Noteworthy Outcome in Early Test of Federal Trade Secrets Act

court ruling 2There’s a bigger story behind a Florida judge’s recent ruling in one of the first lawsuits brought under the new Defend Trade Secrets Act (DTSA).

U.S. District Judge Cecilia M. Altonaga dismissed, at least temporarily, a lawsuit filed by an engineering and telecom services provider working as a subcontractor on the renovation of the city of Miami Beach’s convention center.

M.C. Dean Inc. filed a claim under the DTSA in May, just days after it was enacted. The company sought injunctive relief to recover employee payroll data it claimed was wrongly obtained by an electricians union from the city.

Judge Altonaga ruled that while M.C. Dean raised plausible allegations that the data had value that was worth keeping confidential, it failed to show it took reasonable actions to protect its payroll information.

“M.C. Dean fails to allege it took reasonable steps to protect the secrecy of the information at issue, thus failing to satisfy the definition of trade secret as to both counts,” the judge said.

However, Judge Altonaga refused the city and union’s request to have the case dismissed with prejudice. She gave M.C. Dean some time to refile an amended complaint that shows it took reasonable actions to protect its confidential information. Stay tuned.

The bigger issue, I believe, is the fact that the case was dismissed so early. That probably would not have happened in state court.

The DTSA, overwhelmingly passed by Congress in April, allows trade theft claims to be filed in federal court. Previously, these actions could only be pursued in state courts.

As I wrote earlier, I’m not sold on the need for the DTSA – and the Florida ruling only confirms my skepticism.

I represent executives in a variety of matters, including trade secrets. I know from experience that in state courts, these types of lawsuits are rarely punted at the start.

But the federal judge in the Florida case was able to apply a higher standard – Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) and Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007) – in deciding the motion to dismiss.

“Although this pleading standard does not require detailed factual allegations … it demands more than an unadorned, the defendant-unlawfully-harmed-me accusation,” she wrote.

It’s important to remember that trade theft lawsuits often are filed quickly. A company suddenly realizes that confidential information may have been stolen. It rushes for a remedy – an injunction to secure the information as it builds its case. State courts understand this.

So if a federal court is going to hold your claim to a higher standard, is it the proper venue to use?

I don’t know the merits of the Florida lawsuit – but I do know that valuable time has been lost in pursuing the claim, not to mention the ego-deflating effect of losing right out of the starting gate.

You need to give careful consideration to filing a trade secret theft claim in federal court. Is it the best legal avenue to pursue? I’m not so sure.

Posted in Confidential Information, Defend Trade Secrets Act, Trade Secrets, Uniform Trade Secrets Act | Tagged , , | Comments Off on Noteworthy Outcome in Early Test of Federal Trade Secrets Act

Massage Envy No More

massageTexasBarToday_TopTen_Badge_VectorGraphicHouston Chronicle business columnist Chris Tomlinson recently interviewed me about how a woman’s search for a better job landed her in serious legal trouble.

The unfortunate story involves Maxie Foster, who worked for years as a receptionist to pay her way through beauty school to earn an esthetician license. She got a job at a Massage Envy franchise and worked there for 2½ years. Her legal problems began after she got another job at a similar business that paid her better money, which she needed to support her daughter.

FBE Ventures, which owns the Massage Envy franchises in Conroe and Tomball where Ms. Foster worked, filed a lawsuit against her and the new employer, which fired her just before Christmas to settle their part of the legal battle. Ms. Foster, now 27, is still fighting the $100,000 lawsuit and she’s prohibited from working in her field at any business located within 40 miles of her home, which is now a trailer on her parents’ property in Magnolia, a town north of Houston.

As Mr. Tomlinson wrote, Ms. Foster is one of millions of Americans who signed employment contracts that came with non-compete agreements they probably didn’t completely understand.

I represent high-level executives and non-compete agreements are a major focus of my work. I realize they can be an important tool for a company. They help protect a business’ trade secrets and can motivate an employer to invest in specialized training and provide stock options or equity in the company because it makes employees less likely to leave.

