#MeToo Archives - Richard Friedman

Clawing Back Compensation from a Sexual Harassment Predator in the #MeToo Era

Posted on September 11, 2018May 2, 2022 by Richard Friedman

The September 9 resignation of CBS Chairman, President, and Chief Executive Officer Les Moonves after six women accused him in the New Yorker of engaging in sexual harassment years ago, which came about six or so weeks after the New Yorker had published an article in which six other women had made the same accusations, brings to mind two questions that some companies, particularly public ones accountable to their shareholders, will confront as the #MeToo movement continues to have a wide impact on Corporate America: can a company claw back compensation from a former executive found to have engaged in sexual harassment and, if so, is it in the company’s interests to try to do so? This article will briefly discuss two cases in which the faithless servant doctrine was invoked under New York law this year to try to claw back compensation with varying results.

In our recent article, Clawing Back All Compensation From The ‘Faithless Servant’ Under New York Law, we pointed out that the faithless servant doctrine is a potentially powerful tool that employers can use to try to claw back all compensation paid to a former employee upon demonstrating that the former employee repeatedly engaged in disloyal and unfaithful conduct during his or her employment. The theory underlying the doctrine is quite simple: one who has acted unfaithfully or in bad faith in an employment context should not be entitled to retain his or her compensation.

To provide a remedy for employers, employees found to be disloyal under the faithless servant doctrine in New York are generally “entitled to no compensation, at least for the period of the agent’s disloyalty.” Yukos Capital S.A.R.L. v. Feldman, 2017 U.S. Dist. LEXIS 16438, *3 (S.D.N.Y. 2017). However, two cases decided in recent months under New York law apply the doctrine in very different ways depending on whether the alleged misconduct was financial in nature or sexual in nature.

In Salus Capital Partners, LLC v. Moser, 289 F. Supp. 3d 468 (S.D.N.Y. 2018), employees reviewed emails of the company’s former CEO who had been terminated without cause and realized that the CEO had concealed unauthorized personal charges on his corporate credit card. In an arbitration proceeding, the employer invoked the faithless servant doctrine to obtain a forfeiture of compensation and recoup the fees it had paid to outside counsel for investigating the former CEO’s misconduct. The U.S. District Court for the Southern District of New York upheld the former arbitrator’s findings that the former CEO had:

spent just under $100,000 in improper credit card charges for patio furniture, watches, and family travel;
falsified a vendor’s invoices totaling approximately $100,000 for certain audio visual work which was done at his home; and
spent $35,000 for personal use of the company’s NetJets account.

The court also upheld the arbitrator’s award of $879,514 in compensation forfeiture and $748,155 in attorneys’ fees for the investigation of the former CEO’s conduct. The court stated as follows: “[The CEO’s] purported exemplary performance of his duties when he was not stealing from plaintiff does not insulate him from the application of the faithless servant doctrine.” Id. at 480 (quoting City of Binghamton v. Whalen, 141 A.D.3d 145, 148 (3d Dep’t. 2016)) (internal quotations omitted).

The investigative costs were recoverable pursuant to an indemnification clause in the applicable agreements. The same misconduct that formed the basis for the compensation forfeiture triggered the indemnity obligation.

Although the faithless servant doctrine was first recognized by the New York Court of Appeals over 125 years ago, there have been very few cases involving sexual harassment as the underlying act of disloyalty. In one such case, Astra USA, Inc. v. Bildman, 455 Mass. 116 (2009), the Massachusetts Supreme Court, applying New York law, found that a former CEO guilty of fiscal improprieties and habitual sexual harassment which caused financial and reputational harm to Astra USA, Inc., his former employer, must forfeit his entire compensation under the faithless servant doctrine.

However, in Pozner v. Fox Broadcasting Company, 59 Misc. 3d 897 (Sup. Ct. N.Y. Cty. 2018), Justice Saliann Scarpulla of the New York County Supreme Court’s Commercial Division, considered by many to be one of the crown jewels of the state judiciary system, declined to extend the faithless servant doctrine to require Cliff Pozner, a former Executive Vice President at Fox Broadcasting Company (“Fox”), to forfeit compensation resulting from his termination for cause because of sexual harassment allegations directed against him. The court held that Pozner had not breached his duty of loyalty to Fox despite his alleged misconduct. In so holding, the court distinguished the action from Astra, stating that breach of the duty of loyalty to an employer “has only been extended to cases where the employee act[s] directly against the employer’s interests – as in embezzlement, improperly competing with the current employer, or usurping business opportunities,”and not in cases where sexual harassment was the only alleged impropriety. Id. at 901.

