Barnes & Noble got good news and bad news in court this week. The good news: at a May 6 conference, Judge John G. Koeltl ruled from the bench that a key counterclaim filed against former CEO Demos Parneros for alleged misconduct and "disloyal" behavior can proceed. The bad news: Koeltl also ruled that B&N must pay Parneros's legal costs and fees in advance for defending himself against B&N's countersuit.

The decision to allow B&N's full countersuit to proceed was not unexpected. Going back to the parties’ initial court appearance on November 13, 2018, when Parneros's attorneys announced their intention to move for at least part of the countersuit to be dismissed, Koeltl frankly told Parneros's attorneys the move was a waste of time and effort, suggesting the retailer's "faithless servant" counterclaim was well-pled, which he ultimately ruled on Monday. But in something of a surprise, Koeltl agreed with Parneros's attorneys that an indemnification clause in the former CEO's employment contract was so sweeping that it could reasonably be read to extend beyond third party suits.

The fee dispute landed in front of Koeltl after Parneros's attorneys stuck to their demand in previous negotiations that B&N advance 50% of the former CEO's total litigation costs, given that Parneros's initial claim and the subsequent countersuit were so intertwined. In response, B&N attorneys appeared to concede that some costs under the broad indemnity clause were potentially advanceable, but argued that since only two of the claims at issue in the combined litigation were brought against Parneros in his capacity as a corporate officer—the breach of fiduciary duty and faithless servant claims—any potential award, if any, should be minor.

"Plaintiff’s demand for advancement of 50% of his total fees and expenses for this lawsuit is clearly excessive and would provide Plaintiff with an unjustified windfall," B&N attorneys argued in court filings. "Plaintiff is asking Barnes & Noble to subsidize his defense of direct claims asserted by the Company for his own misconduct—a result that was not contemplated by the indemnification statutes, which were enacted to protect directors and officers from the costs of defending third party and derivative claims, not to immunize them from the consequences of their misdeeds towards the company itself."

"Plaintiff is asking Barnes & Noble to subsidize his defense of direct claims asserted by the Company for his own misconduct..."

Koeltl, however, rejected the retailer's contention, finding that all of the claims in the suit involved Parneros's actions in an official capacity, and were thus covered by the broad indemnity clause. Koeltl ruled that B&N must advance half of Parneros's total legal costs and fees in the litigation, and ordered the two sides to work out numbers and accounting details.

Meanwhile, a third decision delivered from the bench at the May 6 conference could be a potential powderkeg. Ruling on a discovery dispute between the parties, Koeltl granted a motion by Parneros's attorneys seeking information and records about the workplace conduct of two key B&N executives—founder Len Riggio, and former v-p of B&N's Media & Entertainment division, Chuck Gorman. Wary of "a fishing expedition," however, Koeltl recommended the two sides begin with a set of interrogatories to set the bounds of the inquiry.

But in principle, Koeltl largely agreed with Parneros's attorneys that claims against the former CEO's workplace behavior were at issue, and since B&N’s “Employee Relations policies” do not establish what constitutes, for example, bullying behavior (one of the stated reasons for Parneros’s dismissal) exploring the "comparative" conduct of other senior executives could help establish "the bounds of accepted executive behavior at Barnes & Noble.” That could be significant, as Parneros’ initial complaint takes particular aim at Riggio’s management style, alleging that he set “an unprofessional tone at B&N,” and offering a long list of disparaging comments Riggio allegedly made toward other executives.

Koeltl also punted a decision on what constitutes privileged information back to the parties, and the magistrate court for more negotiation. And he agreed to extend the discovery period from June 14 to September 20.

Monday's developments come after Parneros filed a bombshell lawsuit against B&N last August alleging breach of contract and defamation in the wake of his abrupt dismissal on July 3, 2018.

In response, on October 30, B&N filed its countersuit accusing Parneros of “disloyal” conduct and breach of his fiduciary duties. The company is seeking damages and to claw back more than $1 million in compensation, alleging that Parneros sabotaged a potential deal with British retailer W.H. Smith for personal reasons.