Walsh v. Zurich American Insurance Comp ( 2017 )

United States Court of Appeals
For the First Circuit
No. 15-2245
JAMES WALSH,
Plaintiff, Appellee,
v.
ZURICH AMERICAN INSURANCE COMPANY, d/b/a ZURICH DIRECT MARKETS,
d/b/a ZURICH NORTH AMERICA COMMERCIAL,
d/b/a ZURICH NORTH AMERICA, et al.,
Defendants, Appellants.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW HAMPSHIRE
[Hon. Steven J. McAuliffe, U.S. District Judge]
Before
Howard, Chief Judge,
Selya and Lipez, Circuit Judges.
Charles P. Roberts, III, with whom Donald S. Prophete and
Constangy, Brooks, Smith & Prophete LLP were on brief, for
appellants.
Jamie N. Hage, with whom Douglas J. Miller, Kathleen A.
Davidson, and Hage Hodes, P.A. were on brief, for appellee.
February 22 2017
LIPEZ, Circuit Judge. A jury found that appellant Zurich
American Insurance Company ("Zurich") breached employment
agreements with appellee James Walsh when it substantially reduced
his incentive pay for a lucrative deal -- the largest of its type
in the company's history -- and did not pay incentive on another
deal.1 Walsh was awarded double damages and attorney's fees,
totaling nearly $2.4 million, based on findings that Zurich
willfully and without good cause withheld the compensation owed.
On appeal, Zurich asserts that the evidence failed to show
contractual breaches, let alone willful ones. Hence, the company
argues, the district court erred in denying its motion for judgment
as a matter of law on Walsh's contract and wage claims. Zurich
alternatively argues that the district court committed legal error
by instructing the jury to disregard contract provisions that gave
the company discretion to limit incentive pay.
Having carefully reviewed the record and pertinent
caselaw, we reject Zurich's contention that it was entitled to
judgment as a matter of law on the breach-of-contract and wage
claims. We also uphold the jury's breach and willfulness findings
stemming from Zurich's withholding of incentive compensation for
a deal made with Great American Insurance Company ("GAIC").
However, we agree that the district court erroneously concluded
1
We note that defendants are a group of related corporate
entities whom we refer to collectively as "Zurich."
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that, if Walsh had an enforceable incentive plan when the
unprecedented deal was struck with Automobile Protection Corp.
("APCO"), Zurich lacked discretion as a matter of law to change
Walsh's incentive formula for that deal. Rather than telling the
jury to disregard the contractual discretion provisions applicable
to that deal, the court should have instructed the jury to
determine whether Zurich's exercise of discretion satisfied the
implied contractual obligation of good faith and fair dealing.
We therefore vacate the district court's judgment
insofar as it incorporates the jury's verdict on the APCO deal,
affirm the judgment with respect to the GAIC deal, and remand for
further proceedings.
I.
A. Factual Background
Walsh's dispute with Zurich centers on two compensation
plans that awarded him incentive pay based on certain types of new
business brought into the company. We sketch the facts as the
jury could have found them, drawing all reasonable inferences in
the plaintiff's favor. See, e.g., Butynski v. Springfield Terminal
Ry. Co., 592 F.3d 272, 274 (1st Cir. 2010).
Walsh was hired by Zurich in 1996 as a finance and
insurance ("F&I") regional administrator responsible for sales in
Maine and New Hampshire, and he was promoted in 1999 to regional
sales manager. Walsh focused on selling various types of coverage
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to car dealers, including vehicle service contracts, credit
insurance, and tire and wheel coverage. In early 2007, Walsh
approached his superiors, Bill Stoothoff and Dennis Kane, seeking
increased responsibility and the potential for salary growth
within the company. Told that nothing was currently available,
Walsh looked elsewhere. He received an offer from GMAC in Chicago
that included a guaranteed salary of $350,000 over eighteen months,
a $20,000 signing bonus, and a relocation package.
Within an hour after giving Zurich notice of his decision
to leave the company, Walsh received a phone call from Kane,
Zurich's vice president of direct markets, who asked him to
consider staying in a new, soon-to-be-created position. In
subsequent discussions, Stoothoff, Zurich's vice president of F&I,
offered Walsh the opportunity to manage a new market for Zurich,
the "alternative distribution channel" -- ADC -- in which the
company, instead of selling service contracts and other auto-
related insurance only through car dealers, would sell their
products more broadly, e.g., selling service contracts through
telemarketing and credit unions, equipment coverage to the
original manufacturers, and contractual liability policies to
third party administrators of service contracts.
Walsh advised Stoothoff of his three requirements for
staying at Zurich: (1) a job description that would allow him to
grow, with unlimited potential, (2) an annual salary of $250,000
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for the next eighteen months, and (3) "an incentive plan that
allows me to make money and grow and do what I need to do." Zurich
agreed to meet those terms. In October 2007, Walsh, Stoothoff and
Kane signed a "Supplemental Pay Agreement" providing Walsh with a
monthly supplement of $13,246.63, payable through March 2009, in
addition to his $91,000 base salary -- a total of roughly $250,000
annually. The supplemental payments, which were "in lieu of any
incentives earned," were designed to meet Walsh's salary demand
until the new business he was expected to generate would produce
incentive pay sufficient to support a comparable, or higher,
salary.
The October 2007 agreement did not specify the incentive
arrangement that would go into effect in April 2009, and the
company began discussing the details of Walsh's incentive plan the
following summer. By mid-August 2008, Walsh, Stoothoff and Kane
had settled on a target of $8 million for the new ADC business in
2009, and they discussed an incentive formula that would result in
a total 2009 salary of about $250,000 at the midpoint, with a low
of $183,000 and a high of $292,000.2 By that time, Walsh's base
salary had increased to $135,000, and his supplemental payments
2 The written model prepared by the company's compensation
specialists showed Walsh's projected incentive pay for the
multiple types of business for which he was responsible ranging
from a low-end total of about $48,000 to a maximum of about
$157,000. The targeted mid-point amount was $115,000, of which
$60,000 was attributed to the ADC.
