There’s More to Learn from Jeopardy! than Trivia

Q: This household-name company allowed an insider to lead a high-profile executive search only to end up hiring himself for the job. It then failed to perform basic vetting that might have uncovered the new guy’s embarrassing history of insensitive and derogatory public statements.

A: What is Sony’s botched search to replace iconic Jeopardy! host Alex Trebek?

The saga continues for legions of intensely loyal Jeopardy! fans who’ve lived the ups and downs of the gameshow’s search to replace iconic host Alex Trebek. Debate rages over who should take the helm, but this much they can agree on: Sony Pictures’ handling of the effort has been a resounding failure.

The mistakes and mishandling began soon after Trebek succumbed to pancreatic cancer. Sony quietly appointed the show’s executive producer, Mike Richards, to lead the search for a replacement. The show rolled out a handful of guest hosts trying out for the job. LeVar Burton developed a passionate following, and others like champion contestant Ken Jennings and sitcom star Mayim Bialik drew strong reviews.

Few realized that Richards was leading the search and had also thrown his hat in the ring, and most were shocked to learn that he had been selected. Richards didn’t have time to prove his doubters wrong. Within days, a journalist for The Ringer began uncovering insensitive statements that Richards had made on a podcast. Richards’ halfhearted “that’s not who I am” apology could not prevent the inevitable. The seat held by Trebek for 37 seasons is now open again.

There’s so much wrong here from an executive employment standpoint. Executive searches that are not well-defined, objective and professional do not do anyone any favors. In addition, a thorough vetting process is critical for executive hires today. When someone like Richards – who was an integral part of the search – ends up with the job, that should raise red flags and prompt extra vetting, not less.

This happens a lot with internal candidates. Since they already have a position with the company, there is a sense that some vetting, background checks, etc. have already occurred. But in reality, assuming a more prominent role should bring more scrutiny. Think about this way: How many times have we seen damning information come out about a politician who had an existing political position when they run for president? 

If the insensitive comments made by Richards were uncovered so easily, it makes you wonder whether Sony had done any vetting at all.

Writes Variety:

What should have been a triumphant period of “Jeopardy” now appears to be the beginning of a long, chaotic crisis for a show that, until recently, was the model of consistency. From the moment of his announcement, Richards was a deflating choice. His status as the show’s executive producer lent the sense that the months of host auditions had been rigged in his favor from the start.

There’s always been a lot to learn from watching Jeopardy! Executive employment law can now be added to the list.

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When it Comes to Lawyers and Allegiances, Execs Should Look Out for No. 1

Embattled former Theranos CEO Elizabeth Holmes learned an inconvenient truth when it comes to allegiances between outside law firms, their corporate clients and individuals on the executive team.

In pretrial wrangling before the August 31 start of her federal criminal fraud trial, Holmes found herself without attorney-client privilege related to years of discussions she had with what she considered to be her legal team. U.S. Magistrate Judge Nathanael M. Cousins had a different opinion about the relationship.

Writes Law360:

Holmes argued in her briefs that the law firm began jointly representing her and Theranos in 2011 in an intellectual property dispute. She said that over time their relationship “grew organically,” with Boies and his firm jointly advising Holmes and the company on a variety of topics through 2016, including in her interactions with the media and the U.S. Centers for Medicare & Medicaid Services.

But U.S. Magistrate Judge Nathanael M. Cousins ruled last week that the communications are subject only to corporate privilege and that the former CEO had not shown that she made it clear to Boies Schiller attorneys that she was seeking legal advice in her personal capacity and not just as a company executive.

This is an important lesson that execs should take to heart – your company’s lawyers do not represent you, even when your interests are aligned. It can be confusing when the executive is friends with the lawyer, whether it’s outside counsel or an in-house counsel. The personal relationship has the effect of blurring the lines between company and executive in the executive’s mind. Oftentimes, the executive feels like the lawyer is their personal lawyer.

I often get a phone call when an executive has an ah-ha moment like this or when the company’s lawyer advises them to obtain their own counsel. It can be a difficult concept to grasp when you think that your interests are aligned, but at the end of the day, a personal lawyer has a duty to look after your interests and only your interests.

In Holmes’ case, there was some confusion about the scope of the law firm’s role because the relationship grew as the startup expanded. There was no engagement letter spelling out the scope of the law firm’s role. While lawyers should always make their representation crystal clear, it’s never too soon for an executive to understand that lawyers paid by the company typically represent the company. That means you don’t have personal privilege. And if there is no engagement agreement, you should assume that the lawyer represents the company and not you.

