Executive Termination, Quirky Question # 1

Quirky Question # 1:

We recently terminated one of our executives “without cause.”  Under his employment contract, we are obligated to pay one year’s severance for terminations without cause.  In contrast, we have no obligation to pay him anything if he is terminated “with cause.”  Following his departure, we reviewed his computer hard drive.  We discovered two areas of concern.

First, he had downloaded pornography onto his work computer, in violation of our clear policies regarding use of company computers and sexual harassment.  Second, much to our surprise, we found on his computer a substantial number of confidential documents that he had taken from the company where he worked before joining our firm.  This too violates our company policies – we strictly prohibit employees from introducing confidential, proprietary and trade secret information belonging to a former employer into our work place, whether in hard copy or electronic form.

Had we known these facts, we would have fired the executive for cause.  Do we still have to pay him his one year severance pay?

Dorsey’s Analysis:

Here are my thoughts on our first Quirky Question, relating to Executive Termination.

The courts have recognized a legal theory called the “after-acquired evidence doctrine.”The basic notion of this theory is that information learned after the employee has separated from his/her employer may bear upon the employee’s claims in litigation and the employer’s post-employment obligations to the former employee.This is true even if the employer did not know this information at the time of the discharge.For example, assume that a company fired a 56-year-old employee as part of a reduction-in-force and the employee sued for age discrimination.Assume further that the employer then discovered that the employee had been embezzling from the company.In this context, the courts have held that the “after-acquired” evidence (i.e., the facts discovered about the embezzlement) can cut off the employee’s damages in the age discrimination lawsuit even if the employer was ignorant about these facts at the time of the employee’s discharge.

This legal theory developed in the context of discrimination claims under Title VII and the Age Discrimination in Employment Act.The United States Supreme Court recognized the legitimacy of the after-acquired evidence doctrine in the case of McKennon vs. Nashville Banner Publishing Co., 513 U.S. 352 (1995).In McKennon, the high court found that while after-acquired evidence could not bar a liability determination, it could be used to cut off the employee’s damages claim.The Court stated, “Where an employer seeks to rely upon after-acquired evidence of wrongdoing, it must first establish that the wrongdoing was of such severity that the employee in fact would have been terminated on those grounds alone if the employer had known of it at the time of the discharge.”The Supreme Court also held that because of the important public policies underlying the country’s anti-discrimination statutes, the employer had to prove that it would have discharged the employee by “clear and convincing” evidence, an unusually high legal standard in a civil lawsuit.

In recent years, the after-acquired evidence doctrine has been applied in breach of contract cases – the type of case you would be confronting if you elected not to pay your former employee his severance compensation.For example, in a case directly relevant to your situation, the Supreme Court of Tennessee held that the after-acquired evidence applied in breach of contract cases.The court noted that a “majority of jurisdictions” allowed the use of after-acquired evidence as a complete bar to an employee’s recovery or to mitigate damages.The court stated that “those jurisdictions that have concluded that a complete bar to recovery is appropriate, generally reason that under well-established principles of contract law, the prior misconduct of the employee excuses the employer’s subsequent breach.”Teter vs. Republic Parking System, Inc., 181 S.W.3d 330 (Tenn. 2005).In the Teter case, like your situation, the company had discovered pornography on the former employee’s work computer.Importantly, the Supreme Court of Tennessee also found that because a breach of contract case did not implicate any particular public policies, the employer need only prove its contention that it would have fired the employee by the more typical civil liability “preponderance of the evidence” standard.

The situation you described adds another issue as well – the introduction of a different employer’s confidential and proprietary information into your workplace.This fact potentially provides you a separate justification for applying the “for cause” discharge standard.

The key question you will need to answer, both with respect to the pornography and the other employer’s confidential data, is whether your company would have fired the executive had it been aware that he had downloaded pornography, or brought confidential data belonging to another employer into your work environment, or both.If your firm can demonstrate that in the past, it has fired employees for downloading pornography, or for disregarding your policies regarding introducing another company’s proprietary or trade secret data into your workplace, your position will be enhanced significantly.Conversely, if your company has tolerated these kinds of actions by other employees in the past (especially if it has done so without imposing any discipline), your efforts to withhold the severance compensation based on your former employee’s wrongful conduct will be more difficult to justify.

Of course, as reflected in the Readers’ Responses below, there are a variety of practical considerations that also are likely to influence your decision regarding how to proceed.How much money is involved in the one year severance payment?How much will it cost to defend the litigation, assuming the employee sues?Has the company terminated other employees for introducing pornography or competitors’ proprietary data into the workplace and is it committed to doing so in the future?Weighing these and other factors, and considering the governing legal principles, should enable your company to make a thoughtful decision regarding how to proceed in this situation

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Thanks to the many individuals who have sent in a response to the first Quirky Question.  As you will see, the consensus from the readers seems to be that the company should pay the executive his severance compensation and move on.