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had decreased ($9,583.35 monthly), with his total annual salary
still set to be roughly $250,000 until the start of the incentive
plan in April 2009.
Through a series of meetings and emails, Walsh,
Stoothoff, Kane, and Diane Eldridge, a Zurich compensation
consultant, reached consensus on the plan described above,
including a revision requested by Walsh in the description of the
ADC incentive. Following a meeting on August 27, 2008, Walsh was
"satisfied that my plan was done. . . . As far as I'm concerned,
my boss [Stoothoff] and his boss [Kane] told me that this is your
plan." Although Walsh acknowledged that he never saw anything in
writing confirming that the plan was "final," and the August 2008
plan was never entered into Zurich's finance system, Walsh viewed
the "backroom HR or accounting" procedures as irrelevant to the
plan's completion. Stoothoff, who had been asked to complete
Walsh's incentive plan before he left Zurich at the end of August
2008, also believed that he had accomplished that task.
The plan on its face covered the entire 2009 calendar
year, but it was superseded through March by the Supplemental Pay
Agreement that had been executed in October 2007. Hence, Walsh
would first be eligible to receive incentive payments under the
August 2008 Plan for premiums received by Zurich after April 1,
2009. In addition to a chart that specified variable percentages
for Walsh's ADC incentive "based on year to date performance
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against prorated production and profitability goals,"3 the August
2008 Plan contained the following "CONDITIONS":
1. The PLAN is effective January 1, 2009.
INCENTIVE under the PLAN shall be solely
within the discretion of the Executive Vice
President of the COMPANY and is subject to
interpretation by him / her. The PLAN is
subject to cancellation by the Executive Vice
President at any time.
. . . .
7. Management of the COMPANY reserves the
right to limit INCENTIVE in unique
situations.4
Walsh testified that these provisions giving Zurich -- and
specifically, Kane, the executive vice president -- the discretion
to cancel or limit his incentive pay, "didn't mean anything to
[him]," because such provisions had "never been enforced."
In September 2008, Walsh contacted representatives of
APCO to discuss selling Zurich's new alternative distribution
3
The Plan stated that ADC incentive would be paid on "NET
DEALER REMIT (net of chargebacks) for reinsurance and retro
accounts sold through ALTERNATE DISTRIBUTION CHANNELS." The chart
was in the form of a nine-box matrix with different percentages
listed at each intersection of profitability and production goals.
4
A third reference to discretion appeared under the heading
"PURPOSE OF THE PLAN":
The purpose of the INCENTIVE PLAN is to
establish a formula whereby certain employees
. . . may, at the sole discretion of the
President, be paid an INCENTIVE PAYMENT for
the PLAN YEAR as a reward to encourage them to
help make the business of the COMPANY a
success.
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products. The discussions proved fruitful and, in December 2008,
Walsh closed a deal with APCO likely to produce an amount of
premiums in 2009 that far surpassed even the high-end projection
in the compensation models Zurich had prepared for Walsh.
Immediately after the contract signing in a Georgia hotel, as they
rode an elevator together, Kane told Walsh that he would make a
lot of money on the deal. Under the 2008 Plan, Walsh would have
been entitled to ADC incentive pay of nearly $870,000 in 2009.
That plan, however, was not implemented. Rather, in January 2009,
Kane informed Walsh that he would not allow this amount of ADC
incentive, and that a new incentive arrangement needed to be
developed.
Walsh initially protested any change, telling Kane that
he was shocked by the refusal to adhere to the incentive program
they had worked out in August 2008. Within a few days, however,
concluding that he had no choice but to accept a change or leave
the company, Walsh acquiesced to Kane's request that he recommend
an alternative plan that Walsh would consider fair. Walsh's
subsequent proposal provided for a base salary of $250,000 for the
duration of the APCO relationship, plus incentives, but Kane
responded by email that the salary amount "won't work" because "no
one is on a 250k salary" other than the company's top executive.
They scheduled a phone conference for later in the week.
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Walsh testified that he started that call, on January
30, by again expressing his dissatisfaction with the change in his
compensation package, but Kane nonetheless "immediately rolled
into, this is how we're going to pay you going forward." Kane
then told Walsh that his compensation for 2009 would consist of a
continued guarantee of $250,000 in annual income (as Walsh had
been promised in October 2007), accomplished through base salary
and an extension of the supplemental pay agreement that was due to
expire in April 2009. In addition, the new incentive plan -- the
"February 2009 Plan" -- would entitle Walsh to $1,000 for each $1
million of ADC premium paid monthly. On February 19, Eldridge
reported to Walsh that Kane had formally approved that plan, with
minor revisions as Walsh and Eldridge had discussed, and that she
would be uploading it into Zurich's compensation database.
Pursuant to the February 2009 Plan, Walsh's ADC
incentive in 2009 for the APCO deal -- $77,000 -- was less than
one-tenth of the incentive he would have earned under the August
2008 Plan. Nonetheless, his total compensation for 2009 reached
$398,000, which consisted of base salary, supplemental payments,
and incentives.
Although the February 2009 Plan technically covered only
calendar year 2009, no new plan was put into effect for 2010, and
Walsh continued to operate under the February 2009 Plan. In the
late summer and early fall of 2010, another dispute about incentive
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pay arose when Zurich refused to pay Walsh $101,000 based on new
business with GAIC. Although the GAIC transaction was booked by
Zurich's accounting department as ADC income -- for which Walsh
would be entitled to incentive pay -- the company maintained that
the deal was unique and did not in fact fit within the ADC category.
Accordingly, in mid-October 2010, Zurich executives moved to amend
Walsh's still-operative February 2009 Plan to eliminate his
entitlement to the $101,000 incentive.
