Court Rules on Payment of Employees’ Legal Fees
Corporate Law Update
Date: November 01, 2013
Do your company’s bylaws require you to pay for the legal fees of an employee who has stolen from your company? With the ever-increasing costs of white collar criminal defense, it may be a good time to review your bylaws regarding indemnification and advancement of company employees’ legal fees.
A federal district court judge sitting in New Jersey and applying Delaware law recently ruled that Goldman Sachs must advance legal fees to its former computer programmer who is accused of stealing the bank’s computer code.1 The judge ruled that Sergey Aleynikov, a computer programmer who held the title of vice president at Goldman, is entitled to advancement of his legal fees for his defense against criminal charges in a pending New York state court case against him. The criminal case against Mr. Aleynikov is based on allegations that he stole confidential source code from Goldman before leaving his employment there to work for a competitor.2
Delaware corporate law authorizes companies to advance legal fees and indemnify their corporate officials for expenses they incur in legal proceedings by virtue of their positions in the company.3 Goldman’s4 bylaws provide for advancement of legal fees and indemnification for any person made a party to any case “by reason of the fact that such person . . . is or was a director or officer of the Corporation.”5
Although Mr. Aleynikov held the title of vice president, Goldman contended that he did not perform the normal functions of an officer or a manager or have high-level decision-making authority, that he was not appointed through the process usually reserved for officers’ appointments, and that the term “vice president” was a courtesy title – a result of title inflation common in the financial services industry.6
The court disagreed, concluding that Mr. Aleynikov was entitled to advancement of his legal fees.7 The judge found that Goldman’s bylaws were, at a minimum, ambiguous with regard to what employees were considered “officers.”8 The court concluded that a vice president in the corporate context was a kind of officer and that the bylaws regarding advancement, which covered officers, were applicable to Mr. Aleynikov.9 The court also noted that Delaware law strongly favors advancement.10 Therefore, it held that Goldman is liable for advancing Mr. Aleynikov the legal fees for his defense of the criminal case against him, and must also pay the fees he incurred in his civil suit against Goldman for coverage under the bylaws.11 Mr. Aleynikov’s legal fees in the criminal case have already exceeded $700,000, and the case is currently pending.12
Employee theft is a growing problem in this country, and having to pay the legal fees of an employee who allegedly stole from your company can be costly. Companies should review their bylaw provisions and specify what circumstances will trigger advancement.
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1See Aleynikov v. The Goldman Sachs Group, Inc., 2013 U.S. Dist. LEXIS 151603, *3 (D.N.J. 2013).
2Id. at *11 n. 5.
3Id. at *14 (quoting Del. Code. Ann. tit. 8, § 145 (a) & (b)).
4Aleynikov was actually an employee of Goldman, Sachs & Co., a broker-dealer limited liability partnership, which is a corporate subsidiary of Goldman Sachs Group, Inc. Id. at *11 n. 5.
5Id. at *16-17.
6Id. at *19-20.
7Id. at *2-3.
8See id. at *58.
9See id. at *56.
11See id. at *67.
12Peter Lattman, “Judge Orders Goldman to Pay Ex-Programmer’s Legal Bills,” N.Y. Times, October 22, 2013, http://dealbook.nytimes.com/2013/10/22/judge-orders-goldman-to-pay-programmers-legal-bills/?_r=0.