Try Not to Use “Defalcation” in Your Employment Agreements

by Lee Gesmer on February 19, 2016

Few things anger employers more than learning that an employee who has been terminated has, before leaving, copied confidential documents. Courts often view this as an equitable justification for enforcing a covenant not to compete that might otherwise be “on the line” legally – maybe enforceable, maybe not.

But what if an employee copies confidential documents and does nothing with them? In other words, doesn’t give them to a competitor or use them in a way harmful to the employer?  If the employer discovers this after the employee has left, does it justify declaring that the employee is being terminated “for cause” (retroactively) and denying him the one year of severance his employment agreement had promised him when he was terminated “without cause”?

This was the issue in Eventmonitor v. Leland, which (rather oddly) went all the way to the Massachusetts Supreme Judicial Court. The precise issue was whether the employee had engaged in a “defalcation of company assets.” According to the employment agreement, “defalcation” was a basis for terminating the employee for cause and denying him severance payments. (The court chose not to grapple with the question of whether this could be done retroactively, as Eventmonitor tried to do, since a ruling on that issue was not necessary to decide the case).

However, “defalcation” was not defined in the employment agreement. The court decided that “in ordinary usage defalcation requires at least a temporary misuse or deprivation of the use or value of an asset.”  Mr. Leland had not deprived Eventmonitor of its electronic files (he didn’t delete them, he copied them), and therefore he was not guilty of “defalcation.” Leland won.

One troubling postscript to this case is how long it took to resolve. It took five years for the case to go to trial, and eight years to be resolved completely through the appeals process. One can only hope the Massachusetts courts are able to do better than that. Eight years is a long time to wait to decide a case where only one word needs to be interpreted.

Eventmonitor v. Leland (Feb. 4, 2016 Mass.).

 

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