USCA1 Opinion
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
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No. 96-1804
WAYNE H. SARGENT,
Plaintiff, Appellant,
v.
TENASKA, INC.,
Defendant, Appellee.
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APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Michael A. Ponsor, U.S. District Judge]
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Before
Selya, Circuit Judge,
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Aldrich, Senior Circuit Judge,
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and Boudin, Circuit Judge.
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Thomas P. Billings with whom Karen S. White and Sally & Fitch
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were on brief for appellant.
Stephen B. Deutsch with whom Foley, Hoag & Eliot was on brief for
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appellee.
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March 5, 1997
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BOUDIN, Circuit Judge. Wayne Sargent brought this
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action in the district court against his former employer,
Tenaska, Inc. On appeal, the case has been narrowed: the
issue is whether Sargent has a claim to certain ownership
interests because of an alleged breach of the implied
covenant of good faith and fair dealing under Massachusetts
law. Because the district court granted summary judgment
against Sargent on this issue, we review its decision de
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novo, drawing reasonable factual inferences in Sargent's
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favor. Grenier v. Vermont Log Bldgs., Inc., 96 F.3d 559, 562
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(1st Cir. 1996).
Tenaska, Inc., develops power generation and
cogeneration projects in different areas of the United
States. Sargent, a Massachusetts resident with many years of
pertinent engineering and management experience, was hired by
Tenaska, Inc., in May 1990. His title was General Manager of
the Eastern Region. Tenaska, Inc., had a cogeneration
project under way in Lee, Massachusetts, and it was hoped
that Sargent would organize other projects in the Eastern
Region for the company.
Sargent's compensation included not only a management-
level salary but also a promise of an "ownership interest of
1.50% in Tenaska, Inc., Lee Mass Cogeneration Company,
Tenaska Gas Company and in any entities created for new
projects and formed by Tenaska subsequent to [his] employment
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start date." This language appeared in a letter from
Tenaska, Inc., to Sargent offering employment. The district
court treated the letter as setting forth the initial terms
of an at-will employment relationship and neither side now
disputes this treatment.
Tenaska's letter provided that Sargent's ownership
rights would be made available beginning twelve months after
the start of his employment. The letter also said that the
ownership plan, which had not yet been developed, would
ultimately include a right of the company "to buy back the
ownership interests of terminated employees under specified
terms and conditions that will penalize short-term employment
and reward performance and long-term accomplishments."
Tenaska, Inc., never developed a single ownership plan
but instead set up a separate plan for each entity, including
almost a half-dozen new ones created after Sargent joined the
company and during his tenure. In general, the plans
provided a vesting schedule for ownership interests acquired
by an employee; the company was allowed on termination of an
employee to repurchase the unvested portion at a nominal
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price. The vesting schedule, in the typical plan, provided
as follows:1 First 6 months:0% is vested
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1In the case of one company, the entire interest could
be repurchased even after the full vesting period, but
Tenaska had to pay book value for the vested portion. For
another company, half the vested interest could always be
repurchased for nominal value. These variations do not alter
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Months 7-18: 15% is vested
Months 19-30: 35% is vested
Months 31-42: 65% is vested
After 42d month: 100% is vested
Not long after Sargent joined Tenaska, Inc., the Lee
project was cancelled. The project was not revived and no
other projects were secured in Sargent's region during his
period of employment. In December 1993, Tenaska, Inc.,
decided to close its Massachusetts office and to eliminate
Sargent's position. Sargent was offered a new position at
the company's Omaha headquarters; the new position carried a
lower salary and less favorable benefits in the ownership
plans, including a reduction in various interests Sargent had
or hoped to secure in existing projects.
Sargent declined the proposal and was terminated by
Tenaska, Inc., in January 1994, having served about three and
one-half years with the company. Prior to termination,
Sargent had been granted certain ownership interests in a few
of the Tenaska projects but less than all to which he deemed
himself entitled under the terms of the employment letter.
Sargent immediately brought the present suit in the district
court against Tenaska, Inc., seeking all that his employment
letter explicitly provided, and more.
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the issue on appeal, and we disregard them for simplicity's
sake.
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The explicit contract claim need not detain us. On
cross motions for summary judgment, the district court ruled
the employment letter was a contract, suggesting that Sargent
might be entitled to ownership interests, or comparable
damages, to the extent that the promised interests had become
vested under their plans at the time of his termination.
Sargent v. Tenaska, Inc., 914 F. Supp. 722, 729, 730 (D.
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Mass. 1996). Thereafter, Sargent and Tenaska, Inc., reached
a settlement that disposed entirely of these express contract
claims.
