Alerts and Updates

Employee's Unauthorized, Wholesale Copying of Company Data Ruled Insufficient to Terminate Employee for Cause

February 8, 2016

The Massachusetts Supreme Judicial Court held that the employee’s actions did not amount to “defalcation” under the contract.

On February 4, 2016, the Massachusetts Supreme Judicial Court (the “SJC”) ruled that an employee’s copying of confidential data from his company computer to a private backup service was a breach, but not a material breach of his employment agreement. EventMonitor, Inc. v. Leness, No. SJC-11920, Slip op. (Mass. Feb. 4, 2016). As a result, the employer was not permitted to stop severance payments to the employee.

The plaintiff was a Massachusetts-based software company. The employee was a vice-president for business affairs. His employment agreement provided that if he was terminated without cause, he was entitled to be paid one year of severance. It also provided that he was required to “return ‘all items containing or embodying Proprietary Information (including all copies).’”

The company terminated the employee without cause. However, the company soon discovered that the employee had used a personal credit card to sign up for a web-based backup service. The service copied all the data on his company laptop, including the company’s “customer information and proprietary business plans.” Upon his termination, the employee took affirmative steps to hide this fact from his employer.

As a result, the company retroactively characterized the employee’s termination as “for cause.” It stopped making severance payments and filed suit to recoup the previous payments. After a bench trial, the Superior Court ruled that the employee’s unauthorized backup of company data was a breach of the employment contract. It ruled, however, that the breach was not material.

The SJC affirmed. It ruled that the breach of the employment agreement was not material because there was no evidence the employee had shared the information with anyone else. The purpose of the confidentiality term in the agreement, the SJC held, was to keep the information confidential. Since the information was not shared outside the company, there was no material breach.

The SJC also held that the employee’s actions did not amount to “defalcation” under the contract. (Yes, the contract said “defalcation.”) While there was no dispute that the employee backed up his company laptop without permission from the company, the SJC ruled that “in ordinary usage defalcation requires at least a temporary misuse or deprivation of the use or value of an asset.” The SJC noted that if the employee had disclosed the information to a competitor, then that action might have resulted in a loss of revenue for the company. Since that did not happen, the SJC ruled that the employee’s actions did not amount to “defalcation.”

Finally, the SJC declined to adopt the after-acquired evidence rule. This rule would allow employers to change the termination status of a former employee if they learn additional information after the termination. The SJC found that the rule would not matter in this case because there was no material breach.

What This Means for Employers

This case is noteworthy for Massachusetts employers for two reasons. First, it underscores the significance of well-drafted employment agreements. Businesses should take care in drafting provisions protecting critical confidential information with carefully worded provisions, which cover the taking of confidential information, as well as the misuse of it. The employer in EventMonitor likely believed that its employment agreement protected it against this unauthorized copying of company data. But the SJC disagreed. It ruled that since the definition of “defalcation” would have required the employee to deprive the employer of the data, the mere copying was not enough to trigger the provision. In order to protect against this particular type of employee misconduct, the employment agreement should have used better-tailored language.

Second, this decision serves as a reminder of the importance of identifying damages early in a case through discovery. The trial court and the SJC were both swayed by the fact that there was no evidence of the plaintiff’s sharing the information with a third party or using it for his personal benefit. Of course, an ex-employee who steals confidential information from a company has every incentive to lie about the use of the information. It is therefore critical that an employer faced with this situation conduct thorough discovery to uncover wrongful use.

For Further Information

If you have any questions about this Alert, please contact Bronwyn L. Roberts, Gregory S. Bombard or any of the attorneys in our Employment, Labor, Benefits and Immigration Practice Group, any of the attorneys in our Trial Practice Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.