Observations on Mediating Disputes of the Highly Paid Executive:

Richard D. Fincher, Mediator
Workplace Resolutions LLC

This article provides an overview of disputes involving higher-level executives and explores unique aspects in effectively mediating those disputes. Increasingly, mediators in these disputes are expected to possess subject-matter expertise in executive compensation, benefit design, and taxation, in addition to case and statutory law concerning duties of executive employment. 

What is the highly paid executive dispute?
For purposes of mediation, a highly paid executive dispute concerns a person at a senior level who has a dispute with his or her employer concerning a contractual, statutory, or common-law obligation.  The executive may be a corporate officer at least at the level of director or vice president or an insider as designated by the federal Securities and Exchange Commission (SEC). Typical positions are CEO, COO, vice president, law firm equity partner, top-tier stock broker, president of a non-profit organization, or physician within a medical partnership—generally each one with a salary level of over $250,000.

Forms of litigation involving the HPE
Four major types of claims are generally asserted in executive litigation: breach of contract, common law duty of loyalty, statutory claims (such as under the Civil Rights Act of 1964, as amended,) and business torts.

Claims of breach of contract typically involve the employment agreement, the separation agreement, or the application of some benefit policy, such as the stock option summary plan description (SPD). A highly paid executive is as likely to be a plaintiff as a defendant, depending on the facts. The executive sues as a plaintiff if the employer breaches the contract by refusing to perform some commitment, generally failing to pay some compensation or discharging him without cause. With different facts, the executive responds as a defendant if he or she is alleged to have breached some promise in the employment agreement, such as starting a competitive business.

Claims of breach of the common law duty of loyalty involve the obligation of an incumbent executive not to compete with his or her employer, not to self-deal, or not to take actions that are contrary to the employer’s interest. Here, the executive is a defendant. Claims asserted under statutes commonly involve gender, race, or age discrimination under the Civil Rights Act of 1964, as amended. Here, the executive is a plaintiff and alleges some form of discrimination.

Claims asserting business torts are generally litigated against the employer; thus the executive is the plaintiff. One such claim involves “fraudulent inducement,” wherein the employer recruits a senior executive who resigns his job, moves across the country, buys a home, but then has the job offer withdrawn prior to starting the new assignment. Another involves “defamation,” wherein the employer allegedly makes a public statement defaming the executive by name and damaging his employability.

At what point in the litigation cycle are mediations held?
When is a dispute “ripe” for mediation? Generally, there are several prerequisites. First, counsel must have had sufficient time to gather basic information and be able to value the case. Second, both parties must be in a mindset to meet and discuss settlement. Third, at least in many cases, both parties require some litigation before they can accept ADR as a viable option.

Unique challenges in mediating with the HPE
Highly paid executives can be unique clients for several reasons. Typically, they are highly educated, often having an MBA or doctorate. They are highly opinionated about their right to work elsewhere, and have significant financial resources to litigate the matter. They are highly opinionated and are not used to deferring to others. At a president or CEO level, they are often poor listeners. Of course, there is typically a significant amount of money at stake in their litigation.

Contrary to circumstances in most mediation, the HPE also has knowledge of the terms and dollar value of prior executive settlements. For example, the COO would know that just last year, the company settled with the vice president of engineering for $150,000 plus three years of continued stock option vesting and a 50 percent pro-rata payment for his five-year long-term incentive plan. The typical HPE also has a longstanding relationship with the litigation’s decision makers and may have access to the board of directors. Generally, the HPE is impressed with mediators of stature, such as former judges, and prefers confident mediators who use the evaluative model.

Unique nuances in mediating with the HPE
Disputes involving the highly paid executive have several other nuances. One is the preference of both sides to manage publicity. Neither side generally wants their “dirty laundry” aired in the press. A second is the interest of the third-party company that has hired the departing executive. Often the hiring employer is a direct competitor of the current employer, so the senior executive of the current employer knows a lot about the hiring employer and has competitive instincts that encourage disputes. In some litigation, the hiring company can be named in the litigation and can be targeted in the TRO for business torts. The hiring employer wants to hire an executive with no limitations on his or her ability to perform its work. For example, when one stock brokerage firm recruits a high-performing broker from another firm, the original firm often seeks injunctive and monetary relief against the hiring firm but the hiring firm is most interested in the potential productivity of the new HRE. These cases are usually resolved with a financial settlement from the hiring firm and a release from the original firm’s covenant not to compete that was an obligation of the departing broker.

Another issue is related to attorney fees and costs, which may add up to a considerable sum and become an impediment to settlement. Generally, state law grants attorney fees to the prevailing party in disputes involving breach of contract litigation. Attorney fees in HPE litigation can be large and are often contested as part of the settlement.

What the effective HPE mediator needs to know
An effective mediator in HPE disputes should understand basic employment tax law and recognize that the key variable is the form of payment. The label placed on a payment in the settlement agreement, such as compensation or damages, is not controlling. The form of payment can determine whether or not the financial payment is taxable. Damages from breach of contract litigation, for example, are not taxable.

Mediators should have a passing familiarity with Section 409A of the IRS Code (unfunded deferred compensation) and how it may affect cash and equity compensation arrangements and separation pay. (9) Following the Enron accounting scandal, this law (the American Jobs Creation Act of 2004) was enacted to prevent executives from cashing out deferred benefits while their company is “sinking.” Significant damage settlements can also trigger additional tax liability under the Alternative Minimum Tax (AMT).

Summary
In this volatile economy, disputes involving the HPE are increasing yearly. Although fewer senior executives have complex employment agreements these days, all have “adhesion” obligations restricting post-employment rights. The expectations of the executive litigants make mediating these claims a challenge. In addition, these mediations are one of the few occasions when the room can be full of actual corporate clients, themselves, not just the attorneys who represent them. These disputes clearly require mediators with subject-matter expertise, as well as significant experience and savvy with executive personalities.

About the author
Richard Fincher is a full-time mediator and arbitrator of workplace disputes and litigation. Formerly a practicing employment attorney, Dick has drafted hundreds of complex employment and separation agreements and is a subject-matter expert on executive compensation, executive benefits, and equity incentive plans in publicly traded corporations. Dick serves on the employment mediation and arbitration panel of the American Arbitration Association. He has mediated and arbitrated over 1000 workplace and commercial matters.

Dick is adjunct faculty at the Scheinman Institute for Conflict Resolution at Cornell University. In 2006, he served as National Vice-President for the Association for Conflict Resolution (ACR). He has received distinction as an Advanced Practitioner in Employment Mediation and an Advanced Practitioner in Labor and Employment Arbitration, from ACR. Dick is a graduate of Cornell University and the DePaul University College of Law.  He can be reached at (602) 953-5322 or rdf@workplaceresolutions.com.