Securing the Bag – Sixth Circuit Affirms Award of Attorneys’ Fees to Staffing CompanyIn today’s competitive job market, it is customary for employers to include restrictive covenants, e.g., non-competition and non-solicitation provisions, in employment agreements. While these covenants are essential to protect employers from unfair competition, an attorney’s fees provision is just as critical to save employers tens of thousands of dollars in litigation expenses. In Kelly Services, Inc. v. De Steno, the Sixth Circuit not only illustrates the importance of strategically drafted damages provisions in employment agreements, but also defines the role of a jury in determining the amount of certain fees to be awarded to a party.

Background

Kelly Services, a staffing and consulting company, hired Dale De Steno, Jonathan Persico, and Nathan Peters. Before joining Kelly Services, all of the men were required to sign employment agreements that included non-compete provisions. The agreements also included damages provisions that stated that if the employee breached the agreement, he would pay reasonable attorneys’ fees, court costs, and any other related fees and/or costs incurred by Kelly Services in enforcing the agreement.

In early 2016, De Steno, Persico, and Peters left Kelly Services to work for a competitor in similar staffing positions in the same market area. Kelly Services sued the men for breach of the non-competition provisions and breach of the duty of loyalty and moved for a preliminary injunction. The district court found: (1) Kelly Services made an initial demonstration that irreparable harm may occur without an injunction; (2) harm to Kelly Services from not issuing an injunction outweighed the harm to the former employees; (3) Kelly Services demonstrated that it would likely prevail on the merits; and (4) public interest was more favorable to Kelly Services. Consequently, the district court enjoined De Steno, Persico, and Peters from violating their non-compete agreements and determined that the preliminary injunction would last for 60 days. De Steno, Persico, and Peters filed an interlocutory appeal challenging the preliminary injunction.

On July 25, 2016, three days before the preliminary injunction was set to expire, Kelly Services requested a 60-day extension.  The district court granted an extension until the Sixth Circuit ruled on the interlocutory appeal. However, within a few weeks, De Steno, Persico, and Peters voluntarily dismissed their interlocutory appeal and litigation continued. In the spring of 2017, the district court retroactively lifted the preliminary injunction and the parties engaged in mediation. After mediation was unsuccessful, the parties moved for summary judgment. The district court acknowledged that Kelly Services had received all of the injunctive relief that it sought in its complaint and agreed with Kelly Services that the only remaining issue was the amount of attorneys’ fees and costs owed to Kelly Services. Ultimately, the district court ruled Kelly Services was contractually entitled to reasonable attorneys’ fees under a plain reading of the employment agreements and a jury was not required to decide the amount of damages. De Steno, Persico, and Peters appealed.

Sixth Circuit Affirms District Court’s Award of Attorneys’ Fees

On appeal, De Steno, Persico, and Peters initially argued that the non-compete provisions were unenforceable under Michigan law and the district court never finally ruled on that issue. Like the district court, the Sixth Circuit rejected that argument, concluding that even though the district court did not reach the enforceability issue, the former employees still owed Kelly Services attorneys’ fees based on the terms of the agreements themselves. Specifically, De Steno’s agreement provided that he would “pay Kelly’s reasonable attorney’s fees and costs involved in enforcing [the] Agreement.” Similarly, Persico’s and Peters’ agreements provided that they would “pay any and all legal fees, including . . . all attorneys’ fees . . . incurred by [Kelly Services] in enforcing [the] Agreement.” The Sixth Circuit ruled that Kelly Services’ attorneys’ fees were “involved” or “incurred” “in enforcing” the employment agreements, so Kelly Services was entitled to these fees under a plain reading of the contracts. The court emphasized that the terms of the agreements did not require a final determination of liability in favor of Kelly as a condition for the award of fees.

“Unlike numerous similar agreements, these contracts [did] not employ the words “prevailing party,” nor by their literal language [did] they require a final determination of liability.”

