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LUCENTE v. INTERN. BUSINESS MACHINES CORP.

October 5, 2000

EDWARD E. LUCENTE, PLAINTIFF,
V.
INTERNATIONAL BUSINESS MACHINES CORPORATION, DEFENDANT.



The opinion of the court was delivered by: McMAHON, District Judge.

MEMORANDUM DECISION AND ORDER GRANTING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT, DENYING DEFENDANT'S CROSS-MOTIONS FOR PARTIAL SUMMARY JUDGMENT ON ISSUES OF LIABILITY AND GRANTING IN PART AND DENYING IN PART DEFENDANT'S CROSS-MOTION FOR PARTIAL SUMMARY JUDGMENT ON THE MEASURE OF DAMAGES

Summary

Plaintiff Edward Lucente sued International Business Machines Corporation ("IBM") for payment of stock options and restricted stock granted to him over the course of his thirty years of employment with IBM, which IBM had withheld after Lucente took up employment with a competitor. Lucente moved for summary judgment on the grounds that IBM's noncompetition provisions are not enforceable against him. IBM filed several cross-motions on issues of liability and damages. For the reasons stated below, Plaintiff's motion for summary judgment on the issue of liability is granted and the Defendant's cross-motions addressing liability are denied. Defendant's motion for partial summary judgment on the question of damages is granted in part and denied in part. A trial will be held to determine damages.

I FACTUAL BACKGROUND

The following facts are undisputed:

Edward Lucente worked for IBM from 1961 until 1991. During the course of his 30-year employment at IBM, Lucente participated in several incentive award programs, including a program through which he was awarded certain restricted stock and another which awarded him stock options. The purpose of such awards is twofold: to promote loyalty to the company, and to tie executive compensation to stock performance and thus to the profitability and growth of the company. As is typical of such executive incentive programs, Lucente's stock and stock option awards were subject to certain forfeiture-for-competition provisions,*fn1 which authorized IBM to cancel any deferred, unpaid or unexpired awards if Lucente ever went to work for any company that IBM deemed a competitor. The clauses contain no limitations for time, place and scope. These noncompete clauses state, in essence, that an executive is entitled to receive the awards for as long as he remains in the employ of IBM or, in the event he leaves IBM, he does not do so to work for a company that competes with IBM.

By 1991, Lucente had been promoted to the position of President of the Asia-Pacific Operation, and was one of a handful of senior executives reporting directly to the CEO, John Akers. In late 1990, Akers, unhappy with the results in the Asia-Pacific Division, told Lucente that it would be in the best interests of both Lucente and IBM if Lucente sought employment elsewhere. (Akers Dep. at 95). Lucente, believing that he was being asked to leave IBM, pursued an opportunity at Northern Telecom. With the express understanding from Akers and IBM that his move to Northern Telecom would be deemed not to be competitive with IBM (and thus would not trigger forfeiture of his long-term compensation package), Lucente retired from IBM in February 1991. As part of his retirement package, IBM paid Lucente a lump-sum severance equivalent to approximately one year's salary, or $675,000. Lucente worked for Northern Telecom in the position of Senior Vice President, Marketing until November 1992, when he announced his resignation, to take effect March 1993.

On April 14, 1993, Lucente joined Digital Equipment Corporation ("Digital"), where he worked for approximately one year. On April 15, 1993, IBM notified Lucente that IBM was canceling his outstanding stock options and restricted stock awards, because IBM deemed Lucente's employment at Digital to be "competitive employment." (Letter to Lucente from Donald Edman, Apr. 15, 1993, attached to Plaintiff's Aff. as Exh. 1.) IBM did not demand reimbursement of the $675,000 severance payment at that time.

Over the years, Lucente has sought, without success, to have IBM reverse the forfeiture decision. He filed this suit on February 24, 1999.

Procedural History

Lucente sued for breach of contract to recover restricted stock and stock options, damages and related relief. IBM filed two counterclaims: (1) to recover the $675,000 severance payment IBM made to Lucente in 1991, and (2) to recover payments IBM made on behalf of Lucente to a tax reconciliation account maintained while he was an IBM employee. Lucente has conceded that IBM should prevail on the later counterclaim. He emphatically contests the former.

IBM moved under Fed.R.Civ.P. 12(c) for judgment on the pleadings. This Court denied IBM's motion, except with respect to the uncontested tax reconciliation claim, which Plaintiff has satisfied. See Lucente v. IBM, 75 F. Supp.2d 169 (S.D.N.Y. 1999) Familiarity with this opinion is presumed. In pertinent part, I observed that forfeiture for competition clauses were sometimes enforceable under New York law without regard to their reasonableness, but only when the employee had the choice of remaining in the employ of the employer who seeks to restrict his moving to a competitor. Id. at 172-173 (discussing Post v. Merrill Lynch, et al., 48 N.Y.2d 84, 421 N.Y.S.2d 847, 397 N.E.2d 358 (1979)). And I concluded that judgment on the pleadings would be inappropriate because nothing in the pleadings suggested that IBM either did or would have offered Lucente such a choice in the unusual circumstances of the case. Id. at 174.

