McGrath v. Zenith Radio Corp., 79-1361

• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)
• Citation: 651 F.2d 458
• Docket Number: No. 79-1361,79-1361
• Parties: Fed. Sec. L. Rep. P 97,841 Robert Edward McGRATH, Plaintiff-Appellee, v. ZENITH RADIO CORPORATION, Zenith Distributing Corporation of Northern California, Walter C. Fisher and Amile J. Forni, Defendants-Appellants.
• Decision Date: 20 May 1981

Page 458

651 F.2d 458

Fed. Sec. L. Rep. P 97,841

Robert Edward McGRATH, Plaintiff-Appellee, v. ZENITH RADIO CORPORATION, Zenith Distributing Corporation of

Northern California, Walter C. Fisher and Amile J.

Forni, Defendants-Appellants.

No. 79-1361.

United States Court of Appeals,

Seventh Circuit.

Argued Feb. 13, 1980.

Decided Jan. 28, 1981.

As Modified May 20, 1981.

Henry L. Pitts, James G. McConnell, Chicago, Ill., for defendants-appellants.

D. Kendall Griffith, Chicago, Ill., for plaintiff-appellee.

Before FAIRCHILD, Chief Judge, and SWYGERT and CUMMINGS, Circuit Judges.

FAIRCHILD, Chief Judge.

This case arises out of the July 1972 acquisition by Zenith Radio Corporation (Zenith or Zenith Radio) of the H. R. Basford Company (Basford), an electronic products wholesaler, and the November 1972 firing of plaintiff, Robert E. McGrath, Basford's vice-president. Alleging breach of contract, fraud, and violations of the securities laws, McGrath argued in the district court that his termination was wrongful because defendants had failed to fulfill a promise to appoint him president of the Zenith subsidiary upon the retirement of the then-current top executive. A six-person jury returned a verdict in plaintiff's favor for one million dollars in compensatory damages against all defendants and, in addition, returned separate verdicts against each defendant for punitive damages totaling another million dollars. On appeal to this court, defendants claim primarily that the evidence was insufficient under each of the three counts and that the respective measures of damages were inappropriate. While we reject the challenge to the sufficiency of the evidence and find certain alleged errors not preserved for appellate review, we conclude that since there was no testimony as to how long it was probable that McGrath would continue as president of the subsidiary or would occupy a similar position with another company, the jury's award of compensatory damages for loss of future earnings was in part speculative. Plaintiff shall therefore have the option of accepting $1,300,000 in damages ($300,000 compensatory, $1,000,000 punitive) or submitting to a new trial on the question of damages only.

Facts

The defendants in this case are two corporations, Zenith and its subsidiary, Zenith Distributing of Northern California (Zenith Distributing), and two individuals, Amile J. Forni and Walter C. Fisher.

H. R. Basford Company was a California corporation which distributed Zenith products in the San Francisco area. In August 1971, McGrath was hired by Forni, the president of Basford, to assume the position of vice-president and general manager. It was the intention of both parties that Forni would soon retire and that McGrath would succeed to the company's presidency. In addition to an annual salary of $35,000 as vice-president, McGrath was given the option of purchasing 5,000 shares of Basford stock, provided that he was still working for Basford in three years and that the California Commissioner of Corporations would approve the sale. In September and October, 1971, McGrath bought 2,835 shares of Basford stock.

In February 1972, representatives of Zenith Radio and Basford began discussing the possibility of expanding Basford's market for Zenith products. Following a series of meetings in April, May, and June of 1972 it was agreed that this expansion could best be handled by Zenith's acquisition of Basford. At these meetings, McGrath was the main spokesman for Basford. His chief concern was that Basford employees would retain their job security and that Basford shareholders, all of whom were employees, would receive a fair price for their shares. Zenith's primary demand was that it be assured of acquiring all of Basford's stock, for it wanted no minority shareholders.

On June 2, 1972, a tentative agreement was reached, and on July 12, 1972, the terms of the proposed sale were disclosed to Basford employees and shareholders. Fisher, a representative of Zenith, assured the employees that their jobs were secure and that career opportunities would probably be enhanced as a result of the acquisition.

Also on July 12, 1972, Fisher, Forni, and Paul Dwyer, Zenith's treasurer, concluded that because of Zenith's desire to acquire all of Basford's stock, it was necessary to extinguish the option agreement which gave McGrath the right to purchase additional shares. The following day Fisher met with McGrath and asked him to waive the option. McGrath testified that at that meeting:

"Mr. Fisher ... indicated to me that, you know, we have to dispose we have to in some way eliminate this option to buy shares. I said 'Yes, I knew that.'

