Last week, we covered the Third Circuit’s decision that Goldman Sachs bylaws didn’t clearly establish a vice president’s right to advancement of his legal fees for his criminal travails.  The vice president, software programmer Sergey Aleynikov, isn’t giving up easily, however.

Law360 reports that Aleynikov has filed a petition for panel rehearing or rehearing en banc.  In the federal appellate courts, this is a step that parties can take when they disagree with the decision of the three-judge panel that heard their case.  In a panel rehearing, the panel can revisit and vacate its original decision; in a rehearing en banc, the entire Third Circuit could consider the issue.

Aleynikov contends in his petition that the panel misapplied a doctrine of contractual interpretation called contra proferentem.  In plain English, contra proferentem means that a court will read the written words of a contract against the party that drafted it.  The panel in Aleynikov’s case disagreed as to whether under Delaware law (which governs his dispute), the doctrine can be used to determine whether a person has any rights under a contract.  The two-judge majority said that it can’t, and therefore refused to use the doctrine when it decided whether Aleynikov – as a Goldman vice-president – fell within the definition of an “officer” entitled to advancement under the company’s bylaws.  In dissent, Judge Fuentes asserted that “Delaware has never suggested that there is an exception to its contra proferentem rule where the ambiguity concerns whether a plaintiff is a party to or beneficiary of a contract.”

In his petition, Aleynikov asks the whole Third Circuit to decide who is right: Judge Fuentes or the majority.  He also cites additional Delaware cases that he says support his position, including one “unreported case” that was brought to his counsel’s attention “unbidden by a member of the Delaware bar who read an article commenting on the panel’s decision in The New York Times on Sunday, September 7, 2014.”  Sometimes, to establish a right to advancement rights, it takes a village.

• Civil Litigation
• Executive Compensation
• Indemnification and Advancement
• Summary Judgment

The case of Sergey Aleynikov, a former vice president at Goldman Sachs, has drawn a lot of media attention, including these prior posts here at Suits by Suits. Aleynikov was arrested and jailed for allegedly taking programming code from Goldman Sachs that he had helped create at the firm. His story even inspired parts of Michael Lewis’s book Flash Boys. A federal jury convicted him of economic espionage and theft, but the Second Circuit reversed his conviction, holding that his conduct did not violate federal law. Now, Aleynikov is under indictment by a state grand jury in New York.

Unsurprisingly, Aleynikov wants someone else to pay his legal bills – Goldman Sachs. And it is no surprise that Goldman, which accused him of stealing and had him arrested, doesn’t want to bear the cost of his defense. In 2012, Aleynikov sued Goldman in New Jersey federal court for indemnification and advancement of his legal fees, along with his “fees on fees” for the lawsuit to enforce his claimed right to fees. As we discussed in this post, indemnification means reimbursing fees after they are incurred, and advancement means paying the fees in advance. Advancement is particularly important for those employees who cannot float an expensive legal defense on their own dime.

• Civil Litigation
• Executive Compensation
• Indemnification and Advancement
• Summary Judgment

Last week, American Apparel announced that its board had decided to terminate Dov Charney, the company’s founder, CEO, and Chairman, “for cause.”  (We’ve discussed the meaning of terminations “for cause” in prior posts here and here.)  The board also immediately suspended Charney from his positions with the company.  Although the board didn’t initially disclose the reasons for its action, Charney is not new to controversy; in recent years, he has faced allegations of sexual harassment and assault.

The reasons for Charney’s termination have now become public, and they aren’t pretty.  In its termination letter, available here, the board accuses Charney of putting the company at significant litigation risk.  It complains that he sexually harassed employees and allowed another employee to post false information online about a former employee, which led to a substantial lawsuit.  The board also says that Charney misused corporate assets for “personal, non-business reasons,” including making severance payments to protect himself from personal liability.  According to the board, Charney’s behavior has harmed the company’s “business reputation,” scaring away potential financing sources.