What remains open is Sargent's claim for "more." In
substance, Sargent has argued in the district court and on
appeal that he is also entitled to the unvested portion of
the ownership interests in question that would have become
vested in due course if he had not been discharged. The
basis for this claim is the implied covenant of good faith
and fair dealing that Massachusetts law reads into employment
contracts.
This implied covenant has been taken by Massachusetts
courts to permit discharged employees to recover unpaid
commissions or other expectancies in certain circumstances.
Fortune v. National Cash Register Co., 364 N.E.2d 1251, 1257-
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58 (Mass. 1977). One condition is that the discharge have
been done in bad faith; another, put generally, is that the
interest or claim pertains to "past" services, i.e., to
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services already performed at the time of the discharge.
McCone v. New England Tel. & Tel. Co., 471 N.E.2d 47, 49-50
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(Mass. 1984).
In the district court Tenaska, Inc., sought summary
judgment against this Fortune claim. It conceded that its
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good or bad faith in discharging Sargent could not be
determined on summary judgment, but asserted that the
unvested interests claimed by Sargent were compensation for
future rather than past services. The district court agreed,
stressing the language in the employment letter that the
vesting provision was designed to "reward performance and
long-term accomplishments." This appeal followed.
The Fortune doctrine is easy to grasp in the simple
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case that spawned it: an at-will salesman, entitled to a
commission payable at a later date, is fired, after the sale
but before the date of payment; and the reason for the firing
is to cut off the commission. In that case, Massachusetts
courts imply a covenant of good faith and fair dealing, treat
the discharge as a breach, and fix the remedy as an award to
the salesman of future compensation for the completed sale.
Fortune, 364 N.E.2d at 1257-58.
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Since Fortune so held in 1977, Massachusetts appeals
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courts have both extended and limited the doctrine in several
important decisions. For example, Fortune-based recoveries
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have been allowed in Gram v. Liberty Mut. Ins. Co., 429
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N.E.2d 21, 29 (Mass. 1981) ("Gram I"), Maddaloni v. Western
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Mass. Bus Lines, 438 N.E.2d 351, 355-56 (Mass. 1982), and
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Cataldo v. Zuckerman, 482 N.E.2d 849, 855-56 (Mass. App. Ct.
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1985). These cases make clear that Fortune is not limited to
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simple cases of commission sales with deferred payments. Id.
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at 851-52.
On the other hand, the Supreme Judicial Court has
confined recovery to "identifiable, future benefit[s] . . .
reflective of past services," Gram I, 429 N.E.2d at 29, and
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firmly excluded prospective benefits not thus tied to past
services, McCone, 471 N.E.2d at 50; Gram v. Liberty Mut.
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Ins. Co., 461 N.E.2d 796, 798 (Mass. 1984) ("Gram II"). The
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recurring difficulty, presented in the case before us, is how
to decide whether the unvested interests relate to "past" or
"future" services.
We treat this characterization issue as one of law. The
contract terms agreed to by the parties are not in dispute;
the debate is whether the law should extend protection
(assuming bad faith discharge) beyond the express terms of
the contract to certain expectancies. The extent of such
protection is primarily a matter for judges, not juries. See
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Gram II, 461 N.E.2d at 798; cf. Green v. Richmond, 337 N.E.2d
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691, 695 (Mass. 1975) (judge decides the legal question of
whether undisputed contract terms violate public policy).
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It is easy to find a protectable interest where, as in
Fortune, the promised future payment is directly tied to a
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particular past service, such as a discrete sale. This kind
of correlation is harder where the future payment is
connected not with a specific past act but with continued
service at the company over a period of time. The company
could be interested simply in the employee's service as it
occurs or, at the other extreme, in keeping the employee
until the last day no matter what. In the former case, one
could treat all of the time worked prior to discharge as past
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services and require pro rata payment; the latter case might
suggest otherwise.
In reality, motives are often mixed: the company may
want both to provide an ongoing incentive to work harder and
to retain an ever more valuable employee as long as possible.
A periodic vesting schedule achieves both aims; and the
latter is reenforced where, as here, the incremental amount
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vested in each period increases in later periods. And, with
periodic vesting, the employee gets some contractual
protection (i.e., of vested interests) against the loss of
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the job in midstream.
A good argument could be made that, where a colorable
periodic vesting period is provided, the parties should be
taken to have settled between themselves the issue that the
Fortune doctrine itself seeks to mediate: how much of the
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promised future compensation should be treated as already
earned prior to the discharge. But Massachusetts case law
sends mixed signals on this issue. Compare Cataldo, 482
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N.E.2d at 851-52 with Cort v. Bristol-Myers Co., 431 N.E.2d
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908, 910-11 (Mass. 1982).
