Scott P. Hammond v. T.J. Litle & Company, Inc., Cross-Appellee
Docket: 95-1690
Court: Court of Appeals for the First Circuit; May 24, 1996; Federal Appellate Court
Scott P. Hammond filed a lawsuit against T.J. Litle Company, Inc. after his termination, claiming the company breached his employment contract regarding stock shares and violated the implied covenant of good faith and fair dealing. The case originated from an oral employment offer made by Thomas J. Litle in May 1986, which included a salary of $45,000, the option to purchase 100 shares of non-voting founders' stock at $1.00 per share, and deferred compensation of $10,000 annually convertible into additional stock. Hammond accepted the offer, anticipating further negotiations on the vesting schedule and repurchase rights of the shares.
After commencing employment on June 9, 1986, Hammond requested a more favorable vesting schedule for the shares, which Litle approved in a handwritten note. The agreed vesting schedule specified percentages of shares vesting at set intervals from March 1987 to March 1990. Draft agreements incorporating these terms were prepared by outside counsel. However, during a September 1986 meeting to execute the agreements, Hammond sought substantive changes, which Litle rejected, leading to the agreements remaining unsigned.
The appellate court, after a bifurcated trial where some issues were decided by a jury and others by a magistrate judge, found no errors in the lower court's decision and affirmed the ruling.
On March 31, 1987, Litle informed Hammond that no agreement had been reached regarding his stock participation, prompting Hammond to refuse to work until the matter was resolved. In an April 14 meeting, Litle proposed that Hammond could acquire a maximum of 66 2/3 shares, with 25% vesting annually, contingent upon meeting unspecified performance standards. Hammond rejected these terms, leading to a follow-up letter from Litle on April 17 that reiterated the conditions, admonished Hammond for his behavior, and warned that further issues could be considered a resignation. General Manager Alemian confirmed these terms in a July 13, 1987 letter.
Disagreement remained on whether Hammond accepted the new terms; the Company argued he did by reporting to work and submitting a check for $66.67, while Hammond maintained he tendered $100 insisting on 100 shares but paid only what Litle would accept. In December 1987, Hammond again claimed entitlement to 100 shares. To resolve the dispute, Alemian offered him 33 1/3 shares if he gave up his claim to 100 shares, which Hammond refused, resulting in Litle withdrawing the offer. Hammond was terminated on January 27, 1988.
In his Second Amended Complaint, Hammond alleged the Company breached his employment contract regarding stock acquisition, violated the implied covenant of good faith, and failed to issue shares due to him as deferred compensation. The trial was bifurcated into two phases: the first, tried to a jury in June 1994, addressed whether Hammond had a contract with the Company and the number of shares owed upon termination. The jury found that a contract existed and awarded Hammond 48 shares.
The second phase, held in December 1994, focused on whether Hammond must offer the 48 shares back to the Company and if he was entitled to 5 additional shares for deferred compensation. The magistrate judge ruled negatively on both issues. The Company appealed the jury's decision regarding the 48 shares and the magistrate's ruling on the repurchase obligation, while Hammond cross-appealed the magistrate’s conclusion concerning the additional shares for deferred compensation. The jury concluded that an agreement entitling Hammond to 100 shares existed, last amended in the summer of 1986, and that he was entitled to 48 shares upon termination.
The Company acknowledges the jury's finding that a contract for 100 shares was established in May 1986 and modified in summer 1986, but disputes the determination that Hammond was entitled to 48 shares. The jury was instructed to consider three possible outcomes for Hammond's entitlement: (1) award at least 36 shares for those that vested between June 1986 and January 31, 1988, (2) award 100 shares if the contract implied Hammond would have a fair opportunity to earn all shares and the Company breached this by terminating him without cause, or (3) award a number greater than 36 if the Company terminated him without cause or in bad faith. The Company argues the jury must have relied on the third alternative since Hammond received neither 36 nor 100 shares but contends there was insufficient evidence to support compensation for foregone employment opportunities. The Company did not object to the jury instruction on awarding 48 shares and forfeited its opportunity for a new trial by not moving for one under Fed. R. Civ. P. 59(a). Additionally, the Company lost its right to contest the judgment for other than 48 shares as it did not raise this issue in a motion for judgment as a matter of law. To challenge the evidence's sufficiency on appeal, a party must have first presented the claim to the district court through specific motions, otherwise, the appellate court cannot review the evidence's weight for the first time.
The Company did not highlight any alleged errors to the district court during the trial. After Hammond's case was presented, the magistrate judge proposed to instruct the jury that it could award Hammond shares as consideration for accepting the Company's offer if it found the Company acted in bad faith or without cause in his discharge. The Company contended there was no evidence to support this instruction but did not object after it was given or move for judgment as a matter of law or a new trial on that basis. When the Company eventually moved for judgment at the close of evidence, it focused solely on the existence of a contract for stock shares, specifically disputing whether a contract for 100 shares existed or if it was limited to 66 2/3 shares per a letter from Alemian to Hammond.
