Title: Gonzalez v. Ward and Ehrlich and Respiratory Research Institute LLC
Citation: N/A
Docket Number: 253, 2003
State: Delaware
Issuer: Delaware Supreme Court
Date: January 15, 2004

IN THE SUPREME COURT OF THE STATE OF DELAWARE 
 
I. PETER GONZALEZ,  
 
) 
 
 
 
 
 
 
)  No. 253, 2003 
 
 
Plaintiff Below, 
 
) 
 
 
Appellant,  
 
)  Court Below:  Court of Chancery 
 
 
 
 
 
 
)  of the State of Delaware in 
v. 
 
 
 
 
 
)  and for New Castle County 
 
 
 
 
 
 
) 
DONALD R. WARD and 
 
)  C.A. No. 19224 
FRANCIA E. EHRLICH, 
 
) 
 
 
 
 
 
 
) 
 
 
Appellees Below,  
) 
 
 
Appellees,  
 
) 
 
 
 
 
 
 
) 
and 
 
 
 
 
 
) 
 
 
 
 
 
 
) 
RESPIRATORY RESEARCH  
) 
INSTITUTE LLC, a Delaware  
) 
Limited Liability Company, 
 
) 
 
 
 
 
 
 
) 
 
 
Derivative Nominal 
) 
 
 
Defendant Below,  
) 
 
 
Appellee. 
 
 
) 
 
Submitted:  November 12, 2003 
Decided:  January 15, 2004 
 
Before HOLLAND, BERGER, and STEELE, Justices. 
 
O R D E R 
 
 
This 15th day of January 2004, upon consideration of the briefs of the parties, 
it appears to the Court as follows: 
1. 
Appellant I. Peter Gonzalez and Appellees Donald R. Ward, Francia 
E. Ehrlich, together with other investor/members, formed Respiratory Research 
 
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Institute LLC (“RRI”) in 1994.  RRI used CRN, a network of allergists and 
pulmonologists that conducted clinical research, to provide pharmaceutical 
companies with a pool of investigators for their clinical studies.  The Operating 
Agreement listed Ward, Ehrlich and Gonzalez, along with James P. Kemp and 
David Tinkleman as the initial managers of the RRI.  However, only Ward, Ehrlich 
and Gonzalez acted as Operating Managers and engaged in day-to-day work for 
RRI.  By the end of 1998, only Ward, Ehrlich and Gonzalez remained as Member-
Managers and each held a one-third interest.       
2. 
The Initial Managers unanimously agreed to a compensation formula 
for the Operating Managers of $500 per day not to exceed 30 days per month total 
for the first year.  The Operating Managers agreed to perform the following duties: 
(i) Ward was responsible for marketing but also took on responsibility for the 
financial work of RRI; (ii) Ehrlich was responsible for the legal and financial 
obligations of RRI; and, (iii) Gonzalez was responsible for sales activities.  
Compensation was based on a work schedule to be determined by the Operating 
Managers.  The formula provided compensation only to the Operating Managers 
and the formula set a ceiling on the total yearly compensation to be paid out by 
RRI at $180,000 ($500 * 30 days per month * 12 months).  Accordingly, Ward, 
Ehrlich and Gonzalez each received compensation of $60,000 per year.   
 
3
3. 
In the late 1990’s, a new type of entity emerged called a contact 
research organization (CRO).  CRO’s provided services above and beyond those 
offered by RRI and eventually became more attractive to pharmaceutical 
companies.  By September 1999, Ward, Ehrlich and Gonzalez decided to sever 
their relationship with CRN, dissolve RRI, and wind up the remaining studies still 
in progress.  Winding up generally only involved the duties assigned to and 
performed by Ward and Ehrlich.  Gonzalez abandoned his position as an Operating 
Manager, stating: “I will not spend any [more] days at RRI.  I have done my share 
of it and that is enough.”  Gonzalez did not participate in RRI after the end of 
1999.  As a result, Gonzalez was only entitled to receive profit distribution based 
on his one-third interest in RRI.   
 
