John Hardy v. Reynolds and Reynolds Company

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 09a0135n.06
Filed: February 17, 2009
No. 07-2293
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
JOHN HARDY, )
)
Plaintiff-Appellant, )
)
v. ) ON APPEAL FROM THE UNITED
) STATES DISTRICT COURT FOR THE
REYNOLDS & REYNOLDS COMPANY, ) EASTERN DISTRICT OF MICHIGAN
)
Defendant-Appellee. )
Before: MARTIN, BATCHELDER, and DAUGHTREY, Circuit Judges.
PER CURIAM. In this diversity contract action, plaintiff John Hardy challenges the
ruling of the district court granting summary judgment to his former employer, Reynolds &
Reynolds Company. Because the sales commission agreement between the parties gives
Reynolds & Reynolds the discretion to modify it, and because Hardy was not responsible
for procuring the contested sale through his individual efforts as required by the agreement,
we conclude that the district court properly resolved the issue before it. In addition, we
hold that the choice-of-law question raised by the plaintiff for the first time on appeal has
been waived. We therefore affirm the judgment of the district court.
No. 07-2293
Hardy v. Reynolds & Reynolds Co.
FACTUAL AND PROCEDURAL BACKGROUND
On December 3, 2004, plaintiff John Hardy was hired as an account executive for
the defendant, Reynolds & Reynolds Company, a company that sells software and
information technology services to retail automobile dealers. Reynolds & Reynolds has its
headquarters in Dayton, Ohio, but Hardy was assigned to the General Motors account in
Detroit and worked in Michigan. Prior to beginning his employment, Hardy signed a “Sales
Representative and Associate Agreement,” which provided that Ohio law would govern the
agreement and choice of venue and jurisdiction would be in the Ohio courts. The
agreement also provided that the “[e]mployee shall be entitled to compensation according
to the formula, method or system described in the then-current compensation plan
including the provisions of such plan applicable upon transfer or termination as such plan
may change from time to time.” (Descriptions of sales representative compensation plans
were made available on the company’s intranet site.)
Prior to Hardy’s hiring, Reynolds & Reynolds had been working on a proposal to
provide an Integrated Dealer Management System (IDMS) for General Motors dealers. As
a result of these efforts, Reynolds & Reynolds received a formal Request for Proposal in
January 2005, not long after Hardy was hired. Reynolds & Reynolds management created
a team of employees to respond to the GM request for a proposal. Hardy was not a part
of this team, nor was he included in the conference calls and meetings involved in
preparing the proposal. Hardy’s role in the process was simply to serve as a “point person”
-2-
No. 07-2293
Hardy v. Reynolds & Reynolds Co.
to submit questions to General Motors. He continued to serve in this capacity after the
proposal was submitted to General Motors, but he did not participate in the contract
negotiations with General Motors to finalize the transaction. Hardy was, however, listed
as a “key person” on the contract. The personal sales plan that Hardy developed in
November 2005 for the 2006 fiscal year did not include the IDMS deal with General Motors.
The IDMS contract with General Motors was announced to Reynolds & Reynolds
employees on December 16, 2005, and had a value of $260 million over seven years.
After the contract was finalized, on January 9, 2006, Hardy received a letter
awarding him a $43,000 cash and stock bonus for his participation in the IDMS transaction.
The letter stated:
Since deals this large are unanticipated when establishing your annual
compensation plan, no credit will be provided through your standard
compensation program. However, the following cash and stock are intended
to reward you for your outstanding efforts.
Had Hardy been granted a commission on the IDMS deal according to his variable
compensation plan, he would have received $2,283,750.
Hardy filed a complaint in the Eastern District of Michigan in March 2006, alleging
breach of contract and breach of the Michigan Sales Representatives’ Commission Act,
MICH . COMP. LAW S ANN . § 600.2961, with jurisdiction based on diversity grounds. Reynolds
& Reynolds moved for summary judgment, and that motion was later granted based on
Michigan law.
-3-
No. 07-2293
Hardy v. Reynolds & Reynolds Co.
