Updated below with details of judge’s ruling.
Lawyers for Gravity Payments CEO Dan Price and his brother and business partner, Lucas Price, squared off in court Friday in a dispute that could determine the fate of the Seattle-based credit-card payment processing company known internationally for instituting a minimum $70,000 salary for employees.
The brothers — both dressed in dark suits and seated a short distance apart — did not speak to each other during or after the proceedings in King County Superior Court in Seattle. Neither addressed the court, as their lawyers argued on their behalf in a complex case that pits brother against brother.
Lucas Price, co-founder and minority shareholder in the company, served his brother with the suit in March 2015, alleging that Dan Price had “improperly used his majority control of the company to pay himself excessive compensation and to deprive Lucas of the benefits of ownership in Gravity Payments.”
A month later, in April 2015, Dan Price made international news with the announcement that he would be raising the minimum salary at the company to $70,000 and reducing his own compensation, previously more than $1 million a year, to the same amount to help fund the pay increases for employees.
Dan Price has denied the allegations in his brother’s suit and said publicly that his previous compensation as CEO was set with the guidance of compensation consultants, based on market rates for the role. His motion for summary judgment, currently pending before King County Superior Court Judge Theresa B. Doyle, seeks to toss out major portions of his brother’s lawsuit.
“Lucas Price in this litigation attacks Daniel Price’s leadership of a business that they both launched in 2004,” said Paul Dayton, the attorney for Dan Price, during the court hearing Friday afternoon. “The attacks are remarkable on several grounds, but not least of which because the company has been extraordinarily successful.”
But Gregory Hollon, the attorney for Lucas Price, said Dan Price had a “duty to refrain from taking or retaining as personal profit money that rightfully should be in the company’s coffers. That’s the bare minimum fiduciary duty, and the one at issue in this case.”
In addition to challenging Dan Price’s compensation, Hollon questioned personal expenses charged to the company by the CEO, saying that “hundreds of thousands of dollars flowed out to support an extravagant lifestyle at Lucas’ expense.”
The dispute between the brothers is a lesser-noticed element of a larger story that continues to receive widespread media attention. With The New York Times and NBC News on hand, Dan Price’s announcement of the $70,000 minimum salaries at Gravity Payments spread quickly around the world, fueled in part by a global audience interested in issues of income disparity.
Over the past year, Dan Price has appeared on programs including the Today Show and the Daily Show, on the cover of Inc. magazine, and at the United Nations, among many other appearances. Earlier this week he tweeted a picture of himself with Pearl Jam lead singer Eddie Vedder in the green room of HBO host Bill Maher.
In deciding to raise employee salaries, Dan Price told reporters that he was motivated by research demonstrating a correlation between employees’ salaries and their emotional well-being. Price’s announcement fueled a larger discussion about wage equality and executive compensation, and positioned him as a thought leader on the topic of corporate responsibility.
“My 40-year goal is to create a world where values-based companies suck up all the oxygen and take over the economy,” he wrote in the Huffington Post in November. “I don’t mind if existing companies convert, but I want to send the ones that don’t out of business.”
The lawsuit by Lucas Price over Dan Price’s previous compensation seeks relief “up to and including dissolution of Gravity Payments and/or a forced purchase of Lucas’s interest in Gravity Payments at fair value.”
Court records show that Dan Price received $1.1 million in compensation in 2014, the last full year before the salary changes reduced his compensation to $70,000 a year. Gravity’s pre-tax net income was $3.5 million in 2014, on sales of more than $16.1 million. Dan Price received more than $2 million in compensation in 2012, which represented more than 20 percent of Gravity Payments’ $9.9 million in sales that year.
The subject of Friday’s court hearing, in King County Superior Court in Seattle, was Dan Price’s motion for partial summary judgment, filed on Feb. 12 of this year. The Gravity Payments CEO is seeking to dismiss three of Lucas Price’s causes of action: breach of fiduciary duty; breach of contract; and equitable relief.
In court on Friday, Judge Doyle did not rule on the motion for summary judgment, noting that she hoped to issue a decision by the middle of next week.
[Update, April 7, 2016: Judge Doyle granted in part and denied in part Dan Price’s motion for summary judgment. The judge dismissed Lucas Price’s breach of contract and equitable relief claims. She allowed the claim for breach of fiduciary duty and another claim, based on the company’s shareholders’ agreement, to remain for trial. Another cause of action, alleging minority shareholder oppression, was not part of the summary judgment motion and will also remain for trial.]
Dayton, the attorney for Dan Price, stressed repeatedly that his client has not violated any agreement with his brother. “There were a number of documents that were signed, and Lucas Price does not claim that Daniel Price failed to comply with any agreement between the two of them,” said Dayton, adding that if any damages were to be awarded, they should go to the company, not to Lucas Price.
