Schunkewitz v. Prudential

Opinions of the United
2004 Decisions States Court of Appeals
for the Third Circuit
4-27-2004
Schunkewitz v. Prudential
Precedential or Non-Precedential: Non-Precedential
Docket No. 03-1181
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"Schunkewitz v. Prudential" (2004). 2004 Decisions. Paper 769.
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NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
___________
No. 03-1181
___________
GLEN SCHUNKEW ITZ, individually
and on behalf of all others similarly situated,
Appellant
v.
PRUDENTIAL SECURITIES INCORPORATED;
JOHN DOES, 1-100, inclusive
_______________
On Appeal from the United States District Court
for the District of New Jersey
District Court Judge: The Honorable Katharine S. Hayden
(D.C. No. 02-cv-00356)
________________
Argued January 27, 2004
Before: NYGAARD, FUENTES, Circuit Judges and O’NEILL,* District Judge
(Filed: April 27, 2004)
*
Honorable Thomas N. O=Neill, Jr., Senior District Judge for the United States District
Court for the Eastern District of Pennsylvania, sitting by designation.
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________________________
OPINION OF THE COURT
_______________________
Bruce H. Nagel (argued)
Andrew R. Bronsnick
Nagel Rice & Mazie
301 South Livingston Avenue
Suite 201
Livingston, NJ 07039
Attorneys for Appellant
Glen Schunkewitz
Thomas J. Kavaler (argued)
Nicholas S. Goldin
Tammy L. Roy
Cahill Gordon & Reindel
80 Pine Street
New York, NY 10005
David J. Libowsky
Bressler, Amery & Ross
325 Columbia Turnpike
Florham Park, NJ 07932
Attorneys for Appellee
Prudential Securities
Incorporated
FUENTES, Circuit Judge:
On January 25, 2002, Glen Schunkewitz (“Schunkewitz”) filed a class action
lawsuit in the United States District Court for the District of New Jersey against
Prudential Securities Incorporated (“Prudential”) on behalf of himself and others
employed as financial advisors at Prudential. The lawsuit arose out of these employees’
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participation in Prudential’s deferred compensation plan, the MaterShare Plan
(“MasterShare”). Schunkewitz’s complaint included counts for breach of employment
contract, breach of the MasterShare contract, conversion, and unjust enrichment.
Schunkewitz also argued that M asterShare violated NY and NJ statutory wage laws. All
of these claims arose out of MasterShare’s forfeiture provision, which required
participants to forfeit deferred compensation in the form of stock under certain
circumstances.
Prudential moved to dismiss under Federal Rule of Civil Procedure 12(b)(6) for
failure to state a claim upon which relief could be granted. Schunkewitz cross-moved for
partial summary judgment based on MasterShare’s alleged violation of a NJ statute
requiring that any withheld or diverted wages must be used to purchase securities in the
employing company and that the securities must be listed on a stock exchange or be
marketable over the counter. See N.J. Stat. Ann. § 34:11-4.4. The District Court granted
summary judgment in favor of Prudential and denied Schunkewitz’s cross-motion for
partial summary judgment.
On appeal, Schunkewitz argues that the District Court erred in granting summary
judgment in favor of Prudential because, he contends, MasterShare’s forfeiture clause is
unlawful. He also argues that the District Court erred in applying NY law (rather than NJ
law) to evaluate the legality of the forfeiture clause. Despite the fact that MasterShare
contains an express NY choice of law provision, Schunkewitz asserts that applying NY
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law results in a violation of NJ public policy by requiring NJ citizens to forfeit a portion
of their earned income.
Because we agree with the District Court’s thorough and well-reasoned decision
that NY law controls under MasterShare’s express choice of law provision, and that
MasterShare’s forfeiture clause is valid under NY law, we affirm.
I.
As we write only for the parties, we will not recite the complete factual
background of this case. Under MasterShare, employees could invest up to 25% of their
income on a tax-deferred basis by periodically placing this portion of their earnings into
an individual employee’s deferral account. Prudential would invest this deferred income
into the Prudential Stock Index Fund by buying Restricted Stock on the employee’s
behalf.
MasterShare contained an express NY choice of law provision, which stated that
NY law would govern all disputes and claims arising out of or in connection with
participation in MasterShare. The provision stated: “The Plan shall be governed by, and
construed and enforced in accordance with the substantive and procedural laws of the
State of New York, without giving effect to the conflicts of laws provisions thereof.”
App. II at 88.
MasterShare also contained a forfeiture provision. This provision required
participating employees to forfeit their Restricted Stock, or any other compensation in the
form of stock, if they were terminated for cause or voluntarily left Prudential before the
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end of a three-year “Restricted Period.” All MasterShare participants are made aware of
the forfeiture provision before investing in the plan. MasterShare participants agree in
writing to terms and conditions that are fully disclosed and explained in detail in the
“MasterShare Plan Booklet.” Resp. Br. at 5. Before investing through MasterShare,
participants must sign a set of representations and warranties acknowledging that they
have “received, read, and understand” the Booklet and all of MasterShare’s terms of
participation and that they had an opportunity to ask questions about the plan. App. II at
85. Schunkewitz voluntarily left Prudential before the end of the Restricted Period. He
was, therefore, required to forfeit the Restricted Stock that Prudential had purchased with
the income he had contributed to MasterShare. Under the terms of MasterShare, forfeited
shares revert to Prudential.
II.
Schunkewitz argues that NJ law should govern in all of the counts raised in his
complaint, including his two breach of contract claims and the related conversion and
unjust enrichment claims. Schunkewitz bases his argument largely on the assertion that
MasterShare’s forfeiture provision violates “the strong public policy of New Jersey that
its citizens must receive the entire fruits of their labor.” Pet. Br. at 11.
