed any timing issues as to the discharge being close to Henson’s workplace injury. The court also found that Henson’s self-assessment of his performance was not enough to show pretext. Rather, it noted that it is the manager’s perception of the employee’s performance, as opposed to a subjective self-evaluation, that is relevant to review of legitimate and nondiscriminatory termination practices carried out in good faith by a company.

This case is useful for our clients in the transportation, trucking, and logistics industries because it shows that when an employer effectively uses written discipline and can cite to safety and/or customer complaints, this can provide a powerful counter to a plaintiff’s claims of pretext.  Employers in any industry should always try to ensure that there is a written and comprehensive record of discipline and/or performance reviews of employees to negate a plaintiff’s pretext argument.

For questions about employment issues involving the trucking and logistics industries, please contact John Vreeland, Esq., Chair of the Transportation, Trucking & Logistics Group and Partner in the Labor Law Practice Group at jvreeland@nullgenovaburns.com or (973) 535-7118, or, Harris S. Freier, Esq., Partner in the Firm’s Employment Law and Appellate Practice Groups, at hfreier@nullgenovaburns.com or (973) 533-0777.  Please also sign-up for our free Labor & Employment Law Blog at www.labor-law-blog.com to keep up-to-date on the latest news and legal developments effecting your workforce.

Of Employees and Independent Contractors: The Ninth Circuit to Consider Where Truck Drivers Fall

On February 24, 2017, Senior U.S. District Judge John W. Sedwick in the district of Arizona stayed a proposed class action in Virginia Van Dusen et al v. Swift Transportation Co., Inc. et al, No.: 2:10-cv-00899, against Swift Transportation Co., Inc. (“Swift Transportation”). The proposed class is comprised of about 600 members but could have implications for thousands of drivers for the company. This long-running case centers around claims that the trucking company incorrectly classifies its drivers as independent contractors. February’s ruling prevents any advancement until the Ninth Circuit hears the company’s challenge to the district court’s January 2017 ruling that its drivers’ contractor agreements were actually contracts of employment.

In the initial complaint, plaintiffs alleged that Swift Transportation incorrectly classified them as independent contractors as opposed to employees and failed to pay them proper wages under the Fair Labor Standards Act (FLSA) and under various provisions of the New York Labor Law and the California Labor Code. Plaintiffs sought relief from the court, requesting it enter an order declaring that Swift Transportation violated the FLSA, certifying the class, and awarding damages for unpaid wages, reimbursement for illegal deductions from wages, and an equal amount in liquidated damages and interest as well as attorneys’ fees. Illegal deductions, such as fuel costs, maintenance and repairs, and insurance, can be substantial in a trucking case, which makes trucking companies popular targets of class actions.

According to documents initially submitted to the court, twenty-five percent of Swift Transportation’s drivers worked in the company’s “owner operator division” and were considered independent contractors. Three-quarters of the trucks were driven by employees. The plaintiffs maintained that a majority of the “owner operators” did not own anything at all, but were instead selected by Swift to lease trucks from an affiliated company. They further argued that they should be considered employees because much of their day-to-day operations were within Swift Transportation’s control and oversight.

In determining whether the contractor agreements were exempt from arbitration under the Federal Arbitration Act (“FAA”) and the Arizona Arbitration Act (“AAA”), the court noted that § 1 of the FAA excludes “contracts of employment”. In assessing whether the Swift Transportation’s contractor agreements were exempt from the FAA, the federal district court looked to the four corners of the agreements. The agreements specified the type of work performed by the drivers, clearly showing that Swift Transportation’s “central mission” is delivering freight to customers across the country. The district court noted that the fact that its employees were doing the work of transporting on the company’s behalf suggested an employment relationship. Swift Transportation maintained, however, that the drivers were giving substantial autonomy and were free to do as much or as little as they wanted in order to profit as an independent driver. Other factors contained within the agreements bolstered the employment relationship, according to the court, including provisions regarding Swift’s control of its drivers’ schedules, load-determination and assignment, and per-mile rates paid to drivers. Moreover, these agreements were automatically extended on a year-to-year basis, a feature of employee status where the relationship is of possibly infinite duration. Thus, the court found that, within the four corners of the agreements, the contracts were those of employment and were exempt from arbitration under both the FAA and the AAA.

