Non-compete breach in business contract nets client $25.6M 

Posted on September 4, 2024 by Joe Ahmad

My colleagues at AZA and I won a $25.6 million breach of contract jury verdict in Houston court this week in a non-compete case pitting AZA client doctors’ group Fondren Orthopedic Ltd. against healthcare giant HCA Healthcare.  

While the Federal Trade Commission’s ban on non-competes for employees is headed to appellate courts after being overturned in two trial courts and upheld in one other, here a non-compete in a business contract was honored by a jury granting our client all requested damages.  

Fondren and HCA (which took over for Columbia Hospital Corporation) were in a limited partnership that owns and operates Texas Orthopedic Hospital, a hospital specializing in orthopedic surgery services. The jury found that HCA had broken the non-compete provisions of the contract by opening 10 competing hospitals in the Houston area. In addition, HCA prevented the Fondren group doctors from doing the same by invoking the same non-compete provisions the larger entity was blatantly breaking.  

HCA had the size, the scale and the power and felt they could do what they wanted. The hospital contract with Fondren was for 57 years, and about halfway through, they just decided they would no longer honor the contract. HCA owned 60% of the hospital with Fondren, but 100 percent of their improperly opened competing hospitals and sent business to their fully owned places. 

The case was covered by Texas Lawbook in “Houston Jury Finds HCA Hlethcare Owes Doctors $25.6M” (subscription required).  

The AZA team included my partner Kelsi Stayart White, associates Paul Turkevich and Karina Sanchez-Peralta, of counsel Kyle Poelker and Hilary Greene. HCA was represented by a team from Latham Watkins, including former Enron lead prosecutor Sean Berkowitz.  

Judge Jeralynn Manor oversaw the three-week trial and will hold a separate bench trial to determine attorney’s fees.  The case is Fondren Orthopedic Ltd vs. Columbia Hospital Corporation, Harris County case number 2021-68404. 

 

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Northern District of Texas temporarily enjoins FTC from enforcing its non-compete ban

Posted on July 4, 2024 by Joe Ahmad

It’s not surprising that a federal court enjoined the Federal Trade Commission’s (FTC) non-compete ban. Many non-compete lawyers, including me, predicted that the FTC ban on worker non-compete agreements would be struck down.  And the first court to rule on the issue, albeit, in a preliminary ruling, indicated that it will likely rule that the FTC’s ban is invalid.

Northern District of Texas Judge Ada Brown granted a preliminary injunction preventing the rule from taking effect in September, ruling that the FTC “exceeded its statutory authority in promulgating the noncompete rule, and thus plaintiffs are likely to succeed on the merits” of their request to strike down the ban. 

It appears that at least one court is poised to pull down the ban. And, given the U.S. Supreme Court’s late June decision courts are now instructed to interpret statutes using their own independent t judgment without deference to an agency’s interpretation. The high court overruled its previous policy of deferring to reasonable agency determinations under Chevron v. Natural Resources Defense Council.  It now seems inevitable that Judge Brown’s anticipated striking down the ban will be upheld by 5th U.S. Circuit Court of Appeals, and the U.S. Supreme Court, if it gets that far. While Judge Brown limited her injunction to the parties in front of her, other courts will likely do the same or even apply their order nationwide.

As a practical matter, employees and business should and will consider FTC’s ban void, unless something surprising happens.

One significant cautionary note – this only applies to federal efforts to limit non-competes. It has no effect on the continuing trend at the state legislative level to reign in non-competes. Considering what appears to be stalled efforts at the federal level to limit non-competes, pressure on state legislators to act will only increase. I doubt my state, Texas, however, will take any such action soon. Outside of Texas, lawyers should still stay tuned.

 

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Whistleblower client helps government settle $15 million Baylor heart surgery Medicare fraud case 

Posted on July 2, 2024 by Joe Ahmad

Working in concert with the federal government for five years, my law firm colleagues and I saw our whistleblower client receive $3 million of the $15 million settlement of a lawsuit alleging that Houston surgeons were letting unqualified trainees perform parts of heart surgeries while the surgeons billed for two or three concurrent surgeries.

The government said it is the largest settlement on record for Medicare fraud over concurrent surgery claims. The settlement is with Baylor St. Luke’s Medical Center, Baylor College of Medicine and Surgical Associates of Texas P.A.

This case is a good example of what qui tam claims under the False Claims Act can do. The allegations in this case became public and got a lot of publicity when the government intervened and settled. It puts people on notice around the country that this type of behavior will risk the wrath of the government.

