Opinion ID: 203451
Heading Depth: 2
Heading Rank: 3

Heading: Breach of Stock-Option Agreements

Text: Noonan next argues that the district court erred in granting summary judgment to Staples on his claim that the latter breached the two stock-option agreements by not allowing him to exercise his options. The district court noted the language in the agreements providing that Noonan was ineligible for the stock options if Staples determined that his termination was for cause, and dismissed the claim because Staples's classification of [Noonan's] actions as willful misconduct appears reasonable and applicable in the circumstances. As an initial matter, we must ascertain the correct rubric through which to evaluate Noonan's assertion that he did not, in fact, engage in willful misconduct or any other activity that would qualify as cause for his firing. Staples contends that we are prohibited from reaching the merits of this question, as the stock-option agreements entrust the decision on what constitutes cause to Staples, and Staples alone. It argues that several courts have held similar clauses to be a valid limitation on contractual remedies. See, e.g., McIntyre v. Phila. Suburban Corp., 90 F.Supp.2d 596, 600 (E.D.Pa.2000); Stemerman v. Ackerman, 184 A.2d 28, 33 (Del.Ch.1962). Noonan, by contrast, urges us to declare the relevant clauses in the agreements invalid because they violate public policy, because they allow Staples to be the judge in its own case. See, e.g., Ellis v. Emhart Mfg. Co., 150 Conn. 501, 191 A.2d 546, 549 (Conn.1963) (clause in stock-option agreement violated public policy by providing that board of directors' interpretation was final and conclusive) (citing, inter alia, Patton v. Babson's Statistical Org., Inc., 259 Mass. 424, 156 N.E. 534, 536 (1927)). Noonan invites us instead to engage in de novo review of whether there was cause to fire him. For the reasons explained below, the weight of authority pushes us onto a middle course between these two extremes. The question we must answer is whether Staples's contractual prerogative to determine what constitutes cause is unreviewable. If so, the matter ends there and we need not look at the evidence to determine whether cause did indeed exist for firing Noonan, because Staples undisputably determined that it did. Unlike the inquiry into an alleged libel's truth or falsity discussed abovewhich Massachusetts courts have addressedour survey of Massachusetts law reveals no pronouncement by that state's courts on this precise question. Since this case rests on diversity jurisdiction, we must attempt to divine how the Massachusetts courts, and in particular the Supreme Judicial Court, would answer the question if faced squarely with it. See Hardy v. Loon Mt. Recreation Corp., 276 F.3d 18, 20 (1st Cir.2002); accord Liberty Mutual Ins. Co. v. Metro. Life Ins. Co., 260 F.3d 54, 65 (1st Cir.2001) (Absent a decision by the state's highest court, we are free to make our own best guess as to Massachusetts law. . . .). In coming up with our best guess, we may look to analogous decisions from other jurisdictions. Hardy, 276 F.3d at 20 (citing Stratford Sch. Dist., S.A.U. #58 v. Employers Reins. Corp., 162 F.3d 718, 720 (1st Cir.1998)); see also Vigortone AG Prods., Inc. v. PM AG Prods., Inc., 316 F.3d 641, 644 (7th Cir.2002) (explaining that the best guess is that the state's highest court, should it ever be presented with the issues, will line up with the majority of the states). We may also find guidance in pronouncements on similar matters by Massachusetts courts. Staples points us to what is probably the most closely analogous published case of the handful that exist dealing with this question, Weir v. Anaconda Co., 773 F.2d 1073 (10th Cir.1985). In that case, Weir and his former employer, the Anaconda Company, had a stock-option plan which gave an Anaconda compensation committee the sole authority to determine whether Weir had been fired for cause, and was thereby precluded from exercising a stock option. Contrary to Staples's suggestion, however, the Tenth Circuit did not hold that the compensation committee's cause decision was unreviewable. Id. at 1078. Instead, according to that court's reading of the applicable Kansas law, the committee's decision should be treated in a manner similar to an agency decision, and thus reviewed for whether it was arbitrary, fraudulent, or made in bad faith. Id. at 1078-79. After evaluating the evidence relating to Weir's firing in the light most favorable to him, the court concluded that the committee's decision suffered from none of these defects, and affirmed summary judgment in favor of Anaconda. See id. at 1081-83. Importantly, the court expressly rejected Weir's request that it apply, as Noonan implores us to do here, a fully de novo standard of review to the committee's decision. Id. at 1078. Our survey of other jurisdictions has uncovered several cases adopting similar standards of review. See, e.g., Scribner v. Worldcom, Inc., 249 F.3d 902, 909 (9th Cir.2001) (applying Washington law, court reviews stock-option committee's interpretation of plan's terms to determine whether it was made in good faith); Craig v. Pillsbury Non-Qualified Pension Plan, 458 F.3d 748, 752 (8th Cir.2006) (similar); W.R. Berkley Corp. v. Hall, No. Civ.A. 03C-12-146WCC, 2005 WL 406348, at  (Del.Super.Ct. Feb.16, 2005) (unpublished) (when stock-option committee is vested with final authority to determine rights under plan, court will not second-guess its decision absent showing of fraud or bad faith); Schwartz v. Century Circuit, Inc., 163 A.2d 793, 796 (Del.Ch.1960) (similar). These standards, and that propounded by the Weir court, comport with the standard consistently used by Massachusetts courts for determining whether a government official acted properly in discharging another government employee. See, e.g., Flomenbaum