4. 
Ward and Ehrlich worked diligently to wind up the business from the 
time the decision was made in 1999 until 2001.  As a result, Ward and Ehrlich 
compensated themselves as Operating Managers according to the formula set out 
in the Operating Agreement.  Each earned $90,000 in 2000 and $41,000 for part of 
2001.  After Ward and Ehrlich completed RRI’s winding up, Gonzalez filed an 
unsuccessful action in the Court of Chancery.   
 
5. 
We consider four arguments raised by Gonzalez.  First, he argues the 
Vice Chancellor erred by finding that the level of work performed by Ward and 
Ehrlich in 2000 and 2001 justified an increase in their respective salaries by fifty 
 
4
percent.  Second, Gonzalez claims the Vice Chancellor erred by finding 
justification for the increased compensation because it would have cost RRI more 
to hire others to do the work.  Third, Gonzalez argues that the Vice Chancellor 
erred by finding that the compensation formula was set before his 1999 departure 
and that the formula was used properly by Ward and Ehrlich thereafter.  Finally, 
Gonzalez argues that the Vice Chancellor erred by failing to apply the entire 
fairness standard to Ward and Ehrlich’s salary increase. 
 
6. 
The first three arguments seek review of Ward’s and Ehrlich’s 
authority to increase their compensation during 2000 and 2001.  We find that 
Gonzalez’ assertion that Ward and Ehrlich acted arbitrarily is without record or 
case law support.  He insists that we consider Ward and Ehrlich’s actions in light 
of Wilderman v. Wilderman, which stated that “the standard for fixing executive 
compensation is obviously more strict when it is fixed by the recipient himself.”1  
There, the president of a corporate defendant caused excessive unearned and 
unauthorized payments to himself.2  However, we find Wilderman inapposite.  
Ward and Ehrlich did not fix their own compensation; rather, they applied a 
specific compensation formula that was approved beforehand by all of the initial 
RRI managers and members.  Ward’s and Ehrlich’s workload increased 
substantially after the initial Managers decided to dissolve RRI because “winding 
                                                 
1 315 A.2d 610, 615 (Del. Ch. 1974).   
2 Id. 
 
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up” the business amid ongoing clinical trials created special challenges.  Because 
they remained within the framework of the formula, Ward and Ehrlich had the 
authority to increase their compensation to $90,000 in 2000 and $41,000 for part of 
2001.  Accordingly, the Vice Chancellor acted appropriately within his discretion 
by finding that Ward and Ehrlich had the authority to increase their compensation 
during the winding up period.  
 
7. 
Gonzalez’s final argument is without merit.  In Wilderman, the Vice 
Chancellor reviewed a list of non-exclusive factors that could be considered in 
determining whether the level of compensation was reasonable.3  Here, the Vice 
Chancellor heard extensive testimony regarding the nature of the work done by 
Ehrlich and Ward and conducted a thorough analysis before concluding that the 
compensation decision was fair and reasonable:    
At the end of the day, I’m convinced whatever standard applies, 
whether it’s the entire fairness standard, that defendants have to prove 
they acted fairly - - that they did so.       
 
                                                 
3 Wilderman, 315 A.2d at 615 (“Other relevant factors are whether the salary bears a reasonable 
relation to the success of the corporation, the amount previously received as salary, whether 
increases in salary are geared to increases in the value of services rendered, and the amount of 
the challenged salary compared to other salaries paid by the employer.” See 2 Washington and 
Rothschild, COMPENSATING THE CORPORATE EXECUTIVE, 848-873 (3rd Ed. 1962)); see also Hall 
v. Isaacs, 146 A.2d 602 (Del. Ch. 1958) (evidence of what other executives similarly situated 
received was relevant); see also Meiselman v. Eberstadt, 1961 Del. Ch. LEXIS 55 
(compensation should be considered in light of the responsibilities involved and the duties 
performed by the executives in question). 
 
 
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Accordingly, the Vice Chancellor did not err when he concluded that Ward and 
Ehrlich acted fairly and reasonably with respect to their compensation decisions.  
NOW, THEREFORE IT IS ORDERED that the judgment of the Court of 
Chancery be, and the same hereby is, AFFIRMED. 
 
 
 
 
 
 
 
 
 
 
 
 
/s/ Myron T. Steele 
 
 
 
 
 
 
Justice