CEO Cannot Raise New Argument on Appeal Challenging His Dismissal for Cause

I litigated a CEO’s termination-for-cause case when I was in practice. I was also involved in a suit against a CEO on behalf of a corporation undergoing post-bankruptcy restructuring. That limited experience supported two of my priors. First, CEOs have a tendency to inflate the value that they bring to an organization and overreach in litigation. Second, corporations encourage the first characteristic by entering into agreements with absurdly favorable terms.

In the case of the terminated CEO, he received a generous payout for having destroyed my client’s subsidiary in about a year. He sued for an extra $500,000 or so, and he did so because his employment agreement included what the CEO construed as a “sue us and we’ll pay your legal fees” provision. Unfortunately for the CEO, the agreement provided that his claim had to be “colorable” and his wasn’t, said the court. I didn’t think we were going to win that argument, but in our case, life favored the bold. In the CEO’s case, not so much.

In the bankruptcy case, the CEO tried to claim that he had never signed any of the agreements setting up a multi-million dollar credit facility secured by a pledge of his shares and options in the now-bankrupt corporation. The agreements were in fact signed and notarized, and he took and spent the money. The CEO proffered evidence that he was traveling on the dates when the documents were signed and notarized, was not present at the specified times and places, and so could not possibly be bound by the agreements. He had already admitted in his Answer and in deposition testimony that he had signed the documents. At oral argument, the judge called it “the stupidest argument I’ve ever heard” but for some reason chose not to include that assessment in the written opinion.

Jay Gould was the CEO of Interface, Inc. (Interface) a carpet manufacturer. Interface alleges that Mr. Gould got drunk at a company function and used foul and offensive language to insult an employee. The record does not reveal whether Karaoke was involved this time. This was not his first offense. He had been disciplined one year earlier for a bout of alcohol-fueled sexual harassment and warned that any further misbehavior could result in termination. After an outside review, Interface’s board voted unanimously to fire Mr. Gould for cause, a decision that could cost Mr. Gould as much as $10 million. When you offer executive compensation on this level, it can function like my former client’s “sue us and we’ll pay your legal fees” provision. A terminated employee might think it worth spending a few hundred thousand dollars to create enough of a nuisance to at least get a settlement.

The contractual language provided for certain situations that would establish grounds for termination for cause. It then provided that “termination shall take effect immediately upon the giving of written notice of termination for Cause. . . if the Company shall have determined in good faith that such events or circumstances are not remediable . . . .” Mr. Gould sued, claiming that Interface had not acted in good faith, both because the outside investigation was a “sham” and because Interface had not made good faith findings that any grounds for for-cause termination existed.

The magistrate issued a Report and Recommendation finding for Interface, and the District Court adopted that Report and Recommendation. It first found that Interface had absolute discretion to terminate Mr. Gould for cause. In the alternative, it found that, if there was a good faith limit on that discretion, Interface had acted in good faith. Mr. Gould moved for reconsideration, now arguing that Interface in fact had no discretion to terminate him for cause. The District Court found that the argument, raised for the first time on reconsideration, had been waived, by which it meant forfeited. Mr. Gould then appealed.

In Gould v. Interface, Inc., the Eleventh Circuit Court of Appeals affirmed the District Court’s dismissal of Mr. Gould’s suit. The main question on appeal was whether Mr. Gould had forfeited his right to argue that Interface had no discretion in the matter. The Court pursued a lengthy inquiry into the difference between issues, positions, or claims and subsidiary arguments. The former can be forfeited; the latter cannot. As you can imagine, this question can arise in innumerable situations, but here, Mr. Gould took one interpretive position about Interface’s discretion to terminate him for cause and then reversed course and took a different position in his motion for reconsideration. He was not making a subsidiary argument; he adopted a new position.

In support of that new position, Mr. Gould introduced “a slew of new facts” and “an entirely new category of law.” All facts relating to the board’s lack of good faith now became irrelevant. Similarly, Mr. Gould pivoted from reliance on legal precedents relating to bad faith actors to reliance on “principles of contract interpretation governing the allocation of decisionmaking authority in private agreements.”

Having concluded that Mr. Gould’s no-discretion theory had been forfeited, it then proceeded to his argument that there was no factual basis for the determination that Mr. Gould could be fired for cause. Unfortunately for Mr. Gould, he attacked only one of two grounds that the District Court gave for rejecting his suit. He attacked the District Court’s alternative ruling — that there were good faith grounds for Mr. Gould’s dismissal. He did not challenge its primary holding that Interface’s discretion to terminate Mr. Gould for cause was not limited by good faith. So, even if Mr. Gould prevailed on his argument that good faith was not satisfied, he still would lose if Interface’s discretion was unfettered by good faith.

The Court didn’t reach the merits, but I don’t think the question is close. The Court proposes three options for interpreting the termination-for-cause provision. Interface argued that good faith does not limit its discretion, but that doesn’t seem right, even if the District Court endorsed it. Section 5(c) of the employment agreement provides that Interface can fire Mr. Gould “in its sole discretion, whether with or without Cause, at any time upon written notice.” However, the provision on for-cause termination, § 5(a)(i) expressly mentions good faith at least with respect to some aspects of the termination decision. The specific clause should trump the general one. Indeed, I’m not sure what the point of the detailed enumeration of grounds for termination for cause in § 5(a)(1) would be if § 5(c)’s “sole discretion” language governed. There would be a surplusage problem. However, even if it weren’t mentioned at all, good faith is always an implied term. At the very least, the Court could confidently say that it has not been contracted around here, and I’m not sure whether it can be contracted around in this context. If Interface could really terminate its employees at any time in its sole discretion with or without cause, that sounds like at-will employment, so what’s the point of the rest of the employment agreement?

As the Court only recited Mr. Gould’s arguments in broad outline, it is hard to assess the strength of his position, but it seems similarly unlikely that Interface could exercise no discretion and that the determination of whether termination for cause is justified is a purely factual matter. That position can’t be reconciled with the way the provision is written, laying out grounds and permitting termination for cause if Interface concludes in good faith that any of those grounds is met. As a matter of public policy, it seems appropriate that adjudicatory bodies should accord some margin of appreciation to corporate boards so long as they act in good faith.

Having eliminated two extreme positions, we are left with the middle path. I feel so Aristotelian! Interface can terminate Gould for cause, so long as its determination that cause exists is made in good faith. And here, Interface seems to have met that test. Again, I do not know on what basis Mr. Gould thinks that the outside investigation was a sham, but the District Court did not think the investigation was a sham.

The case seems to me to be another data point in support of my hunch that corporate executive agreements create incentives in favor of litigation with limited chance of success. The Eleventh Circuit’s opinion seems to tell a story of sloppy lawyering, but it might tell a story of a plaintiff who stands to lose $10 million and is willing to risk some, but not too much, money pursuing a law suit for its potential settlement value. The appeal seems especially half-hearted, akin to a $20-50,000 investment in an appeal as a hail Mary pass in the hopes of a remand and settlement. In addition, the interrelationship between §§ 5(a)(i) and 5(c) is genuinely challenging to untangle. It’s as though the parties could not reach consensus, so they left some language in the contract that benefits both sides. The result is a confusing mess, because the people negotiating on behalf of the corporation failed to advocate for its position with the rigor they would otherwise bring to an arm’s-length deal. It’s not that they favor the executive’s interest over the corporation’s, but the usual adversarial pressure is dampened. That structural slack lets compromise language survive, which a more zealous negotiator would have excised.