Court Opinion

ID: 4110246
Source: CourtListenerOpinion
Date Created: 2016-12-22 17:01:02.245637+00
Date Added: 2024-06-11T07:46:08.848017
License: Public Domain

In the

     United States Court of Appeals
                 For the Seventh Circuit
No. 16-1063

RILEY J. WILSON, on behalf of himself
and all others similarly situated,
                                                 Plaintiff-Appellant,

                                 v.

CAREER EDUCATION CORPORATION,
                                                Defendant-Appellee.

         Appeal from the United States District Court for the
             Northern District of Illinois, Eastern Division.
     No. 1:11-cv-05453 — Geraldine Soat Brown, Magistrate Judge.

 ARGUED SEPTEMBER 23, 2016 — DECIDED DECEMBER 22, 2016

   Before RIPPLE, ROVNER, and SYKES, Circuit Judges.

   ROVNER, Circuit Judge. Riley Wilson sued Career Education
Corporation (CEC) alleging that CEC owed him the payment of
bonuses for students that he had recruited, as an admissions
representative, to CEC’s culinary arts college. This is the second
appeal by Wilson in this case. Wilson initially argued that he
was entitled to the bonuses under numerous legal theories,
2                                                      No. 16-1063

including that: (1) CEC breached its employment contract with
him by failing to pay the bonuses; (2) CEC was unjustly
enriched; and (3) CEC violated an implied covenant of good
faith and fair dealing that is implicit in the contract. In his first
appeal to this court, we upheld the dismissal of the claim on the
first two grounds, but a majority held that the complaint
survived dismissal on the claim that CEC violated the implied
covenant of good faith and fair dealing. Wilson v. Career Educ.
Corp., 729 F.3d 665 (7th Cir. 2013) (Wilson I). We remanded for
further proceedings on that claim.
    The facts underlying the case are set forth in detail in our
earlier opinion, and will only be briefly summarized here.
Wilson worked for CEC as an admissions representative
recruiting students to enroll in CEC’s culinary arts college.
Under the incentive compensation provision in his contract
(called the Plan) with CEC, Wilson was entitled to a bonus for
each student that he recruited above a definite threshold who
either completed a full course or a year of study. If a representa-
tive was terminated, he was entitled only to bonuses already
earned, which would not include students “in the pipeline”
who had enrolled but had not yet completed a full course or a
year of study as of the date of the representative’s termination.
Moreover, the Plan explicitly reserved to CEC the right to
“terminate or amend the terms of this Plan at any time, for
regulatory compliance purposes or any other reason that CEC
determines, in its sole discretion.” Accordingly, Wilson would
have been entitled to a bonus only as to recruited students
above his minimum threshold who completed the full course or
a year of study, during a time at which he remained employed,
No. 16-1063                                                     3

and at a time in which CEC had not exercised its discretion to
terminate the Plan before those conditions were met.
    In October 2010, the Education Department released
regulations that would become effective in July 2011, that
would prohibit institutions such as CEC which were participat-
ing in Title IV student financial aid programs from providing
bonuses based directly or indirectly on securing enrollment.
Accordingly, as of July 2011, CEC would be prohibited from
paying bonuses under the Plan. CEC did not wait until July
2011 to cease the payment of bonuses, however. Instead, after
internal discussions, CEC decided to pay only bonuses that
were earned as of February 28, 2011, thereby depriving Wilson
of bonuses that were in the pipeline at that time. In place of the
incentive compensation structure, CEC implemented a revised
compensation program. That program provided to every
currently employed admissions representative a raise in base
salary of at least the total of 3% plus 75% of his or her previous
two years’ bonuses. Some representatives received higher
compensation under the revised plan, while others fared worse.
Wilson sued on behalf of himself and others similarly situated;
the only claim still remaining is his claim that the decision to
terminate the bonus payments in February 2011 constituted a
breach of the implied covenant of good faith and fair dealing.
    A majority held in Wilson I that CEC had the unambiguous
right to terminate the contract and to refuse to pay the bonuses
for students in the pipeline. Id. at 671. Although CEC retained
the right to terminate the contract, we further held that under
the implied covenant of good faith and fair dealing, CEC’s
discretion to terminate the Plan and refuse to pay the unearned
bonuses was limited by the reasonable expectations of the
4                                                      No. 16-1063