DISCUSSION
Standard of Review
We review a grant of summary judgment by a district court de novo. See Ciminillo
v. Streicher, 434 F.3d 461, 464 (6th Cir. 2006). Summary judgment is proper where “the
pleadings, the discovery and disclosure materials on file, and any affidavits show that there
is no genuine issue as to any material fact and that the movant is entitled to judgment as
a matter of law.” FED . R. CIV. P. 56(c). In evaluating a motion for summary judgment, a
court “must review all the evidence, facts, and inferences in the light most favorable to the
nonmoving party.” Van Gorder v. Grand Trunk Western R.R., Inc., 509 F.3d 265, 268 (6th
Cir. 2007). To defeat a motion for summary judgment, the nonmoving party must
demonstrate the existence of a genuine issue of material fact. See id. The evidence
presented by the nonmoving party must be more than a mere scintilla; it must be sufficient
to allow a reasonable finder of fact to find in that party’s favor. See Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 252 (1986).
Choice of Law
In a diversity case, federal courts apply the conflict of law rules of the forum state.
See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1940). Determinations of
state law by federal district courts are to be reviewed de novo by courts of appeals. See
Salve Regina College v. Russell, 499 U.S. 225, 231 (1991). Because this lawsuit was filed
-4-
No. 07-2293
Hardy v. Reynolds & Reynolds Co.
in federal court in Michigan, we look first to Michigan state law. Michigan’s choice of law
rules “require a court to balance the expectations of the parties to a contract with the
interests of the states involved to determine which state's law to apply.” Equitable Life
Assurance Soc'y of the United States v. Poe, 143 F.3d 1013, 1016 (6th Cir.1998). The
Supreme Court of Michigan has followed the approach of the Restatement (Second) of
Conflict of Laws, §§ 187-188 in striking this balance. See Mill’s Pride, Inc. v. Continental
Ins. Co., 300 F.3d 701, 704-06 (6th Cir. 2002). According to the Restatement, the law of
the state selected by the parties generally controls, unless there is no substantial
connection between the contract and the state or the parties’ choice of law would violate
a fundamental policy of the state law which would have governed in the absence of the
parties’ choice. See Kipin Indus., Inc. v. Van Deilen Int’l, Inc., 182 F.3d 490, 493 (6th Cir.
1999).
Here, the parties agreed in the Sales Representative and Associate Agreement that
“[t]he laws of the State of Ohio shall govern all questions relative to the interpretation and
construction of this Agreement.” Michigan state courts generally favor enforcing
contractual provisions regarding the choice of law, which in this case would seem to weigh
in favor of applying Ohio law. See Turcheck v. Amerifund Fin., Inc., 725 N.W.2d 684, 688
(Mich. Ct. App. 2006). However, the plaintiff sued under a specific Michigan statute, and
neither party raised the choice of law provision at the district court level. As a result, the
district court judge relied on Michigan law without objection. Both parties relied primarily
on Michigan law in their briefs supporting or opposing summary judgment; neither party
-5-
No. 07-2293
Hardy v. Reynolds & Reynolds Co.
raised or cited Ohio law. Accordingly, the defendant argues that the choice of law issue
was waived by the plaintiff in the district court, and because it was not asserted at the
district court level, the issue is waived on appeal.1
As a general rule, we decline to consider arguments that were not previously raised
in the district court. See, e.g., City Mgmt. Corp. v. U.S. Chem. Co., Inc., 43 F.3d 244, 255
(6th Cir. 1994). However, there are recognized exceptions to this general rule, permitting
review of arguments not previously raised if they are pure questions of law, or “where
injustice might otherwise result.” Id. In granting this exception, we have tended to view
more favorably arguments that have been raised in substance, although not explicitly. See
id. (addressing an issue on appeal that was “actually raised . . . [but] not pressed at trial”);
1
In so arguing, the defendant relies on an unpublished Sixth Circuit decision,
Golumbia v. The Prudential Ins. Co., No. 96-1521, 1997 WL 345728 (6th Cir. June 20,
1997). Golumbia involved an insurance contract which expressly stated that New York law
was to govern the policy. Because the plaintiff’s attorney “represented to the district court
that Michigan law controls,” the panel treated the issue as waived, and did not allow the
plaintiff to raise the choice of law provision on appeal. See id. at *2. In reaching this
conclusion, the panel relied on two cases from the Seventh Circuit, only one of which
squarely addressed the issue of acquiescence to the application of state law at the district
court level. The first case, Muslin v. Frelinghuysen Livestock Managers, Inc., 777 F.2d
1230 (7th Cir. 1985), addresses an attempt to raise the issue of choice of state law “at a
late point in . . . litigation” after the parties had “acquiesced” to the choice of New York law.
