August 4, 2017

Today in a San Diego courtroom, the battle for Snopes will be set in motion — and it should be an interesting showdown.

In the first hearing of a multi-part lawsuit, Snopes and a digital services company will present their pre-trial arguments before a judge in the Superior Court of California in San Diego County. On one side is Bardav, Inc., the parent company of the popular debunking site, and on the other is Proper Media, a contractor-turned-alleged-Snopes-co-owner.

At the center of the dispute are three issues: Who owns Snopes? Did Bardav CEO David Mikkelson have the right to cancel the company’s contract with Proper Media? And is Mikkelson fit to own the company?

Proper Media, which filed its original complaint in early May, alleges it’s an equal co-owner with Bardav, it still has a valid contract with the company and that Mikkelson is unfit to own Snopes because of alleged prior misdeeds. (For more background, read this, this and this).

In a cross-complaint filed in early June, Bardav argued that it had every right to cancel its contract with Proper Media — which Snopes signed in August 2015 for the company to handle its back-end advertising and development platforms — because it owns more than 50 percent of the debunking site and because Proper Media is unjustly withholding advertising revenue from the company.

Mikkelson also argued in the cross-complaint that Proper Media is actually not a 50 percent co-owner because Vincent Green, one of its shareholders, retained a 3.33 percent ownership in Bardav when he left Proper Media to work for the company in spring 2017. Proper Media alleges that was a conspiracy.

But Snopes already has a leg up.

On Thursday afternoon, the debunking site was handed an early victory in the legal dispute, with a judge tentatively ruling in favor of Bardav on two key issues. First, Judge Judith Hayes of the San Diego Superior Court granted the company’s request for a temporary injunction forcing Proper Media to release advertising revenue to Snopes — which Mikkelson previously told Poynter hadn’t received any ad money since February 2017. She also ruled against Proper Media’s argument for the removal of Mikkelson as director of Bardav.

“Proper Media does not have standing to seek removal of Mikkelson. … Plaintiffs have not presented sufficient evidence to prove fraudulent acts,” Hayes wrote in her decision.

Despite Thursday’s ruling — which is not binding — three separate motions are to be heard today. Judge Hayes ruled that Proper Media can move forward with its breach of contract claim, and both sides will have the chance to argue their pre-trial motions, which include the ownership dispute.

A permanent resolution is likely months away, but who will prevail? Legal experts say it’s complicated — and everything is not quite as it seems.

“I actually think it’s a contractual dispute and there is an effort to kind of block the contractual dispute by making a play for ownership,” said Michael Chasalow, director of the Small Business Clinic at the University of Southern California’s Gould School of Law.

Who owns Snopes?

The ownership half of the legal fracas is the primary argument from Proper Media’s camp.

According to the original complaint, Mikkelson had no right to cancel the contract earlier that spring because Proper Media was a 50 percent co-owner of Bardav.

Legal experts say the ownership issue will be determined by the structure of a $3.6 million deal between Barbara Mikkelson, David’s ex-wife, and Proper Media. Barbara Mikkelson sold her 50 percent stake in Bardav directly to Proper Media after her contentious divorce with David Mikkelson as one share, said Karl Kronenberger, the attorney representing Proper Media in the case.

“It was sold all as one chunk, so technically there’s one share — one owned by Proper Media and one owned by David Mikkelson,” he said. “In the very last minute, with David’s interest in keeping S corp status, Proper Media changed the structure to be individuals holding shares for the benefit of Proper Media.”

Per United States law, if a company maintains S corporation status — meaning its shares are held by individuals, not the organization itself — then it qualifies for certain tax exemptions intended for small businesses. Bardav claimed this status prior to Barbara Mikkelson’s sale to Proper Media.

Patrick Ross, a senior manager for marketing and communications at Procopio — the law firm representing Bardav — told Poynter in an email that the firm didn’t have any further comment beyond its statement (available here) and existing court filings.

