EventMonitor, Inc. vs. Anthony Leness
Case Details
- Citation
- 473 Mass. 540
- Judge(s)
- Present: Gants, C.J., Spina, Cordy, Botsford, Duffly, & Lenk, JJ.
- Procedural Posture — the stage the case had reached
- bench trial
- State
- Massachusetts
- Circuit
- 1st Circuit
Related Laws
No specific laws identified for this ruling.
Claim Types
Outcome
Employee prevailed on breach of contract and wage act claims. Court affirmed that employee's copying of proprietary data to secure cloud storage was not a material breach, did not constitute defalcation, and did not justify retroactive conversion of termination to 'for cause,' requiring employer to pay full severance and accrued vacation.
Excerpt
EventMonitor, Inc. vs. Anthony Leness. Suffolk. November 3, 2015. February 4, 2016. Present: Gants, C.J., Spina, Cordy, Botsford, Duffly, & Lenk, JJ. Employment, Termination. Contract, Employment, Performance and breach, Termination, Indemnity. Indemnity. Massachusetts Wage Act. Damages, Employment contract. In a civil action alleging breach of an employment agreement, the judge correctly concluded that, although the employee’s copying of the employer’s proprietary information to a third-party data storage system, not disclosing this action to the employer, and not returning the files stored with the third party upon the employee’s termination from employment without cause constituted a breach of the employment agreement, the breach was not material, where the employee did not knowingly disclose or knowingly use any of the employer’s information, and therefore, his breach did not endanger the confidentiality of the employer’s information [545-548]; further, the employee’s breach did not provide the employer grounds retroactively to convert his termination to one for cause, where the employee’s activities did not constitute defalcation within the meaning of the agreement, in that the employee’s secure storage of the information, in the absence of any disclosure or use by anyone other than the employer, did not undermine the employer’s exclusive use of its information [548-550]. In a civil action arising from a breach of an employment agreement, the judge correctly denied the employee’s counterclaim for indemnification by the employer of costs that the employee incurred in defending against the employer’s claims, where the commencement of the action was a direct result of the employee’s copying of the employer’s proprietary information to a third-party data storage system, undertaken in his personal capacity and not as an employee. [550-551] This court remanded a civil action for correction of a mathematical error in calculating damages for violations of the Massachusetts Wage Act, G. L. c. 149, § 148. [551-552] Civil action commenced in the Superior Court Department on April 30, 2008. The case was heard by Jeffrey A. Locke, J. The Supreme Judicial Court on its own initiative transferred the case from the Appeals Court. Ronald W. Dunbar, Jr. (Andrew E. Goloboy with him) for the plaintiff. Shana I. Kaplan (James E. O’Connell, Jr., with her) for the defendant. David J. Fried, for Massachusetts Employment Lawyers Association, amicus curiae, submitted a brief. Before trial, Anthony Leness voluntarily dismissed all claims against third-party defendant Sheldon Chang, who plays no role in this appeal. Duffly, J. The plaintiff, EventMonitor, Inc. (EventMonitor), is a Delaware corporation, established in 2000, with headquarters in Boston. It develops and markets software for the financial industry. The defendant, Anthony Leness, was one of the early employees of the company. Leness was hired as EventMonitor’s vice-president for business affairs in June, 2001, upon his graduation from Harvard Business School. He served in that position for approximately six years, until he was terminated on December 5, 2007, two months after he had proposed a plan to restructure EventMonitor into two related entities, a proposal that Sheldon Chang, EventMonitor’s president and executive director, believed would undermine the future of the company. The termination was characterized as “without cause.” Under the terms of Leness’s employment contract, EventMonitor therefore was required to pay him one year’s salary and benefits, plus the value of any accrued but unused vacation time. Section 6(b) of the employment agreement provided that, upon termination, Leness was to return “all items containing or embodying Proprietary Information (including all copies).” Before his departure, Leness returned, among other things, a company laptop computer containing proprietary information that he had used in the course of his work at EventMonitor. Soon after Leness’s termination, through a forensic examination of the laptop computer, EventMonitor discovered that Leness had copied all of the data on the computer, including EventMonitor’s customer information and proprietary business plans, to a data backup and storage service accessed over the Internet. Leness had not informed EventMonitor about this backup before his termination was effective. To the contrary, Leness had paid the subscription for the data storage service with a personal credit