Jottings By An Employer's Lawyer

Thursday, December 28, 2006

The Pesky World of Torts Strikes Again

Most of the time employment lawyers delve in the statutory world — discrimination, retaliation, harassment — all created by a legislative body. But there also exists the common law, developed over hundreds of years, rarely in the employment context. Still there is no workplace wall that excludes the common law, a fact that more often than employers would like leaves them at risk.

Negligent misrepresentation is one such common law cause of action which occasionally pokes its head in the employment law setting. A recent example, The First Marblehead Corp. v. House(1st Cir. 12/22/06) [pdf] shows just how costly words spoken, or in this case unspoken, have the potential to be.

House, along with other employees, received a memo from the General Counsel of Marblehead outlining the terms of his stock options, including a provision that they could be exercised over a period of 10 years. Shortly after that memo, the General Counsel realized he should also have noted that upon termination of employment, an employee had only 3 months to exercise the options. Realizing his error, he submitted another memo noting it was important that it be given to all employees who had received the first memo.

By now it is no surprise that the 2nd memo never made it to House. He quit, the 3 months passed, and six years later when the company went public, options with a face value of $75,000 when issued were now worth over $7 million. Not surprisingly House attempted to exercise the options, First Marblehead resisted, and litigation ensued.

Bottom line House lost his breach of contract and promissory estoppel claims, since under Delaware law those causes of action cannot prevail if they would run counter to a written plan approved by the Board of Directors. But House gained at least a temporary victory when the Circuit reversed the district court's grant of summary judgment on his negligent misrepresentation claim. According to the court under Massachusetts law, House had to show that Marblehead:
  1. in the course of [its] business,
  2. supplie[d] false information for the guidance of others
  3. in their business transactions,
  4. causing and resulting in pecuniary loss to those others
  5. by their justifiable reliance on the information, and
  6. with failure to exercise reasonable care or competence in obtaining or communicating the information.

Top that off with Massachusetts case law making it clear that a failure to disclose can be a "misrepresentation" and there is another valuable lesson why employers' — and their lawyers — forget about the common law of torts at their peril.


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