C-Suite Lessons from Ghosn’s Nissan Ouster

For Carlos Ghosn – one of the highest-flying chief executives in the world (literally) – home has been a 50-square-foot cell since Japanese authorities announced a series of vague allegations against him for underreporting his compensation and misusing company property.

He’s been held without details of the allegations against him, denied bail, and has been subjected to daily interrogations without legal representation.

Ghosn’s spectacular fall from grace is truly bizarre and sheds light on Japan’s opaque legal and regulatory system for investigating corporate compliance issues. But while the circumstances of Ghosn’s problems are unique to Japan’s corporate governance practices, executive pay remains a career minefield for U.S. execs and is one of the most common sources of c-suite scandal and intrigue.

The source of Ghosn’s current troubles can be traced to his ability to set his own compensation (something unheard of in U.S. for publicly traded corporations), as well as a decision following the global recession to reduce his take-home compensation in lieu of deferred compensation, which grew to a reported $80 million. Japanese authorities also accuse him of misusing company property, including two private homes and a corporate jet.

 Writes The Economist:

If true, however, [the allegations] reflect as badly on Nissan as on him … Public filings on Mr. Ghosn’s pay and perks would have been Nissan’s responsibility as well as his; any shortcomings should have been flagged up by internal as well as external audits. In a country that is at last overcoming decades of resistance to corporate-governance reform, the apparent lack of oversight is a stain on the reputation of Nissan and its board of directors. The more powerful Mr. Ghosn became, the more essential the need for close board supervision.

Troubles that can befall occupants of the c-suites in the U.S. often involve compensation issues, too, but their origins tend to be different. For publicly traded companies, there are just too many checks for something like that to fly under the board’s radar. A corporation’s compensation committee, for example, typically is charged with setting the CEO’s salary. Issues can surface when CEOs are too close to compensation committee members, but at the end of the day, compensation for CEO’s in publicly traded companies must be publicly disclosed.

Expense report violations are another common source of executive compensation problems and can lead to serious actions against U.S. executives. Whether it’s taking vacations on the company dime or sending work to a vendor that happens to be a shell company run by an exec’s mistress, expense issues are a regular source of compliance problems.

As Ghosn remains in custody, more details will certainly emerge about what he did or did not do. For the integrity of Japan’s corporate compliance system, hard questions also must be asked about the failure of board oversight that would have allowed these alleged excesses to occur. For U.S. business leaders, the screaming newspaper headlines about Ghosn offer a cautionary tale and some universal takeaways: 1) expenses that are reimbursed by the company should be transparent and backed up 2) don’t seek reimbursement for personal expenses and 3) when in doubt, disclose, disclose, disclose.

Posted in CEOs, Complaints Against Executives, Confidential Information, Corporate culture, Criminal Prosecutions, Executive Compensation, Fraud | Tagged , , , , , , , , , | Leave a comment

Dallas Morning News Interviews Joe Ahmad About Clash of the Dating App Start-Ups

The Dallas Morning News took a close look at a raft of lawsuits facing Dallas-based online dating company Match.com, including a series of bitter lawsuits with rival startup Bumble, which I’ve written about previously on this blog. DMN Reporter Danielle Abril asked me for insight into how litigation figures into the growing pains faced by fast-growing startups like Match’s Tinder app, which has seen its stock price double amid a flurry headline-grabbing litigation ranging executive compensation disputes to patent infringement and trade secret theft.

Writes Abril:
Now, amid this historically high-growth period, the $1.3 billion publicly traded online dating juggernaut is working through its latest relationship squabble: two high-profile and high-stakes legal battles that some worry could derail the company’s trajectory.

“It’s impossible to know the truth of it, but they’re the kind of allegations that could cause serious distraction,” said Joseph Ahmad, founding partner of Houston-based Ahmad, Zavitsanos, Anaipakos, Alavi & Mensing PC law firm and a commercial litigator not involved in Match’s lawsuits.

Read the entire Dallas Morning News article here.

