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The In-House Advisor

Published by Shepard Davidson & Renee Inomata

In-House Counsel Need to Think Like a Litigator When Drafting Contracts

By Shep Davidson on Posted in Contracts

Memorializing an agreement in a written contract serves two primary purposes.  First and foremost, a written contract should clearly set out the deal terms so that there is little or no chance of a misunderstanding as to what the parties’ rights and obligations are.  Further, to be sure that they get the deal terms right, in-house counsel often turn to business people involved in the deal because they are the experts on the deal terms. 

The second reason to have a written contract is to set out the “Rules of Engagement” that will apply if a dispute arises between the parties.  Such Rules, on which I have written in other posts, include choice of law provisions, forum selection clauses, liquidated damages provisions, and arbitration clauses, just to name a few.  Surprisingly, however, and in contrast to in-house counsels’ willingness to consult with business people about the deal terms in a contract, in-house counsel often are reluctant to consult with experts on the Rules of Engagement, i.e., experienced litigators.  Whether the reason for this is a psychological aversion to placing too much emphasis on what might go wrong with a deal before it is fully in place, a concern for legal fees, or some other reason, the fact remains that even a slight variation in one or more dispute-related clauses in a contract could have an enormous impact should a dispute ever arise.

I suggest that the benefits of consulting with an experienced litigator in connection with almost any contract will far outweigh the cost.  Indeed, in many instances a litigator will not have to spend very much time issue-spotting and/or advising on any dispute-related provisions.  If in-house counsel really do not want to do this, however, they at least need to think like a litigator when negotiating and drafting such provisions.  This involves trying to imagine as many scenarios as you can involving the deal falling apart and/or how one party or the other could breach its obligations under the contract.  Among other things, doing this might reveal that: (i) it is advantageous for the law governing the contract to be that of the state where the other company resides; (ii) there is a big risk to your company if mediation is required before a lawsuit can be filed; or (iii) it is worth agreeing to the other party’s desire to have a liquidated damages provision because a court never would enforce what has been proposed.  

Thinking like a litigator does not mean: (i) stubbornly holding out for every little advantage possible; (ii) refusing to compromise; or (iii) building into the contract remedies for every conceivable type of breach, no matter how unlikely.  Negotiating favorable Rules of Engagement, just like negotiating favorable deal terms, always requires balancing the risk of not having your preferred wording with practical and business realities, as well as your company’s desire/need to ensure that a business deal is consummated in a formal contract.

Let’s face it, the percentage of contracts that ultimately end up with some sort of dispute that has to be resolved through litigation or some other formal process is far from de minimus.  Thus, while in-house counsel may not enjoy thinking like a litigator when drafting contracts, doing so can play a critical role in placing your company in a much stronger position if a dispute does arise.

Gratuitous Payments Cannot Be Re-Cast as Accrued Vacation Pay Required by Massachusetts Wage Act

By Renee Inomata on Posted in Wage & Hour

A favorite saying of my mentor and colleague in the Labor and Employment Group here at Burns & Levinson is “no good deed goes unpunished.”  Over my years of practice, I have found that this phrase oft comes to mind when an employer just wants to “do the right thing” or wants to be generous to an employee by giving the employee money, or time off, to which the employee is not entitled.  The phrase may be one that is recently being muttered around Malden City Hall, in light of the Massachusetts Supreme Judicial Court’s (SJC) recent decision in Dixon v. City of Malden. 

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“Work Spouse Privilege” Recognized by Massachusetts Supreme Judicial Court

By Shep Davidson on Posted in Uncategorized

In a closely watched case, Ayeprel v. Phules, the Supreme Judicial Court of Massachusetts formally recognized that confidential communications between so-called “work spouses” may be privileged.  The 5-4 decision makes Massachusetts the first state in the country to adopt such a privilege. 

The genesis of this ruling dates back to 2008, when Marcus Ayeprel was accused through an anonymous posting on his company’s intranet site of having embezzled funds from the company’s March Madness office pool.  Believing that his colleague, Judith Phules, was behind the allegations of embezzlement, Ayeprel sued Phules for defamation and intentional infliction of emotional distress.  Because Ayeprel knew that Phules had a particularly close relationship with another co-worker, Sidney Finch, Ayeprel sought to depose Finch to uncover whether Phules had admitted to him her involvement in the intranet posting.  While Finch admitted generally that he and Phules had discussed what appeared to be discrepancies in the March Madness pool proceeds, Finch refused to divulge the substance of his conversations with Phules.  When pressed to justify his objection, Finch’s counsel said that the conversations were privileged because Finch and Phules were “work spouses who intended such communications to remain in confidence.”