The federal district court also looked to other evidence to determine whether the independent drivers were employees. It noted that the plaintiffs had limited autonomy when it came to load assignments and payment structures. The fact that the plaintiffs were paid on a per-mile basis as opposed to time spent at work did not, in the court’s view, make the compensation project-based. Also, Plaintiffs were not paid after completion of a specific job but rather received settlement payments on a weekly basis similar to the regular paydays of Swift Transportation’s employee drivers. Even though Swift Transportation argued that plaintiffs were free to do as much or as few miles for the company as needed to profit as an independent driver, the combination of agreements and leases dictated a minimum amount plaintiffs needed to drive in order to pay for weekly rentals of leased trucks. As a result, the amount independent drivers had to drive for the company was the same as the employee drivers. It was also impractical for plaintiffs to “moonlight” or to turn down cargo loads in hopes of larger ones as there was no guarantee there would be one, which undermined the alleged freedom available to the independent drivers.

The lower court’s review of the agreements and of the additional factors is in line with the approach taken by the Ninth Circuit generally. In 2014, the Ninth Circuit held that the most important factor in determining a worker’s status is the amount of control exercised by the putative employer over the worker’s position. However, the Ninth Circuit also reviews the “totality of the circumstances,” similar to the test used by the U.S. Department of Labor when evaluating independent contractor status under the FLSA.

What is troubling for companies operating in multiple states is there is no complete consistency amongst the circuits as to how to assess the issue of employee versus independent contractor status. Even within the circuits themselves different tests are often used depending on from which state the case originated. Within Third Circuit, for example, there are several approaches. New Jersey expressly rejects the common law right to control test and instead courts apply the ABC test under N.J.S.A. 43:21-19(i)(6)(A)-(C):

  1. Such individual has been and will continue to be free from control or direction over the performance of such service, both under his contract of service and in fact; and
  2. Such service is either outside the usual course of the business for which such service is performed, or that such service is performed outside of all the places of business of the enterprise for which such service is performed; and
  3. Such individual is customarily engaged in an independently established trade, occupation, profession or business.

Delaware, on the other hand, uses the common law right to control test and courts focus on the amount of control “retained or exercised by the owner.” Delaware courts also look to the element of continuous subjection to the will of the principal, which is a defining factor in the worker-owner relationship.

In Pennsylvania, courts look to the common law factors which mirror those considered in the four corners assessment by the Ninth Circuit: control of manner work is to be done; responsibility for result only; terms of agreement between the parties; the nature of the work or occupation; skill required for performance; whether one employed is engaged in a distinct occupation or business; which party supplies the tools; whether payment is by time or by the job; whether the work is part of the regular business of the employer, and also the right to terminate the employment at any time.

While the Swift Transportation case will be instructive in determining whether truckers can be treated as independent contractors as opposed to employees, the lack of consistency among the circuits means that independent truckers will continue to be subject to challenge. Employers, therefore, need to be very careful in classifying their drivers as independent contractors, especially if their job duties and responsibilities are not materially different from those of its employee-drivers and if company maintains control over how the drivers perform their work.

For questions about independent contractors or trucking and logistics, please contact John Vreeland, Esq., Chair of the Transportation, Trucking & Logistics Group and a Partner in the Labor Law Practice Group at jvreeland@nullgenovaburns.com or (973) 535-7118, or, Harris S. Freier, Esq., a Partner in the Firm’s Employment Law and Appellate Practice Groups, at hfreier@nullgenovaburns.com or (973) 533-0777. Please also sign-up our free Labor & Employment Blog at www.labor-law-blog.com to keep up-to-date on the latest news and legal developments effecting your workforce.