The Pozner Court also distinguished Colliton v. Cravath, Swaine & Moore, LLC, 2008 U.S. Dist. LEXIS 74388 (S.D.N.Y. 2008), in which the U.S. District Court for the Southern District of New York had held that an attorney was subject to a forfeiture of his compensation because, by committing statutory rape and patronizing a prostitute, he was incapable of meeting the ethical standards of his profession constituting “a substantial breach of his duty of loyalty to Cravath.” Id. at *17. The Court reasoned that the conduct at issue in Colliton rendered the disloyal employee unable to fulfill the terms of his employment and that his entire employment was the product of fraudulent concealment, whereas there were no allegations of fraud in the Pozner action. Id.

Incredibly, the Pozner Court failed to consider sexual harassment to be an act “directly against … a company’s interests” even though it can (i) lead to an untenable work environment, (ii) harm valued employees, and (iii) severely damage a company’s reputation with multiple constituencies such as employees, customers, and suppliers. It also appears that the court did not believe that the act of concealing one’s sexual harassment to retain one’s job constitutes fraudulent concealment.

Some would view the Pozner ruling as tone deaf not only because of the financial and reputational harm and elevated scrutiny often faced by companies entangled in high-profile sexual harassment scandals, but also because the faithless servant doctrine was intended to serve as a deterrent to employees from engaging in similar acts in the future. In Diamond v. Oreamuno, 24 N.Y.2d 494 (1969), for example, the New York Court of Appeals held that the remedy for breaches of fiduciary duties of loyalty was not simply “to compensate the plaintiff for wrongs committed by the defendants, but to … prevent them, by removing from agents and trustees all inducement to attempt dealing for their own benefit in matters which they have undertaken for others, or to which their agency or trust relates.” Id.

Indeed, there are surely victims of sexual harassment in the workplace who have not reported it over the years because of overt or implicit threats made by both the perpetrators of the harassment who are senior to them in the organization where they work. Of course, only time will tell how the New York appellate courts will treat Pozner and subsequent cases like it where the faithless servant doctrine is invoked to try to recoup compensation against perpetrators of sexual harassment in the workplace.

Richard B. Friedman
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Gearing Up to Comply With New York State’s and City’s New Anti-Sexual Harassment Laws

Posted on July 25, 2018May 2, 2022 by Richard Friedman

As discussed in a previous newsletter, the #MeToo movement has generated nationwide discussion about sexual harassment and resulted in increased workplace sexual harassment complaints throughout the country. In response to the perceived growing crisis, New York State made extensive changes to the state’s human rights laws as part of the 2019 New York State Budget. In addition, the New York City Council passed the Stop Sexual Harassment in NYC Act. These changes increase employer liability for—and enhance employee protections against—workplace sexual harassment and gender discrimination, requiring the immediate attention of employers of all sizes. This article will discuss what I consider to be the most salient changes in the law.

2019 New York State Law

The 2019 New York State Budget, signed into effect by Governor Andrew Cuomo, contains many employee-related changes of which employers should be aware, including:

1. Mandatory Annual Sexual Harassment Prevention Policy and Interactive Training Program

Effective October 9, 2018, New York State employers must implement a new sexual harassment policy that meets or exceeds the guidelines provided by the forthcoming model sexual harassment prevention policy created by the New York State Department of Labor and New York State Division of Human Rights. Employers must distribute their new or revamped policies to all employees and provide a standard complaint form for employee use.

Additionally, employers must implement an interactive sexual harassment prevention training program that features:

an explanation and specific examples of sexual harassment;
detailed information about federal, state, and local laws concerning sexual harassment and available remedies for victims;
the responsibilities of supervisors; and
a description of employee rights and all internal and external forums for bringing complaints.

Employers must conduct these trainings for all employees annually.

2. Prohibition of Mandatory Arbitration of Sexual Harassment Claims

Since July 11, 2018, New York Civil Practice Law and Rules has banned mandatory binding arbitration provisions in employment contracts except where inconsistent with federal law or included as part of a collective bargaining agreement. It is unclear whether this provision will withstand legal challenges asserting that the Federal Arbitration Act preempts it, but employers should operate under the assumption that it’s constitutionality will be upheld while awaiting word eventually from the Supreme Court.

