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. 

Posted in CEOs, Complaints Against Executives, Corporate culture, Executive Compensation, Retention agreements, Severance Packages | Tagged , , , | Comments Off on Executives Cash in as Companies March Toward Bankruptcy 

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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Harassment Skeletons in McDonald’s Closet Hasten CEO Steve Easterbrook Downfall 

Even by today’s standards of board oversight in the #MeToo era, the speed of McDonald’s CEO Steve Easterbrook’s fall was breathtaking. In just four short years at the helm, Easterbrook was credited with nearly doubling the company’s share price and helping reposition the chain in the fast food market. But his swift termination last week is just the latest example of how execs are no longer untouchable. The #MeToo movement has brought long-overdue sensitivity to sexual harassment in the workplace, and corporate c-suites are now littered with the careers of executives who engaged in inappropriate relationships. In his case, Easterbrook was cut loose quickly for having a consensual relationship with a subordinate in violation of company policy.

Before this happened, McDonald’s was facing dozens of sexual harassment-related lawsuits and EEOC complaints over claims that the chain allowed a toxic work culture to flourish at its independently owned franchises. Easterbrook appeared to be committed to turning the company’s reputation around. He implemented sexual harassment prevention training throughout the chain, along with a policy forbidding consensual relationships with subordinates. With that as a backdrop, it’s even less of a surprise that the board acted so quickly and decisively. After all, it’s hard to claim an organization takes sexual harassment policies seriously when the CEO is allowed to operate under different rules than the rank and file.

Allowing Easterbrook to remain would have sent a message that the company wasn’t serious. Even if a relationship is consensual – as it reportedly was in this case – when a boss dates a subordinate the power imbalance creates a dynamic that cannot be eliminated. It’s important to remember that a company is not shielded from sexual harassment liability just because a relationship is “consensual.” Legally, the issue is whether the behavior is “unwelcome.”  A supervisor has the power to give the employee unfair advantages—or ruin their career if the relationship unravels.  So sometimes a “consensual” relationship is not necessarily a welcome one.

Although he was cut loose quickly by McDonald’s, he was hardly kicked to the curb. The board categorized his termination as “without cause,” which allows Easterbrook to leave with an eye-popping $37 million in stock awards and roughly $675,000 in severance and health insurance benefits. Makes you wonder how that compares to lowly store managers facing similar accusations.

Posted in CEOs, Complaints Against Executives, Corporate culture, Executive Compensation, Executive contracts, Workplace Romances | Tagged , , , , , , | Comments Off on Harassment Skeletons in McDonald’s Closet Hasten CEO Steve Easterbrook Downfall 

Treatment of Trump-Ukraine Informer Could Have Chilling Effect on Corporate Whistleblowers 

Whistleblowers have a variety of understandable reasons for bravely coming forward – but winning a popularity contest is rarely one of them. After all, they are typically corporate or government insiders alleging fraud and wrongdoing, which tends to render them vulnerable from many sides, including from the powers at be. That’s why the hallmark of whistleblower law has always been to protect whistleblowers from retaliation.

As the Trump-Ukraine whistleblower scandal has many searching for historical comparisons, it’s important to remember that the U.S. government has long made it a priority to protect whistleblowers. The Continental Congress passed the first whistleblower protection law just seven months after the Declaration of Independence was signed, while Honest Abe Lincoln is responsible for the False Claims Act, which empowers whistleblowers to investigate and prosecute fraud and waste in the government, even when the government chooses not to intervene.

Despite last week’s sworn testimony from Acting Director of National Intelligence Joseph McGuire defending the informer’s conduct and confirming that the whistleblower had precisely followed the steps required by law, a chorus of powerful second-guessers has begun doubting the complaint and calling for a public outing and punishment – something that would alarm many lawyers with experience handling whistleblower claims.  Normally, behavior like this is strong evidence for whistleblowers claiming retaliation and demonstrates a desire to cover up the exposed wrongdoing. But here, undoubtedly because those calling for such punishment are fighting a political battle, not a legal one, the threats are explicit.

President Trump even joined in, suggesting that anyone who shared information that wound up in the whistleblower complaint is “close to a spy.”

