McDonald’s U.S., LLC v Steve Easterbrook

Case Facts

On August 10, 2020, McDonald U.S., LLC (“McDonald” or “The Company”) filed a claim against its former Chief Executive Officer (CEO), Steve Easterbrook (Easterbrook) in an effort to recover the exit payout he received after being fired “without cause” in November 2019 to avoid embroiling with him in a lengthy dispute. Easterbrook was dismissed for admitting to a consensual relationship with a subordinate which was in breach of the company’s written policy prohibiting relationships between colleagues. Easterbrook received an exit payout of approximately $40 million cash, 6 months of severance pay, shares, and other equity as part of his termination package.

Months after the incident, McDonald received an anonymous tip about a second relationship between Easterbrook and a different employee, which motivated the company to revisit the case. McDonald's investigating team found on the server several nudes, partially nudes, and videos shared between late 2018 and early 2019 of various women that the former CEO had attached using his company email. This was undisputed evidence said the investigating team – they concluded that he had a sexual relationship with at least three McDonald’s employees around 2018 before he was fired thus has violated rules about intimate relationships at work.

The new evidence clearly shows that several policies were breached – Pieces of evidence from his phone were erased and proof of stock grant worth “hundreds of thousands of dollars” for one of those workers was found. McDonald believed that Easterbrook lied during the investigation, committed frauds, disrespected the Company’s values, and abused the trust of all shareholders. Therefore, he should have been fired “with cause” and disqualified from receiving the payout and other benefits. McDonald decided then to sue its former CEO in an effort to recover the severance package that could be worth up to $85 million since his employment termination.

Easterbrook rejected the accusations and argued that the fast-food chain had enough information about his conduct at the time of his dismissal and the stock grant was not a secret. His attorney confirmed Easterbrook's innocence in a statement which was admitted by McDonald that “Rather, since the outset of the investigation, it was in the company email account stored on the company’s own servers.”

McDonald filed a claim against Easterbrook on August 10, 2020, for breach of fiduciary duty and fraud in the inducement. On November 13, 2020, Easterbrook’s attorney brought a Motion to Dismiss under Chancery Rules 12(b)(3) and 12(b)(6)

The Issue

The main issue is to conclude whether McDonald’s has pled a reasonably conceivable basis to conclude that it was justified in relying upon the statements of its fiduciary and it relied on those representations to its detriment.

Rule

In general, sexual relationships between employees and especially between supervisors and subordinates are inappropriate. Employers usually prohibit these kind of relationships to reduce the risk of non-consensual romantic or sexual conduct among employees, as well as the risk that even if consensual, may result in difficulties in the work environment such as harassment. Companies also ensure that employees receive proper training on the policies and understand the consequences of violating such rules.

The Legal Institute Information defines harassment on the basis of sex is “a violation of section 703 of title VII. Unwelcome sexual advances, requests for sexual favors, and other verbal or physical conduct of a sexual nature constitute sexual harassment when (1) submission to such conduct is made either explicitly or implicitly a term or condition of an individual's employment, (2) submission to or rejection of such conduct by an individual is used as the basis for employment decisions affecting such individual, or (3) such conduct has the purpose or effect of unreasonably interfering with an individual's work performance or creating an intimidating, hostile, or offensive working environment.” The Institute also explained that “… in determining whether alleged conduct constitutes sexual harassment, the Commission will look at the record as a whole and at the totality of the circumstances, such as the nature of the sexual advances and the context in which the alleged incidents occurred. The determination of the legality of a particular action will be made from the facts, on a case by case basis.”

These laws and policies are guidelines to assist those who have a fiduciary duty to some else, in order to act in a way that will benefit the principal, usually financially. Legal Institute of Information explains that “if the fiduciary breaches the fiduciary duties, he or she would need to account for the ill-gotten profit. The beneficiaries are typically entitled to damages”. Directors of corporations’ primary fiduciary duties are the duty of care and the duty of loyalty. And in the UK public law, “the duty of candour is the duty imposed on a public authority 'not to seek to win [a] litigatio at all costs but to assist the court in reaching the correct result and thereby to improve standards in public administration” Wikipedia. Failure to comply with any of the fiduciary duties might result to either being terminated “with cause” or “without cause”. “Cause” is defined to include commission of any act “involving dishonesty, fraud, illegality, or moral turpitude,” as well as any “serious, reckless or material violation of the employment policies.”

Often, a fraud in the inducement leads to employment conflict. The Legal Institute Information states that “fraud in the inducement occurs when a person tricks another person into signing an agreement to one’s disadvantage by using fraudulent statements and representations. Because fraud negates the “meeting of the minds” required of a contract, the injured party can seek damages or terminate the contract.”