 “In short, the teaching physicians churned through as many cardiac surgeries as possible to generate revenue for Baylor, regulations be damned, and were rewarded with lavish compensation,” said the lawsuit filed by my firm AZA.

The press release from the U.S. Southern District of Texas’ U.S. Attorney’s Office is here Texas medical center institutions agree to pay $15M record settlement involving concurrent billing claims for critical surgeries.

The False Claims Act was enacted after the Civil War to address military contract fraud. These days it is health care and still some department of defense fraud that dominate use of the act in lawsuits filed by whistleblowers.

This case took five years from when we filed it in 2019, which is not uncommon when the government intervenes and does its own thorough due diligence. The government tends to get involved in cases it deems both important and likely to lead to end in a win for the government. Otherwise, the whistleblower who filed the lawsuit must proceed on their own, even though the government would still take the biggest chunk of any judgment.

In this case, Medicare billing regulations require that a teaching physician must be in the operating room and supervising operations during critical portions of surgeries. Regulations also require adequate informed consent from patients. The lawsuit alleges that procedures were done in violation of these regulations, resulting in a $150 million windfall for the hospital and allowed the surgeons to make compensation up to four times what their colleagues made.

These Medicare regulations are there to protect the integrity of the government program and to protect patients. Patients have a right to a surgeon’s undivided attention, especially in a procedure as important and complicated as heart surgery. We took this case when we saw it concerned not only double and triple billing to Medicare but also something as serious as heart surgeries. The surgeries in question included coronary artery bypass grafts, valve repairs and aortic repair procedures.

The case is in federal court in Houston titled Morgan et al. v. Baylor St. Luke’s Medical Center et al. case number 4:19-cv-02925.    

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Tech entrepreneur Mike Lynch acquitted of defrauding HP; he was smart to testify 

Posted on June 11, 2024 by Joe Ahmad

A San Francisco jury that heard three months of testimony unanimously acquitted Autonomy CEO Mike Lynch of 15 criminal charges of conspiracy and wire fraud over the 2011 sale of his company to Hewlett-Packard. The government charged that Lynch misrepresented the value of his company at $11 billion and HP had to write down the value of the company by more than half. 

This sale, a major British tech deals at the time, was supposed to give a jump start to HP’s software business but it did not. HP won a civil case against Lynch in London, but damages have not been set. This U.S. case was a criminal one brought by the U.S. Justice Department. 

Lynch, a software entrepreneur who has both been praised for his ingenuity and criticized for this sale, told jurors himself that he did not lie to HP but depended in good faith on the calculations of others. He spent three days on the stand and clearly made a positive impression.  

In a battle between a rich founder executive and a sophisticated larger company, where the larger company bought the founder’s company, people will assume that the larger company is responsible for doing its due diligence. They will likely assume the company executives should know better than to rely purely on representations of the other side’s management.  

Some jurors tend to believe that these companies and executives operate in infested waters and should know it is ‘buyer beware.’ And the theme that HP and Whitman would blame others for their own mismanagement or failures is easy for some jurors to believe. 

Finally, some on the jury may have expected former HP CEO Meg Whitman to testify, and when she didn’t, that may have raised some suspicion and doubt in their minds. Whitman, a one-time California gubernatorial candidate, was running the company when it took the massive write down for the Autonomy purchase and she led some of the accusations against Lynch. 

And the fact that Lynch did testify and that he, over days, played guide and teacher to the jury about British phrases may have endeared him to the jurors. Given all that, it wasn’t a surprising outcome. 

I was quoted about this case in several trade publications including CIO.com and Accounting WEB. 

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Boeing CEO resigns – the top must drop in crises like these 

Posted on March 29, 2024 by Joe Ahmad

Davd Calhoun, CEO of Boeing, announced he is resigning from the troubled airlines at the end of the year. This is inevitable and the right thing to do.

Just like in pro sports, an organization with major problems needs to defend itself and do so with a change at the top. Customers, workers and the market need to know solutions are coming.

Just like the New England Patriots jettisoned even the mostly revered Bill Belichick, Boeing needed a change. The Wall Street Journal reported in Boeing CEO Dave Calhoun to Step Down in Wake of 737 MAX Struggles that not only will Calhoun be gone but his exit is “part of a broader executive shake-up after a Jan. 5 midair blowout and sweeping production problemsthat have angered airlines and regulators.”

Calhoun came on in 2020 after fatal crashes the two years before he joined. But the Alaka Air door plug falling out midair and other recent problems have proved too much.

CNBC featured a story on who might replace Calhoun, looking to GE, Carrier, Spirit, and an executive inside Boeing. Ideally, they need someone from outside to come in with fresh eyes. They should be looking in manufacturing and airline industries. Folks already inside the company tend to be defensive.

