Online Res. Corp. v. Lawlor

• Decision Date: 10 January 2013
• Docket Number: Record No. 120208.
• Parties: ONLINE RESOURCES CORP. v. Matthew P. LAWLOR.
• Court: Virginia Supreme Court

285 Va. 40

736 S.E.2d 886

ONLINE RESOURCES CORP.

v.Matthew P. LAWLOR.

Record No. 120208.

Supreme Court of Virginia.

Jan. 10, 2013.

Stuart A. Raphael, McLean (David G. Barger, McLean; Hunton & Williams; Greenberg Traurig, on briefs), for appellant.

George A. Somerville, Richmond (Ellen D. Marcus; Graeme W. Bush; Jason M. Knott; Zuckerman Spaeder; Troutman Sanders, on brief), for appellee.

Present: KINSER, C.J., LEMONS, MILLETTE, MIMS, McCLANAHAN, and POWELL, JJ., and LACY, S.J.

Opinion by Justice DONALD W. LEMONS.

In this appeal, we consider whether the Circuit Court of Fairfax County (“trial court”) erred in a complex civil matter arising from termination of a corporation's chief executive officer from employment when it (1) refused to hold, as a matter of law, that no change in control occurred that would entitle Matthew P. Lawlor (“Lawlor”) to mandatory severance benefits from Online Resources Corporation (“ORC”); (2) instructed the jury to construe any ambiguities in the contracts against the drafter; (3) submitted Lawlor's alternative theory of mandatory severance benefits to the jury; and (4) submitted Lawlor's claim for unjust enrichment to the jury.

We also consider whether the trial court abused its discretion when it (1) admitted the testimony of James Reda, Lawlor's damages expert; (2) permitted Lawlor to amend his complaint to plead the basis for recovering attorneys' fees; and (3) awarded Lawlor attorneys' fees and expenses.

I. Facts and Proceedings

In Lawlor's second amended complaint against ORC, he sought damages for breach of contract, unjust enrichment, and wrongful termination, as well as declarative and injunctive relief ¹ in connection with ORC's terminationof Lawlor's employment as Chief Executive Officer (“CEO”), his position as Chair of the Board of Directors, and his employment with ORC. Lawlor contended that he resigned under duress after reporting insider trading by Tennenbaum Capital Partners (“TCP”), ORC's largest voting shareholder. He also claimed that he was denied payments under the 2005 Stock Plan, as amended (“2005 Plan”), 1999 Stock Option Plan (“1999 Plan”), and 2009 Change in Control Severance Agreement (“Severance Agreement”) that provided certain payments in the event of a “change in control” in the company. Additionally, Lawlor claimed that he was entitled to compensation to offset a pay reduction he took in 2009 with the understanding that he would be made whole in the future. Additionally, he demanded attorneys' fees and expenses.²

On March 24, 2011, Lawlor moved the court to defer the issue of attorneys' fees and expenses until after the trial. The trial court granted the unopposed motion, and both parties endorsed the order as “agreed.”

An eleven-day jury trial took place in April 2011. The jury found for Lawlor on all counts except Count VI for wrongful termination, and awarded Lawlor $2,325,000 on Count I for breach of the 2005 Plan, $494,266 on Count II for breach of the 1999 Plan, $4,935,619 on Count III for breach of the Severance Agreement, and $360,000 on Count V for unjust enrichment, for a total of $5,295,619 in compensatorydamages.³ In the bifurcated proceeding, the trial court awarded attorneys' fees of $2,131,034.75 to Lawlor.

Change In Control

Lawlor founded ORC in 1989 to provide on-line banking services. ORC went public in 1999, and Lawlor continued to serve as its CEO and the Chairman of its Board of Directors. In 2006, TCP invested $75 million in ORC and became a Class A–1 preferred shareholder with the right to designate a director to the Board. In 2007, Michael Leitner (“Leitner”) became TCP's designee to the Board of Directors. Evidence presented revealed that Leitner and Lawlor had a contentious relationship.

