Hawes v. Downing Health Techs.
| Decision Date | 19 May 2022 |
| Docket Number | 110920 |
| Parties | SHANE HAWES, Plaintiff-Appellee, v. DOWNING HEALTH TECHNOLOGIES L.L.C., ET AL., Defendants-Appellees, [Appeal by Michael Shaut, Defendant-Appellant.] |
| Court | Ohio Court of Appeals |
Appearances:
Morganstern MacAdams & DeVito Co., L.P.A., and Christopher M. DeVito, for appellee Shane Hawes.
Cohen Rosenthal & Kramer LLP, Ellen M. Kramer, and Joshua R Cohen, for appellant.
JOURNAL ENTRY AND OPINION
{¶ 1} Appellant Michael Shaut ("Shaut") appeals the decision of the Cuyahoga County Court of Common Pleas entering judgment against him and awarding compensatory damages, punitive damages, and attorney fees to appellee Shane Hawes ("Hawes") following a bench trial. After a thorough review of the facts and applicable law, we affirm in part, reverse in part, vacate in part, and remand to the trial court.
{¶ 2} This case arose from Hawes's investment in and former employment with a company known as Downing Health Technologies, LLC f.k.a. Downing Digital Healthcare Group, LLC n.k.a. 3SI ("Downing Health").
{¶ 3} Defendant Downing Partners, LLC ("Downing Partners") owns a majority interest and operates Downing Health and a pooled investment fund of affiliated companies through defendant Downing Investments, LLC ("Downing Investments"). Downing Investments' general manager is defendant David Wagner ("Wagner"). Downing Investments, through its ownership and the control of Wagner, owns and operates other business entities known as Downing Partners, Downing Health n.k.a. 3SI, and the "portfolio companies" of defendant Surgical Safety Solutions, LLC ("SSS") and defendant IVC Healthcom, LLC ("IVC").
{¶ 4} SSS is a portfolio company that has been merged into 3SI and/or is controlled and operated by 3SI or the other parent corporations known as Downing Investments and its general partner Downing Partners through Wagner. IVC is a portfolio company that has been merged into 3SI and/or is controlled by the other parent corporate entities Downing Partners and Downing Investments through Wagner.[1]
{¶ 5}Shaut was president of Downing Investments and had invested $500, 000 into the business. Shaut also had ownership, directly or indirectly, and management responsibility with respect to the other related Downing entities, including Downing Health. Defendant Marc Lawrence ("Lawrence") was the president and chief operating officer of Downing Health and had ownership, directly or indirectly, and management responsibility at the other related Downing entities. Wagner is the majority owner, chairman, and general manager of Downing Investments.
{¶ 6} In 2014, Hawes was seeking a new employment opportunity and was contacted by a recruiter, Peter Boyle ("Boyle"), who put him in touch with Lawrence, who at the time was running a division of Downing Partners. Hawes spoke several times with both Boyle and Lawrence and eventually had a face-to-face meeting with Lawrence.
{¶ 7} Lawrence presented him with a summary of the organization known as Downing Health. The document consisted of a slide deck that provided information about the organization for Hawes as both an employee and an investor.
{¶ 8} After reviewing the slide deck, Hawes spoke with Boyle and some friends who worked in venture capital to get their thoughts on the opportunity. Hawes conveyed to Boyle that he was having second thoughts about being an employee and investor in the company. His concerns were the compensation, which was lower than he felt comfortable with, and the fact that he was required to make a $250, 000 investment in the company. Hawes was aware that the company was a "start-up," which made him nervous because start-ups often fail and carry greater risks than an established company.
{¶ 9} The venture capitalists with whom Hawes had spoken did not help him to feel any more comfortable with investing the money because they told him they had not heard of such an arrangement. One of these venture capitalists was Hawes's friend, Joe Renson ("Renson"), who was the chief executive officer of a venture capital firm. Hawes sent Renson some of the documents he had received regarding Downing Health and asked him to review it. Renson advised Hawes against making the investment and working for Downing Health.
{¶ 10} Boyle suggested that he speak with someone else at the company, namely Shaut. Hawes was familiar with Shaut's name from reviewing the Downing Health organizational chart.
