Walsh v. Zurich Am. Ins. Co.

• Decision Date: 22 February 2017
• Docket Number: No. 15-2245,15-2245
• Citation: 853 F.3d 1
• Parties: James WALSH, Plaintiff, Appellee, v. ZURICH AMERICAN INSURANCE COMPANY, d/b/a Zurich Direct Markets, d/b/a Zurich North America Commercial, d/b/a Zurich North America, et al., Defendants, Appellants.
• Court: U.S. Court of Appeals — First Circuit

853 F.3d 1

James WALSH, Plaintiff, Appellee,

v.ZURICH AMERICAN INSURANCE COMPANY, d/b/a Zurich Direct Markets, d/b/a Zurich North America Commercial, d/b/a Zurich North America, et al., Defendants, Appellants.

No. 15-2245

United States Court of Appeals, First Circuit.

February 22, 2017

Charles P. Roberts, III , Winston–Salem, NC, with whom Donald S. Prophete , Kansas City, MO, and Constangy, Brooks, Smith & Prophete LLP were on brief, for appellants.

Jamie N. Hage , with whom Douglas J. Miller , Kathleen A. Davidson , and Hage Hodes, P.A. , Manchester, NH, were on brief, for appellee.

Before Howard, Chief Judge, Selya and Lipez, Circuit Judges.

LIPEZ, Circuit Judge.

A jury found that appellant Zurich American Insurance Company ("Zurich") breached employment agreements with appellee James Walsh when it substantially reduced his incentive pay for a lucrative deal—the largest of its type in the company's history—and did not pay incentive on another deal.¹ Walsh was awarded double damages and attorney's fees, totaling nearly $2.4 million, based on findings that Zurich willfully and without good cause withheld the compensation owed. On appeal, Zurich asserts that the evidence failed to show contractual breaches, let alone willful ones. Hence, the company argues, the district court erred in denying its motion for judgment as a matter of law on Walsh's contract and wage claims. Zurich alternatively argues that the district court committed legal error by instructing the jury to disregard contract provisions that gave the company discretion to limit incentive pay.

Having carefully reviewed the record and pertinent caselaw, we reject Zurich's contention that it was entitled to judgment as a matter of law on the breach-of-contract and wage claims. We also uphold the jury's breach and willfulness findings stemming from Zurich's withholding of incentive compensation for a deal made with Great American Insurance Company ("GAIC"). However, we agree that the district court erroneously concluded that, if Walsh had an enforceable incentive plan when the unprecedented deal was struck with Automobile Protection Corp. ("APCO"), Zurich lacked discretion as a matter of law to change Walsh's incentive formula for that deal. Rather than telling the jury to disregard the contractual discretion provisions applicable to that deal, the court should have instructed the jury to determine whether Zurich's exercise of discretion satisfied the implied contractual obligation of good faith and fair dealing.

We therefore vacate the district court's judgment insofar as it incorporates the jury's verdict on the APCO deal, affirm the judgment with respect to the GAIC deal, and remand for further proceedings.

I.

A. Factual Background

Walsh's dispute with Zurich centers on two compensation plans that awarded him incentive pay based on certain types of new business brought into the company. We sketch the facts as the jury could have found them, drawing all reasonable inferences in the plaintiff's favor. See , e.g. , Butynski v. Springfield Terminal Ry. Co. , 592 F.3d 272, 274 (1st Cir. 2010).

Walsh was hired by Zurich in 1996 as a finance and insurance ("F&I") regional administrator responsible for sales in Maine and New Hampshire, and he was promoted in 1999 to regional sales manager. Walsh focused on selling various types of coverage to car dealers, including vehicle service contracts, credit insurance, and tire and wheel coverage. In early 2007, Walsh approached his superiors, Bill Stoothoff and Dennis Kane, seeking increased responsibility and the potential for salary growth within the company. Told that nothing was currently available, Walsh looked elsewhere. He received an offer from GMAC in Chicago that included a guaranteed salary of $350,000 over eighteen months, a $20,000 signing bonus, and a relocation package.

Within an hour after giving Zurich notice of his decision to leave the company, Walsh received a phone call from Kane, Zurich's vice president of direct markets, who asked him to consider staying in a new, soon-to-be-created position. In subsequent discussions, Stoothoff, Zurich's vice president of F&I, offered Walsh the opportunity to manage a new market for Zurich, the "alternative distribution channel"—ADC—in which the company, instead of selling service contracts and other auto-related insurance only through car dealers, would sell their products more broadly, e.g., selling service contracts through telemarketing and credit unions, equipment coverage to the original manufacturers, and contractual liability policies to third party administrators of service contracts.

