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Federal Court Orders Trial on Validity of Depressed Employee's Release of Claims

August 4, 2003

Employers who offer a terminated employee severance pay or other separation benefits typically condition those benefits on the employee's execution of a general release, waiving all legal claims arising out of his/her employment or termination. Provided the release is entered into knowingly and voluntarily, it is fully effective, and precludes subsequent lawsuits for employment discrimination and other employment-related claims. In a recent decision, however, a federal district court in New York refused to dismiss claims of employment discrimination on the basis of a release signed by an employee diagnosed with clinical depression and anxiety. The court found that triable issues of fact existed as to whether the employee had the mental capacity to enter into a valid release. Knoll v. Merrill Corp., 2003 WL 21556942 (S.D.N.Y. July 9, 2003).

The plaintiff, Paul Knoll, began working for Merrill Corp., a document and communications services company, in 1998 as the General Manager of Document Management Services for the New York/New Jersey region. According to his complaint, Knoll built this unit into Merrill's most profitable unit in the country. In 2000, Knoll began experiencing difficulties arising from stress and anxiety. Though he initially attempted to treat these problems with natural remedies, in March 2001 Knoll sought treatment from a mental health professional, who diagnosed him with depression and anxiety and prescribed several medications to treat these conditions. Knoll immediately notified Merrill management of his diagnosis, and Merrill initially responded by offering to arrange for treatment by a Merrill-paid mental health professional.

Merrill, however, changed its position only a few days later, and terminated Knoll's employment. In connection with this termination, Merrill required that Knoll sign a separation agreement, including a general release of claims, in exchange for certain separation benefits, including three months' salary and forgiveness of an outstanding $15,000 loan. Knoll negotiated for certain enhancements of these benefits, including an additional three months' salary, payment for unused vacation time, and a lump sum payment to cover six months of the cost of health insurance under COBRA.

Knoll signed the agreement and collected the separation benefits. Thereafter, he brought suit against Merrill for disability discrimination in connection with the termination of his employment. Merrill moved for summary judgment, urging dismissal of the lawsuit on the basis of Knoll's separation agreement and general release. In response, Knoll claimed that in October 2001, after the separation agreement was signed, employees of Merrill made slanderous comments about him to members of the business community, implying that he had been discharged for engaging in illegal activities. Knoll asserted that these acts violated the no-defamation provision of the separation agreement, and that Merrill's violation should relieve him of his obligations under the agreement, most notably the release of claims. In a further effort to overcome the release, Knoll also alleged that he lacked the mental capacity to enter into a binding release, because of his depression and the associated medications.

The court denied Merrill's motion for summary judgment. The court first agreed with Merrill that its breach of the no-defamation provision was not a "material breach" of the agreement, which would allow Knoll to void the release. However, the court also found that, because of Knoll's mental health and the medications he was taking, the question of his ability to knowingly and voluntarily enter into the release could not be determined on a motion, and had to be decided at trial. Among the factors that the court took into account in reaching this conclusion were: Knoll's decision not to consult legal counsel despite being advised to do so; the language of the release, which was drafted clearly in favor of Merrill with little input from Knoll; the possibility that Merrill's conduct constituted duress, given its knowledge of Knoll's mental health problems; and the potential inadequacy of the consideration accepted by Knoll in exchange for waiving all future claims. Of special concern to the court were questions of Knoll's mental capacity arising from expert testimony that depression and medications such as Paxil and Xanax could affect a person's ability to appreciate technical details, such as the terms of a separation agreement. Accordingly, the court left open the possibility that the jury could find that the release was invalid, leaving Knoll free to pursue his discrimination claims against Merrill.

The Knoll decision is unquestionably a troubling ruling for employers. Even though Knoll clearly had a substantial understanding of the transaction and even succeeded in negotiating for certain improvements in the package originally offered by the employer, Merrill was required to go to trial over the question whether Knoll's mental condition and the medications used to treat them were sufficiently disabling to preclude him from knowingly and voluntarily entering into a release. The lesson of this decision is clear: in situations where an employer is aware that a terminating employee suffers from conditions that could affect his/her mental capacity, the employer should take extra precautions to ensure that the circumstances support the conclusion that the release is knowing and voluntary, such as by urging the employee to consult with counsel (or even requiring the employee to do so) and ensuring that he/she is given sufficient time and opportunity to consider the agreement before being required to sign it. Depending on the circumstances, an employer might even hold in abeyance any offer of severance benefits in exchange for a release until such time as the employee's treating physician attests that the employee is able to make an informed decision about the offer.