2006-17

Ninth Circuit Invalidates Release Of Federal Age Bias Claims Which Was Not Written In A Manner Calculated To Be Understood By Employees.

In Syverson v. IBM, 2006 DJDAR 11818 (9th Cir. Aug. 31, 2006)(1), the Ninth Circuit held that a release and covenant not to sue signed by laid-off IBM employees was not written in a manner "calculated to be understood by the intended participants," as required under the Older Workers' Benefits Protection Act ("OWBPA"), 29 U.S.C. ? 626(f)(1), and thus the release was not enforceable as a waiver of claims under the federal Age Discrimination in Employment Act ("ADEA"), 29 U.S.C. ?? 621 et seq. The court agreed with a prior decision by the Eighth Circuit which reached the same result. Thomforde v. IBM, 406 F.3d 500 (8th Cir. 2005).

The document, which was titled "Micro Electronics Resource Action (MERA) General Release and Covenant Not to Sue" ("MERA Agreement"), stated in pertinent part as follows:

In exchange for the sums and benefits received pursuant to the terms of the MICRO ELECTRONICS RESOURCE ACTION (MERA), [employee name], ("you") agrees to release and hereby does release [IBM] ... from all claims, demands, actions or liabilities you may have against IBM of whatever kind including, but not limited to, those that are related to your employment with IBM, termination of that employment, or other severance payments....

. . .

You also agree that this Release covers but is not limited to, claims arising from the [ADEA], as amended ... any other federal, state or local law dealing with discrimination in employment, including, but not limited to, discrimination based on sex, sexual orientation, race, national origin, religion, disability, veterans status or age....

. . .

You agree that you will never institute a claim of any kind against IBM ... including but not limited to, claims related to your employment with IBM or the termination of that employment or other severance payments .... If you violate this covenant not to sue by suing IBM ... , you agree that you will pay all costs and expenses of defending against the suit incurred by IBM ..., including reasonable attorneys' fees, and all further costs and fees, including attorneys' fees incurred in connection with collection. This covenant not to sue does not apply to actions based solely under the [ADEA], as amended. That means that if you were to sue IBM ... only under the [ADEA], as amended, you would not be liable under the terms of this Release for their attorneys' fees and other costs and expenses of defending against the suit. This Release does not preclude filing a charge with the U.S. Equal Employment Commission.

Syverson and nine other named plaintiffs signed the MERA Agreement in return for severance pay and benefits. They later filed age discrimination charges with the EEOC. The EEOC dismissed all charges, based on a finding that the MERA Agreement satisfied all the requirements set out in OWBPA for obtaining a "knowing and voluntary" waiver of ADEA rights and claims. Plaintiffs then filed suit, on behalf of themselves and a putative class of persons similarly situated, in the United States District Court for the Northern District of California. IBM filed a motion to dismiss, along with counterclaims for breach of the covenants not to sue. The District Court ruled in favor of IBM and plaintiffs appealed.

While the appeal was pending, the Eighth Circuit in Thomforde reversed a Minnesota district court's grant of summary judgment in favor of IBM, holding that an agreement that was essentially identical to the agreement signed by the Syverson plaintiffs, was "not written in a manner calculated to be understood by the intended participants as required by the OWBPA." Thereafter, the Syverson plaintiffs argued that, not only does the MERA agreement not satisfy the OWBPA's "manner calculated" requirement, but IBM should be precluded from arguing otherwise under the doctrine of "offensive non-mutual issue preclusion" (i.e., collateral estoppel) based on the Eighth Circuit's ruling.

Offensive Non-Mutual Issue Preclusion

The Ninth Circuit set out the four requirements for issue preclusion: (1) that there was a full and fair opportunity to litigate the identical issue in the prior action; (2) that the issue was actually litigated in the prior action; (3) there was a final judgment in the prior action; and (4) the party against whom preclusion, is asserted is the same party (or party in privity) to the party in the prior action. The court also noted a number of "fairness" factors courts use in determining whether to apply preclusion including whether "one or more judgments entered before the one invoked as preclusive are inconsistent with the latter or each other, suggesting that reliance on a single adverse judgment would be unfair."