• Age Discrimination
• Breach of Contract
• Civil Litigation
• Executive Compensation
• Indemnification and Advancement
• Releases
• Severance Agreements
• Termination With or Without Cause
• Wrongful Termination

Bon-Ton Stores, Inc. alleges in a lawsuit that it recently filed against its former Senior Vice President, Director of Sales Gary Pralle that – after the company fired Mr. Pralle – it discovered “pornographic materials” and “documents containing racial slurs” in his e-mails.  According to Bon-Ton, had it known about this “after-acquired evidence” before it fired Mr. Pralle, it would have had “cause” for firing him under its “Executive Severance Pay Plan” such that Mr. Pralle would not be entitled to severance.  In other words, Bon-Ton v. Pralle is an example of a company invoking the after-acquired evidence doctrine to overcome a breach of contract claim.  (Bon-Ton also alleges that bad behavior by Mr. Pralle that the company knew about before it fired him also gave the company “cause,” but those allegations mess up the example so we’re ignoring them.)

• After-Acquired Evidence
• Executive Compensation
• Severance Agreements
• Termination With or Without Cause

Top ‘o the mornin’ to ya!  In honor of St. Patrick’s Day, we considered writing today’s inbox entirely in Irish-speak.  We could have told you to sit down and wet the tea, or sip on a pint of Gat, while we spun tales of how an executive’s suit put the heart crossways in his employer.  But because we didn’t want anyone feeling the fear tomorrow, we decided to stick with our tried-and-true approach of (somewhat) plain American English.

• Bonuses on Wall Street are flowing like Guinness, says The Age.  New York’s state comptroller says that firms paid their highest bonuses since 2007, with an average of $164,530.  However, for those looking to get a piece of that pot of gold, the news wasn’t all good: jobs in finance declined.

• Glenn Kessler of the Washington Post’s Fact Checker put together this interesting piece on Edward Snowden’s claim that federal law did not protect him from whistleblower retaliation.  Kessler concluded by awarding Snowden only one Pinocchio for “some shading of the facts.”  Snowden has many Pinocchios to go if he wants to reach the levels achieved by many illustrious citizens of Washington, D.C.

• Andrew Burrell of The Australian reports that BHP Billiton’s decision to pay large bonuses has boomeranged on the executives of the resources giant, with shareholders voicing their disapproval (subscription required).  Yes, we included this news solely to use the pun.  No, we do not have a subscription to The Australian.

• TheTownTalk.com brings us news of a Louisiana College VP’s lawsuit against his employer in state court.  The vice president, Tim Johnson, claims that the Baptist school and its president retaliated against him for blowing the whistle on the president’s diversion of funds.  An outside law firm has already advised the college that the president “misrepresented material information to the Board of Trustees on countless occasions,” but a committee appointed by the board rejected that conclusion.

• A New York trial judge questioned a hedge fund’s efforts to have a former analyst jailed for stealing trade secrets, reported Stewart Bishop of Law360 (subscription required, and yes, we do have one).  Justice Jeffrey Oing told lawyers for Two Sigma Investments LLC that it might be “going over the top” by pursuing jail time for Kang Gao, who is accused of illegally accessing and copying Two Sigma’s confidential information.

• Civil Litigation
• Confidentiality
• Executive Compensation
• Whistleblowers

Earlier this week, we outlined the rights of indemnification and advancement, and discussed how those rights can hinge on the statutory law governing a corporation and the private agreements that companies enter into with their officials.  In this post, we review a recent decision to see how these principles apply in real life.

The decision comes from Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery.  Because many companies are incorporated in Delaware, the Delaware courts handle some of the most preeminent disputes involving corporate law, and they have significant experience addressing issues of indemnification and advancement. 

The Vice Chancellor’s opinion illustrates a judicial view that companies sometimes agree to broad rights at the outset of an employment relationship, but then seek to back away from those agreements once a dispute arises.  He wrote:

It is far from uncommon that an entity finds it useful to offer broad advancement rights when encouraging an employee to enter a contract, and then finds it financially unpalatable, even morally repugnant, to perform that contract once it alleges wrongdoing against the employee.