This search goes to the need all companies have for a succession plan. Given that Calhoun is looking to leave in nine months, one can assume there was no such solid succession plan in place at Boeing. A succession plan is not a luxury, it is a necessity for companies that can face a crisis in which the top executives are immediately unavailable to continue service.

Where Boeing stands now, it needs to do three things. One, find experienced and fresh eyes to run the company. Two, the folks at the top must show all employees that they are taking this seriously and seeking to strengthen and fix things at Boeing. Three, show the market that the company is up for the reset it needs.

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Paxton and Succession – What if you are the coup target?

Posted on September 25, 2023 by Joe Ahmad

Though politics, in the more formal political party sense of the word, had a leading role in the impeachment trial of Texas Attorney General Ken Paxton, there were definite similarities between that attempted takeover and what happens in the hit HBO show Succession and in boardrooms across America.  

As with the characters in the show, people are always maneuvering to get into the C suite. And once there, they often aspire to being CEO or chair of the board. Many times, that involves dethroning an existing CEO or board chair. And two things that mattered in both the attempts to unseat Paxton and in the show Succession are politics and the rules of engagement. 

Both party politics and workplace politics can matter a lot. Inevitably, you must win over the decision makers who will vote on your future. Unless your dad hands you the keys to the company like Rupert Murdoch just did, it is not good enough just to have good performance. It usually must be a demonstratively great performance. More importantly, it must be shown to benefit those who decide your future.  

In Succession, workplace politics and family politics were the backbone of all four seasons as Logan Roy’s children jockeyed for their won exalted spot at the table. In the Paxton case, politics in front of the public, and more importantly behind the scenes, played dual roles. In C-suites, it can be just as cutthroat as on HBO or in Austin.  

The other key issue is the rules of engagement. Frequently the rules are found in company bylaws or employment contracts. Unfortunately, with respect to employment agreements, very few people study them with an eye towards their own future and rise in the company. If you do not have a lot of leverage from your employment agreement, or company bylaws, you are too easy at target for people to remove rather than promote if they think they will benefit personally.  

The rules in Succession were on paper but they were bent and mangled and eventually cleverly superseded in the show. The rules of engagement for Paxton were clear but what went on between Senators was where the real decisions were made.  

The rules of engagement in the C suite need to be as specific, unambiguous and non-discretionary as possible. If discretion is allowed as an element of the decision to terminate someone, an ability to cure is essential. Written notice of the details of the cause for termination and an opportunity and ability to cure it are key.  

Requiring a vote of a board or others as opposed to investing discretion with a single person is important as well. It is easier for someone opposed to you to plan your overthrow if only a few have to okay it, rather than a larger group.  

Change of control agreements can be extremely helpful as well. Often the people that gang up on you are people you do not know well or at all. You may have a great relationship with your existing board. But what happens when new owners and a new board take control? Inevitably the existing management will be partially if not completely removed. It is smart to have a payment agreement in place if there is a change of control over your report, responsibilities, pay or location. And of course, the payout should be as significant as possible. The higher the cost, obviously the less likely an improper removal will gain traction.  

  

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FTC Non-Compete Rule Change Could Boost Wages and Innovation

Posted on May 9, 2023 by Joe Ahmad

In April, the Federal Trade Commission (FTC) closed comments on a proposed rule change that would drastically limit employers’ uses and abuses of non-compete agreements in employee contracts. 

When the FTC announced the proposed rule change its press release suggested exploitation will go down and wages will go up if the change goes through: 

The Federal Trade Commission proposed a new rule that would ban employers from imposing noncompetes on their workers, a widespread and often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses. By stopping this practice, the agency estimates that the new proposed rule could increase wages by nearly $300 billion per year and expand career opportunities for about 30 million Americans. 

It is no surprise that labor and consumers have overwhelmingly favored the changes and business interests have opposed them. In a story on the divide NBC News noted that what it called “lobbying crossfire” by the dueling interest groups was “in addition to the more than 26,000 comments from the public the FTC gathered over the past several months.” 

This showdown in Washington was inspired by business’ expansion of the uses of non-competes over the last few years that many would argue has been an over- use or abuse. The original purpose of a non-compete was to protect legitimate business interests like the privacy of confidential business information and trade secrets. But some businesses have used non-competes as handcuffs to prevent even lower-level employees from leaving.  

A non-compete can unfairly lock someone into a job though there is no real threat to the business if they leave. The businesses have lawyers to enforce their claims but it is a small percentage of employees who have the finances to access lawyers for an expensive legal fight over the non-compete. 

