When we discuss adopting or updating a clawback policy, clients (and others) occasionally ask me: “Can a new statute or regulation override an existing employment (or other) agreement? For example, if an employment agreement requires a severance payment, can a new law forbid the company from paying severance?” Based on recent case law, the answer seems to be: Yes.
In a case decided in August, Piszel v. United States (Federal Circuit Court of Appeals, 2016), a federal appellate court considered the question of whether a governmental prohibition on making golden parachute payments to terminated employees of a company constitutes a “taking” of the former employee’s property interest, which is prohibited by the Fifth Amendment to the U.S. Constitution. Issues like this began to arise more frequently after TARP prohibited a variety of common executive compensation practices that companies had included in employment, severance, change in control, and other legally binding agreements. The clawback provisions of the Dodd-Frank Act have (and will continue to) further highlighted the issue.
It is not often that executive compensation matters raise Constitutional issues. In Piszel v. U.S., the Housing and Economic Recovery Act of 2008 was signed two years after Piszel’s hire date and the signing of his employment agreement. The Act limited severance payments (which it misleading labeled “parachute payments”). Two months after the Act was signed into law, the government placed Piszel’s employer into conservatorship. When the employer eventually terminated Piszel, it refused to pay the severance required under his employment agreement, based on the new law.
Piszel sued the U.S. government rather than his former employer. The court found that Mr. Piszel had a “cognizant Fifth Amendment property interest.” (The court found that no law mandates that a claimant pursue a remedy against a private party before seeking compensation from the government.) However, the court also found that “Congress did not outright prohibit all golden parachute payments, but rather left it to the Director of the [Federal Housing Finance Agency] to develop regulations determining which payments should, and should not, be made.” This created a bizarre Catch 22 for Piszel. The Act did not take away his ability to pursue a breach of contract claim against his employer, but the Act ensured that his claim would be of little value because the claim would be subject to an impossibility defense. Nice.
And by the way, on August 30, 2016, the SEC announced in a press release that the aggregate amounts awarded in the Whistleblower program’s five-year history have exceeded $100 million, with six of the ten largest whistleblower awards having been made since March 2016. More whistleblowing means more restatements, which means more clawbacks.