Although the Sixth Circuit recognized that there could be problematic cases in which efforts to “seek enforcement” were unreasonable, made with little or no basis, made for the purpose of oppression or harassment, or simply unsuccessful, none of these scenarios were at issue in the present case.

In addressing the former employees’ argument that a jury must determine the amount of attorneys’ fees under the Seventh Amendment, the Sixth Circuit again sided with the district court. The court explained that the Seventh Amendment grants parties a right to a jury only for a determination of legal issues, not equitable ones, and no legal issues existed in this case. The court also stressed that it would have been “highly impractical” for a jury to determine the amount of attorneys’ fees in the instant case because the parties would have to submit evidence on attorneys’ fees before the end of the trial and resultant necessary legal services. With no provision in the employment agreements specifying the amount of attorneys’ fees to be awarded, and in the interest of fairness and efficiency, the district court rightfully determined a reasonable amount of attorneys’ fees. The Seventh Amendment did not require otherwise.

Securing the Bag

So how can employers increase their likelihood of “securing the bag” from rogue employees who violate restrictive covenants and expect to escape liability? Here are a few ideas:

  1. In addition to drafting enforceable restrictive covenants, draft damages provisions so that you are compensated for enforcing the agreement, not merely prevailing in litigation. Unless contrary to public policy, courts will generally enforce an attorneys’ fees’ provision just as any other term in a contract. Protect yourself first.
  2. Do your homework, and be sure you have a factual basis to show that your former employee violated a restrictive covenant. The rumor mill may be enough to begin investigating an employee, but it may not be enough to get a preliminary injunction. Research the former employee’s LinkedIn profile for employment updates. Review the subsequent employer’s website for any press releases about new hires or lists of employees in certain departments or industries. The internet and social media are great resources to verify suspicions of breach of an employment contract.
  3. Confront the former employee before engaging in litigation. Send a cease and desist letter to the employee and his or her subsequent employer detailing the terms of the restrictive covenant and the factual basis for your belief that the covenant has been violated. Hopefully, this is sufficient to compel the employee to adhere to the terms that he or she originally agreed to. If not, you can place the potential defendant on notice that you will seek legal action to remedy the breach. Because of your well-crafted employment agreement and due diligence, the law is likely to be on your side.

Cooperate or Pay: Recovering Attorneys’ Fees to Get to ArbitrationDoes your arbitration agreement allow you to recover attorneys’ fees if the employee rebels against arbitration and you have to compel it? Maybe it should. In Aralar v. Scott McRea Automotive Group, a court in Florida recently affirmed an arbitrator’s award of nearly $20,000 in attorney’s fees for the defendant’s hassle of moving for arbitration. Employers with arbitration agreements should be encouraged that the fees incurred for moving for arbitration (when it should be clear cut) may be recoverable with the contract clause.

The Facts and the Arbitration Clause

Aralar worked in the McRea auto service center and filed a lawsuit in court under the FLSA for unpaid overtime and back wages. Pursuant to an arbitration agreement Aralar signed as a condition of employment, McRea notified Aralar’s counsel multiple times that he could not pursue the matter in court — it had to go to arbitration.

The arbitration clause provided that if one of the parties filed an action in court that was subject to arbitration, the other party would provide notice of the arbitration requirement and request to have the case dismissed. If the party who filed the court action did not dismiss the case within 10 days and the case ultimately ended up in arbitration following a motion, the moving party could recover reasonable attorneys’ fees incurred “because of the filing of the complaint.”

Aralar did not respond, and McRae filed a motion to dismiss the case and compel arbitration. Yet again Aralar failed to respond, although he eventually agreed to the arbitration forum about six weeks after it was filed. The court then compelled the matter to arbitration and stayed the case pending the results. Aralar did not end up filing his request for arbitration for another six months after the court’s ruling.

About a year later, the arbitrator granted McRae’s motion for judgment on the pleadings, finding that Aralar’s job as a service advisor was exempt from FLSA requirements. A few months later, the arbitrator awarded McRae the fees and costs incurred up through the time the case was stayed by the court, a sum totaling $19,291.58. The fees and costs awarded were about half of the amount requested.

