In a recent decision, the Massachusetts Supreme Judicial Court (SJC) clarified the scope of personal liability for investors and board members under the Commonwealth’s Wage Act, as codified at G.L. c. 149, §§148-150.  The SJC held that investors and board members could not be held personally liable solely by virtue of their investment activity or acts performed in their official capacity as board members.  While the case involved a nuanced set of facts aptly described as “unusual and removed from the core concerns of the Wage Act,” its holding is nonetheless significant, and provides guidance for personal liability under the Wage Act for individuals other than a company’s president or treasurer.

In Segal v. Genitrix, LLC, 478 Mass. 551 (2017), H. Fisk Johnson and Stephen Rose, two former board members of Genitrix, LLC, sought direct appellate review of an adverse jury verdict that found them personally liable for failing to pay wages owed to the company’s former president and CEO, Andrew Segal.  Johnson, Rose, and Segal founded the biotech company, originally a Maryland LLC, in 1997.  Johnson briefly served as a board member during Genitrix’s opening year, but continued to invest in the company until its dissolution in 2007.  Johnson designated Rose as his appointee to the board and advised Segal that Rose was to be his contact for any financial matters.

As a condition to Johnson’s initial investment, he required Segal to execute an employment agreement with Genitrix.  The agreement stipulated that Segal would receive a fixed salary in consideration for his service as the company’s president and CEO, including managing the day-to-day financial and administrative affairs of the company.  Segal, the company’s sole officer, supervised the laboratory, managed all human resource functions, including payroll, and was the only individual authorized to issue wage checks.

The company began to experience financial difficulties in 2006, which led to Segal’s recommendation that the company lay off its at-will employees in order to meet payroll obligations.  In turn, the two defendants invested additional money in the company; however, they earmarked the investment for specific purposes such as funding payroll and replacing lab equipment.  The company’s financial condition worsened in 2007, and Segal unilaterally decided to stop taking his salary.  By mid-2007, the company was unable to make payroll and its board voted to lay off the other remaining employee.  The defendants made a final investment to pay off that employee’s remaining salary obligations and then shuttered the company’s doors.

The company ultimately filed a petition for judicial dissolution.  During those proceedings, Segal filed an array of claims against the company, and also attempted unsuccessfully to block the dissolution of Genitrix, a Delaware LLC.  See Fisk Ventures, LLC v. Segal, et al., C.A. No. 3017-CC (Del. Ch. Jan. 13, 2009).However, Segal did not assert a claim under the Massachusetts Wage Act.  Notably, Segal continued in his role as president while the dissolution proceedings were ongoing, despite continuing to decline a salary.  Segal’s belief that he eventually would get paid for the work did not come to fruition, and he filed a Wage Act claim in 2009.

The defendants were awarded summary judgment on the grounds that they did not “have the management” of the company, as required by the Wage Act.  That victory was fleeting, as the Massachusetts Appeals Court  reversed summary judgment on the grounds that a genuine issue of material fact existed as to whether the defendants managed the company.

On remand, the case went to trial, where the judge instructed the jury, in part, that “a person qualifies as an agent having the management of such corporation if he…controls, directs, and participates to a substantial degree in formulating and determining policy of the corporation.”  The jury went on to find both defendants personally liable based upon the given instruction.  The defendants then moved for direct appellate review on the grounds that there was insufficient evidence at trial to find personal liability, and that the above-referenced jury instruction was erroneous.

In a straightforward reading of the Wage Act, the SJC noted that the omission of investors and board members from the statute was significant.  Thus, the defendants could be personally liable only if they were deemed “agents having management of the company.”  This was the first time the SJC had been tasked with interpreting that language.

In doing so, the Court looked at whether the defendants were agents as a result of their board participation, and whether the restrictions placed on new investments constituted “management” activities.

