Quirky Question # 168 — Is Describing a C-Level Executive’s Discharge as “For Cause” Defamatory?

Question:

I saw your last question about discharging an executive for cause. We recently terminated a C-level executive for that reason.  His contract delineated four different “cause” grounds and we felt that two were implicated, although one of these ground arguably was iffy.  We’re wondering whom we can tell about this decision.  Are there any risks associated with publicizing this discharge?

Answer:

You raise an excellent question, which companies like yours need to consider thoughtfully. Ideally, this thoughtful assessment will occur before a company terminates an executive “for cause.”  As a prefatory matter, just to ensure that the readers all understand the terminology of your question, a “C-level” executive is typically a CEO, CFO, COO or some other high-ranking executive.  These individuals, especially in the case of the CEO, usually report either directly to the Board of Directors, or for the lower level execs, to the CEO. At times the non-CEO, C-level executives report jointly to the CEO and the Board.

Often, C-level executives have employment agreements that delineate the terms upon which they may be terminated.  In most executive employment agreements, there usually are provisions for termination without cause and terminations for cause.  There frequently are additional provisions that describe other circumstances in which an executive’s employment relationship with a company might end.  These provisions might include mandatory retirement at a certain age, a separation in the event of a change-in-control, a necessary termination due to a debilitating disability which cannot be accommodated, and other specific circumstances surrounding an executive’s voluntary and involuntary termination.

A company’s right to terminate an executive for cause will be governed by the specific terms of the contract with that executive. Thus, when evaluating the grounds upon which the company intends to end the employment relationship with the executive, it is crucial to assess whether, in fact, there are sufficient bases to satisfy the “for cause” discharge provisions of the executive’s contract. If the company cannot clearly support a termination for cause, based on the specific language of the executive’s employment agreement, a company should not  characterize the termination as a “for cause” discharge. Doing so in such circumstances would be imprudent, exposing the company to liability for breach of contract.

For example, in your question, you state that your executive’s employment agreement delineated four different grounds for terminating the executive for cause. You concede that two of the four grounds do not apply, but state that the company justified the termination on the other two bases. In and of itself, this approach does not raise any red flags. A company does not need to satisfy every sub-part of a f”or cause” discharge standard, so long as the grounds relied upon are factually accurate and comport with the contract.

Here, however, your suggestion that one of the two grounds upon which your company relied was “iffy” does cause me some concern. What does that mean? Are you suggesting that the factual support for this justification for your actions was absent? Are you suggesting that the conduct precipitating the discharge might not be encompassed by the language of the contract? If either of these two observations is applicable, you have a serious problem.

In essence, you are acknowledging that one of the two grounds on which you justified your executive’s discharge may not be valid. Again, this is problematic, as it may expose your company to a breach of contract claim. Moreover, relying on an infirm basis for the discharge decision undermines the other ground upon which your company justified its decision. The legitimate inferences that a fact-finder could draw are that either both grounds are deficient or that had your firm truly believed the first ground was adequate, it would not have considered it necessary to advance a second inadequate justification as well.  Simply put, inclusion of a second, infirm basis for your decision diminishes (if not destroys) the legitimacy of your analysis with respect to the first ground.

But, let’s focus more specifically on the narrow question you posed – whom can you tell about the decision and what risks are attendant upon publicizing the “for cause” discharge decision? The principal risk with respect to publication is that you will be exposing the company to a defamation claim. Of course, if the facts which the discharge decision is grounded are truthful, defamation will not be a concern. Truth is a defense to a defamation claim.  For example, let’s say that your executive embezzled hundreds of thousands of dollars from your company and that the commission of a felony was one of the “for cause” provisions in your executive’s contract. In this context, publicizing the fact that your organization is terminating the executive “for cause” will not expose your firm to legal risk. Similarly, let’s assume that your executive sexually assaulted a subordinate employee. Again, presuming that your executive’s contract provision encompassed that conduct (either because it was a felony or because it violated the sexual harassment policies of the company), it would be relatively easy to justify a “for cause” termination. Publicizing that decision, either internally or externally, should not lead to exposure.

