Reading the appellate court’s rendition of the facts in this breach of contract, breach of non-competition agreement and fraudulent inducement/concealment case, it is clear that the court empathized with the plaintiff, and wanted to allow the plaintiffs their day in court. The sordid details are as follows:

In GoSmile, Inc. v. Levine, the defendant founded the plaintiff corporation, which develops and sells tooth-whitening and oral hygiene products, and, he, together with his wife, were the company’s sole stockholders, directors and employees. In 2003, they sold a majority interest in the company to investors (the plaintiffs).

At that time, the defendants executed confidentiality and non-competition agreements that granted plaintiff exclusive ownership rights of all intellectual property, and prohibited defendants from using this information to compete with the company. In exchange for a cash payment, the defendants became at-will employees, directors and minority owners of plaintiff.

After the parties became embroiled in arguments over the company’s financial difficulties, the defendants were terminated, and later resolved their wrongful termination lawsuit arising therefrom via a settlement agreement with plaintiff and several other parties “which contained a broad mutual release of all claims of all kinds, whether known or unknown, that the parties ever had or now had.”

As part of the settlement agreement, plaintiff insisted upon – and defendant warranted – that he had neither breached the 2003 confidentiality and non-compete agreement in the past, and was also not in breach of those agreements at that time. That settlement agreement resulted in a payout to defendants of over $3 million, and an additional payout of $1 million over the following 4 years in exchange for the remainder of defendant’s stock in the company.

Later plaintiffs learned that defendant had, in fact, breached his fiduciary duties to the company, and used this confidential information to unfairly compete with the plaintiff. In other words, he deliberately lied about (in legalese, misrepresented) his breach of fiduciary duty and breach of the non-compete agreement to the plaintiff company in order to fraudulently induce them into entering into the settlement agreement, and pay him over $3 million.

Although the Court was required to sidestep some general rules in order to reach this result, and allow the plaintiff’s claims for breach of contract, rescission and fraudulent inducement to succeed, are you surprised that they did so?

I thought not.

(But if you’re interested in the legal nitty-gritty of why, see “How Breach of a Non-Compete Can Sustain Both Fraud & Breach of Contract Claims in NY“).

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New York’s Appellate Division, First Department’s dismissal of a wrongful termination and breach of contract claim by a securities firm’s compliance officer in a December 21 decision in Sullivan v. Harnisch is troubling. And I say that against a backdrop of a solid understanding and appreciation that most wrongful termination claims in New York are doomed.

But this case should have been different.

After all, the entire reason that this compliance officer was fired was because he did his job – questioning the propriety of some of his boss’s stock trades.

That said, here are my observations:

(1) I think that the Court got this decision right under current New York law.

(2) This case leaves little to no doubt that the law should be different.

Simply put, since both the plaintiff’s job description as well as his company’s ethics code required him to act as soon as he became aware that his boss (defendant Harnisch) had been “front-running,” i.e., selling shares of a stock that he owned before making similar sales for his clients, there should be an exception or carve-out, to protect such people from the at-will employment doctrine.

The plaintiff in this case is not without a consolation prize, however: his claims seeking to recover his equity in the company are still alive, and potentially worth nearly $30 million.

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In the breach of contract context, one of the most common – and potent – defenses to these cases is that the agreement was never reduced to writing, and therefore barred by New York’s Statute of Frauds.

There is a narrow, but  important exception to this rule: when the contract is terminable at will, or, in other words, if either party to the agreement is free to walk away at any time. This limited exception falls within the ambit of the larger exception that the Statute of Frauds does not apply to agreements that “are capable of being performed within one year.” (For more on this topic, please see “How Some Important Exceptions to NY’s Statute of Frauds Can Sustain a Breach of Contract Action.”)

This exception has been applied by New York’s courts in several different contexts, ranging from the breach of an agreement to supply goods to oral joint business venture  agreements – even when they apply to real estate (which normally must be reduced to writing as a matter of law).

For example, in the recent case of Mendelovitz v. Cohen, a Brooklyn court held that a formal writing is not necessary to enforce such an oral  joint venture agreement because the alleged joint venture agreement was capable of being performed within one year.

Likewise, in the Queens County case of Reliable Realtors v. Guerre, where the parties’ alleged joint venture was only to invest in and develop property, rather than creating a new property interest, the oral agreement was upheld as well.

The moral of the story is clear: don’t assume that your failure to reduce your agreement to writing is fatal to your breach of contract case.

