Word of the day: Indemnification. It’s how an airport governing board is paying for one of its ‎members to sue to contest his removal from the board itself. ‎

| Zuckerman Spaeder Team

A hullabaloo.  A brouhaha.  Even, perhaps, a ruckus, if you will. 

Those words describe what’s been happening with the Metropolitan Washington Airports Authority (MWAA) board – the entity that oversees our two main airports in this region, Washington-Dulles and National (formally “Ronald Reagan National,” but National to us Washingtonians who have lived in the area more than ten years).  The airports themselves are running fairly well. 

The problem is with another thing the MWAA board is overseeing – construction of the Silver Line, a $6.8 billion, 29-mile extension of the Washington subway out to the Washington-Dulles airport.  The Silver Line has been a fierce battleground for all of the parties involved – Virginia, Maryland, and the District of Columbia (which partly finance the project through their funding of the subway system), taxpayers along the route of the line (who add more money), and the U.S. Department of Transportation (which contributes the largest share).  Those parties, and others, fight nearly continuously on all sorts of issues – from whether the last station should be in the Dulles terminal or outside of it, through the composition of the labor force building it, and where it should go.  And, of course, their respective shares of the cost of the project

The MWAA board and its members have been drawn into something of a public proxy war for this bigger battle over the Silver Line (last week, the board was criticized by two Governors and the Secretary of Transportation).  This proxy war involves scrutiny of everything the board members do – including the amount of money they spend going to airport conferences. 

This scrutiny has led to what may appear to be an absurd action on the part of the MWAA board: it has spent $75,000 to pay legal fees for a board member to fight his removal from the MWAA board itself.  Even more interesting: the main reason the board member is being removed is because of a $9,200 business-class flight he took to a conference in Prague.  Board member Dennis Martire says he did nothing wrong – that the trip to the conference in Prague was well within his duties – and that his removal by Virginia Governor Robert McDonnell was politically motivated and therefore improper.  So, to sum up: the MWAA board has spent $75,000 to pay board member Martire’s legal fees in a case involving his removal for spending $9,200 in board travel money. 

Wierd, right?  Not so fast: the reimbursement of the legal fees is all perfectly reasonable and legal. In fact, the board really didn’t have any choice.  The magic word here is indemnification.

Indemnification clauses in employment contracts and corporate board service agreements are often overlooked, but they provide important protection for individual employees or board members by advancing defense fees if an employee or member is sued and paying any judgment against him or her arising of out of the individual’s work.  These clauses fulfill a similar function to (and often work with) directors and officers’ insurance contracts (a specialty of mine, and a topic on which I’ll write much more later).  In the event of a lawsuit, an indemnification clause can be the employee’s best friend – because by requiring “advancement of defense costs,” it gets the lawyers’ bills paid and lets the employee focus on the merits of the case. 

This clause can also come from bylaws, the source of Dennis Martire’s indemnification.  The indemnification clause in the MWAA board’s bylaws provides that:

The Authority shall indemnify each Director and Officer against all costs and expenses (including counsel fees) the Director actually incurs in connection with or resulting from any action, suit or proceeding, of whatever nature, to which the Director is or shall be made a part by reason of his being or having been a Director or Officer …provided (1) that the Director or Officer conducted him- or herself in good faith and (2) reasonably believed that his or her conduct was in the best interest of the Authority. This indemnity shall not apply in actions when the Director or Officer is adjudged liable to the Authority.

According to the Washington Post, some members of the MWAA board don’t like it, but this indemnification clause in MWAA’s bylaws – at least reading them against the publicly available facts – appears to entitle Martire to indemnification.  The case arises out of “his…having been a Director…,” and Martire has at least a facial argument that he conducted himself in good faith and in the best interests of MWAA by going to a conference on airports (significantly for Martire’s argument, business class travel for international flights is expressly authorized under the board’s travel policy). 

Courts often uphold indemnity clauses because they play a significant role in the employer/employee relationship.  In U.S. v. Stein, which looked at the government’s ability to pressure a company to not indemnify one of its employees, the federal court hearing the case wrote that indemnification of employees “is very much a part of American life. Persons in jobs big and small, private and public, rely on it every day. Bus drivers sued for accidents, cops sued for allegedly wrongful arrests, nurses named in malpractice cases, news reporters sued in libel cases, and corporate chieftains embroiled in securities litigation generally have similar rights to have their employers pay their legal expenses if they are sued as a result of their doing their jobs. This right is as much a part of the bargain between employer and employee as salary or wages.”

While bylaws that apply to corporate board members often have indemnification clauses, employment agreements covering non-board members often do as well.  Employment candidates asked to sign an agreement should read the draft over and look for the indemnification clause – and if it’s not there, they should consider asking for it.  Employers, for their part, should consider indemnification clauses as incentives to lure talented employees – many of whom won’t work without them. 

Information provided on InsightZS should not be considered legal advice and expressed views are those of the authors alone. Readers should seek specific legal guidance before acting in any particular circumstance.

As the regulatory and business environments in which our clients operate grow increasingly complex, we identify and offer perspectives on significant legal developments affecting businesses, organizations, and individuals. Each post aims to address timely issues and trends by evaluating impactful decisions, sharing observations of key enforcement changes, or distilling best practices drawn from experience. InsightZS also features personal interest pieces about the impact of our legal work in our communities and about associate life at Zuckerman Spaeder.

Information provided on InsightZS should not be considered legal advice and expressed views are those of the authors alone. Readers should seek specific legal guidance before acting in any particular circumstance.