card, and also had installed a “cleaning” program in an effort (ultimately unsuccessful) to delete from the laptop information related to the account subscription. EventMonitor deemed Leness’s actions to have been a defalcation of company assets. “Defalcation” was one of the only reasons in the employment contract that would have allowed EventMonitor to terminate Leness “for cause.” And, where a termination was for cause, the contract did not require Eventmonitor to make any severance payments. Retroactively characterizing the termination as having been for cause, in mid-February, 2008, approximately five weeks after Leness’s departure, Eventmonitor stopped paying Leness any severance payments, declined to pay him his accrued vacation, and filed a complaint in the Superior Court asserting, among other claims, breach of contract. Leness asserted twelve counterclaims, among them breach of contract; breach of the implied covenant of good faith and fair dealing; violations of the Massachusetts Wage Act, G. L. c. 149, § 148 (wage act); and indemnification under the terms of the employment contract. Leness argued that Event-Monitor had no valid basis for treating his termination as one “for cause,” and had committed a breach of the contract by refusing to pay his severance payments, as well as violated the wage act by refusing to pay him the value of his accrued and unused vacation. After a jury-waived trial, a Superior Court judge found that Leness had not engaged in defalcation of EventMonitor’s assets, and had not committed a material breach of the employment contract, and thus that his termination could not have been for cause. Judgment entered for Leness on EventMonitor’s claims for breach of contract, breach of the covenant of good faith and fair dealing, and breach of fiduciary duty. The judge also entered judgment for Leness on his counterclaims for breach of contract, breach of the covenant of good faith and fair dealing, and violations of the wage act, but entered judgment for EventMonitor on Leness’s claim for indemnification. EventMonitor appealed, and Leness cross-appealed. We transferred the matter to this court on our own motion. EventMonitor contends that the judge erred in finding that Leness did not commit a material breach of the employment contract and did not engage in a defalcation of company assets. In support of its assertion that Leness’s employment properly was terminated for cause, EventMonitor asks that we adopt the “after-acquired evidence doctrine” used in some other jurisdictions, which allows an employer to recharacterize the nature of an employee’s termination on the basis of information learned after the termination has taken place. In the rare opportunities that this court and the Appeals Court have had to consider the issue of after-acquired evidence in the context of a termination from employment, neither of the courts has adopted, or declined to adopt, this doctrine. See Flesner v. Technical Communications Corp., 410 Mass. 805, 815-817 (1991); Prozinski v. Northeast Real Estate Servs., 59 Mass. App. Ct. 599, 610-612 (2004). We need not reach the question here, because we agree with the trial judge that Leness did not commit a material breach of the employment contract, and did not engage in defalcation of company assets. Therefore, Leness committed no act giving rise to a termination for cause, and the after-acquired evidence doctrine would have had no impact on the result we reach. We affirm the judge’s conclusion that Leness is entitled to severance payments under the terms of the contract, and remand the matter for entry of an amended judgment correcting certain arithmetic errors in the calculation of accrued vacation payments. 1. Facts. “We recite the essential facts found by the judge, which we accept ‘unless they are clearly erroneous,’ ... and which the parties do not challenge, supplemented by other undisputed information from the record.” Boyle v. Zurich American Ins. Co., 472 Mass. 649, 651 (2015), quoting Weiler v. PortfolioScope, Inc., 469 Mass. 75, 81 (2014). In June, 2001, EventMonitor hired Leness as vice-president for business affairs. Leness and EventMonitor entered into a written employment agreement detailing how EventMonitor could terminate Leness with or without cause. Termination without cause required thirty days’ written notice; it also entitled Leness to severance payments consisting of twelve months of salary and benefits, unless he began full-time employment during that period, and his accrued but unused vacation time. Section 5 of the contract specified a very limited number of reasons that EventMonitor could terminate Leness’s employment for cause, including if Leness “engaged in wilful fraud or defalcation, either of which involved funds or other assets of [EventMonitor].” Section 6(b) of the employment agreement, the non-disclosure provision, required Leness to “hold in confidence and not knowingly disclose or, except within the scope of his employment, knowingly use any Proprietary Information.” “Proprietary Information” was defined as the following: “[A]ll [inventions and all other business, technical and financial information (including without limitation, the identity of and information relating to customers, investors, vendors, business partners or employees of [EventMonitor])... that relate to [EventMonitor] or the business or demonstrably anticipated business of [EventMonitor] or that are received by or for [EventMonitor] in confidence.” The section provided further that, upon termination of his employment, Leness was required “promptly [to] return to [Event-Monitor] all items containing or embodying Proprietary Information (including all copies).” Leness worked at EventMonitor for approximately six years. In the early years, the company grew substantially in terms of revenue and number of employees. In the fall of 2007, however, tensions developed between Leness and Chang over the direction of the company. Those tensions escalated significantly after October 17, 2007, when Leness submitted a business proposal that would have left Chang to focus on research and development, using the existing software as a base product, and would have created a spin-off company for sales and support, with Leness in charge of that new entity. The new entity would have taken the majority of EventMonitor’s revenue, which was derived largely from service and licensing agreements with three large clients; in exchange, the new entity would have lent EventMonitor startup funds to develop several new products that were then being considered. Chang initially agreed to Leness’s suggestion that a new business plan be considered. After seeing the proposal, however, Chang believed that the plan was developed to further Leness’s self-interest, and the proposal demonstrated that he was not loyal to the company. Consequently, in December, 2007, EventMonitor notified Leness of his termination. On December 5, 2007, Chang informed Leness verbally that his employment was terminated “without cause,” and sent him a copy of a written termination letter, via electronic mail, stating that EventMonitor was giving thirty days’ notice. As required by the employment contract, prior to the effective date of his termination, Leness provided EventMonitor with information about client accounts and agreements, as well as a written explanation of the locations on the company computers where he had stored proprietary information. After Leness’s departure, Chang hired a forensic expert to examine Leness’s work-issued laptop computer. The examination revealed that in early October, 2007, at approximately the same time that he submitted the proposal for restructuring EventMon-itor, Leness paid for a one-year subscription to an online data storage service through a company called Carbonite. Carbonite is a professional data storage service that encrypts information for purposes of security. Using this subscription, Leness copied all of EventMonitor’s files that had been on his laptop to Carbonite’s data storage system. The uploaded data included EventMonitor’s “proprietary information,” as defined by the contract, including information related to its customers, business documents, and financing. Leness did not tell anyone at EventMonitor about the Carbonite account or the copying of EventMonitor’s proprietary information to Carbonite’s storage system. Indeed, Leness used his personal electronic mail address, and his personal credit card, to pay for the Carbonite subscription. Leness also downloaded a computer cleaning program to the company laptop in an effort to erase evidence of the Carbonite account from the laptop. When Chang learned of Leness’s actions in copying Event-Monitor’s proprietary information to the Carbonite system, he retroactively changed Leness’s termination to one “for cause.” As a result, in early February, 2008, EventMonitor stopped making the severance payments required under the contract for a termination “without cause.” EventMonitor also refused to pay Leness for his unused vacation time, which, under the terms of the contract, it was required to pay regardless of the type of termination. Ultimately, Leness informed EventMonitor that he would file a claim in the Superior Court if his severance payments were not resumed by May 1,2008. On April 30,2008, without having made any further payments, EventMonitor commenced this action. 2. Material breach of the employment agreement. EventMon-itor argues that Leness committed a material breach of the employment agreement by violating section 6(b), which required him to maintain the confidentiality of EventMonitor’s proprietary information and to return all such information, including all copies, upon termination. A breach of a contract is a material breach when it involves “an essential and inducing feature of the contract.” Anthony’s Pier Four, Inc. v. HBC Assocs., 411 Mass. 451, 470 (1991), quoting Bucholz v. Green Bros., 272 Mass. 49, 52 (1930), S.C., 290 Mass. 350 (1935). Whether a party has committed a material breach ordinarily is a question of fact. See Cetrone v. Paul Livoli, Inc., 337 Mass. 607, 610 (1958); Coviello v. Richardson, 76 Mass. App. Ct. 603, 609 (2010); Prozinski v. Northeast Real Estate Servs., LLC, 59 Mass. App. Ct. at 609. See also 23 Williston on Contracts § 63:3, at 440 (4th ed. 