RICO VS. ORGANIZING DRIVES; WOBBLIES WIN WILD ONE FOR NOW WHILE SMITHFIELD CANS UFCW DEFENSES

In response to union organizing as an alternative to NLRB elections, employers have enjoyed surprising success challenging such drives as violations of the Racketeer Influenced Corrupt Organizations Act ("RICO"). Typically, the employer alleges that the union and others conspired to unlawfully coerce third parties from doing business with the employer unless it succumbed to the union’s organizing demands, usually appending secondary boycott claims under the Labor Management Relations Act ("LMRA"), Sections 8(b)(4) and 303, as well as common law torts. Two recent cases are instructive as to the law and judicial attitudes.

In Wild Edibles Inc. v. Industrial Workers of the World Local 460/640, S.D.N.Y. No. 07-Civ.-9225 (10/8/08), New York Federal District Court Judge Louis L. Stanton took a strict view of RICO pleading requirements, granting defendants’ motion to dismiss with leave to replead. Wild Edibles had alleged that the Industrial Workers of the World ("IWW" or "Wobblies" as historically known) with its agents Brandworkers Int’l ("BWI") and Daniel Gross, had associated to illegally extort agreements from restaurants not to purchase Wild Edibles’ products or face strikes, blocked entrances and other threats of economic harm. Assuming without deciding that the allegations established extortion under the Hobbs Act, 17 U.S.C. § 1951 (a favorite RICO predicate) Judge Stanton still ruled that no Rico claim followed. Relying on Second Circuit authority, Judge Stanton insisted that a RICO claim must allege the creation of an "enterprise" separate from the unlawful act, with "hierarchy, organization, and activities" functioning "as a unit"; it was not enough that defendants "merely acted together …" Moreover, Judge Stanton deemed the alleged two-month period of activity insufficient to establish a RICO "pattern". Finally, Wild Edibles failed to plead "open-ended continuity" because the alleged union scheme to put it out of business "is inherently short-lived."

Contrast the S.D.N.Y. decision with Smithfield Foods, Inc. and Smithfield Packaging Co. v. United Food and Commercial Workers Int’l Union, E.D. Va. No. 3:07cv641 (10/14/08). In that case, Sr. Judge Robert E. Payne of Richmond, Virginia, granted Smithfield’s motion to strike three affirmative defenses raised by the UFCW against Smithfield’s RICO complaint. First, Judge Payne ruled that since the union’s speech in its "corporate campaign" was allegedly unlawful, the UFCW could not assert the First Amendment as a defense. Second, the UFCW asserted that its anti-Smithfield testimony and activities at municipal hearings enjoyed immunity under the Noerr-Pennington Doctrine, 365 U.S. 127 (1961) and 381 U.S. 657 (1965). However, Judge Payne would not relent; since the union’s "intent was principally to vex Smithfield … their appearances before municipal governments cannot be an affirmative defense …" Finally, UFCW turned to "truth" as a defense. Observing that "truth" remained an unsettled defense under applicable state law, Judge Payne ruled that the state courts would reject a truth defense as irrelevant to the tortious interference claims pled. Protests that Smithfield had "unclean hands" just washed away.

Tempting as it may be to view these cases regionally, the "in terrorem" effect of employer RICO suits on union organizing cannot be easily dismissed. On October 27, the day trial was scheduled to begin, UFCW agreed to end its corporate campaign and the parties consented to an undisclosed "fair election process", thereby settling the case. Unions engaged in corporate campaigns and non-NLRB organizing must take special care to avoid arguably unlawful coercion and to document the circumstances of their lawful persuasive efforts.

SECOND CIRCUIT APPROVES PERFORMANCE BASED SALARY FOR FLSA OVERTIME EXCEPTIONS 

Although the courts firmly enforce overtime pay obligations imposed by the Fair Law Standards Act ("FLSA"), the FLSA itself creates exceptions which the courts will likewise honor so long as the employer’s use of the exception is bona fide. The recent decision of the U.S. Court of Appeals for the Second Circuit in Havey v. Homebound Mortgage, Inc., 2d Cir. No. 06-0978 (10/22/08) offers helpful guidance to employers. Under this case, employers may structure compensation plans which keep administrative and executive employees exempt from overtime while still providing compensation incentives for better performance.

The FLSA provides an exception from overtime pay for employees whose work is primarily administrative or executive and are paid a salary not less then $250/week, "not subject to reduction because of variations in the quality or quantity of the work performed." 29 C.F.R. § 541 2(e)(2). Homebound Mortgage, Inc., ("Homebound") employed Linda Havey as an underwriter, an exempt administrative position, paying her no overtime. Havey’s and other underwriters’ salaries, set in formal written agreements, consisted of base pay of $48,000 plus bonuses for meeting extra performance goals. Consistently meeting such goals would move the underwriter into higher base scales. If any underwriter consistently fell below an advanced performance level, the underwriter would drop to a lower level but never below the base $48,000. Compensation levels were determined prospectively every quarter under these agreements. Havey claimed that this adjustable compensation voided her administrative exception status and, therefore, Homebound owed her lots of overtime pay.

