DC Shoes Co-Owner Files Wrongful Termination Lawsuit; DC Countersues Claiming Fraud.

Clayton Blehm, one of DC Shoes’ founders and owners, has filed a 140-million-dollar lawsuit against his former business partners, the company he helped build, and Billabong International — which last summer was in negotiations to buy DC.

Blehm’s employment at DC was terminated June 30, 2002, and the lawsuit’s six causes of action revolve around the alleged circumstances and reasons behind this dismissal.

The defendants in the suit include DC Shoes, Billabong International Limited, DC Co-Owners Ken Block and Damon Way, the Damon Way Revocable Trust, and the DC Shoes Employee Share Trust. The case was filed in California Superior Court at the North San Diego County branch on October 1, 2002.

On November 20, DC Shoes, Way, and Block filed a cross-complaint against Blehm alleging, in part, that Blehm “has continuously and repeatedly engaged in fraudulent and dishonest acts and gross abuse of his authority and discretion,” including a failure to implement a sound financial management program for the company.

While normally an employment dispute would hardly cause a stir, Blehm’s ownership stake in DC, the involvement of Billabong, and the large sums being sought for damages makes this not your typical case.

Blehm’s Allegations
According to the lawsuit, Blehm was hired to be the controller of Circus Distribution — the predecessor to DC — back in January of 1993. He held that position until the end of 1995, at which time he was issued shares of stock in Circus sufficient to make him a one-third owner of the company, along with Block and Way.

In November 1996, Blehm was elected to Circus’ board of directors and appointed as its chief financial officer. In November 1997, Circus Distribution changed its name to DC. According to the lawsuit, “During the time Blehm was CFO of Circus/DC, Blehm performed his duties competently and professionally, without criticism from others in senior management of Circus/DC.”

At the beginning of this year, Blehm formally became an employee of DC. According to the suit, “Between 1995 and the present, gross sales of DC increased from approximately eight-million dollars to approximately 110-million annually.” In April, Billabong made an unsolicited inquiry about purchasing all the issued and outstanding corporate shares of DC — in other words, it wanted to buy the company.

According to the arcane legalese in the lawsuit, “Blehm is informed and believes … that Billabong’s interest in acquiring DC’s stock was subject to various conditions, one of which was that DC terminate Blehm because he was an older, high-salaried employee.” The case also asserts, “Billabong wanted DC to terminate Blehm as a condition to Billabong acquiring DC’s stock, because Billabong did not think Blehm fit its corporate image, i.e., that of marketing sports apparel to predominately young consumers.”

Blehm’s lawsuit claims that while DC justified Blehm’s termination on “another pretext,” he was actually terminated because of his age. Blehm was 69 years old at the time of his termination. According to the suit, Blehm’s duties as CFO of DC were assumed by a substantially younger, less-qualified individual. As a result of this alleged “tortious discharge in violation of public policy” Blehm is seeking an award from DC for damages in excess of ten-million dollars.

Blehm is seeking another ten-million dollars from DC for “breach of implied contract.” According to the suit, “Blehm believes that he would not be terminated arbitrarily, and relied on the fact that, unlike other employees, he was not required by DC to accept the ‘at will’ employment provisions in DC’s Employee Handbook.” The suit claims this created an implied employment contract between Blehm and DC, “whereby DC agreed to employ Blehm for as long as he chose to work, and whereby DC agreed not to discharge Blehm absent just cause.”

The third cause of action asserts that DC breached the implied covenant of good faith and fair dealing under the employment agreement by discharging Blehm without notice or just cause. Blehm is seeking damages in excess of ten-million dollars for this one, too.

The fourth cause of action — again asking for more than ten-million in damages — is against Billabong for “interference with contractual relations.” The next cause of action is against Block and Way for breach of contract. The suit says Blehm, Block, and Way agreed both orally and in writing that they would all be compensated equally for the jobs they did for DC.

The sixth and last cause of action in the lawsuit is against Billabong for breach of contract. Blehm is seeking compensatory damages in excess of 90-million dollars, to be established at trial, for this alleged violation.

Lawrence Campitiello, one of the attorneys representing Blehm, declined to comment on the case.

The Cross-Complaint
The cross-complaint filed on behalf of Way, Block, and DC Shoes contains twelve causes of action against Blehm, including breach of fiduciary duty, fraud, breach of contract, and misappropriation of trade secrets.

Perhaps the most serious cause of action is the tenth, which calls for the “rescission” (or cancellation) of the 1995 agreement to transfer one-third ownership of the company to Blehm because of his alleged “fraud, misrepresentations, omissions, breach of duty,” and other failures to perform.

The cross-complaint claims Blehm “secretly, intentionally, and unlawfully” charged tens of thousands of dollars in personal expenses to his corporate credit card and then concealed those expenses. He also allegedly used the corporate credit cards of other DC employees for personal expenses, then approved their payment on behalf of the company. The cross-complaint further claims that Blehm told DC employees not to tell Way or Block about these improprieties “under the threat of termination of employment and financial ruin,” reads the cross-complaint.

The cross-complaint also reports that on February 13, 2002 Blehm took a 500,000-dollar loan from the company to help him buy a new home and that he agreed to repay it within fifteen days. The lawsuit claims this money has yet to be paid back, despite a demand for its repayment.

Jim Peterson, the lawyer representing Way, Block, and DC Shoes declined to comment about this cross complaint or Blehm’s lawsuit.

Billabong’s Take On The Matter
On November 1, Billabong released a statement to the Australian Stock Exchange about the lawsuit: “Billabong denies it is liable as alleged or on any basis whatsoever. Billabong believes there is no substance to the claim and that it is frivolous.”

“Billabong is examining with its lawyers the avenues available to it to bring the proceedings to an end or to at least extract Billabong from them,” the statement concluded.

If this case isn’t settled out of court, it will be the legal process that decides whether Blehm’s case has merit or whether DC’s cross complaint strikes closer to the truth. Depositions are anticipated to take place in the next few months.