Pollard v. Autotote, Ltd.

• Decision Date: 18 July 1988
• Docket Number: No. 87-1691,87-1691
• Citation: 852 F.2d 67
• Parties: Richard C. POLLARD, Appellant, v. AUTOTOTE, LTD.
• Court: U.S. Court of Appeals — Third Circuit

Page 67

852 F.2d 67

Richard C. POLLARD, Appellant, v. AUTOTOTE, LTD.

No. 87-1691.

United States Court of Appeals, Third Circuit.

Argued April 14, 1988.

Decided July 18, 1988.

As Amended April 26, 1989. ^*

Frank W. Daly (argued), Auritt and Daly, Media, Pa., for appellant.

Barbara MacDonald (argued), Morris, James, Hitchens & Williams, Wilmington, Del., for appellee.

Before HUTCHINSON, SCIRICA and ROSENN, Circuit Judges.

OPINION OF THE COURT

SCIRICA, Circuit Judge.

The issue in this appeal is whether a forfeiture provision in a deferred compensation management incentive plan is enforceable under Delaware law.

I

The facts developed thus far are undisputed. Appellant Richard C. Pollard worked for Autotote, Ltd. and its corporate predecessor for approximately sixteen years. Autotote designs, installs and maintains parimutuel betting machines at racetracks and other betting arenas. Pollard's last position with Autotote was general manager of field operations for the United States, Canada and Mexico. His primary responsibilities involved overseeing operations, trouble-shooting and maintenance of parimutuel betting machines. He earned approximately $55,000.00 annually.

In 1971, Autotote's predecessor adopted a "Management Incentive Compensation Plan" for selected key executives. The plan authorized an Executive Committee to select employees to receive incentive benefits. The employee would receive one-half the benefits in cash in the year after they were earned. The other one-half would be deferred compensation carried on the employer's books and payable on retirement, death, disability or termination of employment in accordance with the terms set out in the plan. See J.A. at 59 (1971 plan, Secs. 1.1-1.2). Section 5 of the plan provided that

[i]n the event that an employee terminates his employment, there shall be distributed to him his vested interest ... in the amount of his deferred compensation on or after the twelfth month following the termination of his employment .... Key executives who disclose company information or secrets, or who directly or indirectly accept employment with a competitor within twelve months from the date of their termination, shall also lose all vested rights.

J.A. at 63 (Sec. 5.1(c)).

The plan was revised in 1977. Section 6.5 of the revised plan provided for forfeiture of deferred compensation in certain circumstances:

[i]n the event that a Participating Executive voluntarily terminates his employment or is discharged other than for the reasons listed in Article 6.4 above [excessive drug or liquor use; conviction of certain crimes and commission of others; dishonesty, gross negligence or incompetence], he shall be paid his vested interest in the amount of his deferred compensation on or after the end of the twelfth month following such termination, provided however that should such executive disclose company information or secrets, or directly or indirectly accept employment as an employee or consultant or advisor or in any similar capacity with a competitor of the Participating Corporations within twelve months of such termination, he shall lose all of his vested interest in the deferred compensation and the same shall be forfeited.

J.A. at 24.

Pollard participated in the plan from 1975 through 1979, and was awarded total management incentive compensation of $104,223.00. He received one-half that amount, and one-half was deferred pursuant to the terms of the plans. ¹

On August 2, 1985, Autote eliminated Pollard's position as General Manager, Field Operations, and terminated his employment. On September 24, 1985, Pollard accepted employment with United Tote, Inc., which also supplies parimutuel betting machinery and apparatus. Pollard's position with United Tote is Customer Service Director for the eastern region, with a salary of $40,000.00 per year.

On August 6, 1986, Pollard asked Autotote to pay him the $52,111.50 that Autotote had been carrying on its books as deferred compensation. Autotote denied his request and notified Pollard that pursuant to section 6.5 of the 1977 plan, he forfeited his rights to deferred compensation when he accepted employment with United Tote, a competitor. See J.A. at 39.

II

Pollard sought declaratory relief in district court, asking the court to (1) declare that he is entitled to payment in the sum of $52,111.50 plus interest under the management incentive plan, or (2) declare that the plan is governed by the Employee Retirement Income Security Act, 29 U.S.C. Secs. 1001-1461 (1982) (ERISA), rendering the forfeiture clause void and unenforceable, and entitling him to payment plus interest and attorneys' fees.

The district court granted summary judgment for Autotote, holding that under the terms of the plan Pollard forfeited his deferred compensation by accepting employment with a competitor of Autotote within twelve months of his termination. ² See J.A. at 100 (Oct. 13, 1987 order). Pollard appeals from that decision.

