Sales rep who planned to compete with employer can’t revive FMLA claims, but counterclaims against her are reversed
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Thursday, April 26, 2018

Sales rep who planned to compete with employer can’t revive FMLA claims, but counterclaims against her are reversed

By Lisa Milam-Perez, J.D.

A sales rep who took FMLA leave to attend a training for a competing franchise she had set up with her husband was unable to revive her claim her employer interfered with her FMLA rights by offering to let her service existing clients during her FMLA leave so that she could continue to earn commissions. However, the Fifth Circuit reversed summary judgment in the employer’s favor on a litany of counterclaims against the employee and her husband, as well as on her sexual harassment claim, which had been disposed of sua sponte with no advance notice to the employee (D’Onofrio v. Vacation Publications, Inc., April 23, 2018, Higginson, S.).

Two ports, two storms. As a sales rep for Vacation Publications, a company that sells cruises, the employee was given specialized training in sales and marketing and was armed with industry knowledge and confidential client information as well as marketing and sales techniques. Her employment contract included an 18-month noncompete provision, as well as a confidentiality agreement. The employee’s husband purchased a franchise with “CruiseOne,” another company that sells cruises and similar products and services. (He was seriously injured in a 2011 car accident that left him unable to carry the products he had once sold in his own direct-sales business; he chose to pursue his “long-held desire” to sell travel services, which would not require heavy lifting). In his purchase application, he had submitted a screenshot of his wife’s sales records at Vacation, including sales totals, but no customer information. The new CruiseOne franchise was jointly owned by the couple.

When CruiseOne scheduled the employee to attend a training out of state, she requested FMLA leave, ostensibly to care for her husband. Her employer offered her the option of either taking unpaid leave or logging in remotely a few times per week so she could continue to service her existing accounts and earn commissions from those accounts while on leave. She took the offer and left to attend the training while her husband stayed home. Then she went AWOL. She didn’t respond to the HR director’s request that she update her email “away” message to reflect that she was absent but available periodically. Her clients complained to her manager that she wasn’t answering their voice mail messages. When the HR director sent an email reminding her of her responsibilities if she wanted to continue receiving commissions while on leave, she responded (a week later) that her laptop had not been working. A few weeks later, after being unable to reach her for more than week, her manager accessed her email account and discovered 220 unread messages—she hadn’t opened a single email in weeks.

So the HR director brought the employee’s clients in-house and told her that she would get her clients back when she returned from leave. The employee also was locked out of her accounts, and one of the sales reps who was servicing her customers mistakenly told 23 of her clients via email that she was no longer with the company; one of those clients was the employee’s husband, who had once booked a cruise through his wife. That led the employee to believe she had been terminated, and she filed for unemployment benefits, but her employer reported that she was on FMLA leave.

When her FMLA officially expired, the employer asked the employee whether she intended to return. She said she would not, believing she already had been discharged, and filed an FMLA suit in state court. The employer counterclaimed for breach of contract, conversion of confidential information, fraud, tortious interference with existing and prospective business relations, and breach of fiduciary duty. It then removed the case to federal court and added the employee’s husband as a third-party defendant, asserting claims against him for conversion, civil conspiracy, tortious interference, and aiding and abetting breach of fiduciary duties.

Procedural history. The employee moved to voluntarily dismiss her FMLA claims, which the employer opposed and the district court denied. Her husband moved to dismiss the complaint against him for lack of jurisdiction. The employer moved for summary judgment on all claims. The employee filed a separate pro se sexual harassment suit in federal court, which was consolidated with this case, and the district court then granted the employer’s motion for summary judgment on all claims, terminated all pending motions, and issued a final judgment in its favor. The employee and her husband appealed.

Preliminary matters. The husband first contended that the district court lacked subject-matter jurisdiction over the state-law claims against him because they did not arise out of the same nucleus of operative fact as his wife’s FMLA suit, but the appeals court disagreed. Common facts were in play as the employer contended the employee was ineligible for FMLA leave because she had misrepresented her reason for taking leave and improperly used it to help her husband establish a competing business. The appeals court then turned to the merits of the summary judgment ruling.

FMLA interference. Although the employee claimed her employer interfered with her right to FMLA leave by requiring her to perform work while on leave, it was undisputed she was given the option to either take unpaid leave or service her existing accounts while on leave. “Giving employees the option to work while on leave does not constitute interference with FMLA rights so long as working while on leave is not a condition of continued employment,” the appeals court said, affirming summary judgment to the employer on her FMLA claim.

Sexual harassment. The employee alleged that one of the employer’s IT technicians touched her breast and continued to make unwanted physical contact even after she complained. After reporting the harassment, she was reassigned to another department, but then other employees, including supervisors, allegedly made inappropriate comments, used obscene language, and engaged in unwanted physical contact. The district court erred in granting summary judgment sua sponte in the employer’s favor on her hostile work environment claim without a pending motion and without giving her prior notice, as required under Rule 56(f), the appeals court held.

Although the employer argued that this was harmless because the employee failed to present evidence to support her hostile work environment claim, she had no notice that the court would consider the merits of her claim and, had she received proper notice, she would have marshaled that evidence, deposing key witnesses and engaging in written discovery, she said. The appeals court reversed summary judgment in the employer’s favor on this claim.