The District Court noted that “[p]rivate, contractual choice of law provisions will
be upheld save for conflicts in public policy.” App. I at 16, citing General Motors Corp.
v. New A.C. Chevrolet, Inc., 263 F.3d 296, 331 n.21 (3d Cir. 2001) (“New Jersey gives
effect to contracting parties’ private choice of law clauses unless they conflict with New
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Jersey public policy.”). However, the Court rejected Shunkewitz’s policy argument and,
consequently, upheld MasterShare’s express NY choice of law provision. We agree that
the provision is valid.
In Pepe v. Rival Co., we affirmed a ruling in the District of New Jersey that “New
Jersey conflict of laws principles clearly recognize the validity and enforceability of
choice-of-law provisions in contracts . . . .” 254 F.3d 1078 (3d Cir. 2001), affirming 85
F. Supp. 2d 349, 382 (D.N.J. 1999). Applying NY law here does not conflict with NJ
policy, as Schunkewitz contends, because both the NY and NJ statutory wage laws ensure
that employees receive the full amount of their earned compensation. “On their faces New
York and New Jersey Wage Statutes invoke the same protections by controlling the
employer’s ability to withhold wages.” See App. II at 246-47, citing Transcript of Motion
in Marsh v. Prudential Securities Inc., Civ. No. 01-4940 (D.N.J. May 2, 2002).
Therefore, we affirm the District Court’s decision to uphold MasterShare’s NY choice of
law provision.
Schunkewitz’s argument that NJ law should apply to his common law contract,
conversion, and unjust enrichment claims also fails. He argues that these claims arise out
of Prudential’s alleged breach of his employment contract and, therefore, that
MasterShare’s NY choice of law provision does not cover these claims. See Pet. Br. at
11. However, all of these claims arise from Schunkewitz having forfeited his Restricted
Shares under MasterShare. As the District Court held, the claims “are all directly related
to the forfeiture provision of the Plan . . . . Because Schunkewitz’s common law claims
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all involve the Plan’s forfeiture provision, they are as such governed by the Plan’s New
York choice of law provision.” App. I at 17. Accordingly, we affirm the decision of the
District Court that, under MasterShare’s choice of law provision, NY law controls in all
of Schunkewitz’s claims.
III.
Schunkewitz goes on to argue that M asterShare’s forfeiture provision is unlawful. 1
However, courts have upheld forfeiture provisions as part of deferred compensation
agreements, as long as they were not triggered by an employee’s termination without
cause. See, e.g., Cray v. Nationwide Mutual Insurance Co., 136 F. Supp. 2d 171, 179
(W.D.N.Y. 2001) (stating that the mere fact that an insurance agency agreement provided
for forfeiture of agent’s deferred compensation under certain circumstances did not render
that provision invalid as a matter of NY law). As the District Court held, forfeiture
provisions are valid as long as the employee entered into the agreement willingly. App. I
at 17. Here, Schunkewitz agreed in writing to the forfeiture provision after full disclosure
of MasterShare’s terms and conditions. As the District Court found, “Schunkewitz
explicitly signed an authorization at the end of the MasterShare contract in which he
acknowledged and agreed to forfeit his deferred income upon voluntary or involuntary
[termination of] employment” and he “clearly knew the Plan included a forfeiture
1
Although Schunkewitz characterizes his claim with respect to MasterShare as a breach
of contract claim, he is actually arguing that MasterShare’s forfeiture provision is unenforceable
due to illegality.
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provision.” App. I at 17, 18. Because Schunkewitz willingly entered into MasterShare
after Prudential clearly conveyed the risk of forfeiture under the agreement, we affirm the
District Court’s decision that MasterShare’s forfeiture provision is valid.
Schunkewitz also argues that Prudential unlawfully converted the income it
withheld and invested under MasterShare into company property, causing Prudential to be
unjustly enriched. However, because the District Court held MasterShare’s forfeiture
provision to be lawful, the Court properly dismissed these related conversion and unjust
enrichment claims. App. I at 17.
IV.
Finally, Schunkewitz asserts that, if NY law applies, Prudential’s failure to pay all
earned income violates § 193 of the N.Y. Labor Law. The District Court dismissed this
claim, holding that § 193 specifically authorizes employers to make deductions from
employees’ wages that “are expressly authorized in writing by the employee and are for
the benefit of the employee.” App. I at 14-15, citing N.Y. Labor Law § 193(1)(b).
However, until recently, no NY court had ever directly answered the question of whether
a plan structured like MasterShare was valid under N.Y. Labor Law § 193. This issue
arose in Marsh v. Prudential Securities Inc., another class action brought in the District of
New Jersey, and currently on appeal before this Court, challenging the validity of
MasterShare. Civ. No. 01-4940 (D.N.J. May 2, 2002), appeal pending U.S. Ct. App. 3d
Cir. No. 02-2528. In Marsh, we certified the question of M asterShare’s validity under §
193 to the New York Court of Appeals. In November 2003, the New York Court of
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Appeals held that an employer may divert part of an employee’s wages into a mutual fund
under § 193 where the employee has consented to the diversion because an investment
scheme in mutual funds is similar to other deductions that are specifically authorized by
the statute. See Marsh v. Prudential Securities Inc., 1 N.Y.3d 146, 153 (N.Y. 2003).
Therefore, under the New York Court of Appeals’ interpretation of § 193, Schunkewitz’s
argument that MasterShare violates N.Y. Labor Law fails.
Accordingly, for the reasons stated above, we affirm the judgment of the District
Court.
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