Employer May Not Withhold Severance After Learning Former Employee Copied and Retained Proprietary Data

Employers are left scratching their heads in the wake of a Massachusetts Supreme Court ruling, EventMonitor, Inc. v. Leness, No. SJC-11920, 2015 WL 9957743 (Mass. Feb. 4, 2016), that a terminated employee was entitled to receive severance payments despite uncontroverted evidence that the employee copied and retained his employer’s proprietary business plans and customer lists in violation of the employee’s employment agreement. In so ruling, the Court again sidestepped an opportunity to recognize, or refuse to recognize, the so-called “after-acquired evidence doctrine.”

Case Background

Anthony Leness served as a VP of business affairs for EventMonitor, Inc. In the fall of 2007, the relationship between Leness and EventMonitor began to deteriorate as a result of differences of opinion regarding the company’s internal structure. EventMonitor notified Leness on December 5, 2007 that it was terminating his employment “without cause.”

Pursuant the terms of Leness’ written employment contract, EventMonitor agreed to pay Leness a year’s worth of severance and to compensate him for all unused vacation time. The contract required Leness to have held EventMonitor’s proprietary data in confidence during the term of his employment and to return all such information to the company upon termination. The contract also provided that if Leness engaged in “defalcation” of EventMonitor’s assets, the company had the right to terminate him “for cause,” in which case EventMonitor was relieved of any obligation to pay Leness’ severance benefits.

Following Leness’ termination (and after EventMonitor had begun making severance payments), EventMonitor discovered that Leness had retained copies of EventMonitor’s proprietary business data, a fact that Leness appears to have taken significant efforts to hide from EventMonitor. Leness, for instance, used a personal credit card to pay for a digital-storage vendor to store a copy of EventMonitor’s data. Perhaps more egregiously, Leness installed a “cleaning” program on his company laptop in an attempt to remove all references to his retention of the documents. EventMonitor, however, was unable to produce any evidence suggesting that Leness disclosed the information to third-parties or otherwise used the information for any improper purpose.

On appeal of a Superior Court verdict in favor of Leness, EventMonitor argued that Leness’ retention of EventMonitor’s confidential documents was a material breach of contract, which relieved EventMonitor of its obligation to pay Leness’ severance benefits. EventMonitor also argued that Leness’ actions constituted “defalcation,” and that as such, EventMonitor retroactively could classify the termination as “for cause” pursuant to the after-acquired evidence doctrine, and therefore stop paying severance to Leness.

Court’s Holding

The Court agreed that Leness’ retention of EventMonitor’s documents violated Leness’ employment agreement, but held that the breach was not material because the essential purpose of the provision was to prevent the disclosure of the information to third-party competitors, and there was no evidence that Leness ever made such a disclosure. As such, the copying of EventMonitor’s documents, without more, was insufficient to nullify EventMonitor’s post-termination obligations.

The Court went on to hold that Leness did not engage in “defalcation” justifying a “for cause” termination because the term defalcation implies a “temporary misuse or deprivation of the use or value of an asset.” The Court concluded that no such misuse or deprivation was occasioned where Leness withheld the information from third parties, despite the evidence that Leness failed to return all proprietary data to EventMonitor upon his termination as required under the terms of his employment agreement. This conclusion takes on added significance because without grounds for a just-cause termination, the Court avoided a need to address the issue of whether Massachusetts recognizes the after-acquired evidence doctrine.

Take-Away for Employers

The Court’s opinion in Leness provides another example of the importance of precise drafting in any contract. Although the SJC likely was correct in concluding that EventMonitor’s primary concern was the nondisclosure of its proprietary data to competitors, EventMonitor undoubtedly intended to accomplish that end by conditioning its post-termination obligations on the outright return of all its confidential information. Leness’ employment agreement, however, failed to make this expectation express, leaving the Court sufficient room to avoid the forfeiture of Leness’ severance benefits where EventMonitor suffered no tangible harm.

Employers should take care to condition the payment of post-termination benefits expressly on the employee’s strict compliance with all obligations set forth in the employment agreement. The agreement should note that the employer considers all such obligations material to the agreement, and that the non-performance of any obligation constitutes a material breach of contract excusing the employer from any further performance under the contract and giving the employer a right to seek damages. Ambiguities and other drafting deficiencies will be interpreted against the interests of the drafter, so employers proceed at their own peril in utilizing imprecise language in standard employment agreements.

CHRISTOPHER K. SWEENEY

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2017-01-13T17:24:14+00:00 February 23rd, 2016|Categories: Christopher Sweeney, Human Resources Compliance, Labor Law & NLRB|0 Comments

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