Breach of contract. Summary judgment also was improper on the employer’s breach of contract claim because the noncompete agreement that the employee allegedly violated was unreasonable and unenforceable under Texas law. The covenant prohibited the employee from working “in any capacity” for any direct or indirect competitor for a period of 18 months after her employment ended—an unreasonable restraint on trade, the appeals court concluded. And while courts are urged to reform covenants that are deemed unreasonable, it was impossible to do so here when the record lacked the requisite information as to geographic territories, customer base, and other factors. The proper approach was to remand for the district court to make those determinations and reform the covenants accordingly.

Conversion. The district court also erroneously granted summary judgment to the employer on its claims against the couple for conversion of confidential information. The employer claimed the employee had access to its confidential information and trade secrets, including customer lists, while she was involved with its competitor. However, the only tangible property that it alleged she converted was a laptop computer. Even assuming that the electronic information accessible through that laptop was the kind of “document” that can be converted, it remained disputed whether she unlawfully had dominion or control over that information.

She did not access any confidential company information during her time on leave—indeed, as she pointed out, she couldn’t do so because she had no access to its network. Nor was there evidence she shared confidential information with her husband, or that he otherwise unlawfully exercised control over any such information. There was also a dispute as to whether the employee refused a demand to return her laptop; a jury could reject the notion that an email to her from the company constituted a proper demand for its return. And the employer’s evidence of damages from the alleged conversion was speculative.

Tortious interference. Summary judgment in the employer’s favor was reversed on its claims for tortious interference with prospective and existing business relationships. The employer argued there was a reasonable probability it would have entered into business relationships with clients who previously had booked travel with the company, or had contacted it for travel bookings. As evidence, it offered a single customer who had booked a cruise for her parents and later booked a vacation through the defendants’ company. But this customer testified she had no plans to book another cruise in the future, so a reasonable jury could conclude there was no prospective business relationship there to interfere with. As for existing business relationships, there was, at the very least, a question of material fact as to whether the employer suffered any actual harm or damage.

Civil conspiracy. Because it reversed summary judgment on the employer’s underlying claims for conversion and tortious interference, summary judgment also was reversed on the employer’s claims for conspiracy to covert confidential information and conspiracy to interfere with existing business relationships.

Breach of fiduciary duty. The employer alleged that the employee breached her fiduciary duty by becoming a 51-percent owner in a competing company, by using a screenshot of her sales record at the company to obtain the competing franchise, attending a training for that competitor, and working for that competitor while still employed by the company. “Becoming the part owner of a competing franchise is insufficient to establish breach of a fiduciary duty,” the appeals court held. Moreover, the screenshot did not include client names, and there was no evidence it was used for any purpose other than to demonstrate the employee’s sales skills. And, while attending a training for a competitor is an “active step” towards going into competition, it does not involve the appropriation of the employer’s trade secrets, confidential information, or customers, and thus does not amount to a fiduciary breach.

In addition, despite some evidence she may have answered phone for the franchise about a month before she thought she was discharged, there was no evidence she actually spoke to customers or used her position with the employer to gain a business opportunity or solicit business away from the company. While there was some evidence the couple wanted to use her book of business with her employer to build up its own company, there was evidence she generated that business through her own personal contacts, not through the employer’s sales lists or confidential information. A reasonable jury could find the employee did not breach her fiduciary duty, but did nothing more than prepare to compete with her employer.

Fraud. The employer also asserted claims for common-law fraud and fraud by nondisclosure, returning to the FMLA-related facts of the dispute. It contended the employee misrepresented her need for FMLA leave, and failed to disclose her ownership interest in a competing company and the fact that she was using her FMLA leave to attend competitor training. Here, too, the appeals court found disputes of material fact should have precluded summary judgment in the employer’s favor.

There was evidence the employee made plans to attend the out-of-state training before she made arrangements to go on leave, suggesting her purpose in taking leave may have been to attend the training rather than to care for husband. But that did not itself establish that she misrepresented her need for FMLA leave. It was undisputed her husband did need care, and there was some evidence suggesting that the employee did, in fact, care for him while she was on FMLA leave. The appeals court also cited testimony that the employee didn’t even know FMLA leave was a possibility until her supervisor suggested it to her (he knew the stress she was under while working and also taking care of her husband). Accordingly, there was evidence from which a reasonable jury could conclude that the employee did not misrepresent her need for FMLA leave.

Planning to compete. The appeals court also reversed summary judgment on the employer’s claims for fraud by nondisclosure arising from her failure to disclose her intent to compete with the company for the same reason that summary judgment on the breach-of-fiduciary-duty claim was reversed: A reasonable jury could find the employee was simply planning to compete with the employer, but was not actively competing—a fact she was not required to disclose. As to the employer’s claim of fraud by nondisclosure of her intent to attend competitor training while on FMLA leave, even assuming the other elements of a fraud claim could be satisfied here, the employer failed to present sufficient evidence of damages to establish it was injured by the employee’s allegedly wrongful conduct.

Finally, the appeals court found the district court’s damages award was independently erroneous, regardless of whether summary judgment was warranted, in light of “the infirm evidence” used to support the employer’s claims.

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