Last November, Judge James P. Kleinberg of the Santa Clara Superior Court in San Jose, California ruled on motions for summary judgment in a case brought by former employees of a management company that had been retained by the general partner of multiple investment funds. These former employees sued the funds for more than $2 million in past due wages and millions more in future wages. Judge Kleinberg ruled in favor of the employees. This spring, a jury awarded the plaintiffs $10 million after a three-week jury trial. See Peter Delevett, Jury Awards $10 Million, Including Punitive Damages, in HRJ Capital LawsuitContra Costa Times (March 14, 2013). The case name is Wong v. HRJ Capital BD, LLC, Santa Clara Sup. Ct. Case Nos. l-09-CV-139520 (Lead) and 1-09-CV-140349

In July, CalPERS submitted a proposed amicus brief in support of the defendants’ motion for a new trial. CalPERS ended its brief with this stark warning:

CalPERS believes the Court’s decision threatens to fundamentally alter CalPERS’ and other investors’ expectations of their risks and investment returns. Exposing investors to this additional risk is detrimental to California’s vibrant private fund industry, and to California’s economy in general.

According to this update from Mr. Delevett, CalPERS’ brief was rejected two weeks ago by Judge Patricia Lucas, the judge who presided at the trial.

Judge Kleinberg’s ruling is not precedential and it could be viewed as limited to the specific contractual provisions in the fund agreements. Be that as it may, I agree with CalPERS. The result is unexpected and unwelcome. If there is a lesson here, it may be that seemingly inconsequential language in a lengthy partnership agreement can have costly and surprising consequences.