The Appellate Division, First Department, of the NY Supreme Court yesterday affirmed the dismissal of an action against Cohen & Steers, Inc. and Cohen & Steers Capital Management, Inc. (both represented by the firm) brought by a former employee, Greg Brooks. This decision is significant for two reasons: First, it upheld the determination of the Compensation Committee of the Company's Board of Directors as being rationally based and without evidence of bad faith, against a challenge in which the former employee argued that he was owed a fiduciary duty under New York law. Second, it affirmed the dismissal of the action prior to any answer being filed, or discovery being conducted, based solely upon the allegations in the complaint and the documents considered by the Compensation Committee.
Mr. Brooks, the former employee, resigned from Cohen & Steers two weeks after receiving Restricted Stock Units under a plan providing that the RSUs would be forfeited were he to compete with Cohen & Steers. The plan further provided that all determinations under the plan were to be made by the Compensation Committee of the company's Board of Directors and that the Committee's decision would "be final, conclusive and binding".
Shortly after resigning from Cohen & Steers, Mr. Brooks began work as Portfolio Manager, REITs at Amaranth Group Inc. Cohen & Steers management believed that Brooks was competing with the company in his new position and suspended Cohen & Steers' performance under the RSU Agreement. The Compensation Committee then determined that Amaranth competes with Cohen & Steers and decided that Brooks should forfeit his RSUs which Brooks valued at approximately $5.8 million.
Mr. Brooks sued for breach of contract. On June 13, the appellate court held that the Compensation Committee's determination was conclusive, that Brooks had failed to make any showing that the directors who determined this issue were acting improperly and that the Compensation Committee had considered the relevant submissions and underlying documents. It distinguished the contractual relationship before it from one involving fiduciary duties of pension trustees and approved the motion court's review of documentary evidence extrinsic to the complaint "as they conclusively demonstrate that the committee examined all of the relevant evidence, considered the relevant contractual provisions and made a rational determination." The Court affirmed the previous dismissal of the action by the Commercial Division of NY Supreme Court, NY County, which had dismissed the action in its entirety, without leave to file an amended complaint, by decision dated March 28, 2005. The appeals decision was by a vote of 4-1.
Increasingly, employers look to the "employee choice doctrine" under New York law as a means to impose a forfeiture, or claw back, of benefits provided or paid to former employees who voluntarily leave to work for a competitor. The successful implementation of this procedure requires strong and appropriate plan language and sound litigation strategy.
Cohen & Steers was represented in this action by Scott Dyer, Fagie Hartman and Helena Almeida, with Peter Thomas and Josh Bonnie.