In the

United States Court of Appeals

For the Seventh Circuit ____________

No. 02-1175

STEPHEN A. GEROW,

Plaintiff-Appellant,

v.

ROHM & HAAS COMPANY and MORTON

INTERNATIONAL, INC.,

Defendants-Appellees.

____________

Appeal from the United States District Court

for the Northern District of Illinois, Eastern Division.

No. 00 C 6538—Matthew F. Kennelly, Judge.

____________

ARGUED SEPTEMBER 20, 2002—DECIDED OCTOBER 16, 2002

____________

Before EASTERBROOK,RIPPLE, and KANNE, Circuit Judges.

EASTERBROOK, Circuit Judge. When Rohm & Haas

acquired Morton International in 1999, it had to deal with

the change-of-control agreements (often called Golden

Parachutes) that Morton had awarded to its executives.

Any change of control (a term carefully defined in the

contracts) triggered a three-year “employment period” for

Morton’s senior executives. During this span managers’

positions, salary, fringe benefits, and perquisites were protected against erosion. The contract (the “Morton Agreement”) provided benefits in the event of death, disability, or
2 No. 02-1175

discharge without cause; employees could trigger the discharge benefits by quitting. Rohm & Haas decided to negotiate individually with executives entitled to these benefits.

It offered Stephen Gerow about $1 million more than his

existing deal, in exchange for a release of all legal claims

and an extension (from two years to three) of Gerow’s noncompetition agreement. Gerow, who had been told that his

services were no longer required, took the offer and signed

a new contract (the “Rohm Agreement”). The Rohm Agreement tracked the Morton Agreement, though a date certain

(July 31, 1999) replaced the elaborate definition of the

“Change of Control Date” in the Morton Agreement. Two

side agreements included the release and the establishment

of a trust to hold the sums (about $2.3 million) that Gerow

was to receive for his promise not to compete with Rohm &

Haas. (The trust was to hand over these funds, plus investment income, after confirming that Gerow had refrained from competition for the agreed time.)

Gerow received more than $4.5 million in severance (including payments in lieu of fringe benefits and retirement

contributions that the firm would have made had he remained employed) and compensation for the promise not to

compete. He was not satisfied and filed this suit seeking

almost $10 million extra—the amount he says he would

have received had he remained employed during the three

years after the acquisition, and had his pay and benefits

been increased to match those of Morton’s very top executives, whose packages (Gerow insists) are the measure of

his protection under ¶3 of the Rohm Agreement. Gerow’s

position, in other words, is that he is entitled to both the

pay he would have received had he stayed, and the severance benefits he actually received on his discharge. He

insists that this is the consequence of the provisions creating a three-year “employment period” with protection of

salary and status. The district judge was unpersuaded and

granted summary judgment to Rohm & Haas. 2001 U.S.
No. 02-1175 3

Dist. LEXIS 15698 (N.D. Ill. Sept. 28, 2001). He treated the

“employment period” as defining the time of protection after

a change of control during which salary and benefits are

guaranteed if the executive stays, and severance must be

paid if the executive quits or is fired. Using a single phrase

to measure the duration of both packages does not entitle

the executive to receive both sets of benefits, the judge

concluded. Later the judge resolved in Gerow’s favor a few

details about the calculation of the severance package and

entered judgment for a few thousand dollars attributable to

delay in making one payment and the miscalculation of

another, plus about $13,000 in attorneys’ fees. 2001 U.S.

Dist. LEXIS 20995 (N.D. Ill. Dec. 17, 2001). Gerow asks us

to award him the whole $10 million.

Although the agreement is of a common variety, derived

from language that Wachtell, Lipton, Rosen & Katz drafted

for Morton and many other potential targets of acquisition

bids, Gerow’s understanding of his entitlements is novel.

Golden Parachutes protect executives from surprise insecurity, and thus make them more willing to invest human

capital in their firms; by making a change of control profitable to the executive. Moreover, the agreement aligns

managers’ interests with those of investors, who usually

gain substantially from takeovers and do not want managers to resist in order to protect their positions. Neither of

these purposes calls for compensating an executive twice on

a change of control, however—once through guaranteed salary, and a second time through guaranteed severance over

the same period. The parties could not find any published

decision discussing this agreement’s language, or any close

variation, and neither could we. Nor are the parties aware

of any executive covered by an agreement of this kind who

has received both salary and severance for the same period.

Illinois law governs here (the agreement has a choice-of-law

clause), but none of that state’s distinctive principles bears

on the issues. It is unnecessary for us to blaze new legal
4 No. 02-1175

ground. This dispute can be resolved by a careful reading of

the agreement.

Gerow offers one textual argument and two confirming

inferences. The textual argument rests on the language of

¶2, which defines the “employment period”:

The Company [Rohm & Haas] hereby agrees to

continue the Executive [Gerow] in its employ, and

the Executive hereby agrees to remain in the

employ of the Company, for the period commencing

on the Effective Date [the day the contract was

signed] and ending on the third anniversary of such

date . . . (the “Employment Period”).