The appellate court found that the Company's motion for judgment did not adequately encompass the argument that no reasonable jury could conclude Hammond was entitled to any shares. The Company claimed it could not argue for judgment based on the jury's potential findings of various share amounts; however, the court clarified that parties can move for judgment on an issue-by-issue basis. The Company was aware of the magistrate's jury instruction and could have raised its concerns at that time or after the verdict, thereby forfeiting its claim by failing to do so.
The court reviewed the case for plain error, concluding that there was no such error or manifest miscarriage of justice. Evidence suggested that Hammond's compensation discussions before accepting the offer centered on stock shares rather than cash salary, and while there was no explicit agreement on 12 shares, the jury could reasonably determine that a contract existed without adhering to the minimum or maximum shares discussed. The verdict would not be disturbed due to the Company's failure to preserve the argument for appeal.
The magistrate judge determined that Hammond was not obligated to offer his shares back to the Company for repurchase following his termination. This conclusion was based on the jury's findings that an agreement regarding vesting and stock restrictions had been reached in the summer of 1986, with terms formalized in the Repurchase and Stock Restriction Agreements prepared by outside counsel in August 1986. The agreements indicated that if the Corporation terminated a Stockholder for cause, the Stockholder must offer their shares for purchase at fair market value within five days. However, the judge noted that the Company had only shown potential grounds for terminating Hammond for cause but had not actually done so.
Alemian, who decided to terminate Hammond, cited performance issues stemming from Hammond's frustration over a stock package reduction as a significant factor. Alemian expressed concern that Hammond's ongoing discontent was affecting his performance as CFO and jeopardizing the company’s well-being. Despite these issues, Alemian acknowledged that Hammond's overall performance had been adequate and stated that he had previously sought to resolve the matter amicably.
During the termination discussion on January 27, 1988, Alemian clarified to Hammond that the termination was not due to performance issues but rather due to a conflict with the company chairman, Tim Litle. Both Alemian and Hammond confirmed that the termination was not based on performance but on the inability to resolve this conflict.
Hammond's termination circumstances were examined by the magistrate judge, who concluded that the Company chose not to terminate Hammond for cause, despite having the option. The judge noted that the Company did not communicate any performance-related reasons at the time of termination or in a subsequent letter dated February 19, 1988, which confirmed his termination but made no mention of cause. The letter indicated the Company was exercising its right to purchase Hammond's unvested shares and expressed a willingness to discuss his vested shares without any urgency, contradicting the Company's claim that Hammond had a duty to offer his shares within five days post-termination.
The magistrate judge also highlighted that the Company’s by-laws allowed for the removal of an officer with or without cause but required notice and an opportunity to be heard if the termination was for cause, which Hammond did not receive. The Company is appealing the ruling, arguing that Massachusetts law focuses on the objective existence of cause rather than the reasons communicated to the employee. Alternatively, the Company claims the magistrate judge misdefined 'cause' by only considering Alemian's statement denying inadequate performance and ignoring references to "relationship issues" with Litle. Hammond argues that the judge's finding was factually supported, and the appeal raises questions about the legal standards applied in determining cause.
The Company cites Klein v. President and Fellows of Harvard College to argue that the objective existence of cause, not what the employer communicates at termination, is key in determining if an employee was discharged for cause. In Klein, the court found that while the dean treated the plaintiff as an at-will employee during a probationary period, she had a fixed-term contract that allowed termination only for cause. The Supreme Judicial Court ruled her dismissal was indeed for cause due to her poor performance and negative relations with faculty, despite the dean's vague termination letter. The court emphasized that the plaintiff was aware of the reasons for her termination from a prior discussion with the dean. The ruling implies that when an employee can only be terminated for cause, the employer’s communication significantly influences judicial assessment of the termination. The Company argues this principle should extend to situations where employees can be terminated without cause, yet their contract rights depend on whether the termination is for cause. The interpretation the Company seeks would allow employers to misrepresent the nature of the termination, which Klein's ruling does not support.
The Company argues that the case of Cort v. Bristol-Myers Co. supports its claim that the reason for terminating Hammond is irrelevant. In Cort, at-will employees were fired for not completing a company questionnaire deemed intrusive, despite good performance records. The Supreme Judicial Court ruled that at-will employees cannot claim damages for being given a false reason for dismissal unless the actual reason violated public policy. The court noted that a false reason could be relevant if it concealed a public policy violation. In this case, where consequences hinge on whether the termination was for cause, the employer's stated reason is crucial unless proven pretextual.
Additionally, the Company cites King v. Driscoll, where the employee was terminated for participating in a shareholder lawsuit. The court found no public policy violation and upheld the employer's termination without cause, rejecting the employee's claim that the employer's trial arguments indicated a cause for termination.
However, the Company’s reliance on King is undermined, as it initially stated Hammond’s poor performance as a reason for termination only after the lawsuit was filed, ten months post-termination. Although performance issues were discussed prior, evidence showed that Hammond's performance improved, and the employer, Alemian, explicitly stated performance was not the reason for termination. The magistrate judge noted that the Company did not communicate a cause at the time of termination, indicating that it chose not to act on that basis and cannot retroactively justify its decision with different reasons during litigation.
