The 10-year legal brawl between Goldman Sachs and its former programmer Sergey Aleynikov has spilled over into multiple courts — a federal conviction that was overturned, another conviction by a New York state jury still on appeal today, and finally, the fight in two different courts over payment of his defense fees. While the prosecutions have garnered considerable media attention, the civil litigation over Aleynikov’s demand for advancement of his $10 million in legal fees from Goldman is the most relevant for civil litigators. Why? An order granting advancement, which requires the employer to pay for the former employee’s attorneys fees, can fundamentally alter the course of a trade secret litigation. Last week, the U.S. District Court for New Jersey rejected Aleynikov’s claims for advancement, declining to essentially reconsider a Delaware court’s ruling that Aleynikov had failed to demonstrate that he qualified for advancement under Goldman’s bylaws. As I explain below, the ruling is an important reminder for both employers and employees in trade secret disputes of the power of advancement claims, and the determined resistance an employee may face if he or she pursues that claim.
Background: Goldman’s bylaws authorize the advancement of legal fees to officers and directors who are accused of wrongdoing while they were an officer or director of Goldman. Aleynikov, who had the title of Vice President at Goldman, was responsible for developing Goldman’s high-frequency trading (HFT) computer programs for various commodities and equities markets. On his last day in 2009, Aleynikov transferred thousands of computer files, including source code to the HFT system, to a server in Germany that was not blocked by Goldman’s firewall. That evening, at his home, Aleynikov downloaded the material from the German server to his personal devices so that he could make it available for later misappropriation for a new employer.
After Goldman learned of the misappropriation, it notified federal prosecutors. Aleynikov was arrested and then convicted by a federal jury for, among other things, stealing trade secrets under the Economic Espionage Act (EEA). On February 16, 2012, the U.S. Court of Appeals for the Second Circuit reversed the convictions on various technical grounds (for more on that decision, see my previous blog post here). Six months later, the Manhattan District Attorney’s office arrested and charged Aleynikov for improperly using secret scientific material and unlawful duplication of computer-related material under various state penal statutes. Aleynikov was again convicted and that case continues to wind its way through the New York appellate courts.
Defending two high profile criminal cases can be expensive. To cover his defense costs, Aleynikov turned to Goldman and invoked its bylaws, arguing that as a former Vice President, he was an officer and therefore entitled to advancement and indemnification for his attorneys fees from Goldman. Goldman is incorporated under Delaware law and § 145(a) and (e) of the Delaware Code allows business entities to indemnify or provide advancement to “an individual involved in a lawsuit by reason of fact that he or she is or was a director, officer, employee, or agent of the corporation.” Goldman’s bylaws largely tracked that language.
Needless to say, Goldman was not amused by Aleynikov’s request and argued that Aleynikov was not an officer for purposes of the bylaws because, for among other reasons, he did not supervise other employees or perform other duties expected of an officer. A New Jersey federal court initially resolved the dispute in Aleynikov’s favor, and entered an injunction requiring Goldman to reimburse Alyenikov for his attorneys fees and periodically pay additional fees as they became due. The Third Circuit reversed that decision in 2014, reasoning that Aleynikov’s title did not necessarily equate to being an officer under the bylaws and remanding the case back to the district court to consider further evidence to determine whether Aleynikov was truly an officer.
But the dispute over advancement moved to Delaware’s Chancery Court in early 2015, when Aleynikov brought another lawsuit to obtain advancement for his legal fees, this time to defend against Goldman’s claims against him. Aleynikov lost this case, as Vice Chancellor J. Travis Laster found that Aleynikov could not meet his burden of establishing that he was an officer, and denied the claim for advancement. The Delaware Supreme Court affirmed that opinion in December 2017. When Aleynikov returned to the New Jersey district court, U.S. District Court Judge McNulty ruled that there was nothing left for him to resolve and deferred to the previously-litigated holdings in Delaware.
So why is this ruling significant to parties in a trade secret litigation? While the Aleynikov courts’ rulings are specific to the bylaws and facts before them, the dispute serves as an important reminder that a claim for advancement may be available in a civil trade secret case brought against an employee whom the former employee believes has stolen from it. In the past, I have written about the potential absurdity of this potential claim in the Aleynikov case, as the evidence against Aleynikov appeared to be compelling and overwhelming. However, in the case of a vindictive or bad faith trade secret action, a claim for advancement may be the only meaningful way for a former employee to defend himself without being put out of business or into bankruptcy.
For employees accused of trade secret theft, the benefit is obvious. An order of advancement can transform the cost/benefit analysis of a litigation, because the employee will be able to shift the expense of the entire action to her former employer (who would find itself not only paying its own attorneys but also paying the attorneys of the employee it just sued for trade secret misappropriation). Not surprisingly, therefore, a request for advancement probably will be met with stiff resistance and lead to even greater expense in an already expensive litigation. The Aleynikov dispute makes clear that a well-funded employer will fight that decision tooth-and-nail.
Where an employer’s bylaws or operating documents do not permit advancement, a claim of indemnification still may be available. Indemnification requires reimbursement by the employer if the employee is ultimately successful at trial; as a result, the employee is left to fund his or her defense out of pocket. Nevertheless, a claim for indemnification is still a potent counterclaim for a former employee. Most employees don’t have the benefit of a prevailing party provision in their employment agreements, which means they frequently have to counterclaim on the grounds that the trade secret action has been brought in bad faith. However, unlike a bad faith counterclaim which generally requires a finding that the trade secret claim was objectively specious and was subjectively brought in bad faith, a claim for indemnification is neater and cleaner. It simply requires that the employee win. Thus, indemnification essentially creates a “prevailing party” right, enabling an employee, officer or director to secure his or her attorneys fees if she is successful in having to defend against the employer’s claims.
A former employee should also consult state law to see if a claim for indemnification exists. For example, Ohio provides a mandatory right of indemnification for all incurred expenses including attorney’s fees to an employee who has been successful in his or her defense of a civil action “by reason of fact” that he/she is or was an employee.
For employers, they need to be mindful of the potential of these claims in their organizational documents and be prepared to evaluate the need to provide protection to officers and directors from litigation against the possibility that they may find themselves funding the defense of an opposing party’s trade secret claim. As Venable’s Doug Mishkin and his colleagues note in a recent Trade Secrets & Transitions blog post, advancement is a risky proposition for an employer because any advancement likely would be unsecured and there would be no assurance of repayment at the end of the day if the employer prevails. While Goldman was able to successfully oppose Aleynikov’s advancement claim, it had to spend several million dollars to do it. For that reason, employers may want to revisit their bylaws and other organizational documents and refine language to address this situation.