Like in many cases, the defense or the prosecution uses a motion to dismiss as an attempt to have a case thrown out by the courts. But judges weight all the legal proceedings to decide whether or not they were invalid before the starting of the trial.

Application

By appointing Easterbrook as the Company’s CEO, the board of directors relied on him to take the organization to increase its market share and remain in the leadership of world fast food.

The Company’ statement is clear “We operate our business ethically. Sound ethics is good business. At McDonald’s we hold ourselves and conduct our business to high standards of fairness, honesty, and integrity. We are individually accountable and collectively responsible.”

Although after he had signed off on the code in 2018 which bans relationships between bosses and those who work directly or indirectly for them, Easterbrook found himself admitting of having a consensual affair with an employee of McDonald. When the company learned that their core value (“integrity”) was breached by its CEO who has engaged in sexual affairs with a female employee, they immediately commissioned an investigation. Easterbrook lied to the investigating team that the case was the only one consensual relationship he had with an employee and there was never a physical relationship with the female employee.

Because of his lies, the evidence indicated that Easterbrook’s relationship with first employee was consensual, non-physical, and did not involve any allegation of sexual harassment. After weighting the alternatives, the directors concluded that it would be in McDonald’s best interest if Easterbrook’s separation was accomplished with as little disruption as possible. Therefore, Easterbrook deceived the entire company and was terminated “without cause” in November 2019

Nevertheless, a year later new evidence from an anonymous tip led McDonald to revisit the case by performing a thorough investigation. Fearing the investigation, Easterbrook destroyed evidence of his own misconduct. It was then found that Easterbrook had a physical sexual relationship not only with the second employee, but also with two other employees in the year before his termination, and he approved an extraordinary stock grant, worth hundreds of thousands of dollars, for one of those employees in the midst of their sexual relationship.

To protect its iconic brand against sexual harassment, bullying and abuse of female employees at the hands of their bosses, peers, and customers, McDonald filed a claim in order to seek damages and send a message to the world that victims of sexual harassment will not be ignored, and should not be mocked or retaliated against, including being fired, while their abusers continue working with impunity. Facing this moral issue in court will spare McDonald to face some difficult questions if these new allegations are ignored and become public.

Easterbrook’s silence and lies is a clear breach of the duty of candour— His actions were well calculated to induce the Company so that the terms will benefit him at the expense of the Company. Dishonesty and destroying the evidence by Easterbrook as a way to hide the truth of circumstances surrounding a departure from an employer as a means to secure a favorable financial settlement are potentially the most serious allegation in this case and if court agrees with McDonald’s request, then the Company might recover the money it paid its former CEO.

McDonald Head of Employment Joseph Lappin commented “if McDonald’s had known about the serious allegations and his conduct at the time, it is very unlikely it would have agreed to pay him this amount of money.” And he continues “Relationships between employees, even involving senior staff members, will not necessarily amount to misconduct. But with McDonald’s policies clear in this area, Easterbrook is clearly in breach of company rules, and he failed to live up to McDonald’s values.”

Had Easterbrook stay away from romantic and sexual relationship with employees, he could still be the CEO. And had the Company known the full truth of his behavior during the investigation, the Company wouldn’t have cashed out so much money into some who brought the company’s reputation to disrupt.

Conclusion

Easterbrook breached the fiduciary duty and committed fraud in the inducement by lying to the Company and destroying the evidence which harmed the Company financially and ethically. Therefore, McDonald is entitled to recover the sums paid to Easterbrook including (but not limited to) the benefits granted to and retained by Easterbrook under the Separation Agreement, other compensation Easterbrook obtained, and costs associated with investigating and responding to allegations of Easterbrook’s violations of McDonald’s policy.

Reference

Michael H (2021). “Business Law.”

Brigham Young University - Idaho, Chapter 19, 20, 21

Wikipedia. “Duty of Candour”. 2021

https://en.wikipedia.org/wiki/Duty_of_candour. (Accessed 20 November 2021)

Legal Institute of Information. (1992). Sexual harassment.

https://www.law.cornell.edu/cfr/text/29/1604.11. (Accessed 20 November 2021)

Legal Institute of Information. (1992). Fraud in the inducement.

https://www.law.cornell.edu/wex/fraud_in_the_inducement. (Accessed 20 November 2021)

Legal Institute of Information. (1992). Fiduciary duty.

https://www.law.cornell.edu/wex/fiduciary_duty. (Accessed 20 November 2021)

Stewart. (2020). McDonald’s sues former CEO to recover severance pay after new misconduct allegations come to light.