Ayeprel moved to compel disclosure of the Phules-Finch conversations, and the Superior Court ordered Finch to reveal them at a second deposition.  Before that deposition took place, however, Phules appealed, and the Supreme Judicial Court took the issue for its own direct appellate review.  The SJC then reversed the ruling of the Superior Court based on the following reasoning: 

Many employees share confidential information related to their jobs and/or work environment with a work-place confidant whom they trust never to repeat what is communicated between the two.  Today, we not only acknowledge that such ‘work spouse’ relationships exist, but we also hold that confidential communications between work spouses are privileged from disclosure unless both agree to waive that privilege.

As the case ultimately makes clear, the work spouse privilege applies only to verbal communications:

  1. Between two co-workers who have a purely platonic relationship;
  2. Where the subject matter of the communication is work-related; and
  3. If the co-workers who are parties to the communication have a history of exchanging confidential information about their jobs, their employer or working environment for a period of at least 6 months.

While Ayeprel involved work spouses of the opposite sex, the decision does not hinge on this fact, and experts agree that same-sex work spouses could invoke the new privilege as well.

So what can or should in-house counsel do in light of the formal recognition of the work spouse privilege?  Some have suggested that companies should ask employees to formally declare who, if anyone, is their work spouse so that employers at least can know which communications might be privileged and avoid any risk of what has become known as “work spouse polygamy.”  Others, such as civil rights advocates in my office, insist that any such mandate would violate the Massachusetts Constitution. 

This much is for sure: work spouses are here to stay – at least, that is, until they get work divorces….

New FTC Advertising Guidelines Are Worth a Review

By Shep Davidson on Posted in Compliance, Policies & Notices

In a recent post, I discussed how a company could be liable for referencing a third-party’s unbiased endorsement if, unbeknownst to that company, the basis for the endorsement turned out to be unjustified.  In another advertising-related development last week, the Federal Trade Commission (FTC) issued new guidelines: How to Make Effective Disclosures in Digital Advertising. 

One key point the FTC makes in the new guidelines is that when a disclosure is necessary to ensure that an ad is not misleading or unfair, the disclosure must be clear and conspicuous.  Recognizing that this can be particularly challenging when ads are viewed on mobile devices such as smart phones and tablets and/or in the context of other emerging technologies, the FTC explains in detail how the following five circumstances affect the clarity and conspicuousness of disclosures when advertisements are viewed on non-traditional media:

  1. Proximity and Placement
  2. Prominence
  3. Distracting Factors in Ads
  4. Repetition
  5. Multimedia Messages and Campaigns

Although the entire publication is less than 25 pages of text (including a number of useful examples), you can review a nice summary of the new guidelines in a post in the Covington and Burling blog, Inside Privacy.  

In-house counsel should be aware that publishing misleading advertisements can lead to consequences that go beyond merely being liable for damages, particularly in jurisdictions that have statutes commonly referred to as “Little FTC Acts,” i.e., state laws that parallel the Federal FTC Act.  Many of these statutes not only allow the state Attorney General to impose fines and penalties, but some, like Massachusetts’ M.G.L. c. 93A, allow a private right of action by a consumer who has been subjected to deceptive or unfair acts or practices.  Further, Chapter 93A not only entitles a prevailing party to recover legal fees, but it also allows for double or even treble damages, if the deceptive or unfair act or practice at issue was perpetrated knowingly or willfully.  Chapter 93A even has a separate section that allows businesses (as opposed to simply consumers) to bring claims against other businesses.

In sum, in-house counsel whose companies advertise on-line or digitally should review the new FTC guidelines and ensure that any business people involved with advertising also familiarize themselves with those guidelines.  Likewise, whether or not your company engages in formal advertising, it is a good idea to learn about any Little FTC Acts on the books in all jurisdictions in which your company does business.

3 Keys to Drafting Commission Plans to Avoid Wage Act Violations

By Renee Inomata on Posted in Wage & Hour

As I mentioned in some of my prior posts, the Massachusetts Weekly Payment of Wages Act (“Wage Act”) poses many challenges to employers due, in part, to the vagueness of its terms, the strict liability it imposes on employers (and individuals having management of the company), and the threat of treble damages and attorneys’ fees.  One thing is clear, however: commissions are considered “wages” under the Wage Act if they are “definitely determinable” and have become “due and payable.”  While many in-house counsel and employers are aware of this, they mistakenly assume that their company can avoid violating the Wage Act if the company’s commission plan states that commissions are payable: (a) only if the employee is employed at the time the employer decides to pay them, or (b) only at the employer’s discretion.  As Prudential Insurance Company of America recently found out, however, simply including such a clause may not provide enough protection if the plan does not clearly address when commissions are “definitely determinable” and when they are “due and payable.”