Walsh advised Stoothoff of his three requirements for staying at Zurich: (1) a job description that would allow him to grow, with unlimited potential, (2) an annual salary of $250,000 for the next eighteen months, and (3) "an incentive plan that allows me to make money and grow and do what I need to do." Zurich agreed to meet those terms. In October 2007, Walsh, Stoothoff and Kane signed a "Supplemental Pay Agreement" providing Walsh with a monthly supplement of $13,246.63, payable through March 2009, in addition to his $91,000 base salary—a total of roughly $250,000 annually. The supplemental payments, which were "in lieu of any incentives earned," were designed to meet Walsh's salary demand until the new business he was expected to generate would produce incentive pay sufficient to support a comparable, or higher, salary.

The October 2007 agreement did not specify the incentive arrangement that would go into effect in April 2009, and the company began discussing the details of Walsh's incentive plan the following summer. By mid-August 2008, Walsh, Stoothoff and Kane had settled on a target of $8 million for the new ADC business in 2009, and they discussed an incentive formula that would result in a total 2009 salary of about $250,000 at the midpoint, with a low of $183,000 and a high of $292,000.² By that time, Walsh's base salary had increased to $135,000, and his supplemental payments had decreased ($9,583.35 monthly), with his total annual salary still set to be roughly $250,000 until the start of the incentive plan in April 2009.

Through a series of meetings and emails, Walsh, Stoothoff, Kane, and Diane Eldridge, a Zurich compensation consultant, reached consensus on the plan described above, including a revision requested by Walsh in the description of the ADC incentive. Following a meeting on August 27, 2008, Walsh was "satisfied that my plan was done.... As far as I'm concerned, my boss [Stoothoff] and his boss [Kane] told me that this is your plan." Although Walsh acknowledged that he never saw anything in writing confirming that the plan was "final," and the August 2008 plan was never entered into Zurich's finance system, Walsh viewed the "backroom HR or accounting" procedures as irrelevant to the plan's completion. Stoothoff, who had been asked to complete Walsh's incentive plan before he left Zurich at the end of August 2008, also believed that he had accomplished that task.

The plan on its face covered the entire 2009 calendar year, but it was superseded through March by the Supplemental Pay Agreement that had been executed in October 2007. Hence, Walsh would first be eligible to receive incentive payments under the August 2008 Plan for premiums received by Zurich after April 1, 2009. In addition to a chart that specified variable percentages for Walsh's ADC incentive "based on year to date performance against prorated production and profitability goals,"³ the August 2008 Plan contained the following "CONDITIONS":

1. The PLAN is effective January 1, 2009. INCENTIVE under the PLAN shall be solely within the discretion of the Executive Vice President of the COMPANY and is subject to interpretation by him / her. The PLAN is subject to cancellation by the Executive Vice President at any time.

....

7. Management of the COMPANY reserves the right to limit INCENTIVE in unique situations.⁴

Walsh testified that these provisions giving Zurich—and specifically, Kane, the executive vice president—the discretion to cancel or limit his incentive pay, "didn't mean anything to [him]," because such provisions had "never been enforced."

In September 2008, Walsh contacted representatives of APCO to discuss selling Zurich's new alternative distribution products. The discussions proved fruitful and, in December 2008, Walsh closed a deal with APCO likely to produce an amount of premiums in 2009 that far surpassed even the high-end projection in the compensation models Zurich had prepared for Walsh. Immediately after the contract signing in a Georgia hotel, as they rode an elevator together, Kane told Walsh that he would make a lot of money on the deal. Under the 2008 Plan, Walsh would have been entitled to ADC incentive pay of nearly $870,000 in 2009. That plan, however, was not implemented. Rather, in January 2009, Kane informed Walsh that he would not allow this amount of ADC incentive, and that a new incentive arrangement needed to be developed.

Walsh initially protested any change, telling Kane that he was shocked by the refusal to adhere to the incentive program they had worked out in August 2008. Within a few days, however, concluding that he had no choice but to accept a change or leave the company, Walsh acquiesced to Kane's request that he recommend an alternative plan that Walsh would consider fair. Walsh's subsequent proposal provided for a base salary of $250,000 for the duration of the APCO relationship, plus incentives, but Kane responded by email that the salary amount "won't work" because "no one is on a 250k salary" other than the company's top executive. They scheduled a phone conference for later in the week.

Walsh testified that he started that call, on January 30, by again expressing his dissatisfaction with the change in his compensation package, but Kane nonetheless "immediately rolled into, this is how we're going to pay you going forward." Kane then told Walsh that his...