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In the wake of the massive layoffs of the last few years, I’ve been asked this question an awful lot. (If you’re looking for a link to what a typical non-compete clause looks like, keep reading).

Fortunately, the Court of Appeals – New York State’s highest court, has written rather extensively on the subject. In my view, here are the most pertinent parts:

“A restraint is reasonable only if it: (1) is no greater than is required for the protection of the legitimate interest of the employer, (2) does not impose undue hardship on the employee, and (3) is not injurious to the public … A non-compete agreement must also be reasonably limited temporally and geographically.”

Well, that’s awfully vague, you say. And you’re right.

(For purposes of illustration, here’s some sample non-compete language).

But the Court gave us a clearer insight into the policy considerations that help determine whether a particular non-compete provision will be upheld:

“Undoubtedly judicial disfavor of these covenants is provoked by ‘powerful considerations of public policy which militate against sanctioning the loss of a man’s livelihood’ …

“Indeed, our economy is premised on the competition engendered by the uninhibited flow of services, talent and ideas. Therefore, no restrictions should fetter an employee’s right to apply to his own best advantage the skills and knowledge acquired by the overall experience of his previous employment. This includes those techniques which are but ‘skillful variations of general processes known to the particular trade.’

“Of course, the courts must also recognize the legitimate interest an employer has in safeguarding that which has made his business successful and to protect himself against deliberate surreptitious commercial piracy.”

So where does that leave us?

Here’s the Court’s conclusion:

“Restrictive covenants will be enforceable to the extent necessary to prevent the disclosure or use of trade secrets or confidential customer information.”

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If an at-will employee resigns before they are paid their commissions, they forfeit their right to collect them, right?

Absolutely not, held a New York County trial court.

In Nichols v. SG Partners, Inc., the plaintiffs were employed by defendant as placement professionals, earning both a base salary as well as a percentage of defendant’s revenues generated for placements that the plaintiffs made, or commissions. After the plaintiffs found the working conditions “intolerable,” they resigned, and requested that the defendant pay them for the commissions they had earned during their employment. Not surprisingly, the defendant ignored these requests.

Accordingly, the plaintiffs sued the defendants, contending that the defendants were liable for breach of contract, breach of an implied covenant of good faith and fair dealing, unjust enrichment and violation of New York Labor Law (“Labor Law”) §193. The defendant then promptly moved to dismiss the case, arguing, among other things, that since the plaintiffs did not have a written contract the plaintiffs’ claims were barred under New York’s Statute of Frauds (N.Y. Gen. Obl. Law §5-701).

In rejecting the defendant’s argument, the Court cited a long litany of precedent for the proposition that “[B]ecause an at-will employment relationship may be freely terminated by either party at any time for any reason or even no reason, employment agreements of this type generally do not fall under the proscription of the Statute of Frauds.”

Importantly, the Court also noted that if it is later found at trial that an employer willfully withheld the plaintiffs’ wages, in derogation of Labor Law §198.1-a, “an additional amount as liquidated damages equal to twenty-five percent of the total amount of the wages found to be due” (Rasmussen v. Yellow River, Inc. 298 AD2d 322 [1st Dept 2002]; Wolintetz v. Island Stationary Corp., 16 Misc 3d 1133 [NY Dist Ct 2007] (withholding of payment of commissions was a willful act of retaliation for the plaintiff’s leaving the defendant’s employ)).

The message to employers is unmistakably clear: if you wrongfully withhold earned wages or payments due to your former employees, you do so at your own peril.

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In a hot-off-the-presses decision that was handed down this past Thursday, and is scheduled to appear in Tuesday’s New York Law Journal, New York’s Appellate Division, First Department (which covers New York and Bronx Counties) reversed that portion of a trial court’s decision that dismissed a former at-will employee’s claims under Labor Law §§191 and 198 and Business Corporation Law §630, holding that although the plaintiff’s claim for unpaid salary was correctly dismissed (his employment contract allowed management to adjust his salary at their sole discretion), he had sufficiently stated a breach of contract claim for unpaid earned commissions that he “arranged” prior to his termination. In particular, the Appellate Court stated as follows:

“Once the commission is earned, it cannot be forfeited (see Davidson v. Regan Fund Mgt. Ltd., 13 AD3d 117 [2004];⁴ Yudell, 248 AD2d 189, supra). There is a long-standing policy against the forfeiture of earned wages, and this applies to earned, uncollected commissions as well (Weiner v. Diebold Group, Inc., 166, 166-167[1991]) …”

On the other hand, “although generally an at-will employee is not entitled to post-termination commissions, the parties are certainly free to provide otherwise in a written agreement.”

