Corporate Law

Connecticut Supreme Court Protects Corporate and Personal Assets By Denying Reverse Piercing of the Corporate Veil

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Commissioner of Environmental Protection, et al., v. State Five Industrial Park, Inc., et al, 304 Conn. 128,  37 A.3d 724 (2012)

In a case before the Supreme Court of Connecticut,  State Five Industrial Park, Inc., (“State Five”) and Jean L. Farricielli (“Jean”) appealed a trial court judgment holding them liable for a $3.8 million judgment rendered in 2001 against Jean’s husband, Joseph J. Farricielli (“Joseph”) and five corporations (assets) that he owned and/or controlled.

The Supreme Court transferred the case from the appellate division, reversed the lower court judgment and remanded the case with direction to render judgment in favor of State Five. Although the Supreme Court concluded that the facts of this specific case did not support the application of reverse veil piercing, the court refused to address whether that doctrine should be disallowed in Connecticut under any and all circumstances.

Commissioner of Environmental Protection’s Case Against State Five

In 1999, the Commissioner of Environmental Protection (“commissioner”), the town of Hamden (“town”) and the town’s zoning enforcement officer (collectively, “the plaintiffs”) brought an environmental enforcement action against Joseph and the five corporations that he owned and/or controlled alleging egregious violations of state solid waste disposal statutes.

A bench trial took place in 2000 and, in 2001, a memorandum of decision was issued awarding the plaintiffs all relief sought, including civil penalties for each day of each alleged violation, which totaled approximately $3.8 million.  Joseph appealed and, in 2004, the Supreme Court affirmed the trial court judgment against him and the five corporations.

In 2005, the civil penalties of approximately $3.8 million were still largely unpaid; therefore, the plaintiffs initiated the present action.  They argued that principles of reverse piercing of the corporate veil should be applied to hold State Five liable for the 2001 judgment against Joseph and that principles of traditional piercing of the corporate veil should be applied thereafter to hold Jean liable for the resulting judgment against State Five.

The Court’s Ruling

The trial court concluded that reverse veil piercing was warranted because Joseph used State Five to hide assets and used State Five funds to pay thousands of dollars in personal expenses; both actions complicated the plaintiffs’ normal efforts to collect their judgment. Once Joseph’s liability was imputed to State Five, the trial court concluded that traditional veil piercing principles applied to Jean, who was the majority shareholder in State Five.  Therefore, the lower court held both State Five and Jean liable for the 2001 judgment against Joseph, plus pre-judgment interest on the outstanding amount, for a total liability of over $4.1 million.

The appeal raised the question of whether the equitable doctrine of reverse piercing of the corporate veil is a viable remedy in Connecticut.  State Five and Jean argued that the trial court improperly applied veil piercing principles because that remedy should not be recognized in Connecticut under any circumstances.  In the alternative, State Five and Jean argued that the trial court should not have applied veil piercing principles given the facts of the instant case.

A corporation generally is a distinct legal entity, and stockholders are not personally liable for the acts and obligations of the corporation.  Saphir v. Neustadt, 177 Conn. 191, 209, 413 A.2d 843 (1979).  This corporate shield of liability is pierced in only exceptional circumstances, such as where the corporation is a “mere shell, serving no legitimate purpose, and used primarily as an intermediary to perpetuate fraud or promote injustice.”  Angelo Tomasso, Inc. v. Armor Construction & Paving, Inc., 187 Conn. 544, 557, 447 A.2d 406 (1982). (internal quotation marks omitted.)

Veil Piercing vs. Reverse Veil Piercing

In veil piercing cases, the party seeking to disregard the corporate form bears the burden of proving that there is a basis to do so.  In a traditional veil piercing case, the corporate veil shields a majority shareholder or other corporate insider who is abusing the corporate fiction in order to perpetuate a wrong; therefore, the claimant requests that the court disregard the corporate form in order to reach this individual’s assets. C.F. Trust, Inc. v. First Flight, L.P., 266 Va. 3, 10, 580 S.E.2d 806 (2003).

In a reverse veil piercing case, however, the corporate form protects the corporation which gets used by a dominant shareholder or other corporate insider to perpetuate a fraud or defeat a rightful claim of an outsider; therefore, the claimant seeks to reach the assets of the corporation to satisfy claims or a judgment obtained against the corporate insider.  Tomasso, 187 Conn. at 557, 447 A.2d 406.