The Appeals Court disagreed and upheld the exception from FLSA overtime pay. "A two-part salary scheme in which employees received a pre-determined amount plus, on a quarterly prospective basis, an additional portion subject to deductions for quality errors does not violate the ‘salary basis test’ unless the system is designed to circumvent the requirements of the FLSA", ruled the Court. Absent any subterfuge, quarterly prospective changes under a plan are not the equivalent of hourly wages rather than salaries. Accordingly, the Court concluded that Homebound’s compensation system legitimately balanced the FLSA overtime exceptions with the employer’s performance incentives.

DOL WARNS FIDUCIARIES AND THEIR ADVISORS: RETURNS ARE YOUR PRIMARY CONCERN 

In two recently published bulletins, the U.S. Department of Labor (DOL) reiterated and clarified the obligations of plan fiduciaries and their advisors under the Employee Retirement Income Security Act (ERISA) when considering investing in "economically targeted investments."

The DOL described "economically targeted investments" as investment decisions that are based on factors other than how the investment will benefit the plan. These investments would include investments in companies or projects that stand to create an economic benefit outside the parameters of the plan, such as a bond to finance affordable housing for people in the local community, an investment in a commercial real estate project that uses union labor or a loan that will finance a construction project expected to create jobs in the area where the plan participants live. Such investments are allowed, but only if the plan fiduciary or investment manager can show that the investments would result in returns equal or higher than those that would be generated through alternative investments with comparable risk.

The DOL states in its bulletin that "given the significance of ERISA’s requirements that fiduciaries act ‘solely in the interest of participants and beneficiaries,’ the department believes that, before selecting an economically targeted investment, fiduciaries must have first concluded that the alterative options are truly equal, taking into account a quantitative and qualitative analysis of the economic impact on the plan."

A spokesperson for the DOL said that recent events "highlight the importance of ensuring secure and transparent retirement savings plans for American workers, retirees and their families." He added that "today the department reiterates and clarifies its long-standing view that workers’ money must be invested and used solely to provide for retirements, not for political, corporate or other purposes."

The bulletin also provided that a fiduciary must periodically monitor an investment manager appointed to manage the plan’s assets, taking care to base decisions on how they will benefit the plan and not how it will impact the fiduciary’s relationship to the company sponsoring the plan. It further states that investment managers who do not follow a written investment policy because it would lead to imprudent decisions are not considered to have violated ERISA. In fact, investment managers who make bad decisions because they are following an investment policy are not shielded from liability for those choices. Fiduciaries and advisors must therefore invest with caution.

TRADITION TRUMPS INJUNCTIVE RELIEF IN SECURITIES INDUSTRY   

Two cases may well signal judicial resistance to policing widespread fast and loose employment practices, especially where the party seeking "emergency" relief looks like an avid practitioner and does not offer hard proof compelling its claims.

Decrying the "alarming frequency" with which parties in the securities industry "are asserting alternative and contrary positions depending on which side of a particular suit they are on," Manhattan Supreme Court Justice Richard Lowe denied the motion of one such party for an injunction to prevent its former brokers from working for competitors pending industry arbitration. GFI Securities v. Tradition Asiel Securities, 6001183/08. Justice Lowe explained that to obtain an injunction, the requesting party must show: (1) irreparable harm, (2) a likelihood of success on the merits, and (3) a balance of equities; all of which GFI failed. GFI’s claims of irreparable harm were belied by the frequency with which brokers switch houses in the industry to the point that such events are quantifiable costs of doing business. Ultimate success looked unlikely because the restrictive covenants GFI sought to enforce were limited to preserving trade secrets and customer lists, none of which seemed at risk. Finally, GFI lacked equitable appeal, having taken and won diametrically opposite arguments when it had raided other houses for their brokers.

In similar vein, Kings County Supreme Court Justice Carolyn E. Demarest dismissed an unfair competition action by one mortgage broker against another pursuant to CPLR § 3103. Alpha Funding Group, Inc. v. Continental Funding, LLC, 13784/06 (8/15/08). Alpha star employee Igor "Gary" Kanfer led ten other employees from Alpha to competitor Continental, whereupon Alpha sued the employees and Continental for, among other claims, unfair competition, breach of fiduciary duty and misappropriation of confidential proprietary information. About a year and a half later, Kanfer returned to Alpha with four others from Continental. Citing "irreparable prejudice to the conduct of Continental’s defense … as a result of the knowledge that Gay Kanfer has gained through privileged communications," Justice Demarest granted Continental’s motion to dismiss.

In Focus
If you have any questions regarding any of the matters addressed in this newsletter, or any other labor or employment related issues in general, please contact the Pitta & Dreier attorney with whom you usually work.