Sixth Circuit Court of Appeals Holds that a Release with a No-Obligation-to-Rehire Provision Bars Age Discrimination Claim Arising After Execution of the Release

In Kellogg Company v. Sabhlok, 471 F. 3d 679, (6th Cir. 2006), the Sixth Circuit Court of Appeals considered a challenge to a general release executed by an employee in exchange for an enhanced severance package. The release contained a provision that the employer was not obligated to offer the employee new employment in the future. The employee signed the release a year prior to his actual last day of work. He claimed that during that year he was turned down for various jobs because of his age and the release did not bar discrimination claims arising after its execution. He also claimed that he had been given oral assurances of continued employment. The Court, however, held that given the specific provisions of the release at issue, the employee could not proceed with his age discrimination claims.

Facts

In July 2001, Sabhlok, who had worked for Kellogg for four years and held the position of Vice-President of the International Research and Development Group, was advised that his department would be disbanded in September and that his position was one of those being eliminated. Kellogg, however, asked him to stay on for an additional year to assist in the decentralization of the research and development function. Sabhlok claimed that he was induced to stay on by several assurances from his supervisor that a permanent position would be found for him.

In exchange for an enhanced severance package, Sabhlok executed a “Separation Agreement and Release of Claims Form” on November 13, 2001 and continued to work through September 30, 2002. Although several permanent positions became available and Sabhlok asked to be considered for each of them, he was not selected for any of the openings. He claimed that Kellogg selected a younger, less qualified employee over him in each case. After the retention period ended, Sabhlok executed an “Amendment of Separation Agreement and Release of Claims Form.” The Amendment included a noncompete clause and provided Sabhlok with an additional six weeks of severance pay and a pro-rata bonus for 2002.

After being threatened with a lawsuit by Sabhlok, Kellogg filed a declaratory judgment action on September 8, 2004 and Sabhlok filed an answer and a counterclaim seeking declaration that the Separation Agreement and Amendment “did not release, waive, or discharge claims for breach of contract or age discrimination that arose after September 30, 2001.” On the parties cross-motions for summary judgment, the district court entered judgment in favor of Kellogg, holding Sabhlok’s claims were barred by the Separation Agreement and Amendment.

The Court’s Decision

The Court first determined that state law, in this case the law of Michigan, governed the interpretation of the Settlement Agreement and Amendment. Turning first to the Separation Agreement which Sabhlok signed in November 2001, the Court recited the following relevant provisions:

D. (1) … I irrevocably and unconditionally release, waive, and forever discharge [Kellogg] … from any and all claims, demands and causes of action I have or may claim to have arising from or relating in any way to my employment or separation of employment. This includes, but is not limited to, all claims under … the Michigan Elliott-Larsen Civil Rights Act, …; and any and all of Employees claims arising out of or related to any contract, … or under any common law right of any kind whatsoever,….

(3) Employee agrees and understands that execution of this Separation Agreement and Release of Claims Form by Employee operates as a complete bar and defense against any and all of Employee’s Claims against Kellogg….

(4) I agree and acknowledge that the above-described consideration (additional severance pay and benefits) is in full and complete settlement of any and all claims, demands, and causes of action I have or may have.

H. This Separation Agreement and Release of Claims Form does not waive any claims that I may have that arise after the effective date of the Separation Agreement and Release of Claims Form.

Two other paragraphs of the Separation Agreement, Paragraphs N and S, are specifically relevant to the claims that Kellogg failed to “rehire” Sabhlok into a permanent position. They provide as follows:

N. I understand that I may apply for employment as a new employee, but acknowledge that the Company is not obligated to offer employment to me now or in the future.

S. I acknowledge and agree that this is the entire agreement and the only promises made to me to sign the Separation Agreement and Release of Claims Form are those contained within this document.

The Court also pointed to the following provision in the Amendment that Sabhlok executed in October 2002:

Entire Agreement: Employee agrees that this Amendment and original Separation Agreement dated November 15, 2001 constitute the entire agreement between Employee and Kellogg and that this Amendment and the original Separation Agreement supersede any and all prior and/or contemporaneous written and/or oral agreements relating to Employee’s employment with the Company and termination therefrom. All other terms of the original Separation Agreement and Release of Claims Form remain unchanged and in full force and effect. Further, Employee acknowledges that this Amendment may not be modified except by written document, signed by Employee and an authorized officer of the Company.

The Court then turned to Sabhlok’s contention that Kellogg’s failure to rehire him during the one-year retention period constituted breach of an oral contract and age discrimination in violation of Michigan’s Elliott-Larsen Civil Rights Act.

As to the breach of contract claim, the Sixth Circuit agreed with the district court’s conclusion that the Separation Agreement and the Amendment, taken together, barred any claim based on oral promises of future employment. The Court noted that pursuant to the Separation Agreement Kellogg was “not obligated to offer employment to [Sabhlok] now or in the future” and that the Separation Agreement constituted the parties’ “entire agreement.” And the Court rejected Sabhlok’s contention that the parties remained free to modify their agreement by oral promises of future employment, given that the Amendment that Sabhlok executed at the end of his employment expressly precluded reliance on such oral promises. The Court approved the district court’s reasoning that “[a] merger clause such as this ‘serves to integrate the agreement and makes the agreement a final written expression of the parties.”

The Court also rejected Sabhlok’s claim that the Separation Agreement and the Amendment did not bar his age discrimination claims based on Kellogg’s failure to rehire him for positions that were given to younger employees. Although Sabhlok maintained that the Michigan law would follow federal law in that prospective waivers of civil rights claims are unenforceable and also cited to the provision in the Separation Agreement that he did not waive any claims that might arise after the effective date thereof, the Court agreed with the district court’s finding “that Sabhlok’s failure-to-rehire claims did not arise after the effective date of the Separation Agreement and therefore did not implicate a prospective waiver of civil rights claims. Rather, the district court properly concluded that the claims of discriminatory failure to ‘rehire’ were barred by the Separation Agreement itself. Those claims ‘did not arise independently after his termination but [were] instead inextricably linked to the claims of wrongful discharge that he expressly waived at the time of his termination,'” as evidenced by his allegations (1) that his “age was at least one factor that made a difference in Kellogg’s decision to terminate [him] from his position . . . and not transfer [him] to any of the other positions given to younger . . . employees” and (2) that younger employee were given his duties and responsibilities and essentially replaced him. Thus Sabhlok’s age discrimination claim “was merely an attempt to resurrect age discrimination claims for which he was paid to release.”

The Court also noted that the Amendment which Sabhlok executed at the end of his employment in exchange for additional consideration provided that “All other terms of the original Separation Agreement and Release of Claims Form remain unchanged and in full force and effect,” thus reaffirming that Kellogg was not obligated to offer Sabhlok employment “now or in the future.” In this regard, the Sixth Circuit agreed with the district court “that contracts must be construed consistent with common sense and in a manner that avoids absurd results” and that “‘common sense dictates that Kellogg would not have offered additional benefits to Sabhlok at the conclusion of the retention period if it was not satisfied that Sabhlok had waived his right to sue Kellogg for age discrimination claims arising out of Kellogg’s failure to rehire Sabhlok during the retention period.'” Accordingly, the Court affirmed summary judgment in Kellogg’s favor.

Conclusion

It is not uncommon for employers, who have implemented a downsizing or restructuring and have requested certain employees to remain on for a period of time to complete a project or assist with the transition of work, to be faced with the types of contract and discrimination claims asserted in the Sabhlok case. Although the case is fact specific, the Sixth Circuit’s decision provides a road map for drafting release documents that can be modified on a case-by-case basis that will serve to preclude such claims.