New 1st Circut Decision on Confidentiality Provisions

(Cross-posted at the Mass High Tech site)

The Young Tech Company's Introduction to the NLRA and Confidentiality

By Terry Klein and Matthew T. Henshon


“The National Labor Relations Act? I thought that was for Big Labor. What’s that got to do with my growing tech company?”

Potentially, a lot.

The First Circuit Court of Appeals has helpfully reminded employers in the private sector that the NLRA has a broader reach than they might think. Historically, the NLRA was enacted to protect the rights of employees and employers to engage in collective bargaining. It codifies the rights of employees to organize, establishes the National Labor Relations Board, governs union elections, and forbids certain unfair labor practices by employers and union organizations. Examples of such practices include employer interference in employees’ efforts to organize, an employer’s refusal to bargain with employee representatives (and vice versa), and conduct by unions that amounts to coercing employees to organize or employers to enter into collective bargaining agreements.

But the language of the NLRA is very broad, invoking a different era when many – if not most – employers faced the prospect of a unionized workforce. And that broad language could still apply to a “New Economy” company.

Earlier this week, the court issued a decision that could affect all employers that include confidentiality provisions in employment agreements, whether they are union shops or not. The court found that one such employer had engaged in an unfair labor practice when it terminated an employee for violating one such confidentiality provision. It did so in spite of the fact that the employer’s workforce was not unionized, and in spite of the fact that the employer was terminated for discussing the terms of his employment with one of the employer’s clients, as opposed to one of his coworkers. Employers that include confidentiality provisions in their employment agreements would be well served to review those provisions to ensure that they comply with the NLRA.

NLRB v. Northeastern Land Services Ltd. presented the First Circuit with the question of whether including a confidentiality provision in an employment agreement constituted an unfair labor practice. While a 2009 First Circuit opinion in the same case concentrated on NLRB procedure (and was vacated by the U.S. Supreme Court), the latest decision returns the focus to the substantive interplay between the NLRA and employee confidentiality agreements.

NLS is a temporary employment agency that supplies workers to companies in the natural gas and telecommunications industry. The employee who filed the unfair labor practices charge with the NLRB signed a temporary employment contract stating that he “understands that the terms of this employment, including compensation, are confidential to Employee and the NLS Group. Disclosure of these terms to other parties may constitute grounds for dismissal.” In connection with a dispute with NLS over reimbursable expenses, the employee notified the temp agency’s client that he would be offline until the dispute was resolved. NLS terminated him. He responded by filing a charge with the NLRB. It was undisputed that NLS had not terminated him for discussing the terms of his employment with fellow employees in connection with a union organizing effort, but instead for disclosing terms to a client. The First Circuit is silent as to whether other NLS employees were union members or were seeking to organize collectively.

The court nonetheless concluded that the provision at issue violated Section 8(a)(1) of the NLRA and that by terminating an employee for violating the provision, the employer had engaged in an unfair labor practice. Stating the broader rule, the Court held that a confidentiality provision is unlawful if (1) employees would reasonably construe it to forbid organizing activity, (2) it was promulgated in response to union activity, or (3) the provision has been used to restrict the exercise of organizing rights. Firing an employee for taking issue with the terms of his employment, the court stated, “went to a prime area of concern” under the NLRA.

The First Circuit’s restatement of its 2009 decision should prompt employers to review employment agreements that include confidentiality provisions. While temporary employment agencies will certainly want to subject their agreements to close examination, other employers for which confidentiality provisions are important should also take note.

The court does not, of course, hold all confidentiality provisions to be automatically void. Narrow provisions that prohibit disclosure of “company business and documents”, for example, are most likely lawful. But, as the court decision makes clear, the mere inclusion of a confidentiality provision can violate the NLRA. And terminating an employee for acting contrary to the provision will constitute still another violation. In NLS’s case, the NLRB forced the company to rehire the employee and pay him damages related to his termination.

Technology companies are not fertile grounds for the type of union organizing that the NLRA is intended to protect, to be sure. But in the context of an employment dispute – say, attempting to enforce a non-compete provision against a former employee – an enterprising employee would be sure to use a broad confidentiality provision and a potential NLRA claim as leverage. Whether located in the First Circuit or not, businesses would be wise to make sure their confidentiality provisions are narrowly tailored to fit specific business needs.

