Appellate Update

By Joe Murray

Here are the 4th Circuit and North Carolina Court of Appeals’ latest employment law decisions.

Gomez v. Haystax Technology, Inc., No. 17-2360 (4th Cir. March 5, 2019) (unpublished) (ADA, FMLA, Title VII, ADEA): Defendants, who are private government contractors, hired Gomez in May 2013 to work on various government contracts. During the course of her employment, Gomez was moved to different contracts and locations as defendants lost and won contracts. Also during her employment, Gomez underwent two hip surgeries. In February 2016, defendants lost the contract Gomez was assigned to. As she was not assigned to a contract, Gomez had to find another position with the defendants to remain employed. Defendants terminated her when she failed to obtain another position. Gomez filed suit against defendants alleging (1) disability discrimination in violation of the ADA; (2) sex discrimination in violation of Title VII; (3) age discrimination in violation of the ADEA; and (4) FMLA retaliation. The district court granted summary judgment on Gomez’s claims, and the 4th Circuit upheld the award. [1] On appeal, the issue before the court was whether Gomez had presented evidence that defendants’ reason for termination—the loss of the contract—was pretext. Gomez first alleged that defendants provided shifting justifications for her termination; the 4th Circuit found these alleged shifting justifications were not presented as justifications for the termination but for why Gomez was not transferred to open positions. Next, Gomez alleged that defendants provided inconsistent statements on the positions available to her prior to her termination; the court easily dismissed this allegation by pointing out that Gomez presented testimony out of context to support her case. Finally, Gomez tried to argue that defendants internally transferred some employees without requiring them to apply for open positions; the court rejected Gomez’s contention by showing the alleged comparator employees or situations were different in meaningful ways. Since Gomez could not support her pretext argument, the 4th Circuit upheld summary judgment.

Lake v. State Health Plan For Teachers & State Emps., No. COA17-1280 (N.C. App. March 5, 2019) (constitution contract claims): Seven years. It has taken 7 years for this case to (almost) get to the finish line. In 2011, the General Assembly amended the State Health Plan (Plan) to require retirees to contribute a premium for coverage under an 80/20 PPO plan; the amendment kept a 70/30 PPO plan premium-free for retirees. State retirees sued the state, alleging the Plan amendment breached the retirees’ contract for “premium-free, non-contributory static health benefits under an 80/20 health care plan for the remainder of their lives.” The retirees alleged three claims: (1) breach of contract, (2) impairment of contract under the NC and US Constitutions, and (3) deprivation of property and equal protection under the NC constitution. The trial court granted partial summary judgment in favor of the retirees, resolving all issues except for damages. The court of appeals reversed and directed the trial court to enter judgment in favor of the state. Ultimately, the court of appeals found that the state did not intend to create contractual rights in health insurance benefits when it created the Plan. Unlike state-created pensions, which have been found to create contractual rights, the statutes implementing the Plan did not use the term “contract”; did not mandate employees or retirees to use the Plan; granted employees and retirees equal access to the Plan; and reserved the right to amend the statutes. Finally, the court noted that the General Assembly had amended the Plan over 200 times since its inception, including reducing the value of the Plan; 200 amendments was evidence of a lack of intent on the part of the state to create an unalterable, static contract.

Hately v. Dr. David Watts, No. 18-1306 (4th Cir. March 6, 2019) (Stored Communications Act): Come for the infidelities, stay for the important ruling on the Stored Communications Act. The former romantic partner of Hately gave Hately’s e-mail account password to Watts so Watts could find evidence of Hately cheating with Watts’s wife (the former romantic partner and Watts were also in an intimate relationship). Watts then accessed Hately’s emails, which were hosted by Google. One of the claims Hately sued Watts under was the Stored Communications Act. The district court granted Watts summary judgment on the Stored Communications Act by determining that “previously opened and delivered emails” stored “in a web-based email client” were not in protected “electronic storage” within the meaning of the Stored Communications Act. The 4th Circuit reversed, finding “that previously delivered and opened emails stored on a web-based email client are in ‘electronic storage,’” and therefore are protected by the Stored Communications Act. The discussion on the Stored Communications Act is 34 pages long and I cannot summarize it here in a succinct manner. I suggest if this issue comes up in your cases to read the whole thing. (The meat of the decision, the discussion on the Stored Communications Act, starts at the bottom of page 21 of the opinion.)

