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Contributing Editors

© 2015 Zuckerman Spaeder LLP

Court Rejects American Apparel Founder’s Bid for Advancement and Indemnification

When a company sues an executive, one question is who will pay the legal bills. As we covered earlier this year, that’s been an issue in Dov Charney’s ongoing legal battle with his former employer, American Apparel. Specifically, after American Apparel sued Charney for violating their standstill agreement by getting involved in shareholder suits and commenting to the press, Charney sued American Apparel in Delaware for indemnification and advancement. He claimed that the suit was brought “by reason of the fact” that he had been CEO, and thus fell within the indemnification provisions in various corporate documents. Read More ›

With Yates Memo, the DOJ aims to prosecute more corporate executives. But will there be unintended consequences?

On September 9, 2015, Deputy Attorney General Sally Q. Yates issued a memorandum to all Department of Justice attorneys concerning “Individual Accountability for Corporate Wrongdoing.” Referred to as the “Yates Memo,” the memorandum consolidates several statements from other DOJ officials over the past year, memorializes new policy, and reiterates long-established practices. Significantly, the Yates Memo recognizes what every American has understood since the inception of our legal system: living, breathing individuals commit crimes or engage in civil misconduct, not the business entities (fictional “persons”) on behalf of which the individual acts. Read More ›

The Inbox – No Fall Guys Allowed

The Justice Department issued a memo to United States attorneys nationwide that might have Wall Street executives shifting nervously in their seats. The memo signifies a new focus as it instructs both civil and criminal prosecutors to pursue individuals, not just their companies, when conducting white collar investigations. According to The New York Times, the memo is a “tacit acknowledgement” that very few executives who played a role in the housing crisis, the financial meltdown, and other corporate scandals have been punished by the Justice Department in recent years. Typically when a company is suspected of wrongdoing, the company settles with the government after supplying the authorities with the results of its own internal investigation. This paradigm has led to corporations paying record penalties, while individuals usually escape criminal prosecution. Deputy U.S. Attorney General Sally Q. Yates authored the memo and articulated the Justice Department’s new resolve. “Corporations can only commit crimes through flesh-and-blood people. It’s only fair that the people who are responsible for committing those crimes be held accountable.” To achieve this end, U.S. attorneys are directed to focus on individuals from the beginning, and will refuse “cooperation credit” to the company if they refuse to provide names and evidence against culpable employees. And don’t think about naming a fall guy to take the blame. Ms. Yates said the Justice Department wants big names in senior positions. “We’re not going to be accepting a company’s cooperation when they just offer up the vice president in charge of going to jail.” We’ll have more on the Yates Memo and its potential implications in weeks to come. Read More ›

The Inbox – It’s Electric

The famous scientist Nikola Tesla was prolific not only in his scientific writings and experiments, but he has also become quite the posthumous eponym. From 80s rock bands to electric car manufacturers, the Tesla name continues to find its way into the headlines. Nikola’s more recent namesake, Tesla Motors (named for Mr. Tesla’s patented AC induction motor), was allegedly the target of a former disgruntled employee, Nima Kalbasi. Prosecutors say that Mr. Kalbasi, a Canadian national and mechanical engineer, hacked the company’s servers. According to The Washington Times, Mr. Kalbasi was terminated on December 3rd of last year, but not before he was able to ferret out his boss’s email credentials. For the next few weeks, according to allegations in Mr. Kalbasi’s criminal case, Mr. Kalbasi repeatedly accessed Tesla’s corporate server to retrieve employee reviews and at least one consumer complaint against the company, which he published online along with some other disparaging commentary. Ironically, Mr. Kalbasi allegedly used in his computer hacking the wireless technology that many credit to Mr. Tesla himself. Read More ›

Court Disposes of Former CEO’s Claims Against Purchaser of His Company’s Trash Carts

Normally, in litigation between executives and employees, the executive will bring suit after he or she is fired, alleging wrongdoing by the former employer. This makes sense: the employer, after all, is the one who took the adverse action against the exec. And it’s the one that caused the damage, assuming that the executive can prove his or her claims.

The case of Stephen Stradtman, former CEO of Otto Industries North America, Inc., was not a normal case. For one thing, Stradtman wasn’t fired – he quit. And Stradtman didn’t sue Otto – he sued two other companies (Republic Services, Inc. and Republic Services of Virginia, LLC) and one of their employees. Read More ›

The Inbox – The Games We Play

On his way through the San Francisco International Airport with the hopes of boarding his flight to China, Silicon Valley former employee Jing Zeng was not greeted by the friendly faces of a flight crew, but rather the handcuff-wielding agents of the FBI. Detained on charges of stealing trade secrets, Mr. Zeng will have to remain in the US and explain the behavior that led up to his August 20th airport arrest. The Wall Street Journal explains that Mr. Zeng, a new employee with Machine Zone, maker of Game of War: Fire Age (you may have seen the ads prominently featuring model Kate Upton sporting medieval garb), sought to change teams and work under a different boss. His request was denied and the company eventually asked Mr. Zeng to leave. Mr. Zeng then allegedly began to download highly valuable user data from a proprietary database in an attempt to leverage his possession of the information for a more lucrative severance agreement. The company contacted the FBI, and Mr. Zeng’s arrest followed. Now, Mr. Zeng finds himself in the custody of federal authorities, although his LinkedIn profile indicates that he is “ready for next venture.” Read More ›

When Trouble Looms, How Many Battles Will You Have To Fight?