parties. Id. at 673. Accordingly, we held that Wilson could
succeed in his claim if he could prove that CEC exercised its
discretion in a manner contrary to the reasonable expectations
of the parties. Id. at 675 (citing Jordan v. Duff & Phelps, Inc.,
815 F.2d 429, 438 (7th Cir. 1987)).
    Wilson argued to the district court on remand that cost
savings, not the desire to comply with the regulations, was the
primary driver in CEC’s decision to terminate the Plan in
February 2011. But the district court rejected that argument,
holding that the facts did not support it. Among the facts
refuting Wilson’s contention, the court identified as most
significant that Wilson admitted there were no cost savings to
CEC, and that the alteration in the compensation structure left
macro-costs stagnant. The court held that there was no evidence
that CEC retained for itself $5 million in bonus payments that
were due admissions representatives, as Wilson alleged.
Because no reasonable jury could conclude that CEC chose
February 28 as the date to end the Plan bonuses in order to
retain the bonuses for itself, the court granted CEC’s motion for
summary judgment. Wilson now appeals that determination to
this court.
    As we recognized in Wilson I, an avowedly opportunistic
decision to terminate bonuses would not comport with the
reasonable expectations of the parties. Id. at 675, citing Jordan v.
Duff & Phelps, Inc., 815 F.2d 429, 438 (7th Cir. 1987). Thus, if CEC
used the excuse of the impending regulations to prematurely
terminate the bonuses in a “money grab” unrelated to any
legitimate business expectations, that arbitrary termination of
bonuses would violate the objectively reasonable expectations
of the parties. The parties could reasonably expect that alter-
No. 16-1063                                                    5

ations in the Plan terms would be made in good faith, although
the good faith requirement is a limited inquiry:
       The element of good faith dealing implied in a
       contract ‘is not an enforceable legal duty to be
       nice or to behave decently in a general way.‘
       [citation omitted] It is not a version of the Golden
       Rule, to regard the interests of one's contracting
       partner the same way you regard your own. An
       employer may be thoughtless, nasty, and mis-
       taken. Avowedly opportunistic conduct has been
       treated differently, however.
 Jordan, 815 F.2d at 438. If CEC used the impending regulation
as an excuse to avoid payments arbitrarily, that would be the
type of avowedly opportunistic conduct that would evince a
lack of good faith and fair dealing. Thus, “it was reasonable for
Wilson to expect that avoiding the three conditions needed for
Wilson to earn a bonus on a recruited student would not be the
but-for reason for CEC exercising its discretion.” Wilson I,
729 F.3d at 675. Wilson argues that CEC’s decision to terminate
the Plan was made in violation of the covenant of good faith
and fair dealing in that it was inconsistent with Wilson’s
reasonable expectation that CEC would not terminate the Plan
early and that CEC acted with improper motivation.
    As regards the first argument, Wilson acknowledges that the
inquiry is an objective one, with the proper focus on whether
the decision was inconsistent with the objectively reasonable
expectations. In arguing that this standard was met, Wilson
relies on evidence that: CEC had historically paid for all Plan
compensation; CEC had never made substantive Plan changes
6                                                    No. 16-1063

during the period of performance; CEC promoted the Plan in
late 2010 as if it was going to continue paying through 2011; and
Wilson was surprised that the Plan was ending early. The last
factor rested on Wilson’s testimony that he did not think the
Plan would be terminated early and that “it was a big surprise”
to him. But the determination as to whether an expectation is
reasonable is an objective not a subjective determination. If
Wilson’s belief that the Plan would not be terminated or altered
was not objectively reasonable, it would not matter that he
actually held that belief.
    The other arguments essentially amount to a contention that
the Plan had never made changes in the past and had given no
indication it was about to do so, and therefore any alteration in
the Plan defied Wilson’s objectively reasonable expectations.
The failure of CEC to alter the Plan terms earlier did not create
a reasonable expectation that it would never do so given the
language in the contract preserving that right. As we recognized
in Wilson I, the contract by its plain language makes clear that
bonuses are only actually earned once the student has com-
pleted the academic program or one year of study. In short, a
reasonable expectation that the Plan will be continued cannot
arise solely from CEC’s failure to exercise that option earlier or
its failure to provide six months’ notice of the termination.
Nothing in the contract or the dealings between the parties
would render such an expectation reasonable.
   Moreover, in Wilson I, the majority held that under the plain
language of the contract, Wilson could not have reasonably
expected that CEC would only terminate the bonuses for good
cause because the express terms of the Plan preclude such an
expectation. Id. at 675. We recognized in Wilson I that CEC may
No. 16-1063                                                      7