Spencer v. Virginia State University, No. 17-2453 (4th Cir. March 18, 2019) (Equal Pay Act, Title VII): Spencer earned about $70,000 per year as a sociology professor at Virginia State University. This was a median salary compared to the men who were also professors in her department. Rather than focus on those men, Spencer identified as her comparators two professors in other departments who earned over $100,000 per year. The 4th Circuit upheld the district court’s award of summary judgment because the two male professors were not comparators and the male professors’ higher pay was based on a factor other than sex. In holding that the male professors did not perform equal work, the 4th Circuit dismissed Spencer’s argument that all university professors perform the same essential function—teaching. Instead, the court relied on its own precedent that the same job title and only vaguely corresponding responsibilities do not meet the EPA’s equal work standard. Instead of relying on title alone, Spencer needed to show that the work performed and skills needed by the two male professors in different departments were virtually identical to Spencer in her department and that their teaching requirements were the same. Even if the two male professors were comparators, VSU established the affirmative defense that the salary difference was based on a “factor other than sex.” Both of the male professors were previously in administration, and VSU had a policy that set former administrators’ salaries at 75% of their previous salaries as administrators—a fact Spencer admitted occurred in this case. Finally, the court found that even assuming Spencer established a prima facie case under Title VII for wage discrimination, VSU’s 75% rule was a nondiscriminatory explanation for the pay differential, and Spencer could not rebut this explanation.

Aesthetic Facial & Ocular Plastic Surgery Ctr., P.A. v. Zaldivar, COA18-431 (N.C. App. March 19, 2019) (restrictive covenants): Dr. Zaldivar, one of the few specialists in North Carolina to practice oculofacial plastic surgery, worked for Aesthetic Facial for two years. His employment agreement contained non-compete and non-solicitation covenants that effectively prevented Dr. Zaldivar from practicing in the eastern part of North Carolina for two years after he left Aesthetic Facial. Eventually, Dr. Zaldivar left Aesthetic Facial and started his own practice, violating the covenants. Aesthetic Facial filed suit alleging, among other claims, breach of the covenants in the employment agreement. The trial court granted Dr. Zaldivar’s motion for summary judgment on all claims. On appeal, the court focused on prior case law that stated courts must weigh the specialization of the physician’s practice (and how few practitioners there are) against the reasonableness of the restrictions—essentially, what is the potential for harm to public health? In this case it was undisputed that Dr. Zaldivar was one of a limited number of physicians in the entire state who provided oculofacial plastic surgery; further, the need for an oculofacial plastic specialist to be available was of dire importance because if some procedures were not performed promptly a patient could go blind. Due to the limited number of physicians practicing in Dr. Zaldivar’s specialty, the court had no problem finding that the non-compete could not be enforced. Aesthetic Facial tried to save the non-compete by arguing that it contained a buyout clause that would allow Dr. Zaldivar to practice in exchange for a payment. The court rejected this argument because a physician “may opt not to continue practicing in the restricted area because of the risk of the financial penalty.” As for the non-solicitation agreement, the court found its terms were too broad as it covered potential customers who were never treated at Aesthetic Facial and because it prohibited Dr. Zaldivar from working with other physicians who also worked with Aesthetic Facial. Since neither covenant was enforceable, the court of appeals upheld summary judgment.

Wright v. NC Off. of State Hum. Res., No. COA18-276 (N.C. App. March 19, 2019) (unpublished) (North Carolina Human Resources Act): Then-Governor McCrory ordered that Wright’s position be removed from the exempt designation as of January 20, 2016 (exempt designation means that the position is generally not protected by the North Carolina Human Resources Act (SHRA) and the employee can be fired without cause). On January 18, 2017, Governor Cooper’s office reversed the designation back to exempt. The following day, Wright was informed of the designation change and fired. The SHRA requires that an employee be given notice of a change to exempt status 10 working days prior to the change. Based on this 10-day notice requirement, the change of Wright’s position could not occur until January 29, 2017. The SHRA further provides that if an employee has been in a position for the immediate 12 preceding months, the employee is a career state employee entitled to the SHRA’s protections. Since Wright’s designation could not change until January 29th at the earliest, she met the 12-month provision and was protected by the SHRA. Therefore, she could not be terminated without meeting the SHRA cause requirements, which had never been alleged. The court also addressed the issue of whether the Office of State Human Resources was in “the Office of the Governor and, therefore, the Governor is authorized to exempt OSHR positions.” The court found it was not.

