No Cause of Action for Violation of Code of Ethics

There is no recognized independent cause of action for a violation of a company’s internal Code of Ethics under federal law or the Commonwealth of Virginia. See Taylor v. CVS, Inc., 2018 U.S. Dist. LEXIS 114954 (E.D. VA July 10, 2018); See also.  Taylor v. Ahold, USA/Martin’s Food & Pharmacy No. 3:16-CV-248 2016 WL 1752763 (E.D. Va. May 2, 2016) (holding “neither Virginia law nor federal law has a standalone provision to sue a private party for a violation of its own Code of Ethics.”)


Employee Who Engaged in Protected Activity Failed to Assert Viable Retaliation Claim Where Employee Terminated for Operating a Competing Company in Violation of Employer’s Conflict-of-Interest Policy

On April 24, 2018, the Tenth Circuit affirmed summary judgment in favor of an employer  where an employee alleged retaliatory discharge in violation of Title VII of the Civil Rights Act of 1964 because the employee failed to present evidence of a causal relation between her alleged protected activity and the termination of her employment.

The employer operated a telecommunications company.

In June 2012, the employee told her supervisor and human resources partner that she observed a manager treat an employee in an allegedly discriminatory manner.

The employee also contends that in August 2013 she made additional comments to management about the same manager engaging in discriminatory conduct towards the same employee.

In October 2013, the employer terminated a different employee for violating its conflict of interest policy. The terminated employee told a human resources partner that the plaintiff employee had a similar conflict.

Thereafter, the plaintiff employee’s supervisor asked the employee to disclose any potential conflicts that she had. The employee disclosed that her domestic partner and two uncles owned telecommunications businesses that were used by the employer’s customers.

On November 6, 2013, the human resources manager directed the human resources partner to conduct an investigation into the employee’s potential conflicts. The investigation revealed that the employee owned and operated a telecommunications business with her partner.

The human resources partner, submitted a report in December 2013 to the employer’s vice president of human resources who determined that the employee had a conflict of interest. The human resources partner told the employee’s supervisor that the employee had a conflict of interest because she had access to the employer’s current and prospective customer lists and could refer the employer’s customers to her own business.

On December 16, 2013, the human resources partner recommended that the employee be terminated because she owned, operated, and financially benefited from a telecommunications company that competes with the employer.

Thereafter the fired employee sued the employer alleging that she was terminated, in violation of Title VII, for engaging in protected activity, which protected activity consisted of her reporting the alleged discriminatory conduct referenced above, in June 2012 and August 2013.

In affirming the summary judgment dismissal in favor of the employer, the appeals court noted that: “a vague reference to discrimination and harassment without any indication that this misconduct was motivated by criteria prohibited by Title VII does not constitute protected activity and will not support a retaliation claim.” Nonetheless the court noted that the district court assumed that the employee had engaged in protected activity in August 2013.

The district court ruled that the employee failed to establish any causal connection between her alleged protected activity in August 2013 and her termination in December 2013.

The court found that asking the employee to disclose her potential conflicts in October 2013 does not qualify as a retaliatory action, nor does the employer’s commencement of an internal investigation of potential wrongdoing in November 2013. The court cited 10th Circuit caselaw holding that as to a First Amendment retaliation claim, courts do not consider standard workplace investigations to be materially adverse employment actions.

In sum, an employee assumed to have engaged in protected activity roughly four months before she was terminated for a conflict of interest, which conflict was created by the employee operating a competing business, failed to present sufficient evidence to establish a prima facie case of retaliatory discharge under Title VII.

See Nealis v. Coxcom, 2018 U.S. App. LEXIS 10302 (10th Cir. April 24, 2018)

CVS’ Conflict of Interest Policy Violated Where Pharmacist Formed a Compounding Pharmacy that Competed with CVS for Patients Even Though the Compounding Pharmacy Sold Pharmaceuticals that CVS Did Not Dispense

A CVS pharmacist founded her own compounding pharmacy that mainly created compounded pharmaceuticals that CVS did not dispense.

However, although the compounding pharmacy’s pharmaceutical products were distinct from CVS products, the pharmaceutical products sold at both pharmacies treated the same or similar conditions.

The pharmacist’s supervisor discovered her side-business and recommended that the pharmacist be terminated because her conduct violated the company’s conflict-of-interest policy. CVS terminated the pharmacist for violation of its conflict-of-interest policy.

