Tymshare, Inc. v. Covell

• Decision Date: 07 February 1984
• Docket Number: Nos. 82-2218,82-2237,s. 82-2218
• Parties: , 1 Indiv.Empl.Rts.Cas. 613 TYMSHARE, INC., Appellant, v. William J. COVELL. William J. COVELL, Appellant, v. TYMSHARE, INC.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 1145

727 F.2d 1145

234 U.S.App.D.C. 46, 1 Indiv.Empl.Rts.Cas. 613

TYMSHARE, INC., Appellant, v. William J. COVELL.

William J. COVELL, Appellant, v. TYMSHARE, INC.

Nos. 82-2218, 82-2237.

United States Court of Appeals, District of Columbia Circuit.

Argued Oct. 17, 1983.

Decided Feb. 7, 1984.

Appeals from the United States District Court for the District of Columbia (D.C. Civil Action No. 81-571).

David S. Cohen, Washington, D.C., for appellant in 82-2218 and appellee in 82-2237. Andrew Mohr, Washington, D.C., also entered an appearance for Tymshare, Inc.

F. Lane Heard, III, Washington, D.C., for appellee in 82-2218 and cross-appellant in 82-2237.

Before EDWARDS and SCALIA, Circuit Judges, and LUMBARD, ^* Senior Circuit Judge for the United States Court of Appeals for the Second Circuit.

Opinion for the Court filed by Circuit Judge SCALIA.

SCALIA, Circuit Judge:

In this diversity suit for breach of contract defendant Tymshare, Inc., appeals (No. 82-2218) from summary judgment finding that Tymshare violated its contractual obligation of good faith performance when it retroactively raised the commission quota of plaintiff William J. Covell, one of its sales representatives. Plaintiff cross appeals (No. 82-2237) from the district court's denial of prejudgment interest.

I

Covell, a resident of Maryland, began to work for Tymshare, a California corporation which sells data processing services, in 1978. He was based in Tymshare's regional office in Virginia, where he agreed to the Compensation Plan that is the subject of this suit. His accounts included federal agencies in the District of Columbia, and the present dispute arose primarily out of his sales activities on behalf of Tymshare with regard to the United States Postal Service. We conclude from these factors that we have personal jurisdiction under the District of Columbia long-arm statute, D.C.CODE ANN. Sec. 13-423(a)(1) (1981), that we have subject matter jurisdiction under 28 U.S.C. Sec. 1332 (1976), and that the substantive law of Virginia governs the issues of contract law before us.

Tymshare paid Covell on a salary-plus-commission basis. The exact amount of his compensation was determined with reference to the company's "Compensation Plan," under which sales representatives were entitled to commissions on all sales in excess of designated annual sales quotas. These commissions were to be paid monthly, on the basis of sales to date, and for that purpose each sales representative's annual quota was subdivided into (not necessarily equal) monthly quotas. If this system of commission payments were rigidly followed, however, an employee could surpass his year-to-date quota through one month and receive a payment, fall drastically below his year-to-date quota through the next month, and thus owe Tymshare for commissions previously paid. To lessen the likelihood of this occurrence, the Plan allowed Tymshare to hold a portion of each employee's accrued monthly commissions in a reserve account, which would be settled at year's end.

The following provisions of the Plan are of central importance here:

I A

... This plan can be modified or terminated as set forth in Sections V and VI, within the sole discretion of the Division VP.

II H(6)

All incentives recorded by the individual resulting from over 100% of new revenue performance by the sales representative shall be held in the reserve account. True performance and, therefore, true earned incentives are not known until year end. Due to large fluctuations in actual revenue that could result in a high percent of new revenue quota achievement early in the year, a reserve will be established. This reserve will tend to smooth payment of incentive monies during the course of the year. Monies held in reserve are not considered "earned" until the end of the quota period.... Sales Representative [sic ] leaving their quota plan for any reason during the quota year will receive a portion of their reserve earned up to the last full month of employment based on the rule of 78's payout.

V

Below are some examples of provisions under which adjustment to the quota plan may be made. This list is not exhaustive and management reserves the right to change the quota plan and individual quota and reserve payments at any time during the quota year within their sole discretion....

VI A(3)

A Sales Representative whose employment is terminated will receive a statement of the individual's Commission account, accompanied by a check for commissions earned, up to and including the individual's last day of active work. However, reserve will be paid up to the last full month of employment, based on the rule of 78's payout....