What to Consider Before Implementing A Reverse Veil Piercing

Three specific concerns have been identified in the distinction between these two doctrines:

  1. Reverse piercing bypasses normal judgment collection procedures, prejudicing the rightful creditors of the corporation who relied on the entity’s separate corporate existence
  2. Reverse piercing prejudices the rights of the non-culpable shareholders
  3. When the judgment creditor is a shareholder or other insider, their other legal remedies are potentially available to obviate the need for the more drastic remedy of corporate disregard.

Therefore, a court contemplating reverse veil piercing must weigh the impact of this action on innocent investors and creditors, and consider the availability of other remedies to satisfy the debt. C.F. Trust, 266 Va. at 12–13, 580 S.E.2d 806.

The Identity and the Instrumentality Rule

In Connecticut jurisprudence, two rules form the legal standard for the application of traditional veil piercing doctrine and reverse veil piercing doctrine:  the identity rule and the instrumentality rule.  The instrumentality rule requires proof of three elements:

  1. Control, equivalent to the complete domination of finances, policy and business practice such that the corporate entity had no separate mind, will or existence of its own with respect to the contested transaction
  2. That such control was used to commit fraud or wrong, to perpetrate the violation of a statutory or other positive legal duty, or a dishonest or unjust act in contravention of the plaintiff’s legal rights
  3. That such control and breach of duty proximately caused the injury or unjust loss complained of.  Naples v. Keystone Building & Development Corp., 295 Conn. 214, 232, 990 A.2d 326 (2010) (internal quotation marks omitted.)

The identity rule requires that the plaintiff show that there was such a unity of interest and ownership between the shareholder and the corporation that the independence of the corporation had in effect ceased or had never begun, and adhering to the legal fiction of separate identity would serve only to defeat justice and equity by permitting the economic entity to escape liability. Id.

The Trial Court’s Decision

Whether the circumstances of a particular case justify the piercing of the corporate veil presents a question of fact.  Therefore, the Supreme Court defers to the trial court decision to pierce the corporate veil, as well as any subsidiary factual findings, unless these factual findings are clearly erroneous, which means that either the record contains no evidence to support the findings or the reviewing court is left with the “definite and firm conviction” that a mistake has been made.

The Supreme Court concluded that, in the present matter, the trial court should not have applied reverse veil piercing, regardless of whether it is a viable theory in Connecticut.  Certain subsidiary factual findings related to crucial factors that necessarily render reverse veil piercing inequitable lacked evidentiary support and, therefore, were clearly erroneous.  Furthermore, after reviewing the trial court’s application of the instrumentality and identity rules, the Supreme Court was left with the definite and firm conviction that a mistake has been made.

The Supreme Court determined that the trial court did not adequately ensure that third party creditors did not exist or, if they did, that these creditors would not be harmed by applying reverse veil piercing principles that made all of the corporation’s assets available to satisfy the 2001 judgment.  Permitting direct attachment of corporate assets to satisfy an individual insider’s debt undermines corporate viability, reasonably relied upon by creditors, with no forewarning.

Wrongful Application of a Reverse Veil Piercing

Testimony and printed statements in evidence at trial indicated that State Five had a line of credit with a local bank; however, the trial court concluded that this bank would not be harmed by the reverse piercing because the line of credit had been paid off in 2007 and the line was secured with Jean’s personal assets rather than corporate property.

The Supreme Court determined that this finding was clearly erroneous because the record was silent as to the outstanding balance on the line of credit as of the date of trial and the precedent in Connecticut is that a lender in this context extends credit in reasonable reliance on the existence of both a viable borrower in possession of assets and the additional security provided by a secondary obligor.

Evidence that certain State Five shareholders were not involved in running the corporation, making necessary business decisions or suggesting changes did not support the trial court’s factual finding that these shareholders were complicit in Joseph’s activities.  Because the plaintiffs did not establish that these shareholders were not innocent, the Supreme Court determined that it was improper for the trial court to apply reverse piercing without regard to whether the interests of these individuals would be impacted.

Fulfillment of the Instrumentality Rule

Finally, the Supreme Court was convinced that the trial court improperly concluded that the equitable remedy was warranted in this case.  To justify any veil piercing action pursuant to the instrumentality rule, it must be shown that the insider debtor exercised complete control over the subject corporation and used such control “to commit fraud or wrong, to perpetrate the violation of a statutory or other positive legal duty, or a dishonest or unjust act in contravention of [the plaintiffs’] legal rights; and … that the aforesaid control and breach of duty … proximately cause[d] the injury or unjust loss complained of.” Tomasso, 187 Conn. at 553, 447 A.2d 406.

To justify imposing the entire obligation of the 2001 judgment on State Five, the plaintiffs needed to show that Joseph exercised his control over State Five to divert or hide assets that belonged to him personally or to his corporations and that otherwise would have been available to satisfy that judgment.