After no further response was received from Aralar, McRae filed a motion with the court to confirm the arbitration award. Aralar finally woke up and filed to vacate the attorneys’ fee award.

The Court’s Decision

In his ruling, the judge conveyed that any party seeking to vacate an arbitrator’s findings must clear a high hurdle because federal courts defer to an arbitrator’s decisions whenever possible. Then the judge said the same standard applies for award of attorneys’ fees. Aralar contended that (1) fees should only be awarded as a sanction, and (2) that because his FLSA claim was not frivolous, the awarding of fees was inappropriate based on rulings in civil rights cases. The judge rejected those contentions and found that because the parties contractually agreed to the arbitration agreement’s fee shifting provision and Aralar did not withdraw his lawsuit within 10 days of notice, McRae was entitled to enforce the contract terms and recover the fees incurred to get the matter into arbitration.

Takeaways

The decision makes sense and these fee shifting clauses could be a useful tool to avoid fights about arbitration. Where the employer has to have its attorneys compel a matter into arbitration when the employee should have agreed to it, that unnecessary expense should come out of the plaintiff’s pocket. Employers should find some small encouragement that fee recovery provisions will be enforced. At the very least, the Aralar decision provides leverage towards peaceful agreements into arbitration rather than a fight. No plaintiff wants to pay a former employer—especially when they filed a lawsuit to try and get money.

The Supreme Court Says Yes to Arbitration and Class Action Waivers

With its 5-4 ruling in Epic Systems Corp. v. Lewis, the Supreme Court delivered a seemingly big win for employers. The Supreme Court held that employees’ waiver of their rights to bring collective or class actions, as a term of an arbitration agreement, is valid and enforceable. This ruling rejected the NLRB’s position that such waivers are invalid given the NLRA’s grant to employees of “the right . . . to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for . . . mutual aid and protection.” A blog post on Declassified provided a legal analysis of the Epic Systems opinion from a class action—as opposed to employment—standpoint. The Supreme Court has now definitively resolved that employers can use arbitration agreements to prevent employees from bringing a collective action.

But Corporate America Is Conflicted

Does This Arbitration Agreement Make Me Look Sexist? <i>The Moving Target of Using Arbitration Clauses</i>Ironically, at the very moment the Supreme Court has made it easier for employers to double down on arbitration agreements, some businesses are making headlines by curtailing arbitration terms for certain claims. It’s safe to say that the #MeToo movement has something to do with it.

Last week, after months of scrutiny and negative publicity, Uber announced that it would “no longer require mandatory arbitration for individual claims of sexual assault or sexual harassment by Uber riders, drivers or employees.” As NPR reported, Uber’s new policy does not apply to claims brought as class actions.

Uber wasn’t the first to take this step. In December 2017, Microsoft publically endorsed legislation that would protect sexual harassment victims’ ability to bring a case in court instead of in arbitration where they could be prohibited from speaking of the incident. In the same statement, Microsoft announced its own new policy and waived its contractual requirements for arbitration of sexual harassment claims.

Even some law firms have had to adapt their employment agreements in the wake of #MeToo. Posts of Munger Tolles & Olson’s summer employment contract, which effectively mandated arbitration for harassment claims, garnered unwanted attention on social media. In response, the firm released its own tweet statement that it would “no longer require any employees, including summer associates, to sign any mandatory arbitration agreements.”

#arbitrationwhatnow?  

While employers have weighed the costs of arbitration versus litigation for decades, the current environment requires new considerations. Are the cost savings of an arbitration agreement (including the ability to maintain confidentiality and prevention of class claims) worth the risk of a social media firestorm? Should you carve out individual harassment claims from mandatory arbitration (ala Uber) or risk class treatment, and carve out all harassment claims (ala MicroSoft)? In the throes of #MeToo, it’s important to consider these new costs and benefits. A simple test: If you wouldn’t want it to go viral on Twitter, reconsider.