Prudential had an elaborate nine-page document outlining its Regional Coordinators’ Sales Compensation Plan.  One of its long-time employees, Christopher McAleer, claimed that he was terminated from his employment and was owed commissions.  Prudential contended that, because the Compensation Plan granted Prudential complete discretion to interpret and calculate payments under the Compensation Plan, including determining whether McAleer was eligible for commissions, his commissions were not arithmetically determinable and, therefore, not “wages” under the Wage Act.  Judge Woodlock of the Federal District Court disagreed, however, noting that, while Prudential reserved discretion over many aspects of the commissions (even including the calculations of commissions and whether to withhold commission payments under the Plan from an employee it deemed was ineligible or who was terminated for cause), the commissions were “not themselves discretionary.”  In other words, Prudential did not have discretion to not award commissions at all.  (In fact, the Court noted that, had Prudential retained such broad discretion, the Plan would have been rendered meaningless.)

Prudential could have avoided its current predicament, and in-house counsel (and employers without in-house counsel) should keep the following three concepts in mind when reviewing their commission plans:

  1. The commission plan should be clear as to when any commission is “definitely determinable” (commonly referred to as “earned”).  Too often, the only focus in plans is on when commissions are payable.  Yet, since commissions are “due and payable” based on when they are “earned,” it is best to be explicit as to when a commission is “earned.”
  2. Once a commission is “earned” by the employee, the employer will likely be required to pay that amount, even if the employee is terminated or quits before the company generally pays out commissions.  If the commission has been earned, the Wage Act requires that all accrued wages be paid on an employee’s last day, if the employer terminates her employment (or on the next payroll day, if an employee resigns).  This provision of the Wage Act is likely to trump any provision in a compensation plan that the amount is not payable until a much later date.
  3. Be clear when an advance of unearned commissions is being provided to ensure that the employee does not leave employment with overpayments.  This also requires careful consideration on how an employer can claw-back overpayments, as offsets against final paychecks of earned wages may be a violation of the Wage Act itself.

Although there is no need to draft a lengthy commission plan setting forth every conceivable trigger of when a commission is “earned,” checking existing commission plans for holes –like the one that Prudential had in its plan – may help avoid surprises with potentially devastating consequences.

Limiting Intra-Company Conversations About Disputes is Critical

By Shep Davidson on Posted in Attorney-Client Privilege, Pre-Litigation Considerations

When an employee talks to in-house or outside counsel for the purpose of obtaining legal advice for the company, that communication will be privileged and can be protected from disclosure.  Likewise, when in-house counsel is meeting with several employees at the same time for the purpose of gathering information to be used for legal advice, the communication that takes place will be privileged.

Notwithstanding the fact that the attorney-client privilege applies to communications between a lawyer and a client, many people still believe that communications amongst employees are protectable even if no attorney is present, as long as they are discussing an ongoing or potential litigation.  That is a misguided notion, and looking at the facts of a 4th Circuit case, US v. Tedder, reveals how dangerous having such a misconception can be. Continue Reading

Be Aware of More Aggressive Enforcement of Equal Pay

By Renee Inomata on Posted in Compliance, Policies & Notices

Gender equality wagesThe Director of the Office of Federal Contract Compliance Programs (OFCCP), Patricia A. Shiu, just announced that prior voluntary guidelines and compliance standards for federal contractors and subcontractors to comply with equal pay obligations will be rescinded, effective February 28, 2013.  The OFCCP will be instituting new procedures which, in effect, would broaden the scope of OFCCP’s investigations and allow OFCCP to “use every enforcement tool at its disposal to combat pay discrimination.”

In connection with its new efforts to remedy pay discrimination, the OFCCP issued Directive 307, setting forth the procedures for OFCCP contractors to review contractor compensation systems and practices.  The OFCCP also issued helpful “FAQs” to assist in navigating through the Directive and will be providing webinars to assist contractors with compliance.

We have a few of our own FAQs which may be helpful to employers and in-house counsel:

Q:  Does this apply to my company?

A:  If you are an employer with federal service or supply contracts or subcontracts that exceed $10,000 or that will (or can reasonably be expected to) accumulate to more than $10,000 in any 12-month period, you are required to comply with Executive Order 11246, Section 503 of the Rehabilitation Act of 1973, and the Vietnam Era Veterans’ Readjustment Assistance Act of 1974.  These three laws require that federal contractors and subcontractors not discriminate in employment on the basis of sex, race, color, religion, national origin, disability or status as a protected veteran.  (Of course, state laws may require that an employer not discriminate based on a host of other protected classes.)  Equal pay is just one form of discrimination protected by these laws.  If you have 50 or more employees and have federal service or supply contracts or subcontracts that exceed $50,000, then you are further required to have an Affirmative Action Plan. 