ORC's stock price dropped significantly in 2008 and 2009. In 2009, TCP announced that it was running three of its own nominees for the Board of Directors. A proxy contest ensued, and the TCP nominees were elected in May 2009. In May 2009, the Board also approved the Severance Agreement. Lawlor signed the Severance Agreement on May 13, 2009.

Shortly after the proxy contest, Leitner wrote in an email to the other TCP nominees, who were now directors, that Lawlor “doesn't fully appreciate the significant governance change that has taken place, and that he is no longer in control. It just doesn't seep in for him.” He added that Lawlor was resistant to “any process that requires him to seek our direction on issues” and “just doesnt [sic] get he is one election away from losing his job.”

On December 9, 2009, the Board of Directors met in closed session without Lawlor and agreed that it was time for him to step down as CEO. On December 14, 2009, the Board voted to remove Lawlor immediately as CEO, but agreed to retain him as Chairman of the Board and as an employee until February 19, 2010.

On January 20, 2010, Lawlor resigned from the Board. That same day, one of the incumbent directors,⁴ Joe Spalluto, also resigned from the Board. The Board, which had ten seats, was then composed of four incumbent directors, the three new TCP directors, Leitner (the TCP designee), and two empty seats.

ORC offered Lawlor a severance package that Lawlor rejected because “it would have taken away any rights to claim for a change in control.” Lawlor maintained that a change in control had occurred, and that he was entitled to mandatory severance benefits under the 1999 Plan, the 2005 Plan, and the Severance Agreement. All three of these plans defined “change in control,” but with slight variations. The 2005 Plan defined “change in control” in relevant part as:

(i) When any “person” as defined in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d) and 14(d) thereof (including a “group” as defined in Section 13(d) of the Exchange Act, but excluding the Company, any Subsidiary or any employee benefit plan sponsored or maintained by the Company or any Subsidiary (including any trustee of such plan acting as trustee)), directly or indirectly, becomes the “beneficial owner” (as defined in Rule 13d–3 under the Exchange Act, as amended from time to time), of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding securities.

(ii) The individuals who, as of January 1, 2005, constitute the Board (the “Incumbent Board”), cease for any reason to constitute at least a majority of the Board; provided however, that any individual becoming a director subsequent to such date, whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall, for purposes of this section, be counted as a member of the Incumbent Board in determining whether the Incumbent Board constitutes a majority of the Board.

The 1999 Plan defined “change in control” as:

(e) “Change in Control” means a change in control of the Company of a nature that; (i) would be required to be reported in response to Item 1 of the current report on Form 8–K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Exchange Act; or (ii) without limitation such a Change in Control shall be deemed to have occurred at such time as (A) any “person” (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the “beneficial owner” (as defined in Rule 13d–3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the Company's outstanding securities except for any securities of the Company purchased by any tax qualified employee benefit plan of the Company; or (B) individuals who constitute the Board of Directors of the Company on the date hereof (the “Incumbent Board”) cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Company's stockholders was approved by a Nominating Committee serving under an Incumbent Board, shall be, for purposes of this clause (B), considered as though he were a member of the Incumbent Board; or (C) a plan of reorganization, merger, consolidation, sale of all or substantially all of the assets of the Company or similar transaction occurs in which the Company is not the resulting entity.

The Severance Agreement defined “change in control” as:

(e) A “Change in Control” shall mean any change in control of the Company of a nature that would be required to be reported in response to Item 1(a) of the Current Report on Form 10–K,⁵ as in effect on the Effective Date, pursuant to Section 13 or 15(d) of the Act; provided that, without limitation, such a “Change in Control” shall be deemed to have occurred if:

(i) a third person, including a “group” as such term is used in Section 13(d)(3) of the Act, becomes the beneficial owner, directly or indirectly, of 50% or more of the combinedvoting power of the Company's outstanding voting securities ordinarily having the right to vote for the election of directors of the Company, unless such acquisition of beneficial ownership is approved by a majority of the Incumbent Board (as such term is defined in clause (ii) below); or

(ii) individuals who, as of the date hereof, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the Directors of the Company, as such terms are used in ...