Another concern is that many studies show the most innovative businesses created by executive types come from those who worked at other companies and saw a new, potentially better way to do things. In this way non-competes can stifle competition and innovation.  

In a New York Times op-ed, Lina Khan makes the argument that in addition to suppressing wages, non-competes suppress creativity in the marketplace: 

Start-ups are historically a key driver of job creation and innovation but several studies have found that noncompetes reduce entrepreneurship and start-up formation. How can a new business break into the market if all of the qualified workers are locked in? Or if the would-be founder is bound by a noncompete? 

I expect the FTC will carefully consider the concerns of businesses as it addresses the rule change. But it will balance that with the data showing the suppression of wages and the costs to innovation non-competes have created.  

 

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Can CEO’s learn something from Dolphins owner Stephen Ross’s problems with the NFL?

Posted on August 11, 2022 by Joe Ahmad

Earlier this week, multibillionaire and longtime Miami Dolphins owner Stephen Ross was found to have violated the league’s tampering rules in a scheme described as “unprecedented in scope and severity” by commissioner Roger Goodell.

It’s hard for someone like me not to think about executive employment when I hear the details. Writes Greg Cote in the Miami Herald:

Ross not only cheated, he cheated badly, unsuccessfully, with no guile whatsoever, but as clumsily ham-handed as an amateur thief smiling at the security camera. He wanted to win something awful, and did something awful to get there, and got caught.

 A six-month NFL investigation found Ross as well as Dolphins vice chairman (and future owner-in-waiting) Beal both violated “integrity of the game” rules by tampering between 2019 and ‘22 to lure QB Tom Brady while he still was under contract with the Patriots and later the Buccaneers. And also tampered to lure coach Sean Payton while he still was under contract with the Saints.

Ross was fined $1.5 million and Beal $500,000. Ross was suspended from all team involvement until October and both were temporarily suspended from league committee involvement and league meetings. Far more damaging to the team, the Dolphins were made to forfeit their 2023 first-round draft pick and a third-rounder in 2024.

The tampering rule – which forbids teams from recruiting players under contract on competing teams – is relatively unique to the league. While businesses can enforce non-disclosure rules and in some cases non-compete agreements, businesses generally cannot forbid workers from talking with competitors.

Ross’s actions are surprising because they amount to a flagrant violation of a well-known rule by a someone at the NFL’s highest levels, and that speaks to Ross’s judgment and leadership. Arguably more serious, the probe confirmed the substance of allegations made by former Dolphins coach Brian Flores in a racial discrimination lawsuit filed earlier this year that Ross had urged him to intentionally tank games during the 2019 season.

Writes Rodger Sherman in The Ringer:

“The NFL’s investigation indicates that these claims are true—that Ross did, in fact, tell the Dolphins’ brain trust ‘that the Dolphins’ position in the upcoming 2020 draft should take priority over the team’s win-loss record,’ and that Ross did make a comment about giving Flores $100,000 to lose games.

But Goodell let Ross off the hook with regards to the tanking allegations, noting that Ross stopped telling Flores to prioritize draft position after Flores wrote a letter expressing discomfort with Ross’s requests, and that the Dolphins fought hard throughout the 2019 season, turning around an 0-7 start by winning five of their final nine games. It’s strange logic. It actually seems pretty clear that Ross wanted to tank, but was saved by Flores’s coaching prowess and formal complaints about Ross’s comments. Why does Flores’s admirable refusal to tank exculpate Ross’s clearly stated desire to tank? The report also concludes that the $100,000 comment was a joke and ‘however phrased, such a comment was not intended or taken to be a serious offer.’ This seems like a generous interpretation. Clearly, Flores did not think Ross was joking, and even if he were, it’s also probably not a good thing to make light of.”

Not surprisingly, Ross has denied the claims and disputed the NFL’s findings and his punishment.

Tanking games to improve a mediocre team’s place in the draft is not a new concept, and it probably occurs more than we realize. Still, it has never been proven and punished by the NFL. That streak continues, although with an asterisk based on the findings here.

CEOs find themselves in ethically compromised situations all the time. Fiduciary duty and the “business judgment rule” provide some guideposts to ensure that the interests of the business come before personal interests or gain. In practice, these concepts provide wide latitude. What it comes down to is how leaders respond to the intense pressure to win.

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Despite Two Closely Watched Trial Losses, DOJ Pressing on with Controversial Criminal No-Poaching, Price-Fixing Antitrust Enforcement

Posted on May 24, 2022 by Joe Ahmad

Is the DOJ going too far by aggressively pursuing criminal no-poach and price-fixing charges as per se violations of the Sherman Antitrust Act? In two recent trials testing these enforcement theories for the first time, jurors thought the government’s cases were a stretch. 