The terminated pharmacist unsuccessfully sued her supervisor on a variety of grounds, including defamation.

The pharmacist alleged that her supervisor’s statement that the pharmacist’s business “clearly competes with CVS for Patients” was false.

The pharmacist argued that her compounding pharmacy did not compete with CVS because her compounding pharmacy sold different products than those available at CVS.

However, neither the district court nor the Minnesota Court of Appeals were convinced by the pharmacist’s arguments. The court noted that although the two businesses’ products might be different, they treated the same conditions, which showed that the compounding pharmacy clearly competed with CVS for customers.

The pharmacist asserted two other arguments for why her compounding pharmacy did not compete with CVS, but lost those arguments too.

The pharmacist unsuccessfully argued that pharmacies do not treat patients, doctors treat patients, and pharmacies simply fill prescriptions created by doctors; thus, the compounding pharmacy could not compete with CVS because the doctor decides what prescriptions to prescribe, not the pharmacist. Under this theory, the pharmacist argued that if a doctor prescribes medications that are fillable at the compounding pharmacy and not CVS, the compounding pharmacy has done nothing to detract from CVS’ business, because it was the doctor’s decision to prescribe the medication.

The courts were unconvinced by this argument on the grounds that the compounding pharmacy and CVS offer drugs that treat the same conditions and although a patient cannot receive prescription drugs from either pharmacy without a doctor’s prescription, a patient might ask their doctor to change their prescription such that the prescriptions could be transferred from a conventional pharmacy like CVS to a compounding pharmacy.

The pharmacist also argued that the compounding pharmacy was not competing with CVS because Minnesota law limits the types of products that a compounding pharmacy and CVS can legally sell and CVS is licensed under Minnesota law as a synthetic pharmacy and the pharmacist’s business was licensed as a compounding pharmacy; synthetic pharmacies sell pills that are mass marketed and are legally distinct from customized powders sold by compounding pharmacies. In response, the court found that the sale of compounded pharmaceuticals constitutes competition because those pharmaceuticals serve to treat substantially the same conditions in a pharmaceutical patient as the synthetic pharmaceuticals.

In sum, the court rejected the argument that the compounding pharmacy did not compete with CVS because its products are distinct and concluded that the CVS supervisor made a true statement when she said that the compounding pharmacy clearly competes with CVS Pharmacy for patients.

See Martinsen v. Engleka, 2018 Minn. App. LEXIS 214 (April 30, 2018).

Continued Employment Sufficient Consideration for Rhode Island Arbitration Agreement

The United States District Court for the District of Rhode Island held that continued employment is sufficient consideration to enforce an arbitration agreement in Rhode Island.

Employee’s company was purchased by a new company. During the transition period, the new company required employee to sign an offer letter, arbitration agreement, and the company’s code of conduct as a required condition of continued employment.

In federal court found the arbitration agreement enforceable because it was supported by independent valid consideration, i.e., the employee’s continued employment. Specifically, the Rhode Island Supreme Court has held that continued employment is sufficient consideration to enforce an agreement; Puerto Rico law has held that continued employment suffices for consideration to enforce an arbitration agreement.

Britto v. St. Joseph Health Servs. of R.I., 2018 U.S. Dist. LEXIS 67629 (U.S. Dist. R.I., April 23, 2018)





Promise to Improve Ethics and Compliance Program Only Gets Company So Far

Embedded in the facts of a December 14, 2017 Supreme Court of Virginia opinion is an unfortunate example of how a promise to improve a company’s compliance and ethics program only got it so far in its fight to avoid a suspension.

The company was competing for an Air Force contract when it became embroiled in an ethics scandal related to the mishandling of a competitor’s bid that was inadvertently emailed to the company by an Air Force contracting officer.  The contracting officer quickly realized her mistake, but the email had already been forwarded internally within the company to six employees.

The next morning, the company employee who received the email informed the contracting officer that he had distributed the email internally, but had deleted all copies.  The contracting officer asked for affidavits from all employees who received the email describing their actions upon receipt of the email that inadvertently attached the competitor’s bid.

After the affidavits were submitted, the Air Force asked each employee to answer questions that focused on whether information related to the inadvertently shared competitor’s bid affected the final bid that the company submitted after receiving the email.

