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Segal v. Genitrix, LLC

Supreme Judicial Court of Massachusetts, Suffolk

December 28, 2017

GENITRIX, LLC, & others.[1]

          Heard: September 5, 2017

         Civil action commenced in the Superior Court Department on February 23, 2009. The case was tried before Paul D. Wilson, J., and a motion for a new trial was heard by him.

         The Supreme Judicial Court granted an application for direct appellate review.

          Thomas H. Dupree, Jr. (Matthew S. Rozen, of the District of Columbia, Peter M. Durney, & Julianne C. Fitzpatrick also present) for H. Fisk Johnson, III, & another.

          Timothy J. Wilton (Kathy Jo Cook also present) for the plaintiff.

          Jonathan A. Karon, Thomas R. Murphy, Matthew J. Fogelman, & Danielle Jurema Lederman, for Massachusetts Academy of Trial Attorneys, amicus curiae, submitted a brief.

          Ben Robbins & Martin J. Newhouse, for New England Legal Foundation, amicus curiae, submitted a brief.

          Present: Gants, C.J., Lenk, Gaziano, Lowy, Budd, Cypher, & Kafker, JJ.

          KAFKER, J.

         A jury found the defendants, H. Fisk Johnson, III, and Stephen Rose, two former board members and investors in Genitrix, LLC (Genitrix or company), personally liable under G. L. c. 149, § 148 (Wage Act), for failing to pay wages owed to the former president of Genitrix, Andrew Segal. The defendants moved for judgment notwithstanding the verdict and a new trial. Both motions were denied, and the defendants appealed. We granted the defendants' application for direct appellate review and conclude that the Wage Act does not impose personal liability on board members, acting only in their capacity as board members, or investors engaged in ordinary investment activity. Rather, to impose such liability, the statute requires that the defendants be "officers or agents having the management" of a company. G. L. c. 149, § 148. The defendants were not designated as company officers and had limited agency authority. Indeed, the only officer having the management of the company was the plaintiff, not the defendants. We therefore conclude that there was insufficient evidence to satisfy the statutory requirements and reverse the denial of the motion for judgment notwithstanding the verdict.[2]

         1. Background.

         Because the defendants contend that the trial judge erred in denying their motion for judgment notwithstanding the verdict, we construe the facts in the light most favorable to the plaintiff. See 0'Brien v. Pearson, 449 Mass. 377, 383 (2007). In 1997, representatives for Johnson contacted Segal about investing in Segal's cancer research. Segal and Johnson agreed to form a biotechnology startup company with Segal serving as president and chief executive officer (CEO) and Johnson providing initial funding. Stephen Rose was a representative for Johnson, and spoke to Segal on Johnson's behalf during their negotiations over the formation of the company. The company, Genitrix, was established as a Delaware limited liability company (LLC) headquartered in Boston.

         Segal transferred his intellectual property rights to the company in exchange for a substantial equity interest. Johnson also received a substantial equity interest in return for his initial investment in the company. Segal and Johnson each had authority to appoint two board members to Genitrix's four-member board of representatives, and both could remove and replace their representatives with or without cause. Most board decisions required a seventy-five per cent majority to pass. Johnson served on the board for only the first year of the company. Rose was appointed as one of Johnson's board representatives in 1999 and remained a Johnson board member until the company's dissolution. Johnson indicated to Segal that Segal should contact Rose about any financing issues, stating that Rose "speaks for" Johnson.

         As a condition of Johnson's investment in the company, he insisted Segal sign an employment agreement with Genitrix. The agreement provided that Segal would serve as the president and CEO of the company, with the "duties, responsibilities and authority" commensurate with those positions, such as "conducting the [c]ompany's business, research and development, " and managing its "finances and other administrative matters, subject to the overall direction and authority of [its] [b]oard." The agreement further provided that "[a]t any time after the second anniversary . . ., the [c]ompany, with the approval of at least [fifty per cent] of the [board], may replace [Segal] as chief executive officer." If no suitable replacement CEO could be found within fifteen months who seventy-five per cent of the board could agree upon, the Johnson board members were authorized to appoint a new CEO.[3]

         The employment agreement contained terms for Segal's removal as an employee that were different from the terms for his removal as CEO. Under the employment agreement, Segal's "[e]mployment [p]eriod" could be terminated in one of three ways: (1) resignation; (2) removal for cause approved by fifty per cent of the board; or (3) removal without cause approved by seventy-five per cent of the board. The agreement stated, "Upon termination of the [e]mployment [p]eriod, [Segal] shall not be entitled to receive his [b]ase [s]alary or any fringe benefits for periods after the termination of the [e]mployment [p]eriod." The agreement also specified Segal's salary for the first two years of his employment. Afterward, his salary was to be determined by a vote of seventy-five per cent of the board, and was "payable in regular installments in accordance with [Genitrix]'s general payroll practices."[4] The employment agreement identified Johnson as a third-party beneficiary, and authorized him to "enforce the [c]ompany's rights under the terms of this [a]greement." Any amendment or waiver of a provision in the employment agreement required written consent from Genitrix, Segal, and Johnson. At no point did Johnson exercise his rights, including termination rights, pursuant to this agreement.

         In 2003, Johnson began funding Genitrix through Fisk Ventures, LLC (Fisk), an entity owned entirely by Johnson and Rose.[5] Fisk became the largest shareholder of Genitrix, and gained the authority to appoint a fifth member to the board. Thereafter, Johnson and Fisk's combined equity in Genitrix exceeded fifty per cent. Fisk and Johnson's board representatives, taken together, constituted sixty per cent of the board. Although their representatives comprised a majority on Genitrix's board, they were still short of the seventy-five per cent threshold required to pass most board resolutions.

