# UnitedStates C ou rt o f App eals For th e First C ircuit

No. 07-1549 MARIO MARIASCH, Plaintiff, Appellant,

v . THE GILLETTE COMPANY, Defendant, Appellant.

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS [Hon. Richard G. Stearns, U.S. District Judge]

Before Lipez, Circuit Judge, Cyr, Senior Circuit Judge, and Howard, Circuit Judge.

Alvin S. Nathanson, with whom Nathanson & Goldberg, PC was on brief for appellant. Richard P. Ward, with whom David C. Potter and Ropes & Gray, LLP were on brief for appellee.

March 27, 2008-2- LIPEZ, Circuit Judge . In this diversity case, Mario O. Mariasch, a citizen of California, claims that The Gillette Company, his former employer and a Delaware Corporation, wrongfully rejected his attempt to exercise stock options that he acquired in 1995 and 1996 as part of his executive compensation package. After Mariasch retired from Gillette on April 22, 2002, he had three years to exercise these options pursuant to Gillette's 1971 Stock Option Plan ("Stock Option Plan"). Mariasch tried to exercise the options seven days a f t e r the three-year period lapsed and was rebuffed by Gillette. He now argues that principles of contract law and equity required Gillette to accept this late exercise.

The district court granted summary judgment for Gillette, primarily on the authority of our decision in First Marblehead Corp. v. House, 473 F.3d 1 (1st Cir. 2006), where we held that Delaware law requires t h e strict application of the terms and conditions of a board-approved stock option plan. We agree with the district court's a n a l y s is and affirm its grant of summary judgment.
I.

The following facts a r e drawn from the pleadings and depositions. Where the facts are disputed, we view the record in the light most favorable to Mariasch, the nonmoving party. First Marblehead, 474 F.3d at 3.Under the Internal Revenue Code, ISOs and NQSOs are treated 1 differently for tax purposes, with the former having more favorable tax treatment in exchange for greater r e s t r i ctions on their use. I.R.C. §§ 421-23. The Stock Option Plan dictates that if the NQSOs had been 2 issued prior to April 21, 1994, a retiree would have only two years from the termination date to exercise those options. -3- Before retiring in 2002, Mariasch worked at Gillette for over thirty years, rising to the level of Senior Vice President for
Ne wB u s i n e s s D e v e l o p m e n t a t O r a l

- BL a b o r a t o r i e s , a G i l l e tte sub s i d i ary. As part of his compensation package for most of his tenure, he received two types of Gillette stock o p t i o n s -- incentive stock options ("ISOs") and non-qualif i e dstock options ("NQSOs"). He acquired over 2 1 0 ,000 shares of Gillette stock by

1 exercising these options.

The stock options at issue here are the NQSOs granted to Mariasch in 1995 and 1996. The terms governing the stock options were set forth in the 1971 Stock Option Plan, which provided that active employees must exercise their NQSOs within ten years of the date that the options were issued and that retired employees must exercise their options within three years of their official termination date. 2

In 2000, a s part of Gillette's 1998 Reorganization and Realignment Program, Mariasch's position as a senior vice president was eliminated and his employment was terminated. On July 10, 2000, Mariasch and Gillette entered into a Termination SettlementAlthough Mariasch's departure was not voluntary, the parties 3 agree that Mariasch's departure would b e t r e ated as a retirement for the purposes of the Stock O p tion Plan. Both parties use termination date and retirement date interchangeably. Mariasch exercised his ISOs in a timely manner and there is 4 no dispute regarding these options. -4- Agreement ("Termination Agreement") that provided for Mariasch toreceive his base pay during the settlement period -- the sixtyeight weeks following his release date. Pursuant to the
Ter m i n ation Agreement, the close of the settlement period, April 22 , 2 0 0 2, would be deemed his termination date and retirement date. Mariasch wou ld then have three months from that date to