But non-competes used to apply primarily to well-compensated employees who had access to confidential information or received highly specialized training or equity in the employer. I’m talking about a company’s top executives and lead researchers. And although I understand their value, I often seek more flexible terms for my executive-clients.

I’m concerned about the expanded use of non-competes. What was once a tool essentially reserved for the executive suite has become a standard practice for the rank-and-file.

Ms. Foster says the company suing her didn’t pay for her training or her license. She says she didn’t have access to company trade secrets or equity and didn’t take any previous clients to her new employer.

“You’d think I’d murdered somebody. They came in with two corporate attorneys and tore me apart,” Ms. Foster told the Chronicle.

Ms. Foster’s lawyer, if she could afford one, likely could make a strong argument against the validity of the non-compete.

I’m not the only one concerned about the increasing use of non-competes. Earlier this year, I wrote about how the White House issued a 16-page report detailing how non-competes are becoming more commonplace among lower-wage employees.

I will say it again and again – please be aware of the real ramifications of signing a non-compete. Please consult an attorney if at all possible before signing any such agreement.


Posted in Confidential Information, Corporate culture, Covenants Not to Compete, Executive Compensation, Executive contracts, Litigation, Non-Competes, Trade Secrets | Tagged , , , , , , | Comments Off on Massage Envy No More

Who Says There’s No Crying in Baseball?

baseball-1091210_960_720TexasBarToday_TopTen_Badge_VectorGraphicTo those who shrug off cybertheft as a victimless crime that shouldn’t involve any real punishment, there’s a federal judge in Houston who just officially delivered a very different message on the subject.

U.S. District Judge Lynn Hughes sentenced former St. Louis Cardinals executive Christopher Correa to 46 months in prison for illegal intrusions into the Houston Astros computer database. Correa also was fined $279,000.

Correa, who was the Cardinals’ director of baseball development, admitted in January that he had accessed the Astros’ database in 2013 and 2014. He said then he suspected the Astros of having information proprietary to the Cardinals because former Cardinals employees had gone to work for the Houston team. The Astros have denied the claim and Correa made no mention of it at his sentencing.

It turns out, Correa hacked into the database in part by guessing at logon information, which was similar to what was used by one of the former Cardinals executives. Correa gained access to a database that contained scouting reports, amateur player evaluations, notes on trade discussions and proposed bonuses for draft picks. The U.S. Attorney’s office put the estimated value of the cybertheft at $1.7 million.

Judge Hughes’ indignation at Correa’s actions was evident at his sentencing. As Correa read a letter of apology to the court, the judge interjected some of his words to characterize Correa’s actions: “intentionally, over a long period time, stupidly.”

The key takeaway from this case is that digital theft of trade secrets is a serious matter that can have serious ramifications, including jail time. There seems to be a prevailing attitude, particularly among some younger people, that digital theft of trade secrets really isn’t that big a deal, certainly not something that merits incarceration.

While I do believe the punishment in this high-profile case was pretty stiff, I don’t see this as the only time this could happen. The threat is real. It’s important to understand that there are laws against digital theft of information and procedures in place that can result in severe, life-changing punishments. In fact, the potential for getting into legal trouble has expanded with the recent passage of the Defend Trade Secrets Act (DTSA), which I wrote about earlier this year.

The fallout from this cyber-crime may not be over. Next up to bat? Major League Baseball Commissioner Rob Manfred will decide if the Cardinals face sanctions because of Correa’s actions.

Posted in Confidential Information, Corporate culture, Criminal Prosecutions, Defend Trade Secrets Act, Trade Secrets | Tagged , , , | 1 Comment

Considering a New Job? Please Talk to Your Lawyer

dream jobZillow recently reached a whopping $130 million settlement with operator Move Inc. shortly before the two online real estate giants went to trial over alleged misappropriation of trade secrets. While the settlement amount is a far cry from the estimated $1 billion in potential damages that was at stake in the contentious legal battle, it still is an extraordinary amount of money.

And to think it all started with a job change. Ok, so it wasn’t your run-of-the-mill job switch – it involved two high-level Move executives who took important roles at Zillow.