The online dating industry is evolving by the week with all players involved keeping a close watch on Facebook’s moves to enter this market. Abril notes that these market forces – plus Match.com’s internal drama and dynamics – are an important leadership test for CEO Mandy Ginsberg.

“Good executives in this position know how to deal with an unexpected major crisis,” Ahmad said. “This is the test — is it going to take you down or can you manage your way through this crisis and still perform on a business and operational level? From what I’ve seen on the legal side, I’m confident in saying that is not an easy job.”

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Whistleblowers Receive Whopper Payouts as SEC Proposes New Rules to Limit Future Awards

The U.S. Securities and Exchange Commission announced two large whistleblower payouts last week, bringing the total paid-out bounty for the program to more than $320 million since it was created as part of the 2011 Dodd-Frank Act.

The $39 million and $15 million awards are the second- and eighth-largest payments distributed in the program’s history. Like most of these cases, the whistleblowers’ identities and other key details have remained confidential.

Reports of these mega bounties have made the SEC becoming a magnet for tips, both good and bad. But the flood of tipsters means the whistleblower review process now takes more than two years to reach resolution, with some taking four years or more. Tipsters who provide the SEC information that leads to sanctions in excess of $1 million can receive 10 percent to 30 percent of the money collected. Payments are funded by monetary fines collected by wrongdoers.

Writes the Wall Street Journal:

Deciding who gets paid is a demanding process that involves vetting each request to determine how important the person’s tip was, according to current and former officials. When multiple whistleblowers are involved, decisions are more challenging because the SEC has to measure each tipster’s value to the case.

Hoping to get a handle on the backlog, the SEC is proposing a new procedure with the goal of creating a way for the agency to quickly reject what it considers to be less-deserving applicants so it can focus on better-quality whistleblowers reporting waste, fraud and abuse. The proposed amendment also includes a controversial plan to potentially increase payouts for relatively small cases under $2 million (which make up 60 percent of the rewards program payouts) and limit the size of the relatively small amount of very large recoveries. According to the proposal, whistleblower awards over $30 million could be reduced at the commission’s discretion based on the “value of the whistleblower’s information and the personal and professional sacrifices made in reporting the information.”

SEC commissioner Kara Stein – who voted against the amendments – expressed concern that the changes could weaken incentives for whistleblowers to come forward.

“This means the Commission can reduce the award if, in its sole discretion, it thinks the award is ‘too large.’ I am worried that this subjective determination will be used as a means to weaken the Whistleblower Program.”

Some, perhaps many, whistleblowers are motivated by the prospect of a monetary award. In this respect, it may be a positive step to provide commissioners with the ability to increase payouts to the large percentage of smaller whistleblower claims. However, it seems the overall intent behind this proposed amendment is to dissuade whistleblowers, and procedural changes aimed at reducing the backlog will not necessarily result in a better or more efficient system. It’s critical to bring issues of fraud related to publicly traded entities to the SEC’s attention. Any change that allows such fraud to be kept concealed only serves to protect fraudsters and harm the public.

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#MeToo Zeitgeist Sends Quakes Through C-Suites

CEOs from three big U.S. chipmakers made unexpected career exits for improper behavior in the last two months alone, some on the job barely long enough to get their new business cards.

Most recently and perhaps most surprising, Texas Instruments’ Brian Crutcher had just been promoted and was on the job as CEO for six weeks when TI announced his departure, noting that it was related to “personal behavior that is not consistent with our ethics and core values, but not related to company strategy, operations or financial reporting.”

Crutcher joins Rambus’s Ron Black and Intel’s Brian Krzanich in being shown the door this summer by increasingly vigilant boards and a realization that even those at the very top are not immune from the #metoo movement.

Not that long ago, denizens of the c-suites, particularly CEOs, could skate by anything but the most severe allegations. The bar for removing execs has dropped along with everyone else. And as we see in this case, the consequences can be swift and severe – Crutcher was cut loose after more than two decades at TI with no severance.

