The opinion of the court was delivered by: SPATT
This is an action to recover damages for breach of a written employment agreement. The contract consists of two letters respectively dated June 2, 1994 (Plaintiff's Exh. 1) and September 26, 1994 (Plaintiff's Exh. 2). On June 2, 1994, the plaintiff Charles J. Boyle, Jr. (the "plaintiff" or "Boyle") and the defendant Lumex, Inc. (the "defendant" or "Lumex") by its President and Chief Executive Officer, James E. George entered into a letter employment agreement (Plaintiff's Exh. 1). The agreement provided for employment by the plaintiff as an executive of Lumex/Cybex for a period of two years from June 2, 1994 at a base salary of $ 185,000 per year. The plaintiff's salary was increased to $ 193,500 per year by a resolution of the Board of Directors effective March 8, 1995. The plaintiff actually commenced his employment on July 5, 1994.
This initial agreement was supplemented by another letter agreement dated September 26, 1994 (Plaintiff's Exh. 2) from President George to Boyle which provided, among other things, as follows:
I am extremely pleased that you have decided to join Lumex, Inc. and have every expectation that our relationship will be a tremendous success. However, we need to recognize that work relationships sometimes do not succeed because there is no the right fit between individuals or due to other unforeseen circumstances. Therefore, we believe it is beneficial for both of us to clarify our rights and expectations in the event our relationship does not succeed, as follows:
You shall have the right to terminate your employment relationship with Lumex, Inc. at any time with two weeks notice.
Lumex, Inc. shall have the right to terminate your employment for cause at any time. In the event you are terminated for cause, your employment relationship with Lumex will end immediately and you will not be entitled to any further payments other than salary and benefits earned as of the date of termination. Cause can be defined as unethical behavior, theft, embezzlement or immoral behavior.
If terminated without cause within the first two years of employment, you will receive a salary for the remaining portion of the two years following your termination date. Within the term of the two year employment period, you agree to a non-compete commitment. (emphasis supplied)
During the time of his employment, the plaintiff acted in an executive capacity, namely as President of Cybex International, Inc. ("Cybex") and as Vice President of Lumex. On May 30, 1995, after approximately 11 months on the job, the plaintiff was terminated. The sole liability issue in this breach of contract action is whether the plaintiff was terminated "for cause."
The second amended complaint consists of three claims or causes of action. The first claim is to recover damages for breach of the employment contract, seeking the loss of salary for the unexpired term in the sum of $ 209,625. The second claim, similarly for breach of the written employment agreement, seeks damages for loss of stock option rights in the sum of $ 11,250. The third claim alleging a malicious, arbitrary and capricious discharge, was dismissed by the Court at the end of the plaintiff's case for the reasons stated in the record.
In the defendant's answer to the second amended complaint, in addition to certain denials, the defendant pleaded "As and For a First (and only) Defense," as follows:
14. That on or about May 25, 1995, Defendant terminated Plaintiff for cause within the meaning of their agreement and therefore has no further obligation to Plaintiff under the terms of their agreement.
II. WAS THERE A TERMINATION FOR CAUSE?
As stated above, the sole issue in this breach of contract case is whether the termination of the plaintiff on May 30, 1995, was "for cause," within the terms of this contract. Point one in the plaintiff's "Post-Trial Memorandum of Law" states that the "Defendant's witnesses are incredible." The Court disagrees. On the contrary, the Court finds that all of the witnesses, including the plaintiff and the defendant's witnesses, were generally credible witnesses.
A. The Reasons Advance by the Defendant.
The defendant raised a number of reasons for the plaintiff's termination "for cause." However, the Court finds that only three of the reasons could validly be considered on the issue of a discharge "for cause." The first reason involves a product called the AB Trainer, which was an exercise device patented by a company named Precise Exercise Equipment, Inc. ("Precise"). Cybex acquired the rights to manufacture and market the AB Trainer. In the Lumex 1994 Annual Report (Plaintiff's Exh. 11), it is stated:
CYBEX also formed a business relationship with Precise Exercise Equipment Inc., the developers of the AB Trainer, an exciting new product which safely and comfortably exercises abdominal muscles while providing cervical and lumbar support. CYBEX will manufacture and market this product family in consumer, club and clinical markets worldwide.
Boyle was very enthusiastic about the AB Trainer. At a Board of Directors ("Board") meeting on May 1, 1995, Boyle recommended that Cybex promote the AB Trainer in the consumer retail market by way of a television infomercial. When the Board raised concerns about the risky expense involved in such an advertising program, Boyle told the Directors, in words or substance, that if Cybex did not agree to undertake this infomercial promotional program, he, personally, would do so. The defendant contends that this was an act of disloyalty and constituted unethical behavior.
The second reason advanced by the defendant in support of the "for cause" termination, was that instead of relocating from Pennsylvania to Long Island, where the company has its headquarters, the plaintiff purchased two homes in Austin, Texas, and made that distant locale his permanent residence.
The third reason proffered by the defendant and considered by the Court, was that the plaintiff allowed Lumex to expend the sum of approximately $ 18,000 for relocation expenses with regard to storing his personal property in Pennsylvania, when he intended to and did move to Austin, Texas, rather than to Long Island.
