United States Court of Appeals

For the Eighth Circuit

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No. 13-1530

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Thomas Kmak

lllllllllllllllllllll Plaintiff - Appellant

v.

American Century Companies, Inc.

lllllllllllllllllllll Defendant - Appellee

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 Appeal from United States District Court 

for the Western District of Missouri - Kansas City

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 Submitted: February 11, 2014

 Filed: June 5, 2014

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Before LOKEN, BYE, and COLLOTON, Circuit Judges.

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BYE, Circuit Judge.

Thomas Kmak appeals the district court's dismissal of Kmak's second amended

complaint ("Complaint") for failure to state a claim upon which relief could be

granted. Because Kmak sufficiently alleged that American Century Companies, Inc.

("American Century") retaliated against him in violation of public policy, we reverse

and remand.
I

American Century is an investment management firm. It hired Kmak in 1990

to develop its Retirement Plan Services division. Beginning in 1998, American

Century adopted a series of stock option plans, enabling Kmak and other employees

to purchase America Century's privately held common stock. On October 10, 2003,

and April 28, 2005, Kmak exercised these options and purchased a total of 238,000

shares. As a shareholder, Kmak received an annual dividend per share at the end of

every year.

Each stock purchase was governed by a "Stock Restriction Agreement for

Exercise of Stock Option" ("Stock Restriction Agreement"). The Stock Restriction

Agreement contained the following provision:

(h) Call Rights on Shares of Common Stock.

(i) The Company will have the right to call any of the

Shares for repurchase, in exchange for payment in

cash of the most recent value of the Shares as

determined in accordance with the valuation

procedures provided below, at any time following

the Purchaser's disability, death, ortermination of, or

retirement from, the Company's employment . . . . 

The Company's right to call the Shares hereunder

shall be a continuing right.

Between 1998 and 2003, American Century operated the Retirement Plan

Services division as a joint venture with JPMorgan. In 2003, JPMorgan purchased

the division outright, and Kmak left American Century to work for JPMorgan. When

he left American Century, Kmak had specific conversations with American Century's

CEO, Bill Lyons, who assured Kmak American Century would not exercise its right

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of redemption for any shares Kmak had purchased unless Kmak began working for

one of American Century's competitors.

In 2007, Kmak left JPMorgan to start his own business, Fiduciary Benchmarks,

which is not an investment management firm and does not compete with American

Century. Kmak considered selling his American Century stock at that time, but

decided against it, believing American Century would only exercise its right of

redemption if he began working for a competitor.

Several yearslater, AmericanCentury initiated arbitration proceedings against

JPMorgan to resolve a dispute related to the Retirement Plan Services division. 

Kmak was subpoenaed to testify by JPMorgan, which did not subpoena any other

current or former employee of American Century who held stock in the company. 

Kmak provided sworn testimony which, allegedly, was not helpful to American

Century's position. Ultimately, American Century prevailed in the arbitration and

won a $373 million judgment against JPMorgan.

In May 2011, shortly after Kmak testified, American Century sent Kmak a

letter to "remind" him American Century had the right to call his shares at any time. 

To Kmak's knowledge, this reminder was not sent to any other American Century

shareholder. When Kmak inquired about the letter, he received assurances American

Century would not be calling his shares. Consistent with this information, American

Century stated in a December 5, 2011, letter that Kmak would receive his regular

annual stock dividend.

Mere days later, between December 6 and 9, 2011, American Century's

arbitration award was finalized and/or paid. Kmak alleges this prompted American

Century to change its position. On December 9, 2011, American Century notified

Kmak it was calling his shares for repurchase. As a result, Kmak did not receive

either of the two stock dividends issued in 2011, which would have totaled more than

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$540,000. To Kmak's knowledge, American Century did not exercise its call rights

with respect to any other shareholder.

Kmak filed suit against American Century on August 28, 2012, asserting a

single claim for breach of the implied covenant of good faith and fair dealing. Kmak

alleged American Century called his shares in retaliation for his testimony on

JPMorgan's behalf in the arbitration. AmericanCenturymoved to dismiss under Rule

12(b)(6) of the Federal Rules of Civil Procedure, arguing it could not be held liable

because it had an unqualified contractual right to call its shares "at any time."

