Court Opinion

ID: 2996019
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:24:22.243407+00
Date Added: 2024-06-11T09:18:50.960232
License: Public Domain

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 pro-
tected against erosion. The contract (the “Morton Agree-
ment”) provided benefits in the event of death, disability, or
2                                                No. 02-1175

discharge without cause; employees could trigger the dis-
charge benefits by quitting. Rohm & Haas decided to nego-
tiate 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 non-
competition 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 Agree-
ment 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 in-
vestment income, after confirming that Gerow had re-
frained from competition for the agreed time.)
  Gerow received more than $4.5 million in severance (in-
cluding payments in lieu of fringe benefits and retirement
contributions that the firm would have made had he re-
mained 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 execu-
tives, 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 sever-
ance benefits he actually received on his discharge. He
insists that this is the consequence of the provisions cre-
ating 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 in-
security, and thus make them more willing to invest human
capital in their firms; by making a change of control prof-
itable to the executive. Moreover, the agreement aligns
managers’ interests with those of investors, who usually
gain substantially from takeovers and do not want manag-
ers 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 sal-
ary, 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 hap-
pens if Gerow dies before the employment period ends,
names some death benefits and adds that the “Agreement
shall terminate without further obligations”. Similar lan-
guage 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 ra-
tionale), 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 fur-
ther 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, furni-
ture, and staff. This is an implausible understanding. Every
contract is of similar form, and it is a common understand-
ing (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 com-
petition 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 ben-
efits that assume lack of employment? (One of the sever-
ance 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 writ-
ten 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 ap-
pears in ¶7:
    The Company agrees to pay . . . all legal fees and
    expenses which the Executive may reasonably in-
    cur as a result of any contest or controversy (re-
    gardless of the outcome thereof and whether or not
    litigation is involved) by the Company, the Execu-
    tive 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 reim-
burse 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, re-
marking 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 dis-
pute, 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 unreason-
able. 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 non-
frivolous). 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