New Op-Ed in Mass High Tech

A new op-ed in this week's Mass High Tech, co-written with HPVPC partner (and fellow-blogger) Terry Klein.

1987: Yes, 1998: No, 2007: ???

Warren Buffett has a wonderful reputation as an investor. His accumulated stakes in Coca-Cola, Gillette, and the Washington Post are all good examples of "sticking to what you know" as an investment philosophy.

But his investment opportunities in the securities and funds industries are certainly not the ones about which he is the most convicted.

In 1987, the Sage of Omaha came in as a white knight to take a stake in Salomon Brothers, who had a hostile bid from corporate raider Ron Perelman on the table. Eleven years later, after a painful government bond scandal among other things, Sandy Weill took him out (of his misery???) with a tidy profit.

Then in 1998, he was asked to help stave off a global liquidity crisis by rescuing Long-Term Capital Management. Perhaps remembering his Solly experience (John Meriwether being a common denominator), he conveniently went on an Alaskan vacation with his new best friend and bungled the mechanics of his bid, which forced a consortium of banks (not including Bear Stearns) to come to the rescue.

Today, there are reports of Buffett taking a stake in Bear Stearns, perhaps to keep it independent as Wachovia and Bank of America are looking to expand their securities businesses through acquisition. Supposedly on vacation, just like in 1998 (what is it with these post-Labor Day retreats?), Buffett may change his tune on derivatives if the price is right.

Liquidity Problems North of the Border

One of the lesser publicized, yet more dramatic, stories of this summer's liquidity crisis has been the literal shutdown of the asset-backed commercial paper market in Canada.

Why Canada? It has very little to do with the underlying asset quality, and almost entirely to do with how the market operates. Dominion (DBRS), the Canadian rating agency, has continued to give most ABCP prime (investment grade) credit ratings, in spite of the fact that there was never any liquidity backstop from banks in the case of market turmoil. Standard & Poor's doesn't have the same policy, and for good reason, as a liquidity backstop for a CP program is an investor's only assurance of timely repayment.

Good thing the Canadian market is only about US$32 billion (as compared with almost US$2 trillion for all of the USCP market), although that has not meant any less angst and anxiety for market participants.

Who's Afraid of the TED spread?

A lot has been written recently about the rise in yield of LIBOR, the short-term rate that banks charge each other, even as rates on other short-term fixed income instruments have fallen. Reasons have ranged from impact of the collapse of the asset-backed commerical market to hoarding of cash (and not lending it out) to broader liquidity issues.

One thing that we learned from our fixed income strategist mentor (for me, the great Curtis Shambaugh) is that if you are looking for a reliable barometer of fear and greed, the TED spread is practically unbeatable.

The "T" in TED is the Treasury bill yields, and the "ED" is Eurodollar futures, the way the market trades future 3-month LIBOR settings. Because of their risk-free nature, Treasuries will always yield less than LIBOR, so the wider the spread between the two, the more fear is apparent in the market.

Therefore the spot TED spread is very wide (at a 20-year high according to some), indicating lots of current fear. But the future TED spreads are much narrower, since the T-bill curve is positively sloped (3-month bill yield = 4.07%; 6-month bill yield = 4.20%) but the Eurodollar curve is massively inverted (Sep '07 =5.56%, Dec '07 = 4.76%).

Maybe things aren't going to be so bad after all...

Bernanke's Put-etto

In Ben Bernanke's much anticipated speech today in Jackson Hole, he essentially absolved the Fed of responsibility for protecting market participants from bad financial decisions, emphasizing vigilance yet patience and allowing others to make policy decisions that should relieve pressure on the economy's best friend: the US consumer.

Equity markets liked the speech, even though the market expectation for Fed rate cuts this year has been tempered. Unlike his predecessor, who was famous for swiftly cutting rates to ensure liquidity, Bernanke seems to be content biding his time despite some implicit pleading by others.

Of course this positive market action could just be month-end (and quarter-end for some broker-dealers) window dressing....

Happy Birthday, Roy Oswalt

The pride of Weir, Mississippi, Roy Oswalt, turned 30 today and celebrated by shutting the resurgent Cardinals out on 4 hits over 7 innings, striking out nine. Exactly how good is old Roy?