Q:  How will I know my company is being investigated?

A:  Usually, the OFCCP will send a Scheduling Letter to the employer requesting compensation and other data for a “desk audit.”  Based on the new directive, the OFCCP will analyze the data under the same standards as are applied in claims brought under other discrimination laws, rather than limiting their analysis to whether or not the employer had complied with previously issued OFCCP compliance standards or voluntary guidelines.

Q:  If my company is found to have discriminated, what are the penalties?

A:  Remedies for discrimination under Executive Order 11246, Section 503 of the Rehabilitation Act of 1973, and the Vietnam Era Veterans’ Readjustment Assistance Act of 1974 may include backpay and benefits; frontpay salary adjustments; non-discrimination training requirements; modifications in hiring, compensation, record-keeping and other policies and practices; providing training opportunities, work assignments, promotions or job placements and other affirmative action.

Taking proactive measures now, such as voluntarily conducting self-audits and taking measures to correct discovered noncompliance, is likely to place employers in a better position if the OFCCP comes knocking on your door.

Re-Publishing a Third-Party’s Unbiased Endorsement Can be Perilous

By Shep Davidson on Posted in Pre-Litigation Considerations

It should come as no surprise that making a false statement about a competitor’s product or service is actionable.  Similarly, albeit slightly less obvious, repeating a false statement that someone else makes about a competitor also may be actionable if you have reason to believe that the statement is false or if you recklessly repeat it without making any effort to determine if that statement is true or false.  In Genzyme Corp. v. Shire Human Genetic Therapies, Inc., however, the District of Massachusetts took the concept of holding someone liable for republishing another’s unbiased statement to a whole new level. 

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6 Tips for Drafting Offer Letters

By Renee Inomata on Posted in Contracts, Hiring

Just as in romance, employer-employee relationships often are at their best in the courting stage.  During the after-glow of an initial hire, many employers wish to make new employees feel welcome by sending confirmatory offer letters.  Yet, in that warm and fuzzy moment, employers also should keep in mind that they may be binding themselves to certain obligations to which they never intended to be bound. 

To minimize regret when the employer-employee relationship goes sour, here are my top six tips of things to avoid in offer letters:

  1. If you intend for the employee to actually stay on for a set period of time, the term may be included, but be sure to couch the term as “anticipated term” and allow yourself the ability to terminate the relationship before the end of the term.  If the employment is “at-will,” specifically state “your employment is at-will, which means that you or the company may terminate your employment at any time for any reason or no reason at all.”
  2. Avoid stating compensation as an annual salary.  For example, state that the compensation to be provided an employee is $X per week, which is the equivalent of $Y annualized.  A promise of a yearly salary may bind an employer to an implied employment term of at least one year, which may result in a claim that an employee is entitled to one year’s worth of compensation even if he is terminated mid-year for misconduct.
  3. Do not use terms such as “guaranteed” or “entitled,” unless they are preceded with the word “not.”  Similarly, avoid phrases such as “shall be paid” or “shall receive” related to compensation.  Under Massachusetts law, and many other states’ laws, once compensation is deemed earned, or when an employee has a legitimate expectation of being entitled to certain compensation, it may be considered an accrued wage which must be paid.
  4. While it is perfectly fine to state the title of the job and the direct reporting arrangement contemplated at the time of hire, avoid describing the employee’s job duties and obligations in anything other than general terms.  For example, the letter may state “your job duties and obligations are as generally described in your interview and will be described in more detail upon commencement of employment.  The job duties and obligations may change from time to time as determined by the Company.”  Alternatively, it may be best to state “initially, your job title is expected to be _____,” or “initially, you will be expected to perform _____ duties.”
  5. Identify any contingencies of the offer, such as executing a nondisclosure agreement, receiving appropriate papers to satisfy immigration requirements or satisfactorily completing drug testing.  (Of course, it is just as important not to allow the employee to commence work if a contingency has not been met.)
  6. If an employee is required to sign and “accept” the terms of the offer letter, then it may be a binding contract.  To avoid this risk, plainly state that “this letter is for information and guidance purposes only and is not intended to be a binding contract.” 

Because offer letters may be deemed to be contracts of employment, employers need to be careful in their drafting.  If an offer letter is necessary, review the wording carefully to ensure that what is not intended is not set forth in the offer letter.  If the employer intends to bind the employee or the company to certain obligations, then a properly drafted employment agreement is often the better practice to avoid unintended liabilities and the mistaken belief that the offer letter is not a legally binding document.