Response # 1:  No, I don’t believe they are able to now use the issues that they have recently uncovered in order not to pay severance. That due diligence should have been done before the employee’s dismisal.

Response # 2:  It seems to me that the executive has already been terminated, therefore you cannot go back to terminate for “cause” for something found AFTER his termination.

Response # 3:  Really interesting question. The obvious place to start is the contract itself. (How’s that for a shocker?!) Does the contract define cause? Usually, the definition of cause includes “misconduct”. So far, so good. But some contracts also require the employer to give written notice of any misdonduct and/or an opportunity for the Executive to cure the problem. In that situation, the Executive would have the better argument. The employer would have to rely on the argument that the misconduct was of a nature that could not be cured. That’s a little dicey. The more interesting scenario is where the definition does not give the Executive a right to cure the misconduct. Then, let the games begin! The Executive may argue that this “after-acquired evidence” does not alter the employer’s reason for the discharge. The employer has already gone on record as describing the separation as a termination without cause and, therefore, should be estopped from changing its tune. But the employer can use the “after-acquired” evidence principle to its advantage. By analogy, in discrimination cases, where after-acquired evidence of misconduct is found, courts allow damages to be cut off from the date the evidence is discovered, if it was of a nature that would have caused the termination. The employer bears the burden of proof that it would have terminated the Executive. To show this, the employer should marshal evidence that it in fact terminated others who violated this policy. But if other violators were only reprimanded or suspended, the argument is considerably weakened. That is a good reminder of why every termination decision is a precedent of sorts.

Response # 4:  Had he sued for wrongful discharge, your liability would have been limited to the time you discovered the terminable event. However, this is not a wrongful discharge case. He was terminated, admittedly, without cause at the time of termination. As such, the contract prevails unless it has a provision providing for later discovered cause. There is little question but that if you terminate the severance payments the executive will bring an employment claim. Even if it were defensible, the cost of defense (and probable settlement) probably meets or exceeds the cost of severance. My recommendation is to put this behind you and learn valuable lessons including the need to better supervise executives. One thing you could do is notify the former employer about the confidential info. discovered by sending them a copy of everything you found with a cover letter explaining how you found it and assuring them that you have now destroyed all copies in your possession. They DO have a claim against him and perhaps they will pursue it. Lastly, subject to contractual commitments to the contrary, you are free to provide this information to prospective future employers under the limited privilege available to employers.

Response # 5:  When the Company separated the executive they were not aware of the violation of their sexual harassment policy and their confidential information policy. Even though the Company probably has a policy that the computer is their property and they can view what is contained in it at anytime, the point is they hadn’t done so at the time the decision was made to ask him to leave without cause. It is problematic to change your mind later on based on after acquired evidence, especially when you could have found the information if you had looked. I say pay him his one year of severance and be glad you’re rid of him before you had a sexual harrassment or Confidential Information lawsuit filed against him and the Company.

Response # 6:  Response #3 (as well as some of the other responses) encompassed a lot of my thoughts.  In counseling the remaining execs on this issue, I would sure raise the after-acquired evidence rationale/doctrine as a possible way to deny the severance, but I would also remind the executives that this could sure look like a bad faith, post-termination attempt to wiggle out of paying the $ (not to mention quite possibly constitute a breach of contract for which the company could be liable for not only the damages but also the exec’s attorney’s fees, costs, etc…)  Of course, denying the severance $ based on the “porno” and “confidential” information of the prior e’er also raises the question of why the company didn’t do a search for these things while exec was employed — it looks (and would be portrayed by a plaintiff’s attorney) like the company was a-okay with him looking at the porno and using the confidential/proprietary info as long as he was with the company, but, now that he’s gone, the company is looking for any reason to deny the $.  No doubt also that if the company wants to deny the $, it had better do some thorough due diligence before denying the $, in order to check the computers of its other higher-ups to see if similar materials are on their computers.  It may be that the remaining execs become far less interested in denying the severance $ if they know that what is on their computers could be subject to discovery/scrutiny.  As always, uniformity/consistency of enforcement of company policies and practices would also come into play.  In the end, I bet most companies would pay the $ and be done with it, but may also revise future exec employment agreements to cover post-separation “bad acts” like this.  A potential middle ground would be to confront the exiting exec with the “bad info” (possibly complete with actual images taken from his computer) and negotiate something less than 100% $; that way, if successful, some action has been taken, and a positive precedent set, but hopefully litigation and the associated dirty laundry airing would be avoided.  Fun stuff.

Dorsey & Whitney

Dorsey & Whitney

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