Law vs. Ethics: A Cautionary Tale From Texas

You fucked up

“You can’t worry forever about your mistakes. You fucked up. You trusted us. Make the best of it. ” —Otter (DuPont) to Flounder (Its former employees) in “Animal House”

Law and ethics are two different things, and courts are frequently forced to embrace unethical results in order to uphold a bad law or to deal with a messy fact pattern. It is seldom, however, that one sees as blatant an example of atrociously unethical behavior being ruled legal as in a recent case in Texas, decided this month. It is the kind of case that promotes distrust all around, as you will see. When that is the result, the ruling itself is unethical.

In the case of Sawyer, Kempf, et al. v DuPont and Company, an employer’s false promise not to exercise a legal right in order to induce its employees to forgo their negotiated rights was deemed unenforceable. The legal reasoning is solid. The ethics stinks, and is as good an example as you will ever find for the inspiration behind Charles Dickens’ (speaking through his creation Mr. Bumble, in “Oliver Twist”) statement, “The law is a ass.”

In 2002, DuPont announced plans to spin off some of its operations into a separate subsidiary. Many affected employees had a negotiated  a union agreement that bound the company  to transfer them within DuPont if they didn’t want to stay with the new entity. This could have been costly for DuPont if the union members exercised that right, because retraining the transfers and hiring their replacements would take time and money. The employees’ reasonable concern was that  DuPont might sell the new subsidiary, giving them new bosses and working conditions, including worse pay and benefits.  So DuPont assured its employees that there were no plans to sell the new subsidiary. Based on these assurances, the employees didn’t exercise their right to force a transfer, and moved to the spin-off, Just a few weeks later DuPont sold it and them to Koch Industries, which promptly cut their salaries and retirement packages. It turned out that DuPont had, been negotiating the sale for months. The promise to the union members was, quite simply, a lie. Technically it was deceit: technically true (“We have no plans now, because we haven’t come to an agreement with a potential buyer, but we do have plans to try to come to that agreement, in which case we will have a plan to sell the new subsidiary. But since nothing’s written in stone, we can’t plan yet. We might have a plan tomorrow though) but designed to mislead.

The employees sued, and the Texas Supreme Court was faced with a classic law vs. fairness conflict. Texas is an extreme employment-at-will state where an employer can fire an employee for no good reason unless the terms of employment—the contract—state otherwise. The opinion declared that the aggrieved employees remained employees at will, and thus the promise not to sell the company amounted to an assurance that the employees should have known was meaningless. “To recover for fraud,” Justice Hecht wrote for the court, “one must prove justifiable reliance on a material misrepresentation. A representation dependent on continued at-will employment cannot be material because employment can terminate at any time. Nor can one justifiably rely on the continuation of employment that can be terminated at will….’I will if I want to’ is not fraud.”

In other words, an employer saying, “you can trust me” isn’t fraud or cause for recovery of damages, because there is no legal reason to trust him if it isn’t backed by the law. I can’t dispute the logic of this, though the result is nauseating.

It reminds me of a trick my beloved baseball team, the Red Sox, played on a player, pitcher Bronson Arroyo, after the team finally won the World Series in 2004. Arroyo was a young, promising starting pitcher who had played a key role in the epic season. He was also a pal of the team’s General Manager, Theo Epstein. The two were amateur musicians, and jammed together. Arroyo’s contract was up after the next season, but he wanted to remain in Boston. Epstein negotiated a multi-year contract for bargain rates that reflected Arroyo’s desire to stay rather than maximizing his earnings by becoming a free agent. There was no provision in the contract barring a trade, as some players insist on, for Arroyo trusted Epstein, and didn’t think he would induce him to sign for less money with assurances that he could stay in Boston only to trade him. But that’s exactly what Epstein did. Arroyo was not only forced to play in another city, for another team; he also lost his bargaining power, and undoubtedly millions of dollars in the process.  (There was justice, of a sort: the trade was disastrous for the Red Sox. But I digress.)

Writing at Main Street about the DuPont victory, an indignant Eric Reed writes…

“Texas gets a ban that will further erode what little trust remains in the workplace. Employees already worry about what happens behind closed doors, now they need to cross examine everything they’re told as well. Can it possibly be a good idea to give carte blanche to every bad actor out there who can save a dollar by tricking his workers? Trust matters, and decisions like this can only hurt that. From a common sense standpoint specifically approving of deception by an employer (even in the limited case where it “only” leads to job loss) is foolish, not to mention cruel. From a legal standpoint, any decision that didn’t award the employees their jobs back could have respected DuPont’s right to fire everyone while still addressing the fraud it employed while doing so.”

I agree with him in all respects, except that the Court is right on the law: a promise that “we have no current plans”  to do something an employer can do whenever it wants to just isn’t fraud, and thus the decision is right on the law.

It’s just wrong in every other way, including undermining trust not only between employers and employees, but between the public and the courts.

The law is a ass.


Pointer and Source: Main Street

14 thoughts on “Law vs. Ethics: A Cautionary Tale From Texas

  1. Grammar not withstanding, here’s the full quotation:
    “If the law supposes that,” said Mr. Bumble,… “the law is a ass—a idiot. If that’s the eye of the law, the law is a bachelor; and the worst I wish the law is that his eye may be opened by experience—by experience.”

  2. I disagree. Do verbal contracts have zero force in Texas? For that matter, since there was a union contract, did that contract not contain any terms restricting the ability to fire employees at will? Given that it had a term requiring transfers, I strongly suspect the employees in question weren’t subject to at will firing either. If I’m right, “A representation dependent on continued at-will employment cannot be material because employment can terminate at any time” is simply wrong.