Bardav’s cross-complaint alleges that the written sale agreement between Barbara Mikkelson and Proper Media did not structure the company’s ownership in Bardav as one single stock or for the benefit of Proper Media. It also argues that the agreement did not provide for any of the shareholders to join Bardav’s board of directors.

Proper Media’s original complaint alleges the opposite.

Chasalow, an expert on S corporations, said he’d be surprised (for more than one reason) if the five original Proper Media board members weren’t listed as co-owners of that 50 percent stake in Bardav. If they’re not, the company is no longer an S corporation, which wouldn’t line up with both Bardav and Proper Media’s arguments. And if the five individuals are listed as the owners of the stock — as Bardav is saying — then Proper Media isn’t a 50 percent co-owner of the company.

Further, Chasalow said Kronenberger’s allegation that the sale of Barbara Mikkelson’s half of Bardav was structured “for the benefit of Proper Media” wouldn’t really hold up in court anyway.

“It is possible that the five individuals all agreed to vote their shares in a certain way … if I put my best friend on the board and I assume that he or she is going to vote how I want them to, but they don’t, I don’t have any recourse,” he said. “Words like ‘with the understanding’ aren’t legally binding terms.”

Unless the five original board members were contractually obligated to vote the same way, Proper Media has no recourse against Mikkelson or Green, Chasalow said. And he said he suspects that’s the case because the company has yet to provide documentation of the ownership structure of their stake in Bardav.

“My guess is there was an understanding that the five owners would vote in Proper Media’s interest and maybe even that they would elect the president of Proper Media to the board,” Chasalow said. “I’m guessing there may not be such a contract actually detailing this. The only reason I think that is, that’s your strongest point. Why wouldn’t that be part of your complaint?”

Was Bardav allowed to cancel its contract?

Ultimately, it doesn’t really matter who owns Snopes, Chasalow said. The contractual dispute will most likely be the primary issue at bar during today’s hearing.

And Snopes will probably win, he said.

“(Proper Media has) a conflict of interest because it’s their contract, and because they have a conflict of interest, they are not allowed to vote on the matter involving their own contract,” he said. “Even if Proper Media owns half the company, I still don’t think they get to vote on what happen with the contract with Proper Media.”

Robert Hillman, a professor of law at Cornell University, agreed, saying the sale of Barbara Mikkelson’s stock in Bardav to Proper Media is largely irrelevant in the contractual dispute.

“It’s unusual for two parties, one has filed a complaint and the other also a counterclaim, for this ownership issue to be mixed into the equation,” he said. “What I am saying is, as to who’s right with respect to who materially breached (the contract) first, the fact of the sale I don’t think is relevant.”

Despite the complexity of the situation, including the struggle over who owns Snopes, Hillman said legal disputes like the one between Bardav and Proper Media aren’t altogether uncommon.

“In contract law this happens all the time — the parties are fighting out who breached first,” he said. “Many breach of contract cases come down to the questions that I’ve posited: What does the express contract say about the right to cancel?”

According to the cross-complaint filed by Bardav, the original general services agreement with Proper Media included a provision that allowed for the cancellation of the deal “with or without cause.”

Mikkelson gave Proper Media 60 days notice prior to canceling the contract, according to both complaints. But Proper Media’s original complaint argues that Mikkelson allegedly cut off Proper Media’s access to a bank account the two companies shared in April. Additionally, Kronenberger said Mikkelson did not accept any invitations to meet about the contract from Proper Media President Drew Schoentrup, who the company argues is on the Bardav board of directors.

“Our position is that if Mikkelson is going to be acting on behalf of the company and terminating this contract, then he has to get the consent of the other director,” Kronenberger said.

Bardav disputes that Schoentrup has a position on the company’s board of directors in a formal objection of evidence, and Chasalow said it’s fairly irrelevant. But by arguing that Mikkelson made it impossible for the company to do its job by interfering with their contract, Proper Media might have a claim.

“The complaint seems to be suggesting that Mikkelson interfered with Proper Media’s performance and that he can’t complain about nonperformance if he caused the nonperformance,” said Clayton Gillette, professor of contract law at New York University. “As a general matter, that is an accurate principle of contract law.”

