Share This Post
Massachusetts Employee Prevails in Retroactive For-Cause Termination Case
The termination of an employee is always complicated, but it is even more complex when the employee has a high level position and an employment contract. When the employment agreement sets out the circumstances under which the employment may be terminated, a failure to follow it can have expensive consequences for the business. Employment agreements commonly require an employer to pay severance for termination without cause, so it is very important for the employer to follow all of the contract’s requirements when terminating for cause.
In EventMonitor, Inc. v. Leness, the plaintiff was a software company that had hired the defendant as its vice president for business affairs in 2001. Pursuant to the agreement, the company could terminate the defendant without cause with 30 days’ notice, but it had to pay severance of 12 months’ salary and benefits in the event of a no-cause termination. The contract required the company to pay unused vacation time, regardless of whether termination was for cause or without cause. There was also a non-disclosure provision that required the defendant to return any items with proprietary information, including any copies.
In 2007, the defendant presented a business proposal to the company president that would spin off the sales and support business into a new company, led by the defendant. The new company would take most of the revenue, which came from service and licensing agreements. The president thought that the defendant developed the plan out of his own self-interest and that it demonstrated a lack of loyalty to the company. The company notified the defendant of his termination.
The defendant gave the company information on client accounts and an explanation of where he had stored proprietary information on company computers. An examination of his company laptop found that he had subscribed to an online data storage system and copied the company’s files into it, including proprietary information related to customers and finances. The defendant did not tell the company about the account, and he actually tried to erase information about the account from the laptop.
After learning about the files, the president retroactively changed the termination from without cause to for cause. The company stopped making severance payments and refused to pay the vacation time. The defendant threatened to sue if he did not begin receiving his severance payments again, but the company filed first, alleging breach of contract and several other claims. The defendant filed 12 counterclaims, including breach of contract and violation of the Wage Act.
The trial court entered judgment in favor of the defendant on the plaintiff’s claims for breach of contract, breach of the covenant of good faith and fair dealing, and breach of fiduciary duty. It also found in favor of the defendant on his counterclaims for breach of contract, breach of the covenant of good faith and fair dealing, and violations of the Wage Act. The court found in favor of the company on the defendant’s indemnity claim. Both parties appealed.
The company argued the defendant’s actions violated the provision of the employment contract requiring confidentiality and the return of the company’s proprietary information. The company argued that this violation constituted a material breach of the agreement. The trial court found that the defendant had violated that provision, but it determined it was not a material breach because it did not affect an essential and inducing feature of the agreement. Furthermore, there was no evidence that he had disclosed any proprietary information to anyone. The court found the essential purpose of the provision was to protect the confidentiality of the company’s proprietary information, so a breach would be material if it undermined the confidentiality. Since there was no evidence that the defendant had disclosed the information, the breach was not material. The appeals court agreed with the trial court’s findings and reasoning.
The Supreme Judicial Court then considered whether the company could retroactively change the termination to for-cause. The contract allowed termination for cause in the event of defalcation of company assets. Black’s Law Dictionary defines defalcation as “fraudulent misappropriation of money held in trust; financial wrongdoing involving a breach of trust; embezzlement.” Considering case law and the common meaning of “asset,” the trial judge found that defalcation under the contract did not include taking nonmonetary assets. The judge further found that even if nonmonetary assets could be subject to defalcation, the defendant’s actions had not deprived the company of the use or value of the assets, and there was no evidence of actual disclosure, intent to disclose, or use of the information to the defendant’s benefit or the company’s detriment. The Supreme Court of Justice agreed that there was no defalcation, finding that even if it was not limited to the taking of monetary assets, it usually requires a misuse or deprivation of the use or value of an asset. The defendant here only kept a copy, and the trial court had found he had not misused or deprived the company of its proprietary information. The defendant’s secure storage of a copy of the information did not undermine the company’s exclusive use of the information.
The Supreme Judicial Court affirmed the trial court’s judgment except for the amount awarded for the Wage Act claim. The Supreme Judicial Court affirmed the trial court’s finding that the defendant was entitled to severance pay. Both courts found that the defendant was also entitled to payment of his vacation time, but the case had to be remanded for recalculation due to an error in the trial court’s order.
Unfortunately, the Supreme Judicial Court declined to reach the issue of “after-acquired evidence” in an employment termination context. Thus, it is unclear if a Massachusetts employer may retroactively change a termination from no cause to for cause.