Companies commonly advance millions in legal fees to employees fighting securities fraud and other charges related to work performed in connection with the employment. When employees proceed to trial, that number can balloon into the tens of millions. Employers of convicted employees–otherwise entitled under indemnification agreements to recoup the fees–are left with limited opportunities to get the money back. This week, the Honorable Jed S. Rakoff, U.S. District Judge for the Southern District of New York, soundly foreclosed one of those opportunities in certain cases: restitution. Judge Rakoff held that where a crime was committed to benefit the employer, and the employer is legally responsible under the doctrine of respondeat superior, the employer is not a “victim” entitled to restitution. As this covers a fairly broad swath of fraud cases, now is a good time to review indemnification agreements to make sure that provisions related to fee advancement and recoupment are as protective as possible.
Judge Rakoff’s decision arose from the MiMedx trial, where two high-level executives of the company were found guilty in connection with a scheme to fraudulently inflate its revenue. The question posed was whether restitution could be obtained from either employee. Judge Rakoff made some preliminary findings against holding one of the defendants liable for restitution, but the most broadly important holding in the decision was that MiMedx was not a “victim” under the restitution statutes because the employees were acting within the scope of their employment and for the benefit of MiMedx, thus implicating the doctrine of respondeat superior by which MiMedx was legally responsible for its employees’ conduct. To be sure, the employees were also acting in their own interest, but that did not negate the legal responsibility of MiMedx for its employees’ crimes. Accordingly, Judge Rakoff held, MiMedx did not qualify as a victim under the relevant restitution statutes and could not recoup funds that way. As the court noted, this case was different from cases where, for instance, defendants are insider traders working solely for their own benefit or otherwise engaged in self-dealing outside the scope of their employment. In such cases, restitution to recoup a company’s losses may be appropriate.
Judge Rakoff noted that restitution was not the only means by which MiMedx would be able to recoup its losses, pointing out that MiMedx was also suing the defendants directly for the tens of millions in legal fees advanced in the case. Initiating a separate litigation, of course, is a much less desirable option, as it–among other things–causes a company to incur additional legal fees and likely delays any recovery should the company even prevail in the litigation. Of course, attracting and retaining talent will require strong indemnification rights for executives. But Judge Rakoff’s decision suggests that now is a good time for experienced counsel to review employment and indemnification agreements to ensure they are as protective as possible of the company.