3 exercise his ISOs and t h r e e years to exercise his NQSOs. The 4 Termination Agreement included a Massachusetts choice-of-law provision. On April 29, 2005, Mariasch attempted to exercise his disputed NQSOs by c o n tacting the plan agent, Merrill Lynch, who informed him that the options had expired on April 21, 2005. Upon hearing this, Mariasch emailed Gillette, writing, "I made an honest mistake on the due date to exercise two stock options that were due three years after retirement." Mariasch says that he thought his retirement date was May 1, 2002 because in 2002 he received a pay stub that listed May 1, 2002 to May 31, 2002 as a payment period. Also, Mariasch states that he failed to exercise the disputed NSQOs before the expiration date because he did not receive the usual "friend l yreminder" letter or a call from either Gillette or-5-

M e r r i l l Lynch telling him that they were about to expire. He asserts that Gillette had sent him a "friendly r eminder" letter prior to the expiration of stock options for over twenty years and then abruptly stopped sending him a reminder in 2005.

After Gillette persisted in its refusal to allow him to exercise his 1995 an d 1996 options, Mariasch filed suit against Gillette in the federal district court in Boston. On assorted theories, he sought a declaratory judgment that he should be permitted to exercise the disputed options. After Gillette moved for summary judgment, the d i s t rict court granted the motion, largely on the basis of our prior decision in First Marblehead. Mariasch now appeals.
II.

We review the district court's grant of summary judgment de novo. First Marblehead, 473 F.3d at 5. Summary judgment is proper if, viewing the re c o r din the light most favorable to the nonmoving party, "there is no genuine issue as to any material fact and . . . the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c); First Marblehead, 473 F.3d at 5. "Once the moving party avers the absence of genuine issues of material fact, the nonmovant must show that a factual dispute does exist, but summary judgment c a n not be defeated by relying on improbable inferences, conclusory allegations, or rank-6-

speculation." Ingram v. Brink's, Inc., 414 F.3d 222, 228-29 (1st Cir. 2005).
A. Choice-of-Law

In thi s d iversity case we must follow the applicable state laws. See, e.g., Phoung Luc v. Wyndham Mgmt. Corp., 496 F.3d 85, 88 (1st Cir. 2 0 07). The parties dispute which state's laws

s h o u l d apply, with Mariasch contending that Massachusetts law applies to his claim and Gillette responding tha t Delaware law applie s . T o d e t e r m i n e w h i c hs t a t e ' s l a w s a r e a p p l i c a b l e , w e look to the choice-of-law jurisprudence of Mass achusetts, the forum state. Lexington Ins. C o . v. Gen. Accident Ins. Co. of Am., 338 F.3d 42, 46 (1st Cir. 2003)("In de t e r m i n i ng what state law is relevant, a federal court must apply the choice-of-law framework of the forum state.").

Massachusetts applies the internal affairs doctrine, which "recognizes that only one State should have the authority to regulate a corporation's internal affairs - matters peculiar to the relationships among or between the corporation and its curr e nt officers, directors, and shareholders - b e c a u s e otherwise a corporation could be faced with conflicting demands." Edgar v. MITE Corp., 457 U.S. 624, 645 (1982). The state with authority over a corporation's inter n a l affairs is the state of incorporation. Harrison v. N e tCentric Corp., 744 N.E.2d 622, 628 (Mass. 2001) ("Traditionally, we have applie dthe law of the State of-7-

inc o rporation in matters relating to the internal affairs of a corporation
. . . ."); see also Mass. Gen. Laws ch. 156D, § 15.05(c) ("[A] foreign corporation organization and internal affairs and the liability of its stockholders and directors shall be governed by the laws of the jurisdic t i o n u n der which it is organized."). Since Gillette was incorporated in Delaware, Gillette's internal affairs are governed by Delaware law.