It has been a long time coming, but as a result of boards now rigorously taking action on complaints related to sexual harassment, many who previously felt fearful of coming forward, no longer do. Therefore, one can expect more complaints of this nature, and more top executives to fall.

Writes the Dallas Morning News: Emboldened by the growing list of high-placed executives laid low – many by the #metoo movement – those who see something are increasingly open to say something, at times leading to dramatic results. And boards of directors, once derided as being mere appendages of the CEO, have stepped up their response to personal conduct violations and are showing even wunderkinds the door.

For businesses, sweeping bad behavior under the rug to protect the figurehead is simply no longer an option. The first priority for boards in most cases is to take action in response to misconduct and deal with succession planning and PR subsequently. Barring unexpected new revelations, it’s unlikely that TI – a corporation known for its button-down culture – will suffer lasting PR damage from this move. In terms of the executive employment landscape, beware to any Master of the Universe living under a rock who may not be aware of this new reality.

The bottom line is that while not all affairs are frowned upon by a board of directors, senior executives in any relationship or inappropriate communication with a coworker, vendor, customer/client, investor, or anyone else involved in the business, is certainly at risk. These relationships invariably violate company sexual harassment policy, or perhaps another policy regarding conflict of interest. All executives would be wise to steer clear of any such relationships even if they are not the aggressor.

Posted in CEOs, Complaints Against Executives, Corporate culture, Executive contracts, Executive Management Style, Workplace Romances | Tagged , , , , , , , , , , | Comments Off on #MeToo Zeitgeist Sends Quakes Through C-Suites

Fifth Circuit Reminder: Words Matter in Employment Contacts, Restrictive Covenants

Sometimes the most fundamental legal concepts are so basic and intuitive that they tend to fall by the wayside in practice. Case in point is a recent Fifth Circuit opinion throwing out an arbitration agreement because the employer didn’t follow its own instructions spelled out in the agreement.

In this case, the Fifth Circuit sided with employee Kimberly Huckaba, who sought to nullify her arbitration agreement in a sexual harassment and retaliation claim against her former employer, Texas-based engineering and construction services firm Ref-Chem LP.

The appellate decision focused on a dispute resolution agreement signed by Ms. Huckaba that mandated arbitration for such claims and included boxes for both employer and employee to sign. No one from the company signed the document, which would not normally be a problem because Texas courts have previously held that such signature blocks are insufficient to establish that signatures are required. The problem for Ref-Chem is that the agreement specifically spelled out that both parties were required to sign for it to go in effect.

The case is Kimberly Huckaba v. Ref-Chem LP, case number 17-50341, in the U.S. Court of Appeals for the Fifth Circuit.

In this case, we have more than a blank signature block that speaks to the parties’ intent,” the opinion reads. “The agreement also contains language that the parties need to sign the agreement to give it effect or to modify it. Thus, the question of Ref-Chem’s intention is answered by the agreement it drafted.”

Writes Law360:

The panel wrote that if it adopted Ref-Chem’s argument, the words of the agreement would have no meaning, and also that the company could “have it both ways,” by arguing it did not intend to be bound because it didn’t sign the agreement, or argument it did because it kept the agreement on file.

When it comes to things like contracts, restrictive covenants and employment policies, words really do matter. Too often, employers simply hand new arrivals a stack of on-boarding documents and policy handbooks, but never bother to make sure they are returned or properly signed. Years later when faced with noncompete violations or any number of contract breaches, the company discovers, too late, that there is no contract or the one in hand has not been properly executed.

This case is a potent reminder for employers to review on-boarding procedures and ensure that polices and other contracts are properly memorialized.

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Dating App Execs Make Failed Tinder-Bumble Merger Personal

A nasty court fight unfolding between Texas-based dating apps Tinder and Bumble has all of the elements of a soap opera drama – romance, unfaithfulness, intrigue and, of course, revenge. The mess began just four years ago with a bitter breakup of a workplace romance between two Tinder execs that resulted in visionary cofounder Whitney Wolfe Herd filing a sexual harassment lawsuit and leaving the company after a settlement.