By that time, the relationship between Walsh and Zurich
had deteriorated even further. Kane had left Zurich in early 2010,
and Walsh's new boss, Tina Mallie, told him in June 2010 that his
future travel to meet with customers was being restricted. In
conversations with Mallie in September, and with another new boss,
Kathi Ingham, in October, Walsh learned that he would no longer be
responsible for reinsurance business, which had provided a
substantial portion of his incentive pay. On October 29, he sent
Ingham an email advising that he would be leaving Zurich in thirty
days. He was terminated later that day.
B. Procedural Background
In January 2012, Walsh filed a complaint against Zurich
in New Hampshire state court. Seeking more than $14 million in
damages, he alleged breach of contract, breach of the implied
covenant of good faith and fair dealing, wrongful discharge, and
willful violation of New Hampshire's wage and hour law. He claimed
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that Zurich owed him additional APCO incentive, as promised in the
August 2008 Plan, and GAIC incentive as provided by the February
2009 Plan. The case was removed to federal court based on
diversity jurisdiction, and a trial took place before a jury.
During the trial, the court granted Zurich's motion for
judgment as a matter of law on the wrongful discharge claim,5 but
it otherwise denied the company's motions for judgment as a matter
of law both at the close of plaintiff's case and at the close of
all evidence. The court rejected Zurich's contention that Walsh
did not produce sufficient evidence to establish that the August
2008 Plan was a binding agreement or that he was entitled to
incentive on the GAIC deal. The court also decided not to instruct
the jury on the implied covenant claim, concluding that the
contractual good faith issue was subsumed within the breach claim.
Specifically with respect to the APCO deal, the court ruled that,
if the jury found that the August 2008 Plan was not an enforceable
contract, there would be no basis for a claim that the company had
breached an implied contractual covenant. Conversely, the court
held, if the jury found that the August 2008 Plan was a binding
agreement, Zurich could not have had a good faith belief that the
5 Walsh has not appealed the court's ruling on the wrongful
discharge claim, and we do not further address it.
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Plan's discretion provisions permitted it to retroactively modify
Walsh's compensation for the APCO deal via the February 2009 Plan.
The jury found in favor of Walsh on the claims for breach
of contract and willful violation of New Hampshire wage law, the
latter finding providing the basis for doubling the contractual
damages. See N.H. Rev. Stat. Ann. § 275:44(IV).6 The court
subsequently denied Zurich's post-trial motion for judgment as a
matter of law on those claims, and it granted Walsh's motion for
attorney's fees and expenses. The monetary awards, before
doubling, were $791,353 on the APCO deal and $101,000 on the GAIC
6 Section 275:44 is titled "Employees Separated From Payroll
Before Pay Days," and it generally provides for the prompt payment
of wages owed. At issue here is subsection (IV), which states, in
pertinent part:
If an employer willfully and without good
cause fails to pay an employee wages as
required under . . . this section, such
employer shall be additionally liable to the
employee for liquidated damages in the amount
of 10 percent of the unpaid wages for each day
except Sunday and legal holidays upon which
such failure continues after the day upon
which payment is required or in an amount
equal to the unpaid wages, whichever is
smaller . . . .
N.H. Rev. Stat. Ann. § 275:44(IV). The New Hampshire Supreme Court
deems an employer's failure to pay owed compensation "willful and
without good cause" when the nonpayment is done "voluntarily, with
knowledge that the wages are owed and despite financial ability to
pay them." Ives v. Manchester Subaru, Inc., 498 A.2d 297, 302
(N.H. 1985) (Souter, J.).
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deal. The parties stipulated to an award of $595,000 in attorney's
fees and $9,171.52 in other legal expenses.
This appeal followed.
II.
On appeal, Zurich argues that the district court
incorrectly concluded that sufficient evidence supported the
jury's breach-of-contract and willfulness findings on the APCO and
GAIC deals and, hence, the court erred by denying its motions for
judgment as a matter of law on every claim submitted to the jury.
On the question of breach, Zurich argues that Walsh failed to prove
two facts necessary to find the company liable for the disputed
incentive amounts: (1) the August 2008 Plan was an enforceable
contract covering the APCO deal, and (2) the GAIC deal involved
ADC business covered by the February 2009 incentive plan. In
addition, Zurich maintains that the court made a legal error in
handling the APCO breach claim when it refused to instruct on the
covenant of good faith and fair dealing or "to submit any issue
regarding Zurich's right under the August 2008 Plan to modify the
plan and/or limit incentive before the plan became effective on
April 1, 2009."
Zurich further claims that the evidence failed to
establish that the company acted willfully and without good cause
when it paid Walsh incentive for the APCO deal under the February
2009 Plan, rather than the August 2008 Plan, and in refusing to
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pay incentive on the GAIC deal. As may be appropriate based on
the outcome of its claims on the merits, the company also seeks
reversal of the attorney's fee award or remand for reconsideration
of the fee amount.
We review de novo the district court's denial of Zurich's
motions for judgment as a matter of law, "viewing the evidence in
the light most favorable to the nonmoving party." T G Plastics
Trading Co. v. Toray Plastics (Am.), Inc., 775 F.3d 31, 37 (1st
Cir. 2014) (quoting Monteagudo v. Asociación de Empleados del
Estado Libre Asociado de P.R., 554 F.3d 164, 170 (1st Cir. 2009)).
We also apply de novo review to the asserted instructional error.
See Burke v. McDonald, 572 F.3d 51, 57 (1st Cir. 2009) ("Where, as
here, a claim of instructional error challenges the very basis for
instructing or refusing to instruct on a particular subject, we
review that claim of error de novo.").
A. The August 2008 Plan
1. Sufficiency of the Evidence
In the circumstances of this case, whether the August
2008 Plan was an enforceable contract is a question of fact, see,
e.g., Durgin v. Pillsbury Lake Water Dist., 903 A.2d 1003, 1006
(N.H. 2006), and we may overturn the jury's finding that it was a
finalized agreement only if we can say that no reasonable jury
could have reached that conclusion, see, e.g., T G Plastics Trading
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Co., 775 F.3d at 38. Zurich is unable to satisfy this "stringent
standard." Id.