The legal battle began in March 2014 shortly after Erroll Samuelson resigned from his job as Move’s chief strategy officer and joined Zillow as its second-highest paid executive – on the same day. The second executive was sued later in the year.

In today’s world, leaving a high-level executive position one day and taking a similar job in the same industry the next is a high-risk move. At the very least, this kind of action is going to prompt a meeting between your former employer and its lawyers. Even worse, a lawsuit may be in your future, whether a non-compete clause was involved or not.

Move claimed Zillow engaged in a “very regrettable act of executive poaching.”

These days, there are just too many ways for an executive to get tripped up legally when he/she decides to leave a company. I advise my executive clients to consult an attorney BEFORE they take a new job, even if they aren’t bound by a non-compete agreement.

The key legal points to remember in these cases are: geography, scope of industry and length of time. Is your potential new employer located in the same area? Is in the same field of work? Are you going to join the company immediately, or will you sit out for six months or so?

If you are an executive thinking about leaving your current job, you should first discuss these issues with your attorney before you make any kind of decision that could be harmful to you and your potential new employer. Your attorney can advise you on the risks of accepting a new job as well as explain how to properly exit a position in terms of what information you can take with you and other legal matters.

An executive has the right to seek new employment opportunities. Just do so wisely, with no regrets and with the benefit of legal counsel.



Posted in Business Continuity, CEOs, Complaints Against Executives, Confidential Information, Corporate culture, Covenants Not to Compete, Executive Compensation, Executive contracts, Executive Management Style, Fiduciary Duty, Legal, Litigation, Non-Competes, Trade Secrets, Uncategorized | Comments Off on Considering a New Job? Please Talk to Your Lawyer

White House Report Says Non-Competes May Hurt Competition

The White House is weighing in on the growing use of non-compete agreements and how they can negatively affect competition, individual workers and the overall economy. Once a tool reserved for top executives, the 16-page report released earlier this week details how non-compete agreements are becoming more commonplace for low-wage, less-skilled workers.

Non-compete agreements are a focus of my work and one of my favorite topics for discussion. These agreements can be valuable tools in the marketplace. They help protect company trade secrets, which promotes innovation. They also may encourage a company to invest more in specialized training for employees by reducing the possibility that the employee will leave the company.

But as the White House notes, with nearly a fifth of U.S. workers, including many low-wage employees, currently covered by non-competes, these agreements are likely being used in situations where they aren’t necessary. download

Here are a couple of interesting excerpts:

In addition to reducing job mobility and worker bargaining power, non-competes can negatively impact other companies by constricting the labor pool from which to hire. Non-competes may also prevent workers from launching new companies. Some critics also argue that non-competes can actually stifle innovation by reducing the diffusion of skills and ideas between companies within a region, which can in turn impact economic growth. Non-compete agreements may also have a detrimental effect on consumer well-being by restricting consumer choice.

Based on the impacts of unnecessary non-competes for workers, consumers, and the broader economy, several states have passed, and many others are currently weighing reforms to the ways non-compete agreements are regulated. Federal legislation has also been proposed to limit the use of non-compete agreements in low-wage fields where they are less likely to have valid uses.

As I wrote earlier this year when the U.S. Treasury Department released its report on non-competes, I work with many executives who are required to sign such agreements.

These individuals generally have access to important confidential information, receive specialized training and are well-compensated, often with stock options and equity interests. However, I still have argued in some cases for more flexible agreements to allow my client greater mobility and career growth.

I can understand a company wanting to protect its confidential information and investment in top workers, but what if the company’s chief goal is to keep customers? Is the use of a non-compete a fair tool in these cases?

For example, let’s say a popular hair stylist gets a lucrative offer to move to a new salon. Devoted customers often follow the stylist to the new shop. But what happens if a stylist is covered by a non-compete? Is the existing salon trying to protect confidential information and/or training, or is it using a non-compete merely to keep customers?

I have deep concerns about a non-compete agreement being used in cases to preserve a company’s relationship with the customer through a well-regarded employee. You just can’t own someone else’s personality. And using a non-compete in this way is really just a thinly veiled attempt at stifling competition, hardly a laudable or even legitimate purpose.