Additionally, the plaintiffs needed to demonstrate that these maneuvers were the proximate cause of the plaintiffs’ inability to collect $3.8 million that it otherwise would have been able to recover. The Supreme Court found that the trial court’s analysis failed to specifically establish the necessary connection between Joseph’s improper actions in relation to State Five and the plaintiffs’ inability to collect on the 2001 judgment.

Fulfillment of the Identity Rule

The Supreme Court found that the identity rule was not satisfied in the present case.  It was neither unjust nor inequitable to permit State Five to avoid liability for the judgment against Joseph and his other corporations when State Five received little in the way of assets from those parties and much in the way of liabilities.  Additionally, in paying personal expenses for Joseph, State Five has been caused to pay other expenses for which it is not legally obligated.

The Supreme Court’s Final Decision

Because the Supreme Court concluded that the trial court improperly applied reverse veil piercing, Joseph’s liability for the 2001 judgment could not be imputed to State Five.  Therefore, there was no liability to transfer from State Five to Jean.

The Supreme Court had a definite and firm conviction that a mistake has been made because the trial court’s application of the equitable remedy of reverse veil piercing was based in part on unsupported factual findings, and the court employed improper reasoning when analyzing other facts.  Therefore, the Supreme Court set aside the trial court’s factual determinations as clearly erroneous, reversed the lower court judgment, and remanded the case with direction to render judgment in favor of State Five and Jean Farricielli.

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If you have any questions relating to the content above, or any corporate law matter, please do not hesitate to contact Joseph Maya and the other experienced attorneys at Maya Murphy, P.C. at (203) 221-3100 or JMaya@Mayalaw.com to schedule a free initial consultation.

FINRA Announces Voluntary Large Case Pilot Program to Provide Greater Flexibility in Case Administration

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On July 2, 2012, the Financial Industry Regulatory Authority (FINRA) launched a voluntary large case pilot program in all regions for cases involving damages claims of at least $10 million.  This pilot program formalizes the previous ad hoc flexibility that parties had to deviate from administrative procedures under the Arbitration Code.   The large case pilot program is intended to improve the efficiency of processing these cases by permitting parties to agree in advance to changes in FINRA procedures for arbitrator qualifications and selection, motion practice, discovery, official record of proceedings, hearing facilities, or explained decisions.

FINRA will identify cases that are candidates for the pilot program after the parties have submitted their initial pleadings.  Cases that have already been filed may request to participate in the pilot program provided that all parties agree to participation and are represented by counsel.

Pilot Program Process

Counsel for parties agreeing to participate in the large case pilot program will be encouraged to meet and confer regarding their preferences for the administration of the case.  FINRA will hold an early administrative conference to assist parties with developing a detailed plan for case administration and will provide the parties with forms to memorialize their agreements.

Under the large case pilot program, the parties may request FINRA arbitrators with specific experience or qualifications, or agree to use arbitrators who are not on the FINRA roster.  FINRA staff will reach out to these arbitrators and attempt to secure their participation on the parties’ panels.  The parties can also agree to use interrogatories, depositions, requests for admissions, or any other discovery method.

Additionally, the parties may mutually request a discovery arbitrator whose sole role on the case is to decide discovery issues. The parties can use a FINRA arbitrator in this role or can suggest a non-FINRA arbitrator for the role.  Finally, under the large case pilot program, parties may agree to conduct the hearings at an alternative hearing facility to satisfy their requirements for larger conference rooms, separate breakout rooms, or enhanced technology.

FINRA will assess an additional administrative fee for each separately represented party participating in the large case pilot program.  Additional costs resulting from the parties’ agreements will be discussed and agreed upon during the administrative conference.

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Should you have any questions relating to FINRA or arbitration issues generally, please do not hesitate to contact Attorney Joseph C. Maya in the firm’s Westport office in Fairfield County at 203-221-3100 or at JMaya@Mayalaw.com.

“The Fact That You Were An Attorney, Sir, Makes the Crime Worse,” Sentence Review Division Denies Modification Request

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Superior Court of Connecticut: Sentence Review Division

In a criminal law matter, the Sentence Review Division (Division) of the Superior Court of Connecticut declined to modify a defendant’s sentence because it was neither inappropriate nor disproportionate.

In this case, the petitioner, an attorney, was hired by the complainants to provide services related to the sale of their home. The complainants gave him nearly $111,000 to pay off their mortgage, but the money was never tendered to the bank. The petitioner was charged with larceny in the first degree, a violation of General Statutes § 53a-122 with a maximum punishment of twenty years incarceration. He entered into a plea agreement, and the court sentenced him to twelve years incarceration, execution suspended after four years, with five years of probation and special conditions, including restitution.