3. Extension of Employer Liability for Sexual Harassment to Non-Employees

Since April 12, 2018, employers can be held liable for sexual harassment claims brought by non-employees such as independent contractors and subcontractors as well as employees working under service contracts. Employers will be liable for sexual harassment experienced by non-employees if the employer had knowledge or should have known about the incident(s) and did not take prompt and appropriate action to resolve the issue.

4. Prohibition of Non-Disclosure Agreements

Since July 11, 2018, New York State Law has prohibited non-disclosure provisions in sexual harassment settlement agreements unless the complainant consents. In order to obtain consent, the employer must ensure:

the complainant prefers a non-disclosure provision;
the complainant is given 21 days to consider the non-disclosure provision; and
the complainant is given seven days to revoke acceptance of the non-disclosure provision.

Stop Sexual Harassment in NYC Act (the”Act”)(New York City Law)

The passing of the Stop Sexual Harassment in NYC Act, many provisions of which became effective when Mayor De Blasio signed it on May 9, 2018, requires the attention of all NYC employers. The following is a list of provisions of which employers should be aware:

1. Extended Statute of Limitations for NYC Sexual Harassment Claims

The statute of limitations for sexual harassment claims under the New York City Human Rights Law was extended from one year to three years.

2. Law Applies to All Employers

Current city laws prohibiting gender-based harassment apply equally to all employers, rather than merely those with four or more employees.

3. Requirement to Distribute Written Policies, Forms, Information Sheets, and Hang Posters Outlining the Sexual Harassment Complaint Process

Effective September 7, 2018, 120 days after Mayor De Blasio signed the Act, New York City employers will be required to conspicuously display a poster created by the New York City Human Rights Commission that outlines the rights of employees and responsibilities of employers with respect to sexual harassment policies and protocol. Employers must also distribute an information sheet containing the same information to current employees and new employees upon hire.

4. Mandatory Interactive Anti-Sexual Harassment Training

Effective April 1, 2019, the Act requires employers with 15 or more employees to conduct annual, interactive anti-sexual harassment training with all employees and interns. According to the City Law, the “interactive” requirement means “participatory teaching whereby the trainee is engaged in a trainer-trainee interaction, use of audio-visuals, computer or online training program or other participatory forms of training as determined by the [New York City Human Rights] Commission.”

Though it is similar to the New York State law, the Act provides a longer list of mandates for the trainings and does not require training of employees until after 90 days of employment or retraining of employees who participated in the requisite training through another employer. Employers are now required to maintain training records dating back three years to demonstrate compliance with the law.

Takeaway

Given the extensive changes in New York State and New York City Law contained in these two pieces of legislation, it is reasonable to assume that there will be an upswing in sexual harassment claims against New York State and New York City employers. Accordingly, if not yet doing so, employers should implement policy and training reforms to their sexual harassment programs, if any, to protect their employees and try to insulate themselves from potential liability.

Sexual Harassment Legal Settlements: The Rules Have Changed Under the Tax Cuts and Jobs Act

Posted on February 21, 2018May 2, 2022 by Richard Friedman

At the risk of stating the obvious, the #MeToo movement, in raising awareness about the traumatic experiences of sexual assault and harassment victims, has already begun to spur changes to our laws. This is readily apparent in Section 162(q) of the Tax Cuts and Jobs Act which disallows employers from deducting settlement payments and legal costs related to sexual harassment or abuse matters if the parties signed a settlement agreement with a confidentiality provision. It would appear that ensuring the confidentiality of a settlement now comes at a higher price to corporations which in the past would have deducted the settlement amount and the attorney’s fees related to that matter. However, as is often the case under the “law” of unintended consequences, this provision may prove detrimental to some claimants by causing companies to (i) challenge allegations and fight lawsuits alleging sexual harassment or sexual abuse rather than settle early if they don’t expect to be able to use the foregoing deductions because any settlement will be confidential and/or (ii) insist on paying lower amounts to settle confidentially, including in instances where claimants desire confidentiality because of the unavailability of these deductions.

What Does Section 162(q) Say?

New Internal Revenue Code Section 162(q) provides that, as of December 22, 2017, no deduction shall be allowed for:

” 1. any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement; or

2. attorney’s fees related to such a settlement or payment.”