have had a number of reasons, including but not limited to
regulatory compliance, for terminating the Plan early and
refusing to pay bonuses that otherwise would have been earned
before the new regulations became effective. It was not objec-
tively reasonable for Wilson to expect that CEC would never
exercise that option, or would do so only by following a certain
notice procedure not required by the Plan, simply because it
had failed to exercise the option in the past. Wilson has pointed
to no evidence that CEC explicitly disavowed any intention to
exercise its rights under the Plan in the future, and in fact the
evidence in the record established that Wilson expected that the
bonuses would be terminated but he hoped it would happen at
a later date. Wilson’s argument that CEC promoted the Plan as
if it was going to continue paying cannot create an expectation
that the provision will never be changed. Because the bonuses
are earned only after a long period of time, the reality is that at
any point in which the bonuses were eliminated, some of the
payments would likely be in the pipeline at that time.
     Significantly, Wilson does not argue that CEC promoted the
recruitment bonus at a time at which it knew it would not pay
the bonuses. It is undisputed that throughout the summer and
fall of 2010, when the recruitment that would trigger the unpaid
bonuses was occurring, there was no consensus among the CEC
leadership as to when the Plan should be terminated. The
timing of the termination was a topic of debate within CEC,
with termination dates ranging from December 2010 to June
2011 proposed. Given the impending regulations, CEC’s
employees certainly knew that the bonuses would end, and in
fact an interoffice memorandum to its admissions representa-
tives in June 2010—before the start of the third quarter—stated
8                                                     No. 16-1063

that CEC was reviewing the incentives compensation rules
proposed by the Department of Education. In addition, on
November 2, 2010, the CEO informed all employees of CEC that
the Plan would need to change in order to comply with the
Department of Education rules issued on October 29, 2010.
Nothing in CEC’s past conduct or its statements to the employ-
ees gave them a reasonable expectation that the bonuses would
be paid right up to the regulatory deadline. The decision to
terminate bonuses as of February 2011 was not made until early
December 2010, and was immediately communicated to the
admissions representatives. Although Wilson may have
reasonably expected that CEC would not promise a bonus
which it intended to withdraw before payment, there is no
allegation of such behavior here. See Trovare Capital Group, LLC
v. Simkins Industries, Inc., 794 F.3d 772, 779 (7th Cir. 2015) (can
show violation of implied covenant of good faith and fair
dealing by demonstrating the party had no intention of com-
pleting the deal but continued the sham negotiations). Given
the contract language, Wilson could not reasonably expect that
bonuses would not be terminated prior to the July 2011 effective
date of the regulation.
   Wilson additionally argues that he demonstrated that the
termination of the bonus was made in bad faith. He asserts that
the district court failed to credit his evidence on summary
judgment, and that he provided evidence that the actual reason
for CEC’s action was because of its deteriorating financial
condition rather than the regulation.
   As we stated, if CEC chose to use the impending regulation
and the need to end the bonuses in July as an excuse to termi-
nate it early merely to deprive its employees of their bonuses,
No. 16-1063                                                    9

without any business necessity or other reason than an intent to
exploit the opportunity, such an action could be beyond the
reasonable expectation of the parties that the employer would
act in good faith and change the Plan only for a legitimate
reason. Wilson argues that CEC acted in bad faith because it
altered the salary structure in response to its deteriorating
economic condition, and not because of the impending regula-
tion. We noted in Wilson I, however, that the mere presence of
a reason other than the regulation does not itself render the
actions in bad faith. Wilson I, 729 F.3d at 676 (noting that CEC
might have had a number of reasons to terminate the Plan early,
but the stated reason raised questions given the timing of the
termination). The relevant question is whether that reason
demonstrates bad faith, or is the type of reason that would be
beyond the reasonable expectations of the parties.
    Wilson argues that he should survive summary judgment
because he provided sufficient evidence that CEC terminated
the bonuses because it was facing an economic crisis and
eliminated the bonuses to save money. The district court
characterized the undisputed evidence as indicating that no
money was saved by the changes to the bonuses because the
salary structure was changed so that employees received higher
base salaries plus salary increases that correlated with 75% of
their bonus average for the past two years. The record appears
to bear out that conclusion. Even if we accept Wilson’s charac-
terization of the record, however, that CEC acted to cut ex-
penses in response to an economic crisis, that is precisely the
type of reason that employees would reasonably expect would
result in an alteration of salary. The covenant of good faith and
fair dealing requires only that discretion be exercised reason-
10                                                    No. 16-1063

