In May, iGate sacked its CEO Phaneesh Murthy, claiming that the Board decided to do so after its outside legal counsel found that Mr. Murthy’s failure to report his relationship with a subordinate employee violated iGate’s policy. Outside counsel made that finding as part of their investigation of the relationship and the employee’s claim of sexual harassment. (For spicier accounts of the office affair check out the news stories from the time – like this one.) Last week, Mr. Murthy sued iGate in California state court claiming that his termination was not with cause and that he is therefore entitled under his employment agreement and company stock plans to compensation and benefits that the company has refused to pay.
According to iGate, its termination of Mr. Murthy was “with cause.” If that is true, then under Mr. Murthy’s employment agreement with iGate, he should not get six months of severance pay or other compensation and benefits that are provided for in the agreement and the company’s stock plans in the event of “without cause” termination. “Cause” is defined in the agreement as, among other things, “any material breach of Section 6” of the agreement. In Section 6, Mr. Murthy agreed to “abide by all the Company rules, regulations, instructions, policies, practices and procedures as amended from time to time and as posted on the Company’s intranet.” Apparently, iGate had a company policy requiring reporting of relationships like the one between Mr. Murthy and the subordinate employee. Mr. Murthy alleges in his lawsuit that Board members knew about his relationship with the employee at the time, therefore he did not need to report it, and therefore he did not materially breach company policy and was terminated without cause.
Mr. Murthy’s lawsuit against iGate is an example of the classic dispute that arises when an executive is fired from a company - one we have examined before -because most high-level employees have contracts providing that they will get certain severance compensation and benefits if they are terminated without cause but not if they are terminated with cause. “Cause” is usually defined in these agreements and disputes turn on whether or not events surrounding the termination meet that definition.
Murthy v. iGate is a helpful reminder to both companies and executives that one of the best ways to avoid a post-termination dispute is to give special care – when times are good and a nasty lawsuit is the furthest thing from anyone’s mind – to defining “cause” clearly in the agreement. If other documents, concepts or sources – such as “company policy” – are referred to in the definition of “cause,” then the documents, concepts and sources should also be clear. In the case of Mr. Murthy and iGate, the company policy that he could not materially breach if he wanted to receive severance was supposedly on the company intranet. Was it? Did it clearly provide that he had to disclose a relationship like the one he had with the employee and, if so, was the manner in which he had to disclose it clear?
Murthy v. iGate also serves as a reminder to parties to an executive employment agreement that, if the relationship later sours and separation seems imminent, the company and executive would be wise to refer to the agreement and to think about the meaning of “cause” in planning and taking next steps, ideally with a lawyer's guidance.