This creates an unambiguous right to be employed, and

thus to receive the salary and other benefits identified in ¶3

(which defines “terms of employment”) as damages for

breach, Gerow insists. The first confirming inference is the

fact that the contract contains ¶3 at all, even though it was

signed after Gerow’s last day on the job. Why specify the

terms of employment in such detail if these cannot have

any effect? The second confirming inference lies in the

structure of ¶5, captioned “Obligations of the Company

upon Termination.” Paragraph 5(a), which says what happens if Gerow dies before the employment period ends,

names some death benefits and adds that the “Agreement

shall terminate without further obligations”. Similar language appears in ¶5(b), which deals with disability, and

¶5(c), which handles discharge for cause. But ¶5(d), which

covers discharge without cause, names a lot of benefits but

omits the “without further obligations” language—showing,

Gerow contends, that there were further obligations, namely

the whole package of benefits in ¶3.

None of these arguments carries much water. Take the

fact that the contract was signed after Gerow’s last day at

work. If this entitled him to all of the employment benefits

under ¶3 (because the company knew that he would not
No. 02-1175 5

work, yet included ¶3 anyway), then it also entitles him to

death benefits under ¶5(a) (because the company knew that

he was alive on his terminal working day, yet included

¶5(a) anyway), disability benefits under ¶5(b) (same rationale), and so on. The argument about ¶3 is no better

than the equivalent argument about ¶5(a), which is to say

that it is no good. The agreement’s structure is attributable

not to some subtle effort to reflect Gerow’s status, but to its

genesis in the Morton Agreement, which dates to 1990.

Rohm & Haas adopted the existing benefits wholesale and

added some new ones to induce Gerow to release any

potential claims and extend the restrictive covenant. This

says nothing about what the benefits carried over from the

Morton Agreement may be.

Now take the absence of “without further obligations” in

¶5(d). Drawing inferences from omissions is risky in the

best circumstances and untenable here, for the language

“without further obligations” would have been out of place.

There were further obligations—some of them detailed in

¶5(d) itself and others in ¶10, which dealt with restrictive

covenants. These covenants were not going to matter if

Gerow had died, so it is no surprise that ¶5(a) and ¶5(d)

differed. It would have been possible to reword ¶5(d) to add

something like “without further obligations except to the

extent the rest of this paragraph and ¶10 provide for further obligations”, but this much was plain from the text and

structure of the agreement. Why impute significance to the

non-parallel phraseology when the underlying substance

was not parallel?

So let us turn to ¶2 and ¶3, which Gerow says give him

an explicit right to be employed for three years, with the

same salary, responsibilities, fringe benefits, office, furniture, and staff. This is an implausible understanding. Every

contract is of similar form, and it is a common understanding (on which Holmes remarked long ago) each contracting

party can choose between performing and paying damages.
6 No. 02-1175

A football coach with a four-year term still may be fired.

The coach gets damages, of course—the salary less what he

makes elsewhere (or could have made had he mitigated his

damages)—but does not keep control of the team. And if the

contract contains a liquidated damages provision, then the

coach gets that sum instead of the wages-less-other-income

calculation. That is how Gerow’s contract works too. The

deal provides a three-year period of protection and includes

a liquidated-damages provision in the form of severance

pay plus handsome compensation for refraining from competition during the remainder of the “employment period.”

Gerow’s reading, by contrast, attributes irrationality to

his employer. Why would Rohm promise to pay $2.3 million

to induce Gerow not to compete during the three years after

the change of control, when on Gerow’s reading of ¶2 and

¶3 Gerow was obliged to come to work every day of those

three years? Recall the language of ¶2: “The Company

hereby agrees to continue the Executive in its employ, and

the Executive hereby agrees to remain in the employ of the

Company, for the period” of three years (emphasis added).

Why would the acquirer ever fire any executive during the

first three years, if the executive had a guaranteed position

for that time? Why would ¶5(d) provide for severance benefits that assume lack of employment? (One of the severance benefits is three years’ pension contributions in lieu of

those that the employer would have made had Gerow

remained employed. But on Gerow’s reading, he receives

those pension contributions twice: once as severance under

¶5(d) and again as damages for breach of ¶¶ 2 and 3.) The

big contextual clue is not that this agreement contains ¶3,

which Gerow finds significant, but that it contains ¶5(d),

which on Gerow’s view is either useless (because he can’t be

fired, period) or just an option on Rohm’s part to make a

magnanimous gesture (because the executive gets full pay

whether he stays or not). An employer does not need a written option to make a gift; it can fork over extra money
No. 02-1175 7

(subject to limits on waste of corporate assets) any time.

Gerow’s reading of this contract, in other words, makes no

business sense, while Rohm’s reading is practical. And it is

a fundamental principle of contract interpretation that

courts read language to make business sense whenever

possible. Beanstalk Group, Inc. v. AM General Corp., 283

F.3d 856 (7th Cir. 2002).