Vice Chancellor Glasscock’s ruling also shows how courts will review the governing statutes and agreements in order to decide whether a company’s denial of advancement is legally justified.

This particular dispute, Fillip v. Centerstone Linen Services, LLC, 2014 WL 793123 (Del. Ch. Feb. 20, 2014), involved Karl Fillip, the former CEO of Centerstone.  Fillip resigned, claiming that he had “Good Reason” for the resignation under his employment agreement and therefore was entitled to receive certain bonuses and severance pay.  When Centerstone wouldn’t pay up, Fillip sued it in Georgia state court, alleging breach of contract and also seeking a declaratory judgment that restrictions in his employment agreement were invalid.  Centerstone then filed counterclaims, which triggered a response from Fillip for advancement of funds to defend against those claims.

Centerstone, as you might imagine, was not happy about this turn of events.  It refused his request, but also said it would withdraw certain counterclaims because it didn’t want to pursue claims “that could potentially trigger an obligation by Centerstone to pay Mr. Fillip’s attorney’s fees and costs in defending them.”  Dissatisfied, Fillip sued in Delaware for advancement of his fees.

• Breach of Contract
• Civil Litigation
• Executive Compensation
• Indemnification and Advancement
• Severance Agreements

Imagine sitting on the board of directors of a Fortune 500 company.  You might think it’s a life of corporate jets, cushy board meetings, and prestige.  (Although, the press will tell us, it’s not really that way anymore, thanks to Enron.)  But even if corporate service would truly be the good life, what would happen to you if an aggrieved shareholder sued you for allegedly breaching your fiduciary duties to the company?  Would you have to deplete your bank account to pay expensive lawyers for years of costly litigation?

The answer is found in the rights of indemnification and advancement (which we have previously discussed here, here, and here in connection with a trade secret case against a Goldman Sachs employee).  Indemnification and advancement are two overlapping, yet different, rights that corporate directors, officers, and employees may have when it comes to the payment of their legal fees in lawsuits brought against them because of their corporate service. 

Indemnification is the reimbursement of fees after those fees have been incurred.  This right, as the Delaware Supreme Court has written, “allows corporate officials to defend themselves in legal proceedings secure in the knowledge that, if vindicated, the corporation will bear the expense of litigation.”  The words “if vindicated” cannot be emphasized enough – they show that in order to establish a right to indemnification, the officer may have to prevail in the proceeding.

Advancement, meanwhile, is exactly what it sounds like: payment of fees by the company in advance of the final resolution of the proceeding.  Advancement is an important companion to the right of indemnification, because it provides officials with immediate relief from the financial burden of investigations and legal proceedings.  No vindication required – although the official may have to pay back what she receives if the final decision doesn’t go her way.

To determine an individual’s right to indemnification or advancement, courts will first look to the statutes governing the business, which may either require or permit those rights.  Because many companies are incorporated in Delaware, we’ll take a look at what Delaware law has to say on this subject.

• Executive Compensation
• Indemnification and Advancement
• The Basics

Love is in the air as couples celebrate Valentine’s Day with chocolates, flowers and romantic dinners.  But there’s no love lost between some employers and their executives, as this week’s Inbox shows:

