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Showing 90 posts in Civil Litigation.

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 ›

The Inbox - The Ways of the “Wolf”

Benjamin Wey immigrated to Oklahoma from China as a teenager with scant dollars in his pocket.  He parlayed ambition and ties to Chinese businesses into a lucrative investment firm engaged in the controversial practice of reverse mergers. According to the Washington Post, this so-called “Wolf of Wall Street” hired a beautiful Swedish model, Hanna Bouveng, to serve as his assistant, and used her Swedish contacts to further his business interests while heaping monetary rewards on her to seemingly win her affections.  According to Bouveng, Wey pressured her into a sexual relationship, and when she refused his advances, he allegedly terminated her employment, waged war on her reputation through social media, stalked her, and threatened her with further ruin. Ms. Bouveng fought back in Manhattan federal court where she sued Wey for sexual harassment, retaliation and defamation. The jury returned an $18 million verdict in favor of Ms. Bouveng. While Ms. Bouveng likely feels vindicated, Wey is claiming victory on his twitter account.   Read More ›

Non-Solicitation Clauses: They’re Up to You, New York

National employers sometimes include choice-of-law provisions in their employment agreements, selecting one particular state’s law even for employees who don’t work in that state.  For example, a company based in Massachusetts might ask its California employees to sign agreements selecting Massachusetts law.  Applying one state’s law to all of the employer’s relationships can make outcomes more predictable, especially when the employer knows that law well.

But not always, as the New York Court of Appeals held earlier this month in Brown & Brown, Inc. v. Johnson.  In Brown & Brown, the Court of Appeals refused to apply an employment agreement’s selection of Florida law, holding that New York law should determine whether a customer non-solicitation provision in that same agreement was enforceable.  Read More ›

Part 2 – How to Motivate Executives to Perform at Their Highest Level Through a Bankruptcy

In our last post, we discussed differences between “pay to stay” arrangements, which face stricter scrutiny in bankruptcy cases, and “Produce Value for Pay” plans, which provide incentives for executives based on strong corporate performance.  As promised, we now examine two cases that illustrate acceptable ways for companies to motivate their executives to perform through a Chapter 11 bankruptcy.

The first is the case of Chassix Holdings, Inc., which manufactures parts for approximately two-thirds of automobiles made in North America.  After a sequence of unfortunate financial and operational setbacks during 2014, Chassix found itself a petitioner under Chapter 11 of the bankruptcy code last month.  Included among the operational setbacks was the fact that approximately 1,100 employees voluntarily left Chassix during 2014.  Since it was critical to have a work force with the proper experience, skill, and know-how to manufacture the auto parts, Chassix found itself exploring ways to enhance its compensation options prior to the petition date in order to retain more of its employees.  Unfortunately, it didn’t finish these plans prior to the petition date.

Chassix took a couple of important steps in designing its KERP and seeking authority from the bankruptcy court to implement it.  First, and foremost, it limited its KERP to a pool of employees who were not company “insiders.”  Therefore, the bankruptcy court applied the more liberal standard of business judgment when it evaluated the plan, even though Chassix had not established and regularly implemented the plan before its bankruptcy petition.  Under this standard, and considering the pre-petition employee turnover and the support of the various creditor constituencies, the bankruptcy court approved the KERP.  Read More ›

How to Motivate Executives to Perform at Their Highest Level Through A Bankruptcy

At the outset, the answer to the question posed in this article seems simple: employers should just pay their employees as much as is reasonably possible.  However, when a corporation finds itself in Chapter 11 reorganization, the Bankruptcy Code restricts the use of some traditional motivational methods.  Simultaneously, competitors might make tempting job offers to quality employees, inducing them to leave the business.  This combination of factors can distract employees from the main task of getting the debtor through the reorganization process. 

To provide sufficient compensation and persuade employees to remain with the business, a debtor can attempt to adopt a key employee retention plan (KERP for short), also known as a “pay to stay” arrangement.  This is in contrast to a “Produce Value for Pay” plan that provides incentives for strong corporate performance. Read More ›