There is another important rule to consider, however. And that is the doctrine of contra proferentem, which states that an employment agreement should be construed against the drafter.  In this case, the Court held that had Management “meant to foreclose the possibility that plaintiff might earn a post-termination commission on a placement” arranged by plaintiff, it “could have said so explicitly.” And this they clearly failed to do.

The moral of the story is obvious: be very, very careful in drafting your employment agreements.

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In Bernhardt v. Tradition North America, a case very similar to the one we discussed recently in “Why Whistleblower Protection Clause In Employee Manual May Be Worthless,” the plaintiff, who was a vice president at defendant Tradition North America Inc., notified the SEC of various securities schemes that he had supposedly uncovered at his company. Not surprisingly, after he told defendant’s senior vice president and the company’s legal department that he had gone to the SEC, he was fired.

In seeking to recover damages for breach of contract and wrongful termination, the plaintiff asserted that he had an implied contract of employment (rather than being a mere “at will” employee) because he had been assured “that [d]efendants would operate the firm, and that [p]laintiff would be permitted to perform his job responsibilities, in accordance with the prevailing laws, rules and regulation of the securities profession.” In a similar vein, he claimed that since the defendants had made clear that he would be terminated for violating any laws, the defendants thereby impliedly warranted that they would not fire him for upholding those same laws.

As you may have guessed, these arguments didn’t even make it out of the starting gate; the Court dismissed the complaint without even requiring the defendants to answer the complaint.

And the reason the Court did so is straightforward: not only did the plaintiff fail to overcome the presumption of employment at will, the plaintiff did not produce any writing that limited the defendant’s right to hire, fire, promote, demote, transfer or take any other employment action it deemed otherwise appropriate.

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In Candela v. Banco Industrial de Venezuela C.A., the New York County trial court’s decision to dismiss a breach of contract and wrongful termination claim by a bank employee serves a clear warning to at-will employees everywhere: know your rights and what you must do to protect them before you are fired. Conversely, the decision also serves as a strong reminder to small business owners: make sure that your employee manual is properly drafted – or else.

In this case, the plaintiff, a former assistant treasurer of the defendant bank, claimed that she was fired as a direct result of her attempts to expose suspicious irregularities with respect to several trade confirmations that had come to her attention. Although she acknowledged that she was an at-will (as opposed to a contract) employee (for more information on the limited rights of at-will employees under New York law, see “Why Most Breach of Contract/Wrongful Termination Claims By At-Will Employees Are Doomed To Fail“), she alleged that the defendant’s own “Personnel Policies and Practices Manual promised to protect her from adverse action in connection with reporting suspicious activities,” and that this promise gave rise to a contractual obligation to protect her from retaliatory termination.

According to the Court, there are two problems that prove fatal to her claim, however. First, the Manual only protected against retaliatory action those who file a Suspicious Activities Report (SAR) – which the plaintiff never did. Second, the Manual also contained an explicit disclaimer that allowed them to terminate any at-will employee.

Thus, the implication of this decision is two-fold:

1. If you are an employee, make sure you read carefully your employment manual before you undertake any actions that might affect your job; and,
2. If you are the employer, make sure that your employment manual is appropriately drafted to protect your right to terminate at-will employees.

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Before addressing the merits of a breach of contract/wrongful termination claim against an employer, the threshold question that must be asked is “if I win, is a judgment against my former employer collectible?” Unfortunately, in this economy, the answer to this question is increasingly “no.” Consequently, even if you have the most meritorious claim, external economic factors may render the claim moot before it even begins.

But assuming you clear that first hurdle, there is a second question that may prove even more daunting: Did you have a contract, or were you an “at-will” employee? And the answer to this question is critical, because absent a written contract, the agreement “is presumed to be a hiring at will that may be freely terminated by either party at any time for any reason or even for no reason. Lobosco v. New York Telephone Co./NYNEX, 96 NY2d 312, 316 (2001). Furthermore, there is no exception for firings that violate public policy such as, for example, discharge for exposing an employer’s illegal activities, UNLESS the employee made its employer aware of an express written policy limiting the right of discharge and the employee detrimentally relied on that policy in accepting employment. See,  Weiner v. McGraw Hill, Inc., 57 NY2d 458 (1982).

As you might well surmise, this condition is rare indeed.

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