What happens when an employer tries to change the basis for terminating an employee?

Recently, the Supreme Judicial Court of Massachusetts considered whether an employer could change the basis for the termination from “without cause” to “with cause” and withhold severance benefits otherwise owed the former employee. In EventMonitor, Inc. v. Leness, the employee won the battle, but the cost may have consumed the spoils of war.

In 2001, EventMonitor, a software developer for the financial services industry, hired Anthony Leness as vice president of business affairs. The parties signed an employment agreement which detailed the terms under which Leness could be terminated. The agreement stated that EventMonitor could terminate Leness without cause on 30 days written notice. If terminated without cause, Leness was entitled to receive salary payments and benefits for one year, unless he became employed at another firm, at which time his severance benefits would cease. The employment agreement also provided instances in which Leness could be terminated for cause, including fraud or defalcation involving the assets of EventMonitor. The agreement also required Leness, upon termination, to return all of EventMonitor’s proprietary information, including all copies.

During the following six years, EventMonitor grew substantially. However, in 2007, tensions began to develop between Leness and Sheldon Chang, EventMonitor’s president and executive director. The tension increased when Leness proposed that the company be divided into two separate entities. The first, to be run by Chang, would focus on research and development of new products; the other, to be run by Leness, would be responsible for sales and support of existing products. Because the bulk of EventMonitor’s revenue was derived from the sales and support of the existing products, Chang suspected that Leness was acting in his own self-interest.

As a result, Chang terminated Leness “without cause” and gave him 30 days written notice. Upon leaving EventMonitor, Leness returned information about the client accounts, including the location of important records on the company computer system.

After Leness’ departure, Chang had the laptop which EventMonitor had issued to Leness inspected by a forensic expert. The inspection revealed that Leness had paid for a one-year subscription to an online data storage company and had copied all of the files on his EventMonitor laptop over to this storage system. Leness did not tell anyone at EventMonitor that he had done this, and he had used his personal email account and credit card to complete the transaction. Leness had also downloaded computer cleaning software to conceal this document transfer. Leness had not returned these copies of this information to EventMonitor when he left.

When Chang found out about this conduct, he changed the basis for Leness’s termination to one “for cause” and ceased paying his severance benefits.

Litigation ensued. EventMonitor claimed that Leness’s failure to return files secretly stored with the online service provider amounted to a material breach of the employment agreement because Leness had done so with a malicious intent. In response, Leness claimed that he believed that the backup procedures at EventMonitor were inadequate.

While the trial judge did not credit Leness’s explanation for the additional backup, he also rejected EventMonitor’s claim of malice. Rather, he concluded that given the tension between the parties, it was reasonable that Leness may have copied materials to prove he had not neglected his duties. Moreover, the trial judge determined that the essential element of the contract was to protect the confidentiality of the material. Because the materials had not been accessed at any time during the five years leading up to the trial, the trial court concluded that Leness had not intended to disclose them to any third party and EventMonitor had received the benefit of its bargain. Therefore, the court decided that Leness had committed a technical but not material breach. As a result, EventMonitor was not permitted to cease severance payments to Leness.

On appeal, the Supreme Judicial Court agreed with the decision of the trial court. Because it held that Leness’s violation was not a material one, the Court declined to reach the interesting question of whether the employer was allowed to recharacterize the termination as one for cause. The Court noted, however, that under the “after-acquired evidence” doctrine applied in other states, an employer may take that action if it can show that (1) the employee has committed misconduct, (2) the employer only learned of the misconduct after termination, and (3) had the employer known of the misconduct, the termination would have been “for cause.”

Although EventMonitor was not allowed to cut off his severance benefits, Leness did not get everything he wanted.

He had counterclaimed for indemnification of his litigation costs, citing to a provision in his employment agreement that required EventMonitor to pay for such fees if Leness was involved in litigation “by reason of the fact” that he was an employee of EventMonitor or acting at its request. The Court concluded that Leness was not entitled to indemnification because his copying of the files was done in his personal capacity, not as an EventMonitor employee. Therefore, although Leness prevailed on liability, he was forced to bear his own fees and expenses incurred during the litigation.

Employees should think twice (or thrice) before copying their employer’s confidential or proprietary information to a personal computer or cloud account. Doing so—especially in the cover-your-tracks manner Leness did—can expose the employee to liability for theft of trade secrets and violation of his or her employment agreement should the relationship end badly. At the same time, an employer should take steps to ask exiting employees about personal or unsanctioned storage of its files.

As this case shows, neither side wants to be in the position where facts surface post-termination that adversely impact their post-employment relationship. If the employee thinks he has a valid reason to retain copies of the employer’s proprietary material, he should get the employer’s express approval. Otherwise, as the EventMonitor case shows, the employee risks litigation, at his own expense, over post-employment benefits.