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Former MLB Pitcher Claims Astros Stole More than Hand Signals in Runup to 2017 World Series

Former MLB pitcher Mike Bolsinger has come up with a novel legal strategy as he (literally) relitigates his shoddy third-of-an-inning performance against the Astros in their runup to the 2017 World Series.

The journeyman pitcher gave up four runs and four walks in his ill-fated appearance in a series marred by revelations that the Astros employed an elaborate sign-stealing operation in an attempt to give their offense an upper hand.

Writes the Houston Chronicle:

Continuing to maintain that the Astros’ 2017 sign stealing cost him a job in the major leagues, former Toronto Blue Jays pitcher Mike Bolsinger refiled his lawsuit against the team in Harris County District Court on Thursday afternoon.

Bolsinger, who hasn’t pitched in the majors since allowing four runs and four walks in a third of an inning against the Astros on Aug. 4, 2017, contends his signs were trade secrets under Texas’ Uniform Trade Secrets Act. He is seeking more than $1 million in damages.

The details of the Astros’ scheme are well-known by now. Spies in the outfield used a high-powered camera to intercept hand signals to the opposing team’s pitchers. Astros batters were then alerted about the likely pitch that was on the way by banging on a metal trash can.

“The owners of these trade secrets had taken the reasonable measures customary in the baseball industry to keep the signs secret,” Bolsinger’s suit reads. “Moreover, the signs derived independent economic value, actual or potential, from not generally being known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.”  But this seems to gloss over the question of whose “trade secret” it is – and that is assuming it meets the legal definition of trade secret under the law.  

I touched on some of the lawsuit’s weaknesses in a recent Law360 article:

While TUTSA broadly defines who qualifies as a trade secret owner, Joe Ahmad of Ahmad Zavitsanos Anaipakos Alavi & Mensing PC, told Law360 on Friday that he believes there’s a “real issue as to whether he has any ownership interest at all in the signs.”

“They belong to his team, and I don’t know that he can claim an interest in them,” he said.

But Bolsinger’s problems don’t stop there. He will have a difficult time proving that his pitching would have been more effective without the Astros’ sneaky measures. While courts have emphasized “a flexible and imaginative approach to the problem of damages,” to quote an often-cited passage from University Computing v. Lykes-Youngstown Corp., 504 F.2d 518, 538 (5th Cir. 1974), Bolsinger will still have to prove a connection between the harm he is claiming – damage to his MLB career – and the taking of the trade secrets.  A judge or jurors might be skeptical that his MLB career was derailed by that one brief outing. Bolsinger has reportedly performed well in the minor leagues and in Japan. Professional baseball is a sophisticated free market for talent. If just one team thinks he has the stuff, he will be called back.  And if he is right, it would seem that at least one team would recognize this and overlook that outing. 

Supreme Court Justice John Roberts famously claimed that a judge’s role is focused on calling balls and strikes. Bolsinger may want to think twice about his chances with this one.

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As Gov. Cuomo Keeps Grip on Power, His Baggage Would be a C-Suites Career-Ender

New York Gov. Andrew Cuomo is hanging on as accusations of sexual harassment, inappropriate relationships and workplace hostilities pile up. The revelations are coming so fast that they’re hard to keep straight. Multiple women, including current and former aides, have detailed a list of inappropriate behavior. A broader narrative has also emerged about the sharp elbows, bullying and ruthless political tactics he has employed in his rise to power. Finally, he’s under FBI scrutiny over the way his administration reported Covid-19 deaths in nursing homes.

He’s lost key support from New York lawmakers, as well as senators like Chuck Schumer Kirsten Gillibrand and Jerry Nadler. But with his reelection some time away, many observers say he’ll likely stick it out.

Uncomfortable relationships with subordinates. Leadership marked by bullying and hostility. The accusations have a familiar ring in the halls of corporate America, but there’s a striking difference lately in the way they’re handled. A generation ago, executives and politicians alike usually skated when claims of sexual harassment and worse surfaced. That has changed in board rooms, at least.

Corporate boards today show very little tolerance for such behavior. Perhaps the most recent example is that of former McDonald’s CEO Steve Easterbrook, who was unceremoniously cut loose shortly after he was hired over allegations that he covered up inappropriate relationships with three subordinates. He is now in a legal tangle with McDonald’s over his $57 million severance compensation. The Wall Street Journal reports that corporations are increasingly withholding executive pay longer, hoping to avoid the hassle of recouping money if execs are later found responsible for misconduct.

