Where There’s Smoke, There May Not Be (Legal) Fire

cloud-1289395_1280Common sense would suggest that a company could terminate severance benefits to an executive after discovering that he had surreptitiously downloaded the company’s proprietary information to his private account prior to his departure.  A recent Massachusetts Supreme Judicial Court opinion stands that conclusion on its head, refusing to permit the company to stop paying despite the secretive downloading.

In the case of EventMonitor, Inc. v. Leness decided by the Court in early February 2016, disagreement had arisen between the company and its Vice President for Business Affairs with respect to the direction of the business.  This resulted in the Vice President’s termination by the company without cause in December 2007.  Under the terms of his employment agreement, he was entitled to be paid severance pay and benefits for 12 months after any termination without cause.  The company began paying the severance.

Shortly after his departure, however, the company conducted a forensic analysis of his laptop and discovered that he had copied all of the company’s files to a private data storage account in his name two months before his termination.  The Vice President neither disclosed this downloading nor returned or deleted those files when he turned in his laptop.  Suspecting the worst, the company stopped paying the severance benefits, declaring that his termination was now considered for cause.

The employment agreement expressly provided that the Vice President could be terminated for cause if he committed “defalcation.”  The Court, however, took a very narrow view of the term “defalcation.”  It found that because the Vice President had not used or disclosed the information (perhaps due to the company having made the discovery and filed suit within months of the termination), his conduct was not a material breach.  In the absence of such a breach, the company could not reclassify the nature of the termination and discontinue the severance.

Surprisingly, the Court also expressly noted that the Vice President’s explanation for why he downloaded the information (alleged concerns over the stability of the company’s back-up procedures) was not credible.  At the same time, it found that the downloading was not done with malicious intent, but it made no finding as to what was his true reason.  Instead, the Court speculated that the executive “might well have wanted the copy in order to be able to demonstrate that he had not neglected his duties or acted deliberately to the detriment of EventMonitor’s interests.”

For employers, there are two lessons to be drawn from this case.  First, if an employer wants to protect itself from secret downloads of its crown jewels, it should be sure to have its employees sign employment agreements with appropriate protections.  Second, it should take great care with the wording of the protections in those agreements.  While this case arose in the somewhat unusual context of severance benefits, it underscores the broader point that “words do matter” even when a departed employee is caught red-handed.

About Rich Van Nostrand

Rich is a partner at the Firm. He has extensive experience in general civil trial work, with concentrations in business, commercial and employment litigation. He provides advice and representation in a variety of business and commercial litigation matters, including shareholder disputes, corporate dissolutions, intra- and inter-company disagreements, and intra-family business disputes. Rich also provides ongoing employment litigation and counseling services to numerous clients in the private, public and higher education sectors. In the private sector, Rich represents clients in a broad range of industries including health care, professional services, high technology, industrial and manufacturing. In addition, he is also frequently selected by litigants to assist in the resolution of their disputes as an independent arbitrator or mediator.
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