Chancery Court Expands on When Legal Fees Can Be Advanced

Advancement and indemnification rights provide directors and officers of Delaware corporations comfort when accepting positions that often lead to being named in litigation. However, once the interests of the executive and the company diverge, advancement rights can become a hotly contested issue. In dealing with advancement and indemnification claims, the Court of Chancery will analyze a company’s bylaws and charter to determine to what extent that company has contracted with its executives to advance and indemnify legal fees. Many Delaware corporations, like Echo Therapeutics Inc. in the matter discussed herein, have bylaws and charters that allow for advancement and indemnification “to the full extent not prohibited under Delaware law.” It is within that broad scope that decisions from the Court of Chancery, like the one authored in this case, guide practitioners in crafting arguments both for and against the advancement of legal fees.

In Mooney v. Echo Therapeutics (Del. Ch. May 28, 2015), the Court of Chancery faced a complicated set of facts surrounding Dr. Patrick Mooney’s 2013 termination from Echo Therapeutics as its CEO and chairman of the Echo board of directors. Prior to Mooney’s termination, the Financial Industry Regulatory Authority (FINRA) began an investigation into suspicious trading in Echo’s stock. Shortly before Mooney’s termination, Echo instigated an internal investigation into Mooney’s alleged misconduct. Mooney was ultimately terminated by Echo on Sept. 27, 2013, for cause. Thereafter, Mooney filed a lawsuit against Echo in Pennsylvania asserting claims for breach of Mooney’s employment agreement, violation of various wage and payment statutes, defamation and loss of consortium. Echo responded to this lawsuit by filing an answer, new matter and four counterclaims against Mooney. The counterclaims contained extensive allegations of misconduct by Mooney. Following Echo’s filing of the counterclaims, Mooney demanded advancement of his legal fees. Echo sought to moot Mooney’s advancement claims by amending the counterclaims to remove allegations of misconduct by Mooney. In an effort to vindicate his reputation, Mooney filed a second action against Echo in Pennsylvania alleging wrongful use of civil proceedings against Echo for pursuing the new matter and counterclaims in the first Pennsylvania action.