US Employment Litigation Round-Up for October 2017

Tenth Circuit Reverses DOL Administrative Review Board and Dismisses Whistleblower Complaint

Decision: On October 17, 2017, the US Court of Appeals for the Tenth Circuit overturned the US Department of Labor Administrative Review Board’s (ARB) decision that Cypress Semiconductor retaliated against a former employee for complaining that the company was unlawfully withholding information about its alternative compensation plan (Dietz v. Cypress Semiconductor Corp., Nos. 16-1209 & 16-1249). In March 2016, the ARB upheld an Administrative Law Judge’s finding that the employee had been constructively discharged in violation of Sarbanes-Oxley because his complaints reflected his reasonable belief that the company engaged in mail and wire fraud by withholding information about its alternative compensation plan. In a strongly worded opinion, the Tenth Circuit vacated the ARB’s decision. The court emphasized that the federal mail and wire fraud statutes require “a conscious objective to deprive the victim of property” and the employee’s proffered evidence was “woefully inadequate to support any belief that [the company] committed a fraud in order to deprive the employees of their property.” Accordingly, because the employee failed to establish that he had made his complaints with a reasonable belief that the company had committed mail or wire fraud, his complaints were not protected activity under Sarbanes-Oxley.

Analysis: Sarbanes-Oxley protects whistleblower activity only when an employee “reasonably believes” that his or her employer has engaged in certain enumerated federal offenses. While an employee does not need to prove that every element of the alleged offense was actually satisfied, the employee must show that the at-issue complaint was based on a reasonable belief that an enumerated offense occurred or was occurring. In vacating the ARB decision, the Tenth Circuit emphasized that the facts known to the employee—including that the company provided training and explanations of its alternative compensation plan before implementing it—could not “reasonably be squared” with the elements of mail or wire fraud. Given the broad scope of Sarbanes-Oxley and other similar whistleblower protection statutes, employers should exercise caution to avoid unlawfully retaliating against an employee who makes a whistleblower complaint. However, the Dietz decision makes clear that Sarbanes-Oxley does not protect every employee who complains about any violation of the law. Rather, the employee must reasonably believe that the company’s activity constitutes a violation of the alleged offense being reported for the complaint to qualify as protected activity.

Third Circuit Rules That Short Rest Breaks Are Compensable Time under the FLSA

Decision: On October 13, 2017, the US Court of Appeals for the Third Circuit ruled that the Fair Labor Standards Act (FLSA) requires employers to compensate workers for breaks that are less than 20 minutes in duration. In Department of Labor v. American Furniture Systems, Inc., the employer implemented a policy under which nonexempt employees could log off of their computers and take breaks whenever they chose and for any length of time. However, if the employees were logged off their computers for more than 90 seconds, they were not paid for the break time. The Third Circuit held that the “log off” times were “clearly ‘breaks’ to which the FLSA applies” and that employers cannot “circumvent [the FLSA’s] remedial mandates by disguising a break policy as ‘flexible time.’” Relying on 29 C.F.R. § 785.18, which requires that employers compensate employees for breaks lasting between five and 20 minutes, the court rejected the employer’s argument that its employees used the time when they were logged off solely for their own benefit, thereby rendering it non-compensable, and further refused to engage in a fact-specific inquiry to determine whether a given break is intended to benefit the employer or employee.

Impact: The Third Circuit is the first circuit court to weigh in on this issue. Based on the court’s guidance, employers should review their compensation policies and procedures to ensure that their employees’ pay is not docked when they take short breaks that last up to 20 minutes.

District Court Denies Request for Preliminary Injunction Because Employer Did Not Adequately Protect Its Confidential Information

Decision: On October 3, 2017, a district court in the Eastern District of New York denied a cookware and kitchenware company’s request for a preliminary injunction under the Defend Trade Secrets Act (DTSA) prohibiting its former salesperson from using customer contact lists, designs and marketing strategies that the salesperson sent from his work computer to his personal email account right before his termination. In Art and Cook, Inc. v. Haber (No. 17-cv-1634), the court denied the company’s request for a preliminary injunction because it had failed to demonstrate a likelihood of success on the merits of its DTSA claim. The court determined that the customer lists were little more than a compilation of publically available information and therefore could not be a trade secret. Turning to the product designs and marketing strategies, the court recognized that such information is “the sort of business information that the DTSA was designed to protect” but that the company could not show that it took reasonable measures to keep the information secret. Among the facts that the court found significant for its ruling were the company not requiring the salesperson to sign a non-compete and failing to ask him to sign a non-disclosure agreement until approximately three years after he was hired. Further, the company continued to employ him for two more years after he refused that request and took no steps during that time to limit his access to its sensitive proprietary information. The court found that the company’s other steps to secure its information, including using a password-protected server and password-protected folders, were inadequate given the company’s others failures.

Impact: This decision underscores the importance of restrictive covenants and confidentiality agreements in protecting employers’ trade secrets and other confidential information, regardless of other security measures in place to protect sensitive data.

Tenth Circuit Holds That Employers Must Show Irreparable Harm to Obtain Preliminary Injunction in Trade Secrets Dispute

Decision: On October 30, 2017, the US Court of Appeals for the Tenth Circuit clarified its standard for granting a preliminary injunction in a case involving a trade secrets dispute. In a unanimous opinion by Judge Scott M. Matheson, Jr., the Tenth Circuit panel reversed a district court order granting a preliminary injunction in favor of First Western Financial Inc. The order barred Kenneth Malamed—the founder of an investment firm acquired by First Western—from soliciting First Western’s clients after he was terminated. The district court held that First Western need not show irreparable harm because the conduct at issue—misappropriating the company’s client list—was a violation of trade secrets law. Thus, even though First Western could be financially compensated for any lost clients, and thus lacked irreparable harm, the district court determined that a preliminary injunction was warranted. The Tenth Circuit disagreed, holding that the company must indeed demonstrate irreparable harm because the governing statutes—the Defend Trade Secrets Act and Colorado Uniform Trade Secrets Act—do not provide for a presumption of irreparable harm.

Impact: The Tenth Circuit’s holding clarifies the standard for obtaining a preliminary injunction in a trade secrets misappropriation case. As a result, companies will find it more difficult to prevent the actual use of misappropriated trade secrets moving forward, at least in the absence of showing irreparable harm. However, the decision leaves intact companies’ ability to recover financial compensation for misappropriation, a less desirable result for companies that want to avoid the greater cost and risk that financial recovery entails.