United States Court of Appeals
For the First Circuit
No. 00-1748
No. 00-1749
WILLIAM R. FENOGLIO,
Plaintiff, Appellee/Cross-Appellant,
v.
AUGAT INC. and THOMAS & BETTS CORPORATION,
Defendants, Appellants/Cross-Appellees.
APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Patti B. Saris, U.S. District Judge]
Before
Boudin, Chief Judge,
Bownes, Senior Circuit Judge,
and Lipez, Circuit 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.
June 27, 2001
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
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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."
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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-
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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
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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.
1The factual scenario might itself be open to
interpretation, and, to that extent, we are giving the companies
the benefit of the doubt on a summary judgment issue resolved
against them. Reich v. John Alden Life Ins. Co., 126 F.3d 1, 6
(1st Cir. 1997). The reason for the doubt is that the events on
July 16 look at first blush like an immediate discharge, but
conceivably, Fenoglio could argue that he was merely removed as
chairman and left as an employee without duties for six months
from that date, or, alternatively, from receipt of LeMasters'
August 6, 1996, letter.
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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
foreseeability 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).
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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
2
See, e.g., Markovits v. Venture Info. Capital, Inc., 129 F.
Supp. 2d 647, 650, 654-55 (S.D.N.Y. 2001); Hepner v. Am. Fid.
Life Ins. Co., 258 S.E.2d 508, 509, 511-12 (Va. 1979); cf. Nat'l
Med. Care, Inc. v. Zigelbaum, 468 N.E.2d 868, 872-73 (Mass. App.
Ct.), rev. denied, 471 N.E.2d 1354 (Mass. 1984).
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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.
Of course, it is quite likely that the situation that
has arisen here was not foreseen by the parties. And where
language is ambiguous, courts often make their own best guess as
to how reasonable parties would deal with unanticipated
applications, e.g., Fleet Nat'l Bank v. H & D Entm't, Inc., 96
F.3d 532, 538-39 (1st Cir. 1996), cert. denied, 520 U.S. 1155
(1997), or rely upon mechanical canons of interpretation.3 But
3
Pertinent here is the contra proferentem canon, that is,
that uncertainties should be resolved against Augat, the drafter
of the contract. See Merrimack Valley Nat'l Bank v. Baird, 363
N.E.2d 688, 690-91 (Mass. 1977); Aldrich v. Bay State Constr.
Co., 72 N.E. 53, 54 (Mass. 1904). How much force should be
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literal language favors Fenoglio once the two contracts are read
together, and it is hard to see why literal language should not
be followed where, as here, the result is hardly absurd or
unfair. Indeed, a company that drafts a notice requirement like
this one might deem itself lucky when the executive leaves
office at once and without fuss.
This does not mean that Fenoglio could have obtained
an injunction requiring the Augat board to let him remain as
chief executive officer after he had lost the confidence of the
board; there are public policy reasons why a court would be
likely to refuse such relief. Restatement (Second) of Contracts
§ 367(1) & cmt. a (1981); Fitzpatrick v. Michael, 9 A.2d 639,
641 (Md. 1939). But that is no reason why the more general
commitment to treat him as an employee for six months after
notice should not be given effect insofar as it affects merely
financial entitlements.
The remaining issues in the case concern whether the
stock options were exercised within the required time periods,
a matter resolved as to five of six option grants at issue in
Fenoglio's favor. The district court's treatment, 50 F. Supp.
given to such a canon where the contract is between two
sophisticated parties is open to doubt. Principal, 233 F.3d at
4; RCI Northeast Servs. Div. v. Boston Edison Co., 822 F.2d 199,
203 n.3 (1st Cir. 1987).
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2d at 54-56, was thorough and persuasive, and we adopt its
discussion as to the companies' appeal. We turn, then, to
Fenoglio's cross-appeal; there, Fenoglio objects to the denial
of benefits under the December 20, 1994, options contract.
