Where CEO Drinks and Sleeps with Employees, A Company Is Not Required to Allow Him to “Cure” His Behavior Before Termination

MadMencocktailsIn Duncan v. Woodlawn Manufacturing, Ltd.the company fired the CEO after he became intoxicated at a work dinner charged to a company credit card and asked a subordinate employee to kiss him. The CEO sued the company for breaching his employment agreement, which required a company to provide him with a 30-day written notice of a specific action so that he could cure, i.e. fix it, before terminating him.

During the litigation, the following facts came to light about the CEO:

  • He had a drinking problem, which his mother, who also worked for the company, helped him cover up;
  • He had sexual relations with multiple female company employees;
  • He hired a prostitute on a company business trip when he was a CEO;
  • He entertained company clients at a strip club;

At trial, the CEO argued that because the company did not provide him with a 30-day “notice and cure” period specified in the employment agreement, it could not terminate such agreement. In his defense, he also argued that his conduct occurred away from the workplace and was not precluded by his contract or company policy (i.e. no morals clause or fraternization policy), and it did not impair his work performance. In fact, the plant’s sales increased from 17 million to 22 million during his tenure as the CEO.

The Court of Appeals rejected Duncan’s arguments after finding that the evidence showed that giving Duncan a 30-day period to cure his behavior would have been futile, “and the law does not require the performance of a futile act.”  With respect to his alcohol problem, he had been counseled for it prior to his termination without success, and by his own admission, he did not recognize that he had a problem with alcohol until three months after his termination when he finally came to the conclusion that he was an alcoholic.  Thus, the Court of Appeals concluded that “[a] jury might have believed that a letter from the company would not have resulted in an earlier solution of this problem, i.e., would have been futile.

Similarly, with respect to Duncan’s sexual escapades with employees, even if he could have ended them upon the receipt of a written demand from his employer to do so, he could not cure the effect of the rampant rumors around the plant, undo the perception of the favoritism garnered by those who had sexual relations with him, or eliminate the possibility of a sexual harassment claim from the employee whom he had attempted to kiss at a company dinner. Furthermore, the company’s owners believed that his efforts to hide these issues from them “completely” broke their trust in him  and there was nothing he could do to cure his lack of integrity or breach of such trust.

Thus, the Court of Appeals concluded that Duncan’s employer did not breach the employment agreement by failing to give Duncan notice prior to his termination.

TAKEWAY: Many executive employment agreements have a detailed description of what constitutes a termination “for cause” and what notice and cure period an executive must be provided before he can be terminated.  Such provisions are often negotiated by both parties to the agreement, ensuring that should an executive fail to meet his or her performance goals, he or she is allowed a certain time period to improve the performance before being terminated.  Having a clear definition of “good cause,” any “notice and cure” steps the company must follow before termination an employees, and an unambiguous statement of exceptions to such provisions is key to avoiding an expensive wrongful termination lawsuit and bad publicity.

The Duncan v. Woodlawn Manufacturing, Ltd. opinion highlights a simple proposition that a breach of employer’s trust by a high-level executive who owes fiduciary duties to the company, simply cannot be cured.  The determination of whether a particular act by an executive rises to the level of an incurable breach of trust depends on the facts of each particular case. Thus, a company considering termination of an employee “for cause,” or an employee who is facing or has been terminated “for cause,” should consult with an employment attorney to determine the best course of action.

Leiza Dolghih represents both companies and employees in litigation and arbitration proceedings in state and federal courts.  If you are facing an actual or a potential employment dispute, contact Ms. Dolghih for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

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