I am sure most readers were as fascinated as I was by the allegations in the high profile case involving alleged hiring practices among some of the most prominent companies in Silicon Valley. The lawsuit asserted that the companies – including, for example, Apple and Google – had agreed among themselves that they wouldn’t poach each other’s employees. The class action lawsuit brought on behalf of the affected employees recently settled.
Now shareholders for the companies involved have launched a series of lawsuits alleging that the boards and senior management of the companies involved in the “no poach” arrangements violated their duties to their companies. These latest shareholder lawsuits are a stark example of the way that companies’ employment practices can involve potential liability exposures for the companies’ directors and officers – not just, as is well understood, for violation of the laws directly relating to employment practices, but also for alleged violations of their legal responsibilities as directors and officers.
As reflected in the high tech employees’ amended complaint (here), the claimants in the class action lawsuit alleged that Google, Apple, Intel and other companies had reached an agreement not to recruit each other’s employees. The companies’ alleged “no poach” agreement had been the subject of a prior U.S. Department of Justice enforcement action. In their class action lawsuit, the claimants allege that the supposed agreement violated federal and state antitrust laws. According to press reports (refer for example here), the parties to the high tech employee lawsuit recently reached an agreement to settle the lawsuit on the eve of trial for a reported $324 million.
Now that the employee lawsuit has settled, attorneys for the shareholders of the companies involved have launched a series of shareholders derivative lawsuits alleging that by entering into the agreements not to recruit other companies’ employees, the executives at those companies violated their legal duties and harmed the companies involved.
According to a May 9, 2014 article in The Recorder entitled “No-Poach Pacts Now Basis for Derivative Suits” (here), several separate shareholder derivative lawsuit have now been filed in state court in California against executives of Google, Apple, Intel and Adobe, each of which companies allegedly participated in the agreement not to recruit each other’s’ employees.
For example, on April 29, 2014, a Google shareholder filed a derivative lawsuit in Santa Clara County (California) Superior Court against thirteen Google executives, including company founders Sergey Brin and Larry Page, as well as against the company itself as nominal defendant. In his complaint (here), the plaintiff alleges that the individual defendants entered or authorized the company’s entry into “express, secret, and illegal non-solicitation agreements with high-level executives at other companies.” These agreements, the complaint alleges, not only hurt the employees but also hurt the companies themselves “because Silicon Valley’s innovation is based in large part on the frequent turnover of employees, which causes information diffusion and spurs innovation.” The complaint seeks to recover damages for the alleged harm done to the companies. The complaint asserts claims against the individual defendants for breach of fiduciary duty; abuse of control; gross mismanagement; and waste of corporate assets.
It is not news that hiring practices involve significant potential liability exposures. But what is interesting about these Silicon Valley no poach practices derivative lawsuits is not just that employee hiring practices have led to significant litigation involving senior management; what is interesting is that claims are not based on alleged violation of employment practices laws, but based on the liabilities arising from the executives’ legal duties to their companies.
Unlike the typical lawsuit involving employment practices, the claimants in the derivative lawsuits are not employees or recruits allegedly harmed by the practices; the claimants are the companies’ shareholders. The harm alleged is not the detriments the alleged employment practices caused the employees; the harm claimed is the alleged detriments to the companies themselves. The claims are based not on alleged violations of laws addressing employment practices, but rather are based on the alleged breaches of fiduciary duties.
These recent lawsuits involving the Silicon Valley tech companies are not the only high profile examples where corporate hiring practices are raising the possibility of significant potential liability beyond the basic employment practices laws. According to news reports, the SEC reportedly investigating a number of financial services companies, Including JP Morgan (refer here) and Goldman Sachs (refer here), in connection with allegations that those companies’ hiring practices in China. According to press reports, the SEC is examining whether these companies hired the children of senior government officials to try to curry favor, allegedly in violation of the Foreign Corrupt Practices Act.
The recent lawsuits involving the Silicon Valley companies and the SEC investigation of the financial services companies’ hiring practices in China underscore the fact that corporate hiring practices (and other employment practices as well) represent a significant area of potential liability exposure for directors and officers – not just, as is well known and well understood, for potential violation of employment practices laws, but for violations of a broad range of other laws and duties.
It is worth noting in that regard that the high tech employees’ class action lawsuit itself was not based on alleged violation of basic employment practices laws. Instead, the employees’ claims were based on alleged violations of antitrust laws. Even the employees’ lawsuit highlights the fact that corporate employment practices can involve a wide range of potential liability exposures beyond those arising from the employment laws themselves.
The recent series of lawsuits against the Silicon Valley companies are also illustrative of another recent litigation trend, which is the rising number of civil actions following on in the wake of antitrust investigations and enforcement actions. Here, both the employees’ lawsuit and the later derivative lawsuits followed after the Department of Justice investigation of the companies’ employment practices. As I discussed in a recent post (here), antitrust enforcement is an increasingly important regulatory priority around the world, and increasingly follow-on civil litigation arises in the wake of the regulatory investigations and enforcement actions.
For my insurance industry colleagues, there is an additional important point that needs to be emphasized here – that is, the activities under discussion here involve employment practices, but the liability exposure involved is a D&O liability exposure. The derivative lawsuits filed against the directors and officers are the very kind of lawsuits for which companies purchase D&O insurance. And as I noted above with my reference to the investigation of employment practices in China, employment-related activities can give rise to a wide range of other potential liability exposures. The possibilities of claims arising from employment practices is, as is well understood, significant; but it is perhaps less-well understood that among the liability exposures are D&O liability exposures involving alleged violations of basic director and officer duties.
Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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