Federal Trade Secrets Act Now Law: What Companies Should Know

On May 11, 2016, President Obama signed into law the Defend Trade Secrets Act (“DTSA”).[i]  The measure had previously been passed by the U.S. House of Representatives 410-2 on April 27, 2016, quickly following the U.S. Senate’s unanimous passage of the bill on April 4, 2016.[ii]  The DTSA amends the Economic Espionage Act of 1996 to create a federal private right of action for trade secret misappropriation.  Its passage represents a major overhaul of intellectual property law in the United States, as companies were previously left to seek redress for trade secret misappropriation under a patchwork of state laws, the majority of which were adoptions of the Uniform Trade Secrets Act (“UTSA”).[iii]  While the DTSA mirrors many of the provisions and remedies found in the UTSA, which New Jersey and Pennsylvania have versions of, it does not do away with those state law protections, but rather provides additional tools for companies to utilize in protecting their intellectual property.

Here are some beneficial takeaways for companies:

A. DTSA Definition of a Trade Secret

The DTSA creates a broad, universal definition for the term “trade secret,” encompassing “all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing” provided that:

  1. The company has taken reasonable measures to keep the information secret, and
  1. The information derives independent economic value to the company from not generally being known and not being readily ascertainable by others.

B. DTSA Definition of “Misappropriation”

The DTSA also details when “misappropriation” has occurred—i.e., when a trade secret holder may seek redress—as follows:

  1. When a trade secret has been acquired by someone who knew or should have known that the trade secret was obtained through “improper means,” or
  1. When a trade secret has been disclosed or utilized, without consent of its owner, by someone who knew or had reason to know either that (a) it is a trade secret or (b) it was obtained through “improper means.”

The term “improper means” is defined in the DTSA to include “theft, bribery, misrepresentation, breach or inducement of a breach of duty to maintain secrecy, or espionage through electronic or other means.”  However, the DTSA leaves an exception in the term for “reverse engineering, independent deviation, or any other lawful means of acquisition.”

C. Federal Cause of Action

While the majority of states have enacted the UTSA, there are slight differences between several of the state laws, and New York and Massachusetts have chosen not to adopt the UTSA.  Thus, companies seeking redress for trade secret misappropriation can now bring a suit in federal court without the requirement of diversity of citizenship between the parties.  Importantly, the DTSA does not replace or preempt the states’ existing trade secrets laws.  Thus, it provides more options to trade secret holders, who can now bring an action in federal court to assert parallel federal and state rights.  Note that while federal courts are normally the preferred venue for employers in employment discrimination suits, the same calculus does not necessarily hold as to equity matters, where state courts, for example in New Jersey with its chancery courts, are often the preferred venue for seeking to enforce restrictive covenants.

D. Remedies for Trade Secret Holders

The DTSA provides for several different measures of damages once misappropriation has been found.  These include the actual damages caused by the misappropriation, unjust enrichment damages, reasonable royalties in lieu of other damages, exemplary damages for willful or malicious misappropriation, and attorneys’ fees if the trade secret is found to have been misappropriated willfully or maliciously.  Notably, similar to the state statutes based upon the UTSA such as the New Jersey Trade Secrets Act, N.J.S.A. 56:15-1 et seq. (“NJSTA”), and Pennsylvania Uniform Trade Secrets Act, 12 Pa.C.S. 5301 et seq. (“PUTSA”), the DTSA allows for attorneys’ fees to be awarded if the claim of misappropriation was made in bad faith.  This reverse fee-shifting often leads to hesitation by companies and their attorneys in utilizing these statutes because of the possibility that a court may award fees if it holds that the claim was made in bad faith.  The same reluctance will attach to the use of the DTSA.