ably with proper motive rather than arbitrarily or capriciously
or in a manner inconsistent with reasonable expectations.
McCleary v. Wells Fargo Sec., LLC, 29 N.E.3d 1087, 1093 (Ill. App.
Ct. 2015); Resolution Trust Corp., v. Holtzman, 618 N.E.2d 418, 424
(Ill. App. Ct. 1993). A need to address a significant financial
crisis is unquestionably a proper—as opposed to arbitrary or
capricious—motive for a business.
    The contract reserved the right to terminate the Plan and
retain unearned bonuses at any time, and it would be objec-
tively unreasonable for Wilson to believe that such discretion
would not be exercised where a changing business climate
significantly worsened the financial condition of the company.
A business that retains the right to alter salaries of a compensa-
tion structure cannot be said to have acted in bad faith when it
does so in times of a substantial financial downturn.
    Wilson himself argues that CEC in fact faced such a financial
downturn and that the termination of the bonuses was enacted
to cut costs in response to that. In his brief, Wilson asserts that
CEC was faced with decreasing student admissions and a
concomitant decline in revenues. He states that the second
quarter of 2010 reflected a weaker financial performance, the
third quarter was worse, and the downward trend continued
into the fourth quarter of 2010. He further states that in the
meantime, costs were increasing. He argues that CEC saw
where the business was heading, particularly with the growing
hostility to for-profit schools, knew that it would face increasing
financial pressure, and viewed the termination of the Plan as a
way to manage those issues. Wilson asserts that whether CEC’s
decision to terminate the Plan was entirely cost-savings driven,
or because it wanted to be perceived as a good corporate
No. 16-1063                                                     11

citizen, or because it wanted to synchronize its payment and
performance reviews with the other employees, it made that
decision in bad faith because it was done at the expense of its
employees and redirected those funds to its own corporate
interests. But an employer does not act in bad faith when acting
in furtherance of legitimate corporate interests that would
reasonably have been in the contemplation of the parties. See
McCleary, 29 N.E.3d at 1093, quoting RBS Citizens, Nat’l Assoc.
v. RTG-Oak Lawn, LLC, 943 N.E.2d 198, 207 (Ill. App. Ct. 2011))
(the purpose of the duty of good faith and fair dealing “‘is to
ensure that parties do not take advantage of each other in a way
that could not have been contemplated at the time the contract
was drafted or do anything that will destroy the other party’s
right to receive the benefit of the contract.’”). Wilson already
lost his breach of contract claim and therefore cannot merely
allege that the bonuses were owed to him and that CEC could
not properly retain it. A termination of bonuses to address a
financial downturn, or to mitigate the damage to reputation or
salary structure caused by the impending regulation, is not an
action that can be characterized as being in bad faith or beyond
the objectively reasonable expectations. Those are all legitimate
business reasons for altering a salary and compensation
structure, and a decision based on such reasons could not
violate the objectively reasonable expectations of the parties.
    We note that the relevant issue here is not whether CEC was
forthcoming in stating that the termination of the bonuses in
February 2011 was due to the regulations rather than acknowl-
edging that the timing related to its financial peril. Instead, the
proper issue is whether CEC eliminated the bonus for an
improper motive. We held in Wilson I that the claim could
12                                                   No. 16-1063

proceed beyond the dismissal stage because the timing of the
termination cast doubt on CEC’s claim that the motive was
compliance with the regulation. Wilson I, 729 F.3d at 676.
Although that timing left open the possibility of an improper
motive, Wilson on summary judgment argues that the record
reveals the actual motive, which was to address its precipitous
financial decline. But having a different motive than the one
expressed to its employees does not violate the contract’s
implied duty of good faith and fair dealing. The relevant
question is whether that actual motive was improper and
whether the termination failed to comport with the parties’
reasonable expectations. Wilson does not argue that CEC in fact
did not face financial difficulties, or that an alteration in the
salary structure was unnecessary to address that problem; to
the contrary, Wilson argues that CEC actually faced a serious
financial decline. Wilson has failed to argue that the evidence
allows a jury to infer an improper motive, as opposed to a proper
motive different from the one expressed to its employees.
Accordingly, even accepting Wilson’s characterization of the
record, the evidence is insufficient to allow a jury to reasonably
conclude that CEC breached the implied covenant of good faith
and fair dealing.
  The decision of the district court granting summary judg-
ment to the defendant is AFFIRMED.