Certainly, terms like "vested" and "unvested" do not
automatically control. An agreement might provide that an
employee who worked for five years to complete a five-year
project would get a one-third interest at the end but nothing
if he left prior to that date. If the employee was fired in
bad faith a month before completion, it is doubtful that
Fortune could be shrugged off by saying that the interest had
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not yet vested.2
Still, ordinarily, a colorable periodic vesting schedule
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crudely delineates the line between past and future services.
While Sargent remained at the company, his past services
grew; but so did his vested interests. Most of his past
services were therefore already compensated by his
contractual claims to vested interests; and unvested
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2We decline Sargent's invitation to rely upon the
unpublished slip opinion in Ground Round, Inc. v. King, 671
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N.E.2d 224 (1996) (Table), a summarily affirmed decision of
the Massachusetts Appeals Court that has some bearing upon
such a hypothetical. Massachusetts forbids citations to such
opinions in most circumstances, see Lyons v. Labor Relations
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Comm'n, 476 N.E.2d 243, 246 n.7 (Mass. App. Ct. 1985), for
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reasons explained by the Lyons court, id., that make the
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seldom employed alternative practice exemplified by Aviles v.
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Burgos, 783 F.2d 270, 283 n.4 (1st Cir. 1986), inapposite
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here.
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interests were largely associated with future services not
protected under Fortune. We say "largely" because within the
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single vesting period embracing the date of discharge, one
could make an effort to distinguish and protect services
already performed between the start of that period and the
date of discharge.
Sargent has made no effort to argue for or support such
a drastic narrowing of his claim; he has chosen to argue that
yet unvested interests from all then-occurring and future
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vesting periods are related to past compensation. Taking the
case as he has framed it, we agree with the district court:
taken as a whole, the unvested interests claimed by Sargent
did not specifically and identifiably correspond to Sargent's
past services. Predominantly, they were oriented to
compensating services not yet provided.
Sargent himself is unable to explain how the unvested
interests he claims can plausibly be treated as payment for
past services. His main argument is that it would be "an odd
sort of 'future compensation' indeed, when the employee pays
for it, receives it, earns income on it, and pays taxes on
it-- all in the present." But there is nothing odd about it;
certainly future services can be conditionally purchased by a
nominal transfer of ownership subject to a vesting provision
and enforced by a buy-back option.
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Sargent's best argument hangs on a single precedent, the
Massachusetts Appeals Court decision Cataldo. There, a
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developer hired Cataldo to supervise its projects, promising
him, in addition to a base salary, a portion of the
developer's equity in two named projects and in future
projects handled by the firm. If Cataldo's employment ended
during a project, the firm could buy back his interest at the
lesser of appraised value or a sliding scale payment, giving
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Cataldo $1,000 per month times the number of months the
project had consumed. Cataldo, 482 N.E.2d at 851-52.
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The latter provision was effectively a periodic vesting
provision. When Cataldo was later fired, he sued for his
share of the developer's equity in several uncompleted
projects. Although the trial judge apparently thought the
express contract claim more suitable, he also instructed the
jury under Fortune doctrine. Cataldo, 482 N.E.2d at 854.
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The jury awarded Cataldo substantial sums. The Appeals Court
affirmed, saying:
We conclude that, when Cataldo was
discharged, the possibility that Cataldo
would gain later a vested share of the
developer's equity in each [firm] project
then viable was sufficiently an
`identifiable, future benefit . . .
reflective of past services' . . .
performed by Cataldo, to come within the
principle of the Fortune case. We
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recognize, of course, that the precise
limits of the doctrine of that case are
not free from doubt.
Cataldo, 482 N.E.2d at 855-56 (citations omitted).
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Yet the Appeals Court never decided the question--
critical to us--whether the buy-back provision limited the
firm's liability to Cataldo with respect to uncompleted
projects. Instead, the court upheld a jury finding that the
buy-back option had been waived because the firm failed to
exercise that option promptly. Cataldo, 482 N.E.2d at 857.
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Indeed, the court's language implies that it might otherwise
have limited liability to the vested interests. Hammond v.
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T.J. Litle & Co., 82 F.3d 1166, 1168-69, 1172 (1st Cir.
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1996), perhaps closer to our own facts, turned on the plain
error rule.
Absent controlling precedent, we have sought to apply
the principle of Fortune--protection of compensation earned
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for past services--and conclude that it does not fit
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Sargent's unvested interests. To repeat, this is not because
of any magic in the terms vested and unvested, but because
the unvested interests here predominantly concern future
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services expected from Sargent. Gram II, 461 N.E.2d at 798.
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If Fortune is to be extended, this is a matter for the
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Massachusetts courts and not for us.
Affirmed.
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