Monthly Archives: August 2012

Social Media in the Context of Restrictive Covenants

By Janie Byalik, Esq.
jbyalik@pashmanstein.com

Many employers these days insist that its employees execute restrictive covenants as a condition to their employment.  The restrictive covenant typically include non-compete and non-solicitation provisions.  A non-compete agreement is intended to prevent an employee from setting up his or own her competing business or going to work for the employer’s competitor following termination of employment.  A non-solicitation provision is utilized to prohibit ex-employees from diverting the employer’s customers or employees away from the employer for the benefit of the employee’s new competing business.

Restrictive covenants should carefully strike a balance between the employer’s interests in protecting its confidential information and relationship with its clients/employees and the ability of former employees to earn a living.  New Jersey courts have consistently enforced post-employment restraints incident to an employment relation where the restrictions are reasonably necessary for the protection of the employer, and the restrictions are reasonably limited in duration and geographic extent.  While in the past it has generally been simple to determine whether an ex-employee violated the terms of a non-compete and non-solicitation provision, the task is becoming increasingly difficult in the realm of the growing use of social media.  Sites like Facebook, MySpace and LinkedIn has added a layer of complexity to the determination of whether an employee violates a restrictive covenant.

Consider the following situations:  Employee A signs an employment contract containing a restrictive covenant prohibiting that employee from soliciting the former employer’s customers for a period of one-year following termination of employment.  Just months after leaving employment, Employee A updates his or her LinkedIn profile advertising the new products/services that employee now sells, which the former employee’s clients can see.  Is the act of updating the employee’s status constitute solicitation?  Or what if Employee B, who also signed a non-compete provision, terminates employment, sets up a competing business within the permissible restrictions, and posts on his Facebook page information regarding his new employee incentive programs, salary and bonus, which is much more attractive than that of his ex-employer.  If the former employer’s workers now seek to leave their current jobs and work for Employee B, has he violated the restrictive covenant by posting the announcement on Facebook?  Does the mere “connection” on LinkedIn or “friending” on Facebook with a customer or former colleague of a terminated employee violate his restrictive covenant?  Does compliance with restrictive covenants require former employees to un-connect or de-friend former customers or colleagues until the restrictive period ends?

The answer to these questions is far from clear and the law on this topic is still in its infancy.  The most effective way for an employer to protect him or herself is to carefully draft the restrictive covenant provisions to account for the increasing social media capabilities.  The employer should think carefully about drafting and tailoring the terms of its restrictive covenants to fit the specific circumstances of its business and adapt its policies to account for the changing social media technology.  The more clear and concise the terms, the more likely a court will uphold the covenant so long as those terms are reasonable.

Pharmaceutical Sales Representatives Are Exempt from Overtime Pay

By Elisabeth Rowley Wall, Esq.
erowley@pashmanstein.com

On June 18, 2012, the U.S. Supreme Court, in a 5-4 opinion by Justice Samuel Alito, ruled on the issue of whether pharmaceutical sales representatives are entitled to receive overtime pay under the Fair Labor Standards Act (“FLSA”).  The Court held that pharmaceutical sales reps, who promote the sales of prescription drugs and obtain nonbinding commitments from doctors to prescribe those drugs, but do not themselves, sell the drugs to doctors or patients, are “outside salesmen” and are exempt from the federal overtime pay requirements.  The Court’s landmark holding has brought much needed clarity to the scope of the FLSA’s “outside salesman” exemption, on which lower courts have been split.

The highly anticipated decision came by way of Christopher v. Smithkline Beecham Corp., in which GlaxoSmithKilne was defending legal claims from two former salesmen seeking overtime pay on behalf of a nationwide class of representatives employed by the drug maker.  Though the FLSA does not actually define “outside salesman,” it defines “sale” as “any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition.”  The heavily regulated pharmaceutical industry regulations legally prohibit representatives from actually closing sales, and as the Court advised, sales representatives’ responsibilities should be viewed in the context of the particular industry in which they work.  Pharmaceutical sales reps regularly call on physicians in their assigned sales territory to discuss the features, benefits, and risks of prescription drugs.  Thus, the Court found that although they do not actually close sales, pharmaceutical reps nevertheless act “in the capacity of a salesman,” in that the primary objective of these visits is to obtain non-binding commitments from physicians to prescribe the drugs to their patients.

Pharmaceutical sales reps were found to spend approximately forty hours per week calling on physicians and approximately ten to twenty hours each week attending events, reviewing product information, returning phone calls and other miscellaneous tasks.  Under the FLSA, employers must compensate non-exempt employees for time worked in excess of forty hours per week at the rate of one-and-a-half times the employees’ regular wages.  SmithKline did not pay their sales reps time-and-a-half wages as provided by the FSLA because the company classified them as exempt from overtime. As a result, the sales reps brought suit alleging violations of the FLSA for failing to compensate them for overtime.  Not only was the Court not persuaded by the argument for the reasons herein, but it also noted that the specific petitioners each received average compensation in excess of $70,000 per year, did not perform manual labor and were “hardly the kind of employees that the FLSA was intended to protect.”

