PA Federal Business Decisions Volume 19, No. 2

Henry M. Sneath, Business Decisions Editors (Originally published in the Spring 2015 edition of the Pennsylvania Bar Association’s Civil Litigation Update)

Third Circuit Permits Enforcement of Forum Selection Clause by Non-Signatories Against Non-Signatories

In a recent precedential decision, the U.S. Court of Appeals for the Third Circuit addressed whether non-signatories to a contract containing a forum selection clause could enforce the clause against non-signatories to the same contract. The court answered this question affirmatively.

Carlyle Investment Management, LLC, et al. v. Moonmouth Company, S.A., et al., 779 F.3d 214 (3d. Cir. Feb. 25, 2015), involved an investment dispute between multiple plaintiffs and multiple defendants, several of whom had entered into contracts containing forum selection clauses. Despite the fact that less than all parties had signed the subject contracts, the court held that the forum selection clause was enforceable. In support of its holding, the court generally focused on the close relationship that existed between the signatories and the non-signatories, whom were either affiliated companies or directors or officers of the signatories. Additionally, the court took a broad view of whether the non-signatories claims arose out of the contracts containing the forum selection clause, electing to enforce the clause even though the claims actually arose out of subsequent contracts.

Third Circuit Holds That Allstate Insurance Company Did Not Violate Federal anti retaliation  Laws in Lawsuit Brought By EEOC

In EEOC v. Allstate Ins. Co., 778 F.3d 444 (3d Cir. Feb. 13, 2015), the Third Circuit Court of Appeals affirmed summary judgment in favor of Allstate Insurance Company (“Allstate”), determining that Allstate did not violate the federal anti retaliation laws by requiring its employee agents to sign a release that waived existing legal claims in order to receive unearned post-termination benefits. The Equal Employment Opportunity Commission (“EEOC”) had filed a lawsuit against Allstate, alleging violations of federal anti retaliation laws relating to the termination of approximately 6,200 Allstate employees.

During a reorganization of its business in 1999, Allstate decided to terminate the at-will employment contracts of approximately 6,200 sales agents and offer them the opportunity to work as independent contractors. Employees were offered four options: “(1) conversion to independent contractor status (the Conversion Option); (2) $5,000 and an economic interest in their accounts, to be sold by September 2000 to buyers approved by Allstate (the Sale Option); (3) severance pay equal to one year’s salary (the Enhanced Severance Option); or (4) severance pay equal to thirteen weeks’ pay (the Base Severance Option).” Employees who chose the Conversion Option: (1) were offered a bonus of at least $5,000; (2) not required to repay any office-expense advances; and, (3) acquired transferable interests in their business two years after converting. In addition, employees who chose any of the first three options were required to sign a release of all legal claims against Allstate relating to their employment or termination, including discrimination claims arising under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act (ADEA), and the Americans with Disabilities Act (ADA). However, this release did not cover future claims or bar employees from filing charges with the EEOC, rather it only covered those claims accruing up to the time the employees signed the release. Thousands of employees accepted the Conversion Option.

Several former employees filed individual and class action suits, seeking to invalidate the release and alleging discriminatory discharge, retaliation, ERISA violations, breach of contract, and breach of fiduciary duty. The EEOC also filed an action, seeking a declaratory judgment that “Allstate illegally retaliated against its employee agents by allowing them to continue their careers with the company only if they waived any discrimination claims.”

Following an appeal and upon remand, the district court granted partial summary judgment in Allstate’s favor but determined a trial was necessary to evaluate whether the release was signed knowingly and voluntarily and whether the release was unconscionable. The district court then granted summary judgment in Allstate’s favor on the EEOC’s retaliation lawsuit. The district court reasoned that Allstate’s requirement that employees choosing the Conversion Option waive their legal claims “was not facially retaliatory because the policy did not discriminate on the basis of any protected trait, and that Allstate had not specifically retaliated against agents who spurned the Release because, among other reasons, refusing to sign a release did not constitute ‘protected activity’ under the anti retaliation statutes.”

To establish a prima facie case of illegal retaliation, the following must be shown: “(1) protected employee activity; (2) adverse action by the employer either after or contemporaneous with the employee’s protected activity; and (3) a causal connection between the employee’s protected activity and the employer’s adverse action.” The EEOC argues that Allstate unlawfully retaliated against its employees in that the release failed to fall within the well-established rule that employers can require release in exchange for post-termination benefits. According to the EEOC, Allstate’s conduct was also per se retaliatory because it “withheld a privilege of the employees’ employment – the offer in the conversion option to continue their careers as Allstate agents – if they refused to release all their claims.” Finally, the EEOC argued that by denying employees the option to continue their employment at Allstate as independent contractors unless they signed the release constituted an adverse employment action.