Mariasch's claims fall within the purview of the internal affairs doctrine because stock option plans are considered matters pertaining to the internal affairs of a corporation. In Rogers v. Guaranty Trust Co. of New York, the Supreme Court decided that the plaintiff's claims must be assessed under New Jersey law, the state in which the defendant corporat i on was incorporated, because "[u]nquestionably the steps taken and proposed to formul a t e a nd carry out the [stock option] plan const i t u t e the conduct and management of the internal affairs of the [] company." 288 U.S. 123, 129 (1933); see Fredericks v. Georgia-Pacific Corp., 331 F. Supp. 422, 424 (E.D. Pa. 1971) (explaining that when a stock option plan i s s i l e n t a s t o t h e a p p l i c a b l e s t a t e l a w , c o u r t s h a v e uniformly determined the validity and c o nstruction of stock options by applyin gt h e l a w s o ft h e s t a t e o fi n c o r p o r a t i o n ) ; E l l i s v . E mh art Mfg. Co., 191 A.2d 546, 550 (Conn. 1963) ( " T h e i s s uance of stock option plans by the defendant involves its internal affairs, and any controversy resulting t h e r e f rom is controlled by [the law of the-8-

state of incorporation]."); Beard v. Elster, 160 A.2d 731, 735 (Del. 1960) ("The issuance of stock option plans by Delaware corporations involves the internal affairs of a D e laware corporation and is, therefore, controlled by the laws of Delaware."). Here, as defendant argues, "Gillette's shareholders specifically approved how many shares of Gillette stock could be issued under the 1971 Stock Option Plan. Thus, issues relating to when one is entitled to the issuance of stock pursuant to the 1971 Stock Option P l a n a f f ects Gillette's relationship with the shareholders."

Nonetheless, Mariasch argues that the Stock Option Plan is not subject to the internal affa i r s d o c t rine and the law of Delaware since it was incorporated by reference into the Termination Agreement, which says that "[t]his Agreem e nt shall be governed by

an d c o n s t r u e d i n a c c o r d a n c e w i t h t h e l a w s o f t h e C o mm o n w ealth of Massachusetts." Gillette correctly responds that Mariasch had the benefits provided by the Stock Option Plan prior to becoming party to the Termination Agreement. T h e p u r pose of the Termination Agreement was to provide him with settlement pay and other benefits that he did not previ o usly have. As Gillette puts it, "The additional pay and benefits were the consideration for a release of all claims." Rathe r t h a n incorporating the Stock Option Plan or modifying its terms in any way, the Termi n a t i o n Agreement simply referred to it "for detailed informa t i o n o n the exercise of Stock Options." The Termination Agreement did delay Mariasch's retirementMariasch also argues that because the Termination Agreement 5 is a bilateral contract and the Stock Option Plan is incorporated by ref e r e nce, the disputed NQSOs are subject to the terms of a bilateral contract. According to Mariasch, the deadlines in a bilateral contract are strictly enforced only if the contract explicitly states that time is of the essence. Since the Terminatio n A greement has no such language, Mariasch argues that the deadlines set forth in the Stock Option Plan and incorporated by reference into the Termination Agreement should not be strictly enforced. H o w e v er, since we find that the Termination Agreement does not incorporate the Stock Option Plan by reference and Mariasch's interests in the disputed NQSOs are only subject to the terms of the Stock Option Plan, we reject the bilateral contract argument on this basis alone. -9- date, which had the effect of giving him more time to exercise his options that had to be exercised within three years of retirement. That limited interaction between the Termination Agreement and the Stock Option Plan is a far cry from the incorporation that Mariasch claims. Consistent w i t hthe internal affairs doctrine, we must apply Del a ware law when assessing Mariasch's claim that Gillette should h a v e permitted him to exercise his options beyond the expiration date for such exercise. 5 B. Applicability of First Marblehead

We addressed the law of Delaware as it applies to the timely exercise of stock option plans in First Marblehead. There, Gregory House, pursuant to a board-a p proved plan, had to exercise his ISOs within three months of resigning fro m F i rst Marblehead Corpora t i o n. Id. at 3. Although House allowed the three month period to lapse, he sought to e x e r c i se his options several years later. Id. at 4. First Marblehead sought a declara t o r yj u dgmentHouse also raised successfully a negligent misrepresentation 6 claim that has not been advanced by Mariasch. First Marblehead, 473 F.3d at 9-11. -10- that House's ISOs had expired three months after his resignation and House filed a cross-complaint alleging that he should be permitted to exercise his options on contractual and equ i table grounds. Id. After House lost at summary judgment, he appealed to us. Id. at 5.

