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Board members, investors avoid liability for executive’s pay

Two former board members and investors in a biotechnology startup had no personal liability under the state Wage Act for compensation due the limited liability company’s former president, the Supreme Judicial Court in Massachusetts has decided.

The plaintiff president argued that the defendant board members and investors were officers or agents “having the management” of the company for purposes of imposing individual liability under G.L.c. 149, §148.

But Justice Scott L. Kafker, writing for the unanimous court, found that the defendants did not exercise management authority to the extent necessary to hold them personally responsible for Wage Act violations.

“The defendants were not designated as company officers and had limited agency authority,” Kafker wrote. “Indeed, the only officer having the management of the company was the plaintiff, not the defendants.”

The 37-page decision is Segal v. Genitrix, LLC, et al.

Landmark decision

Peter M. Durney of Boston represented defendants H. Fisk Johnson III and Stephen Rose. At the end of the day, he said, the SJC enforced the Wage Act as written.

“The decision sends a calming message to investors and businesses in Massachusetts,” Durney said.

Boston attorneys Timothy J. Wilton and Kathy Jo Cook represented plaintiff Andrew Segal. Wilton said the ruling exalted corporate formalities over practical realities.

The defendants’ actions met the threshold for what the Legislature intended for individual liability under G.L.c. 149, §148, he added.

“The Legislature would have thought that someone who ran the business was [liable under the statute] as an agent having management of the company,” Wilton said.

Cook, meanwhile, pointed out that Superior Court Judge Paul D. Wilson, in awarding treble damages, found the defendants acted in bad faith by keeping Segal working so that they could get all the intellectual property that he had developed at a discount price.

“That is not ordinary board member or investor activity,” she said.

According to Cook, the SJC reversed the course of Wage Act cases that had interpreted the statute liberally to protect workers from unscrupulous employers.

Benjamin G. Robbins filed an amicus brief on behalf of the New England Legal Foundation. Robbins agreed with the decision and said it was important that the SJC issued model jury instructions that clarified the distinctions between the powers and responsibilities of board members, investors and “agents having the management of such corporation” as used in the Wage Act.

“What is very satisfying here is the court is drawing a presumptive line that if you are acting as a director with management oversight of the company or an outside investor exercising a degree of responsibility or control over how your own funds are being used, you are not an ‘agent’ of the employer,” Robbins said.

Boston business litigator William T. Harrington said the fact that the plaintiff was both the president of the company and made the decision not to pay himself likely weighed heavily in the SJC’s decision.

“The court is trying to limit liability under the statute to a [company] president or treasurer or someone who is the functional equivalent of a president or treasurer,” Harrington said. “With respect to board members, they made clear the board acts collectively, not individually, so to hold a board member personally liable for a decision of the board would be extraordinary.”

Boston employment lawyer Renee Inomata said she saw Segal as bringing clarity to Wage Act liability for board members and investors in the context of the fluid “startup” economy in Massachusetts.

“It gives [board members and investors] a little bit more security in terms of being liable for the tremendous damages under the Wage Act if an officer of the company makes a decision not to pay their employees,” Inomata said.

That said, the decision provides a warning to board members or investors of cash-strapped companies who may get “overzealous” and step into interim president or CEO roles instead of hiring someone else to do those jobs, she added.

durney-peter

“The decision sends a calming message to investors and businesses in Massachusetts.”

— Peter M. Durney, Boston

Unpaid wages   

Plaintiff Segal and defendant Johnson formed Genitrix in 1997 as a Delaware LLC. The biotech company was founded as an investment by Johnson into cancer research performed by the plaintiff. While Johnson provided the initial funding, the plaintiff served as president and chief executive officer.

Defendant Rose represented Johnson in negotiations over the formation of the company. Under the terms of the LLC agreement, the plaintiff transferred his intellectual property rights in his research in exchange for a substantial equity interest.

An employment agreement that the plaintiff was required to sign as a condition of Johnson’s investment designated Johnson as a third-party beneficiary authorized to enforce the company’s rights under the agreement.

The plaintiff and Johnson each had authority to appoint two board members to Genitrix’s four-member board of representatives, in which most decisions required a 75 percent majority to pass. After serving as a board member himself, Johnson appointed Rose to the board in 1999.

