Scully v. US Wats Inc.

• Decision Date: 01 February 2001
• Docket Number: Nos. 99-1590,VICE-PRESIDENT,s. 99-1590
• Citation: 238 F.3d 497
• Parties: (3rd Cir. 2001) MARK SCULLY, V. US WATS, INC.; KEVIN O'HARE, INDIVIDUALLY AND IN HIS CAPACITY AS PRESIDENT OF US WATS; AARON BROWN, INDIVIDUALLY AND IN HIS CAPACITY AS CHAIRMAN OF THE BOARD OF DIRECTORS OF US WATS; STEPHEN PARKER, INDIVIDUALLY AND IN HIS CAPACITY AS EXECUTIVEOF US WATS US WATS, INC.; AARON BROWN; STEPHEN PARKER; APPELLANTS IN 99-1590 MARK SCULLY, APPELLANT IN 99-1653 & 99-1653
• Court: U.S. Court of Appeals — Third Circuit

Page 497

238 F.3d 497 (3rd Cir. 2001)

MARK SCULLY,

V.

US WATS, INC.; KEVIN O'HARE, INDIVIDUALLY AND IN HIS CAPACITY AS PRESIDENT OF US WATS; AARON BROWN, INDIVIDUALLY AND IN HIS CAPACITY AS CHAIRMAN OF THE BOARD OF DIRECTORS OF US WATS; STEPHEN PARKER, INDIVIDUALLY AND IN HIS CAPACITY AS EXECUTIVE VICE-PRESIDENT OF US WATS

US WATS, INC.; AARON BROWN; STEPHEN PARKER; APPELLANTS IN 99-1590

MARK SCULLY, APPELLANT IN 99-1653

Nos. 99-1590 & 99-1653

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

Argued July 10, 2000

Filed February 1, 2001

On Appeal from the United States District Court for the Eastern District of Pennsylvania (D.C. Civ. No. 97-04051) District Court Judge: John P. Fullam

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Steven M. Coren (argued) Bruce Bellingham Kaufman, Coren, Ress & Weidman, P.C. 1525 Locust Street 17th Floor Philadelphia, Pennsylvania 19102, Attorneys for Appellants/Cross-Appellees US Wats, Inc., Aaron Brown, and Stephen Parker

Jonathan D. Wetchler (argued) Amy Anderson Miraglia Wolf, Block, Schorr & Solis-Cohen Llp 1650 Arch Street 22nd Floor Philadelphia, Pennsylvania 19103, Attorneys for Appellee/Cross-Appellant Mark Scully

Before: Scirica, Alito, and Fuentes, Circuit Judges.

OPINION OF THE COURT

Fuentes, Circuit Judge

In this appeal, the primary issue is whether US WATS improperly denied Mark Scully the right to exercise his stock option following his wrongful termination, and, if so, whether the District Court, in awarding damages, improperly failed to apply a discount from market value to account for the option shares' lack of marketability. In May 1995, US WATS, Inc., a Pennsylvania based telecommunications carrier, hired Mark Scully as president and chief operations officer for a two-year period to implement a financial turnaround of the company. As part of Scully's compensation, US WATS offered him an option for a substantial amount of restricted shares which US WATS viewed as exercisable only so long as Scully remained employed by the company. The shares were restricted because they could not be transferred for up to one year of the date of their purchase. Although Scully achieved some success in making US WATS profitable, the company terminated him before the end of his two-year employment period and before he could exercise his stock option.

Scully sued US WATS, as well as three of its former officers and directors, Stephen Parker, Aaron Brown, and Kevin O'Hare for breach of contract, conspiracy, fraudulent and negligent misrepresentation and violation of Pennsylvania's Wage Payment and Collection Law ("WPCL").

After a two-day bench trial, the District Court determined that (1) US WATS had wrongfully terminated Scully in violation of a two-year employment contract; (2) US WATS wrongfully deprived Scully of his stock option; (3) Parker and Brown were individually liable under theories of conspiracy or "alter ego"; (4) O'Hare was not liable on any claim; and (5) Scully was not entitled to attorney's fees and liquidated damages under Pennsylvania law. Based on these findings, the District Court awarded Scully damages in the sum of $626,442, which represented the value of Scully's stock option, lost wages, and interest. The parties cross-appeal.

After careful consideration of the numerous issues on appeal, we will affirm the District Court's conclusion that US WATS unlawfully discharged Scully. We will also affirm the determination that US WATS wrongfully deprived Scully of his stock option and the District Court's damages valuation method. However, we will reverse the judgments entered against Parker and Brown because the evidence does not support their individual liability for the actions of the company. Lastly, because we conclude that under state law US WATS's conduct entitles Scully to attorney's fees and may entitle him to liquidated damages, we will remand this issue to the District Court for further proceedings.

I.

