The ex-Yahoo executive said he was promised several annual payments of $1.35 million, as well as other compensation, when his online advertising company Interclick was acquired by Yahoo in December 2011, according to the lawsuit filed in New York state court.
Mr Katz continued to run the Interclick business after the acquisition, the lawsuit stated.
The complaint, which alleges breach of contract as well as other claims, comes roughly seven months into the tenure of new Yahoo chief executive Marissa Mayer, who is moving to revive Yahoo's stagnant revenue and its popularity among consumers.
Ms Mayer's management was in the spotlight last month after news surfaced about a controversial new policy banning employees from working at home. She is not mentioned in the lawsuit, and Yahoo declined to comment on the case.
Yahoo acquired Interclick, whose technology helped companies target online ads to consumers, eight months before Mayer became CEO, when former Yahoo finance chief Tim Morse was serving as the company's interim CEO.
Mr Katz served under several CEOs during his one year at the company, including interim CEO Ross Levinsohn who praised Mr Katz as a "great visionary," according to the complaint.
Yahoo had promised to pay Mr Katz a "retention bonus" in three annual installments of $1.35 million, the lawsuit said, beginning in January 2013 and ending with a $450,000 payment in January 2016.
According to the lawsuit, Yahoo's head of human resources summoned Mr Katz to a bar for what he believed was a pressing work matter on a Sunday evening in December "while he was at home observing the second night of Hannukah."
At the bar, Mr Katz was informed that he was being terminated "effective almost immediately," weeks before he was to be paid the first of the retention bonuses.
The "rushed termination clearly was structured and timed as an attempt to deprive him of the compensation he was promised during the merger negotiations," according to the complaint.
Copyright @ Thomson Reuters 2013