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We have a weak spot for criminal cases.  We also have a weak spot for doom-scrolling,  inevitably provoked by the country’s insane politics over the last eight years.  And we have a weak spot for visiting nearby Delaware, home of tax-free shopping, excellent beaches, Dogfish Head Brewery, and judges who know corporate law.  We live in one of those “tri-state areas,” and if we were presented with a choice of being before a judge in Pennsylvania, New Jersey, or Delaware, our first choice would be the First State.  Delaware judges usually get to the heart of the matter, interpret statutes correctly, and seldom engage in fantasy.  Perhaps you noticed how a Delaware judge recently steered a very high profile case toward settlement by issuing no-nonsense rulings.  We’ve been in that same judge’s courtroom.  He is lightning smart and wastes zero time.

So imagine our giddiness when Bexis flipped us a Delaware Chancery Court case involving a criminally convicted drug executive who sought indemnification from his former company based on a pardon from former President Trump.  Intermune, Inc. v. Harkonen, 2023 Del. Ch. LEXIS 108 (Del. Chancery Ct. May 10, 2023), is a legal-political-corporate feast. The judge was really cooking. Bring a big spoon and wear a bib.

In Intermune, the plaintiff was a drug manufacturer.  Thus, as far as we’re concerned, we’re already in man-bites-dog territory.  But the drug company was not looking to bite a dog; it was looking to bite its former CEO.  More specifically, the company was looking to take a bite out of the former CEO’s claim for indemnification.  Sit back and enjoy this odd tale. In 2009, a federal jury found beyond a reasonable doubt that the CEO acted with intent to defraud when he directed his company to issue a “false and misleading press release [in 2002] about the results of one of the Company’s clinical trials.” (Bexis wrote about this criminal case here.) The company and its insurers had advanced the CEO’s defense costs.  After the CEO was convicted, the insurer demanded its money back from the company, invoking a policy exclusion for crimes involving intentional fraud.  The company refused, the dispute went to arbitration, and the insurer won.  Now the issue was between the company and the CEO as to who was on the hook for the CEO’s defense costs.  The CEO claimed that under Delaware law, the company was required to indemnify him.  The company filed an action for a declaratory judgment that the former CEO was not entitled to indemnification.  The parties then filed cross motions for summary judgment and the issue was packaged neatly for the court.

Or was it really so neat?  There was a long lead up to this case.  The former CEO had litigated his conviction for nine years, all the way to the Supreme Court, and lost every time.  Let’s list the losses:

  • the jury found the CEO guilty,
  • the trial court denied his motion for acquittal,
  • the trial court denied his motion for a new trial,
  • the appellate court denied his direct appeal,
  • the former CEO lost a petition for writ of error coram nobis,
  • he lost a collateral appeal, and
  • his two petitions for a writ of certiorari to the U.S. Supreme Court were denied. 

The legal system had not treated the former CEO kindly.  But the political system rode to the rescue.  On January 19, 2021, on the next to last day of the Trump presidency, the former CEO received a Trump presidential pardon. Such a pardon, of course, qualifies as a Very Big Deal.  You might even say it was Huge.  But did it make any difference under Delaware law regarding corporate indemnification?  Section 145(c) of the Delaware General Corporation Law provides that a corporate officer is entitled to indemnification if he was “successful on the merits or otherwise.”  Did the presidential pardon make the former CEO successful?  The court in Intermune answered with a resounding No.  A presidential pardon does not eliminate a conviction, or erase guilt, but only restores all “basic civil rights” that the conviction had taken away.  Further, indemnification of legal expenses is not a such “basic” civil right.  Moreover, as the court reasoned, “even if, somehow, corporate officer indemnification qualified as a corporate civil right restored by a federal pardon, [the CEO] never lost it because he never had it.” Nor is a pardon an adjudication of innocence.  The pardon arrived with a letter from the U.S. Pardon Attorney.  That letter explained that, “although full and unconditional,” the pardon did not “erase or expunge” the CEO’s conviction or “indicate his innocence.”  The CEO was convicted; he did not “succeed.”  Getting a pardon is not “success,” at least not in the sense relevant under section 145(c).  As the Intermune court explained, “convictions do not constitute success, on the merits or otherwise.  The Pardon did not overturn [the CEO’s] conviction.  End of story.”

Well, it was not quite the end of the story.  The former CEO had another argument in support of indemnification, though it was equally devoid of merit.  The former CEO contended that indemnification should be interpreted broadly in his favor, and that he should be permitted to relitigate the issue of whether he had acted in good faith in issuing the press release.  The CEO asserted that certain post-conviction events, including the position the company unsuccessfully took against the insurer, supported his claim of acting in good faith.  The Intermune court reasoned that section 145 incorporated preclusion principles.  Bad faith was an element of the crime for which the CEO was convicted.  The conviction actually decided the issue of good faith, and the CEO had a full and fair opportunity to litigate his intent.  By this point, the Intermune court counted up the number of times the CEO had litigated intent, and the result was impressive:  “[The CEO] litigated intent at least ten times.  Adding the insurance arbitration brings the figure to twelve.  The quasi-legal memorandum makes thirteen. … [The CEO] seeks to use this proceeding as a fourteenth opportunity to relitigate his state of mind.  But there is nothing new.”

What about the company’s earlier arguments against the insurer?  The CEO said that the company “admitted” during the parties’ insurance arbitrations that he “acted with an indemnifiable state of mind.”  The Intermune court disagreed.  First, the company’s arbitration position in favor of indemnification was not a “concession of fact.”  Second, “[u]nder Section 145, [the CEO’s] conviction is what matters, not what the Company once thought about it.”  Third, the CEO’s argument runs afoul of Delaware law’s preclusion of corporate indemnification of “crimes committed with bad faith intent.”  The CEO might genuinely disagree with his conviction, but such disagreement does not permit him “to redo his prosecution.”