IBM argued that issue preclusion did not apply, because: (1) the Eighth Circuit's Thomforde decision was not "final" because it remanded the matter to the district court, which might re-reconsider the validity of the waiver based on actual evidence (as opposed to the plaintiffs' allegations); (2) the rulings of the California and Minnesota district courts that the IBM waiver was valid were "prior inconsistent judgments"; (3) there was a substantial difference between the Eighth Circuit action and the Ninth Circuit action because the former was a single-plaintiff action and the latter is a putative class action; and (4) the issues addressed in Thomforde were different than the issues raised here, because in Thomforde the court considered the fact that the plaintiff had asked for clarification of the documents and corporate counsel had declined to provide it. No such facts were alleged in the Ninth Circuit case.

The Ninth Circuit rejected IBM's first three arguments. As to the finality of the Eighth Circuit decision, the court held that the appellate court's opinion left no room for the district court to reconsider the issue of the validity of the waiver on remand, and thus its decision on that issue is sufficiently "final" for purposes of issue preclusion. As to the district court rulings being "prior inconsistent judgments," the court held that IBM was not entitled to rely on either the Minnesota district court's decision, which had been reversed, or the California district court's decision in the instant action which was on appeal, and thus, the only relevant prior judgment on the waiver issue was the Eighth Circuit's decision. As to IBM's argument that its position in a class action was not comparable to its position in defending a single-plaintiff action, the court noted that the Minnesota and California cases were progressing "nearly simultaneously, so invocation of issue preclusion in this case was foreseeable and IBM had every incentive to litigate Thomforde ?fully and vigorously,'" and thus was not treated unfairly.

However, the court grudgingly agreed with IBM that the issue decided in Thomforde and the issue to be decided in the instant case were not identical, because there appeared to be a secondary basis for the Eighth Circuit's decision ? IBM corporate counsel declining to explain the waiver to Thomforde ? which did not exist in this case. Thus, the Ninth Circuit held that IBM was not precluded from arguing the validity of the waiver and moved on to review the merits of the plaintiffs' claims that they did not knowingly and voluntarily waive their right to an ADEA action.

Validity of Waiver

Despite the differences between the Thomforde case and the instant case, the court's analysis of the MERA Agreement was essentially the same as the Eighth Circuit's, and the court concluded that the release was not "written in a manner calculated to be understood by the average individual eligible to participate." The court noted that the MERA Agreement contained, on the one hand, a release of "all claims" including "claims arising from the [ADEA]," and a "covenant not to sue" which includes an "agree[ment] . . . [to] never institute a claim of any kind against IBM. . . related to . . . employment with IBM, but it also provides, on the other hand, that "this covenant not to sue does not apply to actions based solely under the [ADEA]." (Italics in original.) The court agreed with the Eighth Circuit that one plausible reading of the document would be that the employee released IBM from all ADEA claims and agrees not to institute a claim of any kind against IBM, except the employee may bring an action based solely under the ADEA. Although IBM argued that there is a legal distinction between a release and a covenant not to sue, the court held that the average participant would not "grasp the import of the distinction in a meaningful way." "Further, the distinction between releases and covenants not to sue becomes particularly murky when both are included in a single document." The court cited to EEOC guidance which notes: "the chance of misunderstanding is heightened if the covenant not to sue is added to an agreement that already includes an ADEA waiver clause. The covenant in such a case would have no legal affect separate from the waiver clause." Here, the exception for ADEA claims from the covenant not to sue "necessarily creates potential confusion, as it appears to lift any barrier from proceeding to court with an ADEA claim."

IBM protested that the ADEA exception in its covenant not to sue was drafted to comply with the EEOC regulation that provides: "No ADEA waiver agreement, covenant not to sue, or other equivalent arrangement may impose any ... penalty, or any other limitation adversely affecting any individuals right to challenge the agreement ... [including] provisions allowing employers to recover attorneys' fees and/or damages because of the filing of an ADEA suit." 29 C.F.R. ? 1625.23(b). However, the court held that if IBM's intention was to draft an agreement that would preserve the right of an employee to challenge without penalty his waiver of ADEA claims as not knowing or voluntary, "it would have been quite easy to have accomplished this purpose directly," instead of using a term unfamiliar to lay people ("covenant not to sue").