In 2003, Johnson began funding Genitrix through defendant Fisk Ventures, an LLC owned by Johnson and Rose. As a result, Fisk Ventures became the largest shareholder in Genitrix and obtained the authority to appoint a fifth member to the board.

As president and CEO, the plaintiff managed Genitrix’s daily operations, supervising the laboratory and all company employees.

Beginning in early 2006, the company began running into funding problems.

In January 2007, the plaintiff stopped taking his salary so that the company would be better able to meet its expenses. The plaintiff also proposed as cost-cutting measures laying off the company’s only other employee, a lab worker, and selling the company’s lab equipment.

The board initially blocked those moves, with Rose indicating that the lab worker was too valuable to lose based on his work developing a cancer-fighting molecule.

Money problems continued, and in May 2007 the board did vote to terminate the lab worker. When Johnson and Fisk Ventures board members later deadlocked with Segal board members, Rose filed a petition on behalf of Fisk Ventures to dissolve Genitrix in Delaware court.

The plaintiff opposed the dissolution, filing counterclaims for breach of fiduciary duty and breach of the LLC agreement. During the dissolution proceedings, the plaintiff continued working as president, protecting the company’s intellectual property and making necessary tax filings.

The plaintiff would later testify that he continued to work without pay because he expected to be compensated when the company sold its patents.

In early 2009, the plaintiff sued Rose and Johnson under the Wage Act for unpaid wages from 2007 to 2009. At about the same time, the Delaware Chancery Court ordered Genitrix’s dissolution. In the ensuing liquidation of assets, Fisk Ventures obtained the company’s IP at auction for $300,000.

Back in Massachusetts, a Superior Court judge granted the defendants’ motion for summary judgment on the plaintiff’s Wage Act claim, finding that Johnson and Rose did not “have the management” of the company for purposes of imposing liability. The Appeals Court reversed, and a jury later found Johnson and Rose liable for non-payment of the plaintiff’s salary.

The SJC granted direct appellate review from the denial of the defendants’ motions for judgment notwithstanding the verdict and a new trial.

“The court is trying to limit liability under the statute to a [company] president or treasurer or someone who is the functional equivalent of a president or treasurer.”

— William T. Harrington, Boston

No individual liability

The Wage Act authorizes employees to sue an “employer” for unpaid wages. For corporations, G.L.c. 149, §148 imposes liability on persons who are the “president and treasurer” of the corporation, as well as “any officers or agents having the management of such corporation,” in addition to the corporation itself.

Since neither defendant was ever president or treasurer of Genitrix, the plaintiff argued liability arose because they were “agents having the management” of Genitrix.

Looking at the plain text of the statute and its history, the SJC concluded that the Legislature intended to impose personal liability on the president and treasurer of the corporation and “on other officers or agents who may not hold these titles, but who have assumed and accepted as individuals significant management responsibilities over the corporation similar to those performed by a corporate president or treasurer, particularly in regard to the control of finances or payment of wages.”

Kafker said the defendants had limited express agency authority by virtue of Johnson’s right as third-party beneficiary to enforce the terms of the plaintiff’s employment contract and Johnson’s affirmation in an email that Rose spoke for him.

But the defendants’ limited agency powers, when viewed in the context of the corporation’s overall structure, did not make either defendant agents having management of the company, Kafker said.

The plaintiff argued that the defendants became agents having management authority when Rose as a board member and Johnson through his board appointments refused to authorize the plaintiff’s cost-cutting proposals to save the company.

However, Kafker explained that §148 “specifically imposes personal liability on those who have assumed individual responsibility as officers or agents. It does not impose individual liability on board members, acting as board members, or outside investors overseeing their investments.”

Given that the plaintiff was the only person expressly designated as an officer or agent of Genitrix, particularly with respect to the payment of wages, “neither Rose’s ordinary board activities on behalf of Genitrix, his investment activities on behalf of Fisk, nor his actions as Johnson’s agent, alone or in combination, rendered either him or Johnson personally liable for any Wage Act violations as agents having the management of Genitrix,” Kafker wrote.

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