Division Sentence Review

The petitioner sought a sentence reduction in light of his practice as an attorney aiding minorities, arguing that the sentence he received as inappropriate and disproportionate. When the Division reviews a sentence, it is without authority to modify unless the sentence is “inappropriate or disproportionate” when considering such factors as the nature of the offense and the character of the offender. In this case, the Division found that the trial court properly considered mitigating aspects of the petitioner’s background. It also noted, however, that he previously misappropriated a quarter of a million dollars of funds entrusted to him from a client. Citing the trial court:

The fact that you were an attorney, sir, makes the crime worse, not simply because you were a lawyer who committed a crime, but you committed a crime out of the breach of the very trust that was placed in you by your clients, and that is an aggravating factor.

The Division held that modification was not warranted in this case where “an attorney embezzled substantial funds from clients and the prior criminal history of the petitioner… reflects the same type of criminal behavior.” It additionally noted that the petitioner never paid restitution to the victims between the time he entered into the plea agreement and sentencing. Therefore, the sentence was affirmed.

Written by Lindsay E. Raber, Esq.

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Should you have any questions regarding criminal defense, please do not hesitate to contact Attorney Joseph C. Maya in the firm’s Westport, CT office at 203-221-3100 or at JMaya@Mayalaw.com.

Technology Company’s Non-Compete Found Enforceable on Grounds of Protecting Employer’s Interest and Commercial Operations

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Xplore Techs. Corp. v. Killion, 2010 Conn. Super. LEXIS 2401

Xplore Technologies Corporation was a company engaged in the engineering, developing, and marketing of rugged computer tablets.  Mr. Timothy Killion worked as a Senior Sales Representative with the company from December 8, 2003, to June 2010.  As part of his employment contract with Xplore, Mr. Killion signed a non-compete and non-disclosure agreement that stated, “By accepting this offer, you agree not to exercise or participate in any activity directly or indirectly competing with that of Xplore Technologies, Corp.” for a period of one year.

In June 2010, Mr. Killion announced that he would be leaving Xplore to work for another company, later identified as DRS Technologies, Inc., a direct competitor.  In the years leading up to Mr. Killion’s resignation he was intimately involved in the development of a new product and a deal with AT&T valued at $20-23 million.  Xplore commenced a suit seeking an injunction to prevent DRS’s further employment of Mr. Killion and prevent the disclosure/utilization of any classified information regarding Xplore’s business operations.  Mr. Killion claimed that the non-compete agreement was unenforceable because it was too broad in scope.

The Court’s Decision

The Superior Court held in favor of Xplore Technologies, finding the non-compete to be valid and issued an injunction prohibiting DRS from employing Mr. Killion until a year after his resignation from Xplore.  The court found that the strongest factor that made the agreement enforceable was the employer’s interest to protect its commercial operations.  Non-compete agreements protect employers in the specific area in which they do business by restricting the disclosure of trade secrets, technical marketing, and financial information.  The court held that the non-compete agreement was a reasonable and binding way for Xplore to protect itself given the uniqueness of the industry, its products, and business activities.

The court struck down Mr. Killion’s assertion that the agreement was too broad with regard to time and space.  It held that the one-year period was appropriate and reasonable provided the length of Mr. Killion’s employment with Xplore and the nature of the company.  The lack of geographical limitations does not invalidate the agreement in this case.  The nature of Xplore’s business is heavily internet-based and its employees’ work is not confined to a specific office within a specific geographical area.  Instead, the geographical limitations become Xplore’s three direct competitors that conduct business in the same manner and that are involved in the development of similar products.

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If you have any questions relating to your non-compete agreement or would like to discuss any element of your employment agreement, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.

Technology Company’s Non-Compete Found Enforceable on Grounds of Protecting Employer’s Interest and Commercial Operations

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Xplore Techs. Corp. v. Killion, 2010 Conn. Super. LEXIS 2401

Xplore Technologies Corporation was a company engaged in the engineering, developing, and marketing of rugged computer tablets.  Mr. Timothy Killion worked as a Senior Sales Representative with the company from December 8, 2003, to June 2010.  As part of his employment contract with Xplore, Mr. Killion signed a non-compete and non-disclosure agreement that stated, “By accepting this offer, you agree not to exercise or participate in any activity directly or indirectly competing with that of Xplore Technologies, Corp.” for a period of one year.