Three witnesses testified that they understood the
contract was effectively a done deal by the time Stoothoff left
Zurich at the end of August. Walsh reported that the discussions
among him, Stoothoff, Kane, and Eldridge through the summer of
2008 culminated with a meeting in Eldridge's office on August 27
for the purpose of "finaliz[ing] this plan." Walsh testified that,
during that meeting, Stoothoff "called in . . . and gave his
blessing," and Walsh left Eldridge's office "satisfied that my
plan was done." Stoothoff similarly testified that he believed
"all of the essential terms [had] been agreed to," and he therefore
"thought we were done" and "assumed [the plan] was final" when he
left Zurich. He agreed that a reasonable person in Walsh's shoes
would "have reasonably believed that he would be paid on that
incentive plan for 2009." Stoothoff also testified that Kane had
approved the plan as it stood on August 27.
To be sure, other evidence suggested that the August
2008 Plan was never finalized, at least in the way incentive plans
ordinarily were implemented at Zurich. Eldridge testified that
she never received a formal sign-off from Kane on the August 2008
Plan, noting that "[t]he only approval I received from him was in
February of '09." Hence, she never submitted the August 2008 Plan
for inclusion in Zurich's compensation database. Even Walsh
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testified that he did not know what steps needed to be taken to
implement his plan once it had been agreed upon. He acknowledged
that "finalized to me and finalized to the managers above me may
mean two different things," and he recognized that Stoothoff "may
have [had] other things to do to get it through and get through
the system." Indeed, Stoothoff testified that he did not remember
Kane saying the plan was final, but he "assumed it was [based] on
the way the interactions were going."
The record thus presents mixed messages about the status
of the August 2008 Plan, and that conflict was for the jurors to
resolve. It is not our role to second-guess their determination
that a meeting of the minds -- and, hence, a binding agreement --
was reached when the discussion of terms ended on August 27, with
everyone's apparent approval. See Chisholm v. Ultima Nashua Indus.
Corp., 834 A.2d 221, 225 (N.H. 2003) ("A meeting of the minds is
present when the parties assent to the same terms."); see also
Durgin, 903 A.2d at 1006 ("A valid, enforceable contract requires
offer, acceptance, consideration, and a meeting of the minds.").
The missing formal steps -- including entry into Zurich's
compensation database -- could be attributed to the fact that
implementation of the Plan was more than seven months away rather
than to its non-final status.7
7Zurich also highlights the absence of any written protest
by Walsh about the subsequent change in incentive as an indication
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Accordingly, we reject Zurich's contention that the
record does not support the jury's finding that the August 2008
Plan was an enforceable contract.
2. Breach of Contract Instructions
a. Background
Throughout the trial, Zurich's counsel argued that, even
if the August 2008 Plan was a binding agreement, the company was
free to reduce Walsh's incentive for the APCO deal pursuant to the
language giving management discretion on whether to pay incentive
and, specifically, to "limit INCENTIVE in unique situations." The
district court ultimately decided that New Hampshire law barred
Zurich from relying on the Plan's discretion provisions, and, over
Zurich's objection, it instructed the jury on that point as
follows:
Now, you have heard some evidence in this case
suggesting that the August 2008 incentive plan
contained language reserving discretion to
Zurich to change the incentive rates with
respect to the APCO deal as it deemed
appropriate. That reservation of rights does
not permit Zurich to change incentive pay
rates for the APCO deal after it was closed.
If you find that the August 2008 incentive
plan is a binding contract, Zurich is
that he understood the August 2008 Plan was not final under "the
established procedure at Zurich for approving and finalizing pay
plans." That inference is countered, however, by Walsh's testimony
that he felt compelled either to accept the new plan "or walk out
the door and try to find another job" -- with the latter choice
not feasible at that time.
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obligated to pay plaintiff in accordance with
its terms with respect to the APCO deal.
In rejecting Zurich's reliance on the discretion
provisions, the district court took the view that Walsh's incentive
pay from the APCO deal, though not labeled as such, was akin to a
commission that, under New Hampshire case law, necessarily vested
in December 2008 and could not be withheld absent extenuating
circumstances, such as a financial disaster for the company.8 See,
e.g., New Eng. Homes, Inc. v. R.J. Guarnaccia Irrevocable Tr., 846
A.2d 502, 504 (N.H. 2004) (stating the general rule that "a person
employed on a commission basis to solicit sales orders is entitled
to his commission when the order is accepted by his employer"
8 In its oral ruling on Zurich's renewed motion for judgment
as a matter of law following the presentation of all evidence, the
court stated, inter alia, the following:
So New Hampshire common law is pretty
clear, it seems to me. You cannot
retroactively divest an employee of a deferred
compensation amount that he's already earned
under an agreement that was extant. And if
that weren't enough, New Hampshire statutory
law and regulatory law is pretty clear.
. . . Certainly Zurich could change the terms
of employment with respect to incentive pay,
but only prospectively, not retroactively.
. . .
So to the extent that language purports
to vest Zurich with discretion to
retroactively change a vested deferred
compensation entitlement, it's contrary to
statutory law, and therefore is ultra vires
and against public policy and totally
unenforceable.
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(quoting Galloway v. Chicago-Soft, Ltd., 713 A.2d 982, 984 (N.H.
1998))); see also Gilman v. Cheshire Cty., 493 A.2d 485, 488 (N.H.
1985) (holding that an employer may not "impair its obligation to
pay [certain] benefits by changing its . . . policy after the
compensation was earned"). The court also construed regulatory
and statutory provisions to allow "only prospective[]" changes to
Walsh's incentive pay. See N.H. Code Admin. R. Lab. 803.03(c)
(requiring employers to provide written notice of a change in an
employee's rate of pay or salary "prior to the effective date of
such change"); see also N.H. Rev. Stat. Ann. § 275:49(II)
(requiring notice of changes in rates of pay "prior to the time of
such changes").