In spite of that, the situation is complicated by the fact that the contract includes a 60-day termination notice without cause, which would make Proper Media’s claim regarding nonperformance a non-issue, Gillette said. Further, the only important factor of the contractual dispute between the two companies is whether or not California has a law that forces companies to terminate contracts “in good faith.”

“Who cares about corporate control or who cares about whether there was interference with the contract?” he said. “The only interesting issue is whether California would require an absolute termination clause.”

According to Justia, every contract or agreement created in California comes with “an implied promise of good faith and fair dealing,” meaning no party in a contract will do anything that unfairly interferes with another party’s ability to benefit from the agreement. However, that law cannot create “obligations that are inconsistent with the terms of the contract.”

Whether or not Bardav’s alleged actions with regard to its contract with Proper Media violate that law will probably be a point of focus in court, Gillette said.

Is Mikkelson unfit to own Snopes?

Perhaps one of the more interesting arguments that Proper Media has made against Bardav is that Mikkelson, the company’s CEO co-founder,  is unfit to own the company.

Mikkelson previously told Poynter that Snopes hadn’t received any money from its advertising revenue — which Proper Media handles — since February 2017, prompting a crowdfunding effort that had raised nearly $700,000 as of publication. Thursday’s ruling tentatively granted an injunction to free up some of that advertising revenue and, in mid-July, a judge ordered Proper Media to pay $100,000 to Bardav on the condition that it not be given to Mikkelson, Kronenberger said.

The terms of the latter restraining order expose a key interest of Proper Media — the company isn’t trying to keep money from Snopes, it’s trying to keep money from Mikkelson.

“Our primary argument is that David Mikkelson is not fit to be a director and officer of the company,” Kronenberger said. “David became more and more of an absentee owner after Proper Media got involved.”

Thursday’s preemptive ruling against Proper Media’s move to oust Mikkelson as director of Bardav doesn’t seem to bode well for that unfitness claim. However, the ruling is non-binding, and Proper Media will likely still bring up Mikkelson’s alleged past behavior in order to advance its ownership arguments.

Several of the points Kronenberger made relate to a Daily Mail investigation from December 2016 that reported several salacious allegations about Mikkelson, including that he used company money to fund his honeymoon, pay for divorce expenses and buy prostitutes. Mikkelson has disputed the report, but Proper Media is sticking with its allegations.

“Even though it’s inflammatory, and some people may not want to talk about it … when you’re litigating these corporate issues, if it’s discovered that an employee, officer, whatever of a company uses money to pay a prostitute, it raises a major red flag,” Kronenberger said. “We’re arguing that he has breached his fiduciary duties through a variety of actions; refusing to hold meetings and using company funds for personal purposes.”

But whether or not the allegations against Mikkelson are true might not matter in court. Proper Media’s argument that the Bardav CEO is unfit to lead the company isn’t really a defensible position, Chasalow said — a point that seems to be reaffirmed by Thursday’s tentative ruling.

“So here’s the thing — first of all, this ‘not fit’ isn’t really a legal standard, and so if he is acting inappropriately with respect to the company, that is an issue that impacts the shareholders,” he said. “Even if he was kind of acting improperly by taking money out of the company for his own benefit, to the extent that he’s the sole owner, no one has a claim against him.”

While Proper Media may be identifying a plausible problem for Bardav, that doesn’t mean it has any legal justification for doing so, Chasalow said.

“Just because they want the remedy that accompanies the wrongdoing of him using money for his personal defense. .. that doesn’t mean that’s legally what happens,” he said. “As long as he has 50 percent, absent way more extreme wrongdoing than what has as been alleged, I don’t see him being removed.”

And while he’s not sure who will end up winning in court, Chasalow does think one thing is relatively certain.

“It sounds like everyone is behaving a little bit badly, maybe more than a little bit.”

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Daniel Funke is a staff writer covering online misinformation for PolitiFact. He previously reported for Poynter as a fact-checking reporter and a Google News Lab…
Daniel Funke

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