While I support a company’s effort to protect confidential information and the investment in specialized training, I think we are straying too far from the original – and reasonable – uses for these agreements.

Employee mobility is a good thing in the U.S. for the individual, consumers and competition. The White House, the Treasuring Department and Labor Department are expected to convene a group of experts in the coming months to further discuss non-compete agreements and their consequences. Stay tuned.

Posted in Business Continuity, CEOs, Confidential Information, Covenants Not to Compete, Executive contracts, Non-Competes, Uncategorized | Tagged , , , , , | Comments Off on White House Report Says Non-Competes May Hurt Competition

UPDATED: Trade Secret Proposal Has Won Over Congress & The President, But Not Me

Who says Congress can’t agree on anything these days? By an overwhelming vote of 410-2, the House recently approved the Defend Trade Secret Act (DTSA). The Senate already has passed the proposal and President Obama is expected to sign it into law. (UPDATE: The president did sign it into law May 11, 2016)

Washington may be all simpatico about the DTSA, but I still have reservations about the overall need for this expansive new law, as well as the ex parte authority it allows for the seizure of allegedly stolen trade secrets.

The DTSA appears to be another example of the federalization of the justice system – and that’s not always a good thing.

Currently, trade secret theft claims are generally resolved in state courts. Proponents say the DTSA will provide a federal civil cause of action for the theft of trade secrets and establish a nationwide uniform standard for protection and enforcement. With that comes the greatly enhanced potential for forum shopping in these cases.

I don’t see anything wrong with the current system. State courts in Texas have effectively dealt with these cases for years, and I see no reason why they can’t continue to do so. The suggestion that state courts are not as capable as the federal courts in handling complicated intellectual property issues is without merit in my opinion – and in my experience.

Even still, with diversity jurisdiction, a plaintiff can choose to file these cases in federal court. So the notion that we need a federal law to allow federal jurisdiction to deal with theft by agents of foreign nationals is just not a reality for the most part.

And it’s not just creating federal jurisdiction in every trade secrets case. It provides for a longer statute of limitations – five years from discovery of the theft, and for treble damages in the case of willful and malicious theft instead of the usual double damages.  But those are relatively insignificant; the real concern is the ex parte seizure power authorized by the Act. As I discussed earlier this year, this provision raises the issue of hearing only one side of the story and the potential for abuse.

The provision allows for one party to argue before a judge for the seizure of allegedly stolen trade secrets without the opposing party knowing about the complaint or the hearing.

I don’t know about you, but when I argue against nobody, I usually win.

The stakes are high in these types of cases and the potential for abuse of this seizure power is real. Unscrupulous parties will try to find a way to use this power inappropriately.

Generally speaking, ex parte anything in the civil arena is a bad idea. When the other side gets to argue their side, it maintains a higher level or accountability and honesty.

Yes, there are safeguards provided in the provision. Lawmakers added the term “extraordinary circumstances,” in granting such seizures and a fee is imposed in cases of wrongful seizures. But I find the power granted by this provision troubling.

Why aren’t criminal courts – and the protections provided to a defendant in these courts – a more just alternative? Others have succeeded in taking this route for their clients, and the opposing side still is afforded their rightful legal protections.

Posted in Confidential Information, Defend Trade Secrets Act, Litigation, Trade Secrets, Uniform Trade Secrets Act | Tagged , , , , , , , | Comments Off on UPDATED: Trade Secret Proposal Has Won Over Congress & The President, But Not Me

When You Get SLAPPed, You Can Get SLAPPed Hard

Lawyers who are keeping an eye on SLAPP litigation will want to review the Texas Supreme Court’s April 15 ruling in Sullivan v. Abraham.  In its brief decision, the court provided a little more clarity in this emerging area of litigation that can affect many areas of law, including trade secrets.

In Sullivan, the court held that Texas’ new-ish law against strategic lawsuits against public Sullivan v. Abraham, anti-SLAPPparticipation (SLAPP) does not allow a court to reduce the amount of “reasonable” attorneys’ fees to account for “justice and equity.” The plaintiff, who won the underlying action, had sought $71,700 in fees and expenses, but the trial court awarded only $8,000. That decision was upheld on appeal, with the court finding that the trial court had “discretion to award a lesser amount if ‘justice and equity’ so required.”

