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The Right Way to Release Claims for Advancement on Termination of Employment

By | June 28, 2019

In Ephrat et al v medCPU, Inc., the Delaware Court of Chancery considered whether a separation agreement released claims of advancement pursuant to medCPU’s, or the company’s, certificate of incorporation. The plaintiffs, former officers and directors of the company, sued to enforce their rights to payments under a separation agreement. The company counterclaimed, alleging the petitioners had breached the separation agreement and had no right to payment. In this case, the plaintiffs sought advancement to defend themselves against the counterclaims.

The parties agreed New York law applied.  According to the Court, New York law provides that “Generally, a valid release constitutes a complete bar to an action on a claim which is the subject of the release. If the language of a release is clear and unambiguous, the signing of a release is a ‘jural act’ binding on the parties.” “No particular [form] of words is required to make a written release effective; all that is necessary is that the words show an intention to discharge. The scope and meaning of a release will be determined by the manifested intent of the parties,” and “the context of the controversy being settled.”

The Court stated the release in section 3(a) of the separation agreements only covered plaintiffs’ rights as employees. The release encompassed claims “relating to or arising out of Executive’s employment with the Company Released Parties or the termination thereof.”  Plaintiffs’ contrasted this language against medCPU’s release of claims against plaintiffs in Section 3(b), which included “any claims in any way related to Executive’s employment with the Company or his/her acts or omissions as a director or officer of the Company.” Plaintiffs’ pointed to Section 3(b)’s additional language referencing acts as a company director or officer, absent from Section 3(a), and concluded they did not release claims stemming from their status as directors or officers, including their advancement rights.

The Court stated plaintiffs’ argument was bolstered by the enumerated released claims. These included claims arising under the Age Discrimination in Employment Act, Title VII of the Civil Rights Act of 1964, and the Americans with Disabilities Act. The enumerated list was followed by more general types of claims: “any other federal, state or local statutory laws relating to employment, discrimination in employment, termination of employment, wages, benefits or otherwise; or any other federal, state or local constitution, statute, rule, or regulation, . . . addressing fair employment practices.”  These laws govern claims that any employee could potentially assert related to her employment or the termination of her employment. They are narrowly described, and do not include sources of advancement. And under the canon of ejusdem generis, the Court read the general categories in light of the preceding specific employment laws.  The Court stated nothing in this provision shows an intent to release advancement claims.

The Court held section 3(a) released rights within the contractual employee-employer relationship, and not the advancement and indemnification rights under the company’s certificate of incorporation.

It is likely the result would have been different had section 3(a) specifically released rights to advancement or at a minimum released claims in capacities as officers and directors.

Contact Steve Quinlivan for more information.