Following discovery, Plaintiff now moves for summary judgment on all his claims and for summary judgment dismissing IBM's counterclaim for return of the severance payment. Instead of confining its arguments to the opposition papers to Plaintiff's motions that it filed, IBM has taken the tack of filing four additional separate motions for partial summary judgment to resolve the various legal issues in the case. This was a blatant attempt by IBM to circumvent this Court's rules on page-limits for motion papers and briefs. IBM's papers were duplicative. They were also far less persuasive than Plaintiff's concise opposing papers, which came well within the page limitations.

First, IBM seeks a declaration that the restricted stock awards are subject to forfeiture-for-competition under the terms of IBM's variable compensation plan. Second, IBM moves for a declaration by the Court that, so long as Lucente had a choice to remain at IBM when he retired in 1991, the employee choice doctrine applies to IBM's cancellation of his stock options and restricted stock in 1993, and precludes any inquiry into the "reasonableness" of the relevant forfeiture-for-competition provisions. Third, IBM moves for partial summary judgment on the proper measure of damages or, in the alternative, in limine to exclude the expert report and testimony of John Vaught, which underlies Plaintiff's damages claim. Fourth, IBM moves for dismissal of Plaintiff's statute of limitations, laches and estoppel defenses to its counterclaim. The first and second motions address the legal issues at the heart of Lucente's claim and are disposed of in connection with Plaintiff's motion for summary judgment. The issues raised in the fourth motion were briefed by Plaintiff in his motion for summary judgment on the counterclaim and are therefore addressed in the discussion of that claim. I address the question of damages last.

II PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT

Summary judgment is appropriate where there are no genuine issues of material fact and the movant is entitled to judgment as a matter of law. See Fed. R.Civ.P. 56(c); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-50, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A genuine issue for trial exists if, based on the record as a whole, a reasonable jury could find in favor of the non-movant. See Liberty Lobby, 477 U.S. at 248, 106 S.Ct. 2505. In making its determination, the court must resolve all ambiguities and draw all reasonable inferences in favor of the nonmovant. See id. at 255, 106 S.Ct. 2505. To defeat summary judgment, the nonmoving party must go beyond the pleadings and "must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). Because the record before this Court is devoid of any evidence from which a reasonable jury could find in favor of the Defendant on any of Plaintiff's claims for breach of contract, summary judgment is granted to Plaintiff on the issue of liability.

A. The Restricted Stock was Subject to Noncompete Provisions

It is undisputed that between 1981 to 1990, Lucente was awarded 11,162 shares of restricted stock under the "IBM Variable Compensation Plan" (the "1982 Plan") and a predecessor plan, and 1,121 restricted shares under the "IBM Long-Term Performance Plan" (the "1989 Plan"). (Answer ¶ 3; Plaintiff's Mem. of Law in Support of Motion for Summary Judgment, Exh. 4.) It is also undisputed that from 1983 to 1991, Lucente was awarded options for 126,739 shares of IBM stock pursuant to the 1989 Plan. (Plaintiff's Mem. of Law in Support of Motion for Summary Judgment, Exh. 5.)

1. The 1982 Plan

As a threshold matter, Plaintiff argues that the 11,162 shares issued to him under the 1982 Plan are not subject to forfeiture for competition, and that he is thus entitled to those shares as a matter of law. Lucente's argument is based on the fact that the forfeiture for competition clause of the 1982 Plan refers only to conditions placed on awards for which IBM is obligated to "make payment" as opposed to awards that IBM "delivers" to the employee. He contends, in essence, that, because stock certificates are "delivered" and cash awards are "paid," the noncompete does not apply to stock awards. Defendant counters that the clear and unambiguous terms of the 1982 Plan place a forfeiture-for-competition condition on Lucente's shares.