         Genitrix never employed more than five full-time employees. As the president and sole officer, Segal was responsible for all day-to-day operations. He supervised the laboratory and directly managed human resources. He was in charge of fundraising and generating new capital. Segal also handled the company's payroll. As the only individual with authority to "physically sign checks on the Genitrix bank accounts, " he wrote checks for employee wages. When Genitrix began using a company called Paychex to handle its payroll, Segal still had to order each payroll individually, including for himself. However, Segal did need board approval for numerous actions, including "material personnel practices or policies, " hiring and firing of employees earning $45, 000 or more, setting compensation for officers and employees other than Segal, and acquiring debt or equity in the company.

         On March 23, 2006, Segal informed the board that the company was running out of funds to pay its employees. He told the board they would need to lay off at-will employees the company could not afford to pay, so as to avoid liability under the Wage Act. A few days later, Rose told Segal that Fisk would not invest more money in Genitrix if Segal continued to control the management of the company.[6] Fisk did subsequently invest additional money in Genitrix on April 6, 2006, but unlike prior investments, Rose earmarked that investment for specific purposes: payroll, expenses necessary to comply with covenants in the LLC agreement, and the repair or replacement of a centrifuge. All subsequent Fisk investments were also earmarked for specific purposes, such as patent fees and other employees' salaries. Segal voted in favor of each board resolution authorizing Genitrix to accept these investments.

         At the start of 2007, Genitrix was still short on money and struggling to make payroll. Segal stopped taking his salary in January, 2007. He testified that he did so to help the company afford to pay Elihu Young, its last remaining employee other than Segal. Segal explained he "was put in a position where [he] felt [he] had to not pay [him]self." When pressed about who made that decision, Segal testified, "Given the box I was in, I did." Segal later suggested to the board that he was no longer paying himself. On February 23, 2007, he stated, "Even without disbursing my salary, it is unlikely that we will be able to pay . . . Young for more than [two] more pay periods, " and proposed that the company sell its laboratory equipment and lay off Young to cut costs. Rose believed Young was "extraordinarily valuable to the company, " as the only one who knew "how to make the [company's cancer-fighting] molecule." Rose responded that "given [Young's] importance to the company, he should not be let go without giving the board a full opportunity to meet and discuss this issue in detail. Liquidating assets is an important issue as well." The Johnson board members did not agree to either proposal. Instead, Rose directed Fisk to invest enough money in Genitrix to pay Young's salary for another month.

         Despite Segal opting to not pay himself, by mid-2007 Genitrix was again unable to afford to pay even Young. On May 17, 2017, Johnson's board members finally agreed to lay off Young, voting in favor of a board resolution to terminate Young's employment. A week later Fisk invested additional money in Genitrix for the purpose of paying Young's remaining salary. When Young left, Young closed the company's laboratory.

         At this point the company was out of money and apparently deadlocked on even how to conduct board business. Rose and the Johnson board members wanted to hold board meetings, but Segal wanted to conduct board business using electronic mail (e-mail) messages so that everything would be in writing. As a result of the deadlock and the financial condition of the company, Rose filed a petition for the judicial dissolution of Genitrix on behalf of Fisk in June, 2007. The petition was filed in Delaware, where Genitrix was incorporated. Segal was a named party to the Delaware dissolution proceeding because he was still the president of the company.

         For the next two years Segal actively opposed the dissolution. In July, 2007, he brought counterclaims in that proceeding against the defendants for breach of the LLC agreement, breach of the implied covenant of good faith and fair dealing, breach of fiduciary duties, and tortious interference with his employment agreement. Segal did not bring a Massachusetts Wage Act claim in those proceedings.[7]

         As the dissolution proceedings continued, Segal did some other work as president, including paying patent annuity fees and protecting the work associated with those patents, securing directors' and officers' insurance, and making necessary tax filings. Segal testified that he continued to work for the company during this time, despite no longer taking a salary, because he thought he "would eventually get paid." He believed that when the company sold its patents, "that money would go, at least in part, to pay [him]."

         Both Young and Segal raised the issue of unpaid wages with the board. A few months after Segal stopped paying himself, he informed the board that he was no longer taking a salary. In late 2007, months after he left Genitrix, Young threatened to bring a Wage Act claim against the company for outstanding unpaid wages. In March, 2008, Rose directed Fisk to invest enough money in Genitrix to compensate Young for his unpaid wages, and in return Young signed an agreement releasing Genitrix, its board members, and its agents from liability. Rose did not, however, direct Fisk to invest money in Genitrix toward Segal's salary.

         Segal and Rose continued to argue over whether Segal was owed wages, and whether those wages should take priority over other company expenses, such as patent fees. On February 19, 2009, Segal sent an e-mail message to Rose stating, "The [c]ompany owes me wages and benefit expenses. I cannot agree to any arrangement that does not respect that claim." Rose responded, "It is not appropriate to subordinate new funds to whatever claims that you may believe you have. . . . So, if you can't have first priority, you think that the company's intellectual property rights should simply expire?"

         In early 2009, Segal filed suit against Rose and Johnson in Massachusetts under the Wage Act for unpaid wages from 2007 to 2009. Around the same time, the Delaware Court of Chancery ordered Genitrix's dissolution and appointed a liquidator to conduct the dissolution and winding up of the company's affairs. As part of the dissolution, the liquidator auctioned off Genitrix's intellectual property. Fisk submitted the winning bid of $300, 000 even though Johnson's board representatives had said Genitrix was worth over $15 million three years earlier.

         Segal submitted a proof of claim to the liquidator for back pay in June, 2009, but that claim was denied. Segal appealed from the denial to the chancellor, who dismissed the claim as moot in October, 2010, because the ...

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