Recover Your Severance Agreement Payments After Ex-Employee's Breach

Employee being terminatedEmployers Ability to Recoup Payments Due to Employees’ Post-Severance Wrongdoing

It is common in Minnesota for employers to offer severance compensation to employees. These types of agreements vary greatly from business to business and provide an opportunity for the employer to obtain a release of potential claims in exchange for severance benefits, among other things.

The parties to a severance agreement may think that their relationship is over once the agreement is completed. However, employers should continue to monitor the employee after the ink is dry on the severance agreement because an employee’s wrongdoing post-agreement can entitle the employer to withhold severance payment or sue the employee for repayment of the severance benefits.

Two recent Eighth Circuit Court of Appeals cases highlight the need for employers to actively audit their former employees’ actions.

Hallmark Cards Inc. v. Murley, 703 F.3d 456 (8th Cir. 2013)

In Hallmark Cards Inc. v. Murley, Janet Murley, Hallmark’s vice-president of marketing, was let go from the company due to a corporate restructuring. As part of her severance, she was awarded $735,000 and other benefits. In exchange, Murley agreed to a non-compete clause, to no solicit other Hallmark employees, not to disclose proprietary or confidential information, nor retain any business documents.

After the non-compete clause expired, Murley accepted a consulting position at a Hallmark competitor where she admittedly disclosed confidential Hallmark information. Hallmark brought suit alleging breach of contract, misappropriation of trade secrets, conversion of Hallmark’s confidential information, and unjust enrichment. A jury awarded Hallmark $866,000 in damages which equaled the $735,000 severance amount plus Murley’s $125,000 salary from the consulting job and other costs. Although on appeal the Eighth Circuit decreased Hallmark’s award by $125,000, it affirmed the jury’s award of $735,000. The court held,

Hallmark’s terms under the separation agreement clearly indicated its priority in preserving confidentiality. At trial, Hallmark presented ample evidence that Murley not only retained but disclosed Hallmark’s confidential materials to a competitor in violation of the terms and primary purpose of that agreement. Thus, the jury’s determination that Hallmark was entitled to a full refund of the $735,000 is not against the weight of evidence and does not warrant a new trial.

In the end, Morley’s conduct after her severance agreement with Hallmark caused her to forfeit the $735,000 pay out. This case establishes the benefits of severance agreements to employers and the need for employers to continue to keep track of employees long after they have left a company.

St. Louis Produce Market v. Hughes, 735 F.3d 826 (8th Cir. 2013)

St. Louis Produce Market eliminated Clarence Hughes’ position. Shortly after, the parties entered into a severance agreement where Hughes would receive payment equivalent to 14 weeks’ pay. Also in the agreement was a “condition precedent” which obligated Hughes to return all company owned property including a company laptop, power cord, and hard drive prior to receiving any payment.

Prior to execution of the agreement Hughes and his attorney unilaterally altered the agreement and changed 14 weeks’ pay to 104 weeks’ pay. The president of St. Louis Produce Market signed the agreement without realizing the agreement had been modified, nor did Hughes disclose the change. The alteration was discovered later that day and St. Louis Produce informed Hughes the agreement was now void.

St. Louis Produce Market brought suit and sought a declaratory judgment that the agreement was void due to Hughes’ fraud and misrepresentation. The district court granted summary judgment in favor of St. Louis Market. On appeal, the Eighth Circuit affirmed the district court findings without establishing whether Hughes had been fraudulent holding that because Hughes never returned the company lap top, power cord, or hard drive he was not entitled to any payout—whether 14 weeks or 104 weeks. The court stated,

Hughes agreed to return all company property as an explicit condition precedent to the Market’s obligation to pay him under the agreement. Because it is undisputed that Hughes failed to return all company property, including the battery, power cord, and hard drive of the laptop, he failed to fulfill the condition precedent. This failure means that the Market had no duty to perform under the agreement….

In the end, St. Louis Market was able to withhold payment to Hughes because of skilled drafting of a severance agreement after he attempted to defraud his employer.