TexasBarToday_TopTen_Badge_SmallThe Supreme Court, however, disagreed, ruling that the “equitable and just” standard wasn’t part of the Texas Citizens Participation Act, the 2011 anti-SLAPP law the underlying suit invoked. The TCPA simply allows for “reasonable” fees, the high court ruled, and sent it back to the trial court to determine what “reasonable” is in this case.

The lesson here is an important one: the TCPA is a robust tool to protect Texas citizens when they are participating in protected activities, whether that’s exercising free speech, seeking a remedy in court or partaking in the right of association.

In the case of trade secret theft cases, companies will often counter sue, or even file suit against the plaintiff in a separate case, on little more than a hunch that, because a former employee is suing the company, they’re using confidential information, trusting that discovery will – or won’t – bear that suspicion out.

Parties with that thought in mind need to make sure that what they’re suing for isn’t protected activity (i.e. filing a lawsuit) and, if it is, they need to be prepared to explain at the outset of their case that they have “clear and specific” evidence to support their case – even before discovery begins. Otherwise, they risk not only dismissal, but getting SLAPPed with a hefty attorneys’ fees bill.

The high court actually watered down the TCPA in 2015’s In re: Lipsky. In that case, a Texas couple who claimed that fracking contaminated their water well with methane was sued for defamation by Range Resources Corp. The court ruled that Range could not pursue the defamation case because it didn’t show “clear and specific” evidence to establish a prima facie case against the couple.

In its decision, however, the court clarified that circumstantial evidence could be considered “clear and specific” evidence, under the TCPA.

“Circumstantial evidence may be used to prove one’s case-in-chief or to defeat a motion for directed verdict, and so it would be odd to deny its use here to defeat a preliminary motion to dismiss under the TCPA,” the opinion said. “That the statute should create a greater obstacle for the plaintiff to get into the courthouse than to win its case seems nonsensical.”

At just 5 years old, the TCPA is still fairly new, so it’s worth keeping an eye the courts for continued clarity.

Posted in Complaints Against Executives, Litigation, SLAPP, Trade Secrets | 1 Comment

Now in Hackers’ Sights, Law Firms Must Step Up Protection of Client Confidences

As the Panama Papers made brutally obvious, law firms contain vast amounts of confidential information about clients. Some of that information might not reflect positively on those clients (such as huge offshore accounts), but some of that information could help make hackers or their customers secret safe

At least, that was the apparent intention when law enforcement came upon a “criminal-seeks-hacker” posting on the “dark web.” According to an alert sent to American Bar Association members by the FBI’s Cyber Division, the criminal was looking for a hacker to break into the networks of international law firms as part of an insider trading scheme.

The FBI’s alert didn’t specify as much, but presumably the alert involves the recently reported hack into a number of elite U.S. and U.K. law firms.

Unfortunately, law firms are seen as softer cyber targets than some other sectors because they haven’t uniformly adopted rigorous cybersecurity protocols. It’s a safe bet that’s now about to change. We’ve always been protective of our clients’ confidential information in the analog sense, i.e. in what we say publicly, the storing of physical records, and in all other “real world” situations. And that’s as it should be. Some the issues we deal with involve incredibly valuable information, particularly if it’s in the wrong hands.

Now, apparently, it’s time for lawyers and law firms to step up our game on the digital front. Hackers literally have nothing better to do with their time than find ways to steal confidential information, so it’s incumbent on law firms to do everything they can to thwart them.TexasBarToday_TopTen_Badge_Small

The FBI passes along these tips to deter hackers:

