ekinder@spilmanlaw.com
Spilman Thomas & Battle, PLLC

In case the message was not received the first time, another federal appellate court has warned employment defense lawyers that releases should be written in a clear and understandable manner if they are to survive judicial scrutiny.  The United States Court of Appeals for the Ninth Circuit in Syverson v. International Business Machines Corp., No. 04-16449, 2006 WL 2506421 (9th Cir. Aug. 31, 2006) echoed the reasoning used by the Eighth Circuit in striking down a release used by IBM under the theory that it did not satisfy the requirement of the Older Workers Benefit Protection Act (“OWBPA”), 29 USC § 626(f), that a waiver of claims be understandable.  The decision of a second federal Court of Appeals indicates an apparent judicial trend of which the defense should be aware.

The OWBPA states that a release of claims under the Age Discrimination in Employment Act (“ADEA”) is not valid unless it is “knowing and voluntary.”  29 U.S.C. § 626(f)(1).  In order to be “knowing and voluntary,” the release must, among other things, be “written in a manner calculated to be understood” by the average employee likely to sign the agreement.  29 U.S.C. § 626(f)(1)(A).  Regulations promulgated by the Equal Employment Opportunity Commission (“EEOC”) pursuant to the OWBPA define “manner calculated to be understood” to mean that the release “must be drafted in plain language geared to a level of understanding an individual party to the agreement or individuals eligible to participate” in the release.  29 C.F.R. § 1625.22(b)(3).  As a result, employers should take into account such factors as the level of comprehension and education of typical participants, and limit or eliminate “technical jargon” and “long, complex sentences.”  Id.  The Ninth Circuit has now joined the Eighth Circuit in striking down a release for failure to meet this criteria.  Notably, the Ninth Circuit stated that the failure of a release to be written in a manner calculated to be understood is a threshold statutory requirement, thus there is no need for the court to consider the “totality of the circumstances” in order to determine if the waiver was “knowing and voluntary.”  Syverson at n. 7; compare Kruchowski v. Weyerhaeuser Co., 423 F.3d 1139, 1142 (10th Cir. 2005); Wastak v. Lehigh Valley High Network, 342 F.3d 281, 294 n. 8 (3d Cir. 2003); Griffin v. Kraft General Foods Inc., 62 F.3d 368, 373-74 (11th Cir. 1995).

The court in Syverson, just as the Eighth Circuit did in Thomford v. International Business Machines Corp., 406 F.3d 500 (8th Cir. 2005), considered a general release and covenant not to sue used by IBM as part of a January 2001 workforce reduction.  The IBM Release contained 1)  language that released all claims, including those arising under the ADEA, and 2)  an agreement to “never enter into a claim of any kind against IBM . . . including, but not limited to, claims relating to your employment with IBM or termination of that employment.”  The IBM Release also noted that “this covenant not to sue does not apply to actions based solely under the ADEA.”  Participants challenged the IBM Release by claiming it was not clear whether it covered, or did not cover, claims under the ADEA because the covenant not to sue’s language appeared to permit lawsuits under the ADEA.  In reviewing the IBM Release, the Ninth Circuit stated that the technical distinction between a release of claims and a covenant not to sue is “sometimes more apparent than real” and quoted with approval a New York state court decision that found that the “most important difference between a covenant not to sue and a release – the effectiveness of the agreement as a bar to subsequent action by a breaching promissor – has long been recognized as being invariably a distinction without a difference.”    See Colton v. New York Hospital, 414 N.Y.S. 2d 866, 873 (N.Y. Sup. Ct. 1979).  The Ninth Circuit further ruled that the distinction between releases and covenants not to sue “becomes particularly murky” when both are included in a single document and cited to the EEOC for support:  Although ADEA covenants not to sue (absent damages) operated as the functional equivalent of waivers, they carry a higher risk of violating the OWBPA by virtue of their wording.  An employee could read “covenant not to sue” or “promise not to sue” as giving up not only the right to challenge a past employment consequence as an ADEA violation, but also the right to challenge in court the knowing and voluntary nature of his or her verbal agreement.  The chance of misunderstanding is heightened if the covenant not to sue is added to an agreement but already includes an ADEA waiver clause.  The covenant in such a case would have no legal effect separate from the waiver clause.  Nonetheless, its language would appear to bar an individual’s access to court. 

See Waivers of Rights and Claims: Tender Back of Consideration, 65 Fed. Reg. 77438, 77443 (December 11, 2000) (to be codified at 29 C.F.R. Part 1625).  Accordingly, the court held that “the existence of a technical distinction between legal terms does nothing to demonstrate that the average employee confronted with the [release agreement] would grasp the import of the distinction in a meaningful way.”  See Thomford, 406 F.3d at 504. 

