Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_04-cv-02428/USCOURTS-azd-2_04-cv-02428-0/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1332 Diversity-Other Contract

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1

 McKesson emphasizes that Olson did not earn her commissions at the end of the

fiscal year because the amount of the commission was contingent upon various factors that

could occur thereafter. However, Olson does not dispute a reduction pursuant to those

factors. She disputes McKesson's unrelated decision to reduce her commission rate.

WO

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

Deborah Pullin Olson, et al.

Plaintiffs,

vs.

McKesson Corporation, et al.,

Defendants.

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No. CV-04-2428-PHX-FJM

ORDER

During the 2004 fiscal year, Deborah Olson was employed by McKesson Corporation

("McKesson") as a sales executive. Olson and McKesson entered into an employment

contract–the Sales Incentive Compensation Plan–which identified Olson's sales quota and

her commission rate. Olson substantially exceeded her quota and expected to receive

commissions of over $400,000. However, following the close of the fiscal year, and after

Olson completed all of her commission-earning sales,1

 the McKesson Sales Incentive

Compensation Committee informed her that her commission was retroactively capped at

$187,500. Olson disputes this reduction, and accordingly filed this action against McKesson

for breach of contract, unjust enrichment, and withholding of wages. We have before us

Case 2:04-cv-02428-FJM Document 39 Filed 08/15/06 Page 1 of 5
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Olson's motion for summary judgment (doc. 23), McKesson's response and cross-motion for

summary judgment (doc. 28), Olson's reply in support of her motion and response to the

cross-motion (doc. 34), and McKesson's reply in support of its cross-motion (doc. 37).

McKesson contends that Olson is barred from bringing this action because she failed

to comply with the contractual dispute resolution process. The contract provides that "[a]ny

payment questions/issues/disputes for the current Plan year should be documented in an email, and sent to the Director of Sales Incentive Compensation Management" and that "[o]n

a monthly basis a committee . . . will meet to review disputes and evaluate incentive

compensation plan performance." PSOF, Ex. 1 at 16. The provision does not state that it is

the exclusive or necessary method of dispute resolution, and therefore Olson's failure to

comply will not bar her from bringing this action. See Demasse v. ITT Corp., 194 Ariz. 500,

515, 984 P.2d 1138, 1153 (1999) (finding a similar dispute resolution provision permissive,

not mandatory); cf. Moses v. Phelps Dodge Corp., 818 F. Supp. 1287, 1290-91 (D. Ariz.

1993) (finding a dispute resolution provision mandatory that stated that the procedures

"constitute the sole and exclusive procedure for the processing and resolution of any

controversy, complaint, misunderstanding or dispute that may arise concerning any aspect"

of the employment or its termination). Moreover, Olson had reason to disregard the

provision; senior management notified her supervisor that they would not reconsider their

decision to retroactively reduce her commission. PSSOF, Ex. 2 at 77.

McKesson next contends that three provisions in the contract permit it to unilaterally

and retroactively reduce Olson's commission rate. First, McKesson identifies paragraph 8.6,

which provides:

Senior Management of McKesson Information Solutions reserves the right to

modify this Sales Incentive Compensation Plan as deemed appropriate to

handle unusual and/or unanticipated situations. Examples of this include, but

are not limited, to situations where: the Company goes at risk; the company

shares risk with a customer; unusually large discounts are granted to win

business; or a large transaction requires significant company resources to close

business.

PSOF, Ex. 1 at 15. Contrary to McKesson's interpretation, this provision is implicitly

restricted to prospective modifications. When interpreting a contract, "an interpretation

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which gives a reasonable, lawful, and effective meaning to all the terms is preferred to an

interpretation which leaves a part unreasonable, unlawful, or of no effect." Restatement

(Second) of Contracts § 203 (1981). If this provision were interpreted to permit unilateral

retroactive modifications, McKesson could revoke Olson's entire commission for work

previously performed. Not only would no rational person agree to those terms, but any

agreement that included those terms would be merely illusory because it would lack

consideration. Therefore, we reject McKesson's interpretation and adopt a far more rational

interpretation of this provision–McKesson may only unilaterally amend the contract

prospectively.