The Air Force suspended the company and four employees from participating in government contracting.  The suspension barred the company from submitting bids on new government contracts and renewing existing contracts.  The Air Force found that the four suspended employees unethically held meetings to discuss information in the email after they were notified that such information was inadvertently disclosed.  The Air Force also found that the employees helped prepare the final bid despite possessing information about a competitor’s bid.

Promising to improve its ethics and compliance program briefly resulted in the lift of the suspension. 

The Air Force and the company entered an Interim Administrative Agreement that lifted the company’s suspension.  In lifting the suspension, it was noted that the company acknowledged its: (1) improper conduct; (2) the improper conduct of its employees; and (3) its deficient procedures.  Moreover, the company promised to improve its ethics and compliance programs.

Unfortunately, the lift of the suspension was short lived.  After the Air Force learned that one employee made false statements in his affidavit, the Air Force terminated the Interim Administrative Agreement and reinstated the suspension.

The takeaway is that even if a company makes promises to improve its ethics and compliance program, the fruits of those promises can be undermined by an employee’s dishonesty.

MCR Fed., LLC v. JB&A, Inc., 2017 Va. LEXIS 176

Code of Ethics Cited in Trade Secret Misappropriation Case

On September 25, 2017, the Court of Appeals of Washington, cited an employer’s code of ethics in a trade misappropriation case.

The code of ethics was found in the employer’s employee handbook.  The code instructed employees to respect the confidentiality of the employer’s processes.  The former employees signed forms acknowledging their receipt of the employee handbook.  Furthermore, there was testimony from a former employee that he acknowledged the employer’s privacy and confidentiality policies while employed.

The employer’s code of conduct, has a specific section dedicated to confidential information and nondisclosure that applied both during employment and after the employee left the employer.

In the court’s opinion, it was also noted that the employer’s compliance department regularly conducted training session regarding the employer’s confidentiality policy.

Guidance Residential, LLC v. Mangrio, 2017 Wash. LEXIS 2856.

Court Sides with Employer Who Fired Employee for Failing to Disclose Outside Employment

On December 27, 2017, the U.S. Court for the Southern District of New York dismissed the case of a former Teva Pharmaceuticals USA, Inc. (“Teva”) employee who was fired, for cause, because he violated Teva’s: (1) Conflict of Interest Policy, Outside Employment Policy, and Electronic Communications Policy.

The terminated employee was an Associate Director of Process Engineering.  While employed by Teva, the terminated employee failed to disclose, in writing, an ownership interest in multiple other businesses, including an ownership interest in Suffern Pharmacy (“Suffern”), a retail pharmacy and wholesale supplier of branded drugs.

During a period of time when the terminated employee worked for Teva and simultaneously held an ownership interest in Suffern, Teva purchased roughly $470,000 in branded drugs from Suffern.  As a result, Suffern made approximately $50,000 in profit from these transactions.

As the result of a routine audit, Suffern was identified as a supplier in need of further review.  Because the terminated employee had an ownership interest in Suffern, the review of Suffern was transferred to Teva’s Office of Business Integrity and an investigation ensued.

The investigation determined that the terminated employee used his Teva email to correspond on behalf of his outside business interests during regular Teva business hours.  At the conclusion of the investigation, Teva terminated the employee for cause because, as stated above, he violated Teva’s Conflict of Interest PolicyOutside Employment Policy, and Electronic Communications Policy.

The Court agreed that the employee was terminated for cause.  In reaching this conclusion, the Court stated that: “[b]ehavior that constitutes cause for termination is defined by contract, including company policies and procedures even if the employee is at will.” (citation omitted).

The Court found that the employee was in violation of several Teva policies at the time he was fired.  Specifically, Teva’s Code of Conduct states:

E]mployees who violate the Code will be held accountable and sanctioned appropriately.  This may include termination for employment…Misconduct that may result in discipline includes…violation of the Code.

The Court noted that Teva’s Code of Conduct also incorporates, by reference, other Teva policies.  In this regard, Teva’s Code of Conduct states:

In certain cases, this Code of Conduct is supplemented by additional policies that cover specific topics in more detail…[The Code] is not as comprehensive as these supplemental policies and therefore does not supersede them or act as a substitute for reviewing each policy that applies to [an employee’s] specific job. 

The other policies that the Court examined were Teva’s Conflict of Interest Policy, Outside Employment Policy, and Electronic Communications Policy.

