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The U.S. Supreme Court held in 1998 that a release that does not comply with the requirements of the Older Workers’ Benefit Protection Act (OWBPA) cannot bar an employee’s claim under the Age Discrimination in Employment Act (ADEA), even if the employee did not return the sum she received from her employer in exchange for the release. Oubre v. Entergy Operation Inc., 522 U.S. 422 (1998). The Court relied on the statutory command that an employee “may not waive” an ADEA claim unless the waiver satisfies the OWBPA requirements and concluded that an employer cannot invoke the employee’s failure to “tender back” the money received for the release as a way of excusing its own failure to comply. In purported reliance on Oubre, the EEOC has promulgated regulations, which became effective Jan. 10, 2001, to prohibit, inter alia, the imposition of any condition that adversely affects an individual’s right to challenge the validity of a waiver under the ADEA. 65 Fed. Reg. 77,438 (Dec. 11, 2000) (to be codified at 29 C.F.R. � 1625.23). These regulations prohibit, among other things, settlement agreement provisions that require an employee to return — or “tender back”– consideration received. They also prohibit provisions that allow employers to recover attorney fees and/or damages because of the filing of an ADEA suit. The EEOC’s prohibition applies not only to cases in which a waiver fails to meet OWBPA requirements, but also to those in which waivers are upheld as valid. The EEOC’s regulations have not yet come under judicial scrutiny, and the extent to which courts will defer to them is unclear. We focus here not on the “tender back” situation outlawed by Oubre, but on commonplace waiver or release agreements that specify liquidated damages or the right to payment of the winning party’s attorney fees if the waiver or release of ADEA claims is not successfully challenged. In purporting to outlaw the latter, the EEOC appears to have overstepped its authority. For the reasons we will discuss, the EEOC’s prohibition of attorney fees and liquidated damages certainly should not apply to agreements negotiated between parties represented by counsel, or to cases in which waivers are upheld in court. The EEOC regulations state, in pertinent part:
No ADEA waiver agreement, covenant not to sue, or other equivalent arrangement may impose any condition precedent, any penalty, or any other limitation adversely affecting any individual’s right to challenge the agreement. This prohibition includes, but is not limited to, provisions requiring employees to tender back consideration received, and provisions allowing employers to recover attorneys’ fees and/or damages because of the filing of an ADEA suit. This rule is not intended to preclude employers from recovering attorneys’ fees or costs specifically authorized under federal law. 65 Fed. Reg. at 77,447 (to be codified at 29 C.F.R. � 1625.23(b)).

The breadth of the EEOC’s prohibition is premised largely on the alleged chilling effect such provisions may have on legitimate ADEA claims challenging the validity of a waiver. Specifically, in the EEOC’s view, “[b]ecause the chilling effect of damages or attorneys’ fees could give life to waiver agreements that violate the OWBPA, the final rule continues to prohibit the use of provisions allowing the recovery of damages and/or attorneys’ fees simply because suit has been filed.” Id. at 77,442 (emphasis added). The EEOC does not explain how provisions permitting the recovery of damages or attorney fees are likely to result in waiver agreements that are not “knowing and voluntary” as required by the OWBPA. This omission is noteworthy, given that the EEOC defends its authority to promulgate this regulation by asserting that it is regulating the content of waivers only to the extent necessary to fully effectuate the OWBPA’s “knowing and voluntary” standard. Id. at 77,439. According to the EEOC, a covenant not to sue that comports with OWBPA requirements still provides an employer with a defense against the employee’s ADEA claim of age discrimination and will entitle the employer to a dismissal of the employee’s suit. Id. at 77,442. In practice, however, a successful employer will always be in a worse position than it was in before the action was filed, having unnecessarily incurred considerable expense and having wasted time and resources defending a meritless claim that had been released or waived in the first place. It is for this very reason that employers include the kind of damages and attorney fee provisions that the EEOC purports to prohibit. The EEOC also assures the public that, in its view, attorney fees and costs (somehow) will continue to be available to employers under established principles of law. Id. For a party seeking to avoid the disruption and cost of defending a meritless challenge to the validity of a waiver agreement, this assurance does not provide much hope for recovery — or, we submit, much deterrent effect on a litigious individual who may have had second thoughts but little hope of success after receiving severance pay in exchange for the release of claims — given that, under prevailing case law, an employer may recover attorney fees only