Id. at 1231 n.1. The other, Whirlpool Fin. Corp. v. Sevaux, 96 F.3d 216, 221 (7th Cir.
1996), addresses choice of law in the international context and the requirement of Fed. R.
Civ. P. 44.1 to give adequate notice before raising an issue of foreign law, which is not
directly applicable to the issue in this case. Although there is little case law from our own
circuit directly addressing this issue, and Golumbia seems to rely partly on an inapplicable
case from another circuit, its approach appears reasonable and is in accord with the
general contract principle that the parties can consent to the choice of law.
-6-
No. 07-2293
Hardy v. Reynolds & Reynolds Co.
United Food & Commercial Workers Union, Local 1099 v. Sw. Ohio Reg’l Transit Auth.,
163 F.3d 341, 360 n.9 (6th Cir. 1998) (“Though their arguments could have been
presented more clearly to the district court, we nevertheless believe the parties’ briefs
placed before the district court the validity of the policy under the overbreadth doctrine.”).
In the present case, we have no indication from the record that the parties raised,
or attempted to raise, the choice of law provision in the Sales Representative and
Associate Agreement at the district court level. Although the determination of which state
law should govern this agreement is a question of law, there are no other factors that would
weigh in favor of departing from the general rule and considering the choice of law
provision for the first time on appeal: (1) there do not appear to be indications that the
parties attempted to present the issue but did not do so clearly or forcefully enough, as in
City Management or United Food & Commercial Workers; (2) it does not appear that
injustice would otherwise result if Michigan, rather than Ohio, law is applied; (3) the general
principles of contract interpretation that would apply in interpreting the Sales
Representative and Associate Agreement do not significantly differ from Ohio to Michigan,
compare Aerel, S.R.L. v. PCC Airfoils, L.L.C., 448 F.3d 899, 904 (6th Cir. 2006) (“contract
language is ambiguous only if it is susceptible of two conflicting but reasonable
interpretations”) (stating Ohio law) (internal quotation omitted) with Certified Restoration
Dry Cleaning Network, L.L.C. v. Tenke Corp., 511 F.3d, 535, 544 (6th Cir. 2007) (“A
contract is ambiguous if its words may reasonably be understood in different ways.”)
(stating Michigan law) (internal quotation omitted); and (4) the choice of law decision would
-7-
No. 07-2293
Hardy v. Reynolds & Reynolds Co.
not impair plaintiff’s ability to bring a claim under the Michigan Sales Representatives’
Commission Act (SRCA), see Howting-Robinson Assocs., Inc. v. Bryan Custom Plastics,
65 F. Supp. 2d 610, 613 (E.D. Mich. 1999) (applying SRCA in a sales commission dispute
despite the contract’s Ohio choice of law provision). Given these circumstances, we see
no compelling reason to consider the choice-of-law issue for the first time on appeal.
Contract Dispute
Hardy signed a Sales Representative and Associate Agreement prior to beginning
his employment with Reynolds & Reynolds. While this agreement did not detail the
compensation that Hardy was to receive from Reynolds & Reynolds, it did state that
“Employee shall be entitled to compensation according to the formula, method or system
described in the then-current compensation plan . . . as such plan shall change from time
to time.” The contract also stated that “[t]he specific services performed by Employee, the
place of their performance, and Employee’s title may be modified in any way at any time
in Reynolds’ sole discretion.”
The sales representative compensation plans for the 2005 and 2006 fiscal years
were available to Reynolds & Reynolds employees on the company’s intranet. These
documents provided:
Because of unusual circumstances or any other condition, Sales
Management and/or Sales Compensation Management reserve the right to
suspend or change the application of this compensation plan in selected
-8-
No. 07-2293
Hardy v. Reynolds & Reynolds Co.
individual situations. This means, in some cases, compensation may be
arbitrarily determined without regard for the specific details of this plan.
The compensation plans also required sales representatives to submit requests for
adjustments in their credit for sales made to the company, in writing, within 90 days of the
completion of the transaction.
Hardy was paid an initial base salary of $110,000 per year, with additional variable
compensation to be based on the compensation plan in effect for that fiscal year. For the
2006 fiscal year (beginning on October 1, 2005 and ending September 30, 2006) Hardy’s
variable compensation was to be based on three different scales, one of which was to be
calculated based on how much of the employee’s annual sales goal had been met.