The Company's alternative argument asserts that if the employer's stated reason for termination is valid, the magistrate judge incorrectly defined 'cause' by focusing solely on Alemian's denial of performance-related issues and neglecting his indication of 'relationship issues' with Litle as a potential cause under Massachusetts law. 'Cause' for termination encompasses a reasonable basis for employer dissatisfaction, including lack of capacity or diligence, misconduct, or reasons aligned with business needs, contrasting with discharges deemed arbitrary or in bad faith.
The magistrate judge recognized that the definition includes reasons beyond performance but determined that the only evidence-supported basis for termination was inadequate performance, which the Company explicitly rejected as a reason. Testimonies indicated Hammond was terminated primarily due to 'relationship issues' with Litle or his refusal of a reduced stock package, which could imply bad faith in depriving him of shares. The judge concluded that a 'relationship issue' alone does not constitute valid cause for termination under Massachusetts law.
The Company cited precedent cases, Klein and Goldhor, to support its claim that managerial conflicts could justify termination. However, it misinterpreted Klein, as that case involved poor performance, and Goldhor's conflict did not directly compare to Hammond's disagreement over employment contract terms. The judge noted Litle did not intend to terminate Hammond and merely accepted Alemian's recommendation.
Additionally, the jury's finding that Hammond was entitled to shares indicated that he was terminated either without cause or in bad faith. Ultimately, the magistrate judge concluded that the only conceivable just cause for termination was performance-related, which the Company chose not to pursue, thus relieving Hammond of the obligation to sell his shares back.
Hammond had a contractual right to convert his accrued deferred compensation into stock, specifically entitled to 5 shares if he properly exercised his option. The central issue was whether Hammond exercised this option within a reasonable time after his employment termination, given that he filed a lawsuit 10 months post-termination. The magistrate judge ruled that Hammond did not act within a reasonable time and that his lawsuit did not constitute a valid attempt to exercise the option. Additionally, Hammond failed to prove that attempting to exercise his option closer to his termination would have been futile.
Hammond contended that the magistrate judge misinterpreted the contract by implying he needed to exercise his option within a reasonable time post-employment, arguing instead that he could do so as long as his compensation remained deferred. The magistrate judge’s determination of what constituted a reasonable time was deemed a factual finding subject to the "clearly erroneous" standard. The determination of reasonableness is typically left to the district court and is considered a matter for the trier of fact.
The ruling was supported by the nature of the contract and the intention of the parties, indicating that Hammond's option was described as his choice as an employee. While Hammond likened his situation post-termination to that of a nonemployee investor with convertible debt, there was no evidence suggesting that his conversion option was contingent on the company’s cash flow situation.
The record does not support the claim that the Company intended for a former employee to convert a deferred compensation arrangement into a right to purchase stock at a low price in the future. At the time of Hammond's termination, the valuation of shares was significantly less than the $16,000 in deferred compensation owed to him. Testimony indicated that the idea of accepting stock instead of cash in March 1988 was viewed as unreasonable by other employees. The magistrate judge found that Hammond's option to convert deferred compensation into stock was not exercised within a reasonable time, as he did not indicate any intention to do so until ten months after his termination. The judge ruled that the Company did not repudiate the contract, as Hammond did not assert his right to stock conversion at the time of his termination or in follow-up communications, and he made no effort to exercise this option until much later. Hammond's subsequent motion to correct the judgment regarding cash payment for deferred compensation was denied, as the issue of cash payment was not contested; the Company acknowledged its obligation to pay Hammond and stated it was prepared to do so once the appeal is resolved. The judgment was affirmed, with each party bearing their own appeal costs.
The jury determined that 36 shares vested for Hammond, with 16 shares vested by March 31, 1987, and 2 additional shares vesting each month until his termination on January 31, 1988. The legal instruction regarding this case was founded on the principle from *Anthony's Pier Four, Inc. v. HBC Assocs.*, emphasizing the implied covenant of good faith and fair dealing, which prohibits actions that undermine another party's contract rights. The court defined "cause" for termination as a reasonable basis for an employer's dissatisfaction with an employee's performance, aligning with the precedent set in *Goldhor v. Hampshire College*. Massachusetts case law allows recovery of earned compensation if an employee is terminated in bad faith or without cause, as established in cases such as *Cataldo v. Zuckerman* and *Fortune v. Nat'l Cash Register Co.* Failure to object to jury instructions does not preclude a review of evidence sufficiency if the appellant requested judgment as a matter of law or a new trial. The magistrate correctly ruled that the Statute of Frauds did not bar the enforcement of the Stock Restriction Agreement's repurchase provision against Hammond, as he acknowledged an oral contract formed in May 1986, which included necessary terms like vesting and stock restrictions. The Company did not argue the Statute of Frauds would impede contract enforcement against it. Additionally, while the Company provided testimony of employees regarding Hammond's management deficiencies, these witnesses were not involved in the decision to terminate him, and their observations were not communicated to higher management. Hammond could convert his deferred compensation to stock at a price based on its fair market value, but no less than the latest investor price, which was $3,000 per share in early 1988, reportedly exceeding its actual worth at that time.
