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What Constitutes a Material Breach of An Employment Contract

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On February 4, 2016, the Massachusetts Supreme Judicial Court (SJC) ruled in EventMonitor, Inc. v. Leness that an employee’s copying and retention of his employer’s proprietary information was a breach, but not a material breach, of his employment contract, and thus did not constitute grounds to terminate the employee for cause or stop severance payments to the employee.  This case will have a significant impact on the employment law field and serves as an important lesson to all Massachusetts employers.

The case involved a dispute between a Massachusetts based software company and one of its employees after the employee was fired without cause.  Pursuant to the terms of the employee’s employment contract, he was entitled to receive twelve months salary as a severance payment after termination without cause. The employment contract also required the employee to protect the company’s proprietary information and to return “all items containing or embodying proprietary information (including all copies).”

After agreeing to pay the employee’s severance payment, the company later discovered through forensic analysis that the employee, prior to his termination, had copied all the company data from his company laptop to a web-based storage service. The copied data included the company’s proprietary customer and financial information and the employee did not return the copied information, failed to disclose the copying to the company and even took steps to conceal the copying.  When the company learned of the employee’s actions, it retroactively changed the employee’s termination to one “for cause” and stopped making the severance payments required under the contract.

After a jury-waived trial, the Superior Court ruled in favor of the employee, finding that the employee’s undisclosed and wholesale copying of the company’s proprietary information was a breach, but not a material breach of his employment contract and did not amount to a “defalcation” of company assets.  As a result, the Superior Court ruled that the employee’s termination could not have been for cause and that it was the company that breached the employment contract by refusing to continue the severance payments.

On appeal, the SJC upheld the trial judge’s decision.  The SJC agreed that the employee’s failure to return the copied information violated the employment contract, but held that it was not a material breach because there was no evidence that the employee used or disclosed the proprietary information. The deciding factor, according to the SJC, is whether the employee’s conduct undermined or endangered the confidentiality of the company’s information. The SJC concluded that, in this case, the copying and uploading of proprietary data to a third party storage service did not compromise the data.

The SJC went on to find that the employee did not engage in defalcation that would justify a “for cause” termination as the employee didn’t disclose or misuse the copied information and because the company was never deprived from using the information. Because the SJC determined that the company had no right to terminate the employee for cause, it did not decide whether the company had the right to retroactively change the nature of the employee’s termination based on after-acquired evidence.

This case has important implications for both employers and employment lawyers. For employers, it highlights the need to draft precise employment agreements. Moving forward, employment contracts need to be more carefully worded to specifically include language prohibiting the unauthorized copying of company information without express permission and that such copying on its own, without any disclose or misuse, constitutes a material breach of the contract. And because the case did not provide any clarity on an employer’s right to recharactize an employee’s termination or stop severance payments after discovering a material breach of contract, employment contracts need to expressly set forth the employer’s right to change the nature of a termination based on later discovered evidence and also expressly state that severance payments are conditioned on compliance with all obligations under the employment contract.

For lawyers, the key take-away from this case is the need to better scrutinize the strengths of a claim involving the taking of trade secrets or proprietary information. As a result of the SJC’s decision, in order for an employer to be successful in a case against an employee, there must be evidence the employee actually disclosed or misused the employer’s information. Therefore it is important for lawyers to establish wrongful use of the taken information and identify damages as early as possible through discovery and forensic analysis.

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