Finally, the court rejected the trial court's reasoning that "to the extent the language of the [MERA] agreement requires clarification, the [agreement] explicitly advises affected employees to consult an attorney, their manager, or the MERA Project Office of Human Resources prior to signing." As did the Eighth Circuit in Thomforde, the court found that "to rely on the agreement's direction to seek legal advice ... for clarification of the waiver would nullify the distinct requirement that the agreement be written in a manner calculated to be understood by the participant (as opposed to his attorney)."

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California Court of Appeal Rejects Ninth Circuit's "Narrow Restraint" Exception to Prohibition of Non-Competition Agreements.

In Edwards v. Arthur Andersen LLP, 2006 DJDAR 11780 (Cal. App. Aug. 30, 2006)(2), the California Court of Appeal (Second District, Division Three) held that there is no "narrow restraint exception" to California's ban on non-competition agreements (Cal. Bus. & Prof. Code ? 16600), despite Ninth Circuit rulings to the contrary.

Plaintiff Raymond Edwards was a tax manager in Arthur Andersen's Los Angeles office. In 1997, he signed a non-competition agreement which stated in relevant part:

If you leave the Firm, for eighteen months after release or resignation, you agree not to perform professional services of the type you provided for any client on which you worked during the eighteen months prior to release or resignation. This does not prohibit you from accepting employment with a client.

For twelve months after you leave the Firm you agree not to solicit (to perform professional services of the type you provided) any client of the office(s) to which you were assigned during the eighteen months preceding release or resignation.

You agree not to solicit away from the Firm any of its professional personnel for eighteen months after release or resignation.

In 2002, in the wake of the Enron scandal, Andersen began selling portions of its practice to competitors and announced it would cease practicing public accounting in the United States. Edwards' Los Angeles group was to be sold to HSBC. As a condition of closing the transaction, Andersen required that all Andersen managers, including Edwards, execute a Termination of Non-Compete Agreement ("TONC") drafted by Andersen, which also contained an extremely broad release of claims against Andersen, as well as other terms favorable to Andersen. Edwards refused to sign the TONC, and HSBC withdrew its offer of employment to Edwards.

Edwards sued Andersen for intentional interference with prospective economic advantage and other claims. In order to prove intentional interference with prospective economic advantage, Edwards was required to show that Andersen had committed an "independently wrongful" act, i.e., wrongful by some measure beyond the fact of the interference itself. The claim was dismissed by the trial court based on its ruling that both the 1997 non-competition agreement and the 2002 TONC were valid and, thus, requiring Edwards to sign them as condition of employment was not a wrongful act.

Reversing, the Court of Appeal held that both the 1997 non-competition agreement and the 2002 TONC are invalid under Section 16600, "even if the restraints imposed are narrow and leave a substantial portion of the market open to the employee." In a lengthy opinion, the court held that Andersen had committed independently wrongful acts by: (1) requiring consideration (Edwards' release of claims against Andersen) for releasing Edwards from an invalid non-competition agreement; and (2) requiring Edwards to sign the TONC which included a release that was so broad that it would release Edwards' statutory right to indemnity under California Labor Code ? 2802.

Non-Competition Agreement

As to the validity of the 1997 non-competition agreement, the court noted that there were only two narrow, statutory exceptions to Section 16600's ban on non-competition agreements ? sale of the goodwill of a business and dissolution of a partnership ? neither which were applicable in this case. There also is a judicially-recognized exception where such agreements are necessary to protect trade secrets, but there was no allegation that Edwards possessed trade secrets.