In addition, the court observed that Zurich's promise to
pay Walsh at a specific rate was designed to incentivize him to
sell ADC products. Once he did so, the court ruled, the company
had no discretion to change the incentive formula solely to "[m]ake
Zurich richer [and] [m]ake the plaintiff poorer." The court thus
held that any exercise of discretion to retroactively deny Walsh
"a vested deferred compensation entitlement" was "against public
policy and totally unenforceable." See supra note 8. Accordingly,
it refused to instruct the jury on the covenant of good faith and
fair dealing "because I'm not going to allow the defense of we
have discretion to not pay him."
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On appeal, Zurich reiterates its contention that the
August 2008 Plan and New Hampshire law allowed the company to
change Walsh's incentive formula, limited only by the obligation
to do so reasonably and in good faith. The company asserts that
the record unequivocally demonstrates that it complied with this
obligation, and, hence, it is entitled to judgment as a matter of
law on the breach of contract claim. At a minimum, the company
argues, the jurors should have been instructed on the implied
covenant of good faith and told that, if they found the August
2008 Plan to be a binding agreement, they must go on to determine
whether Zurich's substitution of a new plan in February 2009 was
a reasonable and good-faith exercise of the discretion explicitly
given to company management by the Plan. As we explain below, we
agree that Zurich was entitled to such an instruction.
b. Interpreting the Plan
The district court reached its conclusion that Walsh's
incentive for the APCO deal vested in December 2008, barring its
retroactive reduction, by "reading [the August 2008 Plan] in
context and properly construing it." The court's focus on the
terms of the agreement is consistent with both employment law
generally and New Hampshire's approach to employment contract
disputes. See Restatement of Employment Law § 3.02(b) ("Whether
incentive compensation has been earned is determined by the
agreement on incentive compensation between the employer and
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employee or any binding employer promise or binding policy
statement.");9 New Eng. Homes, 846 A.2d at 508 (finding that
ambiguity in a Letter of Understanding setting forth commission
structure created "a legitimate dispute as to whether the plaintiff
owed wages to the employees"); Galloway, 713 A.2d at 985 (examining
employment agreement to determine whether contract specified
departure from general rule that "employees paid on a commission
basis earn commissions when their employer accepts an order"); see
also Pachter v. Bernard Hodes Grp., Inc., 891 N.E.2d 279, 285 (N.Y.
2008) ("[W]hen a commission is 'earned' and becomes a 'wage' for
purposes of [the New York wage-payment statute] is regulated by
the parties' express or implied agreement . . . .").
However, the district court did not identify which
specific terms of the August 2008 Plan it relied on, and our own
9 Section 301 of the Restatement of Employment Law, titled
"Right to Earned Compensation," includes the following comment:
Earned compensation. The employer's
obligation to pay compensation depends on
whether the employee has earned it. In the
case of a salary or wage, the employee is
typically paid for a period of service, and
the compensation is earned when that period
ends . . . . In the case of commissions, the
employee is paid for sales made or other unit
of output produced, and whether the
compensation is earned depends on whether the
sales have been made or other unit of output
has been produced in accordance with the
parties' agreement.
Id. § 3.01, cmt. d.
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review of the Plan's language leads us to a contrary view. See
Clukey v. Town of Camden, 797 F.3d 97, 101 (1st Cir. 2015) (stating
that a trial court's contract interpretation is reviewed de novo);
Birch Broad., Inc. v. Capitol Broad. Corp., 13 A.3d 224, 228 (N.H.
2010) (same). Before detailing our reasoning, we note that we
agree with the underlying premise of the district court's ruling
-- i.e., if the August 2008 Plan gave Walsh "a vested deferred
compensation entitlement," equivalent to an ordinary commission,
for his work on the APCO deal, Zurich could not reduce that
entitlement retroactively. Hence, the first inquiry is whether,
under the August 2008 Plan, the incentive promised to Walsh for
the APCO business vested when he closed the deal in December 2008.
In interpreting the Plan, we "give the language used by
the parties its reasonable meaning, considering the circumstances
and the context in which the agreement was negotiated, and reading
the document as a whole." Birch Broad., 13 A.3d at 228. When we
conduct that examination, we find multiple indicators that Walsh
did not "earn" incentive when the APCO deal closed in December
2008; rather, his entitlement to incentive pay vested when Zurich
received ADC premiums and could apply the variables specified in
the August 2008 Plan to determine the amount of incentive due.
First, as the district court recognized, the August 2008
Plan does not set forth a classic commission arrangement, whereby
the employee is entitled to a certain percentage of the amount of
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a sale of goods or real estate.10 See, e.g., New Eng. Homes, 846
A.2d at 504 (specifying three and one-half percent "commission"
for modular home sales); Galloway, 713 A.2d at 984-85 (specifying
"commission rate[s]" "to be paid on sales closed"). Although
commission in the insurance industry would more likely be based on
premiums received than on "products" (i.e., policies) sold, and
the Plan establishes a premium-based measure, the agreement does
not say that Walsh "earns" a specified percentage of the premiums
resulting from the sale of ADC insurance products. Rather, the
Plan's self-proclaimed purpose is to set up a "formula whereby
certain employees . . . may, at the sole discretion of the
President, be paid an INCENTIVE PAYMENT for the PLAN YEAR as a
reward to encourage them to help make the business of the COMPANY
a success." The "Purpose" paragraph goes on to say that "[t]he
amount of INCENTIVE to each PARTICIPANT is related to VEHICLE
SERVICE CONTRACT new business & service." (Emphasis added.)
Specifically with respect to ADC incentive, the Plan
states:
ALTERNATIVE DISTRIBUTION CHANNEL incentive
shall be paid on Net Dealer, Third Party
Administrator, Agency Business and Original
Equipment Manufacture Remit (net of
10 Early in the trial, the court observed that the promised
incentive "looks like commission, but neither side is claiming
it's a commission," and it noted at another point that Walsh
"didn't have a deal per commission when he made the sale." The
court properly looked beyond the terminology in attempting to
discern the nature of the incentive.