Brundle v. Wilmington Trust, N.A., No. 17-1873 (4th Cir. March 21, 2019) (ERISA): Benefits attorneys rejoice! An ERISA case about an ESOP purchasing the business. [2] This case is chock-full of lines that are just bad for Wilmington: “the ESOP world [is] a very incestuous community” and “a pure heart and an empty head are not enough.” The owners of Constellis Group, Inc. wanted to sell the company to the ESOP. Constellis retained CSG International, an investment banking firm, to create a “unique” ESOP structure that would benefit Constellis’s owners by lowering their tax ramifications, allowing them to retain control of the company, and allowing them to repurchase equity at a set price. At the recommendation of CSG, Constellis hired Wilmington to act as the ESOP’s trustee; Wilmington hired SRR as the financial advisor for the ESOP purchase. CSG, Wilmington, and SRR “maintained significant long-term business relationships.” SRR valued Constellis stock between $3,865 and $4,600. Ultimately, Wilmington purchased Constellis at $4,235—the maximum of Wilmington’s authorized negotiation range. Members of the ESOP then brought suit, alleging that the purchase was a transaction prohibited under ERISA § 1106 and the purchase price was too high. Wilmington conceded that the transaction was prohibited but raised the affirmative defense of adequate-consideration under § 1108(e)(1). After a bench trial, the district court found that Wilmington violated its fiduciary duty to the ESOP by overpaying for Constellis by $29,773,250. The district court then awarded attorney’s fees in the amount of $1,819,631.11 under ERISA’s fee-shifting provisions and an additional $1.5 million out of the damages award. Both parties appealed aspects of the district court’s decision.

Wilmington argued that it did not violate ERISA since it justifiably relied on SRR’s valuation report. The 4th Circuit agreed with the district court that ERISA demands trustees engage in a high level of scrutiny of independent advice and valuations. In this case Wilmington failed to do so in four key ways that cumulatively showed it failed in its fiduciary duties. Wilmington failed to (1) investigate SRR’s omission of another valuation completed months earlier that found a much lower valuation of Constellis; (2) probe the “financial projections prepared by Constellis management and used by SRR”; (3) investigate the appropriateness of the control premium and then discount the valuation due to that control premium; and (4) probe why SRR consistently rounded the value of Constellis upwards. In addition to these 4 failures, the court found that Wilmington ignored the motivations behind the sale of Constellis; truncated its due diligence to meet tax deadlines that benefited Constellis’s owners; and willingly negotiated favorably with CSG—to the point of discussing its valuation strategies with CSG while negotiations were ongoing. [3]

Both parties also appealed the award of attorney’s fees. The 4th Circuit upheld the district court’s awards. Of note, the 4th Circuit rejected the 7th Circuit’s decision in Pierce v. Visteon Corp., 791 F.3d 782 (7th Cir. 2015), that stated when a statute contains a fee-shifting provision, a court cannot award attorney’s fees under a common-fund approach.

Erickson v. NC Dep’t of Pub. Safety, No. COA18-820 (N.C. App. April 2, 2019) (North Carolina Human Resources Act): While this case arises from the termination of a state employee, it is a reminder to all attorneys that drafting matters. DPS policy and the State Human Resources Manual required a second-level grievance to be received by DPS within 5 calendar days of a specific event. On the form provided to Erickson, however, there were inconsistent and contradictory instructions that stated he could initiate the appeal if he mailed the form within 5 calendar days. Erickson mailed the form within 5 days, but DPS received the form after the 5-day deadline. DPS dismissed Erickson’s grievance as untimely, which the Office for Administrative Hearings upheld. On appeal, the court of appeals reversed, finding that Erickson timely initiated his second-level grievance since Erickson mailed the form within 5 calendar days as stated in the form itself.

[1] Both courts also addressed significant discovery violations that Gomez and her attorney engaged in.

[2] If you’re already confused, move on to the next case.

[3] The 4th Circuit also rejected Wilmington’s argument that a subsequent purchase of Constellis by a third party proved that the ESOP did not overpay for Constellis.