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).



Does Your Code of Conduct Speak Loud Enough?

When it comes to explaining where and how to report violations of your company’s code of conduct, does your code of conduct speak loud enough or does it mumble? If employees pick up a copy of the code today are the channels for reporting clear?  Would a jury agree that the procedures for reporting are clear? Why does this matter?

Specifying the method for reporting violations matters because U.S. employers may defend certain employment related claims, at least in part, if they can show that the employee asserting the claim failed to report the alleged wrongdoing in accordance with company policy and procedure. In other words, if an employer can show that an employee did not exercise reasonable care to avoid harassment by reporting the harassment in accordance with the company’s policies and procedures, an employer may be able to successfully defend a harassment claim.  The defense turns on whether the employer established a procedure for reporting misconduct and whether the employee reasonably followed the procedure.

Adding a clause to your code of conduct specifying where employees should report violations sounds simple.  Maybe your gut reaction is to add a line stating that an employee should report violations to her supervisor.  But what if the employee is not comfortable with her supervisor or the supervisor is the violator?  Can employees make a report to just any supervisor at your company?  If casting such a wide net, has your company trained supervisors on how to handle reports and who to contact after a report has been made to them?  Are all relevant departments involved in the reporting process?  For example, does your code direct employees to report to HR, Legal, or Compliance & Ethics?  What happens if the violation is a safety violation?  Is it acceptable for the employee to report to the safety director?  Does your head hurt yet?

I recently came across a case involving Sprint that underscores the need for your code to shout your reporting procedures.  The case, decided in 2001, is a federal appellate court case that examined the channels for reporting sexual harassment that Sprint had in place in the early 90s (the Clinton days).

In Frederick v. Sprint/United Management Co., the employee alleged that in the early 90s her supervisor subjected her to a range of discomforting behavior including: staring at her for prolonged periods, blowing her kisses, lingering at her work station, once kissing her on the cheek, touching her breasts while standing over her to supposedly assist her with typing; and subtly (or maybe not so subtly) implying that they should have sex.

The harassment allegedly started in 1992. At that time, Sprint had a 1990 sexual harassment policy with complaint procedures. Sprint also had a code of conduct entitled “Sprint’s Code of Ethics,” which was a 20 page booklet that described a broad range of employee misconduct.  Two lines in Sprint’s Code refer to sexual harassment complaints.  Specifically, Sprint’s Code stated: “It is our policy, in accordance with the law, to maintain an environment free from discrimination on the basis of sex, race…or disability.  Sexual harassment is both illegal and unethical and it should be reported immediately.”  Sprint’s Code further provided that “any questions” about incidents arising under the Code should be reported to “one’s supervisor, who in turn will work with HR, Legal and the Chief Ethics Officer to get an answer.”  The Code last indicated that an employee can anonymously call the Sprint Ethics Code Hotline with her questions.  Sprint produced its 1990 Policy and Sprint’s Code as part of its defense and claimed that the employee failed to report the misconduct in accordance with the policies outlined above.

The employee testified that she received Sprint’s Code and that she knew the Code applied to her sexual harassment claim, but she alleged she did not understand how to file a complaint under Sprint’s Code. It was undisputed that the employee never complained to her direct supervisor (who keep I mind was the alleged violator) or to any of the various departments listed in Sprint’s Code.  Moreover, the employee never called Sprint’s Ethics Code Hotline.  However, the employee testified that she reported the misconduct to two other managers at Sprint.

Two years after the alleged harassment started, Sprint published a revised Sexual Harassment Policy in 1994. Sprint’s 1994 revision to its sexual harassment policy apparently did not limit the employee to complaining to a direct supervisor, but allowed employees to report misconduct to anyone in a management position with whom they felt comfortable.

Sprint defended the lawsuit by alleging that when the alleged misconduct took place only the 1990 harassment policy and Sprint’s Code were in effect and therefore employees were required to report their allegations to either: (1) their supervisors; (2) HR; (3) the Chief Ethics Officer; or (4) through Sprint’s Ethics Code Hotline. Since the employee did not report the misconduct in accordance with the 1990 policy and Sprint’s Code, Sprint asserted as part of its defense that the employee failed to exercise reasonable care to avoid the harassment.  The employee disagreed asserting that she reported the misconduct to two other managers in accordance with the 1994 sexual harassment policy.

The federal appellate court found a material issue of fact for a jury to decide. Issues of fact for the jury to consider included: (1) whether the 1994 Policy was in fact in place when some of the harassment took place; (2) even it the 1994 policy was  inapplicable, whether it was unclear how to report a complaint under the code; and (2) whether the lack of clarity surrounding how to report  a complaint (or other extenuating circumstances) prevented the employee from reporting a complaint in a timely fashion.

Personally, I see a flaw in Sprint’s Code in that a strict reading of the Code makes it seem like the only way of reporting a complaint are to report to one’s supervisor who will then take the issue to HR, Legal or the Ethics department. However, employees exercising commonsense should know that HR, Legal and Ethics were other acceptable channels for reporting.  Regardless, it appears Sprint corrected the shortcoming in its 1994 Policy by allowing employees to report to other members of management.  The risk with allowing employees to report to any managers (and this was another issue in the Sprint case) is that some of those managers don’t always appropriately escalate the report.

Ethics & Chill: The phrase “Can you Hear me Now?” should be the mantra of companies when drafting the complaint reporting procedures within their codes of conduct and other policies.

Your Code of Conduct Encourages Employees to Report Violations. Are You Listening?

I remember reading the U.S. Supreme Court’s decision in Kasten v. Saint-Gobain  while I was practicing employment law at a private law firm.   Back then, I was focused on what the decision meant for employers.   I wasn’t reading the case through the lens of a compliance and ethics officer, so I didn’t hone in on the role of the employer’s code of ethics and business conduct until I recently reread the case.

Kasten is a Fair Labor Standards Act (“FLSA”) case.  The FLSA sets forth employment rules concerning minimum wages, maximum hours, and overtime pay; it contains a statutory provision that prohibits retaliation against employees who report a FLSA violation.

In Kasten, the employee alleged that his employer unlawfully retaliated against him after he repeatedly orally complained to his employer about unlawful timeclock locations.  It appears that the employee cited the employer’s code of ethics and business conduct as supporting justification for his complaints. It appears that the company’s code of ethics and business conduct (like many codes of conduct) obligated every employee to report suspected violations of any applicable law of which the employee becomes aware.

The employee alleged that he expressed his concerns over the placement of the timeclocks to his shift supervisor, his lead operator, human resources, and the operations manager. The employee alleged that this activity caused the company to discipline him and ultimately dismiss him.   [Note, in a separate legal action, a court held that the placement of the timeclocks violated the FLSA.]

The employer, however, denied that the employee made any significant complaints about the timeclock locations.  Rather, the employer alleged that it dismissed the employee because he failed to record his comings and goings on timeclocks.

While the sole issue that the U.S. Supreme Court decided in Kasten was whether an oral complaint in violation of the FLSA is protected conduct under the act’s anti-retaliation provisions, this case also highlights the need to vigilantly listen for employees who might be reporting a violation of the company’s code of conduct.  In Kasten, the U.S. Supreme court ultimately held that oral complaints are sufficient to trigger anti-retaliation protections, stating that to hold otherwise would prevent the effectiveness of things like hotlines, interviews, and other oral methods of receiving complaints, all of which are components of effective compliance and ethics programs.

Just Ethics & Chill Takeaway

Employers should listen carefully to their employees to discern whether what they are hearing could amount to an oral complaint related to violations of law, regulation, or internal policy.