Mooney v. Echo Therapeutics, Inc., C.A. No. 10054-VCP (Del. Ch. May 28, 2015) (Parsons, V.C.)
In this memorandum opinion, Vice Chancellor Parsons granted a former director’s request for advancement of attorneys’ fees incurred in defending against counterclaims and affirmative defenses asserted by his former employer after he sued the company for breach of contract and defamation, because such counterclaims and affirmative defenses were asserted by reason of the fact that plaintiff was an officer and director of the company. However, the Vice Chancellor denied the former director’s request for advancement of legal fees associated with the offensive prosecution of a second lawsuit that he brought against his previous employer for the alleged purpose of vindicating his reputation.
The plaintiff, Patrick Mooney, M.D. (“Mooney”), served as the CEO and Chairman of Echo Therapeutics, Inc. (“Echo”) from 2007 until Echo terminated his employment in 2013. Mooney initiated this action in the Court of Chancery to seek advancement of legal fees incurred (1) during a government investigation of Echo, (2) in connection with Echo’s internal investigation into Mooney’s alleged misconduct, and (3) in litigating two lawsuits that Mooney brought against Echo following termination of his employment.
In assessing Mooney’s advancement requests, the Court examined Echo’s bylaws to determine the extent of Mooney’s advancement rights. The bylaws provided for mandatory advancement of “expenses of defending actions” for “[a]ny person who was or is a party or is threatened to be made a party to any threatened, pending or completed action [. . .] by reason of the fact that such person is or was a director or officer of [Echo] . . . .” The Court interpreted the “by reason of the fact” language, which closely tracked 8 Del. C. § 145(a), to mean that an action must be brought against Mooney in his official rather than personal capacity to trigger Echo’s mandatory advancement obligations. The Court explained that an action, including a counterclaim, is brought against an officer in his official capacity when there is “a nexus or causal connection between any of the underlying proceedings and [the officer’s] corporate capacity.”
Here, Mooney sought advancement for six categories of fees. First, Mooney sought fees incurred when he retained legal counsel after a government agency requested information from Echo about questionable trading in Echo’s stock. The Court disallowed advancement for these fees, reasoning that the government had investigated Echo, and not Mooney, and there was no evidence that the agency threatened to make Mooney a party to the investigation. Second, Mooney sought fees that he argued were incurred incident to an internal investigation that Echo launched into Mooney’s conduct that culminated in his termination. Echo had already advanced some of Mooney’s legal fees, but refused to pay for any fees incurred after his termination. The Court denied advancement of the post-termination fees because the internal investigation ended with Mooney’s termination; therefore, no actual or threatened action existed against which Mooney had to defend.
Mooney also sought advancement of fees incurred in defending against counterclaims (the “Original Counterclaims”) that Echo asserted after Mooney sued the company for breach of contract and defamation in connection with his termination (“Mooney I”). Echo had previously advanced to Mooney all but $34,000 of Mooney’s legal fees arising from the Original Counterclaims. The Court found that it could not determine based on the record provided whether the fees in question were incurred in defense of the Original Counterclaims and, therefore, whether the disputed fees were advanceable. Accordingly, the Court directed the parties to resolve the issue as outlined in a separate dispute resolution order.
The Court then addressed Echo’s amended counterclaims in Mooney I, which were intended to moot Mooney’s ability to seek advancement. The Court concluded that the amended counterclaims still concerned Mooney’s conduct as CEO and chairman and therefore were advanceable. The amended counterclaims alleged that Mooney obtained improper reimbursements that he could only have received by taking advantage of his position as CEO. Echo also claimed that Mooney threatened high-level executives, and such threats would have had no potency but for his official position. As to Echo’s affirmative defenses, the Court noted that no Delaware court had yet ruled on whether fees incurred in litigating against a corporation’s affirmative defenses are advanceable. However, the Court found such fees advanceable here because Echo’s affirmative defenses alleged that Mooney breached his employment agreement by misusing Echo’s confidential information and engaging in other misconduct. Because litigating against Echo’s affirmative defenses required Mooney to “defend his conduct as an officer and director,” the fees associated with litigating those defenses were advanceable.
Mooney also sought advancement for fees related to a second lawsuit (“Mooney II”)that he filed against Echo to “vindicate his reputation” in response to Echo’s Original Counterclaims in Mooney I. However, the Court stated that fees incurred in offensive litigation are generally not advanceable unless that litigation involves “compulsory counterclaims asserted to defeat or offset affirmative claims by the corporation.” Accordingly, the Court rejected Mooney’s request for advancement of fees in Mooney II, reasoning that his reputational claim was purely personal and not defensive.
Finally, Mooney sought “fees on fees” proportionate to his recovery. Noting that Section 145 of the DGCL permits fees on fees to the extent “reasonable in relation to the results obtained,” the Court awarded Mooney 40% of the legal fees he incurred in litigating his entitlement to advancement because he recovered slightly less than half of the total fees for which he sought advancement.
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