In June 2010, Mr. Killion announced that he would be leaving Xplore to work for another company, later identified as DRS Technologies, Inc., a direct competitor.  In the years leading up to Mr. Killion’s resignation he was intimately involved in the development of a new product and a deal with AT&T valued at $20-23 million.  Xplore commenced a suit seeking an injunction to prevent DRS’s further employment of Mr. Killion and prevent the disclosure/utilization of any classified information regarding Xplore’s business operations.  Mr. Killion claimed that the non-compete agreement was unenforceable because it was too broad in scope.

The Court’s Decision

The Superior Court held in favor of Xplore Technologies, finding the non-compete to be valid and issued an injunction prohibiting DRS from employing Mr. Killion until a year after his resignation from Xplore.  The court found that the strongest factor that made the agreement enforceable was the employer’s interest to protect its commercial operations.  Non-compete agreements protect employers in the specific area in which they do business by restricting the disclosure of trade secrets, technical marketing, and financial information.  The court held that the non-compete agreement was a reasonable and binding way for Xplore to protect itself given the uniqueness of the industry, its products, and business activities.

The court struck down Mr. Killion’s assertion that the agreement was too broad with regard to time and space.  It held that the one-year period was appropriate and reasonable provided the length of Mr. Killion’s employment with Xplore and the nature of the company.  The lack of geographical limitations does not invalidate the agreement in this case.  The nature of Xplore’s business is heavily internet-based and its employees’ work is not confined to a specific office within a specific geographical area.  Instead, the geographical limitations become Xplore’s three direct competitors that conduct business in the same manner and that are involved in the development of similar products.

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If you have any questions relating to your non-compete agreement or would like to discuss any element of your employment agreement, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.

Assignability of Non-Compete Agreements Under Connecticut Law in the Event of a Merger

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Neopost USA, Inc. v. McCabe, 2011 U.S. Dist. LEXIS 105850

Neopost USA, Inc. and Pitney Bowes, Inc. are two companies that essentially hold a duopoly on the national “mailing equipment” market, an industry that includes postage meters, mailing machines, addressing machines, folders, inserters, and relevant software.  Neopost, Inc. employed Mr. John McCabe from 2002 to August 1, 2011 but did not have him sign a non-compete agreement until February 2005, at which time he received a pay raise in connection with a corporate reorganization.

The parties executed a subsequent restrictive covenant in March 2006.  The agreements prohibited Mr. McCabe from engaging in competitive business activities for one year following termination within fifty miles of any Neopost office where he had worked during his employment with the company.  Additionally, he could not solicit Neopost’s customers or employees during the specified one-year period.  Neopost, Inc. merged with Hasler, Inc. and the transaction became official in November 2009 with the creation of a new company, Neopost USA, that assumed title to Neopost, Inc.’s assets and liabilities.

The Dispute

Mr. McCabe’s last day with Neopost was August 1, 2011 and he began to work for Pitney Bowes, its direct and main competitor, only a few days later.  There was a dispute between the parties regarding whether Mr. McCabe voluntarily terminated (resigned) his employment with Neopost or the company fired him.

Neopost sued Mr. McCabe in federal court for violation of the non-compete agreement and requested that the court enforce the provisions of the covenant in order to prevent further breaches of the agreements executed by the parties.  Mr. McCabe argued that his non-compete agreement with Neopost, Inc. were not assignable to Neopost USA, Inc. after the merger with Hasler, Inc. and thus, he was not bound by the provisions contained therein.

The Court’s Decision

The court rejected Mr. McCabe’s defense and granted Neopost’s request for injunctive relief and the enforcement of the non-compete agreements.  The court did not bother deciding the question of fact regarding the classification of Mr. McCabe’s termination.  Provisions of a non-compete are automatically triggered upon termination, regardless of whether it is voluntary or involuntary in nature.  The issue at hand and the focus of the court was the validity and enforceability of the non-compete agreements between Neopost and Mr. McCabe.

The court held that the non-compete agreements were assignable to Neopost USA following the merger, citing Connecticut law that “all property owned by, and every contract right possessed by, each corporation or other entity that merges into the survivor is vested in the survivor without reversion or impairment”.  Conn. Gen. Stat. § 33-820(a)(4).  In the event of a corporate merger, the surviving company holds title to all contracts and employment agreements of the predecessor companies and their provisions are valid and enforceable under Connecticut law.

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The lawyers at Maya Murphy, P.C., are experienced and knowledgeable employment and corporate law practitioners and assist clients in New York, Bridgeport, Darien, Fairfield, Greenwich, New Canaan, Norwalk, Stamford, Westport, and elsewhere in Fairfield County.  If you have any questions relating to your non-compete agreement or would like to discuss any element of your employment agreement, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.

