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LUCENTE v. INTERNATIONAL BUSINESS MACHINES CORP.

May 1, 2001

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 DISPOSING OF PLAINTIFF'S MOTION FOR RECONSIDERATION

In February 1999, plaintiff Edward Lucente sued IBM, seeking the value of certain restricted stock and stock options that he claimed had been wrongfully canceled subsequent to his departure from IBM after thirty years' loyal service. IBM advised Lucente that his stock and options were canceled when he took up employment with a company that IBM viewed as a competitor.

On April 7, 2000, Lucente moved for summary judgment as to liability, on the ground that the non-competition provisions pursuant to which IBM purported to act were not enforceable as against him, thus rendering its cancellation of the various stock and option awards wrongful. IBM opposed Lucente's motion and cross-moved for summary judgment of non-liability, as well as for partial summary judgment declaring the proper measure of damages if Lucente succeeded in proving liability.

Plaintiff now asks the Court to reconsider its earlier ruling to the extent that I resolved the issue of how to measure damages, which presents a pure question of law. See Lucente I, 117 F. Supp.2d at 352 ("Although calculation of the amount of damages is a factual determination, the formula used in making that determination is a question of law."). As to my conclusion that the value of Lucente's restricted stock should be measured as of a reasonable period after November 10, 1993 — the last possible date for Lucente to have received his shares out of escrow under the terms of the restricted stock plan as applied to retired IBM executives — Lucente argues that I misapprehended the import of the Second Circuit's decision in Schultz v. Commodity Futures Trading Comm'n, 716 F.2d 136 (2d Cir. 1983), because Lucente did not know about an amendment to the restricted stock plan that had accelerated the release date of his shares. As to my conclusion that the value of his stock options should be measured using either the so-called Black-Scholes or binomial models, with a measuring date of April 15, 1993 (which I found to be the date of IBM's breach), Lucente argues that the measuring date is wrong, since his claim is not for breach of contract, but for anticipatory breach of contract — something one would not have known from perusing the original motion papers.*fn1

It is not hard to fathom why Lucente moves for reconsideration. IBM stock today — even with the recent glitch in the stock market — is worth far, far more than it was in November or December of 1993. And Lucente's stock options were under water when IBM purported to cancel them in April 15, 1993. So if the theory of recovery is breach of contract, rather than anticipatory breach of contract, and his damages for loss of the options were measured from April 1993, Lucente could expect to recover only about $330,000 for his options (using economic pricing models that assign some minuscule market value to options that are not in the money).

For the reasons stated below, I have considered all of Lucente's arguments on his motion to reconsider. I adhere to my original holding about the value of the restricted stock, but have expanded my reasoning in response to plaintiff's newly crafted arguments. His motion for reconsideration of my holding about how to measure damages for his stock options is granted and, on reconsideration, I adhere to my original ruling, subject to an election that Lucente must make within twenty (20) days following the issuance of this opinion. As will be seen, I decline to give Lucente the $25 million windfall he seeks. He must live with the consequences of the decisions he made, and the actions he took or chose not to take, over the past seven years.

DISCUSSION

Reconsideration will generally be denied "unless the moving party can point to controlling decisions or data that the court overlooked — matters, in other words, that might reasonably be expected to alter the conclusion reached by the court." Shrader v. CSX Transp., Inc., 70 F.3d 255, 257 (2d Cir. 1995). Motions for reconsideration must be narrowly construed and the standard strictly applied "to discourage litigants from making repetitive arguments on issues that have been thoroughly considered by the court", "to ensure finality" and "to prevent the practice of a losing party examining a decision and then plugging the gaps of the lost motion with additional matters." Range Road Music, Inc. v. Music Sales Corp., 90 F. Supp.2d 390, 391-92 (S.D.N.Y. 2000) (citing In Re Houbigant, Inc., 914 F. Supp. 997, 1001 (S.D.N Y 1996)). There can be little doubt that Lucente examined my prior decision and tried as best he could to "plug the gaps." However, because Lucente did not originally move for summary judgment as to damages, and may have misapprehended the impact of IBM's cross-motion for a declaration about how to measure damages, I elect to respond to his motion on the merits.

1. Restricted Stock

In Lucente I, this Court held that IBM breached its contract with plaintiff insofar as his restricted stock awards were concerned, and that it did so by purporting to cancel those awards on April 15, 1993. Because the stock was restricted and plaintiff could not have sold it on April 15, 1993, I further concluded that plaintiff's damages should be measured from a reasonable period after the date when he would have received the shares in unrestricted (i.e., saleable) form. Schultz v. Commodity Futures Trading Comm'n, 716 F.2d 136 (2d Cir. 1983). In Lucente I, I concluded that the last possible date he could have received those shares in saleable form, based on the undisputed evidence, was November 10, 1993. Plaintiff had argued, and continues to argue, that the measuring date should be January 3, 2000.

