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Eighth Circuit Finds Former Employee's ADEA Waiver Ineffective Because of Ambiguous Release Agreement

Article

The Employment and Labor Law Alert

August 30, 2005

In Thomforde v. IBM, the Eighth Circuit Court of Appeals found that a former employee did not waive his claims under the Age Discrimination in Employment Act (“ADEA”) because the release he signed failed to comply with the Older Workers Benefits Protection Act (“OWBPA”). 406 F.3d 500, 501 (8th Cir. 2005). Under the OWBPA, a waiver agreement, among other things, must be written in a manner calculated to be understood by the person providing the waiver. 29 U.S.C. Section 626(f) (2000). The Court of Appeals concluded that IBM’s release agreement did not satisfy this OWBPA requirement thus rendering the waiver ineffective as a matter of law. Accordingly, the Court reversed the District Court’s grant of summary judgment for IBM.

The Release Agreement

IBM selected Plaintiff, an employee of 28 years, for its involuntary termination program as part of a reduction in force. IBM then provided Plaintiff with a document entitled, “General Release & Covenant Not to Sue” (“release agreement”). In exchange for sums and benefits, Plaintiff agreed to release IBM from any claims or actions involving Plaintiff’s employment, termination, severance pay, or retirement program participation. By signing the release agreement, Plaintiff also consented to release any ADEA or other federal, state, or local employment discrimination claims. Further, the release agreement required that Plaintiff pay IBM’s defense costs if Plaintiff sued in violation of the covenant not to sue provision. The release agreement provided that the covenant not to sue provision did not apply to actions based solely under the ADEA. The release agreement explained, “that means that if you were to sue IBM only under the ADEA, as amended, you would not be liable under the terms of this Release for their attorneys’ fees and other costs and expenses of defending against the suit.” Finally, the release agreement stated that it did not preclude Plaintiff from filing Equal Employment Opportunity Commission (“EEOC”) charges.

Before signing the release agreement, Plaintiff asked his supervisor whether he could sue IBM using the ADEA covenant not to sue exception so long as he brought only ADEA claims. IBM’s legal department responded that the language in the agreement was “as intended” The legal department declined to interpret the agreement for Plaintiff and advised Plaintiff to consult outside counsel. Plaintiff signed the release after he consulted an attorney and concluded that the agreement allowed him to pursue any claims limited to the ADEA. When Plaintiff signed the agreement, he delivered a letter addressed to IBM’s legal counsel. In the letter, Plaintiff complained about his retirement package, stated his intention to file an EEOC complaint, and notified IBM that he would pursue any legal action allowed by the release agreement. Subsequently, Plaintiff filed EEOC charges and filed suit.

The District Court Decision

Moving for summary judgment in the District Court, IBM argued that: (1) Plaintiff released all claims by signing the agreement in exchange for sums and benefits; (2) Plaintiff knowingly and voluntarily signed the agreement; (3) Plaintiff’s waiver met the statutory requirements of the OWBPA; and (4) IBM’s release agreement was not ambiguous. Additionally, IBM claimed that the covenant not to sue provision was distinctly separate from the release provision and that both served different purposes. IBM claimed that the ADEA covenant not to sue exception only exempted Plaintiff from defense costs and did not invalidate his ADEA release.

Plaintiff claimed that he did not knowingly and voluntarily waive his ADEA claims because the release agreement preserved his ADEA rights. Next, Plaintiff argued that the release agreement was not written in a manner calculated to be understood and therefore, failed to meet the OWBPA requirements. Lastly, Plaintiff claimed that his waiver was not knowing and voluntary under a totality of the circumstances and that the release agreement was ambiguous on its face. After concluding that Plaintiff waived any potential claims by signing the release agreement, the District Court disposed of Plaintiff’s remaining contentions.

The District Court found that the release agreement met the requirements of the OWBPA. The District Court also rejected Plaintiff’s totality of the circumstances claim and found the release agreement unambiguous. As a result, the District Court granted IBM’s motion for summary judgment and Plaintiff appealed.

The Eighth Circuit’s Decision

The Court of Appeals first explained that the OWBPA, which amended the ADEA, requires that an individual knowingly and voluntarily waive any ADEA claims. To establish a knowing and voluntary waiver, an agreement must meet certain minimum requirements. One OWBPA requirement stipulates that a waiver agreement be “?written in a manner calculated to be understood by the individual, or by the average individual eligible to participate.” Emphasizing the strictness of the ADEA requirements, the Court noted that failing to satisfy just one requirement may render a waiver ineffective. Therefore, if IBM’s release agreement was not written in a manner calculated to be understood by Plaintiff, then his waiver was ineffective as a matter of law.

The Court observed that although initially the release agreement clearly explained that Plaintiff released IBM from any ADEA claims in exchange for certain sums and benefits, three paragraphs later, the release stated that the covenant not to sue provision did not apply to actions solely under the ADEA. Thus, the Court concluded that a participant could interpret the release agreement as releasing IBM from ADEA and other discrimination claims, except when an action was solely based on the ADEA. The Court reasoned that an individual without a clear understanding of the differences between a covenant not to sue provision and a release provision could find the provisions contradictory.

Next, the Court addressed IBM’s argument that the covenant not to sue and release provision comprised separate and distinct provisions. The Court explained that a covenant not to sue is a covenant made by an individual with a right of action at the time of the covenant’s making. By making the covenant, the individual agrees not to sue to enforce that right. In contrast, the Court pointed out that a release relinquishes an individual’s claim to the person that the claim might be enforced against. Although a covenant not to sue and a release serve different functions, the Court recognized that those distinctions might not be evident to a lay person. The Court determined that IBM intended the release agreement to waive an employee’s substantive ADEA claims while still allowing challenges to the validity of the release itself, as required by regulation. The Court observed that the agreement failed to distinguish covenants not to sue from releases. Furthermore, the release agreement used “covenant not to sue” and “release” in a way that implied the terms were interchangeable. Thus, the Court concluded that a participant could interpret the language, “this covenant not to sue does not apply to actions based solely under the ADEA,” as an exception to the general release. Based on the release agreement’s ambiguity and the lack of guidance provided by IBM’s legal department, the Court determined that the release agreement was not written in manner calculated to be understood by a participant. Therefore, the Court found the release agreement ineffective as a matter of law and allowed Plaintiff to pursue his ADEA claims.

Conclusion

Thomforde reiterates the importance of a clear, unambiguous release agreement not only for ADEA purposes but for all employment related claims. A court may find an ambiguous release agreement ineffective, thus exposing the employer to the very liability that the release agreement sought to avoid. Employers must take care to use release agreements that the average employee can correctly interpret and understand.