"He then told me that there was nobody more hurt in the sale of the company, or nobody gave up more in the sale of the company than I was giving up if I was going to waive the option to buy the shares. He explained that it deprived me of potential profit on those shares.

"He then told me that as far as he understood that I would be heir apparent to Mr. Forni upon his retirement and that was thoroughly acceptable to both Zenith and to himself.

"He said that as the president of the new corporation I would be entitled to substantial stock options at the Zenith Radio Company and be a part of a group which was referred to as an executive compensation bonus compensation group, which he explained was in the area of 110 to 120 people of senior executives at Zenith who participated in a yearly extra compensation or bonus program.

"He then presented me with a waiver ... for the right of my purchase of those shares of stock. I said, 'Walter (Fisher), I do think I gave up more than anybody else in this company by the sale, and I would like to have a three-year employment contract with the H. R. Basford Co. under your ownership.'

"Walter said that it was not the practice at Zenith Radio Corporation to have employment contracts with any of their executives, including himself, and that Zenith Radio Corporation did not have a reputation of mistrusting or (mis) handling people, and that it would have to be that there would be no contract, but we certainly understood that I was the heir apparent and I was to benefit from the programs that he had outlined.

"I indicated to him that I was then trusting him as being the person who had represented to me my future status and standing with the Zenith Radio Corporation, and I signed the waiver...."

In exchange for signing the waiver, McGrath received nothing of value other than the knowledge that it facilitated the sale to Zenith.

Immediately after this conference, Fisher went to Forni's office and was advised that Forni had doubts about the job McGrath was doing and whether he would make a suitable successor. His reasons for unhappiness with McGrath included the latter's failure to get out and meet the dealers who were Basford's customers, his time-consuming outside activities, and his poor judgment in handling particular problems. Forni and Fisher discussed these shortcomings and Forni agreed to wait three or four months before making any definite decision. After this meeting, Fisher rode downtown with McGrath but made no mention of the conversation. When McGrath asked how soon he was going to be made president, Fisher said he still had some things to discuss with Forni and appeared more aloof and uncertain than at their earlier meeting. The next day when McGrath asked Forni whether he and Fisher had spoken regarding McGrath's ascendancy to the presidency, Forni said "no."

On July 14, 1972, the Basford stockholders, including McGrath, signed the documents by which they agreed to sell their shares of stock to Zenith.

At no time prior to the closing did McGrath have any reason to believe Forni had reservations about his becoming president upon Forni's retirement. Despite two or three phone conversations with Fisher between July 13 and the closing on July 31, Fisher did not disclose Forni's misgivings about McGrath.

On October 6, 1972, Forni met with Fisher in Chicago and recommended that McGrath be replaced. Fisher agreed after much conversation. When McGrath asked Forni about his meeting of October 6 with Fisher, Forni said that the subject of McGrath's future did not come up.

On Sunday, November 12, 1972, at 10:00 or 11:00 at night, Forni telephoned McGrath to tell him that he was fired effective January 1, 1973, with pay to continue until the end of March 1973. McGrath's attempts to effectuate a reconciliation failed and despite his requests that he be permitted to save face by taking a different job in the Zenith organization, even on a temporary basis, no such opportunity was made available to him. McGrath immediately began to search for new employment but was refused further use of an office, telephone, or secretarial help to aid him in the preparation of resumes and letters to be sent to potential employers. As a result of four months of searching and interviewing, he received three job offers and accepted one with the Fleetwood Corporation of Montreal, Canada, in April 1973. The Fleetwood position paid $36,000 annually and had a bonus potential of approximately another $6,000.

Jurisdiction

Before turning to the merits of this case, we will address defendants' contention that the district court was without jurisdiction to hear McGrath's claims. Jurisdiction was based on 28 U.S.C. § 1331(a), ¹ the general federal question jurisdictional statute, and on the doctrine of pendent jurisdiction. Defendants argue that this is an ordinary employer-employee dispute involving state law, and that McGrath's charge of securities fraud is a contrived attempt to establish federal question jurisdiction which follows his unsuccessful effort to establish diversity jurisdiction. We disagree.

It is settled that if the complaint sets forth a substantial claim, a case is presented within the federal jurisdiction. See Levering & Garrigues Co. v. Morrin, 289 U.S. 103, 105, 53 S.Ct....