July 15, 2005
Just One Little Change to the Contract...
Massachusetts Lawyers Weekly ran an interesting but cryptic story--unfortunately I couldn't find any more info online, so I'm working from my hard copy writeup.
Joseph Cloonan was in-house counsel. He was leaving the company's employ for unclear reasons. The HR department drafts a severance agreement that promised to pay him $21,200. He then modifies the agreement (unclear if this was done by handwriting or if he modified an electronic copy) to include the following language:
"You will be paid eight hundred and fifty thousand for wages earned, if not paid in full within seven days you will be paid three times this amount along with all of your expenses and legal fees, all the officers and directors will be personally liable as well."
This was done in a manner that made it hard to identify that the contract had been changed. The HR director signs this amended contract without reviewing it. The company pays the $21,200, then Cloonan demands the $850,000 (surprisingly, he doesn't seem to demand the $2.5M that the contract language contemplates for late payments).
On the surface, based on the news report, there are so many things wrong with this scenario:
* an attorney trying to "slip" language into the contract. This doesn't really work as a legal proposition; courts can and will simply reform the contract to reflect the parties' true intent. It just gives lawyers a bad name.
* an attorney trying to claim that damages for late payment of seven days equal $1.7M. C'mon, this doesn't pass any reasonableness test.
* an in-house counsel negotiating an increase of severance pay from $21K to $850K with a non-lawyer (the HR director). This type of negotiation, if legitimate at all, needs to be handled with extreme procedural care for precisely the reasons illustrated in this case. I won't tick off all of the potentially applicable model rules that would govern such interactions, but Rules 1.7(b) and 1.8 spring immediately to mind.
Practice pointer to in-house counsel: if you're going to try to pull an extra $850,000 out of your employer as you walk out the door, have someone else draft the documents.
Finally, if all of the facts are true here, we had a number of violations of the Model Rules, and I would think that discipline by the State Bar would be warranted.
Posted by Eric at July 15, 2005 11:00 AM | Legal Industry
The ethical issues depend on context. If he was leaving voluntarily and essentially wrote himself a sweetheart deal, exploiting the fact that he was the company's only lawyer... well, that's a problem.
But if instead he was being fired and therefore was in an adversarial position with the company, then at first glance I don't see a problem.
Companies "sneak in" slanted provisions all the time. Take the standard 200-page employee handbook that has all kinds of assurances and promises for employees' benefit -- but also a disclaimer on the bottom of page 187 saying "all employees are at-will and have no enforceable contract rights arising out of this handbook." This sort of disclaimer means that employees can't even enforce employer promises not to retaliate against whistleblowers (at least in NY and WI, the two states whose common law on this point I know well enough offhand), as long as the employer buried an "I had my fingers crossed" disclaimer somewhere, anywhere, in the handbook. Employers also include ungodly complicated restrictive covenants, mandatory arbitration provisions, and otehr provisions that seriously restrict workers' rights upon termination of employment.
Employers do this, moreover, even with workers who clearly aren't educated enough to reliably understand such provisions (e.g., blue-collar workers, or low-paid office personnel with limited education). The law doesn't cut any slack for the janitor or copy room worker who didn't catch the provision on page 176 of his handbook; I'm not crying a river for the HR director here who didn't look at the contract that was returned to him.
In short, when you hear about an employer-employee dispute in which one side "snuck" a highly significant contract provision into a document, and the other didn't read/notice it... well, 99.9% of the time, it's the employee getting hosed, not the other way around. That's why all the employment law cases saying "the 'contract' binds even if one party never read it" are employer victories. Employers and their lawyers have worked very hard for many many moons to make sure the law enforces as contracts virtually any employment documents that the parties exchange. So now we're supposed to be outraged that there's one measly case where an employer gets bitten in the butt by this case law, this practice of slipping in a contract proivision that the other side didn't expect? Screw 'em; these are the chickens coming home to roost.
Posted by: Scott Moss at July 16, 2005 12:35 AM
Spoken like a true plaintiff's lawyer! :-) I do think context matters, and in this case the overriding fact is that the departing employee was also the company's lawyer. In my book, this simply means that the lawyer has duties to the company that make "slipping in" a major contract clause problematic. This isn't to say that burying clauses in employee handbooks is ethical--let me reserve judgment on that question--but I see it as a different question because those documents aren't necessarily governed by the Rules of Professional Conduct. Eric.
Posted by: Eric Goldman at July 16, 2005 07:16 AM
Spoken like a true in-house counsel! (And one who never inserted such sweetheart provisions into his own contract -- I'll give you the benefit of the doubt and assume that's because you're ethical, not that you're now kicking yourself for not having thought of this!)
I think that if the company was firing him, the company can't rely on him to "represent" their interests in his own termination -- he's suddenly in an adversarial position with his former client. But even in that context, an in-house counsel's duties are tricky -- I once represented an in-house lawyer suing her old company for discriminatory termination, and at the very least the duties of confidentiality to a former client mean that the lawyer probably couldn't use certain information that she came to know solely because she was their lawyer....
Posted by: Scott Moss at July 16, 2005 01:15 PM