It has been a long time since I wrote about some of the traps an executive may face when preparing to trigger termination for Good Reason. However, the recent federal case of Barney v. Zimmer Biomet Holdings (Dist. Court, ND Indiana 2018), made me think that a reminder might be in order. Barney was a senior vice president for operations for Biomet, Inc. when it merged with Zimmer Holdings, Inc., to become Zimmer Biomet Holdings, Inc., in 2015. As a result of the merger, Barney became Zimmer’s senior vice president of global operations and logistics, where she served until her resignation in late 2016.
According to Barney, several distinct incidents precipitated her resignation. First, around August 2016, Zimmer informed Barney that her position would be moved from Indiana to Switzerland by the end of 2017, and that this would require her to relocate. Barney informed Zimmer that she did not wish to relocate with the position. Second, Barney alleged that around October 2016, “Zimmer’s CFO demanded that she concoct a story to mislead Zimmer’s investors about the cause of recent quarterly shortfalls.” She further alleged that, also in October 2016, Zimmer’s CEO ordered her to make organizational changes that included terminating employees under a false pretext. Barney refused to comply with orders of the CFO and the CEO. Instead, she submitted her resignation.
Barney’s Employment Agreement provided enhanced payments if she terminated employment for “Good Reason” following a “Change of Control.” Following her resignation, Barney requested severance benefits in accordance with her Employment Agreement. Zimmer refused to pay severance arguing that Barney’s resignation did not fall under any of the “Good Reason” provisions of her Agreement. Barney sued, claiming that she had no choice but to resign in the face of these incidents. She alleged that, together, they constituted intolerable conditions, and she further wished to extricate herself from the potential securities fraud being committed by other executives.
Among the Good Reasons in the Agreement was the relocation of “Executive’s primary work location more than 50 miles from the Executive’s work location on the Effective Date, without the Executive’s prior written consent.” Around August 2016, Barney alleged that Zimmer’s vice president of human resources informed her that her job would be moved from Warsaw, Indiana to Switzerland, requiring her relocation by the end of 2017. Barney argues that this sufficiently invokes the Agreement’s definition of “Good Reason.” The Court noted, however, that while this might have been sufficient to constitute Good Reason, the Agreement required Barney to “provide written notice to the Company of her intention to terminate her employment for Good Reason,” specifying in reasonable detail the claimed circumstances giving rise to her decision, “within 30 days following the occurrence of any of the events set forth herein.”
The court found this to be a simple case of contract interpretation and enforcement. Since the Agreement unambiguously required Barney to “provide written notice to the Company of her intention to terminate her employment for Good Reason,” and she failed to do so, she was not entitled to severance for a Good Reason termination.
Executives, lawyers, and compensation professionals can learn at least three important lessons from the Barney case. First, an executive must follow whatever procedural steps are set forth for good reason termination in the governing employment or severance agreement. Nearly all good reason termination provisions (and the safe harbor provisions of Code Section 409A) require the executive to:
- give written notice to the company within a specified period of time, usually 30 - 90 days after the initial occurrence of the actions or events alleged to constitute good reason;
- give the company a period of time, usually 30 - 90 days, to cure or remedy the actions or omissions alleged to constitute good reason; and
- actually terminate employment within a specified period of time, usually 30 - 90 days after the lapse of the company’s “cure period.”
The plan or agreement also will likely require the executive to sign and not revoke a broad release and waiver of claims against the company in order to receive severance.
As a practical matter, an executive is almost always best served by giving written notice to the company of his or her intent to terminate for good reason. In addition to giving the company an opportunity to cure inadvertent or unintended actions or omissions that would constitute good reason, written notice also allows the company to express its belief that such actions or omissions do not amount to good reason under the governing provisions or documents. At this point, the parties can resolve the issue or begin to negotiate an amicable departure before the executive has taken the (often) irrevocable step of voluntarily terminating his or her employment.
Second, an executive’s fear or expectation of demotion or termination is not enough. A 1998 case held that an executive could not trigger a good reason termination solely on account of receiving a draft organizational chart that indicated a diminished reporting relationship. An expression of disappointment from the CEO or a request to take certain actions that the employee believes “are under a false pretext” may not be enough. In a case from 1998, Collins v. Ralston Purina Co., the Seventh Circuit held that, although the former employee anticipated his reassignment by an acquiring company to a less attractive position in another region, following the announcement of a change in control, he voluntarily left employment with the company before the time the acquirer actually made the reassignment, and thus, he was not entitled to payments under his retention/change in control agreement. Similarly, where a company offered the employee employment in the same position in another location to which the company was moving, and advised him that he would be entitled to change in control severance if he declined the offer, the employee was not entitled to payment where he resigned and took another job before the date of the relocation (Televantos v. Lyondell Chemical Company, 3d Cir. 2002).