Segal argued that the defendants exercised sufficient agency authority through their investment influence and board voting rights.  The SJC rejected this argument, and concluded that while “boards are regularly required to make difficult decisions that have an impact on the company’s finances,” such decisions are not acts of individual board members as “agents.”  The SJC also disagreed with Segal’s argument that placing conditions and other restrictions on incoming investments constituted management of the company.  On that point, the SJC held “[i]nvestment restrictions limited to the use of new monies are not management direction and control over existing resources,” and “exercising one’s rights and leverage over infusions of new money are separate and distinct from being an agent have the management of the corporation.”  The SJC also noted that as the only officer of Genitrix, Segal was “the only person expressly identified by virtue of his title as responsible for Wage Act violations,” and that Segal “made the decision not to pay himself.”

Segal is significant as it limits the circumstances in which a corporate director, board member or investor can be found individually liable under the Wage Act.  While personal liability for directors and investors is not entirely foreclosed, it cannot result solely on account of an individual’s position as board member or investor.  According to the SJC, the Wage Act continues to impose personal liability on those assuming individual responsibility as an officer or agent of a company, but it “does not impose individual liability on board members, acting as board members, or outside investors overseeing their investments.”  Given the rapidly expanding startup industry in Massachusetts, Segal provides some comfort that board members and investors will not face exposure to the draconian consequences of the Wage Act, provided that they do not participate in the management of a company to a greater extent than the defendants in Segal.

Following the 2012 and 2013 American Bar Association’s amendments to its Model Rules of Professional Conduct, many jurisdictions began to reexamine their own rules.  Massachusetts followed suit, and on July 1, 2015, the Supreme Judicial Court (SJC) adopted several revisions to the Massachusetts Rules of Professional Conduct (Mass. R. Prof. C.) recommended by its Standing Advisory Committee.  This blog post will be the first in a series designed to inform practitioners of several important changes to the Massachusetts rules.

 

Communicating with Jurors

courtroom-12jury-002b-564x338Last summer then Governor Patrick signed into Massachusetts law House Bill 4123 which made two significant changes to Massachusetts Superior Court procedure involving trials.  The first allowed Plaintiffs’ counsel to request a specific dollar amount as damages; the second allowed for questioning of prospective jurors (voir dire).  This summer, the SJC made a significant change to the Massachusetts Rules relating to communications with jurors after they render their verdicts by amending Mass. R. Prof. C. 3.5 to largely conform to ABA Model Rule 3.5.

The former Mass. R. Prof. C. 3.5, articulated in Commonwealth v. Fidler, 377 Mass. 192 (1979) and reaffirmed in Commonwealth v. Solis, 407 Mass. 398 (1990), prohibited lawyer-initiated, post-verdict juror contact unless authorized by court order for good cause shown.  Although the Standing Committee noted that “good cause” was a relatively low threshold, it remained concerned that a complete prohibition of non-judicially approved lawyer-initiated communications with jurors after a verdict may violate the First Amendment and prevent lawyers from receiving useful feedback.

As such, the SJC followed the Standing Committee’s recommendation and revised Mass. R. Prof. C. Rule 3.5 to largely follow the corresponding Model Rule.  Under the new Rule 3.5, attorneys may communicate with jurors post-verdict unless: (i) the communication is prohibited by law or court order; (ii) the juror has made known to the lawyer, directly or indirectly, a desire not to communicate with the lawyer; or (iii) the communication involves misrepresentation, coercion, duress or harassment.

Clearly, the Standing Committee’s desire for clarity of the rules and concerns over potential First Amendment issues were strong, and unlike several other revision recommendations, unanimously recommended this significant alteration to the rules.  In effectively abrogating Solis and Fidler, the SJC agreed, and appeared to have little concern regarding the impact the new rules may have on jurors’ willingness to serve or the potential for improper challenges to their verdict.

 

For more information on the revised rules visit:

http://www.mass.gov/courts/docs/sjc/docs/rules/a-sjc-order-rules-of-professional-conduct-adopted-march-2015.pdf