Enforcing Non-Competes Associated with Sale of Company and Goodwill

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Ms. Dorothy Rogers owned a hair salon in Higganum, Connecticut called Dotties Creative Cuts and entered into an agreement to sell the company’s “assets, goodwill, and client lists” to Kim’s Hair Studio, LLC for the amount of $20,000.  This transaction essentially made Ms. Rogers a new employee of Kim’s hair Studio and as such, she was required to sign a non-compete agreement that prohibited her from offering competing services for twelve months after her termination within ten miles of 323 Saybrook Road, the primary work location of Kim’s Hair Studio.

The parties executed non-compete and confidentiality agreements on August 23, 2004.  Ms. Rogers did not like how the salon was being run by the company’s management and voluntarily terminated her employment in order to work at a new hair salon that was located a mere one-half mile away.  Ms. Rogers additionally removed a rolodex containing Kim’s Hair Studio’s client information and began to contact them to solicit their business.  Kim’s Hair Studio sued Ms. Rogers and requested that the court enforce the non-compete and confidentiality agreements.

The Court’s Decision

The court granted the request for an injunction and ordered the enforcement of the agreements’ provisions.  It concluded that the restrictions were reasonable in scope and that Ms. Rogers’ action had amounted to a breach of the covenant between the two parties.  Kim’s Hair Studio had legitimate interests in executing non-compete agreements with its employees because its goodwill and client clients were essential assets that Kim’s Hair Studio invested resources in to acquire and maintain.  The restrictive covenants were designed to prevent the loss or infringement of these assets and ensure that Kim’s Hair Studio was not negatively affected due to an employee’s termination, whether voluntary or involuntary in nature.

The court reasoned that a party is entitled to an injunction restraining further breach of a restrictive covenant when it demonstrates that the other party has or is very likely to breach the agreement.  Additionally, the court noted Connecticut courts’ willingness to enforce a non-compete agreement when it is made in connection with the sale of a company and its goodwill.  These legal principles, in conjunction with reasonable and limited restrictions, allowed the court to conclude that the non-compete agreement between Ms. Rogers and Kim’s Hair Studio was valid and enforceable under Connecticut law.

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The lawyers at Maya Murphy, P.C., are experienced and knowledgeable employment and corporate law practitioners and assist clients in New York, Bridgeport, Darien, Fairfield, Greenwich, New Canaan, Norwalk, Stamford, Westport, and elsewhere in Fairfield County.  If you have any questions relating to your non-compete agreement or would like to discuss any element of your employment agreement, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.

Beware the Casual Employee Complaint

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The United States Supreme Court had overturned long-standing law in the Federal Districts of Connecticut and New York with respect to employee claims of retaliation for registering a complaint with an employer under the Fair Labor Standards Act (“Act”). In this case note, we will tell you how the law changed, and how employers should adopt changes in policy and procedure to protect themselves from a new and difficult-to-defend source of employment-related liability.

Fair Labor Standards Act

The Fair Labor Standards Act was passed in 1938 and subsequently amended by the Equal Pay Act of 1963. The Act sets forth employment rules concerning minimum wages, maximum hours, and overtime pay. The Act contains an anti-retaliation provision prohibiting the discharge of or discrimination against any employee who has “filed any complaint” related to the Act. In 1993, the United States Court of Appeals for the Second Circuit (whose jurisdiction includes Connecticut and New York) decided Lambert v. Genesee Hospital, 10 F.3d 46 (2d Cir. 1993).

There the Court held that “[t]he plain language of this [anti-retaliation] provision [of the Act] limits the cause of action to retaliation for filing formal complaints, instituting a proceeding, or testifying, but does not encompass complaints made to a supervisor.” Id. at 55. Such was the settled law within this Circuit until March 22, 2011, when the Supreme Court issued its decision in Kasten v. Saint-Gobain Performance Plastics Corp., 2011 U.S. LEXIS 2417 (2011).

Kasten v. Genesee Hospital

In Kasten, the Supreme Court conducted a thorough exegesis of the phrase “filed any complaint” in the context of whether the statutory language included oral, as well as written complaints, and whether oral complaints thereby constituted protected conduct under the Act’s anti-retaliation provision. The case involved an employee who complained orally to his supervisor about the physical placement of time clocks so as to deprive workers of compensable time. The employee was fired soon after his complaint.

