Court Requires Employer to Pay Legal Fees of Ex-Employee Charged with Trade Secret Theft

On October 16, 2013, a federal judge in New Jersey ruled that Goldman Sachs must advance the legal fees of a former employee charged with stealing Goldman’s source code.  The order is the latest twist in a case that previously gained notoriety for the Second Circuit decision reversing the ex-employee’s conviction, an unpopular decision that led to the passage of the Theft of Trade Secrets Clarification Act of 2012.

Sergei Aleynikov worked for Goldman as a programmer of high-frequency trading software.  In June 2009, just before Aleynikov left Goldman to join a Chicago start-up, he allegedly downloaded the source code for the software.  Federal authorities charged Aleynikov with theft of trade secrets in violation of the Electronic Espionage Act and transportation of stolen property.  Aleynikov was tried, convicted, and sentenced to 97 months in prison.  But the Second Circuit overturned Aleynikov’s conviction in February 2012, and he was released.

Aleynikov’s time in court was not over, though.  In August 2012, he was arrested again, this time by New York state authorities, and charged with unlawful use of secret scientific material and unlawful duplication of computer related material.

The case took a new turn when Aleynikov struck back, filing a civil suit against Goldman in New Jersey federal court in September 2012.  Citing alleged indemnification obligations under Goldman’s bylaws and Delaware law, Aleynikov sought: (1) indemnification for fees previously accrued in defending the federal case, and (2) advancement of fees accrued and future fees to be accrued in defending the state case.  Aleynikov moved immediately for summary judgment.

In October 2013, after court-ordered expedited discovery, the court granted the motion as to advancement and deferred its decision as to indemnity.  Under the district court’s order, Goldman must advance Aleynikov’s current fees in defending the state case thus far (estimated at $700,000), plus future fees in that case.  Goldman was also ordered to pay “fees on fees,” i.e. the fees Aleynikov’s lawyers billed in the indemnification/advancement suit (estimated at over $1,000,000).

Among the key factors relied upon by the judge in his 34-page decision were:

  • Aleynikov’s job title of “Vice President.”  The court did not find it important that approximately 12,000 of Goldman’s 30,000+ employees also held the same title, finding that “Goldman must bear the consequences of that profligacy.”
  • The broad language in Goldman’s by-laws defining “officer.”
  • Delaware law, which excludes parol evidence from the interpretation of by-laws, even when they are ambiguous.
  • “Liberal” policy underlying Delaware law on indemnification and advancement of legal fees.
  • Goldman’s past practice.  Goldman had, in recent years, paid the legal fees of 51 of 53 employees who incurred legal fees (including 15 holding the title of “Vice President”).

Although Aleynikov must pay back the advanced legal fees if he loses his state court case, this purported “backstop,” in the words of the court, is cold comfort.  According to his attorney, Aleynikov has no job and is financially destitute, so it appears exceedingly unlikely Goldman would ever recoup any significant portion of the fees advanced.

Goldman appealed the district court’s order to the Third Circuit.  The court expedited the appeal, and the case was fully briefed as of December 6, 2013 (see Goldman’s opening brief, Aleynikov’s brief, and Goldman’s reply).  Oral argument is tentatively scheduled for January 21, 2014, in Philadelphia.  While we wait for a decision, this case may give employers pause before referring an employee’s theft of trade secrets to federal authorities — doing so might just result in having to foot the legal bill for his defense.

The case is Aleynikov v. The Goldman Sachs Group, Inc., No. 12-cv-5994 (D.N.J.), No. 13-4237 (3d Cir.).

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