In addition to the impact this decision has made on the pharmaceutical industry, it is equally notable that the Court declined to give controlling deference to the Department of Labor’s (“DOL’s”) interpretation of its own regulation. In an amicus brief filed by the DOL, it took the position that pharmaceutical sales reps are not exempt outside salesmen because to qualify for this exemption, an employee must “actually transfer[] title to the property at issue,” which is something that pharmaceutical sales reps cannot do. In so holding, the Court noted the DOL’s “decades long” silence on the pharmaceutical industry’s practice of classifying its sales reps as exempt employees. It further opined that non-exempt classification for pharmaceutical sales reps could expose drug companies to retroactive liability and cost the industry billions of dollars for years of employment that “occurred before the [DOL’s] interpretation was announced.”

This decision is a victory for employers in the pharmaceutical industry and provides other employers with similar sales models some peace of mind.  However, while other employers may find themselves in situations where the same arguments can be made for applying the “outside salesman” exemption, they should conduct an analysis of their individual circumstances and not rely on Christopher unconditionally.  Employers should consult with counsel when making these assessments.

Advancement Provisions In Corporate Bylaws: I Have to Pay for What!

By Dennis Smith, Esq.
dsmith@pashmanstein.com

Many corporate by-laws contain provisions that obligate corporations to advance litigation expenses to corporate officers and directors who are sued by reason of their corporate position  in advance of the final disposition of the  litigation upon a promise to repay the sums advanced if it is determined that the officer or director is not entitled to indemnification (for example if they are found guilty or liable for the conduct alleged).  These advancement provisions typically are thought about in the context of a company paying to defend its officers against claims by third parties.

However, the language in common advancement provisions also would require the company to advance defense costs in actions by the corporation against the officer. Why is this type of provision significant? If a corporation sues an officer or director for breach of fiduciary duty the officer can turn around and request that the corporation advance him his defense costs pending resolution of the lawsuit. Thus a corporation can wind up paying a lawyer for its affirmative action and also pay the lawyer defending the corporate officer it sued.   Similarly, if the officer sues the corporation and the corporation counterclaims that the officer breached his fiduciary duty the corporation may have to advance the officer’s costs for defending the counterclaim.  Now if the corporation ultimately succeeds in the lawsuit, it can try to recoup its defense expenses; however, the officer may not have the financial capacity to reimburse.

Under Delaware law (which New Jersey court’s look to for guidance) the question of entitlement to advancement is generally handled in a summary fashion—usually involving briefing and argument before the court. Thus, it is important for corporations to carefully review the advancement provisions of their by-laws and not rely upon boilerplate language.  Also before contemplating suing an officer or director you may want to engage counsel to review the corporation’s bylaws so that you can be fully informed on claims subject to advancement and the potential financial ramifications of bringing suit.

Will My Insurer Defend When I am Sued?

By Dennis Smith, Esq.
dsmith@pashmanstein.com

When you or your company is sued it is important to have someone carefully review your liability insurance coverages to determine whether the carrier is obligated to provide you with a defense.  In New Jersey, the duty to defend is broader than the duty to indemnity (the payment of money to satisfy a judgment entered against you) and defense costs could be the most significant financial exposure a company faces especially if it has meritorious defenses to the underlying lawsuit.  In determining whether an insurer has a duty to defend, New Jersey courts will review the allegations of the complaint along with the policy language and if the claim potentially falls within coverage there is a duty to defend regardless of whether the claim is baseless or fraudulent.  Even if a comparison fails to reveal whether the allegations fit within the four corners of the policy, an insured can introduce evidence outside of the complaint to support an argument that a claim is covered under the policy.  However, an insurer is not allowed to introduce evidence to support a claim that there is no duty to defend so long as the allegations of the complaint bring the claim potentially within coverage.

Sometimes, whether coverage potentially exists, may depend on the meaning of a policy term.  If the term is undefined, courts will look to dictionary definitions to ascertain the meaning of the word or term.  If it is susceptible to two meanings, one favoring coverage and one not, courts generally will adopt the meaning favoring coverage because it is the insurer as the drafter of the policy that has ability to clarify the meaning of a word or term by defining it in the policy.  For example in Auto Lenders v. Gentilini Ford, 181 N.J. 245, 270 (2004) the New Jersey Supreme court was called upon to interpret the term “manifest intent” in connection with an employee dishonesty claim under an employee dishonesty policy.  The court held:

We are mindful that when a court construes an ambiguous clause in an insurance policy, it ‘should consider whether more precise language by the insurer, had such language been included in the policy, would have put the matter beyond reasonable question. . .
. . . For further guidance, we note that had Ohio Casualty wanted to insure that coverage under this policy would be limited to circumstances where the employee acted with the specific intent to harm the employer and benefit himself or another, it could have done so by replacing the term “manifest intent” with the phrase “specific intent or desire.”  That language would have left no ambiguity that it intended to provide coverage only when it was an employee’s conscious object of desire to bring about the resulting benefit and harm.

Practically speaking, if you or your business is sued and you believe that coverage exists for the claim, you should promptly notify your broker to place the carrier on notice or do so internally.  If the insurance company refuses to defend, do not accept it at face value.  Engaging coverage counsel for an opinion on the merits of the disclaimer could potentially lead to a reversal of the carrier’s decision saving the company substantial litigation costs.  Alternatively, a lawsuit seeking a declaration that the claim is covered under the policy can be filed, immediately followed by a motion for partial summary judgment on the duty to defend which typically can be decided as a matter of law.  As a final note, if you obtain a ruling that the carrier owes you a defense, you would be entitled to recover the attorney fees you spent on the declaratory judgment action.  The policy rational for this is that an insured should not have to be out of pocket more than the premium to have the insurer do what it is obligated to under the policy.