Fenoglio v. Augat Inc.

• Decision Date: 08 March 2001
• Docket Number: CROSS-APPELLANT,N,No. 00-1748,CROSS-APPELLEES,00-1748
• Citation: 254 F.3d 368
• Parties: (1st Cir. 2001) WILLIAM R. FENOGLIO, PLAINTIFF, APPELLEE/, v. AUGAT INC. AND THOMAS & BETTS CORPORATION, DEFENDANTS, APPELLANTS/o. 00-1749 Heard
• Court: U.S. Court of Appeals — First Circuit

Page 368

254 F.3d 368 (1st Cir. 2001)

WILLIAM R. FENOGLIO, PLAINTIFF, APPELLEE/CROSS-APPELLANT, v. AUGAT INC. AND THOMAS & BETTS CORPORATION, DEFENDANTS, APPELLANTS/CROSS-APPELLEES.

No. 00-1748, No. 00-1749

United States Court of Appeals For the First Circuit

Heard March 8, 2001

Decided June 27, 2001

APPEALS FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS [Hon. Patti B. Saris, U.S. District Judge] Scott E. Williams with whom Jonathan P. Graham and Williams & Connolly Llp were on brief for defendants.

Michael A. Avery, Suffolk University Law School, with whom Matthew J. Tuttle and Perkins, Smith & Cohen, Llp were on brief for plaintiff.

Before Boudin, Chief Judge, Bownes, Senior Circuit Judge, and Lipez, Circuit Judge.

Boudin, Chief Judge.

In this case, both sides appeal from the decision of the district court. The dispute concerns the extent of payments due from a corporate employer to its former chief executive officer. The difficult issue on appeal is whether the executive was entitled to receive benefits under a "change-in-control" contract. The underlying facts are largely undisputed. We reprint pertinent provisions of the contracts in question in an appendix to this opinion.

On August 29, 1994, William Fenoglio signed an employment contract with Augat Inc., an electronics manufacturing firm in Mansfield, Massachusetts. As provided for in the contract, Fenoglio became chief executive officer ("CEO") on January 1, 1995, and was appointed to Augat's board of directors. The contract also promised Fenoglio a base salary, bonuses, fringe benefits, and stock options. The contract stated that "employment . . . shall terminate . . . [a]t the election of either party, upon not less than six months' prior written notice of termination," and provided for a severance payment after termination.

Pertinently, Augat promised to pay Fenoglio "the compensation which would otherwise be payable" for twelve months from "the date of termination of his employment." This sum was to be reduced by any payments made pursuant to provisions in a separate change-in-control contract. This second contract promised Fenoglio substantial compensation in the event that Augat were to be acquired by another company and Fenoglio were "terminated within 36 months after Change in Control . . . other than for Cause or Disability."

At a July 16, 1996, meeting, Augat's board of directors voted to terminate Fenoglio. This was a policy decision by the board; there is no claim that Fenoglio was discharged "for cause." John Lemasters, the board chairman who immediately replaced Fenoglio as interim CEO, told Fenoglio of the board's decision that evening. Fenoglio was also shown a copy of a press release stating briefly that he had "resigned" as CEO. Fenoglio performed no further work for the company after that date.

In late July, Fenoglio wrote Augat a letter asking about his severance. In a reply letter dated August 6, 1996, Lemasters outlined Augat's understanding of its obligations, contingent upon Fenoglio's "timely agreement" thereto. The letter concluded by saying that it "serve[d] also as notice of termination of all other contracts" between the parties "including the September 6, 1994 Change in Control Agreement."

Two months later, on October 7, 1996, Augat's board agreed that the company would be acquired by Thomas & Betts Corp. The merger was consummated on December 11, 1996, when Augat became a wholly owned subsidiary of Thomas & Betts. The companies refused, however, to pay Fenoglio change-in-control benefits because they said that Fenoglio had been terminated before the merger. On January 3, 1997, Fenoglio filed suit against Augat and Thomas & Betts in federal district court, alleging breach of both the employment and change-in-control contracts.

One such allegation was that the companies had breached the employment contract by failing to honor Fenoglio's stock options. Later, while the lawsuit was pending, Fenoglio wrote to the companies (on May 20 and June 30, 1997) seeking to exercise these options. When the companies refused, Fenoglio amended the complaint to add allegations that Augat and Thomas & Betts had committed securities fraud under federal and Massachusetts law by misrepresenting the exercisability of his options.

