I have blogged frequently on the fiduciary duty of a board of directors or compensation committee when negotiating and setting executive compensation, and at least once on the fiduciary duty of an officer in negotiating his/her own compensation. I feel certain that inquiring minds want to know: What is the duty if the officer is also the chief legal officer of the company? In Chism v. Tri-State Constr., Inc., (Wash. Ct. App. 2016), an appellate court in Washington state recent reversed a trial court’s decision and found that an officer of, and legal counsel to, a company did not breach his fiduciary duty to the company when he arranged for a substantial bonus for himself from the company, with the company’s president, who he knew to be afflicted with early onset Alzheimer’s disease.
Apparently, during a car ride back from a project meeting, the in-house counsel proposed to the company’s president a bonus of $500,000. Upon their return, the in-house counsel memorialized the terms of their discussion in a memo stating that (i) the president “had already indicated that he thought the proposed $500,000 bonus was fair,” and (ii) the president should let him know if he recalled their conversation differently. The president signed the memo.
When the company later refused to pay the bonus and certain other compensation, the in-house counsel sued. The company counterclaimed and requested disgorgement of other compensation it had paid to the in-house counsel, asserting common law breach of fiduciary duty and violations of Washington Rules of Professional Conduct. The company asserted the same claims as defenses to enforcement of the bonus contract.
The trial court found that the company proved actionable breaches of common law fiduciary duties. However, the appellate court reversed, finding that the company had neither alleged nor established at least two of those requisite elements—causation and damages—of a fiduciary duty claim.
The trial court also found that the in-house counsel had breached his fiduciary duties to the company under the Rule of Professional Conduct. Again, the appellate court reversed, finding that a lawyer-employee is not generally bound by a fiduciary duty or the requirements of the Rules of Professional Conduct when negotiating his or her own compensation with the client-employer.
Reading between the lines, the results of this case may not be as surprising as they seem. In a footnote, the appellate court commented on the company’s choice of claims, observing, “this was a strategic choice stemming from the difficulty of proving damage from a lawyer’s misconduct when the lawyer in question was found by the trial court to have saved the company through his efforts.” Additionally, the general counsel had apparently achieved outstanding results for the company in the transactions that led to the disputed bonus.