In ruling that the 1997 agreement was valid, the trial court had relied on a "narrow restraint" exception recognized by the Ninth Circuit, which provides that non-competition agreements are not in violation of Section 16600 as long as the restriction imposed is limited and leaves a substantial portion of the market available to the employee. General Commercial Packaging v. TPS Package Engineering, 126 F.3d 1131, 1134 (9th Cir. 1997.) The Edwards court held that this is "a misapplication of California law." In reaching this conclusion, the court reviewed the legislative history of Section 16600 and applied rules of statutory construction (i.e., "the presence of express exceptions ordinarily implies that additional exceptions are not contemplated"). The court also found that policy concerns strongly militate against the Ninth Circuit's approach, stating: "Under the narrow restraint doctrine, employers have an incentive to draft non-competition agreements that push the envelope of the ?narrowness' requirement. Noncompetition agreements burden a terminated employee with the task of guessing, at his or her peril, whether a court might find particular restrictions sufficiently narrow or overly broad."

Wrongful Act

The court moved on to consider whether requiring Edwards to sign the TONC as consideration for release from the 1997 agreement violated public policy and thus constituted an "independently wrongful act" for the purposes of an intentional interference claim. A previous Court of Appeal decision held that terminating an employee for refusing to sign an unenforceable covenant not to compete constitutes a wrongful termination in violation of public policy. D'Sa v. Playhut, Inc., 85 Cal.App.4th 927 (2000). Although Edwards was not terminated by Andersen for refusing to sign a non-competition agreement, Andersen required, as a condition of his new employment with the purchaser of Andersen's Los Angeles tax practice, that he execute a broad release of claims against Andersen as consideration for Andersen releasing him from the invalid non-competition agreement. "In essence, Andersen enforced the non-competition agreement by demanding consideration for it .... Using the invalid non-competition agreement to coerce Edwards into forfeiting rights was no less wrongful than terminating an employee who refused to sign such an agreement."

Andersen argued that at least one clause in the 1997 non-competition agreement ? the "anti-raiding" clause prohibiting solicitation of Andersen employees ? was not invalid under Section 16600, and that it was therefore entitled to consideration in exchange for release from that lawful agreement. The court rejected this theory, expressing doubt that an agreement not to solicit Andersen employees had any value at a time when Andersen was going out of business in the United States ("Something which is completely worthless cannot constitute a valid consideration."). Further, prior case law had established that an employer cannot lawfully make an employee sign an employment agreement containing an unenforceable covenant not to compete, even if the non-competition agreement can be severed from other, enforceable provisions. Moreover, Andersen sought consideration for releasing Edwards from the entire 1997 agreement, not the anti-raiding provision only.

Release of Right to Indemnity

As to the overbroad release language in the TONC, the Court held that it was so broad as to release Edwards' statutory right to indemnity under Labor Code ? 2802. Forcing Edwards to do so violates the public policy expressed in Labor Code ? 2804, which nullifies such provisions. The TONC purported to release Andersen from:

Any and all actions, causes of action, claims, demands, debts, damages, costs, losses, penalties, attorneys' fees, obligations, judgments, expenses, compensation or liabilities of any nature whatsoever, in law or equity, whether known or unknown, contingent or otherwise, that Employee now has, may have ever had in the past or may have in the future against any of the Released Parties by reason of any act, omission, transaction, occurrence, conduct, circumstance, condition, harm, matter, cause or thing that has occurred from the beginning of time up to including the date hereof, including, without limitation, claims that in any way arise from or out of, are based upon or relate to Employee's employment by, association with or compensation from [Andersen] or any of its affiliated firms, except for claims (i) arising out of [Andersen's] obligations set forth in this Agreement or (ii) for any accrued and unpaid salary or other employee benefit or compensation owing to Employee as of the date hereof.

The trial court had noted that there is no specific mention of a waiver of indemnity rights in this language and, in any event, Labor Code ? 2804 renders any such agreement void. However, the appellate court held that the right to indemnity was "necessarily encompassed within the clear terms of the broad release," because it expressly applies to all "claims that in any way arise from or out of, or are based upon or relate to Employee's employment" and specifically includes "costs," "losses," and "expenses" "of any nature whatsoever." The court stated: "it is difficult to imagine a theory under which indemnity rights would not be covered, given this broad language." (Italics in original.) The court rejected Andersen's argument that indemnity rights would fall within the TONC's exception for "unpaid salary or other employee benefit or compensation owing to Employee as of the date hereof," finding that even if indemnity arguably was encompassed within the term "compensation," the exception was limited to compensation owing as of the date the TONC was executed, and thus would exclude any future indemnity claims.

