On The Case

Sex, lies and … contracts? Ex-McDonald’s CEO fraud case turns on arcane clause

(Reuters) - In high-powered corporate litigation, even the seemingly juiciest cases can turn into mind-bending exercises in contract interpretation.

Case in point: McDonald’s lawsuit against former CEO Stephen Easterbrook, in which Easterbrook just filed a reply brief urging Vice Chancellor Joseph Slights of Delaware Chancery Court to dismiss the company’s complaint against him.

In McDonald’s depiction, the case is a tale of scandal and lies in which the company was tricked into a deal with a man who hid evidence of his abuse of power. According to the lawsuit, when McDonald’s ousted Easterbrook in 2019, the company believed he had engaged in a single, non-physical but inappropriate romantic relationship with a McDonald’s employee. Only after signing the severance deal, McDonald’s said, did the company find out that Easterbrook had had sexual relationships with three female employees in his final year - and had allegedly deleted evidence of the affairs from his company-issued cellphone when McDonald’s began investigating him.

McDonald’s, which is represented by Munger Tolles & Olson and Wachtell Lipton Rosen & Katz, claims that Easterbrook breached his fiduciary duty to the company and fraudulently induced it to enter the severance agreement. Its complaint asks the Delaware court to rescind the deal and order Easterbrook to pay back tens of millions of dollars.

Seems like a case made for tabloid coverage, right?

Not to hear Easterbrook and his attorney, Daniel Herr of the Law Office of Daniel Herr, tell it. Herr did not respond to my email request for comment, but Easterbrook’s Aug. 14 dismissal motion and his newly-filed reply brief portray the case not as a sex-and-lies scandal but as a technical contract dispute.

Easterbrook’s briefs urging dismissal do not address the truth of McDonald’s allegations of affairs and coverups. They argue instead that those assertions are outside of the severance contract between the company and its ex-CEO. McDonald’s, according to Easterbrook, had every advantage available to a sophisticated corporation when it entered into the severance deal. The company had access to all of Easterbrook’s records, which were stored on company computers. It was represented by great lawyers when it negotiated the severance deal. It imposed a series of restrictions on Easterbrook, including non-disparagement and non-compete clauses with which the CEO has complied.

And in that agreement, according to Easterbrook’s briefs, McDonald’s said the only facts that matter are those within the four corners of the contract. So, Easterbrook argued, when McDonald’s now asserts that it relied on his allegedly false assurances about the extent of his misconduct when it signed that deal, it is a “double liar.”

That phrase comes from then-Vice Chancellor Leo Strine in 2006’s Abry Partners v. F&W Acquisition (891 A.2d 1032), which discussed anti-reliance clauses in corporate contracts. In such clauses, the parties expressly contract that their agreement relies only on representations within the agreement, superseding any previous written or oral representations. When one side turns around and sues, pointing to representations outside of the contract to show that it was fraudulently induced to enter the deal, Strine wrote in the Abry case, “it proves itself not only a liar, but a liar in the most inexcusable of commercial circumstances: in a freely negotiated written contract.” To allow a “double liar” to win a fraudulent inducement claims, Strine wrote, “is to sanction its own fraudulent conduct.”

Easterbrook’s briefs point to language in the ex-CEO’s severance agreement that says the contract “completely supersedes any prior written or oral agreements or representations,” and that “any oral representation or modification concerning this agreement shall be of no force or effect.” Those clauses, he argued, are anti-reliance provisions precluding the McDonald’s fraudulent inducement claim.

But here’s the problem, according to McDonald’s brief opposing dismissal: The word “reliance” does not appear in the clauses Easterbrook is citing. Under copious Delaware precedent, the company said, anti-reliance provisions must “clearly and unambiguously” disavow reliance on representations outside of the contract. These provisions are distinct, McDonald’s said, from much more commonly used integration clauses, which supersede other representations. Easterbrook can’t turn a garden-variety integration clause into an explicit anti-reliance clause, McDonald’s said, by misleadingly paraphrasing contract language to suggest that it contains the crucial missing word.

McDonald’s quoted the Abry “double liar” decision to underline its point: “Murky integration clauses, or standard integration clauses without explicit anti-reliance representations, will not relieve a party of its oral and extra-contractual fraudulent representations.”

In the reply brief filed Friday, Easterbrook countered that the McDonald’s interpretation of the contract language will allow corporations to evade their own agreements. “A sophisticated entity can fail to include representations in an agreement, disclaim representations from outside of the document, and, after receiving the full benefit of the bargain, assert ‘but we did rely on those other representations,’” the brief said.

McDonald’s said in a statement responding to Friday’s brief that Easterbrook “lied and destroyed evidence to conceal his inappropriate conduct and impede the investigation into his behavior. He cannot hide behind baseless technical arguments.”

Vice Chancellor Joseph Slights will get to hear from both sides at a telephone dismissal hearing scheduled for Nov. 13. It promises to be a hot ticket – if you like arguments over the difference under Delaware law between integration and anti-reliance contract provisions.