Indemnification and advancement are intended to protect individuals from claims asserted against them by shareholders or regulators by virtue of their position with a business entity.  A minimum level of protection is guaranteed by statute for corporate officers and directors.  As we covered in this post, statutory backstops do not exist for employees of alternative business entities, such as limited partnerships (“LPs”), limited liability partnerships (“LLPs”) and limited liability companies (“LLCs”).  Because these alternative business entities offer different advantages, they are chosen as frequently as corporations when a new business is formed.  Therefore, protection of individuals working for these entities will be a growing issue.

Alternative business entities are desirable because, among other things, the laws under which they are formed are designed to favor flexibility.  Management of an alternative business entity is principally controlled by the operating agreement among the stakeholders, which may contain whatever provisions the stakeholders deem appropriate.  For example, the Delaware Limited Liability Company Act (the “DLLCA”), which governs the formation and operation of Delaware limited liability companies, specifically provides that “it is the policy of this Chapter to give maximum effect to the principal of freedom of contract and to the enforceability of limited liability company agreements.”  6 Del. C.§ 18-1101(b).  The Delaware Revised Uniform Limited Partnership Act (“DRULPA”) has a similar policy statement, 6 Del. C.§ 17-1101(c).  However, if the agreement pursuant to which the alternative entity was formed does not expressly create a right to indemnification and advancement, employees may not have protection or resources to mount a proper defense in a time of need.  Read More ›

Working For An Alternative Business Entity? Check Your Indemnification Rights Carefully

We’ve frequently discussed the well-established indemnification and advancement rights of corporate directors and officers (see here and here, for example).  These benefits protect individuals from claims asserted against them by shareholders or regulators.  Corporate charters and bylaws typically expand these rights to the fullest extent permitted by law, but these provisions are merely an overlay to the statutory provisions which guarantee basic indemnification protections for directors and officers. 

However, that isn’t the case for alternative business entities, such as limited partnerships (“LPs”), limited liability partnerships (“LLPs”) and limited liability companies (“LLCs”).  Those entities don’t always have a statutory back stop that guarantees indemnification and advancement for their employees.  In recent years, founders are just as likely to choose these alternative structures for their new business as they are to choose the corporate form.  Therefore, protection of these key employees will be a growing issue. Read More ›

The Inbox – The SEC’s Claws May Come Out

We recently discussed the SEC’s proposed rules pursuant to the 2010 Dodd-Frank Act regarding the clawback of executive compensation under various circumstances related to accounting restatements. Now it seems Hertz’s former CEO, Mark Frissora, may become one of the first test cases should these rules survive the comment period. According to Footnoted, upon Frissora’s resignation last September, he received over $10 million plus other benefits. But the company recently filed a 10-K for 2014 that not only included restated results for 2012 and 2013, but also made a disclosure that could suggest a possible future effort to claw back Frissora’s severance package. The disclosure blamed Frissora for creating an environment that “in some instances may have led to inappropriate accounting decisions and the failure to disclose information critical to an effective review of transactions and accounting entries.” Perhaps another interesting twist is whether any potential clawback will have an effect on Frissora in his new role as CEO of Caesar’s Entertainment, a position he assumed two weeks ahead of Hertz’s delayed filings.

California is known for its skeptical treatment of employers’ efforts to enforce non-competes, but it may not be as friendly toward all employees as originally suspected, according to The National Law Review. In 2014, California resident Stacey Sabol-Krutz left her position with Quad Electronics, a Michigan-based employer, to take a position with a rival company, which was also based in Michigan. Sabol-Krutz had started working for Quad in Michigan, and signed her employment contract there, but moved to California in 2011. Her employment contract specifically named her new employer as a company that Sabol-Krutz wouldn’t join for 12 months after leaving Quad. After Quad found out about Sabol-Krutz’s new job, it sued her for breach of contract. She, in turn, filed suit in California, attempting to invalidate the agreement under California law. The California court, noting the absence of a choice of law provision in the agreement, found that Michigan law applied, using a “governmental interest” test. Although courts may refuse to apply a choice of law provision when construing restrictive covenants (as we illuminated here), Sabol-Krutz’s move to California to work for an out-of-state employer did not win her the protection of California law. Read More ›

Was American Apparel’s Lawsuit Against Former CEO Dov Charney Brought “By Reason of the Fact” That He Was Its CEO, Such That It Must Advance His Legal Fees?

The legal saga of American Apparel and its founder and former CEO, Dov Charney, has more twists and turns than the latest season of Game of Thrones.  We’ve previously blogged about the sundry clashes between the two, including Charney’s ongoing arbitration for severance, the sexual harassment allegations against Charney, and a lender’s threat of default on a major loan after Charney was fired.

Now, Charney and American Apparel are battling in two separate cases in Delaware Chancery Court.  In the first, American Apparel has sued Charney for violating a standstill agreement by becoming involved in shareholder suits and commenting to the press.  The second case is a follow-on to the first: Charney has sued to force the company to advance his fees for the standstill lawsuit.  In this Game of Thrones, you win or you pay for your defense out of your own pocket. Read More ›