The court also rejected Andersen's argument that, because a release of indemnity rights would be void under Labor Code ? 2804, requiring an employee to sign an agreement which included such a release would not be wrongful because it could not be enforced. The court held that the argument "ignores the reality of the marketplace.... Employees, having no reason to familiarize themselves with the specifics of California's employment law, will tend to assume that the contractual terms proposed by their employer ... are legal."

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Court of Appeal Upholds Department of Industrial Relations Ruling That Couriers Were Employees Rather Than Independent Contractors Under Workers' Compensation Act, Despite Employer's Lack of Control Over Their Work.

In JKH Enterprises, Inc. v. Department of Industrial Relations, 2006 DJDAR 12189 (Cal. App. Aug. 22, 2006)(ordered published Sept. 12, 2006)(3), the state Court of Appeal (Sixth Appellate District) held that there was substantial evidence to support a ruling by the Department of Industrial Relations ("DIR") that freelance couriers were employees of a courier services company, and thus the company was required to obtain workers' compensation insurance coverage.

The president of JKH, Joe Herrara, had previously been the sole proprietor of another courier service business, VIP Courier, which had been issued a "stop work order" by the DIR for failure to procure workers' compensation insurance. Although VIP did not challenge the stop work order, Herrara subsequently incorporated as JKH and then continued to classify his drivers as independent contractors and continued the same business without procuring workers' compensation insurance.

Prior to their engagement by JKH, each of the couriers filled out a form entitled "Independent Contractor Profile," in which they acknowledged their status as independent contractors. For each delivery, a courier was paid a negotiated amount per hour, which varied depending on mileage, time and volume of deliveries along a particular route. "Route drivers" were not required to contact JKH's dispatcher on a regular basis. They picked up packages from JKH's route customers and the customer directed them where to deliver the package. JKH would later obtain details of when packages were picked up and when they were delivered from both the couriers and route customers. A second type of courier, "special drivers," would call JKH's dispatcher each day and inform the dispatcher whether he or she wished to work that day. If so, the dispatcher would provide information regarding pick ups. The special drivers were free to decline any particular assignment, were not required to work any particular schedule and were paid individually negotiated commissions based on the deliveries they made. All couriers paid for their own vehicles, gas, cell phones, car maintenance, etc. Their cars did not bear any JKH markings or logo, nor did they wear uniforms. Some of the couriers performed delivery service for other companies as well as JKH. Two couriers had their own business license, but only one of those had a business license for a delivery service. The couriers received no substantial training.

After an administrative hearing, a DIR hearing officer concluded that:

Although some of the factors in this case can be indicative of the workers being independent contractors, the overriding factor is that the persons performing the work are not engaged in occupations or businesses distinct from that of [JKH]. Rather their work is the basis for [JKH's] business. [JKH] obtains the clients who are in need of a delivery services and provide the workers who conduct the services on behalf of [JKH]. In addition, even though there is an absence of control over the details, an employee/employer relationship will be found if the [principal] retains pervasive control over the operation as a whole, the worker's duties are an integral part of the operation, and the nature of the work makes detailed control unnecessary.

JKH petitioned the Santa Clara Superior Court for a writ of mandate. The trial court denied the petition and granted the DIR's motion for a preliminary injunction enforcing its stop work order, finding that there was substantial evidence to support the DIR's ruling. In affirming the trial court, the Court of Appeal compared the facts of this case with those in SG Barilla & Sons v. DIR, 48 Cal.3d 341 (1989), in which the California Supreme Court held that agricultural workers were not independent contractors for purposes of the requirement to obtain workers' compensation insurance. Unlike the common-law test for independent contractor status, which would apply in the context of determining whether a person is an employee for purposes of imputing tort liability on the putative employer, there is a separate "economic realities" test which is applicable in the context of broad remedial legislation like the Workers' Compensation Act. While the common law test emphasizes the hirer's degree of control over the details of the work performed, "employment" the workers' compensation context is more broadly defined and includes a presumption that any person in service to another person is a covered employee. Moreover, lack of control over the details of the work is not considered dispositive in this context, particularly where the work does not require a high degree of skill and is an integral part of the employer's business. In this case, "control over the operation as a whole" is sufficient to support employee status. It was enough that JKH obtained the clients in need of the service and provided the workers to conduct it.