The Third Circuit noted that “employers can require terminated employees to release claims in exchange for benefits to which they would not otherwise be entitled.” In determining whether a release is valid though, whether the release was knowingly and voluntarily signed must be considered. In addition, the Court pointed out that the release must not waive future claims and employees must receive consideration in return for signing the release. The EEOC argued that Allstate’s Conversion Option’s offer to become an independent contractor failed to qualify as adequate consideration for the release because the employees “were not terminated in any normal sense.” On the other hand though, the EEOC admitted that the Sale Option and Enhanced Severance Option were valid. The EEOC contended that Allstate could have complied with the anti retaliation laws by simply firing its employees instead of offering them the Conversion Option. The Third Circuit held that federal laws are designed to protect employees from such a harmful result. The Third Circuit also found that the Conversion Option offered the terminated employees something of value that they were otherwise not entitled to, in that each of the employees who signed the release was “(1) offered guaranteed conversion, whereas Allstate had previously retained discretion to deny conversion; (2) came with a bonus; (3) excused repayment of outstanding office expense advances; and (4) gave the converting agent a transferrable interest in his or her business after two years, rather than five.”

In determining that the EEOC failed to establish either protected activity or an adverse action, the Third Circuit rejected the EEOC’s arguments that the “protected employee activity” here was the refusal to sign the release and the associated “adverse action by the employer” was Allstate’s withdrawal of the Conversion Option. Under the anti retaliation statutes, there are two forms of protected employee activity: (1) “opposing any act or practice made unlawful by” the employment discrimination laws and (2) initiating or “participating in any manner in an investigation, proceeding, or hearing under” those laws. According to the Third Circuit, the refusal to sign a release failed to constitute “opposition sufficiently specific to qualify as protected employee activity.” The Third Circuit further noted that the EEOC cites no legal authority that an employer commits an adverse action by denying an employee an unearned benefit on the basis of the employee’s refusal to sign a release.

The Third Circuit concluded that Allstate did not violate the federal anti retaliation laws by requiring employees to sign a release in order to receive the Conversion Option as employers can mandate that terminated employees waive existing legal claims to receive an unearned post-termination benefit.

Third Circuit Clarifies Scope of the Qualified Immunity Doctrine

The Third Circuit recently revisited the whistleblower protections afforded to government employees by the First Amendment of the United States Constitution in Dougherty v. Sch. Dist., 772 F.3d 979 (3d Cir. 2014). In Dougherty, a Pennsylvania state employee of the School District of Philadelphia spoke to the Philadelphia Inquirer to bring to light the alleged fact that the former Superintendent of the School District improperly and illegally diverted contracts to ineligible contractors. Id. at 983. After the Inquirer published an article detailing Dougherty’s allegations, Dougherty was first administratively suspended pending investigation and subsequently terminated. Id. at 984.

Dougherty filed suit against the School District and the Superintendent, alleging an unlawful retaliatory termination for exerting his First Amendment free speech rights under § 1983. In response, all defendants moved for summary judgment alleging qualified immunity. Id. at 985. The Eastern District of Pennsylvania held “a reasonable government official would have been on notice that retaliating against Dougherty’s speech was unlawful,” and ruled that the defendants were not entitled to qualified immunity. Id.

On appeal, the Third Circuit used Dougherty as a means to clarify the way the Circuit analyzes the applicability of the qualified immunity doctrine. The basics of the qualified immunity doctrine have long been established into a three-step process: first, the court must determine whether the public employee plaintiff spoke as a citizen, rather than in her capacity as an employee, under the test established in Garcetti v. Ceballos, 547 U.S. 410 (2006); second, the speech must involve a matter of public concern; and third, “the government must lack an ‘adequate justification’ for treating the employee different than the general public based on its needs as an employer under the” balancing test established in Pickering v. Board of Education, 391 U.S. 88 (1968).

The defendants in Dougherty pushed an aggressive reading of the Third Circuit qualified immunity case law, arguing that because Dougherty came by the information he provided to the Inquirer through his role as a state employee that he could claim he was speaking as a citizen. Id. at 989. The Third Circuit roundly rejected this attempted expansion of qualified immunity, stating: “This Court has never applied the ‘owes its existence to’ test that [the defendants] wish to advance, and for good reason: this nearly all-inclusive standard would eviscerate citizen speech by public employees simply because they learned the information in the course of their employment, which is at odds with the delicate balancing and policy rationales underlying Garcetti.” Id.