What is more, although ¶2 says that “the executive

agrees to remain in the employ of the Company”, ¶5(d)

takes that back. The opening of ¶5(d) reads: “If, during the

Employment Period, the Company shall terminate the

Executive’s employment other than for Cause or Disability,

or if the Executive shall terminate employment under this

Agreement” then specified benefits must be paid. The

executive and the company have identical rights to end the

employment without cause; and whichever side ends it the

executive receives the same severance package. The right

to depart with full pockets after a change of control is the

most valuable benefit conferred by a Golden Parachute.

Employer’s and employee’s rights are symmetrical. Yet on

Gerow’s reading of ¶2 an executive who quits within three

years breaks his promise and should be required to pay

damages for breach, rather than receiving millions in

severance. Surely Gerow does not think that ¶2, ¶3, and

¶5(d) read together give the employee an option to quit

without cause and still be paid both salary and severance.

Yet there is no way to read this contract as saying that the

total payments are greater if the employee is fired than if

he quits during the “employment period” and triggers ¶5(d).

The only way to make sense of the executive’s right to

walk—an option to put his job back to the employer in

exchange for the severance package—is to say that all the

“employment period” does is measure the time during which

the employee receives either an undiminished salary (and

perks) or a specified severance package. One or the other,

but not both.
8 No. 02-1175

Quite apart from ¶3, the agreement is extraordinarily

favorable to Gerow. One of the benefits he has enjoyed appears in ¶7:

The Company agrees to pay . . . all legal fees and

expenses which the Executive may reasonably incur as a result of any contest or controversy (regardless of the outcome thereof and whether or not

litigation is involved) by the Company, the Executive or others of the validity or enforceability of, or

liability under, any provision of this Agreement.

Gerow has sent all of his legal bills to Rohm & Haas,

which so far has underwritten the litigation against itself—

even though Gerow received less than $5 thousand of the

$10 million he demanded. An opportunity to litigate on the

adversary’s dime, without any need to prevail in order to

collect, creates a moral hazard, which is mitigated by the

requirement that the fees be incurred “reasonably”. Like

the district judge, we read the word “reasonably” in context

to curtail this hazard by requiring not only that the time

devoted to advocacy must be reasonable in light of the

litigation’s nature (a requirement in every fee-shifting

situation) but also that the litigating position must be

“reasonable” (a filter necessitated by the promise to reimburse even if the claim is unsuccessful). Cf. Ruckelshaus v.

Sierra Club, 463 U.S. 680 (1983). Otherwise the employer

has written a blank check that every employee would seek

to cash on the off chance that a court would order the

employer to pay more. Gerow asked the district judge to

guarantee that he would receive full compensation for the

legal costs of an appeal; the judge sensibly declined, remarking that this would be an advisory opinion, as he could

not know whether Gerow would appeal at all, let alone

whether his arguments (and outlays) would be reasonable.

Now Gerow asks us to compel Rohm & Haas to reimburse

his appellate fees.
No. 02-1175 9

Gerow is on solid ground to the extent that he reads ¶7 as

providing for legal fees through final resolution of a dispute, and not simply until a decision by the court of first

instance. Still, both the legal position taken and the outlay

must be reasonable. A position may be rendered less

reasonable, indeed may be shown to be un-reasonable, by a

judicial decision exposing its fallacies. That is a sound

description of Gerow’s litigation. He had a legal position

never before rejected by any court. He lost in the district

court, which wrote a thorough opinion exposing many of the

position’s weaknesses. At that point Gerow should have

packed up his attaché case and retired from the fray.

Instead he persevered. That was his right—his contentions

are not frivolous—but under the circumstances pressing on

was unreasonable and thus at Gerow’s expense. There is a

gap between what is non-frivolous and what is unreasonable. See, e.g., Pierce v. Underwood, 487 U.S. 552 (1989)

(discussing the Equal Access to Justice Act, which entitles

some litigants to attorneys’ fees when the United States

takes a position that is not substantially justified—in other

words is unreasonable—even though the position is nonfrivolous). A “reasonable” position for purposes of this kind

of bargain is the sort of cost-justified argument that would

be advanced by a solvent litigant who knew in advance that

he would have to pay the tab but thought the return

(discounted by the risk of loss) greater than the outlay.

Despite the assurance of Gerow’s distinguished appellate

counsel that he would have paid every penny himself

without ¶7 in the picture, we do not think this likely. Why

throw good money after bad? In pressing this appeal Gerow

passed beyond the point of reasonableness but did not cross

the line into litigation abuse. As a result, each side must

bear its own legal fees on this appeal.

AFFIRMED
10 No. 02-1175

A true Copy:

Teste: 

 ________________________________

Clerk of the United States Court of

Appeals for the Seventh Circuit 

USCA-02-C-0072—10-16-02