Hallmark Recoups Former Executive’s Severance Pay Seven Years after Separation Agreement

by Ballard Spahr LLP

Seven years after entering into a separation agreement with one of its executives, Hallmark Cards, Inc. brought suit against the former employee, seeking a “full refund” of the $735,000 severance it paid her. In a January 15 decision, the U.S. Court of Appeals for the Eighth Circuit upheld the return of the $735,000 as damages for the former employee's breach of several key provisions of the severance agreement.

The defendant had served as Hallmark’s group vice president of marketing for several years until her position was eliminated due to a corporate restructuring. In exchange for $735,000 in severance pay, as well as a number of other benefits, she agreed not to work in the greeting card or gift industry for 18 months, refrain from soliciting Hallmark employees, and not to “disclose or use any proprietary or confidential information, or retain any business records or documents relating to Hallmark.” The employee also agreed to release the company from any claims relating to her termination.

Eighteen months later, the defendant joined Recycled Paper Greetings (RPG) as a consultant. RPG was acquired by American Greetings in 2009. As part of the due diligence during the takeover, Hallmark was alerted that the defendant possessed its proprietary and confidential information. Despite the length of time that had passed since the parties entered into the separation agreement, Hallmark filed suit against its former executive, alleging “breach of contract, misappropriation of trade secrets, conversion of Hallmark’s confidential information, and unjust enrichment.”

During the course of the litigation, the defendant admitted she disclosed Hallmark’s confidential information to RPG. Hallmark also learned that, in 2007, two days before a forensic computer expert was to copy her hard drive, the defendant deleted 67 documents, including files related to Hallmark.

This document destruction enabled Hallmark to obtain an adverse inference instruction to the jury. The instruction allowed, but did not require, jurors to assume that the contents of the destroyed files would have been detrimental to the defendant. The jury ruled in favor of Hallmark, requiring the defendant to return her full $735,000 in severance pay and pay Hallmark the $125,000 she earned at RPG as a consultant.

The defendant appealed, contending that the verdict was excessive and that the adverse inference instruction was improper. She claimed that because she had partially complied with the severance agreement, Hallmark was not entitled to a return of the full severance payment. The appeals court, for the most part, was not persuaded by her arguments.

The appeals court upheld the return of the entire severance pay to Hallmark, finding that such reimbursement was not “grossly excessive” or “glaringly unwarranted by the evidence.” The court emphasized that the crux of the separation agreement was that the former employee was prohibited from retaining or using Hallmark’s confidential or proprietary information. As she had clearly violated those terms, which were a “primary purpose” of the agreement, Hallmark was “entitled to a full refund of its $735,000.”

The appeals court declined to uphold the jury's award of the defendant’s $125,000 consultant fee. It reasoned that Hallmark was entitled to be in the same position, but not a better one, than it would have been before the defendant’s breach.

As for the adverse inference instruction to the jury, the court concluded that a district court should issue explicit findings of “bad faith and prejudice” before delivering such an instruction. In light of the “overwhelming evidence of bad faith and prejudice,” however, the appeals court found the district's court's failure to issue those explicit findings in this case was harmless error.

This case underscores the importance of monitoring a former employee’s compliance with terms of a severance agreement. Employers who suspect the breach of separation agreement terms may want to contact their employment counsel to discuss the possibility of legal action to enforce those provisions.

Ballard Spahr’s Labor and Employment Group routinely assists employers in the negotiation and enforcement of severance agreements. If you have questions or concerns regarding these developments, please contact Mary Theresa Metzler at 215.864.8242 or metzlerm@ballardspahr.com, Claire Ana-Perot Tracey at 410.528.5516 or traceyc@ballardspahr.com, or the member of the Labor and Employment Group with whom you work.

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Ballard Spahr LLP

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