if the employee’s suit was brought in “bad faith.” Id. Accordingly, the EEOC’s regulations serve to promote unwarranted litigation and effectively deprive employers of any recourse when individuals file unjustified claims to upset a contractual settlement. In reality, the regulations may promote an increase of questionable lawsuits brought for the purpose of gaining leverage in the expectation of negotiating more favorable terms by using the original payment as a new floor. Undaunted, the EEOC contends that the chilling effect of damages or attorney fees disrupts the balance between litigation and voluntary resolution that Congress crafted in the OWBPA. “Congress was concerned about protecting employee rights, particularly in the group termination context, as it allowed unsupervised ADEA waivers …. Permitting employers to chill employees from testing unsupervised ADEA waivers, by threatening to impose damages or attorneys’ fees, would impede access to judicial review and thus undermine this legislative balance.” 65 Fed. Reg. at 77,442-77,443. The EEOC’s view, however, is not supportable under Oubreor the express provisions of the OWBPA; it simply is an attempt at legislation by administrative fiat under the guise of “addressing related issues.” 65 Fed. Reg. at 77,438 (Summary). However, a settlement agreement provision — especially when negotiated between parties represented by counsel — holding out the prospect that either party will be entitled to damages and attorney fees if the other party should violate the settlement agreement, e.g., by bringing an unmeritorious suit under the ADEA, discourages unnecessary litigation without compromising an employee’s protections under the OWBPA. In practice, a release of claims typically arises in two basic contexts: (1) as part of an employer’s unilateral severance offer to departing employees; or (2) as a component of an ad hoc separation or settlement agreement negotiated between the parties to resolve, forevermore, claims that may be asserted by an individual against the former employer. The terms of a severance offer are set by the employer and are not usually subject to change, and employees are rarely represented by counsel in these transactions. In contrast, the terms of an ad hoc settlement agreement are typically the product of negotiation between counsel, in an effort to reach a satisfactory resolution of claims. In this ad hoc situation, the employee has the benefit of an advocate who can represent the employee’s interests in an effort to achieve favorable settlement terms and, at the same time, facilitate a knowing and voluntary waiver by the employee. Law and logic suggest that an employee represented by counsel is far less likely to misunderstand the rights he or she is waiving, for the simple reason that the employee’s attorney can explain the nature of the waiver. Indeed, the OWBPA explicitly recognizes the value of counsel in this process by requiring the employer to advise the employee, in writing, to consult with an attorney before signing a release or waiver agreement. See29 U.S.C. � 626(f)(1)(E). Additionally, the risk of coercion and duress is virtually nonexistent when an employee has had an opportunity to negotiate over the terms of the waiver, particularly because the employee is an active participant in the process, rather than the passive recipient of an offer crafted by the employer. Certainly, to the extent the OWBPA was enacted to address congressional concerns in regard to unsupervised ADEA waivers in the context of wholesale terminations, our view is on all fours with the legislative scheme. Moreover, even in the situation in which counsel is not involved, the EEOC has no legitimate basis, and certainly cites to none, to prevent an employer who has complied with the OWBPA from providing an award of attorney fees or liquidated damages to the successful litigant to discourage unmeritorious suits attacking the waiver agreement. In both situations, a court ultimately will pass upon any award to the prevailing party. Congress granted the EEOC authority under the ADEA to issue rules that it considers “necessary or appropriate” in enforcing the act. Id. at 77,439. A per se prohibition on provisions that impose liquidated damages or attorney fees on employees who file unmeritorious ADEA lawsuits attacking waiver agreements is neither a necessary nor appropriate way to protect the rights of employees, and grossly tips the scales against employers who have complied with the OWBPA. Unless there is a doctrinal shift at the EEOC under the Bush administration, that agency may be expected to pursue its application of the new regulations until told otherwise in court. It is expected that, eventually, these regulations will be judicially circumscribed, at least to the extent of enforcing bargained-for damages and attorney fee provisions, should unmeritorious lawsuits be brought. Jay W. Waks, a member of the board of editors of the New York Employment Law & Practice newsletter, is a litigation partner of Kaye Scholer LLP, where he chairs its employment and labor law practice representing corporate clients. SaraJane Steinberg is an employment litigation associate at Kaye Scholer.

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