  3. I am really afraid our ruling class has given up on justice. I won’t say governing class, I will say ruling class. We see what used to be considered our rights bit-by-bit given away and there is nothing we can do about it. We are being transitioned from citizens to subjects. Rulings like this just seem to confirm the process. Here are some recent changes that make me think this:

    (1) The revocation of common people’s access to the courts. If I give a company money for a service or product and they refuse to give me the service or product, I can’t sue them in the courts. I have to go to a private court the company has hired to decide if their employer or I am in the right. I have lost my access to the courts, a fundamental right of free people.

    (2) Property rights have been greatly diminished. In some states, if a person richer than I wants my property, the state can take it from me to sell (or give) to the richer person through eminent domain. Environmental legislation has eroded my property rights even more. I have lost any real right to own property. I can merely purchase the right to use the property under certain conditions as long as the government allows.

    (3) The government has had confirmed by the courts the right to access all of my personal communication without suspicion, without notification. I have no real right against unreasonable search, I probably don’t have one against unreasonable seizure anymore.

    (4) Our police have become almost indistinguishable from the military. We used to have a civilian police force, now we have military rule. If the police aren’t the military, why to they refer to us as ‘civilians’?

    (5) The government no longer has to follow the law. The recent IRS scandal in which this administration just blatantly refuses to turn over documents with a ‘what you gonna do about it?’ attitude. Now they say they have had the documents all along, but it isn’t worth their time to look for them. We now have federal laws that are enforced in some states, but not others by presidential command. We also have laws that are enforced on arbitrary classes of people, but not others (the AHA mandates that employers with over 50 employees provide health care, the president has decided to only enforce this on employers with 100 employees or more. He has arbitrarily created a class and exempted it from the law). If the government doesn’t have to follow the law, but I do, then we no longer have a government of laws. We have a government by edict.

    What does this have to do with this ruling? It just confirms the idea that we aren’t citizens anymore, we are subjects. We have no right to the truth because we have no rights. Silly peon, just because we tricked you out of your contractual benefits you thought you could sue. The court has ruled that the contractual benefits of subjects are worthless, and you can’t sue over something that is worthless.

    • I am forced to agree. You have rights, provided that our ruling class wants to recognize and enforce them. And if they don’t–Jack and I already had this discussion on unaccountable judges–there’s nothing you can do about it. If judges don’t have to follow the law (because you can’t make them), we do not enjoy a rule of law, but endure the rule of judges.

      Some gal on The Cycle just connected the dots (Burger King, Ferguson, this story, others) that we have. Libertarians are way ahead of her. There is a reason that our ruling class needs all those tanks. They are planning ahead.

  4. “. . . employees had a negotiated a union agreement that bound the company to transfer them within DuPont if they didn’t want to stay with the new entity.”

    “Based on these assurances, the employees didn’t exercise their right to force a transfer, and moved to the spin-off, Just a few weeks later DuPont sold it and them to Koch Industries, which promptly cut their salaries and retirement”

    It seems to me that the argued issue is the definition of “plans”. To suggest that the firm had absolutely no plans to sell is erroneous because it was in the preliminary stages of negotiation. Thus, the strategic plan was to sell but the tactical plan which outlined the terms and conditions of the sale had not yet been developed nor ratified by the Board of Directors. Once the, I assume, wholly owned subsidiary was sold the employees would no longer be employees of DuPont they would be employees of another entity. As a result any contract with DuPont would no longer be enforceable.

    The employees retained the right to force a transfer between the time the firm announced it was spinning off the division and the time the sale was announced. The contract did not state that it had to tell the employees of its plans only that the employees could ask force a transfer if they did not want to stay with the new entity. (Spinning off a division to form a new entity suggests that DuPont would sell eventually for that is the reason you separate it from other operations) Thus, the employees were let down by their own representatives who failed miserably at advising the rank and file of their contractual rights and how to best exercise them.

    More often than not, a legal decision is based on who prevails in defining the agreed to terms. It seems to me that if the issue is one of material misrepresentation of facts ( regarding the pending sale) the union members should have argued that there were in fact strategic plans even though the tactical plans were being developed; even if unilaterally by DuPont. DuPont could not legitimately argue that it had no plans if it had outlined a strategic objective that would have been necessary to court any suitor Koch brothers or anyone else; that in itself is a plan no matter how rudimentary. However, the contract states that the employees could demand a transfer irrespective of ownership of the new entity, which they did not exercise because they were led to believe it would not be sold which could put them at risk. They were put at risk the moment the firm was spun off.

    The upshot of all this will be to diminish DuPont’s ability to maximize the value of any other spinoff’s because the new owner will not have a trained workforce. I expect that future spinoff’s will result in widespread defections from the division to be spun off lowering its economic value. This will mean that both the current owners and prospective owners will incur higher costs to maintain equivalent workforces.

    The lesson here to management (and stockholders) withholding information or parsing your words to employees that creates misunderstanding at best, or deception at worst, can lead to lower long term profit maximization when the employees no longer trust that the employer will see them as part of the value chain that should be protected.

    What do you think the selling price would have been had the new owners been forced to find an entire trained workforce? DuPont’s management has just ensured that future spinoffs will not sell for top dollar.

    It is cases like these that make me laugh when management proclaims its employees are its greatest asset.

  5. Jack: I think I forgot to include a at the end of the second quote of yours. Nothing past the 3rd paragraph should be italicized.

  6. I do not know the circumstances of this case, but there are certainly instances when a company HAS to remain quiet about a sale — because it would trigger regulatory investigations that the lawyers aren’t ready to start yet, financing could fall through, now you have to worry about insider trading, etc.

    But, even in these scenarios, it doesn’t mean that it doesn’t suck for the employees.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.