III

We must first decide what standard the Delaware courts would apply to determine whether the forfeiture provisions of Autotote's management incentive compensation plans are valid and enforceable. ³ We then decide whether under that standard Autotote was entitled to summary judgment. Our review of a grant of summary judgment is plenary. Summary judgment is appropriate only when there is no genuine issue of material fact and, viewing the facts in a light most favorable to the non-moving party, the moving party is entitled to judgment as a matter of law. Equal Employment Opp. Comm'n v. City of Mount Lebanon, 842 F.2d 1480, 1485 (3d Cir.1988).

Pollard contends that the forfeiture provisions in Autotote's plans are unenforceable because Autotote, by terminating him for reasons other than fault, destroyed the mutuality of obligation underlying the management incentive compensation plan. He relies primarily on Post v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 48 N.Y.2d 84, 421 N.Y.S.2d 847, 397 N.E.2d 358 (1979). In Post, the New York Court of Appeals held that a forfeiture-for-competition clause in a pension plan is unenforceable when the termination of employment is involuntary and without cause. The court noted that New York recognizes limited restraints on employment mobility when a "mutuality of obligation is freely bargained for by the parties," but concluded that the employer had destroyed the mutuality of obligation. 421 N.Y.S.2d at 849, 397 N.E.2d at 360-61.

An essential aspect of that relationship ... is the employer's continued willingness to employ the party covenanting not to compete. Where the employer terminates the employment relationship without cause, however, his action necessarily destroys the mutuality of obligation on which the covenant rests as well as the employer's ability to impose a forfeiture.

Id. The court decided that forfeiture by an employee who was involuntarily terminated without cause is unreasonable as a matter of law. ⁴

We have reviewed Delaware law, but find no dispositive case. Delaware courts have not addressed the enforceability of a forfeiture provision against an employee who was involuntarily terminated without fault and who subsequently accepts employment with a competitor. However, Delaware courts have confronted similar issues in different contexts, and we look to those opinions for guidance in predicting Delaware law. See McKenna v. Ortho Pharmaceutical Corp., 622 F.2d 657, 663 (3d Cir.), cert. denied, 449 U.S. 976, 101 S.Ct. 387, 66 L.Ed.2d 237 (1980). In the absence of decisions by the Delaware Supreme Court, we may consider decisions by other Delaware courts. See West v. American Tel. & Tel. Co., 311 U.S. 223, 236-37, 61 S.Ct. 179, 183, 85 L.Ed. 139 (1940).

Delaware courts have examined the enforceability of a non-competition clause in an employment contract. Because a covenant not to compete and a forfeiture-for-competition clause each restricts an employee's ability to accept alternate employment, we turn for guidance to the Delaware cases evaluating covenants not to compete.

As in any contract dispute, the Delaware courts first apply fundamental contract principles in determining whether a covenant not to compete is enforceable. See Research and Trading Corp. v. Powell, 468 A.2d 1301, 1303 (Del.Ch.1983); Faw, Casson & Co. v. Cranston, 375 A.2d 463, 466 (Del.Ch.1977) (formal elements required in agreement not to compete are same as required for a contract in general). Therefore, we first consider whether the forfeiture provisions are enforceable under basic contract principles.

In determining enforceability, Delaware courts examine whether both parties to the contract have fulfilled their respective promises. The " 'first level of inquiry may involve any of the typical issues that arise in a contract action[, such as] ... whether a material breach of the other party to the contract excuses performance....' " McCann Surveyors, Inc. v. Evans, No. 1286-S, slip op. at 6-7 (Del.Ch.1987). In Knowles-Zeswitz Music, Inc. v. Cara, 260 A.2d 171 (Del.Ch.1969), the court held that because the employer's transfer of the employee was not a breach of the employment agreement, the employee was not relieved of his contractual obligations not to compete. 260 A.2d at 174. See generally Restatement (Second) of Contracts Sec. 237 (1981) (uncured material breach by one party discharges other party's duty under contract). Furthermore, in Capital Bakers v. Leahy, 20 Del.Ch. 407, 178 A. 648 (1935), the court, in construing an employment contract containing a covenant not to compete, employed a mutuality of obligation analysis. See id. at 409-10, 412, 178 A. at 649-50. Therefore, we believe Delaware courts would consider Pollard's mutuality of obligation argument, which is based on these contract principles.

Because of the differences in the forfeiture provisions of the 1971 and 1977 plans, we must address each plan separately. With respect to the 1971 plan, we need not reach the...