 E. Unique Provisions of the DTSA

  1. Early Seizure: Under extraordinary circumstances, a trade secret holder may apply ex parte to a court to seize the property that encompasses the trade secret “to prevent [its] propagation or dissemination.” This provision—certainly the DTSA’s most controversial—gives trade secret holders a remedy akin to a preliminary injunction by which they can prevent dissemination of a trade secret early in a case.  Such an application will be granted when a trade secret holder can show that immediate and irreparable harm will occur if a seizure is not ordered, that the harm to the alleged individual who misappropriated the trade secret is less than the harm to the holder, and that the holder is likely to succeed in their case on the merits.
  1. Remedies Against Former Employees: The DTSA makes clear that any injunction granted by a court with respect to trade secret misappropriation shall not be entered where it “prevent[s] a person from entering into an employment relationship,” or “otherwise conflict[s] with an applicable State law prohibiting restraints on the practice of a lawful profession, trade or business.” Moreover, the DTSA states that any “conditions placed on such [new] employment shall be based on evidence of threatened misappropriation” and not simply “information the person knows.”  These provisions address a frequent criticism often levied at restrictive covenants that prevent former employees from working for competitors in a certain geographic area for a certain time period—that they are preventing someone from earning a living.  The same rationale is the reason why non-solicitation agreements are more likely to be enforced by some courts as opposed to non-competition agreements, which restrict a former employee from working for a competitor.
  1. Whistleblower Immunity: The DTSA provides a safe harbor for employees who make a disclosure of a trade secret to the government “for the purpose of reporting or investigating a suspected violation of law,” as well as for employees who confidentially disclose a trade secret in an anti-retaliation action against their employer. Importantly, the DTSA provides that notice of this immunity must be provided by employers in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.  This may be accomplished by cross-referencing a separate policy document.  A failure to do so could result in exemplary damages and attorneys’ fees should the employee win on his or her anti-retaliation action.  Employers should immediately add this immunity language to all new or updated restrictive covenant agreements, non-solicitation agreements, and confidentiality agreements going forward from May 11, 2016, in order to ensure conformity with the DTSA.

F. How the DTSA Compares to State Equivalent Statutes in the Region

As the DTSA does not do away with state equivalent statutes, it is important to note that there remain benefits to utilizing the state statutes for companies operating in the region.

For example, the NJSTA is broader than many other state adoptions of the UTSA.  This is because where other states’ adoption of the UTSA may have pre-empted common law claims for trade secret misappropriation, the NJTSA included an express provision stating that:

The rights, remedies and prohibitions provided under this act are in addition to and cumulative of any other right, remedy or prohibition provided under the common law or statutory law of this State and nothing contained herein shall be construed to deny, abrogate or impair any common law or statutory right, remedy or prohibition . . . .

In interpreting this provision, at least one court has refused to dismiss common law counts brought in addition to a count for violation of the NJTSA.[iv]  Likewise, the PUTSA contains additional avenues for redress apart from the DTSA because its provisions have been interpreted to permit the issuance of preliminary and permanent injunctions preventing a former employee from accepting employment with a competitor where it can be shown that the employment will result in the trade secret’s utilization or disclosure.[v]

By contrast, as New York does not have an equivalent statute adopting the UTSA, its common law interpretation of trade secret misappropriation is very fact-intensive, as its courts have adopted the definition of a trade secret from the Restatement of Torts.  New York defines a trade secret as “any formula, pattern, device or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it,” and the factors that New York courts utilize in deciding a trade secret claim include:

(1) the extent to which the information is known outside of [the] business; (2) the extent to which it is known by employees and others involved in [the] business; (3) the extent of measures taken by [the business] to guard the secrecy of the information; (4) the value of the information to [the business] and [its] competitors; (5) the amount of effort or money expended by [the business] in developing the information; (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.[vi]

As the DTSA’s definition is more straight-forward, its enactment may make it easier for New York companies to demonstrate a trade secret and misappropriation thereof than under New York’s existing common law.