“You know what we used to do in the old days when we were smart with spies and treason, right?” the president mused. “We used to handle it a little differently than we do now.”

Meanwhile, many reporters and political operatives are doing their best gumshoe work trying to unmask the informer despite concern that such reporting was putting his or her life in danger.

Writes Politico contributor Tom Mueller, author of the forthcoming book “Crisis of Conscience: Whistleblowing in the Age of Fraud”: Since the beginning of whistleblowing in America, government whistleblowers who put their name and face on their revelations have not fared well, particularly those from the intelligence community. They are typically tarred in the media, often prosecuted and almost inevitably fired and blackballed from further government service.

It’s not uncommon at all for corporate whistleblowers to be treated with a similar degree of suspicion and threats of reprisal. This sadly predictable treatment explains why so many people are reluctant to assume the whistleblower role in corporate America, despite Sarbanes-Oxley protections that were created to protect whistleblowers following Enron.

Future whistleblowers are watching. Let’s hope these legal protections survive this latest test.

Posted in Dodd-Frank, Fiduciary Duty, Legal, Litigation, Sarbanes-Oxley, Whistleblowers | Tagged , , , , , , | Comments Off on Treatment of Trump-Ukraine Informer Could Have Chilling Effect on Corporate Whistleblowers 

As Patent Litigation Wanes, Businesses Increasingly Turn to Trade Secret Law to Protect Digital Assets

The popular dating app platform Tinder and its parent company Match recently succeeded in having a patent infringement lawsuit tossed. Like many companies accused of infringement today, it accomplished this by going on the offensive and challenging the fundamental validity of the patents they were accused of stealing.

Tinder’s success against Texas-based NetSoc is just the latest example of how the Supreme Court’s 2014 Alice ruling has upended patent infringement litigation. It’s also Exhibit A for why trade secret theft litigation is on the rise as the number of patent lawsuits falls.

In the NetSoc v Match case, U.S. District Judge David C. Godbey ruled in a six-page opinion that the claims in NetSoc’s patent rely on conventional technology and fall well below the threshold of what the Federal Circuit has said comprises an inventive concept.

The high bar that many technology patents now face as a result of the Alice opinion is one reason why patent infringement litigation has dropped three years straight. Because patents are public by design, the risk that comes with having a patent deemed invalid extends far beyond any particular lawsuit. If patented ideas, processes or technology are later found to be invalid, you have lost exclusive rights to it and have essentially given up the crown jewels. It’s not an option to retroactively seek trade secret protection because the secret is already out.

When considering patent vs. trade secret protection, the risk-reward analysis is shifting in many cases because defenses that have turned the tables on patent infringement litigation do not apply to claims of trade secret theft. The central issues revolve around showing a judge or jury that the trade secrets are commercially valuable, that the business has taken measures to protect their secrecy, and that the trade secret cannot be ferreted out independently through tactics like reverse engineering.

As a result, trade secret litigation has increased threefold since passage of the Defend Trade Secrets Act of 2016 created a federal cause of action for trade secret theft claims.

Put simply, there are strong arguments for businesses to protect their ideas and technology as trade secrets rather than pursuing the long, expensive and increasingly risky route to obtaining a patent.

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Backlash Builds for Noncompetes

For a generation of workers, noncompete agreements have steadily crept into more and more facets of the working world to the point that even low- and middle-wage earners are increasingly being asked to sign the agreements as a condition of employment.

But as the labor market continues to tighten and studies show that noncompete agreements have a negative effect on wages, mobility and innovation, a movement is building to reign in the overuse of these contracts.

An analysis by the Wall Street Journal notes that several states have recently passed or are in the process of passing laws that make noncompetes unenforceable for certain workers. Washington state passed a law last month excluding workers making less than $100,000, and Massachusetts tightened conditions for noncompetes, while Hawaii banned noncompetes from technology jobs in 2015. Similar bills are in the works in New Hampshire, Pennsylvania and Vermont.

Writes the Wall Street Journal:

A national backlash is building against employers that make such movement harder with noncompete agreements that bar departing employees from taking jobs with industry competitors for certain periods of time. That’s good news for workers, because eliminating barriers to job-hopping could help stir the kind of wage growth workers haven’t seen since before the last recession. … A low unemployment rate might help shift that balance of power back toward workers.