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chargebacks) sold through ALTERNATIVE
DISTRIBUTION CHANNELS. . . . Quarterly
INCENTIVE shall be calculated on year to date
performance against prorated production and
profitability goals . . . [and] when
calculation results in a negative amount, no
INCENTIVE shall be paid in that quarter.
The amount of incentive pay, which is described generally as
"related to" new ADC business, thus depends specifically on
developments occurring after the deal -- "year to date" factors
that, as Walsh explained at trial, include the "loss ratio" for
the new products. Indeed, the Plan contemplates the possibility
that no incentive will be paid in some fiscal quarters.
In other words, the incentive arrangement in the August
2008 Plan is framed as a computation based on the company's net
income from certain new business, not as a calculable entitlement
triggered by sales consummated by Walsh. In fact, in its ruling
on Zurich's post-trial motion for judgment as a matter of law on
the GAIC deal, the district court noted the parties' concession
"that Walsh did not have to personally sell anything in order to
receive incentive pay on this, or any other, deal producing
Alternative Distribution Channel revenue; he was compensated based
on premiums realized through the ADC." Order at 24 n.1. The
acknowledged reliance on premiums collected to determine
incentive, rather than on Walsh's own efforts, underscores the
distinction between the Plan and a typical commission arrangement.
That is, the incentive promise here was premised on the receipt of
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premiums, starting in April 2009, and not on the acquisition of
the new business that would produce those premiums.
Second, the Plan by its terms went into effect on January
1, 2009, and Walsh's incentive payments were not scheduled to begin
until April. There is no dispute that, at least until the first
of the year, the only operative agreement governing Walsh's
compensation above his base salary was the October 2007
Supplemental Pay Agreement. Thus, when the August 2008 Plan was
adopted (according to the jury), it provided a promise of future
payment, not an immediate entitlement. The district court noted
this prospective effect, observing that, as of December 2008, the
pertinent "employment period hasn't commenced." Walsh's testimony
reinforces the future focus of the August 2008 Plan. In describing
how the ADC incentive program was set up, Walsh noted that he and
his superiors expected premiums to come in on a monthly basis,
"[s]o at the end of my supplemental pay on April 1st of 2009, I
would need to have premiums coming in the door in order for me to
earn income." (Emphasis added.) At another point, he similarly
stated that his incentive was based on "the actual premium that
came in the door."
Third, the Plan states that departing employees are
entitled to "INCENTIVE earned prior to termination," and specifies
that the incentive due "shall be calculated based on production
and profitability at the time of termination and paid at the next
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regular INCENTIVE pay date." Once again, the focus is on
performance factors that can only be established when premiums
start to be paid. Under this provision, if Walsh had left Zurich
in February or March of 2009, he would not be entitled to an
incentive payment because his compensation package did not
incorporate the incentive formula until April 2009. Hence, this
provision seems at odds with a determination that he had "earned"
incentive as soon as he closed the deal.
Taken together, the Plan's express language and its
context -- notably, that it did not govern Walsh's compensation
until April 2009 -- persuade us that the legally correct reading
of the August 2008 Plan does not give Walsh vested incentive pay
at the time he closes a deal. Rather, when the Plan took effect
on January 1, Walsh acquired a contractual right to receive ADC
incentive pursuant to the Plan's formula -- a right that, as
explained below, constrained Zurich's discretion to alter the
formula -- but he had not yet earned any incentive. Walsh's
testimony is compatible with this reading, and the interpretation
gains further strength from the Plan's multiple references to the
company's discretion to withhold or change the incentive pay
specified therein. Walsh was told in express terms that,
notwithstanding the formula in the Plan, the incentive pay he will
receive in the future may be limited by management in "unique
situations." In other words, he was warned that his incentive pay
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may differ from the Plan's terms. He accepted the Plan with that
warning. See Olbres v. Hampton Coop. Bank, 698 A.2d 1239, 1243
(N.H. 1997) ("[P]arties generally are bound by the terms of an
agreement freely and openly entered into, and courts cannot make
better agreements than the parties themselves have entered into or
rewrite contracts merely because they might operate harshly or
inequitably." (quoting Mills v. Nashua Fed. Sav. & Loan Assoc.,
433 A.2d 1312, 1315 (N.H. 1981) (alteration in original)).
Of course, as we explain in the next section, this
interpretation of the Plan does not mean that Zurich possessed
unbridled authority to revise the incentive formula for 2009 to
Walsh's detriment. Rather, it means only that the February 2009
Plan did not effect a retroactive diminution of earned compensation
that would be barred as a matter of law.11 The question remains
whether the particular adjustment that Zurich made, even though
facially permissible under the discretion provisions of the August
2008 Plan, nonetheless constituted a breach of contract.
11 Under this construction of the August 2008 Plan, the
district court's reliance on New Hampshire provisions requiring
notice of changes in compensation "prior to the time of such
changes" was also misplaced. N.H. Rev. Stat. Ann. § 275:49(II);
see also N.H. Code Admin. R. Lab. 803.03(c). Walsh had notice of
the February 2009 Plan before the change in his incentive pay took
effect in April.
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c. The Obligation of Good Faith
Under New Hampshire law, a contract giving one party
unlimited discretion to modify the agreement is permissible, but
subject to "an implied obligation of good faith to observe
reasonable limits in exercising that discretion, consistent with
the parties' purpose or purposes in contracting." Centronics Corp.
v. Genicom Corp., 562 A.2d 187, 193 (N.H. 1989) (Souter, J.)
(emphasis added). Hence, when discretionary action adverse to the
complaining party is taken, the question is whether "the
defendant's exercise of discretion exceeded the limits of
reasonableness." Id.
The answer to this question depends on
identifying the common purpose or purposes of
the contract, against which the reasonableness
of the complaining party's expectations may be
measured, and in furtherance of which
community standards of honesty, decency and
reasonableness can be applied.
