The Supreme Judicial Court of Massachusetts (SJC) has ruled two former board members and investors in a limited liability company are not liable for failing to pay the LLC’s former president, in a case that the SJC called “quite unusual and removed from the core concerns of the Wage Act.”
The case, Andrew Segal vs. Genitrix, LLC, & others, was brought by plaintiff Andrew Segal, former president of Genitrix LLC, against defendants H. Fisk Johnson III and Stephen Rose, two former Genitrix board members and investors.
The Massachusetts SJC concluded in the case that the defendants are not liable for failing to pay wages owed to Segal because they were company officers who had limited agency authority. Segal was the only officer having the management of the company and chose not to pay himself for a period of time as a result of the company’s financial difficulty.
The Massachusetts Wage Act
In Massachusetts, The Wage Act requires employers to compensate their employees for earned wages. An employer who violates the Act may be sued by the affected employees.
Section 148 of the Act defines “employer” as a “person having employees in his [or her] service.” For corporations, these include the “president and treasurer of [the] corporation and any officers or agents having the management of such corporation,” in addition to the corporation itself. The statute does not include board directors or investors in its definition of “employer.”
The provision also indicates two requirements: the defendant must both be an agent and have the management of the company, according to the SJC document.
Although an employee may always sue the president and treasurer of a company for unpaid wages, the Massachusetts SJC stated, the plaintiff in this case is the president and sole officer of the corporation and the only person identified as responsible for Wage Act violations.
The case comes after representatives for Johnson initially contacted Segal about investing in his cancer research in 1997, and Segal and Johnson agreed to form a biotechnology startup.
Genitrix was then established as a Delaware limited liability company headquartered in Boston, with Segal serving as president and 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.
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.
Johnson served on the board for the company’s first year. Rose was appointed as one of Johnson’s board representatives in 1999 and remained a Johnson board member until the company’s dissolution.
As a condition of Johnson’s investment in the company, he required Segal to sign an employment agreement with Genitrix. The agreement stated Segal would serve as the president and CEO of the company, responsible for conducting the company’s business, research and development and managing its finances and other administrative matters, subject to board authority.
The agreement also specified Segal’s salary for the first two years of his employment. Afterward, his salary was to be determined by a 75 percent vote of the board. The employment agreement identified Johnson as a third-party beneficiary and authorized him to enforce the company’s rights under the terms of the agreement.
In 2003, Johnson began funding Genitrix through Fisk Ventures LLC, an entity owned by Johnson and Rose. Fisk became the largest shareholder of Genitrix.
As the president and sole officer, Segal was responsible for all day-to-day operations. He supervised the laboratory, directly managed human resources, was in charge of fundraising and generating new capital and handled the company’s payroll. As the only person at the company with authority to 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, he needed board approval for several actions, including material personnel practices or policies, hiring and firing employees earning $45,000 or more, setting compensation for officers and employees other than himself and acquiring debt or equity in the company, the SJC document said.
On March 23, 2006, Segal informed the board that the company was running out of funds to pay its employees. He told the board it would need to lay off at-will employees the company could not afford to pay in order to avoid liability under the Wage Act. At the start of 2007, Genitrix was still short on money and struggling to make payroll. Because of this, Segal stopped taking his salary in January 2007. He testified that he did this to help the company afford to pay Elihu Young, its last remaining employee other than Segal.
Segal explained that he was put in a position where he felt it was necessary not to pay himself, the SJC document said, adding that Segal later suggested this to the board. Johnson’s board members eventually agreed to lay off Young. When Young left, he closed the company’s laboratory.
Months after he left Genitrix, Young threatened to bring a Wage Act claim against the company for outstanding unpaid wages. In March 2008, after Rose directed Fisk to invest enough money in Genitrix to compensate Young for his unpaid wages, 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.
Dissolution of the Company
As a result of the company’s financial condition, 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 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 particular proceedings.
As the dissolution proceedings continued, Segal did 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, the SJC document said.
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 when the company sold its patents, that money would be used to pay him, at least in part, the SJC document said.
Segal Files Suit
In early 2009, Segal filed suit against Rose and Johnson in Massachusetts under the Wage Act for unpaid wages from 2007 to 2009.
The defendants moved for summary judgment in the suit, and a Massachusetts Superior Court judge granted the motion in 2013 after finding the defendants did not have the management of the company. The Massachusetts Appeals Court then reversed and remanded the grant of summary judgment on the Wage Act claim, with the jury finding both defendants individually liable under the Wage Act. On appeal, the defendants argued there was insufficient evidence to find Wage Act liability. The defendants moved for judgment notwithstanding the verdict and a new trial. Both motions were denied, and the defendants appealed.
Supreme Judicial Court Decision
While Segal had significant officer and agency authority, the defendants had limited express agency authority, the Massachusetts SJC document stated. Additionally, Segal was given responsibility to manage the finances and the payroll and made the decision not to pay himself, the document added.
Because of this, the Massachusetts SJC concluded the agency authority in this case was insufficient to make the defendants individually or collectively liable under the Wage Act. With this in mind, the SJC reversed the denial of the defendants’ motion for judgment notwithstanding the verdict and remanded to the Superior Court for entry of judgment for the defendants.