Dan Price and his brother Lucas Price each scored a victory this week in their legal battle over Gravity Payments, the Seattle credit-card processing company they co-founded twelve years ago. Gravity gained worldwide fame --as well as a cover story in Inc.--when Dan instituted a $70,000 minimum wage one year ago, slashed his own compensation from $1 million to $70,000 to help pay for it, and ignited a ferocious debate about the role of business in combating income inequality.
The lawsuit, filed by Lucas last spring--alleging that Dan previously paid himself "excessive compensation" and asking for a forced sale or dissolution of the company--is still scheduled to go to trial in May.
In that lawsuit, Lucas--who owns 33% of Gravity to Dan's 67%--claimed that after Dan became CEO in 2006 and gained a majority stake in the company two years later, he "engaged in a campaign designed to enrich himself ... to the detriment of Lucas and his minority interest" and over paid himself before his voluntary pay cut last year. Dan has denied the claims and in February filed a motion that asked the court to throw out three of the four charges against him before the case comes to trial.
In a ruling released yesterday, King County Superior Court Judge Theresa B. Doyle dismissed one charge by Lucas--"cause of action for equitable relief"--that asked the court to order Dan to purchase Lucas's shares "at fair value, without application of minority or marketability discounts." (The judge could still issue such an order, but agreed with Dan's counsel in ruling that "these are remedies, and not a separate cause of action.")
Lucas came away with a victory when the judge did not dismiss his claim of breach of fiduciary duty, thus allowing it to be brought to trial. Lucas argued that Dan had a legal duty to act in Lucas's best interests but did not, which he said caused "damages to Lucas in an amount to be proven at trial." In their motion to dismiss the charge, Dan's lawyers argued that, as CEO, his fiduciary duty is not to Lucas, but to the corporation.
The third charge, "breach of contract," was a split decision. Dan's lawyers contended that none of Lucas's legal filings "identif[y] any contract that may have been breached." Judge Doyle ruled in favor of Lucas by saying that such a claim may be brought to trial based on the shareholder's agreement that the brothers signed in 2008. But she also ruled in Dan's favor that breach of contract cannot be claimed based on his employment agreement "because Plaintiff Lucas is not a party to, or third-party beneficiary of, that agreement."
The fourth and final charge by Lucas--"minority shareholder oppression"--was not part of Dan's motion to dismiss. Lucas alleges that Dan engaged in "burdensome, harsh, and wrongful" actions and "lack of fair dealing toward Lucas" and asked the court to either dissolve the company or order "a forced purchase of Lucas's interest" in the company "at fair value."
What is "fair value" for Lucas's shares in Gravity, which had more than $200 million in revenues and 120 employees last year, remains an open question. With both sides remaining mum--Lucas, Dan, and their lawyers all declined to comment for this article--such issues are now being fought entirely through hundreds of pages of court filings.
After yesterday's ruling, a Gravity spokesman emailed a statement to Inc., which stated "the court's ruling vindicated Dan on a number of accusations and did not find any wrongdoing. However, there is still more left to prove. Dan and everyone at Gravity are thankful to Lucas for helping us get started and playing an important role during a critical phase of the company's history. We continue to hope for a resolution that will meet his financial goals, but also allow us to continue our primary focus making credit card processing fair and transparent for independent businesses and entrepreneurs."
In an email interview in September, Lucas's lawyer Greg Hollon told Inc. that past appraisals commissioned by the company estimated the value of Lucas's shares at $35 million but that number now "is likely quite a bit higher, as revenues have increased materially since the time of that appraisal." Dan has said he offered his brother $4 million to $5 million for his shares, which in a court filing Lucas described as a "pittance."
The value of Lucas's shares would clearly peak if the company were sold, something Dan refuses to do, arguing that most buyers in their industry would fire staffers, slash salaries, and jack up prices to customers - "gut this golden goose," as he put it during an interview last July.
In his depositions, Lucas said he sold some of his shares back to Gravity in 2008 for $400,000, and stopped coming to work there in early 2008, four years after co-founding the company with Dan. Since 2008, he has continued to be paid $24,000 per year with benefits, he said. Lucas is currently senior vice president of business development at the Seattle startup Zipwhip.
Lucas's central claim against Dan is that his compensation was "excessive" in the years before he gave himself a big pay cut last April. According to court filings, Dan earned $1.1 million in 2014 and 2013, $2.04 million in 2012, $909,000 in 2011, and $958,00 in 2010. The brothers are the only two members of Gravity's board and Lucas acknowledged in depositions that he approved Dan's $800,000 cash bonus in 2012, based on the company's high performance, a bonus Dan continued to receive in subsequent years. "In hindsight, I probably should not have [approved the bonus]," Lucas said.
Dan has publicly admitted that his compensation was high, but has contended that it was based on market rates and what it would take to replace him. A study by Towers Watson that Gravity commissioned in 2014 recommended that the company's CEO receive between $675,000 and $2.8 million per year in salary, bonus, and stock, depending on how well the company does.
In court filings, Lucas has also alleged that Dan has used his position as majority shareholder to "use company funds to pay for personal expenses with no legitimate purpose." In those documents, he contends that Dan "has threatened to take the maximum possible amount of money out of the company unless Lucas agrees to exorbitant and inappropriate compensation for Daniel. When Lucas declined to agree to an exorbitant raise in compensation for Daniel, Daniel responded by attempting to punish Lucas with decreased dividend payments combined with a cash call on shareholders."
With both sides so far apart--especially on the crucial issue concerning the value of Lucas's shares--it seems unlikely that there will be a settlement before the case comes to trial in May.