2002). But if “the evidence on the point is either undisputed or sufficiently lopsided ... the court must intervene and address what is ordinarily a factual question as a question of law.” See Teragram Corp. v. Marketwatch.com, Inc., 444 F.3d 1, 11 (1st Cir. 2006), quoting Gibson v. Cranston, 37 F.3d 731, 736 (1st Cir. 1994). Thus, we accept a trial judge’s findings as to the materiality of a breach unless they are clearly erroneous. Mass. R. Civ. P. 52 (a), as amended, 423 Mass. 1402 (1996). “We are not bound, however, by the judge’s conclusions of law, and we must ensure that the judge’s ultimate findings and conclusions are consistent with relevant legal standards.” Demoulas v. Demoulas Super Mkts., Inc., 424 Mass. 501, 510 (1996). See Psy-Ed Corp. v. Klein, 459 Mass. 697, 710 (2011), quoting Kendall v. Selvaggio, 413 Mass. 619, 620-621 (1992) (“In reviewing a judge’s decision after a jury-waived trial, ‘we . . . scrutinize without deference the legal standard which the judge applied to the facts’ ”). “If a judge’s ultimate findings aré inconsistent with the subsidiary findings, we must set them aside.” Demoulas v. Demoulas Super Mkts., Inc., supra. Here, the evidence fully supports the judge’s findings, and there is no error in his determination, based on these findings, that Leness did not commit a material breach of the employment contract. The judge found that in copying EventMonitor’s proprietary information to Carbonite’s data storage system, not disclosing the upload to EventMonitor, and not returning the Carbonite files upon his termination from employment, Leness violated section 6(n) of the employment contract, in particular because he did not return all copies of EventMonitor’s proprietary information. Nonetheless, as the judge correctly concluded, Leness’s failure to return the information, while a “variance from complete compliance” with the employment contract, did not affect an essential and inducing feature of the contract, and therefore was not a material breach. The judge found that there was no evidence that Leness had used the information for any purpose, before or after his termination more than five years prior to the date of trial, or intentionally had disclosed it to anyone. The judge stated further that, while he did not credit Leness’s stated reasons for having placed a copy of EventMonitor’s proprietary information on the Car-bonite system (EventMonitor’s purportedly inadequate backup procedures), he also rejected EventMonitor’s suggestion that the copying had been done with a malicious intent. Indeed, the judge stated that, given the circumstances and the state of the relationship between Leness and Chang in October, 2007, when the copies were made, Leness might well have wanted the copy in order to be able to demonstrate that he had not neglected his duties or acted deliberately to the detriment of EventMonitor’s interests. The judge concluded that the essential purpose of section 6(b) is to protect the confidentiality of EventMonitor’s proprietary information. A breach of section 6(b) therefore becomes material if it undermines that confidentiality. Because there was no evidence or indication that Leness had disclosed EventMonitor’s confidential information, Leness’s breach was not material. We observe that, while electronic copies of proprietary information placed on third-party storage devices potentially could fall into the hands of competitors, or otherwise become public or be disclosed, as the judge found, there was no showing that such a result was likely to have, or had, occurred. Carbonite maintains its clients’ information in a secure and encrypted manner, and its business model relies on its clients’ confidence in this assurance. EventMonitor did not suggest, let alone offer evidence to prove, that its information could more readily be compromised because it temporarily had been stored on Carbonite’s servers. Indeed, EventMonitor used similar data backup services, indicating that it did not view the use of such services as endangering the confidentiality of the information stored thereon. In any event, the possibility of unintentional disclosure is not relevant under the terms of the employment contract. As the judge found, Leness did not “knowingly disclose” or “knowingly use” any of EventMonitor’s proprietary information. Accordingly, because Leness’s breach did not endanger the confidentiality of EventMonitor’s information, the breach was not material, and EventMonitor was not entitled to stop making severance payments. See Anthony’s Pier Four, Inc. v. HBC Assocs., 411 Mass. at 470; Lease-It, Inc. v. Massachusetts Port Auth., 33 Mass. App. Ct. 391, 396 (1992); 23 Williston on Contracts § 63:3, at 438. 3. Whether termination could be amended to one “for cause. ” Having concluded that Leness did not commit a material breach of the employment contract, we turn to EventMonitor’s argument that Leness’s breach nonetheless provided adequate grounds for EventMonitor to have converted the termination to one for cause. To support its decision to change the termination to one “for cause,” EventMonitor a
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