The reason for our difference of opinion is as follows: Under IBM's Variable Compensation and Long Term Performance Plans, and the Escrow and Deposit Agreements that Lucente signed, plaintiff's stock was due to become unrestricted "on the later of January 1, 2000 or the first working day after the Employee's retirement." (Barbur Aff. at Ex. H.) However, in 1993, IBM amended those plans so that restricted shares would be released to retired executives (a class that includes Lucente) one year after they left IBM. At the time the plans were amended, Lucente and a number of other IBM executives had been retired for more than one year. As to those executives, the plan amendment provided that the stock be released from escrow immediately. Letters notifying the retired executives of this change went out on an undetermined date between the time the policy became effective (September 28, 1993), and the date when the first retiree disposed of his (formerly) restricted stock on November 5, 1993. (Supp. Statement of Christopher M. James at 2.)

The letters went to all executives except one: Edward Lucente. IBM did not send Lucente a letter because it already had sent him a different letter — the letter cancelling his restricted stock award — six months earlier. Lucente was aware in April 1993 that, as far as IBM was concerned, he no longer owned any restricted stock. But he did not know until after he filed this lawsuit that IBM had accelerated the date on which he could have sold his shares.

Because he never received such a notification letter (thanks to IBM's wrongful cancellation of his stock awards), Lucente, citing Schultz, contends that he is entitled to treat the plan as though it had never been amended, and to have this Court assume that his stock would have been released to him under the original terms of the Plan — i.e., on January 3, 2000. He is incorrect.

Damages for breach of contract are intended to place a party in the same position he would have occupied if the breach had never occurred. They are not designed to create windfall recoveries. Indu Craft, Inc. v. Bank of Baroda, 47 F.3d 490, 495 (2d Cir. 1995) (noting that the general purpose of damages awards is to place the injured party in the position in which she would have been had the contract not been breached); see also Brushton-Moira Cent. School Dist. v. Fred H. Thomas Assocs., P.C., 91 N.Y.2d 256, 261, 669 N.Y.S.2d 520, 692 N.E.2d 551 (1998) ("[d]amages are intended to return the parties to the point at which the breach arose."); Goodstein Corp. v. City of New York, 80 N.Y.2d 366, 590 N.Y.S.2d 425, 604 N.E.2d 1356 (1992) (holding that damages are intended to return the parties to the point at which the breach arose and to place the nonbreaching party in as good a position as it would have been had the contract been performed).

Moreover, under the ancient and hoary rule, damages for breach of contract are measured as of the date of the breach. See, e.g., Rodriguez v. Moore-McCormack Lines, 32 N.Y.2d 425, 429, 345 N.Y.S.2d 993, 299 N.E.2d 243 (1973). In Lucente I, based on statements made by Lucente and his counsel, see supra n. 1, I found that date to be April 15, 1993, the date when IBM divested plaintiff of ownership in his previously-awarded stock. However, I declined to measure plaintiff's damages for the breach as of April 15, 1993, because the canceled shares were restricted and were neither saleable nor in plaintiff's possession on that date. Analogizing Lucente's claim to one for conversion — where the general rule that damages are measured on the date of the conversion is ameliorated in the case of an item of fluctuating value (like stock) — I ruled that damages should be measured from a reasonable period of time after plaintiff would have received his stock in alienable form had IBM not wrongfully canceled his shares. Lucente I, 117 F. Supp.2d at 356. That date — thanks to the Plan amendment described above — was changed from January 3, 2000 to the autumn of 1993.

Lucente does not dispute that IBM altered the terms of the plan in 1993 to provide for the early pay-out of restricted stock to retired executives. As a matter of law, this plan amendment changed every retired executive's contract with IBM concerning his restricted stock. Lucente also does not dispute that he fell into the group of retired executives who had been gone from the company for more than one year — the group that received its stock in the autumn of 1993 by virtue of the amendment. Thus, if IBM had not breached its contract with Lucente by purporting to cancel his restricted stock awards, Lucente would have received a notification letter in the fall of 1993 and would have received his stock within a reasonable period (days or at most weeks) thereafter. Measuring his damages as though the plan had not been amended would put him in a substantially better position than he would have been had IBM not breached. Therefore, Lucente's cannot possibly be the correct measure of damages.