First the Court found that the employee violated Teva’s Conflict of Interest Policy by failing to disclose to Teva, in writing, his interest in Suffern.  Teva’s Conflict of Interest Policy states:

Each employee must be free from any actual or potential conflict of interest and must avoid even the appearance of such a conflict in dealing with other businesses or individuals on behalf of Teva.  A conflict of interest may arise in any situation in which an employee’s judgments and loyalties are divided between any business or outside interest that, to any degree, is incompatible with the best interest of Teva…Types of activities and relationships that could potentially affect an employee’s independent judgment may include outside employment relationships…[or] personal investments…For this reason, employees must disclose, in writing and in advance, any potential or actual conflict of interest for resolution…Employees should avoid outside business or consulting activities that would divert their time, interests or talents from Teva business.  The employee’s manager must approve, in writing, any outside or consulting activity for a vendor, a supplier of goods or services…or a business that provides services to or related to the healthcare industry. 

Second the Court found that the employee violated the Outside Employment Policy an Electronic Communications Policy by using Teva work time and Teva-owned technology to further Suffern’s interest.  The Outside Employment Policy states:

It is the policy of Teva that no outside employment or interests interfere with the ability of employees to satisfactorily perform their job duties and meet scheduling demands and other work requirements of Teva…Teva may opt to terminate the employee’s employment if Teva, at its sole discretion, determines that the circumstances of the employee’s violation of the policy renders continued employment inappropriate. 

Teva’s Electronic Communication Policy states:

All electronic communication systems and hardware must be used primarily for business purposes.  Personal use must remain limited, incidental and in no way affect productivity.  The consequences of a violation could include termination of employment. 

The terminated employee used his computer and email to conduct business for Suffern and his other businesses.  These emails were voluminous and in one month generated 115 emails that related to one Suffern transaction alone.

Having concluded that Teva terminated the employee for cause, the Court found that the terminated employee was not entitled to retroactive payment of a higher salary, a bonus since he was not employed by Teva at the time discretionary bonuses were awarded, or stock options that he failed to exercise before his termination.

See Iqbal v. Teva Pharms. USA, Inc., 2017 US. Dist. LEXIS 212740.



Employer Challenging Unemployment Compensation Award Fails to Establish Willful Misconduct Based on Alleged Code of Conduct Violation

A Pennsylvania employer challenging an award of unemployment compensation failed to establish willful misconduct based on an alleged code of conduct violation.

For roughly 13 years, the fired employee worked as a food service manager for a drug and alcohol treatment center.  The employer regularly assigned residents of the treatment facility to assist in the kitchen without providing the fired employee with background information on the residents.

On a chaotic day, the fired employee was on the phone placing a time sensitive food order when a resident informed the fired employee that the garbage truck urgently needed the fired employee to move her car so that the garbage truck could empty the dumpster.  The fired employee was heading to the door to move her car when a resident informed her that he had a driver’s license and could move her car so that she could continue her telephone conversation.  The fired employee gave the resident her keys and he moved her car roughly 20 feet to allow the garbage truck access to the dumpster.

It was later revealed that the resident did not have a valid driver’s license.  Subsequently, the employer fired the employee and challenged the Unemployment Compensation Board of Review’s award of unemployment to the employee.  The employer appealed the award and argued that the fired employee engaged in willful misconduct when she violated the Employer’s code of ethics/code of conduct.

Specifically, the section of the employer’s code of ethics that the employer cited, prohibited unprofessional conduct such as intimae relationships with residents and interactions in which money exchanged hands.  The Commonwealth Court of Pennsylvania found that this case did not fall into one of those categories and that to apply the cited rule to an instance where an employee allows a resident to move her car a short distance would stretch the employer’s rule too far.

In sum the court did not find that the employer met its burden of establishing willful misconduct because the employer maintained no rule specifically prohibiting the fired employee’s actions or prohibiting residents from operating a motor vehicle while at the facility.

Colonial House v. Unemployment Comp. Bd. of Review, 2017 Pa. Commw. LEXIS 913 (Nov. 14, 2017).


CVS Pharmacy’s Code of Conduct & Ethics Hotline Featured in Recent Litigation

CVS Pharmacy recently lost a motion to dismiss a case alleging a hostile work environment caused by: (1) directions to use racial profiling against black and Hispanic store customers; and (2) an alleged barrage of racial slurs in the workplace.

