Recent headlines highlight a conundrum frequently presented to in-house counsel: When does an overly aggressive demand for settlement rise to the level of extortion?

On Monday, March 25th, the United States Attorney for the Southern District of New York charged celebrity lawyer Michael Avenatti with extortion. The complaint alleges that Avenatti attempted to extort sportswear apparel giant Nike by threatening to publicly release information that Nike made illegal payments to high school basketball players. In his demand, Avenatti threatened to release the information unless Nike agreed to pay his client $1.5 million and hire Avenatti, along with an unindicted co-conspirator, to conduct an internal investigation costing between $15 million and $25 million. Avenatti's charge raises several intriguing questions surrounding sensationalist and over-reaching demands.

To shed light on this timely and critical issue, this article canvasses recent cases from around the country. The picture that emerges is that the outcome depends on the specific facts and the jurisdiction. Nonetheless, the cases offer several guiding principles that are helpful for any careful practitioner.

A Threat to Expose Criminal Conduct Unless Someone Makes a Payment Can Be Extortion

A threat to expose criminal conduct unless a sum of money is paid can be extortion. In Flatley v. Mauro, the California Supreme Court held that a demand letter, which included threats “to publicly accuse [prominent Irish dancer Michael Flatley] of rape” and “other unspecified violations” unless he paid money to settle constituted extortion as a matter of law. The court reasoned that the threat to disclose criminal activity was itself evidence of extortion. The court held that a threat to expose criminal conduct becomes illegal when coupled with a demand for money.

Subsequently, a California Court of Appeal held that an implicit threat to report general criminal activity also constitutes extortion. In Stenehjem v. Sareen, a former employee's demand, which implicitly threatened to report a former company president for alleged violations of the False Claims Act unless he negotiated a settlement, constituted extortion. The email accused the former president of ordering the creation of “accounting documents with false information.” The court reasoned that the “more vague and general” the accusation, the better it served its purpose. The court held that the “absence of either an express threat or a demand for a specific sum of money…[did] not negate its fundamental nature as an extortionate writing.”

Parties Cannot Use Illegal Means to Force a Settlement

Extortion is likewise established when a party uses illegal means to force a settlement. In Rogers v. Dupree, a housekeeper engaged attorneys to represent her in a sexual harassment claim against her former employer. After meeting with the attorneys, she took a “spy camera” to work and secretly recorded a sexual encounter between the employer and herself. The housekeeper resigned from the position and her attorneys sent the employer a demand letter seeking a settlement. The employer filed suit alleging that the housekeeper and the attorneys conspired to illegally obtain video evidence to extort money from him by threatening to file frivolous and false claims regarding his private activities. The Georgia Court of Appeals held that the trial court erred in dismissing the employer's extortion claims.

Whistleblowers Must Have a 'Primary Motivation' to Inform the Public

A whistleblower must have a “primary motivation” of informing the public. In Robinson v. Radian, the court denied a plaintiff's whistleblower protection claim because his “primary motivation” was self-benefit rather than informing the public. The plaintiff sued his former employer, a government defense contractor, for violating Michigan's Whistleblower Protection Act. After receiving several negative performance reviews, the plaintiff claimed that the defendant was violating various federal hiring regulations and reported the alleged violations to the defendant's HR representatives.

The court noted that the whistleblower protection act “was not intended to serve as a tool for extortion.” Because the plaintiff knew of the alleged violations but only threatened to make a report when his job performance was questioned, the court held that the plaintiff's “primary motivation” was self-benefit rather than informing the public.

Non-Extortionate Threats Can Still Be Sanctionable

Even if a demand falls short of extortion, a court may sanction a lawyer for excessive demands and threats. For example, an Arizona lawyer was recently sanctioned for using “inappropriate means to compel a settlement.” In In re Matter of Strojnik, the lawyer represented a restaurant manager in a sexual harassment lawsuit against her former employer. In his demand, the lawyer threatened to use press releases to embarrass the defendant. Additionally, he threatened to meet with police about the lawsuit and notify the Department of Justice that the defendant hired illegal immigrants. In response to a settlement offer, the lawyer stated he intended to “destroy” the defendant's business. The court sanctioned the lawyer for “overzealous tactics” in an attempt to “ruin the opposing party personally.”

Takeaways

Depending on the jurisdiction, the following takeaways emerge: express or implicit threats to expose criminal conduct unless an individual or company pays a sum of money can be extortion. Parties also cannot use illegally obtained material to force a settlement. Whistleblowers who are “primarily motivated” by self-benefit, rather than informing the public, may not be protected by whistleblower protection laws. Finally, even if a demand falls short of extortion, a court may still sanction a lawyer for overzealous tactics.

Gregory Keating is a partner at Choate and chair of the firm's whistleblower defense and labor, employment and benefits practice groups. Thomas Knecht is an associate in the firm's litigation department.