Finally, companies should still be aware that in other states, such as New Jersey, even if information does not rise to the level of a trade secret, it may still be protected under the individual state’s common law.[vii]

For questions about the Defend Trade Secrets Act and its implications, please contact Harris S. Freier, Esq., a Partner in the firm’s Employment Law and Appellate Practice Groups, at hfreier@nullgenovaburns.com or (973) 533-0777.

 

[i] https://www.whitehouse.gov/photos-and-video/video/2016/05/11/president-obama-signs-s1890-defend-trade-secrets-act

[ii] https://www.congress.gov/bill/114th-congress/senate-bill/1890

[iii] http://www.uniformlaws.org/shared/docs/trade%20secrets/utsa_final_85.pdf

[iv] See SCS Healthcare Mktg., LLC v. Allergan USA, Inc., 2012 N.J. Super. Unpub. LEXIS 2704, at *19 (N.J. Super. Ct. Ch. Div. Dec. 7, 2012).

[v] See, e.g., Solar Innovations v. Plevyak, 2013 Pa. Super. Unpub. LEXIS 1230 (Pa. Super. Ct. 2013).

[vi] See Restatement of Torts § 757 cmt. b, at 5 (1939) (quoted in Ashland Mgmt. v. Janien, 82 N.Y.2d 395, 399, 624 N.E.2d 1007, 1008, 604 N.Y.S.2d 912, 913 (N.Y. 1993)).

[vii] See e.g., Ingersoll-Rand v. Ciavatta, 110 N.J. 609, 626 (N.J. 1988); Platinum Mgmt., Inc. v. Dahms, 285 N.J. Super. 274, 295 (N.J. Super. Ct. Law Div. 1995).

A Troubling Decision for Employment Arbitration Agreements with Potentially Ambiguous Language and What it Means for Employers Going Forward

On April 5, 2016, in a rare rebuke of an employment arbitration agreement by a federal court, the United States District Court for the District of New Jersey (Hon. Madeline Cox Arleo, U.S.D.J.) held that it would not compel arbitration mandated by an employment agreement because the agreement at issue was too ambiguously drafted.

In Ranieri v. Banco Santander S.A., Civil Action No. 15-3740, Plaintiffs were former Mortgage Loan Officers with the Defendants in their New Jersey branches who brought a collective action claim for wage and hour violations under federal and state law.  The collective action was on behalf of all current and former employees of Defendants whose job duties included working as a mortgage loan officer and who were not paid overtime or minimum wage in the past three years.

At the start of their employment, Plaintiffs received an offer of employment which mandated that Plaintiffs execute “the enclosed Mortgage Retail Development Officer Agreement” (“MDO”) and all attached exhibits, on or before the first day of work.  The offer letter also attached a copy of the Mortgage Sales Commission Plan.  The MDO Agreement contained six sections, including an arbitration clause which prohibited class, collective, and representative actions against Defendants.  Both Plaintiffs signed the MDO agreements on the bottom of the final page under a bolded sentence that read: “I certify, by my signature below, that I have received a copy of the Mortgage Sales Commission Plan, which has been provided to me.”  The MDO Agreement contained a Pennsylvania choice of law provision.

While the Court acknowledged that ordinarily a party’s signature on an agreement implies agreement to the entire contract, here the Court found that the language in the MDO Agreement was ambiguous, specifically the sentence above the signature line.  The Court found that the purpose of the signatures was too unclear: either the Plaintiffs could memorialize only that they received the Mortgage Sales Commission Plan or that they agreed to all of the terms of the MDO Agreement and that they were confirming receipt of the Mortgage Sales Commission Plan.  Due to the ability to logically construe the agreement in more than one way, the Court held that it would not compel arbitration because the intent of the parties could not be determined on the pleadings alone, and because the ambiguous language in the MDO Agreement should be construed against the drafters, the Defendants.  Defendants’ motion to compel arbitration was denied without prejudice and the Court ordered discovery on the question of arbitrability.

