Thursday, October 16, 2014

Aleynikov Strikes Out in the Third Circuit

About a year ago, I wrote about Sergey Aleynikov's win against Goldman Sachs Group (at least as far as legal fees are concerned). The ex-Goldman computer programmer won an expedited summary judgment proceeding in New Jersey federal court on a claim for fee advancement. His advancement claim related to an ongoing state court criminal case arising out of his alleged theft of Goldman's computer source code, which was used to run its high-frequency trading operation.

"Advancement" is a fancy way of saying that a corporation, under some circumstances, agrees to front legal fees to an officer or director who is part of a proceeding related to his corporate service. Think of a shareholder derivative suit brought against individual directors, in which the claim is for breach of fiduciary duty arising from a proposed business sale. Those directors need assurances not only that the company will cover their expenses if they win but also that the company will pay fees as they're incurred. That's advancement.

Aleynikov's advancement claim against Goldman was somewhat (though only somewhat) unusual since he was in an adverse position to Goldman. After all, they have claimed Aleynikov stole source code with malicious intent. Actually, more than "claimed." His litigation journey (in several states, civil and criminal) is nothing short of remarkable. And for those interested in the non-Goldman side of this, read Michael Lewis' Vanity Fair piece which was published around the time Aleynikov scored his initial win on legal fees. Aleynikov's story inspired Lewis' fantastic new book Flash Boys, which explores the rise of high-frequency trading and the "Army of One" IEX dark pool exchange.

Aleynikov's victory in New Jersey was predicated upon the specific language of Goldman's bylaws, which provided advancement rights to its "officers." Unfortunately, the bylaws weren't terribly clear, and the district court had to contend with competing interpretations of who qualified as an "officer." Aleynikov won in no small part due to Goldman's own drafting problems. This normally is a fair trade. Ambiguities are construed against the drafter; no one even participates in drafting bylaws except the company so there's no apportioning of blame. Arms' length contracts they are not.

The Third Circuit, though, reversed the grant of summary judgment and held that a jury must sort this ambiguity out. That is, did Goldman really intend to include Aleynikov as an officer? It would seem that Goldman will have the upper hand on this question, particularly if Judge McNulty admits evidence of his underlying "offenses" against Goldman (which he shouldn't).

Without belaboring the reasoning, the circuit court effectively found Aleynikov could not benefit from the "no ambiguities" rule because the rule doesn't resolve whether a party has any rights to a contract in the first place. It's only intended to supplant a dispute over the extent of those rights.

The ruling is muddled, confusing, and leaves more questions than it answers. For one, it's not clear how a fact-finder is supposed to sort through this ambiguity. The case is almost uniquely unsuited to a jury's fact determination. Both Goldman and Aleynikov can offer self-serving testimony about what the intent of the provision should be. But that's likely a wash. There are no negotiations to fall back on, since bylaws are not negotiated.

The closest the Third Circuit could come to providing guidance is this bizarre passage: "...resort to extrinsic evidence regarding course of dealing and trade usage to resolve the ambiguity does not seem inappropriate even where Goldman unilaterally drafted the agreement." What this "course of dealing" possibly could be is anyone's guess. The clause "does not seem inappropriate" is hardly a ringing endorsement.

Corporations have great control over how to draft indemnification and advancement provisions. Allowing a case like this to proceed to trial not only undermines the advancement remedy (for it must be expedited to be worth anything) but it encourages poor drafting. It's hard to see how any individual officer or director ever could supply evidence of "course of dealing" to counter what a company would offer in terms of its drafting intent.

Aleynikov lost this one. But he shouldn't have.

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