  • Educate personnel on appropriate preventative and reactive actions to known criminal schemes and social engineering threats, including how employees should respond in their respective position and environment.
  • Scrutinize links contained in e-mails, and do not open attachments included in unsolicited e-mails.
  • Disable macros. Be careful of pop-ups from attachments that require users to enable them.
  • Only download software – especially free software – from known and trusted sites
  • Create a centralized Information Technology e-mail account for employees to report suspicious e-mails.
  • Change network default passwords, configurations, and encryption keys. Use strong passwords.
  • Recommend your company’s IT professional(s) review, test, and certify the need/compatibility of a patch or update prior to installing it onto the operating system or software.
  • Monitor employee logins that occur outside of normal business hours.
  • Restrict access to the Internet on systems handling sensitive information.
  • Install and regularly update anti-malware solutions, software, operating systems, remote management applications, and hardware.
  • Do not use the same login and password for multiple platforms, servers, or networks.
  • Monitor unusual traffic, especially over non-standard ports. Close unused ports.
  • Monitor outgoing data, and be willing to block unknown IP addresses.
  • Isolate sensitive information within the network.
  • Only allow required processes to run on systems handling sensitive information.
  • Implement two-factor authentication for access to sensitive systems.
  • Ensure proper firewall rules are in place.
  • Be aware of the corporate footprint and persona facing the Internet. Conduct searches using multiple search engines on multiple Internet domains of company names, Web addresses, key personnel, and projects to determine if there is an accidental weak point in the network security. Conduct infrastructure look-ups in the public domains to ensure additional information is not inadvertently advertised.

ABA members can click here to subscribe to future Cyber Alerts.

Posted in Confidential Information | 1 Comment

You Really Should Read the Treasury Department’s Report on Non-Competes

Anybody concerned with non-competes – that is any potential employer or employee, so pretty much all of us – should settle in with a nice sandwich and the beverage of their choice and read the U.S. Treasury Department’s Office of Economic Policy’s recent report, “Non-compete Contracts: Economic Effects and Policy Implications.”Department_of_Treasury_Seal_(2895964373)

It’s a well-written, 36-page quick read that, ever so politely and factually, makes the case that, in far too many cases, employers are taking advantage of their employees’ lack of knowledge about non-competes to reduce those employees’ negotiating power, wages and mobility. The report proves what we instinctively already know: many employees who aren’t privy to trade secrets and haven’t been given sufficient “consideration” (typically specialized training and/or additional compensation) are subject to non-competes that effectively reduce their ability to change jobs and grow their careers. The Jimmy Johns and Law360 cases, both of which I’ve blogged about previously, are perfect illustrations of this phenomenon.

Here’s one of the better excerpts from the report:

Several pieces of evidence suggest that employers are relying on workers’ incomplete understanding of non-compete agreements. First, employers often require that workers sign non-compete agreements even in states that refuse to enforce them. For example, in California, which (with limited exceptions) does not enforce non-compete agreements, the fraction of workers currently under a non-compete is 19 percent, which is slightly higher than the national average.

Second, a separate survey, exclusively focused on members of the Institute of Electrical and Electronics Engineers, reports that “…barely 3 in 10 workers reported that they were told about the non-compete in their job offer. In nearly 70% of cases, the worker was asked to sign the non-compete after accepting the offer – and, consequently, after having turned down (all) other offers. Nearly half the time, the non-compete was not presented to employees until or after the first day at work.”

This evidence is especially powerful insofar as it applies to highly-educated, high-wage workers who might be considered more likely to understand the process surrounding non-competes. Even in cases where the conventional explanation of trade secrets has a surface plausibility, firms often delay the presentation of non-competes. This behavior would not be necessary if non-competes were a mutually-beneficial arrangement.[emphasis added]

I work with a lot of executives who are bound by non-competes, but these are men and women with access to confidential information, who are usually quite well-compensated, and who have often received the kind of specialized training that makes a non-compete a reasonable tool. Even then, I have argued that there are other, less restrictive ways to protect confidential information than impeding my client’s mobility and career growth.

TexasBarToday_TopTen_Badge_SmallWe know what non-competes can do to individual employees who are bound by arguably unenforceable non-competes, but the Treasury Department’s report makes the case that the negative effects are more widespread. The report synthesized labor market data and previous studies to conclude that “stricter non-compete enforcement [is] associated with both lower wage growth and lower initial wages.” It also impedes worker mobility, which hurts the overall economy, the report said: “Job churn helps to raise labor productivity by achieving a better matching of workers and firms, and may facilitate the development of industrial clusters like Silicon Valley.”

