The Pennsylvania Supreme Court recently refused to hear an appeal from a venture capital group that had been disappointed by the Superior Court’s en banc decision that a former employee was owed liquidated damages in addition to the $1.26 million already awarded in a compensation dispute. The case is Andrews v. Cross Atl. Capital Partners, and it is an important case for employers and employees whose compensation packages are tied to equity or otherwise subject to a contract. Before Andrews, there was an open question in Pennsylvania whether a prevailing employee could recover a 25% liquidated damages penalty under Pennsylvania’s Wage Payment and Collection Law (“WPCL”) and prejudgment interest on the amount of unpaid compensation. Andrews answered that question in favor of the employee, ruling that in a breach of contract case, an employee can recover both.
Nicholas Andrews worked for Cross Atlantic Capital Partners, Inc. (“Cross Atlantic”) from 1999 to 2000. Andrews was hired to find, negotiate, and manage investments for Cross Atlantic. The ultimate goal for Cross Atlantic was to sell the investments at a price that was sufficient to repay its investors and to allow both the investors and Cross Atlantic to realize a profit. Compensation for Andrews was deferred until the investment funds became sufficiently profitable to make distributions. Andrews did not have a written employment agreement and his employment ended before the funds he was involved with were sold. Upon his departure, Andrews entered into a separation agreement with Cross Atlantic.
In the separation agreement, Cross Atlantic promised to pay certain amounts of “carried interest” to Andrews on specified transactions when the distributions were made to the limited partner investors in those funds. “Carried interest” is a term of art in the venture capital and private equity world that describes an investment manager’s interest in the profits of an investment fund. In return for the carried interest compensation specified in the separation agreement, Andrews agreed not to compete with Cross Atlantic for one year.
Andrews subsequently became aware of distributions and other transactions with investors that he believed triggered Cross Atlantic’s obligation to make the promised carried interest payments to him. He demanded payment from Cross Atlantic, which denied that it owed him anything. Andrews sued for breach of contract and for violations of the WPCL. The WPCL is a powerful lever for executives and professionals in a compensation dispute. The WPCL applies to equity-based compensation and severance payments in addition to ordinary salary and bonus compensation. Moreover, employees who prevail under the WPCL can recover all of their unpaid compensation plus attorneys’ fees, plus an additional 25% of the unpaid compensation as “liquidated damages” if the employer’s refusal to pay was not in “good faith.”
Following a trial, a jury determined that Cross Atlantic breached its contract with Andrews and awarded him $742,000 in damages. The trial court added $216,000 in prejudgment interest and $303,000 in attorneys’ fees to the award. The trial court, however, denied Andrews’s motion for liquidated damages because the liquidated damages were intended to compensate an employee for the delay in payment just like the prejudgment interest already awarded. To award both would give Andrews an unjustified windfall.
The Superior Court, sitting en banc, reversed, stating that the WPCL’s liquidated damages provision is “intended to be a disincentive or penalty for employers to withhold wages in bad faith.” It supplements, not supersedes, remedies available in a breach of contract action. In Pennsylvania, a prevailing plaintiff in a breach of contract action has a legal right to prejudgment interest, so Andrews was not precluded from also receiving an award of liquidated damages under the WPCL. Because the Pennsylvania Supreme Court refused to hear Cross Atlantic’s appeal, the Superior Court’s decision will control future compensation disputes between employers and employees where there is a claim for breach of contract. The lesson for employers: venturing into a compensation dispute without good faith could be costly.