This Court has already held that New York law governs the agreements at issue here. See Lucente, 75 F. Supp.2d at 172. Where the terms of an agreement are in dispute, it is a question of law for the Court to determine the meaning of the contract. See Helmsley-Spear, Inc. v. New York Blood Center, Inc., 257 A.D.2d 64, 68, 687 N.Y.S.2d 353, 356 (1st Dept. 1999) ("Interpretation of an unambiguous contract provision is a function of the court, and matters extrinsic to the agreement may not be considered when the intent of the parties can be gleaned from the face of the instrument.") (internal quotation omitted). "It is axiomatic that vague or ambiguous contract language must be construed against the drafter." U.S. v. Manshul Constr. Corp., 940 F. Supp. 492, 499 (E.D.N.Y. 1996). "In cases of doubt or ambiguity, a contract must be construed most strongly against the party who prepared it and favorably to a party who had no voice in the selection of its language." Jacobson v. Sassower, 66 N.Y.2d 991, 993, 499 N.Y.S.2d 381, 382, 489 N.E.2d 1283 (1985). Anything less than total clarity, "even some level of ambiguity, will result in construction favoring [the nondrafter]." Prescott, Ball & Turben v. LTV Corp., 531 F. Supp. 213, 217 (S.D.N Y 1981). Applying these standards, and construing all ambiguities against IBM, I find that the restricted stock awarded under the 1982 Plan is subject to forfeiture for competition.

The 1982 Plan defines "Restricted Stock" as "Stock which is awarded to an employee pursuant to the limitation contained in paragraphs 7, 8 and 12 below." (Bursor Decl.Exh. 2, ¶ 2(i)). However, under the heading "General Information Regarding the Plan" the Plan states that "[r]estrictions on transferability, and conditions of forfeiture of awards are contained in paragraphs 7(c), 8, 12 and 13 of the Plan." (Id. at p. 3.) Paragraphs 7, 8 and 12 make no reference to noncompetition. Paragraph 7 states in relevant part:

After award of Restricted Stock, certificates for such shares will be deposited in escrow with the IBM Treasurer. The employee shall retain all rights in the Restricted Stock while it is held in escrow including but not limited to voting rights and the right to receive dividends, except that the employee shall not have the rights to transfer or assign such shares until all restrictions pertaining to such shares are terminated at which time the applicable stock certificates shall be released from. escrow and delivered to the employee by the IBM Treasurer.

(Id. ¶ 7.) The only restriction in Paragraph 8 is that "the Committee will establish the period or periods after which the Restrictions on Restricted Stock will lapse." (Id. at ¶ 8.) Paragraph 12, entitled "Restrictions and Forfeiture," states in its entirety:

The Company's obligation to make payments due hereunder or to deliver stock certificates held in escrow is subject to the condition that the employee remain and active employee of the Company for the entire deferral and/or restriction period, including mandatory and optional deferrals or until the employee's death, total and permanent disability, or retirement under a Company retirement plan if any of those events should sooner occur. If the employee fails to meet this condition, the employee's right to any such unpaid amounts or undelivered stock certificates shall be forfeited. This provision may be waived by the Committee in exceptional circumstances.

(Id. ¶ 12.) (emphasis added)

Furthermore, Paragraph 12 clearly distinguishes between payment, which has to do with money, and delivery, which has to do with stock certificates. Plaintiff asserts that this distinction is important, because the noncompete clause of the 1982 Plan, which is contained in Paragraph 13, discussed only the payment of money, not the delivery of stock. Defendant contends that the noncompetition provisions of Paragraph 13 apply to all awards made under the 1982 Plan. I agree.

The relevant portion of Paragraph 13, entitled "Retirement" reads:

If the employee retires under a Company retirement plan, the Company's obligation to make any payment due thereafter under this Plan is subject to the Condition that for the entire period of deferral or restriction: [discussing noncompetition provisions].

(Id. ¶ 13.)

The definition of "Restricted Stock" clearly states that it is subject to the restrictions of Paragraphs 7, 8 and 12. Thus, under the doctrine of inclusio unis es exclusio alteres, it would appear that the 1982 Plan did not contemplate applying the restrictions discussed in Paragraph 13 to Restricted Stock awards. Defendant argues, however, that, because the "General Information" clearly notes that the restrictions of Paragraph 13 are applicable to "the Plan," generally, it must also apply to Restricted Stock:

Restrictions on transferability, and conditions of forfeiture of awards, are contained in paragraphs 7 (c), 8, 12, and 13 of the Plan.

(Id. at p. 1). Defendant's reading is the only one that makes sense here, as it is the only interpretation of the contract that allows the Court "to give meaning to all of its language and avoid an interpretation that effectively renders meaningless a part of the contract." Helmsley-Spear, 257 A.D.2d at 69, 687 N.Y.S.2d at 357.