That can lead to “brain drain” in those states that enforce non-competes. The beneficiaries are states, like California, that typically don’t enforce them – even though, as noted, roughly 19 percent of California workers are bound by non-competes.

The report concludes with several “Directions for Reform” that, unfortunately, are merely suggestions at this point:

  1. Increase transparency in the offering of non-competes. In other words, no employee should be surprised to learn he or she has signed a non-compete. Nor should they be presented the non-compete on the first day on the job, once the employee has turned down other job offers.
  2. Encourage employers to use enforceable non-compete contracts. Right now, so many of the non-competes employees sign are completely unenforceable, but that doesn’t matter because the employees either don’t know that or they can’t afford a lawyer to fight for them. As we learned from the Law360 affair, once a new employer learns of a non-compete, they are likely to simply let the new employee go rather than expend the resources it takes to fight it out in court.
  3. Require that firms provide “consideration” to workers bound by non-compete contracts in exchange for both signing and abiding by non-competes. And, no, 50 percent off sandwiches doesn’t count as “consideration.”

Fortunately, there has been a fair amount of media coverage over this issue in recent years. And that may lead to legislation either on the national or state level.

In the meantime, watch what you sign when you take a new job.

Photo credit: woodleywonderworks

Posted in Confidential Information, Non-Competes, Trade Secrets | Tagged , , | 1 Comment

Crass Executive Spending Puts Leading Veterans Charity under a Cloud

As obvious as it seems, abusing an expense account with lavish personal spending is one of the most common ways a CEO can get into trouble. Being an executive comes with reasonable perks that are necessary and helpful to doing the job. But some people get carried away and forget that these funds are not for their personal use and enjoyment.

It’s not just a problem at the biggest corporations. The same temptations can be found within some of the country’s most respected nonprofit organizations. That’s what seems to have happened at the Wounded Warrior Project, one of the largest charities helping veterans. The two top executives were fired after reports of excessive spending on perks like fancy restaurant dinners and first-class travel to luxury resorts for “team-building” conferences. Such extravagances seem particularly egregious if you’ve ever watched one of the organization’s powerful TV ads featuring severely wounded veterans and the struggles their families go through trying to help them when they return home.

WW picAccording to tax reports and charity watchdog groups, Wounded Warrior was spending roughly 40 percent of donations on overhead costs. Former employees of the organization also complained that its focus seemed to shift too far in the direction of fundraising at the expense of its core mission to help veterans.

Of course, fundraising is a crucial role for leaders of a charity. And the ousted CEO and COO were said to be instrumental in building up Wounded Warrior, which took in $372 million in 2015. Sometimes the leaders of an organization, whether it’s a charity or business, develop a sense of entitlement after working hard to make something a success. That can happen even when they are well-paid. CEO Steven Nardizzi reportedly was paid $473,000 in 2014. That too might strike some as excessive, but as I’ve noted, executives of large well-operated nonprofits are valuable and their compensation should reflect that. The problem here is that spending by Nardizzi and the COO seems to have spun out of control.

We’ve seen this in the public sector too. The scandals at Enron and Tyco uncovered Astroworld rented for a family picnic, a $1.5 million Christmas party, and purchases like a $15,000 dog umbrella stand; a $6,000 shower curtain; $5,960 for two sets of sheets; a $2,900 set of coat hangers; a $2,200 gilt metal wastebasket; and a $445 pincushion

Spending must be for the advancement of your company or institution; it is not a license to take money from the organization for personal enrichment. It just takes a modicum of common sense. Ask yourself this: “Are you doing this to enhance company business or is it to help yourself?” Generally, business judgment gives you wide latitude and discretion on expenses, but it does have limits. At some point, expenses can become over the top and wastefully lavish. The over-the-top spending by Wounded Warrior’s leadership seems like one of those examples.

Posted in CEOs, Complaints Against Executives, Corporate culture, Executive Compensation | Tagged , , , , , , , , , , , , | Comments Off on Crass Executive Spending Puts Leading Veterans Charity under a Cloud