Nonetheless, Lucente contends that the "reasonable period" necessarily presumes a reasonable period after a plaintiff actually has notice of the wrong done to him, and argues that he did not have notice of the wrong on April 15, 1993 — even though IBM advised Lucente that it had canceled his restricted stock awards and divested him of his rights in the shares on that day. Lucente (now) contends that IBM's purported cancellation of his restricted stock in April 1993 was not a breach of contract, but rather (at his election) an anticipatory breach of a contract that IBM was not scheduled to perform until January 3, 2000 — the date when IBM was originally supposed to release the restricted stock from escrow. Plaintiff argues that this makes the plan amendment irrelevant unless he had notice of it.

Lucente's argument is clever, but is misguided in several ways.

First, Lucente relies on cases where plaintiffs pleaded claims in conversion. See, e.g., Caballero v. Anselmo, 759 F. Supp. 144 (S.D.N.Y. 1991); Schultz v. Commodity Futures Trading Comm'n, 716 F.2d 136 (2d Cir. 1983). This reliance is misplaced. Lucente did not plead a claim in conversion. If he had, it would have been time barred. N.Y.C.P.L.R. § 214(4) (three year statute of limitations for conversion claims). Instead, he alleged that IBM, by cancelling the shares of restricted stock he already owned as punishment for his going to work for Digital Equipment Corporation, breached the terms of the contracts pursuant to which those award had been made. The conversion cases cited in Lucente I, like Schultz and Galigher, are applicable only insofar as they offer an analogy for determining how to give Lucente the benefit of his bargain in the face of IBM's breach.*fn2

Second, Lucente can hardly claim that he did not know until last year of the wrong IBM did to him. The April 15, 1993 letter from IBM to Lucente was very clear. It stated: "[T]he IBM stock options and restricted stock in your name have been canceled." (Barbur Decl. at Ex. Y.) (emphasis added). Lucente admits that he received this letter. Therefore, he had notice of the cancellation done to him in the spring of 1993.

Third, this is not an instance of anticipatory breach (in contrast to the stock option situation, which I will address later). In cancelling Lucente's restricted stock, IBM did not renege on a promise to award him stock sometime in the future. Lucente's Escrow and Deposit Agreements all provided that "The Company has awarded to the Employee [a varying number of] shares of the Capital Stock of the Company under Section 7(c) of the IBM 1989 Long-Term Performance Plan (the "Plan")." (Barbur Decl. at Ex. G.) (emphasis added). So from the time the award was made, Lucente owned shares of IBM. That those shares were to be deposited with and held in escrow by IBM during the time that the relevant restrictions on alienability applied (which was January 1, 2000 under the original plan, and in the autumn of 1993 under the amended plan), does not transform the stock award into some sort of promise to award stock in the future. Thus, Lucente cannot rely on a theory of anticipatory breach in connection with his restricted stock awards.

If, however, this were a case upon which the doctrine of anticipatory repudiation could be relied, then the only change I would make to my analysis in Lucente I would be to fix the date of the breach as November 10, 1993, rather than April 15, 1993.

The only way the facts pleaded by Lucente (and subsequently borne out by discovery) could create an anticipatory breach would be if I viewed IBM's April 15, 1993 letter as a repudiation of IBM's contractual agreement to deliver the shares to Lucente out of escrow when they became alienable. Each of the Escrow and Deposit Agreements signed by Lucente when he received an award of restricted stock provided as follows: "The Restricted Stock shall be deposited with and held by the Company in escrow during the period of the restriction. . . . This period of restriction will end and the shares will be released and delivered to the Employee on the later of January 1, 2000 or the first working day after the Employee's retirement." (Barbur Aff. at Ex. H.) Of course, this is not what plaintiff pleaded — he pleaded that IBM breached his contract by canceling the share awards in April 1993 (Compl. ¶ 34). But assuming, arguendo, that this is what Lucente meant to plead, he runs squarely up against the fact that IBM had the contractual right to accelerate the release date by waiving the restriction. Lucente had already consented to IBM's exercise of that right by signing the Escrow and Deposit Agreement, which said that the "Executive Compensation Committee of the Board of Directors, on its sole discretion, may waive the restriction(s) on such shares." (Barbur Aff. at Ex. H.)*fn3 Signing that document was a condition of Lucente's receiving his restricted stock awards. He acknowledged this aspect of the plan and consented to it.

Thus, Lucente was bound by any change that IBM made in the terms of the plan in the restricted period, and his right to the release of shares under the Escrow and Deposit Agreement was entirely governed by, and subject to, IBM's determination on these matters from time to time. Once the Plan was amended, plaintiff's contractual right was to obtain his shares out of escrow, not in January 2000, but no later than a few days after November 10, 1993 — the last day on which any retired Plan participant received notice that the restriction had been lifted and the shares would be released from escrow upon submission of proper documentation. If IBM breached an obligation to deliver restricted stock ...


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