This is an important topic for Texas, where employers in the oil patch routinely use these contracts. The overuse of these agreements is an issue I’ve written about before.

While the trend against noncompetes is growing nationally, legislative and judicial resistance to these agreements in Texas has not yet surfaced to the same degree. Texas venues are likely to continue to enforce reasonable noncompetes – ones that that do not go beyond an employer’s legitimate business interest or prevent employees from working with a competitor. A narrow, well-crafted noncompete designed to protect an employer’s business interest should be fine for the foreseeable future. Along with confidentiality agreements, energy companies operating in Texas are likely to continue reaching for these tools when appropriate.

Clearly, there’s a time and place for noncompete agreements for high-level employees and those with access to proprietary information in an increasingly knowledge-based economy. But businesses are hurting themselves and the larger regional economy when they limit the choice and mobility of workers. Employers lose out on things like creativity, enthusiasm and innovation when their employees feel like indentured laborers.

Posted in Covenants Not to Compete, Non-Competes, Restraint of trade, Retention agreements, Severance Packages, Uniform Trade Secrets Act | Tagged , , , , , , , , , , , , | Comments Off on Backlash Builds for Noncompetes

For Execs Confronting Extortion Shakedowns, Few Reasons to Participate

A juicy corporate scandal has a unique ability to wipe away billions from a corporation’s market cap with frightening speed, so it’s no wonder that executives are prone to quake when faced with the prospect of responding to the threat of negative PR.

That fear is understandable, but it’s also what makes business leaders a common target for extortion threats. Recent high-profile cases involving Nike and Amazon demonstrate that it’s simply not worth it to engage with a bully. Likewise, individuals trying to monetize such information should think long and hard about the legal way to blow the whistle before going down a road that could lead to criminal charges and prison time.

The Nike case unfolded with surprising speed before it backfired spectacularly for TV lawyer Michael Avenatti, according to investigators.

Writes the Wall Street Journal:

[Avenatti] walked into a March 21 meeting in New York with lawyers for Nike Inc. and threatened to expose what he said was wrongdoing by the apparel giant. Unbeknown to him, Nike’s lawyers were recording the profanity-laden encounter for federal investigators. Days later, authorities arrested Mr. Avenatti and charged him with attempting to extort more than $20 million from the sports-apparel giant. 

 In the case of Jeff Bezos, the Amazon CEO was reportedly threatened by National Enquirer owner David Pecker with the publication of embarrassing photos and communications with his lover unless he put out a false statement recanting his prior statements that AMI’s coverage of him had been politically motivated. Instead, Bezos bravely exposed the scheme.

Having been on both sides of the table on this, it’s clear that Bezos and Nike did the right thing in these cases. It’s also clear that most people are inclined to do the same and expose corruption when faced with such threats.  While sometimes the urge to comply with such threats and demands is enormous – to avoid negative market-moving news in Nike’s case and to avoid personal embarrassment in Bezos’ case.  But beyond being the right thing to do ethically, there are plenty of other reasons for execs to take such a position in the face of extortion threats. No. 1, once you pay off a bully, that person is not likely to ever go away completely. More often than not, they only return to ask for more.

And frankly, even if subconsciously, most companies realize this.  So, on the other side of the table, an executive trying to negotiate a severance should be aware that extortion is not just wrong, unethical, and illegal; it is also rarely effective.   No one likes to be extorted and few will comply.   Rather, they usually prefer to turn the table as Nike and Bezos did.  Of course, it helps to have good and ethical counsel in this regard to prevent the executive from making a colossal misstep. Because, in addition to the risk of criminal charges and prison time, the executive, and their lawyer if they participate in the scheme, run the risk of losing whistleblower protections and potential monetary payouts if they try to extort before going to the government.

The takeaway to remember: The carrot is always better than the stick, especially if the stick is dirty.

Posted in CEOs, Complaints Against Executives, Confidential Information, Executive contracts, Executive Management Style, Whistleblowers | Tagged , , , , , , , , | Comments Off on For Execs Confronting Extortion Shakedowns, Few Reasons to Participate