Court: Court of Appeals for the Ninth Circuit; February 24, 2002; Federal Appellate Court
Karen Kelly appeals the district court's summary judgment in favor of SkyTel Communications, Inc. on her breach of contract and promissory fraud claims. The appellate court has jurisdiction under 28 U.S.C. 1291 and reviews the summary judgment de novo. As the case was removed to federal court under diversity jurisdiction, California substantive law applies. The court reverses the judgment on the breach of contract claims and affirms it on the promissory fraud claims. Kelly argues that the compensation agreement does not grant SkyTel unlimited discretion in awarding commissions, thereby invoking the implied covenant of good faith and fair dealing. She also contends that she presented sufficient evidence to suggest that SkyTel arbitrarily awarded only half of her requested commission to her manager, Steve Holetz. The court finds these arguments persuasive, noting that California law implies a covenant of good faith and fair dealing in contracts unless expressly stated otherwise. This covenant ensures that parties act to fulfill the contract's purposes and protect each other's legitimate expectations. While California law allows parties to waive this covenant if the contract provides unrestricted discretion, the district court's determination that SkyTel had absolute discretion in awarding commissions is challenged by the appellate court, which disagrees with this interpretation.
Kelly entered into SkyTel's "Account Executive Compensation Plan," designed to attract top sales talent by offering a compensation package that includes a base salary and eligibility for monthly commissions. The Plan stipulates that the maximum commission an Account Executive can earn is 500% of their monthly quota, with any requests for payments beyond this limit requiring review and approval by the Excellence Committee, which follows specific criteria outlined in a separate document. This document establishes a process for rewarding extraordinary sales performance, detailing how to calculate requests for over-the-maximum commissions and allowing the Committee to exercise discretion in determining payouts. The Committee maintains the authority to modify criteria and make final decisions regarding these payments.
According to California law, the implied covenant of good faith and fair dealing depends on the contract's nature and the parties' legitimate expectations. SkyTel's compensation arrangement grants the Excellence Committee significant discretion in deciding over-the-maximum payouts but also commits to providing a process that rewards exceptional effort and performance. The entirety of the contract must be interpreted as a whole, ensuring that no part is disregarded. Ultimately, SkyTel is expected to exercise its discretion in line with the promise of high earnings potential for Account Executives, governed by the implied covenant of good faith and fair dealing.
The covenant of good faith and fair dealing requires that parties with discretionary power must exercise that power in a manner that does not undermine the other party's legitimate expectations. Specifically, SkyTel’s Excellence Committee is obligated to fairly assess and award over-the-maximum commissions based on Account Executives’ performance. The committee's decisions must be made in good faith and adhere to fair dealing principles. Kelly alleges SkyTel breached this covenant when the Committee, with limited information about her performance, arbitrarily awarded her only half of her requested commission while granting Holetz the remainder and the full amount of his request. California law mandates that the Excellence Committee must investigate claims properly and avoid arbitrary decision-making. The evidence Kelly presents includes minimal documentation from the Committee, specifically meeting minutes and a post-it note, which indicate that her submission was undervalued based on Holetz's assigned effort. This situation illustrates a potential violation of the implied covenant, as the Committee's actions could be seen as arbitrary and not in alignment with the contract's intent and the interests of the Account Executives.
Jim Bowen indicated that commission payments should be split evenly between Karen Kelly and Steve Holetz, in addition to Holetz's existing submission amount. Vicki Gibson, an Excellence Committee member, altered her initial recommendation of a full award to Kelly based on Bowen's claims regarding their contributions, although evidence shows Bowen did not obtain written statements from either party about their efforts until after the committee's decision. Bowen claimed he did not recommend splitting the commission but rather suggested equal amounts based on a statement from Dora Morse about their efforts.
The evidence suggests the Excellence Committee inadequately investigated Kelly’s submission, relying solely on Bowen's claims, which lacked a solid foundation at the time of the vote. This led to potentially arbitrary decisions regarding the commission distribution. Kelly's breach of contract claims under the implied covenant of good faith and fair dealing survived summary judgment, as the district court's previous conclusion was deemed incorrect. The case is remanded for further proceedings on these claims.
Conversely, Kelly's promissory fraud claims failed because the Excellence Committee document explicitly allowed SkyTel to modify payout criteria and did not guarantee adherence to the submission formula. This reservation of rights indicates that SkyTel never made an unconditional promise to follow the formula. The court affirmed summary judgment on the promissory fraud claims, concluding that SkyTel's potential exercise of discretion is still subject to the implied covenant of good faith and fair dealing. The court distinguished this case from Brandt v. Lockheed, noting that SkyTel's contractual commitments differed significantly, providing a countervailing promise that limits its discretionary power. The disposition is partially reversed and partially affirmed, with each party bearing its own costs. The decision is not for publication and cannot be cited in this circuit except under specific rules.