The Court will now review the testimony with regard to the defendant's affirmative defense of a termination "for cause" and will make findings of fact and conclusions of law as required by Fed.R.Civ.P. 52(a). See Colonial Exchange Ltd. Partnership v. Continental Co., 923 F.2d 257 (2d Cir. 1991).
As stated above, the plaintiff was a vigorous proponent of the AB Trainer. Boyle testified that at the May 1, 1995 Board meeting he recommended "that we initiate plans to take that product into the consumer retail markets, and that would entail an infomercial, a television infomercial to accomplish that." Concern was raised by the Board about the cost of such a program and that the company had never previously gone in that direction. The Board then instructed Boyle to bring a business plan to the Executive Committee of the Board. Then Boyle made a statement that forms the crux of the first reason for his "for cause" termination. These were his words:
Q What happened after that May 1 meeting -- withdraw that.
What did you say with respect to the instructions to prepare a plan, a business plan, for presentation to the board for the June meeting?
A I strongly encouraged the board members to pursue that. I felt it was a very powerful product, a product that had a very high potential in the consumer retail markets, and I indicated that the company because of discussions at the board meeting reflected concern and some criticism about the product and the expenses for it.
I indicated that as I was trying to sell the company on the idea of doing it, that if the company or the board chose not to do it, then I would have strong interests in participating or arranging in some joint venture or off balance sheet method to accomplish that. (Tr. at 49).*
The Court attempted to clarify what Boyle meant when he said he wanted to arrange a "joint venture or off balance sheet method."
THE COURT: I don't understand, Mr. Boyle
You say if the board said no to the project, you would do an off balance sheet? What does that mean?
THE WITNESS: It means, your Honor, if the concern from the board of directors was relative to the expenses that were required to do an infomercial and launch that product into retail markets, a way to mitigate those expenses would be to either take a joint venture partner into our relationship, or arrange for some third-party or parties could do that, where the company could still retain the market rights with the product and enjoy royalties or some other form of income from it.
Realizing that this somewhat unusual statement may be construed as a threat to the Board of Directors, plaintiff's counsel asked Boyle the following questions:
Q Did you in fact do anything in either -- what was the phrase you used?
Q In off balance sheet, in connection with the fabrication, manufacture or sale of that particular device?
Q Did you have any intent to do so when you made the strong suggestion to the board?
Q What would you characterize the representation to the board as with respect to your statement to the board?
A I was trying to persuade the board that they should not, because we had not done it before, to be reluctant to consider it. It was a product that we had shown at that stage, and three major fitness show exhibits had very positive comments about. We received favorable press reviews on the product, and we had the enthusiasm of most of the people in the fitness sales force that it would be a successful product. I was trying very hard to persuade the board to consider that. (Tr. at 50).
On cross-examination, Boyle was again asked about what he said to the Board on May 1, 1995 about the AB Trainer project:
Q In fact, you were so committed to this and so concerned about the negative response that you received from the Board on May 1st, that you did say to the Board that if you, Lumex, Inc., are not going to take on this project, then I want to do this myself?
Q You said that you wanted to do it on your own?
A Yes, but in that context.
Q What exactly did you say to the Board on May 1st?
A I said that I felt so strongly that the Board did not want to do the ab trainer, did not want to do it for the home market, that I would want to do it myself. (Tr. at 193-194) (emphasis supplied.
Charles E. Murcott founded Lumex, Inc. in 1947, was President and Chairman at various times, and was on the Board until June 1995. He recalls the events of the May 1, 1995 Board Meeting with regard to the AB Trainer incident, as follows:
My view of this was that in the first place our company has no expertise in this kind of marketing; we sell no other products in this kind of a market; the product was so simple that it would obviously be easy to replicate by any number of people. So, it was a terribly risky thing to do in my view and I think in the view of the rest of the Board.
Therefore, we at this meeting told Chuck that we were very concerned about this and he better give us more information than he had about how we could be assured of success in this venture, and at this meeting Chuck responded to the Board that if we didn't want to do it, he would do it himself.
How can a guy who was going to be the chief executive officer of a company tell you that he's going to take a product which the Board of Directors doesn't like and run with it himself? What about his job? (Tr. at 124-125) (emphasis supplied).
Lumex Director Thomas W. Kahle also testified to what occurred at the May 1, 1995 Board meeting:
THE WITNESS: He indicated that he thought that -- he indicated that he thought that it was very important that we go forward and that if the company wouldn't back this project, he would back it himself. He would put his own money into it. He indicated that he would do it himself. (Tr. at 308).
On cross-examination of Boyle, it was adduced that the costs for producing and televising an infomercial were indeed substantial. The cost of producing the infomercial was between $ 300,000 and $ 600,000; the cost for a media test was from $ 75,000 to $ 100,000; and the media campaign itself was projected to cost between $ 500,000 and 4 million dollars per month. For a six-month period the infomercial for the AB Trainer would cost Cybex "anywhere from 4 million to roughly 25 million." (Tr. at 172) (See Defendant's Exh. A). At the same time, the prospective revenues of Cybex from the consumer market were projected as approximately 1.5 million dollars. The following testimony covers this subject:
Q So at the time you were making this -- presenting this plan to the Board to spend anywhere from 3 or $ 4,000,000 to 24 or $ 25,000,000 in expense to go into the direct response consumer market, if I understand this chart for the first quarter of '95, total revenues from the consumer market, all consumer market, was 1.5 million dollars, give or take. A little less than 1 and-a-half million dollars.