Hardy’s annual sales goal for the 2006 fiscal year (set in November 2005) was five million
dollars, and this goal did not include the much larger GM-IDMS contract. The document
that describes the compensation plan also states that additional payments to employees,
essentially sales commissions, will be “[b]ased on INDIVIDUAL performance.” (Emphasis
in original.)
Breach of Contract Claim
Plaintiff’s breach of contract claim depends on the interpretation accorded the Sales
Representative and Associate Agreement and compensation plan documents referenced
by the agreement. The plaintiff argues that the agreement is “sparsely worded” and that,
based on prior company practice, Hardy should be entitled to receive a percentage of the
-9-
No. 07-2293
Hardy v. Reynolds & Reynolds Co.
IDMS deal according to his compensation formula. Hardy claims that it was company
practice to pay “incentive compensation on any sales contracts received from General
Motors, not just orders which he procured,” so he should receive compensation for the
IDMS deal as well. He also notes that after his lawsuit was filed, the compensation plans
for the 2007 fiscal year were changed so that they specifically define “individual
performance” for the first time and add explicit limits for compensation for employees
involved in “large deals.”
Under Michigan law, however, before we can look to extrinsic evidence, such as the
course of dealing between the parties, we look to the intent of the parties as expressed by
the plain language of the contract’s terms. See Certified Restoration Dry Cleaning, 511
F.3d at 543. If the contract terms are not ambiguous, that is, if they do not allow
reasonable conflicting interpretations, then the court enforces the contract’s terms as the
parties expressed them. See id. at 544. Extrinsic evidence is not considered unless the
terms are ambiguous. See id. When reading contractual provisions, we must “give[] the
words their plain and ordinary meanings.” Id. (quoting Coates v. Bastian Bros., Inc., 741
N.W.2d 539, 543 (Mich. Ct. App. 2007)).
Looking at the agreement between the parties, we see that the compensation
formula, although not extremely detailed, intended that Hardy’s variable compensation was
to be calculated based on his individual performance. The district court, consulting the
dictionary definition of the word “individual,” concluded that, “the ordinary meaning of the
- 10 -
No. 07-2293
Hardy v. Reynolds & Reynolds Co.
words thus seems to refer to sales that, while perhaps not exclusively the result of an
individual’s efforts, in large part result from or are founded on such efforts.” Given that the
IDMS deal was in progress before Hardy was employed by Reynolds & Reynolds and that
Hardy did not play a major role in preparing the proposal for the IDMS deal or negotiating
the final contract, it does not appear that this transaction resulted in large part from Hardy’s
efforts. While Hardy clearly did contribute in some way to the the IDMS deal, the
defendant argued in the district court that the plaintiff’s annual salary already compensated
him for his work on this project. From a plain reading of the words “based on individual
performance,” it does not follow that the plaintiff was to be compensated for a sale to which
he merely contributed.
In the fiscal year following his lawsuit, as the plaintiff points out, the company
revised its policies to more clearly define “individual performance” and specifically limited
the commission that sales representatives could receive from “large deals.” However, just
because the plan was made clearer, it does not necessarily follow that the original
language was ambiguous and “equally susceptible to more than a single meaning.” Mayor
of Lansing v. Mich. Pub. Serv. Comm’n, 680 N.W.2d 840, 847 (Mich. 2004). The
reasonable reading of the plain meaning of the term, “Based on INDIVIDUAL
performance,” would not change. The reasonableness of this reading of the term can be
analyzed in light of other terms in the contract, as the district court did. Considering the
plaintiff’s $110,000 annual salary and $5 million annual sales objective, which did not cover
the IDMS deal, it would not seem reasonable that the parties intended, by this term, to
- 11 -
No. 07-2293
Hardy v. Reynolds & Reynolds Co.
compensate the plaintiff over $2 million for a transaction that was already in progress when
he joined the company and in which he did not play a leading role.
Even if we look to extrinsic evidence of the company’s practice in paying incentive
compensation to help explain the meaning of the individual performance term, that
evidence does not appear to support plaintiff’s contention that he should be paid for every
sale to General Motors, regardless of his degree of participation in the sale. For instance,
a Reynolds & Reynolds vice president asked to explain the meaning of the individual
performance term defined it as “we pay people for what they sell.” She explained that
individual performance was understood in the company to mean “that you were the person
who went out and got the business.” She also stated that as a “team effort,” the IDMS deal
was not intended to be covered by the individual compensation plans.