The Supreme Court found the text of the statute to be inconclusive as to its meaning and harkened back to the words of Franklin D. Roosevelt and pre-World War II census data to further divine the Act’s legislative intent. The Supreme Court ultimately concluded: “[t]o fall within the scope of the anti retaliation provision, a complaint must be sufficiently clear and detailed for a reasonable employer to understand it, in light of both content and context, as an assertion of rights protected by the statute and a call for their protection. This standard can be met, however, by oral complaints, as well as by written ones.” Kasten at * 23.

Left unanswered by the Court, however, is the actual level of clarity and detail required to elevate some employee “letting off steam” (e.g., to a supervisor at a Friday night, after-work happy hour) to the protected activity of “filing of a complaint.” Turning the already murky waters opaque, the Court offered this guidance: “[t]he phrase ‘filed any complaint’ contemplates some degree of formality, certainly to the point where the recipient has been given fair notice that a grievance has been lodged and does, or should, reasonably understand the matter as part of its business concerns.”

Dangers to Employers

Lurking behind the Court’s holding is the spectre of an employee dismissed for cause suddenly recalling his prior oral complaint to his supervisor about violations of the Act, thus playing his anti-retaliation “get out of jail free” card. While the Supreme Court paid lip service to the requirement that an employer be given “fair notice” (albeit orally) of a claimed violation of the Act, it “[left] it to the lower courts to decide whether Kasten [the plaintiff-employee] will be able to satisfy the Act’s notice requirement.” Id. at * 27. As of this point, there is no such lower court advice to depend upon, but there are steps an employer can now take to reduce its exposure to a fabricated, after-the-fact claim of employer retaliation.

Employer Protections

Employee Handbooks or Company Policies and Procedures Manuals should be amended to require that all employee complaints to supervisors or management be written (even if anonymous) on a form prescribed by the employer and delivered to a specific location (e.g., suggestion box) or a designated member of management. A sample form should be appended to the Handbook or Manual as an Exhibit, and a supply of forms should be made readily (but discretely) available to employees. The Company needs to establish a usual, customary, and accepted practice of addressing only written employee complaints, irrespective of their subject, seriousness, or source.

The complaint forms should be numerically serialized upon receipt and logged in so that there is no question as to whether or when it was received. In this way, the company can argue that the absence of such a written complaint form raises a rebuttable presumption that no such complaint was ever made. It will thus deprive a discharged employee of the opportunity after he is fired to conjure up a “stealth” retaliation claim based upon a “phantom” oral complaint.

In the meantime, supervisors and management should be made aware that seemingly innocuous oral complaints from employees about wages and hours are sufficient to trigger the anti-retaliation provision of the Act and should be investigated and acted upon.

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The Attorneys at Maya Murphy, P.C. regularly draft and review Employee Handbooks and advise employers on the full spectrum of employment law and employer-employee relations. For additional information, contact attorney Joseph Maya at (203) 221-3100 or JMaya@Mayalaw.com.

Court Uses Connecticut Law to Supersede Massachusetts Law in Application of Non-Compete Agreement

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In Custard Insurance Adjusters v. Nardi, 2000 Conn. Super. LEXIS 1003, Mr. Robert Nardi worked at Allied Adjustment Services’ Orange, CT office beginning in September 1982 as the vice president of marketing, overseeing the adjustment of claims for insurance companies and self-insurers.  The company had Mr. Nardi sign non-compete and confidentiality agreements as a term of his employment.

The Employment Agreements

The agreements established that he could not solicit or accept claims within a fifty-mile radius of Allied’s Orange office for a period of two years following his termination.  The agreements further specified that the names and contact information of Allied’s clients were the company’s confidential property.  The choice of law provision stated that Massachusetts law would be controlling (Allied had its headquarters in Massachusetts).  On September 1, 1997, Allied sold its business and all its assets, including its non-compete agreements, to Custard Insurance Adjusters.

Mr. Nardi became increasingly worried about future employment at Custard when the company restructured its compensation format, allegedly decreasing his annual income by 25%.  At this point, Mr. Nardi began to inquire about employment at other companies and in particular contacted Mr. John Markle, the president of Mark Adjustment, with whom he had a previous professional history.  He also arranged meetings between Mr. Markle and four other current Custard employees to discuss switching companies.  While the companies are competitors in the insurance industry, Mark’s business was restricted to the New England region while Custard operated nationally.  Custard terminated Mr. Nardi and asked the court to enforce the non-compete agreement.

Determining the Choice of Law Provision

The court first sought to tackle the issue of the choice of law provision since it designated Massachusetts law as controlling but this lawsuit was brought in Connecticut state court.  The court asserted its authority over the issue and case because it could not ascertain any “difference between the courts of Connecticut and Massachusetts in their interpretation of the common law tort breach of fiduciary obligation brought against a former officer of a corporation”.

