Today, I want to mention an important case from June 2014, George Leon Family Trust v. Johnson & Johnson (D.N.J. 2014), that did not receive sufficient attention from us (or anyone else, most likely because the decision was unpublished). This case is potentially significant in two respects:
- The strike suit lawyers brought an unfounded claim of excessive compensation based on, and more or less contemporaneous with, a standard, unfounded claim of corporate malfeasance. In that case, the plaintiffs had alleged that the J&J directors breached their fiduciary duties “by permitting and fostering a culture of systematic, calculated, and widespread legal violations, ... including product recalls, off-label marketing of drugs, and illegal kick-backs.” The excessive compensation lawsuit alleged that the board breached their fiduciary duties by (i) overcompensating the CEO in light of the product recalls, investigations, and lawsuits involving J&J subsidiaries, and (ii) making misrepresentations in proxy statements related to the CEO’s compensation in violation of J&J’s performance pay principles and its “Credo.” Essentially, plaintiffs’ argued that, if senior management had allowed all of these terrible deeds, their compensation must have been excessive.
Surprisingly, the court dismissed the primary lawsuit, but still took the one over executive compensation seriously.
- What seemed to win the executive compensation case for J&J was the investigation and report of special outside counsel appointed by the Board’s special litigation committee. Obviously, boards of directors frequently create a special committee to investigate potential malfeasance or study the merits of and respond to litigation. Boards now may consider this approach for executive compensation matters as well. However, it will be unfortunate and costly if litigation developments begin to force companies facing this kind of litigation to protect themselves by retaining special executive compensation counsel.
By now, everyone must know that litigation over executive compensation has become big business for the plaintiffs’ law firms, which recently have begun to achieve some success after a 30-year losing streak. Will they begin adding executive compensation lawsuits to every strike suit as a matter of routine?