In addition, the language of the Sales Representative and Associate Agreement and
supporting documents mentioned that the employer reserved the right to modify or change
the variable compensation scheme. The agreement itself mentions that the compensation
plans “may change from time to time,” and the “General Rules” from both the 2005 and
2006 fiscal year compensation plan documents state that the company “reserve[s] the right
to suspend or change the application of this compensation plan in selected individual
situations.” Both documents explain that “compensation may be arbitrarily determined
without regard for the specific details of this plan.”
- 12 -
No. 07-2293
Hardy v. Reynolds & Reynolds Co.
The plaintiff contends, however, that there was no language in the plaintiff’s
individual compensation plan that stated that Reynolds & Reynolds could change the terms
at any time. The plaintiff also disputes that the language in the 2005 and 2006
compensation plans applied to him because these compensation plans do not explicitly
refer to Hardy’s job title, OEM Solutions Account Executive. Although the Sales
Representative and Associate Agreement that Hardy signed does incorporate the terms
of “the then-current compensation plan . . . as such plan may change from time to time.”
(emphasis added), in its order granting summary judgment, the district court did not find
it necessary to resolve these issues.
Finally, the parties dispute the applicability of the Michigan procuring cause doctrine,
which governs the liability of principals to pay commissions to their sales agents. As stated
by the Michigan Supreme Court, “the agent is entitled to recover his commission whether
or not he has personally concluded and completed the sale, it being sufficient if his efforts
were the procuring cause of the sale.” Reed v. Kurdziel, 89 N.W.2d 479, 483 (Mich. 1958).
This doctrine applies when a sales agent’s authority or employment is terminated and no
explicit agreement had been reached over the payment of commissions in the event of
termination. See Randall J. Gillary & Kevin P. Albus, Unsupportable Limitations on
Michigan’s Procuring Cause Doctrine in the Case of Roberts Associates, Inc. v. Blazer
International Corp., 2004 MICH . ST . L. REV. 101, 106. Thus, in a case in which the agent
did the work required to bring about a sale but is terminated before the transaction is
completed, the “procuring cause” doctrine would allow the agent to be compensated for
- 13 -
No. 07-2293
Hardy v. Reynolds & Reynolds Co.
work performed and prevent the principal from taking advantage of the agent’s
performance without compensating him or her.
The plaintiff contends that the agreement and other documents did not require that
Hardy be the procuring cause of a sale in order to receive compensation. In fact, Hardy
testified that “he was paid incentive compensation on any sales contracts received from
General Motors, not just orders which he procured.” He also notes that he was
compensated for transactions that other sales representatives completed and, therefore,
should be compensated for the IDMS transaction as well.
Under the doctrine as stated in Reed, Hardy would be entitled to compensation for
sales that he originated and closed, and also for sales for which he was the procuring
cause, even if others worked on the transaction or closed the deal. He would,
consequently, be entitled to commission “on sales which were the subject or the result of
discussions, negotiations, quotations, or pre-sale customer services in which the plaintiff
actually participated,” Roberts Assocs., Inc. v. Blazer Int’l Corp., 741 F. Supp. 650, 655
(E.D. Mich. 1990), even though he did not participate in the final contract negotiations. In
this case, the plaintiff claimed that he was the “most important person in securing the
business” and was “in reality . . . the lead person.” Although Hardy did serve as the point
person for questions to be submitted to General Motors and attend meetings for the
Reynolds & Reynolds team working on the proposal, he did not take any lead role in the
activity leading up to the IDMS negotiations. He also did not play a role in discussions,
- 14 -
No. 07-2293
Hardy v. Reynolds & Reynolds Co.
negotiations, quotations, or pre-sale customer service. As a result, he cannot be
considered a procuring cause of the IDMS sale, and thus is not entitled to compensation
on that basis.
Sales Representatives’ Commission Act Claim
The plaintiff also raises a claim under the Michigan Sales Representatives’
Commission Act, MICH . COMP. LAW S ANN . § 600.2961. The Act requires employers to pay
commissions due to sales representatives within 45 days of the commission becoming due.
Principals who violate the Act are liable for treble damages and attorneys’ fees if they
withhold or delay payment. Id. § 600.2961(5). This claim is derivative of the breach of
contract claim, however, and if there is no liability on the contract claim for sales
commissions, there is no corresponding violation of the Act.
CONCLUSION
For the reasons set out above, we AFFIRM the judgment of the district court.
- 15 -