In denying CVS Pharmacy’s motion, the court focused, in part, on the fact that a reasonable jury could find that CVS Pharmacy failed to adhere to its own Employee Handbook and Code of Conduct  (“CVS Handbook”) and possibly mishandled calls to its ethics hotline.

The CVS Handbook prohibits discrimination against CVS employees and customers on the basis of race and color (among other things).  CVS Pharmacy provides a copy of its CVS Handbook to its employees when they are hired and makes the CVS Handbook available on the company’s internal intranet portal.

In the event of discrimination, the CVS Handbook states that employees are “expected to report incidents of inappropriate behavior, unlawful discrimination, workplace violence, and workplace or sexual harassment as soon as possible after they occur.”  The CVS Handbooks describes a number of ways to report unlawful discrimination, including notifying employees that they may call the CVS Caremark Ethics Line at any time.

In seeking to have the case dismissed, CVS Pharmacy alleged that it had no record of a compliant of race discrimination from either of the two plaintiffs in the case.  Nonetheless, one of the plaintiffs testified that he called the ethics hotline on several occasions to report incidents of racial discrimination.  CVS Pharmacy’s records reflect that the plaintiff called the ethics hotline, however, CVS denied that the plaintiff’s reports to the ethics hotline included complaints of race discrimination.  The court found that the plaintiff’s testimony, that his complaints to the ethics hotline were ignored, raises questions regarding whether the hotline was a viable means of reporting racial discrimination.  The court further found that there was sufficient evidence to conclude that the protocol for handling discrimination complaints, as outlined in the CVS Handbook, was not followed by supervisors and that the written policy was thus “window dressing.”  In other words, there was a genuine issue of fact as to whether CVS’ policy had force.

The other plaintiff in the case, never called the CVS ethics hotline to report discrimination during her employment, but testified that she did call the hotline after her employment ended.

The plaintiffs asserted a theory that CVS has poor record keeping.  The court found this theory to be bolstered by several pieces of evidence, including the second plaintiff’s testimony that she called the hotline after her termination– a call for which CVS has no record–and evidence showing that CVS does not consistently document complaints of racial discrimination or escalate such complaints up the reporting chain, as required by the CVS Handbook.  In sum, the court concluded that “a reasonable jury could clearly find that CVS negligently ignored the complaints of racial discrimination by the plaintiffs.”

Although this case has yet to be resolved, the court’s opinion makes it clear that corporations must follow their own internal policies and carefully track and respond to calls to their ethics hotlines.

See Zaire Lamarr-Arruz & Mominna Ansoralli v. Cvs Pharm., 2017 U.S. Dist. LEXIS 157843 (U.S. District Court, Southern District of New York, September 26 ,2017).



PA Supreme Court Weighs in on Post- Employment Restrictions Finding Restrictions Apply Equally to Attorneys

In Yocum v. Commonwealth, an attorney working for the Pennsylvania Gaming Control Board (“the Board”) challenged, as unconstitutional, certain temporal employment restrictions imposed upon attorneys by the Board.

The Board’s restrictions stated that any employee of the Board was restricted for a period of two years after termination of employment with the Board from: (1) accepting employment with a licensed gaming facility; (2) accepting employment with an applicant, licensed entity, affiliate, intermediary, subsidiary, or holding company; or (3) appearing before the Board for a hearing or proceeding representing any of the aforementioned entities.

The Board attorney asserted that she wished to seek employment as an attorney representing gaming clients and that the Board’s employment restrictions placed an unconstitutional restriction on her ability to practice law.

Had the Board’s employment restrictions only applied to attorneys, the Pennsylvania Supreme Court would have declared the restriction unconstitutional.  However, since the restriction applied to all Board employees, the Pennsylvania Supreme Court found the employment restriction constitutional.

Instead, the Court expressed its support for the sound public policy considerations underlying the Board’s restrictions on future employment, which include preventing conflicts of interest, or the appearance of conflicts, in a historically controversial industry, by restricting current Board employees from using their contacts and insider expertise as a springboard to other employment opportunities within the gaming industry for a certain period of time.

In other words, the Court found it reasonable for the state legislature to place restrictions on the gaming industry aimed at preventing corruption and ensuring public confidence. The court noted that such restrictions are not novel and can be found in other industries where employees are privy to information and knowledge which could lead to the appearance of a conflict of interest in their field of post-employment.