In rejecting his contractual and equitable claims, we 6 noted that, pursuant to Delaware law, "every corporation may create

a n d i s s u e . . . r i g h t s o r o p t i o n s . . . s u c h r i g h t s o r o ptions to be evidenced by or in such instrument or instruments a s s h a l l be approved by the board of di r e ctors." Del. Code Ann. tit. 8, § 157(a); see First Marblehead, 473 F.3d at 6. We added that Delaware courts have observed that the issuance of corporate stock pursuant to a written b o a r d

- a pproved plan is "an act of fundamental legal significance having a direct bearin gupon questions of corporate governance, control and the capital structure of the ente r prise. The law properly requires certainty in s u c hmatters." First Marblehead, 473 F.3d at 6 (quoting STAAR Surgical Co. v. Waggoner, 588 A.2d 1130, 1136 (Del. 1991)). Relatedly, the strict enforcement of a board-approved stock issuance plan serves the important policy of "preserv[ing] the boar d ' s b road authority over the corporation and . . . protect [ i n g ] the certainty of investors' expectations regarding stock." I d
. ( q u oting Grimes v. Alteon, Inc., 804 A.2d 256, 258 (Del. 2002)). Therefore , Delaware courts have deniedFor e x a mp l e , t h e S t o c kO p t i o nP l a na l l o w s t h e P e r s o n n el 7 Committee to extend the period in which a v o luntarily terminated employee can exercise his NQSOs from seven days to three months. Se n s i b l y , M a r i a s c h d o e s n o t a r g u e t h a t F i r s t M a r b l e h e a d is 8 distinguishable on the ground that ISOs were at issue there as opposed to the NQSOs at issue here. -11- claims for equitable relief "even in situation s w h en that might generate an inequitable result" because of the importance of strict adherence to statutory requirements regarding the issuance of stock. Id. (quoting Liebermann v. Frangiosa, 844 A.2d 992, 1004 (Del. Ch. 2002)). Here, the Stock Option Pl a n provides for a Personnel
C o mm i t t e e w i t ht h e a u t h o r i t yt o a w a r dI S O s a n dN Q S O s t o employees of Gillette and its subsidiaries
. I n limited circumstances set forth in the Stock Option Plan, the Personnel Committee can extend the period in which an optionee may exercise his options. However, 7 the p e r i o dwithin which a retired employee can exercise his NQSOs is not s u bject to an extension by the Personnel Committee. The Stock Option Plan provides without exception that retired employees with NQSOs have three years from the date of termination to exercise their options.

For all of the reasons ci t e d i n First Marblehead, this

o p t i o n p e r i o d mu s t b e s t r i c t l y e n f o r c e d
. R e q u i r i n g G i l l e tte to 8 allow a deviation from the ter m s of the Stock Option Plan would undermine the board's authority over the issuance of stocks, thereby creating unpredictability for investors in contravention of DelawareMariasch also argues that the Personnel Committee could have 9 extended the exercise period for the disputed NQSOs to ten years. He cites provisions from the S t o c kOption Plan in support of his position, but these provisions are not applicable by their own terms. The Stock Option Plan says: "Options granted to employees are exercisable as determined by the Committee, except t hat the maximum option period is ten years from the date of grant." This reference to the ten-year option period pertains exclusively to current employees and not retired employees like Mariasch. Similarly, Mariasch quo t e s l anguage that gives the Personnel Committee authority to e xtend exercise periods to ten years for employees who were discharged for cause. This provision is also inapplicable to Mariasch since his termination was characterized as a retirement. -12- law. Moreover, it would limit the Personnel Committee's ability to allocate stock options to employees. Under the Stock Option Plan, the reserved shares become subject to future grants when st o ck options expire. If the deadlines for exercising stock options were not strictly enforc e d, the Personnel Committee would not know how many shares were available for grant.