Well, the list of pitchers who have finished in the top five in Cy Young voting six times during their first seven years in the league has exactly zero entries...until this November when Oswalt (14-6, 3.21) will start the list unless the wheels completely come off the cart. The only year he didn't crack Top 5 was 2003 when he went 10-5, 2.97 in an injury-plagued season.

He is tops in the majors with 112 wins since 2001, already top 15 on the career list in winning percentage and Adjusted ERA+ and has won 53.2% of his career starts. Throw in 19-1, 2.46 in 24 career games just against the Reds and you start to get a sense that he's pretty good.

So the guy whose career was saved by a loose spark plug has quietly amassed the most consistently dominant beginning of a starting pitcher's career in baseball history. Let's just hope that 8-10 years from now he doesn't end up like the pitcher whose career was most like his through age 28.

Taking It In the Shorts

Recent volatility and uncertainty is part of the market's unending pendulum swing between fear and greed, but the specifics around this summer's high drama deserve special mention. Let's lay out the backdrop:

1) New Fed Chairman

Ben (not Benjamin) Shalom Bernanke was sworn in as Fed Chairman on February 1, 2006, but it took the greater part of eighteen months for him to meet a true challenge. Oh, and by the way, good luck following the legendary Alan Greenspan and establishing your own credibility.

2) Single source of market disruption: Credit

The economy seems fine, inflation is relatively contained, and global issues are benign. Far and away the main reason for this disruption is lenders have been doing silly things in the credit markets.

3) "Alpha" dogs

The proliferation of hedge funds and accompanying strategies has led to money flow into some rather strange places. Universa Investments is an example of a fund that seems to pin its investment strategy on short-selling and extreme levels of volatility. Just the latest in the never-ending quest for "alpha".

So what did this cocktail produce? Well the only further background information needed is the characteristics of a credit instrument. Being long credit means that you are short optionality, and therefore volatility. In a steady state world, everyone gets their loans paid back (or doesn't have to pay Par for a defaulted security as a result of a credit derivative contract settlement). But in a more volatile environment, the best case for a creditor is still return of principal, but the likelihood of loss is much greater. Therefore it is not surprising to learn that credit spreads and market-based volatility measures (such as the VIX) are highly correlated.

Fast-forward to the credit contagion that started with the Bear Stearns Asset Management announcement. Soon all the aggressive credit deals that had been originated in the past several months (mortgages, LBOs, CDOs, etc...) were under pressure and liquidity became an issue across the globe. Markets began moving (up and down) in whipsaw fashion and volatility spiked.

Enter the Fed. The Federal Reserve Act states:

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

But everyone knows that financial market stability is an "unlegislated" mandate of the Fed as well. The ingenious aspect of the Fed's response to panic in the market was in the timing. To wit:

1) On the third Saturday of every month, index options expire. Those options stop trading at the end of business on Thursday, and the index settlements are determined based off the opening prices on Friday.

2) The equity market hit new lows on the afternoon of August 16th (Thursday), which also coincided with a spike in the VIX to 37.5.

3) The Fed's policy response was released after the index options stopped trading but before the index settlements were determined.

4) The most leveraged way to play any market is through options, and one would imagine that short-sellers (long puts, short calls) and "long vol" plays were very instrumental in driving the market lower and vol higher.

5) By acting between the end of trading and settlement, the Fed "hung the shorts out to dry" as equities rallied over 5% and vol dropped about 30% as a result of the announcement.

The response can therefore be seen as a warning shot to short-sellers, assuming that the Fed believes that "unfettered" short selling drives up volatility and therefore damages the credit market even more.

In addition, the Fed didn't even use the most famous tool in their monetary policy tool chest: the official Fed Funds target. They get to save that for when economic, not just market, conditions warrant it. And it also gives Mr. Bernanke a another notch in his credibility belt, which never hurts.

Welcome Aboard

A big Allerton hello to guest blogger Matt ("Easty") Eastwick, who joined the discussion today. His first post is here, and we look forward to commentary on topics ranging from the Yankees' playoff roster to changes in the VIX.

Welcome aboard, Easty.