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From Securities Regulation Daily, September 3, 2014

Trial will decide if secret-stealer was Goldman “officer” entitled to indemnification

By Anne Sherry, J.D.

A former Goldman Sachs vice president who copied source code on his way out the door is doomed to spend even more to pursue his indemnification and advancement claims against the firm. The Third Circuit found that Goldman’s bylaws are ambiguous as to whether Sergey Aleynikov was an officer and that material fact issues preclude summary judgment (Aleynikov v. The Goldman Sachs Group, Inc., September 3, 2014, Fisher, D.).

The appeals court declined to construe the ambiguous bylaws against Goldman as the corporate drafter, in effect carving out an exception to Delaware’s doctrine of contra proferentem in cases where resolving the ambiguity is key to determining whether the non-drafter is a party to the agreement at all. One judge on the panel dissented in this portion of the decision, urging that the exception is counter to public policy and has no support in the case law.

Background. Aleynikov was a computer programmer with Goldman, Sachs & Co., a noncorporate subsidiary of the Goldman Sachs Group, Inc. After he transferred the source code for the high-frequency-trading system outside of the firm, he was arrested by FBI agents, indicted by a federal grand jury, and convicted of violating the National Stolen Property Act and Economic Espionage Act. He served 51 weeks in prison pending his appeal to the Second Circuit, which concluded that his conduct did not violate federal law and ordered him acquitted and released. Criminal charges under New York state law are still pending against him.

Indemnification and advancement. Shortly after he was arrested by the state, Aleynikov demanded indemnification for over $2.3 million in fees and costs incurred in the federal proceedings and advancement of fees and costs in the ongoing state proceedings. The demand was based on the Goldman Sachs Group’s bylaws, which provide for indemnification and advancement to officers of noncorporate subsidiaries like Aleynikov’s employer. When the issue was taken up with the district court, the court granted summary judgment for Aleynikov on the advancement claim but denied it on the indemnification claim. Exercising appellate jurisdiction over the interlocutory order, the Third Circuit vacated the grant of summary judgment.

Was Aleynikov an “officer”? Aleynikov’s claim to indemnification and advancement rested on whether he was an “officer” of Goldman, Sachs & Co. The appeals court found significant error in the district court’s analysis of the ordinary meaning of Aleynikov’s title of vice president. The term “officer” appears in the relevant language of the bylaws, but “vice president,” the focus of the district court’s analysis, does not. The appeals court instead focused on the meaning of “officer.”

The bylaws defined “officer” to include (1) any officer; (2) a person serving in a similar capacity; or (3) a person serving as the manager of the non-corporate subsidiary. The apparent circuity of defining “officer” as including any officer did not trouble the appeals court, which read this use as setting forth a contractual category, but the second use remained undefined. Resorting to various dictionary definitions to glean the term’s plain meaning, the court was left with the tautology that “officer” includes someone holding a position of trust, authority, or command and a person serving in a similar capacity.

The court concluded from the failure to define the term that it was meant to have some meaning obvious to readers of the document, but the court was unable to ascertain that meaning from the face of the document or by resorting to dictionary definitions. Principles of statutory interpretation thus tasked the court to look at extrinsic evidence to interpret the provision, and the evidence presented raised genuine issues of material fact that precluded summary judgment.

Interpretation against drafter. The appeals court disagreed with the district court’s application of the doctrine of contra proferentem, under which ambiguities are resolved against the corporate drafter. This doctrine has no place in resolving whether a person has rights under the contract at all, the appeals court held, as such a result “would have us resolve ambiguities in favor of a non-drafting individual in order to determine whether that non-drafting individual was even subject to the agreement.”

Dissent. Circuit Judge Fuentes dissented from this part of the decision, objecting that Delaware has never suggested such an exception to contra proferentemand that the doctrine protects the reasonable expectations of stakeholders who join an entity after the governing document has been drafted. “The reasonable expectation of a vice president that he is an officer of a corporation (and is entitled to the benefits provided for in the By-Laws) is the very sort of expectation that Delaware corporate law clearly protects,” he argued. Resorting to extrinsic evidence also subverts the related policy of encouraging corporations to draft clear corporate instruments and ensuring that such instruments are interpreted and applied consistently and predictably, according to the partial dissent.

The case is No. 13-4237.

Attorneys: John A. Boyle (Marino Tortorella & Boyle) for Sergey Aleynikov. Christopher Duffy, Karen A. Chesley (Boies Schiller & Flexner LLP) and A. Ross Pearlson (Wolff Samson) for Goldman Sachs Group Inc.

Companies: The Goldman Sachs Group, Inc.; Goldman, Sachs & Co.

MainStory: TopStory DirectorsOfficers DelawareNews NewJerseyNews PennsylvaniaNews VirginIslandsNews

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