But Cuomo doesn’t have to answer to a board, and it doesn’t matter that most of his fellow politicians – even those among his party – don’t really like him. Ultimately, he only has to answer to voters.

A business, meanwhile, has to be concerned with goodwill.  Behavior like this by leaders – combined with a leadership style described by The Nation as “petty, controlling and grandiose” – is very harmful to business. 

Governments generally are not concerned about goodwill, so paradoxically politicians are not accountable, except for elections. But elections only go so far. If you have 51 percent support of voters, but the remaining 49 percent strongly disapprove, that is usually good enough. That doesn’t fly in the business world. A business – especially those that are publicly traded – simply can’t tolerate a 49 percent loss in business or impairment to its goodwill. Realistically, if this were a public company CEO, he would have already been shown the door. 

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Tracking the Impact of the Defend Trade Secrets Act After Five Years 

The now five-year-old Defend Trade Secrets Act has had a big impact, I reported in a Texas Lawyer commentary “Tracking the Impact of the Defend Trade Secrets Act After Five Years.” 

 

“Trade secret filings were on the rise even before the DTSA and have only increased since. Texas is no exception: three judicial districts in Texas—the Eastern, Northern and Southern Districts—were among the top five in the United States for trade secret litigation filings, according to an analysis by the global advisory firm Stout. Meanwhile, workplace trends affected by the pandemic shutdown are expected to keep trade secret litigation dockets busy going forward,” I wrote. 

 

Because the notion lifetime employment is now a thing of the past, and workers increasingly view themselves as free agents with loyalty first and foremost to themselves, an increase in these kinds of cases was coming even before the new law. The COVID-19 shutdown magnified this trend.  

 

President Joe Biden favors limiting the use of covenants not to compete by businesses that use these agreements as a blunt tool for protecting proprietary confidential information and several states have limited the ability to enforce noncompete agreements. If this happens on a national level too, I expect businesses will turn to trade secret theft litigation even more to protect confidential information.  

 

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Former Astros GM Demands Trial Over his Sign-Stealing Termination, but Quiet Arbitration Settlement May be Unavoidable

Former Astros general manager Jeff Luhnow is not fading quietly into the footnotes of baseball’s hall of shame. Still unemployed after his termination by the Astros following Major League Baseball’s investigation of the dark arts employed during the team’s World Series-winning season, Luhnow is seeking to air out the circumstances of his termination in a lawsuit filed earlier this week.

The lawsuit charges that the Astros violated the terms of Luhnow’s employment contract and unfairly made him a scapegoat in an attempt to close the books on the sign-stealing scandal and limit lasting damage to the team. Among other things, Luhnow argues he was fired without cause following a “deeply flawed” MLB investigation. Luhnow claims he had no knowledge of the sign-stealing operation, and none of his actions amount to a firing offense as outlined in his contract. The lawsuit seeks the $22 million balance of $31 million in compensation described in the contract he signed in May 2018, along with performance bonuses, profit-sharing interests, legal fees and court costs.

If the facts as alleged are true, Luhnow makes a compelling argument, but his chances for success hinge on the wording of his contract and how the contract language defines firing offenses. So far, the contract has been referenced in the complaint but has not been included in its entirety in the court file.

We’re able to see Luhnow’s allegations thanks to the lawsuit filed in Harris County district court, but the dispute is not likely to stay in the public venue for long. Like most executive employment contracts – especially those involving athletes and entertainers – Luhnow’s contract includes an arbitration clause. In this case, the contract allows MLB Commissioner Rob Manfred to select an arbitrator of his choice to resolve any any dispute behind closed doors.

It’s very difficult to get out of such arbitration provisions, but his legal team has done a good job of alleging potential bias. The lawsuit charges that Luhnow’s unfair punishment and termination were worked out between the team and MLB, so allowing Manfred to select the arbitrator would not result in a fair proceeding. 

“The commissioner vetted potential penalties with [Astros owner Jim Crane], and the two exchanged a series of proposals,” the suit reads. “Those negotiations proved beneficial to Crane and the Astros.

“The commissioner allowed the Astros to keep their 2017 World Series championship, imposed a $5 million fine (a fraction of the revenues Crane had reaped as part of the team’s recent success), and took away four draft picks. He also issued a blanket vindication of Crane, absolving him of any responsibility for failing to supervise his club.

Perhaps Luhlow sees value in the opportunity to rehabilitate his reputation by stating his case in a public filing for all to see, even if those claims are destined for arbitration. At best, it seems that a neutral arbitrator will be chosen, and the case will proceed through arbitration out of the public eye. The likely outcome is a quiet settlement.