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Heightened Deference is Due to Department of Labor Opinion Letter Where The Agency is Interpreting Its Own Regulations.

In Bassiri v. Xerox Corp., 2006 DJDAR 12281 (9th Cir. Sept. 12, 2006)(4), the Ninth Circuit interpreted a U.S. Department of Labor ("DOL") regulation defining "payroll practices" which are not covered under ERISA. The regulation defined an exempt "payroll practice" as: "Payment of an employee's normal compensation out of the employer's general assets, on account of periods of time during which the employee is physically or mentally unable to perform his or her duties, or is otherwise absent for medical reasons...." 29 C.F.R. ?2510.3-1(b)(2) (emphasis added).

The case involved a long-term disability plan for Xerox employees which provided payments at 60% of the employee's salary for a period up to two years. Under the terms of the plan, payments would be made to a disabled employee only as long as he or she remained a full-time, permanent employee of Xerox. The plaintiff, Bassiri, was terminated while receiving disability benefits under the plan, at which time the payments were terminated. Bassiri filed suit in federal court alleging that Xerox had wrongfully terminated his employment and his disability payments. As to the disability payments, Bassiri alleged that either: (a) the plan was an ERISA-qualified plan and he was entitled to a remedy under ERISA; or, in the alternative, (b) the plan was a "payroll practice," exempt from ERISA, and he was entitled to relief under state law for breach of contract, fraud and negligent misrepresentation. Xerox filed a motion to dismiss the state law claims on the basis of ERISA preemption. The district court granted the motion, rejecting Bassiri's contention that the plan might be a "payroll practice" exempted from ERISA because it paid only 60% of salary and not "normal compensation" as defined in the above DOL regulation.

Reversing, the Ninth Circuit cited eleven DOL opinion letters, dating back to 1979, which opined that "normal compensation" includes payments of less than full salary for purposes of establishing the "payroll practice" exemption to ERISA. Although the opinion letters had also been presented to the court below, the district court determined that it was not required to give deference to the opinion letters, citing Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944). The appellate court held that Skidmore deference only applies to opinion letters which purport to interpret a statute, not those which interpret the DOL's own regulations. In this case, the applicable standard is that set out in Auer v. Robbins, 519 U.S. 542, 461 (1997), which provides that "where an agency interprets its own regulation, even if through an informal process, its interpretation of an ambiguous statute is controlling unless it is plainly erroneous or inconsistent with the regulation."

The court held that the term "normal compensation," in the context of the above regulation, is ambiguous, because it could be read to refer to either the employee's normal amount of compensation, payment coming from the normal source of compensation, or compensation paid in the normal manner of payment, or any combination of these. It further held that the DOL's determination that "normal compensation" could include a reduced amount of compensation is not plainly erroneous or inconsistent with the regulation. In the preamble to the regulation, the DOL had stated that exempt payroll practices include practices which relate to ERISA benefits but "are more closely associated with normal wages or salary." Here, the disability payments came in the form of regular paychecks, in an amount tied to salary (as opposed to variable performance of a fund), and ? like salary ? ended upon termination. The court further noted that the interpretation in the opinion letters was more in line with the purposes of ERISA, and "the letters reflect a consistent view over an extended period of time ? here, a position that the Department of Labor has taken uniformly since 1979.... For over 25 years employers have relied on this interpretation and have shaped their plans around the Department of Labor's definition." (Citation omitted.) Under these circumstances, the interpretation in the opinion letters was not "plainly erroneous or inconsistent with the regulation" and was controlling.

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1. Opinion by Berzon, J., joined by Rawlinson and Callahan, JJ.

2. Opinion by Aldrich, J., joined by Klein, P.J., and Croskey, J.

3. Opinion by Duffy, J., joined by Elia, Acting P.J. and Bamattre-Manoukian, J.

4. Opinion by Pregerson, J., joined by Noonan and Thomas, JJ.