• BLR.com reports on a fascinating case involving Bruce Kirby, former CEO of Frontier Medex.  In a lawsuit in Maryland federal district court, Kirby alleged that he was the beneficiary of a change-in-control severance plan and that Frontier kept him on for over a year solely for the purpose of defeating his severance benefits, even though it told him it was going to terminate him before that.  The court ruled that he was not contractually entitled to severance, but could pursue a claim that Frontier interfered with his benefits, violating ERISA.
• Retired Ohio Bureau of Workers’ Compensation attorney Joe Sommer is asking the Ohio Supreme Court to review a decision that limited the application of whistleblower protections in that state.  He believes that the Franklin County Court of Appeals overly limited whistleblower claims when it ruled that an employee had to report criminal conduct in order to be protected from retaliation.
• According to Benefits Pro, the EEOC “slammed” CVS over its severance deals in a lawsuit against the company in Illinois federal court.  The lawsuit alleges that CVS required employees to sign severance agreements with five pages of small print, some of which bargained away the employees’ rights to communicate to agencies about practices that violated the law.  CVS says that nothing in those agreements barred employees from going to the EEOC with complaints.
• Hook ‘em, Mack!  Former Texas football coach Mack Brown, who resigned after this season, did get some love from his employer, as the San Francisco Chronicle reports that he will receive $2.75 million that he was owed under his contract in event of termination.  He will also get a cushy $500k job this year as special assistant to the president for athletics.
• John O’Brien of Legal News Line reports that a California appellate court will allow a whistleblower’s claim of retaliation under the False Claims Act to be heard in state court.  Dr. Scott Driscoll, a radiologist, claims that he was fired for complaining that his employer was committing Medicare fraud.  When the employer sued him in state court, Driscoll counterclaimed for FCA violations.  The California court decided that it had jurisdiction to hear the claim, rejecting the employer’s argument that federal courts have exclusive jurisdiction over FCA retaliation claims.

• Change-in-Control Provisions
• Executive Compensation
• The Inbox
• Whistleblowers
• Wrongful Termination

You may have been left with the impression from our post on Tuesday that Family Dollar Stores is getting a raw deal because the company has to pay former COO Mike Bloom $4.8 million after letting him go for what it saw as poor performance. As we explained, this may be counterintuitive, but it’s consistent with the severance provisions of Bloom’s employment agreement. Besides complying with its contractual obligations, however, the company is getting something in return for the severance: a release from Bloom.

Bloom’s employment agreement, which is typical of executive employment agreements, provides that, upon his termination, the Company’s obligation to pay him severance is conditioned on Bloom "deliver[ing] to the Company a fully executed release agreement . . . which shall fully and irrevocably release and discharge the Company . . . from any and all claims . . . ."

This provision of Bloom’s employment agreement illustrates a best practice for companies when they are contemplating severance provisions in employment agreements at the time of hiring, or even standalone severance agreements that are negotiated at the end of employment: don’t agree to pay severance without getting a release from the executive in return. That way, while it may be painful to write that severance check, at least the company can know that it should not have any future trouble from the executive, the break is clean and the company and executive can move on to whatever’s next. For executives’ part, to the extent that they have the bargaining leverage, they should also insist that any release be mutual – that is, that, just as the executive releases the company from any claims, the company releases the executive from any claims. That way, the executive will also be able to move on without having to look back.

• Executive Compensation
• Releases
• Severance Agreements

Last week, Yahoo’s Marissa Mayer fired COO Henrique de Castro, reportedly because she was not satisfied with his job performance. By some estimates, de Castro will receive severance exceeding $60 million after only 15 months on the job. Also last week, Family Dollar Stores let go COO Mike Bloom because the company was not happy with his performance, and apparently was not moved by Bloom’s Undercover Boss gambit. Bloom is set to receive $4.8 million in severance after slightly more than two years on the job.

What gives? How is it that these former executives are receiving large severance payments after they were asked to leave for poor performance on the job? The definition of "cause" in their severance agreements is what gives – a topic we explored recently here at Suits by Suits in connection with the dispute over former iGate CEO Phaneesh Murthy’s termination. In the iGate case, the company contends that it terminated Murthy for cause and thus owes him no severance. Murthy’s employment agreement provides that he does not get severance in the event of a "with cause" termination, and that "cause" includes violating company policy. The company contends that Murthy’s failure to report his romantic relationship with an employee to the Board was "cause" for his termination because it violated company policy.

In the Yahoo and Family Dollar Store cases, assuming that de Castro and Bloom were let got for poor performance, unless poor performance is "cause" under their employment agreements, they will reap the severance benefits provided for in their agreements for "without cause" terminations.

• Executive Compensation
• Severance Agreements
• Termination With or Without Cause