SEC v. Gemstar-TV Guide Int’l, 401 F.3d 1031 (9th Cir. 2005) (en banc)
As part of its announced plans to restructure its management and corporate governance, Gemstar-TV Guide entered into negotiations for termination agreements with its CEO and CFO. The CEO’s termination agreement provided for a “termination fee” of $22.45 million, an additional $7.03 million in unpaid salary, bonuses, and unused vacation and millions of shares of restricted stock; the CFO’s agreement provided for a termination fee of $7 million, an additional $1.21 million in unpaid salary, bonuses, and unused vacation and shares of common and restricted stock (collectively, the “Payments”). Shortly after the SEC ordered a formal investigation into the announced overvaluation of the revenue and profits from some of Gemstar’s sectors, the Commission requested that the Payments be placed in escrow. Hours before the restructuring agreements were to be executed, Gemstar informed the CEO and CFO that the Payments were to be placed in escrow for six months and that the escrow provision was non-negotiable. Although the executives acceded to the six-month escrow in “side letters,” they subsequently unsuccessfully challenged the escrow in an action filed in the district court. The SEC later filed an application to place the Payments in a 45-day escrow account pursuant to Section 1103 of the Sarbanes-Oxley Act (involving “extraordinary payments”). The district court determined that the Payments were “extraordinary payments” in that they were outside the ordinary course of business and were, therefore, subject to involuntary retention in an escrow account pursuant to Section 1103. A panel of the Ninth Circuit reversed and held that in the absence of objective evidence of what an “ordinary payment” might be, the Payments in question could not be subject to involuntary retention under the Act. In an en banc hearing, the Ninth Circuit reversed the panel’s opinion, affirming the district court’s judgment.