On September 3rd, the U. S. Court of Appeals for the Third Circuit issued an opinion with implications for corporations that award “functional” officer titles that do not carry with them certain types of legal authority to act on behalf of a corporation. The question in this case was whether an employee who held a “Vice President” title but did not have certain legal duties or authorities as a corporate officer was covered by corporate by-laws (and Delaware law) calling for the indemnification of corporate “officers” who incur legal costs in connection with their employment.
This case involved an effort by a former computer programmer to recover $2.3 million in legal fees that he incurred in defending himself against criminal charges arising from his alleged theft of source code immediately before he resigned to join another firm. Federal charges were lodged against him in the Southern District of New York, on which he was convicted after trial. On appeal, the Second Circuit found that the defendant’s conduct did not violate the federal statutes with which he was charged, reversed his conviction and ordered the entry of a judgment of acquittal. Later that same year, the former employee was indicted by a grand jury empaneled by the Manhattan District Attorney on state law criminal charges, which remain pending.
After his Second Circuit victory and the Manhattan District Attorney’s subsequent indictment of him, the employee sent his former employer a demand seeking both indemnification for the legal expenses he already had incurred in defending himself against the federal charges and advancement of the fees he would incur in fighting the state charges. When the company demurred, the employee filed suit in the District of New Jersey and, after conducting limited discovery, moved for summary judgment. The District Court granted partial summary judgment to the employee on his advancement claim only (reasoning that the indemnification claim warranted more than the limited expedited discovery the court had permitted), based on the court’s finding that the employee was “an officer” who was entitled to be indemnified for legal expenses incurred in connection with his employment. The District Court relied on, among other things, the contra proferentem doctrine that applies under Delaware law, a variant of the rule that construes any ambiguities in legal documents against the drafter. The court also relied on evidence suggesting that the company had in the past indemnified similarly titled employees for their legal expenses “on a discretionary basis.”
On appeal, the Third Circuit (in a 2-1 decision) reversed, ruling that the ambiguities of the situation and the genuine unresolved issues of material fact precluded summary judgment for the employee. The appellate court ruled that the trial court erred in applying the contra proferentem doctrine to the threshold question of whether the employee was an “officer” who was covered by the relevant by-laws, vacated the judgment and remanded the case for further proceedings.