Tuesday, August 11, 2020

McDonald’s seeks to claw back ex-CEO’s severance after sexual misconduct revelations

By Anne Sherry, J.D.

McDonald’s Corporation filed suit in Delaware state court to recover severance it paid to former CEO Steve Easterbrook after it fired him "without cause" due to his inappropriate relationship with an employee. Easterbrook had insisted that his only personal relationship with an employee was a single, non-physical relationship occurring via texts and video calls, but recent evidence reveals that Easterbrook had multiple physical sexual relationships with employees while he was CEO. The complaint alleges that had Easterbrook not lied, McDonald’s would have terminated him for cause, and he would not have been entitled to any severance (McDonald’s Corporation v. Easterbrook, August 10, 2020).

The McDonald’s board fired Easterbrook in November 2019 after an investigation confirmed that Easterbrook had engaged in a non-physical intimate relationship with a McDonald’s employee. Easterbrook told the McDonald’s investigators that he had never engaged in a physical sexual relationship with any McDonald’s employee. The board concluded that his conduct violated company policy and that his lack of judgment rendered him unfit to serve as CEO. As for whether to terminate him for cause or without cause, the board was insufficiently confident that Easterbrook’s misconduct would constitute legal cause. Concluding that it would be in McDonald’s best interest not to belabor the matter by litigating an uncertain case, it negotiated a "without cause" separation agreement that entitled Easterbrook to significant severance benefits.

In July 2020, however, McDonald’s received an anonymous tip that a McDonald’s employee had engaged in a physical sexual relationship with Easterbrook while he was CEO. An internal evidence corroborated the tip with photographic evidence of physical sexual relationships with three McDonald’s employees during Easterbrook’s last year at the company. The evidence also revealed that Easterbrook approved a special discretionary grant of hundreds of thousands in RSUs to one of the employees during their relationship.

McDonald’s alleges that Easterbrook breached the fiduciary duties of candor, due care, and loyalty he owed to the company by violating the company’s standards of conduct and lying to conceal the physical relationships. The complaint also contains a claim that Easterbrook committed fraud in the inducement by lying so that the board would approve the "without cause" separation agreement. It is seeking compensatory damages or, in the alternative, rescission of the separation agreement and a return of all awards granted.

McDonald’s filed a Form 8-K disclosing the new litigation. CEO Chris Kempczinski also sent a letter to employees, also posted on the company’s website, that describes the action and expresses the company’s commitment to "continuing to strengthen our culture and maintain an environment in which members of the McDonald’s System are encouraged to and comfortable with coming forward with information about any behavior that doesn’t align with our values."