“If anybody has an action here, it is the company, so Lucas Price cannot come into court and claim breach of contract based on an agreement between Daniel Price and the company,” Dayton said. Furthermore, Dayton said that Dan Price “has the unfettered authority under the shareholders’ agreement to set that bonus amount.”
Hollon, the attorney for Lucas Price, argued against that point, citing legal cases which he said made it clear that his client — as a minority shareholder — can take direct action against a majority shareholder. He said there is a direct claim for breach of fiduciary duty in cases such as this involving privately-held companies.
“That is just consistent with cases from across the country for decades,” he said.
Hollon said it is the fiduciary duty of the majority shareholder to refrain from taking personal profits where that money “rightfully should be in the company coffers.” Hollon later alleged that Dan Price overpaid himself by $4 million to $4.5 million over the past five years, money that “he just took out of the company,” the lawyer said.
Awarding financial damages to the company, rather than to Lucas Price, wouldn’t be the proper course of action based on case law in such situations, Hollon argued.
“So, you require him to put the money back into the company, but don’t allow the minority to proceed, what happens?” asked Hollon. “[Dan Price] remains in control and you’ve just perpetuated the problem with his control over the funds.” Hollon said Dan Price is essentially “taking a dividend to which Lucas Price should be entitled his fair share, so the direct action is allowed.”
In recent weeks and months, lawyers for the brothers have submitted hundreds of pages of court filings, sparring over issues including the admissibility of Lucas Price’s expert witnesses; discovery requests for Dan Price’s social media communications and emails with reporters; access to details about Lucas Price’s current employment at Seattle startup Zipwhip; and the public disclosure of Dan Price’s corporate expense reports.
Lucas Price is also asking for a copy of a book that Dan Price has said he is writing. The Gravity CEO’s lawyers have objected to turning it over.
Gravity Payments is a privately held company. Dan Price owns about 67.5 percent of the company, and Lucas Price about 32.5 percent, according to corporate records disclosed as part of the case. The brothers are the only two members of the company’s board. A footnote in a filing by Dan Price’s lawyers says that, if there is no board consensus over Dan Price’s compensation, the shareholders’ agreement allocates authority on the issue to the majority shareholder.
Although the original complaint was served on Dan Price the month before the announcement of the $70,000 minimum salaries, a recent filing by Lucas Price references the decision.
[Editor’s Note: This reference to the timing of the lawsuit has been clarified. The suit was served on Dan Price on March 16, 2015, and filed with the court on April 24, 2015. Dan Price made the salary announcement on April 13, 2015.]
“The evidence indicates that Daniel has paid himself excessive compensation and used his position to improperly extract additional monetary benefits from the company,” Lucas Price’s filing reads. “Further, without consulting the Board of Directors, after being served with the Complaint in this matter, Daniel made the decision to increase the minimum annual compensation of all Gravity Payments employees to $70,000.”
It adds, “As has been widely noted, this decision was unprecedented. … Lucas is entitled to obtain discovery into the decision-making process that did (or did not) factor into Daniel’s unilateral compensation decisions.”
A Gravity Payments spokesperson provided this statement to GeekWire on Feb. 19:
Dan and everyone at Gravity are thankful to Lucas for helping us get started and playing an important role during such a critical phase of the company’s history. We remain committed to performing well for him as a shareholder. We hope for a resolution that will meet his financial goals, but also allow us to continue to grow and thrive as a company.
Gravity alumni are playing critical roles at many of the best and most innovative companies around the region. We are proud of our associations with them and their impact. Lucas and ZipWhip are no exception.
Lucas Price and his lawyer declined to comment after the court hearing today.
In another recent development, King County property records now show that two deeds of trust have been recorded on Dan Price’s home in Seattle’s Magnolia neighborhood, as of March 9, indicating that Price has successfully borrowed against the property.
GeekWire reported in December that Price had not, at that point, mortgaged his two homes in Seattle, contrary to what Inc. magazine reported for a cover story about the aftermath of Price’s salary announcement last fall. The magazine reported at the time that Price said he had “sold all his stocks, emptied his retirement accounts, and mortgaged his two properties — including a $1.2 million home with a view of Puget Sound — and poured the $3 million he raised into Gravity.”
In a subsequent court filing, Price acknowledged that his homes hadn’t been mortgaged, saying at the time that he had “attempted to mortgage my home and rental property, but so far these loans have been denied based on the ongoing lawsuit” brought by his brother. The magazine reported in a follow-up story that an internal communication issue at Gravity also contributed to the mortgages being delayed.