The district court granted summary judgment for Fenoglio on certain claims, awarding him benefits under the change-in-control contract and five of six disputed lots of stock options. Fenoglio v. Augat, Inc., 50 F. Supp. 2d 46, 56-57 (D. Mass. 1999). The companies prevailed on summary judgment as to the sixth stock option agreement and as to the securities fraud claims, which the district court dismissed. Id. at 56 n.9, 58-59. Fenoglio was awarded just under $3 million plus prejudgment interest of more than $1 million. The companies now appeal as to the award of change-in-control benefits and stock options; Fenoglio cross-appeals only to challenge the district court's ruling that one set of stock options had already expired.

Our review is de novo as to the grant of summary judgment, inferences being drawn against whichever party succeeded on the respective motion. Blackie v. Maine, 75 F.3d 716, 721 (1st Cir. 1996). Contracts are ordinarily construed by the court "as a matter of law" unless there are disputes as to extrinsic facts that bear on interpretation. Principal Mut. Life Ins. Co. v. Racal-Datacom, Inc., 233 F.3d 1, 3 (1st Cir. 2000). We begin with the issue of the change-in-control benefits.

Whether Fenoglio is owed change-in-control benefits depends on how one reads the language of two different contracts. If the change-in-control contract were taken alone, the most straightforward reading favors the companies. It pertinently provides that "[i]f your employment is terminated for any reason and subsequently a Change in Control shall have occurred, you shall not be entitled to any benefits hereunder." And, as the companies point out, Fenoglio was terminated in the ordinary sense of the term--albeit without the six months' notice promised by the employment contract--either in July or August 1996, well before anyone claims that a change in control occurred.¹

Nor is Fenoglio helped much if one looks at purpose--a common interpretive aid, Restatement (Second) of Contracts §§ 202(1) & cmt. c (1981)--if attention is limited to the change-in-control contract. The purpose of "golden parachute" provisions like this one is primarily to assure the loyalty of a high-level employee in the face of a possibly hostile change in control. See Campbell v. Potash Corp., 238 F.3d 792, 799-800 & nn.4-6 (6th Cir. 2001). But Fenoglio was fired by the existing board, and there was no takeover, hostile or otherwise, until after he had been fired.

There is a possible qualification: if Fenoglio had been fired in anticipation of a change in control, he might argue that a denial of change-in-control benefits would frustrate the aim of that contract (if not its literal language); and perhaps he could make a case based on an implied covenant of good faith and fair dealing. Fortune v. Nat'l Cash Register Co., 364 N.E.2d 1251, 1256-58 (Mass. 1977). But Fenoglio does not claim that he was fired as a "housecleaning" measure, in the shadow of a takeover, in order to avoid paying him change-in-control benefits after the takeover. If that claim was supportable, it seems certain that counsel would have made it.

If one turns to the employment contract, Fenoglio's position improves. This is not because Fenoglio is entitled to change-in-control benefits as consequential damages traceable to the breach of the employment contract's notice provision. He might have such a claim, but he has not made it, presumably because he does not want the added burden of satisfying the foresee ability requirement that exists when damages go beyond what was promised in the contract (e.g., salary) to other unspecified consequences, see Am. Mech. Corp. v. Union Mach. Co., 485 N.E.2d 680, 683-84 (Mass. App. Ct. 1985).

Rather, Fenoglio's best case on this record turns on using the employment contract to determine when Fenoglio was terminated for purposes of the change-in-control contract. Despite the companies' claim that the latter is an integrated document, we (like the district court, 50 F. Supp. 2d at 56-57) see no difficulty in reading the two documents together. The reason is that the change-in-control contract itself contemplates an employment relationship defined elsewhere; and the pertinent "elsewhere" is the employment contract read in light of state law. See Wilmot H. Simonson Co. v. Green Textiles Assocs., 755 F.2d 217, 219-20 (1st Cir. 1985); Chelsea Indus., Inc. v. Florence, 260 N.E.2d 732, 735-36 (Mass. 1970).

The employment contract is written in terms quite helpful to Fenoglio. It does not merely promise that Augat will provide six months' notice, although this might be enough under some case law.² Rather, it says that "employment . . . shall terminate upon . . . not less than six months' prior written notice of termination." If, as the language suggests, this statement defines Fenoglio's employment status, then whether this notice was delivered in July or August 1996, he was still an employee--albeit banished as CEO--when the change in control occurred in December.

Contrary to the companies' assertions, it is clear to us that the district judge relied on this contractual language to determine the date of termination rather than on arguably inadmissible (under Fed. R. Evid. 408) language from the August 6, 1996, letter ("Although you have resigned as President and CEO effective July 16, 1996, Augat will pay your current compensation and benefits through your date of termination on January 16, 1997."). See 50 F. Supp. 2d at 53 n.5. The district court merely considered the letter as supplying the required notice, relying on a part of the letter that is not even arguably reached by Rule 408.

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