Perhaps even bolder than the defendants’ argument that Dougherty’s speech was not protected because he learned its content in his capacity as a state employee is that the state still was justified in terminating him for the speech because it proved a “disruption.” Id. at 991. Again, the Third Circuit held that the balance on such matters must primarily protect citizen speech first: “speech involving government impropriety occupies the highest rung of First Amendment protection.” Id. Further, “it would be absurd to hold that the First Amendment generally authorizes corrupt officials to punish subordinates who blow the whistle simply because the speech somewhat disrupted the office.” Id. at 992.

Dougherty aggressively pushes back on government attempts to expand the scope of qualified immunity in the wake of the Garcetti opinion and the resulting Third Circuit case law.

Court Orders Insured to Reimburse Insurer for Settlement Amount Insurer Paid Where Insurer Did Not Owe Coverage

The U.S. District Court for the Eastern District of Pennsylvania held in American Western Home Ins. Co. v. Donnelly Distrib., Inc., No. 14-797, 2015 U.S. Dist. LEXIS 14357 (E.D. Pa. Feb. 6, 2015) (opinion by Schiller, J.), that an insurance company could obtain reimbursement from its insured based on an unjust enrichment theory for $125,000 it paid on its insured’s behalf to settle an underlying slip and fall case after the Third Circuit Court of Appeals held that the insurance company did not owe coverage to the insured for the incident.

Donnelly Distribution, Inc. (“Donnelly”) was sued for negligence arising out of an alleged slip and fall caused by a plastic tie used to wrap papers. American Western Home Insurance Company (“American Western”) insured Donnelly under a commercial insurance policy. American Western defended Donnelly in the slip and fall case under a reservation of rights, and subsequently filed a declaratory judgment action seeking a declaration that it owed no duty to defend or indemnify Donnelly. In the declaratory judgment action, the court initially ruled that American Western owed a defense and indemnity to Donnelly in the slip and fall case, but then vacated that order and ordered additional briefing. Shortly thereafter, Donnelly settled the slip and fall case, with American Western paying $125,000 of the $150,000 settlement amount. The court in the declaratory judgment action subsequently granted summary judgment in favor of Donnelly and declared that American Western owed a duty to defend and indemnify Donnelly. American Western appealed, and the Third Circuit reversed, concluding that American Western did not owe a duty to defend or indemnify Donnelly. American Western then filed suit against Donnelly in the Eastern District seeking reimbursement for the $125,000 it paid to settle the underlying action under an unjust enrichment theory, not breach of contract.

The court granted summary judgment in favor of American Western. In doing so, the court considered the factors set forth in Axis Specialty Ins. Co. v. The Brickman Group, Ltd., 756 F. Supp. 2d 644 (E.D. Pa. 2010), which held that “to prevail on an unjust enrichment theory, the insurer must establish that: (1) it did not make the payment due to a mistake of law; (2) the insured was on notice at the time of payment that the obligation to pay was disputed; (3) the insurer did not make the payment primarily to protect its own interest; and, (4) permitting reimbursement under the circumstances would not upset the delicate incentive structure inherent in the insurer/insured relationship.”

The court found that American Western did not make the payment under a mistake of law, having consistently disputed coverage. It further found that while the settlement benefited American Western, it also benefited Donnelly because it guaranteed a fixed settlement amount and avoided a verdict that could have been higher than the settlement amount. The court also did not believe that a balance of interests between the insured and insurer would be upset by ordering reimbursement, as the decision to settle was reasonable and American Western could not be faulted for settling given the court’s initial ruling prior to settlement of the underlying action that American Western owed a duty to defend and indemnify. Finally, the court held that the Third Circuit’s ruling that American Western did not have a “duty to indemnify Donnelly for any amount due pursuant to the settlement,” when the Third Circuit was aware of the settlement at the time of its ruling, indicated that American Western should not be barred from reimbursement following the Third Circuit’s decision. The court noted that if an insurer were barred in such a situation, “it would provide an incentive for the insurer not to settle, hoping that it owed no duty to indemnify, or stall on litigating and paying a settlement, hoping that its duties would be clarified before it made any payments.”

— Contributed by R. Brandon McCullough, Esq. , Houston Harbaugh, Pittsburgh, Pennsylvania;

Recent Insights