{¶ 11} Shaut and Hawes met at a Starbucks for approximately 45 minutes. The two did not discuss the business operations of the company or any employment matters, such as salary or bonuses. Instead, the discussion was focused on the strategy and legitimacy of the company and the opportunity to "really make some serious money." Hawes found Shaut to be very honest and upbeat about where the organization was going.
{¶ 12} Prior to Hawes's hiring, Downing Health had failed to make payroll at least once. Shaut did not reveal this information to Hawes at their meeting.
{¶ 13} Ultimately, Hawes decided to move forward with Downing Health, and in October 2014, he signed a two-year employment offer letter with Downing Digital Healthcare Group, LLC, which later became known as Downing Health Technologies, LLC, to serve as vice president of business development. Downing Health has since merged and is now known as 3SI, which is controlled or owned by Downing Investments and its general partner, Downing Partners. In addition, 3SI is now a combination of other Downing portfolio entities known as SSS and IVR.
{¶ 14} Regarding his responsibilities, Hawes's employment agreement provided as follows:
Your responsibilities may vary from time-to-time, but will be consistent with the following outline of your general responsibilities: Achieve assigned sales budgets for all portfolio businesses. Develop and implement a business plan for the region to include sales support from the portfolio businesses, channel development and key account strategies including IDN/GPO contracting. Establish business activities with channel partners to include[:] sales support, monthly forecasting, and quarterly business reviews. Manage a 30, 60, 90 day rolling forecast.
{¶ 15} Section 3 of the employment agreement addressed Hawes's compensation and stated:
Your base compensation will be two hundred twenty-five thousand dollars ($225, 000.) per annum. Additionally, you will participate in the commission plan. Variable compensation is fifty thousand dollars ($50, 000) per annum at your assigned budget. Stretch compensation up to an additional twenty-five thousand dollars ($25, 000) per annum exceeding budget.
{¶ 16} Hawes was further entitled to certain benefits under the contract, which stated that "[t]he cost of [his] health benefits (PPO Health plan and Dental plan) will be covered 100% by [Downing Health] during the first year of employment."
{¶ 17} Hawes also signed an investment document titled "Series C Preferred Units & Warrant Purchase Agreement" agreeing to invest $250, 000 in Downing Health for 23, 474 units of the company valued at $10.65 per unit. Hawes's wife signed this agreement as well because she and Hawes jointly purchased the interest in the company.
{¶ 18} Hawes testified that, prior to making the investment, he had read the "Downing Health Private Offering Memorandum," which reinforced this message of inherent risk, as it explicitly indicated that Downing Health might not be able to raise all the money needed to implement its business plan - which Hawes recognized would jeopardize his investment and his employment with the company.
{¶ 19} Within a "couple of days" of beginning his job at Downing Health, Hawes discovered that Downing Health was "fundamentally different than what had been represented" and was in fact a "sham." Hawes's first four paychecks were late, with some being as late as five months. There were several other gaps in pay during 2015, and Hawes's last paycheck covered the period of July 1 through July 15, 2015, although Hawes was employed at the company until August 2015. Hawes was never provided with a W-2 tax form for his 2014 compensation.
{¶ 20} Hawes later learned that Lawrence and other employees were owed back pay from 2014 and 2015. An email was sent to all employees regarding a payroll recovery plan and explained when employees would receive the back pay for 2014 and 2015. This plan was never implemented.
{¶ 21} There were also problems with the medical insurance and premiums not being paid by the company. Hawes and his family lost their health benefits multiple times. Hawes paid his own January 2015 deductible and requested reimbursement but received none. Hawes additionally paid $8, 008 in COBRA benefits for August and September 2015.
{¶ 22} In April 2015, Hawes told Lawrence that he would not recommend investors for Downing Health because it was not a valid company. Hawes thought he might be terminated, but instead, Lawrence demoted him.
{¶ 23} At the same time that Hawes's position was demoted Downing Digital Healthcare Group, LLC underwent a name change to Downing Health Technologies, LLC. Hawes entered into a new employment agreement in May 2015 reflecting the company name change and his "title change with a little bit of a territory change," with "everything [else]" staying "the same." Hawes dealt exclusively with Lawrence in negotiating the contract, and Shaut was not involved. At the time he signed the second employment agreement, Hawes was interviewing with other...
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