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Winning in Litigation Starts with Recognizing what Success Looks Like

I’ve learned over time that sometimes clients have a different version “winning” in litigation than their lawyer. Trial lawyers tend to be consumed with keeping score on issues that don’t matter much to clients. Legal disputes and conflict have a way of sucking up all the oxygen in someone’s life, and it’s not uncommon for those who endure bitter and drawn out litigation to feel unsatisfied when it’s over – even when they have “won.”

I was reminded of that by a thoughtful essay published by my client Ned Scherer reflecting on the conclusion of a drawn-out dispute he’d had with his longtime friend and business partner. The conflict churned through the courts for many, many years and ended recently with the two former friends-turned-adversaries each working to bury the hatchet.

He writes: 

You learn a lot as you get older. Perhaps the saying “youth is wasted on the young” is true. The most important thing I’ve learned is forgiveness. I sometimes fall short of my expectations but have found that holding on to negative thoughts is the ultimate albatross. 
  
I had a serious falling out with my lifelong best friend and business partner about nine years ago. To this day the loss of his friendship and that of his family is a constant reminder of how hubris can destroy the things we treasure most. I wish the Ned Scherer of 2011 had the wisdom and perspective of the Ned Scherer today. The animus we displayed towards each other could easily have been avoided. 
  
I am grateful we have reconciled, at least on a professional level. After a protracted “stalemate” he wrote the attached recommendation. It took courage on his part. When you identify so closely with your career and in an instant it is over, you begin to question everything. The loss for me was overwhelming. 
  
I share this in the hope others in a similar position don’t act as capriciously as I did. At the end of the day life is about family and friends. I lost sight of that. 
  
I don’t know what the future holds for our relationship but I guaranty you, litigation isn’t always the answer. #forgiveness #friendship

Indeed. And that’s why being a truly great trial lawyer is so difficult and rare. There’s a time and place for the civil justice system in resolving intractable disputes, but as trial lawyers it’s important for us to remember that our toolbox contains more than a hammer because not all problems look like nails, and we have to have the vision to see the whole range of these problems and be able to think creatively to solve them in a way that is truly a win from the client’s perspective. 

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Executives Cash in as Companies March Toward Bankruptcy 

Neiman Marcus is the latest company to raise eyebrows with a generous performance- and retention-based compensation plan for a group of executives at a time when the company itself is fighting for survival. 

 

In July, investors, furloughed employees and bankruptcy trustee Henry Hobbs howled at the prospect of a $10 million compensation package for the high-end retailer’s CEO and a group of executives while stores are shuttered and the company’s future is uncertainHobbs argued that the proposed performance goals should represent “challenging incentive-based benchmarks,” while retention pay should be reserved only for employees that have documented job offers in hand. 

 

There’s an opportunity for debate when these packages are filed during bankruptcy proceedings, which is more than can be said for many other companies that are choosing instead to fudge their way around post-Enron era reforms meant to provide more transparency in executive compensation. 

 

The collapse of Enron shined a light on questionable executive compensation practices. In its wake, laws were changed to provide for court scrutiny of bonuses awarded during bankruptcy and limit a business’s ability to rubber stamp executive compensation. So-called retention pay  which is sometimes quite necessary to keep key employees during difficult times – now requires that companies show evidence that an employee has a bona fide job offer in hand before receiving retention pay 

 

But of course, the law has loopholes that allow some to game the system. First, companies may claim the compensation is being rewarded for performance rather than for retention while setting performance goals that are easy to achieve. This effectively takes an end run around the requirement of showing another job offer.   

 

Some companies avoid court accountability altogether by making these payments before filing bankruptcy. The recent hall of shame in this area includes Whiting Petroleum, which awarded $14.6 million in cash bonuses to its executives days before filing for bankruptcy. The board claimed that cash bonuses were appropriate because the fall in the price of oil following the pandemic shutdown made it “virtually impossible” to meet pre-pandemic performance goalsChesapeake Energy and Hertz also paid such bonuses to execs before entering bankruptcy court.  

 

The problem with performance pay is that it’s only fair if it cuts both ways. Executives are happy to reap enormous windfalls via stock-based compensation when a company’s stock is doing well – even if their leadership played no role in the stock’s rise. But when companies are teetering toward bankruptcy, executives see their equity-based compensation rendered worthless. If executives are rewarded for performance even when a company is going down the tubes, it creates a headsIwin, tailsyoulose impression for the rest of us. Parties sometimes sue in an attempt to claw back the executive pay, but that’s rarely a satisfactory remedy. By effectively asking for forgiveness rather than permission, there’s few repercussions for a company beyond the negative hit in the court of public opinion. 