She relocated to Austin and created Bumble, a rival app that distinguished itself by its ability to empower female users to control the introductions with potential suitors. After Bumble took off and began gobbling marketshare, humbled Tinder execs approached with a series of acquisition overtures in 2017, reportedly offering as much as $1 billion.

The negotiations turned ugly quite suddenly earlier this year with Tinder suing Bumble for violating its patents and trademarks, and for a misuse of trade secrets. Four days later, Bumble purchased full-page ads in the New York Times and the Dallas Morning News calling out Tinder’s actions. “We swipe left on your attempted scare tactics, and on these endless games. We swipe left on your assumption that a baseless lawsuit would intimidate us. Given your enduring interest in our company, we expected you to know us a bit better by now,” the ad read.

Bumble then filed its own lawsuit, charging that Tinder’s claims were an attempt to damage the startup’s value in the eyes of potential investors and that the acquisition talks were only a pretext for tricking Bumble into sharing its trade secrets.

Here we have Exhibit A for why workplace romances are generally a bad idea. Cupid may be blind, but this is rarely – if ever – a good idea and almost always results in complications, sometimes in ways the parties could never anticipate. In situations involving executives, startups and highly competitive personalities, it’s not uncommon to see romances break up and confidential information being taken. In this case, the breakup almost certainly colored some of the actions that formed the basis of the lawsuit and the counterclaim, and what would have been a delicate acquisition between two rivals became exponentially more difficult.

With Facebook now promising to enter the online dating space, perhaps these two unicorns will soon be irrelevant.

Posted in Complaints Against Executives, Confidential Information, Covenants Not to Compete, Executive Management Style, Social Media, Trade Secrets, Workplace Romances | Tagged , , , , , , , | Comments Off on Dating App Execs Make Failed Tinder-Bumble Merger Personal

Trump-Daniels Affair Exposes Inherent Legal Challenges with Hush Agreements

There are plenty of clues that the so-called “hush agreement” between Donald Trump and porn actress Stormy Daniels (née Stephanie Clifford) was hastily crafted and poorly thought out. Executed just days before the 2016, the non-disparagement agreement has a wealth of careless errors (“disparagement” is misspelled in the document’s title and signatures are missing from both Trump and the notary who witnessed Daniels’ signature) and head-scratching legal points.

This is an odd legal document, starting with the use of fake names to represent the three parties in the agreement. I’ve seen a lot of highly sensitive confidential settlement arrangements, but I’ve never seen one using fake names (other than to protect the confidentiality of minors, of course). And that’s the problem here – how can you expect to enforce an agreement between parties using pseudonyms all the way around? The lawyers here got a little too cute for their own good.

Confidentiality and non-disparagement agreements have an important place in business litigation, but parties must enter into them with eyes wide open because at the end of the day there is no absolute guarantee of confidentiality. The best you can do is build an attractive structure of incentives to ensure that sensitive information remains confidential. The most effective way to accomplish that is to schedule payments over time. That way, if confidentiality is breached, payments are stopped. There’s a balancing act at play because for confidentiality to be preserved, the value tied to staying quiet must be greater than any incentive to breaching the agreement. In this case, Ms. Daniels received a single early payment to stay quiet before the election, while the moral and financial incentive to breach the agreement skyrocketed after Trump’s win. I have never had an issue with a confidentiality settlement agreement being broken – on either side – but I have never had one involving party who later was elected president.

The Trump legal team is assuming the role of the gang that can’t shoot straight, resulting in death by a thousand cuts as this story churns through the national media, including a “60 Minutes” interview.

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In Buc-ee’s Retention Pay Squabble, Former Manager Scores Big Payback from Appellate Court

A Texas appellate court recently stiff-armed the Buc-ee’s convenience store chain for a poorly considered retention pay provision that amounted to “unenforceable restraints of trade.” The court’s interpretation of the retention pay provision is a learning opportunity for employers who are increasingly using techniques once reserved for high-skilled and specialized workers in an effort to reduce turnover of general employees in a tight labor market.

