As Fredo Corleone could have told us, “family” disputes are the worst kind. (Click here to see what happens when you cross the CEO in a closely held family business.) Disagreements in a closely held business, family or not, tend to get pretty ugly pretty quickly, because they often cause long-held hard feelings, that have been simmering for years, to boil over. At my firm, we’ve seen more than our share of contentious and expensive litigation resulting from such disagreements. And, as is often the case in litigation, no one really wins. (Think World War I, which in many ways was a family dispute.)
But an interesting issue recently arose in a federal appeals court. What if, in the course of such a dispute, the CEO does something discriminatory to one of the other corporate officers that, had he done it to a rank-and-file employee, would have been illegal? Would “Fredo” be able to sue the company under federal or state anti-discrimination laws?
Facts: Louis S. “Babe” Mariotti started a lumber business in 1947. Eventually it grew into a $60 million company. Babe’s kids joined the business. Apparently, one son (Eugene) didn’t care much for another son (Robert). Robert was the Vice-President and Secretary of the company, a member of the Board of Directors, and a shareholder. Eugene managed several divisions. According to Robert, the segments of the business that he managed outperformed those that Eugene managed.
In 1995, Robert underwent a “spiritual awakening.” (The Court’s decision doesn’t indicate whether this means that Robert went the Cat Stevens route, the Tom Cruise route, or the Billy Graham route. Inquiring minds want to know.) His new enlightenment caused his brothers some consternation, and they allegedly began verbally abusing him about his religion. Things really got ugly when the patriarch, Babe, died, and Robert gave a eulogy at the January 2009 funeral in which he began evangelizing. The other shareholders were unhappy, got together, and expelled him from the company. A subsequent letter told him that various benefits were at an end, such as use of a company car, health insurance coverage, a cell phone, company credit cards, and the availability of an office. But the letter also said that “[y]our share of any draws from the corporation or other entities will continue to be distributed to you.” Note the reference to “draws.” That will become important.
After his termination, Robert continued to serve on the Board of Directors for eight months, until August 2009, when the other shareholders declined to re-elect him to the Board. At this point, he headed over to the friendly neighborhood plaintiff’s attorney and filed suit for religious discrimination. And the company moved to dismiss the suit.
The Court began its analysis by considering the six factors used by the EEOC to determine whether someone is an “employee” for purposes of the discrimination laws. They are:
- Whether the company can hire or fire the person or set the rules and regulations of the person’s work.
- Whether the company supervises the person’s work.
- Whether the person reports to someone higher in the company.
- Whether the person is able to “influence” the organization (whatever that means).
- Whether the person has an employment contract or agreement.
- Whether the person shares in the profits, losses, and liabilities of the company.
After reviewing the factors as a whole, the Court concluded that Robert was out of luck, writing: “Plaintiff’s status as a shareholder, a director, and a corporate
officer gave him both substantial authority at [the company] and the right to control the enterprise. He was entitled to participate in the management, development and governance of [the company]. By sitting on the board of directors and serving as a corporate officer, Plaintiff had the ability to participate in the fundamental decisions of the business…[A]fter his termination in January of 2009, he continued to serve as a director of the closely held family corporation until August 6, 2009. Furthermore, the termination letter he received did not mention the cessation of any salary. Instead, it stated that ‘[y]our shares of any draws from the corporation or other entities will continue to be distributed to you.’…Plaintiff’s amended complaint fails to allege that he is ‘the kind of person that the common law would consider’ an employee.” (Citations omitted.)
It’s interesting that, although he had “the right to control the enterprise,” Robert was unable to control his own termination.
The real lesson from this case, though, has nothing to do with employment law or corporate law. The (perhaps fictitious) Chinese general Sun Tzu once wrote: “The Master overcomes others without battle.” Litigation is an exhausting depletion of your energy and financial resources. Stay out of it if you can. (And remember that doing business with family can be dangerous.)
You can read the full decision in Mariotti v. Mariotti Building Products, Inc. by clicking here.
-- Gene Killian