In October 1994 Mark Scully entered into a six-month oral consulting agreement with US WATS, a telecommunications company with a principal office in Bala Cynwyd, Pennsylvania. Scully had been hired by defendants Parker and Brown, who founded US WATS in 1989, to achieve a financial turnaround of their company. Scully's consulting services proved so beneficial to US WATS that, in May 1995, Parker and Brown offered him a written contract to serve a two-year term of employment as president and chief operating officer. He declined the written contract, and instead, according to Scully, entered into an oral employment agreement with the company for a similar two-year term.

As an inducement for Scully to remain the full two years, US WATS granted him an option to purchase 850,000 shares of restricted stock that would vest over a two year period. The option was granted pursuant to a written 1993 Executive Stock Option Agreement ("the Stock Option Agreement"), which was governed by US WATS's 1993 Executive Stock Option Plan ("the Stock Option Plan"). When US WATS hired Scully in May 1995, the Stock Option Plan provided that all options would extinguish upon termination of employment. However, during Scully's term as president, the Stock Option Plan was amended by a 1996 Executive Stock Option Plan to provide that employee options would extinguish 30 days after termination from the company.

Notwithstanding Scully's apparent success in turning US WATS into a profitable company, in December 1996, approximately eighteen months after he began as president, Parker and Brown replaced Scully with Kevin O'Hare. The District Court found that, although Scully would no longer be president, O'Hare, Parker, and Brown promised him "that his continued employment until May 1997 was assured." Scully v. U.S. WATS, Inc., No. CIV.A. 97-4051, 1999 WL 553474, at *1 (E.D. Pa. July 29, 1999). However, on December 30, 1996, Scully was terminated without warning, effective immediately.

On January 23, 1997, Scully attempted to exercise his option to purchase 600,000 shares that had vested by that date. US WATS refused to honor the option. Instead, the company claimed that since Scully had been fired, his stock option automatically expired. As a result, Scully filed suit against US WATS, Parker, Brown, and O'Hare. Following the trial, the District Court determined that Scully and US WATS had entered into a valid two year employment contract and that "the defendants had no just cause for terminating [Scully's] employment." Id. The Court set forth the reasons for that termination as follows:

The real reason for the defendants' actions, or at least a principal reason, lay in the fact that the corporation, which was entirely controlled by Messrs. Brown and Parker, had granted more stock options than it could possibly fulfill; and, unless some of the outstanding stock options could be eliminated before December 31, 1996, accurate filings with the SEC would reveal the true state of the corporation's affairs. Plaintiff's options to purchase 600,000 of the 850,000 shares had already vested; and in view of plaintiff's forthcoming termination in May 1997, and in view of defendants' knowledge that plaintiff would be receiving a substantial sum of money from another investment in January 1997, and would therefore be likely to exercise his options, (which were definitely "in the money") the defendants Brown and Parker carried out their plan to (1) replace plaintiff before the end of 1996, (2) persuade him that he would remain in the company's employ through May 1997, and would therefore see no need to take immediate action with respect to exercising his options, and (3) fire him as of December 30, 1996, without advance notice, so that he would be unable to exercise his options before the termination of his employment.

Id.

During the trial, the parties presented expert testimony to establish the value of the restricted shares that US WATS refused to deliver. Following the evidence, the Court opined that "[r]estricted shares are generally regarded as subject to a discount from market price, because of the restriction." Scully v. US WATS, Inc., No. Civ. A. 97-4051, 1999 WL 391495, at *4 (E.D. Pa. June 8, 1999). On this basis, the Court concluded that the appropriate discount would be 30%. Despite this initial observation, the Court ultimately chose not to apply a discount, and instead, based its damage award on the difference between the exercise price of the option and the price of unrestricted shares as of the date of the breach. The Court therefore awarded Scully $595,000 in compensatory damages for US WATS's failure to deliver the shares and $31,442 for lost wages. The District Court's jurisdiction was based upon diversity of citizenship. See 28 U.S.C.S 1332(a). We have jurisdiction pursuant to 28 U.S.C. S 1291.

II.

We first address the issue of whether US WATS and Scully had entered into a two-year employment contract. US WATS argues that the District Court's conclusion that there was an oral employment contract is (1) based on insufficient evidence, and (2) contrary to Pennsylvania's presumption of at-will employment. This issue sets forth a mixed question of fact and law. To the extent the issue presented concerns narrative facts, r review is for clear error. We extend plenary review to whether the District Court correctly applied the standard for over coming Pennsylvania's presumption in favor of at-will employment. See Ram Constr. Co. v. American States Ins. Co., 749 F.2d 1049, 1052-53 (3d Cir. 1984).

Pennsylvania presumes all employment to be at-will. See, e.g., Geary v. United States Steel Corp., 319 A.2d 174, 176 (Pa. 1974); Scullion v. Emeco Indus., Inc., 580 A.2d 1356, 1358 (Pa. Super. Ct. 1990). This presumption is necessary to prevent baseless assertions of oral employment contracts for a definite term. See Greene v. Oliver Realty, Inc., 526 A.2d 1192, 1198 (Pa. Super. Ct. 1987)....