Executive Employment Agreements: Employer Prevails Against Terminated Executive In Case Over Executive’s Contract Giving Company Discretion to Determine Whether “Just Cause” Exists

Lew Clark
October 9, 2006 — 1,763 views  
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Executive Employment Agreements: Employer Prevails Against Terminated Executive In Case Over Executive’s Contract Giving Company Discretion to Determine Whether “Just Cause” Exists A state appeals court recently reversed a jury verdict in favor of a company’s former executive, finding that the employer had the discretion to determine whether just cause existed, highlighting the importance of close attention to “just cause” provisions in executive employment agreements. On September 12, 2006, a Pennsylvania appeals court decided an appeal taken by Vis.align, LLC from a $357,000 jury verdict in favor of one of the company’s former executives, Jason Leedy. Leedy and Vis.align had entered into a three-year employment agreement under which they agreed that, if the company terminated Leedy’s employment during the three-year term for “just cause,” Leedy would not be entitled to any compensation, but if the company terminated his employment without cause, Leedy would be entitled to his base salary for a period equal to the remainder of the agreement’s term. More specifically, the agreement provided that the company could terminate Leedy’s employment “for cause” if “in the judgment of the Chief Operating Officer, Chief Executive Officer or the Board, [Leedy] has been grossly negligent, incompetent, insubordinate, or has committed willful misconduct in carrying out his duties.” Because the company’s CEO determined that Leedy’s employment should be terminated for cause, the company terminated his employment with nearly one year before the expiration of the three-year term, and the company paid Leedy nothing. Leedy sued the company, and the case proceeded to a jury trial. The trial judge instructed the jury to consider whether or not the company’s CEO’s determination of “cause” was “fair and reasonable under the circumstances.” After the jury rendered a verdict in Leedy’s favor, the company appealed. The company argued on the appeal that the trial court should not have allowed the jury to assess whether or not the CEO’s decision was “fair and reasonable,” since the employment agreement allowed the CEO, the COO or the board the prerogative to exercise essentially their unfettered judgment to determine whether or not cause existed. The company maintained that the parties unambiguously agreed that the only issue to be litigated following a termination of the executive’s employment was whether their judgment was exercised to determine whether cause existed—not whether that judgment was exercised fairly or reasonably. The court of appeals agreed and reversed the trial court’s decision. The court of appeals reasoned that contracted established the “‘for cause’ determination as a subjective one, based on a considered decision or sensible conclusion by the COO, CEO, or Board that Leedy has been ‘grossly negligent, incompetent or insubordinate, or has committed willful misconduct.’” The court refused to alter the contract to require fairness or reasonableness. Instead, the court held that the “for cause” termination depended solely upon the judgment of the COO, CEO or the board and stated that the company only needed to produce evidence sufficient to justify a “for cause” termination on any of the grounds stated in the agreement. Although many executive employment agreements provide for stated compensation in the event the executive’s employment is terminated before the expiration of the term without cause, it is important to state in the agreement who within the company will make that determination to trigger the termination of employment. In addition, the court’s decision in this case instructs that it is important to state clearly the extent to which that “for cause” determination can be scrutinized by a court or arbitrator. In this case, Leedy believed that he could obtain a jury’s review of the company’s “for cause” termination, but the court essentially held that he had contracted away that right.

Lew Clark

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Lewis Clark concentrates his practice on counseling and advocacy for both private and public sector employers in all types of labor and employment matters and is an experienced mediator of employment and other civil litigation matters.