I further find that the inclusion of the language "stock delivery or payment" in Paragraph 12 and the abbreviated reference to "payment" in Paragraph 13, also does not render the noncompetition provisions of Paragraph 13 inapplicable to restricted stock. The 1982 Plan is replete with reference to "payment" in conjunction with restricted share awards. For example, Paragraph 7, discussed supra, is entitled "Payment of Awards," and includes "award of Restricted Stock." (Id. at ¶ 7.) Thus, the fair meaning of "payment" should be construed as including an "award" of shares. And, Defendant is correct that IBM's failure to name one former employee whose Restricted Stock was forfeited for alleged noncompetition does nothing to change this outcome; extrinsic evidence of the parties' intent is not required for a court to interpret the meaning of contract terms.

B. The "Employee Choice" Doctrine Does not Apply

Plaintiff argues that the employee choice doctrine does not apply for two reasons: (1) his departure was not "voluntary" for purposes of applying the employee choice doctrine, and (2) even if his departure from IBM could be deemed voluntary, the fact that IBM allowed Lucente to work for Northern Telecom renders the employee choice doctrine inapplicable to his subsequent employment with Digital — because IBM was not willing to employ Lucente at the time it cancelled the stock.

After reviewing the record before me, I hold that no reasonable juror could conclude that Lucente left IBM voluntarily. Thus, the employee choice doctrine does not apply.

To find that the employee choice doctrine applies, an employer must show that it was willing to continue to employ the employee. See Merrill Lynch, 48 N.Y.2d at 89, 421 N.Y.S.2d at 849. The relevant inquiry is not whether the actual termination of the employer-employee relationship took the form of a resignation, retirement or firing, but whether the employer — the party seeking to enforce the non-compete agreement — was willing to retain the employee. For if an employer is not willing to keep an employee on, the employer would be hard pressed to justify the noncompete on the grounds of promoting long-term employee loyalty and retention or creating economic incentives for employee productivity.

Courts have therefore been strict in requiring that employers put on evidence of their willingness to retain the employee before triggering the employee choice doctrine. Therefore, to overcome summary judgment, IBM must put on some evidence that it was willing to retain r Lucente. Even "preliminary discussions and overtures" cannot qualify as continued willingness to employ. See SIFCO Industries, Inc. v. Advanced Platting Technologies, Inc., 867 F. Supp. 155, 158 (S.D.N Y 1994). Moreover, the employer must be I willing to retain the employee in his existing or a comparable position, with equivalent benefits, salary and employment conditions. See Id.

In SIFCO, the defendants were senior employees at a manufacturing plant that was purchased by plaintiff. The plant closed. SIFCO offered to retain each defendant as a consultant for a two-year period, but the offer was refused. SIPCO thereafter sought to enforce a noncompetition provision against the defendants, who started their own competing business. The court held that, because SIFCO could not come up with enough evidence to show that it offered to continue the defendants in their previous, or comparable, positions, with comparable salaries, employment conditions, and benefits, the noncompetition covenants were unenforceable as a matter of law.*fn2 See Handel v. Nisselson, No. 98 Civ. 6662, 1998 WL 889041, *3 (S.D.N Y Dec. 18, 1998) ("[I]n enforcing a non-competition covenant, a court must first find that the employer was willing to continue providing employment to the employee.")

The evidence in the record is as follows: Lucente was one of a handful of IBM executives who reported directly to the CEO, John Akers. Although all the other division heads also carried the title "Senior Vice President," Lucente's title was Vice President. Lucente himself testified that he had two or three conversations with Akers in which Lucente's departure form IBM was discussed. In September or October 1990, Akers visited Lucente in Japan, and told Lucente that he (Lucente) had "some serious problems with other members of the top management team." (Lucente Dep. at 109).

During a trip back to the United States in November 1990, Lucente met with Akers again, at which time Akers told Lucente that he had lost confidence in him and that Lucente was losing support from other members of the corporate management board. (Id.) During that same conversation, Akers told Lucente to start planning his return to the United States from Japan. According to Lucente, Akers told him that he would not have a job for Lucente and he encouraged Lucente to consider employment elsewhere. (Lucente Dep. at 110, 121). As Lucente recalled the conversation, he was told by Akers that he had no future left at IBM. (Id. at 121-125). Akers asked him if he had considered anything outside IBM. Lucente told him that he had been made an offer from Carnegie-Mellon University and that he had also held some conversations with Paul Stern, the CEO of Northern Telecom.*fn3 Akers discouraged Lucente from the academic job, but indicated that perhaps something could be worked out whereby IBM would not consider Northern Telecom to be a competitor. (Id. at 111.)

John Aker's deposition testimony substantially confirms Lucente's recollection of the conversations:

Q. What do you recall discussing with Mr. Lucente about what he would do for IBM after you brought him back from Tokyo?
A. . . . and I said, well, I don't think you are going to get a job that's at the same level that you've been working in terms of responsibilities, maybe something less. . . .
Q. Did you ever formulate more specifically in your mind what position you had available for Mr. Lucente which ...

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