While the Ninth Circuit recognized IBM’s desire to include a covenant not to sue so that it could obtain its costs and attorneys fees, as appropriate, should an employee who signed a release bring a subsequent law suit, the court found that IBM had failed to protect its rights properly.  Simply put, if IBM intended to draft an agreement that would preserve the right of an employee to challenge without penalty his waiver of ADEA claims while still preserving IBM’s right to seek costs and attorney fees should the employee bring any other subsequent action, “it would have been quite easy to have accomplished this purpose directly.”  Instead, IBM used “a term unfamiliar to lay people” and did not explain “how the release and covenant not to sue dovetail, either in general or as they relate to ADEA claims.”  The court further noted that the IBM Release “muddles the matter by referring to both provisions with the same shorthand name – release – indicating interchangeability not distinction.”  See also Thomford, 406 F.3d at 504 (noting same).  “Adding to the confusion, the paragraph containing the covenant not to sue in fact refers to the covenant and the broader ‘release’ as if the terms were completely interchangeable.”  In sum, the interchangeable use of two legal concepts without explaining distinctions rendered the release invalid because it was not written in a manner calculated to be understood.

Much like the Eighth Circuit in Thomford, the Ninth Circuit in Syverson rejected the argument that any ambiguity should not invalidate the IBM Release because it expressly advised individuals who received it to seek legal counsel.  The court held that the instruction to consult an attorney did not mitigate the confusing waiver language.  As first explained by the Eight Circuit in Thomford, “it seems axiomatic that if an agreement needs clarification, it is not written in a manner calculated to be understood.”  Thomford, 406 F.3d at 504 n. 1.  The court’s logic was that reliance on a separate statutory requirement for a valid waiver (i.e., the requirement that the waiver explicitly inform the recipient to seek legal advice and consult with an attorney) for clarification would nullify the distinct requirement that the agreement be written in a manner calculated to be understood by the participant.  If the lack of clarity might be cured by compliance with a separate requirement that the waiver advise a participant to seek an attorney’s guidance it would rob “all purpose from the distinct ‘manner calculated’ requirement set forth in the statue.”

The lesson to be taken by Syverson, in addition to the general advice to review form waivers periodically, is to be particularly careful when the waiver contains both a release of claims and a covenant not to sue.  Including both, without clearly explaining the interplay between the two concepts, places the entire agreement at risk.  If you, as do many employers and defense counsel, use a waiver of claims that includes both concepts, make doubly sure that the terms are clearly explained and that the waiver of claims does not use the terms interchangeably.

But this is not the only risk defense attorneys face in drafting waivers of rights.  Regulations promulgated under the OWBPA also state that for a waiver to be “knowing and voluntary” it “must not have the effect of misleading, misinforming, or failing to inform participants and affected individuals.”  29 C.F.R. § 1625.22(b)(4).  The EEOC has taken the position that a waiver of claims that includes language that would prohibit a signatory from filing a subsequent charge of discrimination with the EEOC or similar state agency fails to meet this requirement.  The reason is that such an agreement violates the OWBPA which states that “no other agreement may affect the EEOC’s rights and responsibilities to enforce [the ADEA].  No waiver may be used to justify interfering with the protected right of an employee to file a charge or participate in an investigation or proceeding conducted by the EEOC.”  29 U.S.C. § 626(f)(4).  Consequently, the EEOC recently sought and received a consent decree against Ventura Foods, LLC, that the employer “shall not require as part of any agreement with employees or former employees that they will not file charges with the EEOC.”  Equal Employment Opportunity Commission v. Ventura Foods LLC, No. 05-663 (D. Minn. Sept. 1, 2006) (consent decree).  While the ability to obtain victim-specific relief from the EEOC or similar state agency after signing a waiver remains an open question, see EEOC v. Waffle House Inc. 534 U.S. 279, 294-98 (2002), the ability to bring or participate in an EEOC action is not in doubt.  Accordingly, any waiver of claims should not overstate the limitations it would have on the ability to file an administrative claim.  For example, the court in Syverson noted that language in the IBM Release to that the effect that the release does not preclude filing a charge with the EEOC was a proper statement of the law.  A waiver agreement’s silence on this issue, however, presents a more problematic situation; does the failure to address the impact of the waiver on the ability to file an EEOC charge mislead or, perhaps more importantly, fail to inform the signatory of his or her rights?  Arguably it does, and the logic of both the Eighth and the Ninth Circuits in Thomford and Syverson would appear to follow that reasoning.  Similarly, a generic phrase that the waiver does not apply to claims that cannot be waived would also seem to fail to meet the “reasonably calculated” requirement because a lay person will not know precisely what a waiver is legally prescribed from covering.

As always, the overall message is to make sure the waiver of claims that you are using has not been “over lawyered.”  The document should be readily understandable to individuals who have not spent years in the practice of law in the field of labor and employment.