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 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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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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