The October ruling stems from a dispute with former Buc-ee’s assistant manager Kelley Rieves, whose $55,000 annual income was divided on her paychecks between hourly pay and retention pay. In exchange for her retention pay, the contract required that Rieves remain employed for at least 48 months and provide six months’ notice before leaving for any reason. Finally, the contract required that she return the retention pay she had already earned if she quit for any reason during that time period, including if she was fired, took a job with a non-competing business or simply left the workforce altogether.

When Rieves resigned from Buc-ees after about three years and took a job with a non-competing employer, Buc-ee’s demanded that she return $67,720 that had been classified as retention pay. A Brazoria County trial court initially ruled in Buc-ee’s favor granting summary judgment and awarding attorney fees for Buc-ees, which increased the total penalty to nearly $100,000.

But a three-judge panel from the Texas 14th Court of Appeals had problems with the contract language, writing: “These provisions go far beyond protecting any legitimate competitive interest of Buc-ee’s, impose significant hardship on Rieves by clawing back substantial compensation already paid to her and on which she had paid taxes, and injure the public by limiting choice and mobility of skilled employees.”

The obligation that Rieves return her income was designed to prevent her from leaving Buc-ee’s, but that was not a reasonable restraint of trade under Tex. Bus. & Com. Code 15.50 because it applied whether Rieves went to a competitor or to any employer at all. This is particularly true when an employment contract  requires the employee to pay back money they already received – which a lot of employees will have already spent – as opposed to simply forfeiting payments in the future.  Finally, it is helpful to tie the obligation to a legitimate business interest, such as working for a competitor. 

Accordingly, retention strategies like these are potentially problematic on several levels, particularly when used for non-skilled, rank-and-file workers. In such cases, employees typically lack bargaining power when they agree to such contracts and often don’t consider the consequences. The stiff penalties for leaving for another job make it difficult for workers to advance in their careers and increase their earning power. When it comes to executive-level or workers with highly specialized skills, employers can make a strong argument for such arrangements, which often hold up to legal challenges.

span style=”font-family: ‘Times New Roman’,’serif’; font-size: 12pt;”>The Buc-ee’s dispute is one several recent cases that should give employers pause when crafting retention clauses and non-compete agreements for lower-paid workers.

Such policies are also common in the fast-food industry, where franchises often agree not to hire each others’ workers, thus keeping wages down despite a tight labor market. A recent review of 40 fast-food companies found that 32 (including Burger King, Domino’s and Pizza Hut) imposed restrictions in which workers were often not allowed to take new positions without their bosses’ written permission. A lawsuit against CKE Restaurants Holdings and McDonald’s, filed in Los Angeles Superior Court and Illinois District Court, seeks class-action status on behalf of tens of thousands of workers who claim the restrictions have hindered their career advancement. 

 

Posted in Clawback provisions, Covenants Not to Compete, Non-Competes, Restraint of trade, Retention agreements | Tagged , , , , , | Comments Off on In Buc-ee’s Retention Pay Squabble, Former Manager Scores Big Payback from Appellate Court

As Date Nears for Google v. Uber Trade Secret Trial, Uber Insiders Describe Culture of Espionage and Secrecy

In the year since Google’s autonomous vehicle subsidiary Waymo first leveled allegations that Uber had poached star engineer Anthony Levandowski knowing that he was bringing a raft of stolen trade secrets with him, the contentious litigation has consistently revealed new and tantalizing details about the high-octane culture and mercurial personalities within the two companies.

A recently released bombshell document supplied by the Department of Justice created more headaches for the Uber legal team. The letter from former Uber security analyst Richard Jacobs included claims that Uber had encouraged a culture of espionage and trickery to stay ahead in the highly competitive ride-sharing sector. The 37-page letter claims that Uber trained employees to steal trade secrets and hide their tracks, among other things. It also contained an unrelated allegation that Uber had paid a $100,000 ransom to a hacker who had stolen customers’ account information and never reported the data breach to customers or authorities.