The district court granted American Century's motion to dismiss, reasoning

American Century "was entitled under the 2003 and 2005 Stock Restriction

Agreements to call Kmak's stock for repurchase 'at any time' after his employment

with the company had ended." As a result, the district court concluded Kmak's

allegations failed to state a plausible claim for relief under Missouri law.

II

We review "de novo the district court's grant of a motion to dismiss under

Federal Rule of Civil Procedure 12(b)(6), accepting the plaintiff's factual allegations

as true and construing all reasonable inferences in favor of the plaintiff." Alexander

v. Hedback, 718 F.3d 762, 765 (8th Cir. 2013).

"Missouri law implies a covenant of good faith and fair dealing in every

contract." Farmers' Elec. Co-op., Inc. v. Mo. Dep't of Corrs., 977 S.W.2d 266, 271

(Mo. 1998). To establish a breach of the covenant of good faith and fair dealing, "the

plaintiff has the burden to establish that the defendant 'exercised a judgment

conferred by the express terms of the agreement in such a manner as to evade the

spirit of the transaction or so as to deny [the plaintiff] the expected benefit of the

contract.'" Lucero v. Curators of Univ. of Mo., 400 S.W.3d 1, 9-10 (Mo. Ct. App.

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2013) (quoting Mo. Consol. Health Care Plan v. Cmty. Health Plan, 81 S.W.3d 34,

46 (Mo. Ct. App. 2002)). To sufficiently plead such a breach, Kmak has the burden

of pleading that American Century "exercised its discretion in a manner contrary to

good faith and fair dealing." Mo. Consol. Health Care Plan, 81 S.W.3d at 48.

Under Missouri law, a plaintiff properly pleads a breach of the implied

covenant of good faith and fair dealing when he alleges the defendant's action

violated public policy or a statute. Bishop v. Shelter Mut. Ins. Co., 129 S.W.3d 500,

507 (Mo. Ct. App. 2004) (concluding the defendant did not breach the implied

covenant of good faith and fair dealing "since [the plaintiff's] termination did not

violate public policy or any statutory provision."). In Missouri, retaliating against an

individual for providing truthful testimony in a quasi-judicial proceeding violates

public policy. See Drury v. Mo. Youth Soccer Ass'n, 259 S.W.3d 558, 567 (Mo. Ct.

App. 2008) ("[I]t is well-settled that public policy requires that witnesses at trials

shall not be restrained by the fear of being vexed by reprisals from those who are

dissatisfied with their testimony.") (citing Laun v. Union Elec. Co. of Mo., 166

S.W.2d 1065, 1072 (Mo. 1942)); see also L'Orange v. Med. Protective Co., 394 F.2d

57, 62 (6th Cir. 1968) (holding an insurance company's cancellation of a policy as

punishment against a policyholder who testified in a judicial proceeding was

"manifestly . . . contrary to public policy").

Here, Kmak alleged American Century retaliated against himfor his testimony

in the arbitration with JPMorgan. Specifically, the Complaint alleged (1) Kmak

received stock options pursuant to his employment with AmericanCentury; (2) Kmak

testified at JPMorgan's request in its arbitration against American Century in March

2011; (3) in May 2011, Kmak received a letter from American Century reminding

him it had a right to call his shares at any time; (4) American Century's arbitration

award became final between December 6, 2011, and December 9, 2011; (5) American

Century exercised its call rights only with respect to Kmak's shares on December 9,

2011, one day before dividends were to be issued; (6) Kmak reasonably expected

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American Century would exercise its discretion in good faith; and (7) American

Century exercised its call rights "for the purpose of retaliating for his deposition and

Arbitration testimony."

Because Missouri's public policy required American Century not to retaliate

against Kmak for testifying in the arbitration proceeding, Kmak has alleged a breach

of the implied covenant of good faith and fair dealing sufficient to withstand a Rule

12(b)(6) motion. The district court concluded Kmak could not reasonably believe he

would not suffer retaliation for testifying truthfully in the arbitration because the

Stock Restriction Agreements "do not concern testimony in an arbitration arising

years later." However, Kmak did have a reasonable expectation American Century

would not exercise its discretionary authority in a manner which would violate public

policy. It was unnecessary for the Stock Restriction Agreements to reference public

policy for Kmak's expectation to be reasonable. Thus, it is fair to accept, at the Rule

12(b)(6) stage, that Kmak had a reasonable expectation American Century would not

act in violation of public policy with respect to his shares. American Century may

have had the right to call Kmak's shares "at any time," but it did not have the right to

call those shares for any reason, if doing so would violate public policy.