Id. at 193-94; see also Milford-Bennington R.R. Co. v. Pan Am Rys.,
Inc., 695 F.3d 175, 179-80 (1st Cir. 2012) (describing New
Hampshire law); Livingston v. 18 Mile Point Dr., Ltd., 972 A.2d
1001, 1005-06 (N.H. 2009) (stating that the function of the implied
good-faith duty, in the context of "limitation of discretion in
contractual performance," is "to prohibit behavior inconsistent
with the parties' agreed-upon common purpose and justified
expectations, as well as 'with common standards of decency,
- 28 -
fairness and reasonableness'" (quoting Richard v. Good Luck
Trailer Court, 943 A.2d 804, 808 (N.H. 2008)) (citation omitted)).
As described above, the district court refused to allow
the jury to consider the reasonableness of Zurich's substitution
of the February 2009 Plan for the August 2008 Plan with respect to
the APCO incentive. Instead, the court resolved that issue as a
matter of law, incorrectly ruling that Zurich had acted
unreasonably because, in its view, the company impermissibly
withheld an amount of incentive that Walsh had already earned.
Zurich asks us for the converse ruling: a determination
as a matter of law that it acted reasonably and in good faith.
The company asserts that the reduction in Walsh's incentive was
reasonable, and thus proper, because it was driven by the enormous,
unanticipated value of the APCO deal. As noted above, Walsh would
have been entitled to nearly $870,000 in APCO incentive alone in
2009 under the August 2008 Plan -- giving him total compensation
for the year of about $1.1 million. That salary far exceeds the
annual income discussed in 2007 when Walsh was persuaded to stay
at Zurich, and it also eclipses by a large margin the high-end
salary predicted for 2009 by the modeling for the August 2008 Plan
($292,000). More pertinently, Walsh's claimed incentive amount
dwarfs the incentive modeling for the first year of ADC business,
which predicted a high point of $90,000. Hence, Zurich argues,
the roughly $400,000 income that resulted from the February 2009
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incentive arrangement -- combined with the company's decision to
extend Walsh's guaranteed monthly supplemental payments12 -- was
patently reasonable and consistent with the parties' "common
purpose or purposes." Centronics Corp., 562 A.2d at 194; see also
id. ("[T]he good faith requirement is not a fail-safe device
barring a defendant from the fruits of every plaintiff's bad
bargain, or empowering courts to rewrite an agreement even when a
defendant's discretion is consistent with the agreement's legally
contractual character.").
Although Zurich offers a plausible view of the evidence,
we cannot say that it is the only permissible view. A jury could
have found that the amount of the reduction in Walsh's anticipated
APCO incentive was excessive in light of the parties' intentions
when the August 2008 Plan was developed. Zurich knew that Walsh
was hoping for unlimited potential in his new position, and the
company's stated goal was to keep Walsh at Zurich. A jury could
thus find that, when they agreed to the August 2008 Plan, the
parties' underlying objective was to provide Walsh, as soon as
possible, with substantially higher income than the minimum he had
12As noted above, the October 2007 Supplemental Pay Agreement
ended by its terms in March 2009. The monthly payments it provided
were specifically "in lieu of any incentives earned." When Zurich
switched to the February 2009 Plan for Walsh's incentive pay, it
also prepared a new Supplemental Pay Agreement that provided a
monthly allotment of $12,777.77 from April to December 2009 "in
addition to any incentives earned."
- 30 -
been guaranteed when he agreed to remain at Zurich. Though no one
anticipated such a lucrative deal to materialize so early in
Zurich's acquisition of ADC business, a jury could view the switch
to a much less favorable incentive formula for the APCO business
as inconsistent with the wide-open compensation potential the
parties had agreed upon. In addition, Walsh's testimony suggested
that he acted to his disadvantage based on the terms of the August
2008 Plan because its incentive structure motivated him to take
"the chance" of focusing solely on the APCO business, rather than
pursuing multiple other deals.
Given that the evidence presented at trial could have
supported either of these scenarios, the district court erred by,
in effect, directing the jury to find a breach if it found the
August 2008 Plan to be a binding, enforceable agreement. Instead,
the court should have instructed the jurors that, because the Plan
expressly gave Zurich discretion to limit incentive pay, they must
go on to determine whether the company reasonably and in good faith
exercised that authority -- i.e., whether the particular changes
to Walsh's compensation package in February 2009 satisfied the
implied contractual covenant of good faith. See Centronics Corp.,
562 A.2d at 193.
Put another way, Zurich's adoption of a less favorable
formula would not in itself be a breach of the contract's explicit
terms because the August 2008 Plan on its face allowed Zurich to
- 31 -
make whatever changes it wanted to Walsh's incentive pay. Walsh's
APCO-related breach claim thus depended on whether, in making that
change, Zurich breached the covenant of good faith and fair dealing
implicit in the August 2008 Plan. If the jury were to find no
violation of the implied covenant, there would be no contractual
breach. Consequently, the portion of the district court's judgment
incorporating the finding of breach must be vacated.
3. Willfulness
Our decision invalidating the finding of breach with
respect to the APCO incentive necessarily also invalidates the
jury's finding that Zurich "willfully and without good cause"
failed to pay wages owed, in violation of New Hampshire law. N.H.
Rev. Stat. Ann. § 275:44(IV); see supra note 6. Zurich argues
that it is entitled to judgment as a matter of law on the statutory
claim, which provided for doubling the breach-of-contract damages.
New Hampshire courts have construed the phrase
"willfully and without good cause" to mean "voluntarily, with
knowledge that the wages are owed and despite financial ability to
pay them." Chisholm, 834 A.2d at 226 (quoting Ives v. Manchester
Subaru, Inc., 498 A.2d 297, 302 (N.H. 1985) (Souter, J.)).
Although an employer cannot avoid a willfulness finding simply by
disputing an employee's entitlement to pay, see Chisholm, 834 A.2d
at 225-26, "no liquidated damages are available when an employer's
refusal to pay wages is based upon bona fide belief that he is not
- 32 -
obligated to pay them," New Eng. Homes, 846 A.2d at 507-08 (quoting
Richmond v. Hutchinson, 829 A.2d 1075, 1077 (N.H. 2003)). New
Hampshire law contemplates legitimate disputes "over the amount of
wages," and employers are directed by statute to pay "without
condition" and within specified time periods "all wages, or parts
thereof, conceded by [them] to be due, leaving to the employee all
remedies he might otherwise be entitled to . . . as to any balance
claimed." N.H. Rev. Stat. Ann. § 275:45(I).