If true, the workplace culture described in the letter could make it challenging for Uber to convince jurors that the theft of Waymo’s trade secrets was the work of a lone wolf. It’s also creating a credibility problem with U.S. District Judge William Alsup, who was not pleased to learn about the letter just days before the scheduled December 2017 start of the trial.

“I can’t trust anything you say because it’s been proven wrong so many times,” Alsup told Uber at the hearing. “You’re just making the impression that this is a total cover-up.”

Judge Alsup agreed to Waymo’s request to delay the trial into 2018, adding that “if even half of what this letter says is true, it would be a huge injustice to force Waymo to go to trial” as planned.

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5 Lessons About Protecting Digital Assets From ZeniMax v. Oculus VR

The November edition of DCEO magazine dives into the recent $500 million jury verdict against Facebook’s Oculus virtual reality subsidiary, describing the whopper verdict as a transcendent moment for businesses that have not yet taken steps to identify and protect their digital assets. DCEO’s Danielle Abril writes that businesses of all sizes and across sectors should consider the large monetary verdict as a warning sign to protect trade secrets and other intellectual property and get a handle on non-compete and non-disclosure agreements before problems surface.

In her article, “5 Things Companies Can Learn From the ZeniMax Lawsuit Against Oculus VR,” Abril turned to executive employment lawyer Joe Ahmad of Houston’s AZA law firm to comment on what businesses should take away from the verdict to avoid facing trade secret and non-compete disputes. Below are some of the lessons learned:

1. Identify intellectual property and protect it through patents, copyrights, trademarks and nondisclosure agreements (NDA). But that’s just the start because once the digital crown jewels are identified, businesses must be vigilant in protecting them. “An NDA is only good if you catch someone breaking it,” Ahmad tells DCEO. “There ought to be some things that are so important that you can’t risk that the other side will use it without you finding out.”

2. Recognize Risky Hires/Partnerships. There can be great value in hiring experienced workers from a competitor, but businesses must appreciate the legal risks that come with such strategies.

“When you talk about hiring people, who do you think the good people are?” Ahmad tells DCEO. “They’re the people who have [proven] themselves by working for a competitor. If you want people with experience, almost by definition you’re hiring someone from a competitor.”  And sometimes that competitor will sue you to try to prevent you from hiring them because their employees have confidential information that could be used against them

Abril notes that Facebook/Oculus dropped the ball on this count. Oculus’ COO was not informed of the complications until after the lawsuit was filed, and it was this lack of oversight of the Oculus’ NDA with ZeniMax that resulted in the bulk of the $500 million verdict.

3. Beware of Transfers of Assets. An eyebrow-raising detail was that Carmack had particular information from ZeniMax stored on a USB drive that he then allegedly took to Oculus, Abril writes. After leaving Zenimax, he allegedly returned for a tool he created there and took that to Oculus, too. While it’s tough for courts to determine whether those specific items were used in development at Oculus, it’s a risk not worth taking. Companies should be vigilant about making sure that employees from competitors don’t take the competitor’s confidential information with them.

4. Act early. If systems are in place to track intellectual property, risky hires are assessed up-front, and companies are aware of all previous situations tied to new employees, it’s imperative that employers then act on any items that could create future problems, Abril writes. “It’s not what you did; it’s about the cover-up,” Ahmad tells DCEO. “If I knew an employee took info and I didn’t do anything, I could get into some trouble. I think you’re better off wearing the white hat. … You’re going to look better in litigation.”

5. Give the CIO a Board Seat. Abril stresses that it’s past time for executive leadership to value its chief information officer, and that means reserving a seat on the board for the CIO.

As companies struggle to keep up with the changing dynamic of business, strategy becomes essential to avoiding litigation, Abril writes. After all, no one wants to end up with a three-year-and-counting legal battle as Oculus and ZeniMax did.

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