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Unexpected Consequences from the Pandemic Shutdown – A Spike in Whistleblower Complaints

There’s a curious byproduct from the COVID-19 economic crisis and business shutdown – a sharp increase in SEC whistleblower complaints and lawsuits filed by workers against employers. From mid-March to mid-May, the SEC reported approximately 4,000 whistleblower complaints, a 35 percent increase from the previous year.

While we can’t draw a straight line from the historic unemployment numbers caused by the pandemic shutdown to an increase in whistleblower complaints, history tells us that whistleblower claims and claims against businesses tend to increase during economic downturns. We saw this in 2015 when the collapse in oil prices resulted in widespread energy sector layoffs. FLSA wage-and-hour lawsuits filed by employees against businesses increased dramatically then, just as they are now.

Also fueling this trend, many who find themselves suddenly unemployed may feel they have less to lose by speaking out. Even though the law protects whistleblowers from reprisal, there’s a widespread belief among workers that whistleblowers experience retaliation for coming forward with accusations about their employer. This initial spike in filings may just be the first wave because whistleblower claims can be sealed from the public initially.

Struggling unemployed workers may also be enticed by the potential for whistleblower awards or compensation from lawsuits. A provision in the Dodd-Frank Act allows whistleblowers to receive up to 30 percent of the monetary recovery. The SEC recently paid out a record $50 million to a single whistleblower. In all, the commission has paid out more than $500 million, including more than $100 million in this fiscal year alone.

Another explanation is that there may simply be more fraud and waste to report right now – from businesses taking shortcuts to balance the books, to coronavirus-related insider trading, stock scams, and compliance issues like fraudulently filing for federal PPP financial assistance.

Hold on tight. With Federal Reserve Chairman Jerome Powell estimating recently that unemployment will be as high as 6.5 percent at the end of 2021, we could be seeing just the first wave.

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Texas Appellate Court Goes the Extra Mile (literally) in Non-Compete Dispute, Expands Geographic Scope of Injunction

An appellate ruling from the Dallas Fifth Court of Appeals in January is an important read for those who closely follow Texas non-compete litigation.

  

The opinion in Richard Gehrke and Pacific Companies Inc. v Merritt Hawkins and Associates is a rare example of an appellate court not only upholding a trial court’s injunction but also finding that the injunction did not go far enough and significantly extending its geographic reach. 

  

The dispute began when physician recruiting firm Merritt Hawkins and Associates (MWA) moved to enforce its noncompete agreement with Richard Gehrke, a senior salesman and vice president who had joined Pacific Companies and began soliciting former customers. At the trial court, Dallas District Judge Emily Tobolowsky granted an injunction against Gehrke from competing with his former employer but limited the ban to a series of 10-mile radiuses of MHA customers in five states where Gehrke had worked. 

  

On appeal, MHA prevailed by demonstrating that Gehrke was more than just a salesperson and in fact was a vice president who had detailed knowledge of the company’s confidential business plans and trade secrets. The resulting opinion upheld the injunction but also took a rare extra step, finding that the trial court had abused its discretion by limiting the boundaries of the injunction. Where the initial injunction restricted the defendants’ ability to do business within 10-mile radiuses of MHA’s existing clients in five states, the appellate court extended the injunction to cover the entirety of those five states. 

  

The Fifth Court of Appeals opinion indicated that MHA’s need to protect its confidential business plans and trade secrets tipped the balance. Had Gehrke been a lower-level salesperson – rather than an executive – the panel suggested the noncompete would not have been enforceable. 

  

“Covenants not to compete prohibiting solicitation of clients with whom a former salesman had no dealings are unreasonable and unenforceable… However, when an employer seeks to protect its confidential business information in addition to its customer relations, broad non-solicitation restrictions are reasonable… the record demonstrates [Defendant] was much more than a mere salesman–he was an executive and vice president with intimate knowledge of MHA’s confidential business information and trade secrets who also supervised other salesmen.”  

 

With the luxury of 20/20 hindsight, the ruling presents a number of takeaways for executive employment lawyers. Many businesses take a cavalier attitude toward non-competes, thinking they’re difficult to enforce. However, when businesses recruit an executive-level employee from a competitor and indemnify the new hire from potential litigation, the company must go the extra mile to ensure that all concerns at the intersection of non-competes and confidentiality clauses have been thoroughly vetted. 

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