We leave this willfulness issue for resolution on
remand. In a new trial, additional evidence may be offered on the
parties' expectations and understandings when they agreed to the
August 2008 Plan. The question of willfulness should be assessed
on the basis of any such new record. However, we take no view as
to whether the issue of willfulness should reach the jury. Hence,
as with the issue of breach, we vacate the judgment entered on the
statutory wage claim with respect to the APCO incentive.
B. The GAIC Incentive
1. Sufficiency of the Evidence
Zurich attempted to persuade the jury that the type of
business involved in the GAIC deal was never intended to trigger
incentive pay for Walsh, and that the company's decision to amend
the February 2009 Plan to exclude that payment was merely an
attempt to clarify his compensation. The record, however,
permitted the jury to conclude otherwise.
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As with the August 2008 Plan, the evidence was not one-
sided, and Zurich offered testimony that could have supported a
verdict in its favor. Kathi Igham, the vice president for finance
and insurance in the fall of 2010, testified that the disputed
GAIC deal was "purely a financial transaction[] that didn't fall
under [Walsh's] responsibilities of the sale and service of the
alternative distribution channel." She elaborated that the
agreement was "just a transfer of liability from Great American to
Zurich," and, as such, it was not "appropriate" for Walsh to
receive incentive on that deal. In addition, she explained that
this type of transaction was not "contemplated within th[e]
definition" of ADC, but was placed there "from an accounting
perspective" because it was even less suitable for placement on
the "direct side" of the business -- i.e., "it ended up to be a
good sort of path of least resistance to put it in the alternate
channel." Terry McCafferty, a Zurich senior vice president
involved in the GAIC deal, likewise described that business as "a
very unusual transaction" -- "not something we normally do" -- and
stated that "there was really no place else to put it per se that
made sense."
Walsh, however, presented evidence permitting the jury
to find that the 2009 Plan awarded him incentive on the GAIC deal.
Indeed, an email sent on September 8, 2010 from a payroll employee
- 34 -
to Tina Maillie -- Ingham's predecessor as vice president --
explicitly said as much. In pertinent part, the email stated:
The financial statements for August include
$105M in premium on the GAIC reinsurance deal.
Based on the 2009 plan, we would pay $105,000
to Jim Walsh on this premium. How would you
like to handle the August incentive due to the
current review of the 2009 plan and the dollar
amount of the incentive payment?13
A month later, on October 13, Ingham sent an email to Eldridge
containing the following directive: "[A]s we discussed, we should
have an amendment that stipulates that Jim [Walsh] will not receive
incentive related to the GAIC UPR transaction that posted in
September for $101m." McCafferty, despite his statement that the
deal was "very unusual," said he could offer no guidance on whether
it was -- or was not -- properly categorized as ADC business.
Zurich's contention is that these communications about
amending Walsh's incentive plan simply reflect the company's
effort to reconcile the language of the plan with the understanding
that the GAIC deal was not, in fact, ADC business and, hence,
should not be treated as a basis for incentive for Walsh. Given
the competing evidence, however, we cannot say that it was
13It appears that there were two separate GAIC deals that
closed at about the same time, totaling $105 million. The parties'
dispute concerns only $101 million in GAIC business -- hence, an
incentive of $101,000 (at the rate of $1,000 per $1 million under
the February 2009 Plan).
- 35 -
unreasonable for the jury to accept Walsh's claim that he was
entitled to incentive pay for the $101 million GAIC deal.
2. Willfulness
The evidence described above also was sufficient to
permit the jury's finding that Zurich acted willfully in refusing
to pay Walsh incentive on the disputed GAIC deal. Given the jury
finding that the February 2009 Plan covered that deal, the
communications above permit the inference that Zurich
"voluntarily, with knowledge of the obligation and despite the
financial ability to pay it," withheld the $101,000 incentive owed
to Walsh. Ives, 498 A.2d at 302.
III.
To briefly recap our holdings, we find no error in the
district court's denial of judgment as a matter of law to Zurich
on the APCO breach-of-contract claim. The evidence was sufficient
to support the jury's finding that the August 2008 Plan was an
enforceable agreement. However, because the district court
erroneously instructed the jury that Zurich lacked discretion to
change Walsh's incentive pay, and it consequently failed to
instruct the jury on the implied covenant of good faith, we vacate
the portion of its judgment incorporating the jury's breach-of-
contract finding on the APCO incentive and the related violation
of statutory wage law (the willfulness issue). Accordingly, we
vacate the award on the APCO deal of $1,582,706 (the claimed
- 36 -
incentive of $791,353, doubled by statute). On the GAIC claim, we
affirm the judgment incorporating the jury's findings and, hence,
uphold the award on that deal of $202,000 (the claimed incentive
of $101,000, doubled). Given these holdings, and the need for the
district court to reconsider its award of attorney's fees, we
vacate that award.
Going forward, this case will be in a considerably
different posture. Neither the enforceability of the August 2008
Plan nor the GAIC claims will be retried. In addition, we have
found, as a matter of law, that the August 2008 Plan does not
entitle Walsh to incentive payments for the APCO deal pursuant to
the formula set forth in that plan. Hence, the focus will be on
whether Zurich's exercise of its reserved discretion to change
Walsh's incentive arrangement "exceeded the limits of
reasonableness." Centronics Corp., 562 A.2d at 193. Relatedly,
the issue of willfulness under the New Hampshire wage statute must
be revisited. See N.H. Rev. Stat. Ann. § 275:44(IV). Given this
landscape, we believe both parties would be well advised to
consider settlement.
Affirmed in part, vacated in part, and remanded for
proceedings consistent with this opinion. Each party to bear his
or its own costs.
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