In reaching its ruling, the district court relied on Nemec v. Shrader, 991 A.2d

1120 (Del. 2010). In Nemec, the plaintiffs, former corporate officers, sued the

defendants corporation and board members claiming the board breached the

corporation's stock plan's implied covenant of good faith and fair dealing when the

board redeemed the plaintiffs' stock after their post-retirement put rights had expired,

but before selling the corporation's government business division. Id. at 1122-25. 

If the defendants had waited to redeem the stock until after selling the government

business division, the plaintiffs would have realized an additional $60 million in

profits. Id. at 1124-25. Instead, that benefit accrued to the defendants. Id. The

Delaware court rejected the plaintiffs' claim, reasoning the defendants "did nothing

unfair and breached no fiduciary duty by causing the Company to exercise its

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absolute contractual right to redeem the [plaintiffs'] shares at a time that was most

advantageous to the Company's working stockholders." Id. at 1127.

However, Nemec isinapposite to the present case. There, the defendants were

simply accused of exercising their discretion at a time which was economically

disadvantageous to the plaintiffs. No violation of public policy was alleged. Here,

by contrast, American Century did not merely act at an economically disadvantageous

time to Kmak. Instead, American Century is alleged to have exercised its right to

recall Kmak's shares in retaliation for his testimony in the arbitration proceeding. 

This alleged retaliation would violate public policy and renders Nemec inapplicable. 

To the extent the district court dismissed Kmak's Complaint for merely alleging

American Century acted arbitrarily, vindictively, or contrary to Kmak's reasonable

expectations about matters other than public policy, such dismissal was proper. Cf.

Bishop, 129 S.W.3d at 506-07 (stating the implied covenant does not apply to

allegations in the at-will employment context when an employer allegedly terminates

a contract in bad faith or because of ill will). But, to the extent Kmak has alleged

retaliation in violation of public policy, he has sufficiently alleged a breach of the

implied covenant at thisstage, and, thus, the district court erred in dismissing Kmak's

Complaint.

American Century is critical of Kmak's comparison of his case to employment

discrimination cases, but the analogy is a useful one. The stock options at issue were

not merely contractual provisions. Instead, they were compensation for Kmak's

employment with American Century. Missouri's employment-at-will doctrine

generally permits an employer to discharge an at-will employee, with or without

cause, without liability for wrongful discharge. Sivigliano v. Harrah's N. Kan. City

Corp., 188 S.W.3d 46, 48 (Mo. Ct. App. 2006). However, certain exceptions to the

doctrine have been recognized, including the public policy exception, which

establishes a cause of action for an at-will employee who has been terminated in

violation of public policy. Dunn v. Enterprise Rent-A-Car Co., 170 S.W.3d 1, 6 (Mo.

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Ct. App. 2005). As discussed above, one such public policy is for witnesses to be

free from fear of reprisal for their testimony in judicial proceedings. Drury, 259

S.W.3d at 567. Thus, accepting Kmak's allegations as true, it was improper for

American Century, acting in a manner in violation of public policy, to deny Kmak

compensation earned through his employment.

American Century also argues "Kmak utterly fails to allege plausible facts

demonstrating any causation." We disagree. Accepting Kmak's allegations as true

and construing all reasonable inferences in his favor, these facts sufficiently allege

a causal connection between Kmak's testimony in the arbitration proceeding and

American Century's decision to call his shares. First, there is the allegation of

American Century's veiled threat, reminding Kmak it could recall his shares at any

time, after he testified in the arbitration proceeding. More telling isthe allegation that

American Century elected to call only Kmak's sharesjust 1-3 days after its arbitration

award was confirmed and/or paid. The reasonable inference here is that American

Century waited to retaliate until after the arbitration was finalized, so as not to

jeopardize its position in that proceeding.

Further, any intimation that Kmak suffered no damages because American

Century could call Kmak's shares "at any time" also fails. Much like an at-will

employee terminated in a manner violating public policy would suffer damages, here,

Kmak has similarly alleged damages resulting from a violation of public policy,

namely, American Century's retaliation. As such, he has alleged damages sufficient

to survive a Rule 12(b)(6) challenge.

III

For the foregoing reasons, we reverse and remand for further proceedings

consistent with this opinion.

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