The Court’s decision is important because federal courts have traditionally viewed employment arbitration agreements very favorably based upon the Federal Arbitration Act and significant U.S. Supreme Court precedent.  Such agreements have also become more widespread.  Employers with arbitration agreements should have these agreements regularly reviewed by counsel, as the law is in a constant state of flux regarding the effectiveness of arbitration agreements as to state claims and the prohibitions on class claims that any good arbitration agreement contains.  Carefully drafted arbitration agreements are more likely to be enforced.  Note that beyond having employment counsel review arbitration agreements, employers should also discuss the need for such agreements to start with.  Employers often mistake employment arbitration agreements as a panacea to liability from claims by current and former employees, however, legal fees and discovery are often not significantly reduced and with appeal options severely limited, a bad decision by an arbitrator can be disastrous for an employer.  Instead, arbitration agreements are often most useful in industries and for employers who face significant potential wage and hour class and collective action exposure.  Careful consultation with an employment attorney is critical both in deciding whether to use employment arbitration agreements and if the decision is made to use such agreements, how to make sure that they remain enforceable in a constantly changing legal landscape.

For more information regarding employment arbitration agreements, please contact Harris S. Freier, Esq., a Partner in the firm’s Employment Law and Appellate Practice Groups, at hfreier@nullgenovaburns.com or 973-533-0777.

U.S. Department of Labor Extends FMLA Benefits to Same-Sex Spouses in States That Recognize Same-Sex Marriage

As reported in the Wall Street Journal (“U.S. Extends Family Leave to Same-Sex Couples,” August 9, 2013, by Melanie Trottman and Kris Maher) and Employment Law 360 (“Labor Dept. Extends FMLA Coverage To Same-Sex Spouses,” August 12, 2013, by Alex Lawson), the U.S. Department of Labor (“U.S. DOL”) Secretary Tom Perez told agency employees in a memo that U.S. DOL guidance documents had been revised to remove references to the Defense of Marriage Act (“DOMA”), and explain that FMLA benefits for same-sex spouses are available in states that recognize same-sex marriage.  The fact that such benefits are only available in states that recognize same-sex marriage was confirmed by a Labor Department Spokesman as reported by Employment Law 360.  The U.S. DOL choose not to post the memo to agency employees on its website or issue a press release regarding the memo.  The U.S. DOL guidance comes in the wake of the U.S. Supreme Court’s June 26, 2013 historic decisions on same-sex marriage in United States v. Windsor,  No 12-307, 570 U.S. ____ (2013), and Hollingsworth v. Perry, No. 12-144 (2013).  The Court’s decision in United States v. Windsor struck down the provision in DOMA which restricted the definition of “marriage” and “spouse” to heterosexual marriages for all federal laws.  The result is that there is now no definition of “marriage” or “spouse” under federal law.

Note that the DOL guidance does not represent a change in the law, as employment lawyers, including this firm, have interpreted the U.S. Supreme Court’s decision as extending federal benefits to same-sex spouses in those thirteen (13) states and the District of Columbia that recognize same-sex marriage.  While New Jersey does not recognize-same sex marriage, New York does, and employers in New York would be affected by the U.S. DOL’s ruling. However, the guidance is an important first step by the U.S. DOL to provide direction to employers as several questions remain such as whether the U.S. DOL will eventually extend FMLA benefits to same-sex couples in states that don’t recognize same-sex marriage, which would likely require new regulations.  Another difficult issue remains as to what employers should do where employees in same-sex marriages move to states where same-sex marriage is not recognized.  Employers are advised to continue to consult with their Human Resources & Employment outside counsel for guidance in this developing area of the law.

For more information on the implications of the U.S. DOL’s new guidance on FMLA benefits and any other leave issues, please contact Dena B. Calo, Esq., dcalo@nullgenovaburns.com, Director of the Human Resources Practice Group and Partner in the Employment Law & Litigation Group, or Harris S. Freier, Esq., Associate in the Employment Law & Litigation Group, at hfreier@nullgenovaburns.com.