In United States v. Jindal et al., a federal jury in Texas acquitted former executives of a healthcare staffing company of all substantive criminal charges for conspiring to hold down wages. A day later in Denver in United States v. DaVita, national healthcare provider DaVita and its CEO Kent Thiry were acquitted on criminal charges that their use of no-poach agreements stymied competition and hindered employees’ ability to progress their careers.  

Law360 described the DOJ’s strategy as “advancing bold theories that could reshape federal competition regulation.” NYMag described them as a component of the “Biden administration’s ambitious, all-purpose antitrust-enforcement agenda. “ 

At issue in DaVita is the government’s theory that – regardless of their impact – no-poaching agreements can be a “per se” violation of the Sherman Act. Despite the two closely watched acquittals, DOJ Antitrust Division head Jonathan Kanter put on a game face and vowed to press on with dozens of similar enforcement actions in the queue.

“Both of those cases — which were extremely important cases establishing that harm to workers is an antitrust harm — survived motions to dismiss,” Kanter noted, as reported by Law360. “The courts said, ‘These are legally sound cases.’ We want those decisions. … Just because a jury or two decided not to convict on a specific case doesn’t mean the public isn’t demanding more. We’re hearing from the public on a regular basis, and they want more enforcement.” 

While juries and the public often take a dim view of anticompetitive schemes, criminal prosecution should be reserved for exceptional cases, rather than a per se rule. It’s one thing for an individual to bring a case and lay out how they were specifically harmed. The commitment alone that it takes for an individual to take a complaint all the way to trial is an indicator of their conviction. It’s a much greater challenge for government lawyers to convince a jury of a per se violation, regardless of the effects of the action.

Some no-poach agreements should not even be civil violations, much less criminal ones, and the line between an appropriate no-poach and an illegal one is not clear at times even among expert lawyers. In some situations, a no-poach agreement may be a valid exception to an unreasonable restraint of trade – for example, as part of a resolution of past trade secret violations regarding confidential employee or compensation information, or to address violations of a non-solicit by an employee who has left.

Nonetheless, the trend has been more and more to restrict no-poach agreements, and now the government is taking a very aggressive approach against them.  Businesses should be mindful that the DOJ’s commitment to follow through with its controversial position is not going anywhere despite these early losses. Lawyers should advise their clients accordingly to be very wary of them. 

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Covid-19’s Latest Side Effect: A Stampede of Whistleblowers at the SEC

Posted on December 6, 2021 by Joe Ahmad

It seems every day we find new ways the pandemic has upended the way we live and work. Just ask anyone in HR, data security and compliance. It’s no secret that housebound and hybrid workers have been keeping them awake at night – and for good reason. 

The latest proof point is an annual report from the SEC, which documents a stunning amount of whistleblower complaints and monetary payouts in fiscal 2021. Consider:

  • The 12,200 whistleblower complaints filed in fiscal 2021 were more than all previous years combined since the bounty program began in 2012.
  • The 12,200 complaints logged in 2021 represent 76 percent increase over 2020, which itself was a record year.
  • 108 whistleblowers received payouts totaling $564 million in 2021, again more than all previous years combined.
  • Of special concern for businesses: employees and internal whistleblowers are increasingly doing an end run around internal reporting and going straight to the SEC with complaints. That should raise alarms because internal complaints provide businesses a chance to respond, take action and self-report, and potentially mitigate any penalty.

Clearly, filings were on the rise before Covid-19 upended corporate culture. Court rulings and a push by the SEC to encourage whistleblowers have caused a steady increase in such claims. But there’s also no doubt that remote and hybrid working have created a disconnect with compliance frameworks, and that is likely one reason for the 76 percent jump in whistleblower complaints, particularly those that bypassed a company’s internal procedures. Workers at home simply don’t have the same access and opportunity to walk down the hall and poke their head inside a manager’s office to discretely raise a concern.

Many businesses have still not adapted compliance programs to ensure that workers have access to hotlines and other avenues. Reporting has become even more challenging and confusing, and as a result, there’s more reason than ever for employees to bypass the internal process and go straight to the authorities.

Writes Bloomberg Law:

The isolation that comes with being separated from a communal workplace has made many employees question how dedicated they are to their employers, according to lawyers for whistle-blowers and academics. What’s more, people feel emboldened to speak out when managers and co-workers aren’t peering over their shoulders.

With 12,200 whistleblower complaints in the pipeline in fiscal 2021 alone, we can expect even more payouts and higher dollar amounts in the years go come.

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