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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As you may know, under New York law, every contract carries an implied covenant (i.e., promise) of “good faith and fair dealing.” 511 West 232nd Owners Corp. v Jennifer Realty Co., 98 NY2d 144, 746 NYS2d 131, 773 NE2d 496.

But what on earth does that mean?

It’s actually rather tricky; in fact, New York’s courts have expressly acknowledged that there is an inherent conflict between the implied good faith in a contract on the one hand, and not allowing plaintiffs to use this implied promise as a sword to create new contractual responsibilities that completely negate the rights that were specifically established by the contract itself.

Perhaps the simplest way to explain this concept – which is concededly more than a bit vague – is that the implied covenant of good faith and fair dealing is breached when the defendant acts to prevent the plaintiff’s ability to perform his end of the contract, or to assure that the benefits of the contract are withheld from the plaintiff. To better illustrate the application of this concept, here’s a few examples from actual cases that were litigated in New York’s courts:

Case #1:         Where a landlord interfered with its tenant’s ability to meet its lease obligation to make repairs, a New York court properly held that the landlord has breached the implied covenant of good faith and fair dealing in their lease agreement. Chemical Bank v. Stahl, 272 AD2d 1, 712 NYS2d 452.

Case #2:           Likewise, in a wrongful termination and breach of contract case, where a consultant who performed work for a corporation in exchange for the option to purchase shares that were exercisable in installments and intrinsically linked to specific events and was then fired without cause, which caused her to forfeit her option (meaning she was not paid at all for her work), her breach of implied covenant of fair dealing was allowed to survive dismissal. Zuckerwise v. Sorceron Inc., 289 AD2d 114, 735 NYS2d 100.

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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 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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