Mariasch argues that First Marblehead does not apply to his claims b e c a use the Stock Option Plan does not include a fixed option period that must be strictly enforced. To support this odd

n o t i o n , h e c i t e s t h e w o r d" m a y " i nt h e c l a u s e w h i c hs a y s that options "exercisable at the time of the termination, may be exercised within the period shown below" (emphasis added). In his view, the word "may" means that t h e P e rsonnel Committee had the right to extend the three-year period for the exercise of NQSOs by retired employees. This argument is unpersuasive. The word "may" 9 does not make the length of the option period permissive. Rather,-13-

that word simply gave Mariasch the choice duri n g t he three-year period to exercise his options. Mariasch had no contractual right under D e l a w a r e l a wt o e x e r c i s e h i s N Q S O s a f t e rt h e t h r e e y ears lapsed. C. Equitable Claims

We also apply Delaware law t o M a riasch's equitable claims. In First Marblehead we acknowle d g e d t h at, in limited circumstances, Delaware l a w m i ght, on equitable grounds, permit a brief extension in a stock option period which the corp o ration should be estopped from denying. Id. at 8 (citing Ostler v. Codman Research Group, Inc., 241 F.3d 91, 94 (1st Cir. 2001), whe r e we validated a two-day extension of the stock option exercise deadline while noting that such "minor extension[s] of an o p t i o n exercise deadline . . . . to cope with last-minute emergencies" were rarely allowed); cf. id. (denying House's request for an extension because "[w]hile a two-day extension arguably would not frustrate
managemen t 's ability to make capital decisions with certainty, a delay of years could have a significant impact"). Mariasch contends that the circumstances in this case justify a brief extension of the option period. Gillette, he says, engaged in inequitable c onduct when it ceased to provide him notice of the option exercise deadline after twenty years of providing such notice. He also e mp h a s i z es that he is only asking for a seven-day grace period.-14- By virtue of his own testimony, Mariasch defeat s h is cl a i m o f e q u i t a b l e e s t o p p e l
. A t h i s d e p o s i t i o n , M a r i asch was present e d w i t h a letter dated March 21, 2002 from Gillette. The first sentence read, "I have enclosed your retirement package as of April 22, 2002." When questioned whether he unders t o o d t h at his retirement date was April 22, 2002, Mariasch r e s p onded affirmatively. Gillette's counsel later asked Mariasch, "But, when you retired, you understood that you had to exercise them [the 1995 and 1996 NQSOs] within three years of your retirement date, right?" Mariasch once again answered in t h e a f f i rmative. Moreover, when Mariasch attempted to exercise his disputed NQSOs by contacting the plan agent, M e r r i l l Lynch, who informed him that the options had expired on April 21, 2005, he e m a i l ed Gillette the following message: "I made an honest mistake on the due date to exercise two stock options that were due three years after retirement."

Under Delaware law, "[t]o establish estoppel it must be shown that the party claiming estoppel lacked knowledge or the means of obtaining knowledge of the truth of the fa c t s i n question." Waggoner v. L a s t e r , 581 A.2d 1127, 1136 (Del. 1990). Based on Mariasch's deposition testimo n y and the content of the email Mariasch sent to Gillette, it is clear that Mariasch knew that the disputed options lapsed on April 21, 2005. Mariasch must bear theMariasch's equitable estoppel claim fails on other grounds 10 as well. As noted e a r l i e r , Mariasch claims on appeal that he failed to exercise the disputed NSQ O s b e fore the expiration date because he did not receive the usual "friendly reminder" letter or a call from either Gillette or Merrill Lynch telling him that they were about to expire. He asserts that Gillette had sent him a "friendly reminder" letter prior to the expiration of stock options for over twenty years and then abruptly stopped sending him a r e m inder in 2005. However, by his own admission, he was not waiting for a "friendly reminder" when he attempted to exercise his options on April 29, 2005. Thus, his equitable estoppel claim predicated on alleged reliance on rece i v i ng "friendly reminders" from Gillette is unavailing. Citing Delaware cases for the propositi o n that "equity 11 abhors a forfeiture," see, e.g., Hillman v. Hillman, 903 A.2d 798, 812 n.43 (Del. Ch. 2006), Mariasch argues that he is e n t i t led to equitable relief from the forfeiture of his stock options. We disagree for the same reason that Mariasch does not prevail on his equitable estoppel claim -- he is responsible for his own loss. -15- responsibility for not acting on that knowledge. He cannot impose 10 the cost of his mistake on Gillette. 11

Affirmed.