v. Commonwealth, 451 Mass. 740, 889 N.E.2d 423, 429 (2008) (arbitrary or capricious); Levy v. Acting Governor, 436 Mass. 736, 767 N.E.2d 66, 79 (2002); McSweeney v. Town Manager of Lexington, 379 Mass. 794, 401 N.E.2d 113, 117 (1980); cf., e.g., Madera v. Marsh USA, Inc., 426 F.3d 56, 63-64 (1st Cir.2005) (where ERISA benefits plan gives plan administrator or fiduciary discretionary authority to determine employee's eligibility for benefits, the determination is subject to an arbitrary and capricious standard of review, and the decision must be upheld `if there is any reasonable basis for it') (quoting Brigham v. Sun Life of Can., 317 F.3d 72, 81 (1st Cir.2003)). In view of this authority, our best prediction is that the Massachusetts Supreme Judicial Court would hold that Staples's for cause decision is not unreviewable, nor reviewable de novo, [10] but instead that the courts may perform a limited review of the decision to determine if it was arbitrary, capricious, or made in bad faith. [11] Even if we might disagree with Staples's action regarding Noonan's firing, if Staples's decision was not arbitrary, capricious, or made in bad faith, then we must accord it deference, and consequently affirm the denial of Noonan's stock options under the plain terms of the agreements. Cf., e.g., Mesnick v. Gen. Elec. Co., 950 F.2d 816, 825 (1st Cir.1991) (courts are not super personnel departments, and should not ordinarily second-guess employers' business decisions). In performing this portion of the inquiry, we adopt the definition of cause common to both stock-option agreementswillful misconduct or willful failure to perform responsibilities in the best interests of Staplesa definition which Noonan seems to accept as applicable here. Cf. DiPietro v. Sipex Corp., 69 Mass.App.Ct. 29, 865 N.E.2d 1190, 1194 n. 3 (2007) (applying definition of for cause as set forth in the relevant agreement). Noonan argues that, while he undoubtedly committed a number of errors on the expense reports audited by Staples's investigation team, these were merely the result of inadvertence or carelessness, and not a willful attempt to defraud Staples. At the very least, Noonan contends, the determination of whether his conduct was willful involves looking into his state of mind, a question ordinarily reserved for the jury. See Maimaron v. Commonwealth, 449 Mass. 167, 865 N.E.2d 1098, 1109 (2007). Again, however, our task hereand the jury's, if this case were to survive summary judgmentis not to determine whether Noonan did indeed act willfully, but whether Staples's assessment that he acted willfully was arbitrary, capricious, or made in bad faith. Notwithstanding a viewing of the evidence in Noonan's favor, we hold that there is no material fact in dispute on this issue. Noonan does not dispute that the team of investigators was competent and experienced. The team looked at not just one or two of his expense reports, but at thirty-seven, spread across 2005. It uncovered dozens of instances in which Noonan claimed more than he was entitled to and determined unanimously that the discrepancies must have been intentional. Our review of the record reveals no material dispute of this fact. Even if, in fact, the dozens of discrepancies were all the result of some extreme sloppiness or inattentiveness on Noonan's part (as he rather unblushingly contends), we discern no triable issue of fact on whether the teamand the Staples officers who reviewed and acted upon the team's findingshad a good-faith basis for concluding that Noonan deliberately doctored these entries. For example, even taking Noonan's $1,100 Big Mac as an honest keypadding slip (as Noonan claims it was), the several entries showing the item claimed as exactly $100 more than it actually cost are extremely damaging to Noonan's case. The record reveals that the team found these to refute his claim that the discrepancies were merely instances in which he pre-populated the expense report (that is, he guessed at how much the item would cost) and simply forgot to go back and correct the entry later after he bought it and knew how much it actually cost. Also damaging to Noonan's case, and taken into account by the team, was his failure to notice (and his inability to explain this failure to the investigators) the large amounts of extra money being deposited into his account as a result of his over-reimbursements. [12] Therefore, regardless of whether Noonan also made errors that, in the end, resulted in an ultimate windfall for Staples, [13] the evidence viewed in Noonan's favor still shows highly suspicious expense-reporting practices sufficient to ground a finding that Noonan intentionally manipulated at least some expense reports so that he would receive money he did not deserve. As Noonan repeatedly argues or intimates, Staples may have been wiser to conduct yet another, even more searching investigation into his conduct; to give him a second chance before firing him; to impose some less-severe form of discipline; or to punish other violators in the North American Divisionof whom Noonan claims there were manywith the same harsh penalty. Nevertheless, even indulging Noonan all reasonable inferences, we cannot say that Staples's decision that Noonan engaged in willful misconduct or willfully failed to perform his duties in its best interestbased as it was on the findings of experienced auditorswas arbitrary, capricious, or made in bad faith. For these reasons, there is no triable issue of material fact with respect to Staples's decision that cause existed to fire Noonan, and under the plain terms of the stock-option agreements, Staples was thus entitled to determine Noonan ineligible for the stock options. Accordingly, the district court did not err in granting summary judgment to Staples on Noonan's claims concerning the stock-option agreements, and we move on to his last ground of appeal.