VI B

This plan shall terminate 12/31/80. However, in addition to any changes in quota that may be affected [sic ] in accordance with Section V, "Modification to the Compensation Plan," Tymshare may terminate this plan at any earlier date. In its discretion, Tymshare may give thirty (30) days' notice of any modification in, or earlier termination of, this incentive plan. This notice provision applies only to those employees in good standing on the effective day of change or termination of this plan and does not in any manner create for any employee a right to such notice prior to the individual's termination of employment.

In 1979, Tymshare won a major contract to provide data processing services to the United States Postal Service, allegedly due in substantial part to Covell's sales efforts. At the beginning of 1980, Covell's sales quota was set at $1.2 million, ¹ based in large part on the expectation that the Postal Service contract to which he was assigned would produce substantial commissionable revenues that year. Covell's targeted earnings under the plan, given attainment of his quota and no more, were approximately $31,000.

Events in 1980 did not transpire as expected. The Postal Service was unable to convert to Tymshare's system as quickly as planned, and by the spring of 1980 those employees dependent on Postal Service revenues to meet their sales quotas expressed concern that the quotas were unreasonably high. Tymshare responded. Covell's quota was reduced to $815,000, which on the basis of the expectations then held, would produce the originally projected total earnings of approximately $31,000.

In the autumn of 1980 events again took an unexpected turn. Revenues from the Postal Service contract increased dramatically, far exceeding Covell's revised quota. (Total revenues from the contract in 1980 eventually exceeded the initial $1.2 million projection.) By the end of November, Covell's commissions alone already exceeded $30,000. Concerned with the amount of commissions Covell was accumulating, Tymshare withheld his September and October commission checks. On December 1, allegedly after he had questioned why he had not received those checks, Covell was told not to return to work. On December 9, Tymshare presented Covell with a revised quota plan, with the annual target figure adjusted upward from $815,000 to the original $1.2 million. Tymshare effected this change by raising Covell's November quota from $135,200 to $487,600, and by lowering his December quota from $150,400 to $137,000. ² The change shifted the entire increase, and some of December's allotment as well, to November, thus erasing the year-to-date surplus which had existed at the end of November. Tymshare terminated Covell's employment contract on December 20, 1980.

Covell brought suit against Tymshare in March of 1981. The first count of the complaint sought compensatory and punitive damages for breach of the contractual obligation to compensate Covell pursuant to the 1980 Compensation Plan, by reason of Tymshare's failure to exercise its discretion under that Plan in good faith. The second and third counts sought compensatory damages for, respectively, discharge in breach of contract and wrongful discharge. Upon summary judgment motions, the district court entered judgment for the plaintiff on the first count, awarding $31,173.32 in compensatory damages. Thereafter, it granted the parties' joint motion to dismiss the plaintiff's remaining claims and the defendant's counterclaim (for breach of a nondisclosure agreement) with prejudice, making the prior order dispositive of the entire case.

The court acknowledged that the decision to revise the quota in December was "based on a reasonable management judgment that inaccurate revenue forecasts" had previously been relied upon, Covell v. Tymshare, Inc., Civ. No. 81-571, slip op. at 4-5 (D.D.C. July 14, 1982); and further acknowledged that "the allocation of the quota increase to individual monthly quotas would normally have had no effect on the total amount of commission due since the commission is based on the amount by which total year-end revenues exceed the annual quota," id. at 5. In the circumstances of this case, however, the court found that "the timing of the quota increase and the manner in which the increased quota was applied to the individual monthly quotas ... raise[d] questions of bad faith and arbitrary action," id. It concluded that there was "clear and convincing evidence that defendant Tymshare demonstrated bad faith and arbitrary action in manipulating plaintiff's quota plan and terminating his employment in such a manner as to considerably reduce the commissions due him." Id. at 6.

II

In this appeal, appellee has sought to justify the judgment below upon a ground argued below but not relied upon by the opinion of the district court. We may of course sustain on such a ground, Langnes v. Green, 282 U.S. 531, 538-39, 51 S.Ct. 243, 246, 75 L.Ed. 520 (1931), and because it is more readily disposed of we address this issue first. Appellee maintains that the finding of bad faith was correct because, to quote the heading of a section of his brief, "A Retroactive Quota Increase Is Contrary to the Purpose of the Tymshare Commission Plan and the Reasonable...