Moreover, McKesson did not identify an unusual or unanticipated situation to justify

modification. It described its rationale for the commission modification as follows: "as

attainment exceeds the 150% attainment level, the percentage commission for one individual

relative to the incremental contract margin becomes disproportionate due to the rapid

increase in commission accelerators" and the "impact of this scenario with a total quota less

than $2[ million] magnifies the imbalance and results in earnings that exceed expectations

and audit parameters." PSOF, Ex. 5. That is, following an audit, McKesson realized that

some of its commission rates were too large. McKesson does not identify a sudden and

unexpected change in risk, a downturn in markets, or any of the reasons identified in

paragraph 8.6. The examples in that paragraph are merely illustrative, not exhaustive, but

paragraph 8.6 clearly does not permit modifications for mere buyer's remorse.

Next, McKesson identifies two bolded sentences preceding Olson's signature on

Appendix A to the contract: "I have read, understand and agree to the FY2004 Sales

Incentive Compensation Plan. I understand that McKesson Information Solutions has the

right to amend or modify this Plan at any time without notice." PSOF, Ex. 2. As above, the

only rational interpretation of this provision is that McKesson can prospectively modify the

commission rate. And this provision is logically limited to the specific contingencies

outlined in the paragraph 8.6, none of which are present. Otherwise paragraph 8.6 would be

meaningless.

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Finally, McKesson identifies paragraph 8.7, which provides in part that

"[a]mendments, modifications or notices to this Plan will be issued in writing and shall be

effective upon the date specified in the correspondence." Id. This is also insufficient. That

a modification is effective on the date of the notice does not mean that it is retroactive.

McKesson therefore breached its employment contract with Olson by retroactively reducing

her commission. Accordingly, McKesson is liable for the unpaid portion of Olson's

commission.

Olson, however, seeks treble the amount of her unpaid commission. If an employer

fails to pay "wages" due an employee, that employee may recover treble the amount of the

unpaid wages in a civil action. A.R.S. § 23-355. "Wages" means "nondiscretionary

compensation due to an employee in return for labor or services rendered by an employee for

which the employee has a reasonable expectation to be paid whether determined by a . . .

commission or other method of calculation" and "include . . . commissions . . . when the

employer has a policy or a practice of making such payments." A.R.S. § 23-350. While

McKesson could modify Olson's commission in some circumstances, it did not have the

discretion to do so here. And Olson had a reasonable expectation to be paid the commission.

Therefore, the commission is a "wage."

Treble damages are not, however, available where there is a reasonable good faith

dispute as to the amount of wages due. A.R.S. § 23-352. The parties do not dispute any

material facts; they merely dispute the meaning of the contract. McKesson's position,

although erroneous, finds some support in the contract and extra-jurisdictional caselaw and

nothing causes us to conclude that it interpreted the contract in bad faith. Therefore we reject

Olson's request for treble damages. See Abrams v. Horizon Corp., 137 Ariz. 73, 79, 669 P.2d

51, 57 (1983) (concluding that damages were not subject to trebling where there is a good

faith dispute over the contract interpretation).

Olson also raises a claim for unjust enrichment and seeks punitive damages therefor.

Because a valid contract governs the relationship between the parties, "the doctrine of unjust

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enrichment has no application." Brooks v. Valley Nat'l Bank, 113 Ariz. 169, 174, 548 P.2d

1166, 1171 (1976). Therefore, Olson's unjust enrichment claim fails.

IT IS THEREFORE ORDERED GRANTING plaintiff's motion for summary

judgment with regard to the contract claim and DENYING with regard to all other claims

(doc. 23).

IT IS FURTHER ORDERED DENYING defendant's motion for summary

judgment with regard to the contract claim, and GRANTING with regard to all other claims

(doc. 28).

Within 20 days of the docketing of this order, plaintiffs shall file a motion for

summary judgment and memorandum of points and authorities in its support on the issues

of damages arising from this breach of contract, and attorney's fees. Defendant will have 10

days from service thereof to file a responsive memorandum, and plaintiffs will have 5 days

from service of the responsive memorandum to file a reply memorandum. Because plaintiffs

shall file any request for attorney's fees now, rather than after the entry of judgment, these

timing dictates apply rather than those identified in LRCiv 54.2.

DATED this 14th day of August, 2006.

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