When the SEC sued Robert Happ for illegal insider trading in October 2000, he thought his defense costs would be covered. Happ had an indemnification agreement with Galileo, an optical manufacturing company on whose board he served. The agreement said the company would cover any liabilities associated with Happ's duties as long as his conduct was in the company's best interest.
After a court found Happ liable for about $35,000 in unlawful gains from insider trading, the company sued for repayment of Happ's legal-defense bill. The ensuing legal battle might have dragged on with a jury trial and cost hundreds of thousands of dollars, but it didn't because of Galileo's smart strategy of conditioning Happ's indemnification on his exoneration.
"If you believe truthfully the undertaking language is forcing you to give up rights you don't need to give up, the way to approach it is to take the matter to a judge," Sablone says. "Don't take the money and then argue there was duress and you had no choice."
Additionally, Happ claimed the company was obligated to pay his fees under the indemnification agreement, regardless of what the more restrictive undertaking said.