The court emphasized that above all else, the legal issue at hand was that of contractual obligations and a company’s business operations.  It asserted its authority in this respect by stating it believed “that the Massachusetts courts interpret the tort of tortious interference with contractual and business relationships the same way our [Connecticut’s] courts do”.  Additionally, the court cited that the application of Massachusetts law would undermine Connecticut’s policy to afford legal effect to the Connecticut Unfair Trade Practices Act (CUTPA) and Connecticut Uniform Trade Secrets Act (CUTSA), two-state statutes used by Custard to sue Mr. Nardi.

Determining the Enforceability of the Non-Compete Agreement

Next, the court addressed the enforceability of the non-compete agreement signed by Mr. Nardi and Allied.  Mr. Nardi contended that the provisions of the agreement were only binding upon the signatory parties (himself and Allied) and that Custard lacked the authority to enforce its provisions.  He asked the court to deny Custard’s request to enforce the non-compete because it was “based on trust and confidence” between the signatory parties and “was thus not assignable”.  The court rejected this train of thought because the non-compete explicitly contained an assignability clause and it held that the non-compete covenant was properly and legally transferred to Custard under Massachusetts law.

Mr. Nardi based a substantial portion of his defense on the claim that Custard violated, and therefore invalidated, the agreement when it modified his compensation format.  He alleged that he was the victim of unjustified reductions in his professional responsibilities and compensation following Custard’s acquisition of Allied in 1997.  Mr. Nardi, however, was still an executive at the new company despite a reduction in rank and he himself had expressed excitement about becoming an executive at a national, instead of a regional, company.

The Court’s Findings

The court ultimately found the non-compete to be valid and enforceable, therefore granting Custard’s request for injunctive relief.  It assessed the facts of the case and Mr. Nardi’s current position to amend the time restriction of the agreement, however.  Taking into account that he was starting a family and had a young child in conjunction with estimates that the full restrictions could amount to a 60-70% loss of business for Mr. Nardi, the court reduced the time limitation from two years to six months.  The court concluded that while the provisions were reasonable at face value, they could have unforeseen consequences that would have severely impaired Mr. Nardi’s ability to make a living in order to provide for his family.

If you have any questions relating to your non-compete agreement or would like to discuss any element of your employment agreement, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.

Connecticut Non-Compete Prohibits Client Solicitation in Investment Services Industry

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In Robert J. Reby & Co. v. Byrne, 2006 Conn. Super. LEXIS 2115, Mr. Patrick Byrne worked at Robert J. Reby & Co., a financial firm in Danbury, Connecticut, as a registered investment advisor from June 2005 to July 2005.  The company advises high net worth individuals and families in the areas of trusts, wealth management, and taxation.  Mr. Byrne signed an employment contract with Robert J. Reby & Co. wherein it contained a non-compete agreement that stipulated he be prohibited from soliciting the company’s clients or disclosing any of its confidential information in the event of his termination.

Following Mr. Byrne’s short employment with Robert J. Reby & Co. he began to work at Aspetuck Financial Management, LLC, a wealth management firm based in Westport.  Robert J. Reby & Co. alleged that Mr. Byrne solicited its clients for his new firm, Aspetuck, in direct violation of the non-compete agreement.  Mr. Byrne countered that the provisions of the non-compete were unreasonable in the sense that it placed an excessive restraint on his trade and prevented him from pursuing his occupation.

The Court’s Decision

The court held that the non-compete agreement between Mr. Byrne and Robert J. Reby & Co. contained reasonable terms and was enforceable.  It failed to see any merits in Mr. Byrne’s claim that the agreement was too broad and created an insurmountable occupational hardship.  The provisions of the agreement only restricted a very small segment of Mr. Byrne’s occupational activities.

The terms he agreed to only prevented him from soliciting the specific and limited group of people that were clients of Robert J. Reby & Co..  The court held that the covenant was not a pure anti-competitive clause because it did not prevent him from engaging in the investment services industry as a whole.  This limited scope with regard to the prohibition levied upon Mr. Byrne caused the agreement to be reasonable and therefore enforceable.

The court also took time to discuss the public policy behind finding the non-compete agreement enforceable and establishing the legitimacy of the agreement.  Companies, according to the court, have a legitimate interest in protecting their business operations by preventing former employees from exploiting or appropriating the goodwill of its clients that it developed at its own, and not the employees’, expense.

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If you have any questions relating to your non-compete agreement or would like to discuss any element of your employment contract, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.