If, however, the factual underpinnings of your decision were erroneous and you nevertheless publicized the information, you have a problem. In this hypothetical context, the information was not true and you will not be able to avail yourself of the “truth is a defense” argument.  So, for example, if your company terminated an executive for certain alleged conduct and it later turned out that the executive had not engaged in that conduct, your publication of that erroneous, factually-unsupported decision will increase your firm’s exposure. Not only will your company have breached its contractual obligations to the executive, it may have defamed him as well.

Many courts have examined the question of whether characterizing a discharge as “for cause” and publicizing that fact is defamatory. Courts are nearly unanimous in concluding that this action constitutes defamation. See, e.g., Vanover v. Kansas City Life Ins. Co., 553 N.W.2d 192, 197-98 (N.D. 1996)(upholding jury verdict finding that statements of termination “for cause” were defamatory); Slue v. N.Y. Univ. Med. Ctr., 409 F. Supp. 2d 349, 370 (finding defamatory a statement that “on the basis of a ‘detailed investigation’ and ‘clear evidence’ an employee was terminated ‘for cause’); Hayes Microcomputer Prods., Inc. v. Franza, 601 S.E.2d 824, 828 (Ga. App. 2004)(statements that employees were ‘terminated for cause,’ coupled with allegations of breach of fiduciary duty were defamatory per se; decision also noted existence of “numerous cases from other jurisdictions in which [termination for cause alone] has been held to be defamatory”). As these and many other cases illustrate, publicly describing an executive’s discharge as a “for cause” discharge is defamatory.

Moreover, as the Franza case referenced above illustrates, since the allegation goes to a person’s professional reputation, this type of statement constitutes defamation per se. Per se defamation is distinct from other kinds of defamatory statements in that damages do not have to be proven – they are presumed. The fact-finder (whether judge or jury) is empowered to determine the appropriate amount that should be awarded in these contexts. As the Minnesota Supreme Court has explained, “[I]n cases of defamation per se, the common law allow[s] harm to reputation to be presumed.” Richie v. Paramount Pictures Corp., 544 N.W.2d 21, 25 (Minn. 1996). The basis for this rule has been summarized in a leading treatise as follows:

“Libel and slander work their evil in ways that are invidious and subtle. The door of opportunity may be closed to the victim without his knowledge, and his business or professional career limited by operation of forces that he cannot identify but that nonetheless were set in motion by the defamatory statements.”

Fowler V. Harper, et al., Harper, James & Gray on Torts, § 5.30, p. 300 (3d ed. 2006).

As the quote above highlights, and as the defamation per se concept recognizes, it is very difficult for a person whose business reputation has been harmed or destroyed to fully understand (let alone prove) the depth or breadth of the damage. Job opportunities for which he or she otherwise may have been considered may never be presented; the defamed employee’s resume simply will go into the discard pile. Or perhaps, the executive’s resume will be subsequently considered but the “for cause” termination will be a hurdle that cannot be overcome, especially in a highly competitive environment where numerous qualified applicants may be seeking the same opportunity.

This problem is particularly acute for C-level executives, whose future job opportunities may be dependent on selection by a prospective employer’s Board of Directors. When considering an executive previously terminated “for cause” and other executives without that black mark, the choice may be easy.

Finally, in Minnesota at least, the state Supreme Court has recognized a cause of action for self-defamation. In short, this legal theory recognizes that the defamed individual in an employment context will have to repeat the false information regarding his/her discharge to prospective employers when seeking alternative employment. By doing so, the applicant will have to communicate defamatory information about him/herself to others, exacerbating the harm already caused by the defamation.

For all these reasons, it is extremely unwise for a company to characterize a senior executive’s discharge as a “for cause” termination unless it is absolutely certain this is a defensible position. Further, it literally and figuratively adds insult to injury to then publicize the executive’s termination as a “for cause” discharge. Doing so substantially increases the likelihood of litigation and the risk of significant liability.

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