Porter Hedges partner Eric Wade met James Duke VanLue a decade ago when he walked into Porter Hedges’ offices in downtown Houston with a box of documents.
Although VanLue was only 30 at the time and had nothing more than a high school education, the documents he brought that day contained his ideas to develop Downhole Technology, a frac plug manufacturing company that several years later would attract an offer from a foreign buyer to the tune of $103 million.
“We could tell there was some real substance to his ideas,” Wade told The Texas Lawbook. “We helped him establish his company, prosecute his first round of patents, [develop] the corporate documents and develop a relationship with an accounting firm.”
Wade and VanLue’s paths crossed again in 2018 after Schoeller Bleckmann America, the very company that paid $103 million for a controlling interest in Downhole in 2016, fired VanLue and sued him based on a series of allegations that VanLue claimed were false and attacks on his character. VanLue retained Porter Hedges to defend him and bring a slew of counterclaims in the litigation, which played out in a Houston courtroom during a four-week bench trial during the pre-pandemic portion of 2020.
The Porter Hedges team recently received good news. On Nov. 12, Houston visiting judge Caroline Baker awarded VanLue a $143 million judgment, siding with VanLue’s claims and rejecting Downhole/SBA’s claims. And today, the lawyers are due to submit their request for attorneys’ fees.
The judgment is bittersweet for Wade and a team of litigators at Porter Hedges. On the one hand, they say the nine-figure ruling clears their client’s name and awards money he was rightfully owed. On the other hand, VanLue never lived to see the result.
On June 27, VanLue died in an accident as he tried to land his small plane on a private runway in East Texas. He had just turned 40.
“They really maligned him in such a way that it was really a personal attack,” Wade said of Downhole and SBA. “Duke was not going to stand for having his reputation destroyed like they wanted to destroy it. He died not knowing his name had been vindicated.”
The dispute dates back to 2016, when SBA, a subsidiary of publicly-traded Austrian company Schoeller Bleckmann Oilfield Equipment AG, bought a 68% stake in Downhole. SBA reserved the right to purchase the remaining 32% interest held by VanLue and key managers after three years. VanLue’s interest totaled 26%.
At the time of the purchase, VanLue signed an employment agreement that appointed him CEO until the third anniversary of the deal, when SBA would buy out VanLue’s 26% stake in Downhole. In order to incentivize VanLue’s performance, the parties agreed the price for the 26% stake would be seven times Downhole’s EBITDA during the last year of the employment period. This formula assumed that no “triggering event” — such as a for-cause termination — occurred. Otherwise, the buyout price would be $100 million cheaper.
VanLue’s lawyers said their client rose to the occasion. Under VanLue’s leadership, Downhole’s profits between 2016 and 2018 increased by more than 700%.
But on the second anniversary of the acquisition, Downhole’s board of directors terminated VanLue — first under no cause, then, several months later, for cause. By the fall of 2018, the company had seized VanLue’s ownership interest without compensating him. The circumstances surrounding the abrupt series of events wildly differ among the parties.
VanLue and his lawyers characterized the company’s reasons for termination as “a failed SBA gamble” to buy VanLue out at a lower price. When the company’s performance exceeded the board’s expectations, the VanLue team argued, SBA developed a scheme to stunt the company’s EBITDA growth, push VanLue out, and, in the process, accused him of a slew of misdeeds to both justify a “for cause” termination and bury him in litigation.
But lawyers for SBA and Downhole argued at trial that the board of directors acted rationally, methodically and in good faith in deciding to terminate VanLue. They said the board’s relationship with VanLue began to crumble after receiving employee complaints about VanLue and he began acting secretively about Downhole’s operations — never allowing board members to access company property without his supervision.
The board terminated VanLue in April 2016 without cause, but, according to the termination letter, it reserved its right to change his termination to “for cause” if it discovered information that reveals cause existed. Over the next several months, the board conducted an investigation through a third party, Alvarez & Marsal.
The board changed VanLue’s termination to “for cause” after the investigation “revealed a complex fraud orchestrated by VanLue,” said David Baay, a partner at Eversheds Sutherland and a lead lawyer for Downhole and SBA at trial.
“There is no dispute that under VanLue’s leadership and supervision, Downhole developed and disseminated false marketing material and certified false test data about the frac plugs,” he said.
Moreover, Baay said, VanLue refused to cooperate during the investigation, “stole terabytes” of Downhole data that he refused to return until after litigation had begun and used company funds to hire law firms to protect his personal interests.
“Any rational board of directors would have terminated Mr. VanLue for cause,” Baay said.
But at trial, Wade said Downhole and SBA failed to come up with any meaningful evidence substantiating their claims.
For example: “They could not identify any property on the thumb drives he happened to have the day he left the company that were unique and not in possession of Downhole,” Wade said. “They had everything. That claim fell flat.”
The evidence that did surface in trial, Wade said, was a series of wrongdoings that Downhole and SBA committed against VanLue. Wade said his team demonstrated at trial that the financial success VanLue achieved for the company under his leadership increased SBA’s contractual obligation so much that SBA ended up reporting losses in its public filings.
They also argued at trial that Downhole failed to pay VanLue roughly $9 million in tax distributions in 2018 — exposing him to $15 million in taxable income that he never received.
In her order, Judge Baker found Downhole had acted in bad faith and breached fiduciary and contractual duties owed to VanLue. She also sided with VanLue’s declaratory judgment claims, including that Downhole had no contractual right to retroactively change VanLue’s termination to “for cause” nor to seize his ownership interest.
Downhole and SBA’s lawyers have assured that there will be an appeal.
“The court essentially acted as a ‘super-board of directors’ and second-guessed a business decision made in good faith and supported by ample evidence,” Baay said. “We believe that it will be overturned on appeal.”
In addition to the “hundreds of pages” of the trial transcript that Baay says details VanLue’s wrongful conduct, Downhole and SBA’s lawyers say the appeal will also be critical for Texas employers and how much authority the courts have to overturn a termination for cause — even if the circumstances heavily support it.
“Texas businesses will have a keen interest in this appeal, which involves an employer’s decision to terminate an employee and then determine that ‘cause’ existed after conducting a thorough investigation,” said Yetter Coleman partner Connie Pfeiffer, an appellate specialist who also represented Downhole and SBA at trial. “This case is ultimately about whether Texas law gives a board of directors broad authority to exercise business judgment based on the information available to it when terminating employees and the role of fact-finders in reviewing those decisions.”
Wade, on the other hand, said Judge Baker’s ruling sends “a message that big companies can’t abuse the process to injure individuals.
“They tried to out-muscle and outspend Mr. VanLue,” Wade said. “It’s a huge economic risk to fight litigation like this. Duke told me he grew up with very modest means — if not poor. He was willing to spend every dollar he had to redeem his name. He said, ‘Look, I’ve been poor and I can be poor again, but I’m not going to let them destroy my name like this.’”
In addition to Baay and Pfeiffer, the trial team for Downhole (now d/b/a The WellBoss Company) and SBA also included partners Scott McLaughlin and associates Garrett Gibson and John Hays of Eversheds Sutherland as well as Beck Redden associate Daniel Hammond.