In this post-trial opinion, the Court of Chancery considered whether the plaintiff was entitled to advancement of attorneys’ fees incurred in a separate litigation under the bylaws of his former employer’s parent company. The Court concluded that the plaintiff was entitled to advancement because the bylaws language was broad enough that the subsidiary’s employees were entitled to advancement.
Case Background
In December 2019, plaintiff Marc Centrella (the plaintiff) was hired as an executive for the defendant, Avantor, Inc. (Avantor). However, the plaintiff actually worked for Avantor’s subsidiary, VWR Management Services, LLC (VM). VM was identified as the plaintiff’s employer on his W-2s, tax returns, and paystubs. VM processed and paid the plaintiff’s wages and approved his expense reports and vacation requests. VM also provided the plaintiff with a company credit card, and the plaintiff’s cost center was attributed to VM.
In July 2022, the plaintiff advised Avantor that he was resigning to join a company called Waters, an alleged competitor of Avantor. To try to prevent the plaintiff from taking the job, Avantor’s Human Resources Department emailed the plaintiff a personal services agreement that the human resources representative claimed the plaintiff had signed during the onboarding process (although the plaintiff had not signed it). Avantor also informed the plaintiff that his joining Waters would breach the plaintiff’s contractual noncompete obligations and Avantor intended to enforce those obligations.
In September 2022, Avantor filed a complaint against the plaintiff as a “corporate officer” and sought to enforce restrictive covenants and enjoin the plaintiff’s alleged use of confidential information (the Underlying Action). The plaintiff promptly made an advancement demand to Avantor, which Avantor rejected. The plaintiff filed counterclaims in the Underlying Action and also filed a separate action seeking advancement under Avantor’s bylaws. The plaintiff’s advancement claim was premised on the theory that he was a former employee of VM, a subsidiary of Avantor.
Analysis
In assessing the plaintiff’s right to advancement, the court explained the historical backdrop of advancement rights in Delaware. “Rights to indemnification and advancement are deeply rooted in the public policy of Delaware corporate law in that they are viewed less as an individual benefit arising from a person’s employment and more as a desirable mechanism to manage risk in return for greater corporate benefits.” The Court further noted that the parts of Avantor’s bylaws providing for indemnification and advancement “were drafted broadly” on “purpos[e]” and “provide sweeping coverage—including to the employees of Avantor, Inc.’s subsidiaries.”
While the parties did not dispute whether VM employees would be entitled to advancement, they did dispute (i) whether VM employed the plaintiff and (ii) whether Avantor sued the plaintiff “by reason of the fact” of his employment.
In connection with its analysis, the Court analyzed the bylaws’ advancement provision, which provided advancement to an “indemnitee” “[t]o the fullest extent permitted by law, if successful in whole or in part.” The Court described this language as “demonstrably broad,” stating that it “makes its drafter’s intentions clear and compels a similarly broad reading of the definition of Indemnitee,” which was defined as anyone “who was or is made party or is threatened to be made a party to or is otherwise involved in” any civil lawsuit “by reason of the fact that he or she…is or was serving at the request of [Avantor] as a director, officer, employee, agent or trustee of another corporation or of a partnership, joint venture, trust or other enterprise… .” Accordingly, the Court had to determine the meaning of “employee” as used in the definition of indemnitee.
The Court looked to other definitions of employee, including in Black’s Law Dictionary, as well as the Restatement (Second) of Agency, and ultimately applied the Newton test, which while most commonly applied in workers’ compensation cases, has also been applied in other contexts. In applying the Newton test, the Court looked at four factors: (i) who hired the plaintiff, (ii) who had the power to fire or discharge the plaintiff, (iii) who paid the plaintiff’s wages, and (iv) who was in control of the plaintiff’s work activities. Under this test, the most weight is given to the right of control.
Applying this test, the Court concluded that VM was the plaintiff’s employer and that VM controlled him. According to the Court, VM “dominated” the hiring process, employed two other individuals who interviewed the plaintiff, paid the plaintiff’s salary, and appeared on all of the plaintiff’s tax and payroll documents as his employer. VM reimbursed the plaintiff for business expenses, provided the plaintiff with equipment, and appeared as his employer on many other internal documents.
However, Avantor also argued that it did not sue the plaintiff in the Underlying Action “by reason of” the plaintiff’s employment. Rather, Avantor asserted that it sued the plaintiff for breaching a personal contract on which equity grants were conditioned, not based on the plaintiff’s employment. The Court rejected this argument, explaining that “[u]nder Delaware law, [t]he ‘by reason of the fact’ standard, or the ‘official capacity’ standard, is interpreted broadly and in favor of indemnification and advancement.” The Court ultimately held that the equity grants were “inextricably intertwined” with the plaintiff’s employment and that the Underlying Action sought to enjoin the plaintiff’s use of confidential information obtained during his employment, making the Underlying Action brought “by reason of” the plaintiff’s employment.
Finally, Avantor argued that because it voluntarily dismissed its claims in the Underlying Action, the plaintiff’s right to advancement should terminate after that point and that any advancement for the plaintiff’s compulsory counterclaims should be cut off. The Court also rejected these arguments, noting that the plaintiff’s dismissal was without prejudice, and the Court expressed its skepticism that the plaintiff would not face further litigation that could trigger advancement. The Court also emphasized that “any doubts should be resolved in favor of advancement. The policy of Delaware favors advancement when it is provided for, with [Avantor’s] remedy for improperly advanced fees being recoupment at the indemnification stage.”
The Court also awarded the plaintiff fees on fees. The bylaws expressly provided for fees on fees to the “fullest extent permitted by law” if the indemnitee was “successful in whole or in part” in enforcing their advancement rights. Avantor argued that the plaintiff should only recover fees proportional to the success of the theories on which he prevailed, meaning that the Court should reduce the amount of the fees if any of the plaintiff’s legal arguments failed or were unnecessary. The Court rejected this argument, stating that Delaware “law is not concerned with which theory a party prevails on when it comes to apportioning fees on fees for varying levels of success. Instead, it is concerned with the actual success achieved.” Because the plaintiff’s advancement claim was successful, he was entitled to full fees on fees, even if certain arguments were not successful or were not addressed by the Court.
Takeaways
This opinion reiterates the general deference that Delaware law gives to indemnification and advancement rights. It also reflects and confirms that the Court of Chancery will scrutinize advancement and indemnification provisions carefully, and it further underscores the need for companies offering such rights to carefully consider the scope and implications of the advancement and indemnification rights included in bylaws or other agreements, as these rights may be found to extend beyond the traditional categories of covered persons (i.e., directors and officers). Practitioners, the business community, and those entitled to indemnification and advancement should keep these lessons in mind as they prepare and enter into documents or agreements providing for indemnification and advancement.