On The Case

Barnes & Noble is latest company stuck with tab for suing former officer

(Reuters) - The indignation practically sputters from a brief Barnes & Noble filed in February, opposing a motion by ousted CEO Demos Parneros for the company to pay half of his legal bills in litigation between them under the indemnification provisions in his employment contract.

Parneros, wrote B&N’s lawyers at Paul Weiss Rifkind Wharton & Garrison, was fired in July because he allegedly harassed a female employee, bullied another senior executive and sabotaged a deal to sell the company. It was Parneros, the company said, who initiated litigation against Barnes & Noble, claiming in a 2018 complaint in Manhattan federal court that he was scapegoated by Barnes & Noble’s mercurial founder, Leonard Riggio. Barnes & Noble only countersued, according to the company’s brief, to make clear that Parneros was responsible for his own demise.

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So to force the company to advance Parneros’ legal fees to defend counterclaims that overlap with his affirmative allegations, according to Barnes & Noble, would be to deliver a windfall to the ejected CEO. Indemnification provisions are supposed to protect corporate executives and board members from claims by outsiders, the company argued, “not to immunize them from the consequences of their misdeeds towards the company itself.”

Nope. On Monday, U.S. District Judge John Koeltl of Manhattan ruled that Barnes & Noble is, in fact, responsible for advancing Parneros half of his legal fees, an acknowledgment that of the six claims in the litigation between the company and the ex-CEO, Barnes & Noble brought three. Judge Koeltl also agreed with Parneros’ lawyers at Vladeck, Raskin & Clark that he is entitled to fees covering the litigation of the fee issue, but that he cannot be advanced funds to pay for any portion of the litigation that preceded Barnes & Noble’s counterclaim.

Barnes & Noble still has a shot at recouping the fees advanced to Parneros if it ends up prevailing on its claims, which are slated to be heard in a bench trial before Judge Koeltl. Parneros, as you would expect, denied the company’s allegations as part of his bid for advancement of the fees.

Judge Koeltl’s order didn’t elaborate his legal reasoning, but what’s notable from the indemnification briefing by Parneros and Barnes & Noble is how consistently courts have required companies to advance ex-executives to defend against claims by their onetime employers. Parneros’ opening brief, for example, cited a 2002 Manhattan federal case, Happy Kids v. Glasgow, in which the court held that New York business and corporate law entitled a board member of a kids’ clothing company to broad indemnification against the company’s allegations of fraud and breach of duty. Parneros’ lawyers argued that Happy Kids and similar New York precedent require a sweeping interpretation of his indemnification and advancement rights.

Barnes & Noble contended that the company’s Delaware bylaws preclude advancement and indemnification for any claims unrelated to Parneros’ actions as CEO. According to the company, Parneros’ alleged sexual harassment and bullying were outside the scope of his role as a CEO so the company was not responsible for advancing his fees to defend B&N’s claim stemming from those assertions. At most, the company said, he was entitled to advancement of 20 percent of his fees, not the 50 percent he sought.

Parneros’ reply brief countered with two Delaware cases, 2009's Paolino v. Mace Security and 2015's Mooney v. Echo Therapeutics, that broadly defined the scope of official actions by corporate officers and directors. Under Delaware precedent, they argued, Parneros’ alleged misconduct was related to his job as CEO. “Parneros undertook in his CEO role all of the alleged conduct that B&N propounds as the justifications for removing Parneros from that position,” the brief said. “It is hard to conceive of how Parneros could have engaged in alleged bullying and abuse ... if not for the power and authority Parneros had as CEO.”

Parneros’ lawyers hinted that they could have asked for Barnes & Noble to front all of the ex-CEO’s legal fees, considering that his claims against the company overlap entirely with B&N’s counterclaims against him. That would have been a tough sell, considering that he initiated the litigation.

But the message from this case to companies embroiled in disputes with fired employees protected by indemnification agreements is to think twice about counterclaims. Do you really want to foot the cost of your ousted executive’s lawyers?

Parneros counsel Anne Clark of the Vladeck firm declined to provide a statement on the fee order. Barnes & Noble lawyer Jay Cohen of Paul Weiss did not respond to an email request for comment.