This provision applies to payments made on or after December 22, 2017 even if the settlement agreement was signed prior to that date.

How Does It Change Existing Law?

Before Section 162(q) of the Internal Revenue Code was modified, employers could deduct the amounts paid as part of a confidential settlement along with all related legal costs as ordinary and necessary expenses incurred in carrying on their businesses. In forcing employers to choose between non-disclosure of a settlement payment and non-deductibility of the payment and related legal costs, the new section aims to deter settlement agreements containing non-disclosure provisions which have been wildly decried in the media as “hush money” payments that conceal the culpability of employers and thereby do not deter future sexual harassment in the workplace.

IRS Guidance is Needed

Because the IRS has yet to release guidance regarding Section 162(q), there are many unanswered questions, some of which are discussed below.

1. Unintended Consequences for Claimants

Section 162(q) clearly aims to benefit employees who have been the victims of sexual harassment; however, there are aspects of the statute that could end up hurting some of them. First, employees who receive settlements related to sexual harassment or abuse claims may themselves want the settlements to remain confidential out of fear that the publication of the settlement could negatively impact their personal life or future job prospects. Since Section 162(q) provides an incentive for an employer to not settle confidentially, an employee or former employee who desires nondisclosure now has less leverage and may be more likely to accept a lower settlement offer in return for confidentiality. Thus, early settlements may be less common and settlement amounts may be lower than in the past since such amounts and all related legal costs are no longer deductible.

Second, Section 162(q) does not on its face restrict only employers from deducting attorney’s fees. Therefore, it is at least conceivable, however absurd, that claimants could find themselves in a worse position financially than they were in prior to the adoption of the provision. Before Section 162(q) was amended, claimants could take an above-the-line tax deduction on the attorney’s fees they paid; thus, they were only taxed on the net portion of the settlement amount they received. Can claimants possibly be taxed on the entire amount of a settlement, i.e., more than they actually keep after taking into account attorney’s fees and costs which often comprise at least a third of the settlement amount? The far more reasonable position in my view is that, given the stated purpose of the legislation in the Conference Committee Report to disallow any deduction “for any settlement, payout, or attorney fees related to sexual harassment or sexual abuse if such payments are subject to a nondisclosure agreement” (H. Rept. 115-466 at 279), claimants can still deduct attorney’s fees and therefore will only pay taxes on the net amount they receive. However, until the IRS issues clarifying guidelines, some claimants may seek to have employers cover their possible additional tax liability which could present a stumbling block to a settlement.

2. Ambiguity Surrounding the Term “Related To”

Both provisions of 162(q) apply to settlements “related to” sexual harassment or abuse. This is problematic because many plaintiffs allege sexual harassment or abuse in addition to multiple other claims, such as race and gender discrimination claims. In drafting settlement agreements, employers almost always settle all claims simultaneously and do not distinguish between the sexual claims and other allegations. It is now unclear how employers should approach the settlement of multiple claims. Should they insist on separate settlement agreements for the deductible and non-deductible claims? In doing so, can employers offset the tax consequences of a nondeductible settlement by allocating larger amounts to settlements for other, non-sexual related claims? Absent clarifying guidance from the IRS, that seems very likely to occur in my view and, indeed, is probably already being done.

This ambiguity also applies to the provision regarding attorney’s fees. Where there are multiple claims against an employer, its attorneys conduct research and render other legal services vis-a-vis all claims, not only those which relate to sexual harassment or abuse. How should the fees associated with attorney time be allocated under Section 162(q)? Additionally, attorney’s fees are nondeductible only insofar as they relate to “settlement or payment.” Is the investigation of, or response to, a complaint of sexual harassment or abuse sufficiently related to “settlement or payment” to fall within the provision’s purview, or would attorney’s fees related to such legal services be deductible? The answer to these and other questions must await guidance from the IRS and, inevitably in some cases, the United States Tax Court. In the interim, companies confronted with these issues would be well advised to work with counsel who handle these types of matters regularly.

Finally, companies often insist in settlement agreements on general releases of all claims, including those of a sexual nature. Would such a release in a confidential settlement of a matter where there was no allegation of sexual harassment or abuse trigger Section 162(q)? That seems highly unlikely. Nonetheless, companies should give careful consideration before entering into a settlement agreement that contains explicit references to sexual harassment or abuse claims where no such claims were alleged.