The problem in a nutshell is that Fenoglio was
required, under the terms of this contract, to exercise his
options within three months of termination of employment. An
alternative, longer period that the district court held
applicable to other options did not even arguably apply to the
December 20 contract. 50 F. Supp. 2d at 55 n.6. Fenoglio
formally attempted to exercise his options under this last
contract only on May 20, and June 30, 1997.
This attempted exercise came more than three months
after the last date on which Fenoglio could plausibly claim
employee status. Even if one took the latest plausible date of
Fenoglio's purported termination (the August 6, 1996, letter),
treated it merely as notice, and then gave him the further
benefit of the six months' notice period, this would still only
take him to February 6, 1997. His earliest letter seeking to
exercise the December 20 options was sent on May 20, 1997.
Thus, he falls outside the three months' exercise period
explicitly provided.
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On appeal, Fenoglio says that it would have been futile
to exercise the December 20 options because the companies would
not have honored them. Courts sometimes do excuse failures to
give notice or take similar acts where notice would plainly be
futile. E.g., Pupecki v. James Madison Corp., 382 N.E.2d 1030,
1034 (Mass. 1978); Trustees of the Boston & Maine Corp. v. Mass.
Bay Transp. Auth., 323 N.E.2d 870, 873 n.2 (Mass. 1974).
However, there is no evidence here that the purported exercise
would have been futile. Fenoglio relies on an out-of-context
statement by the district court, see Fenoglio v. Augat, Inc.,
Civ. Action No. 97-10012-PBS, slip op. at 3 (D. Mass. Mar. 16,
2000); this statement was not directed to the futility doctrine
and would not, in any event, substitute for the lack of proof.
Fenoglio's other argument is that the companies should
be estopped from denying that Fenoglio was an employee after the
six months' notice period because, for a substantial additional
period (until April 25, 1997), it gave him pay and certain other
benefits as if he were an employee. As the district court
properly found, 50 F. Supp. 2d at 53, these later payments were
post-employment severance payments promised by contract. They
did not constitute representations of continued employment
status sufficient to ground an estoppel claim.
The judgment of the district court is affirmed.
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APPENDIX
Employment Contract (§§ 4 & 5)
4. Employment Termination. The employment
of the Employee by the Company pursuant to
this Agreement shall terminate upon the
occurrence of any of the following:
. . . .
4.4 At the election of either party,
upon not less than six months' prior written
notice of termination.
5. Effect of Termination.
5.1 Termination for Cause or at
Election of Either Party. . . . In the event
the Employee's employment is terminated . .
. at the election of the Company pursuant to
Section 4.4, the Company shall pay the
Employee the compensation which would
otherwise be payable to the Employee up to
the last date to occur of (a) three years
from the Commencement Date [September 6,
1994] or (b) twelve months from the date of
termination of his employment. Any payments
to the Employee pursuant to the preceding
sentence shall be reduced by any payments
made to the Employee pursuant to Section
4(c)(i) of the Employee's Change of Control
Letter Agreement dated September 6, 1994
with the Company.
Change-in-Control Contract (§ 3)
3. Employment Status; Termination Following
Change in Control.
(a) This Agreement does not constitute a
contract of employment or impose on the
Company any obligation to retain you as an
employee. This Agreement does not prevent
you from terminating your employment at any
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time. If 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. Any
termination by the Company or by you
following a Change in Control of the Company
during the Term shall be communicated by
written notice of termination ("Notice of
Termination") to the other party hereto in
accordance with Section 6. The "Date of
Termination" shall mean the effective date
of such termination as specified in the
Notice of Termination.
(b) Notwithstanding anything to the contrary
herein, you shall be entitled to the
benefits provided in Section 4 only if any
of the events constituting a Change in
Control of the Company shall have occurred
during the Term and your employment with the
Company is terminated within 36 months after
such a Change in Control of the Company . .
. .
4. Compensation Upon Termination. If (i)
any of the events constituting a Change in
Control of the Company shall have occurred
during the Term and (ii) your employment
with the Company is terminated within 36
months after such Change in Control of the
Company, you shall be entitled to the
benefits set forth in this Section 4:
. . . .
(c) If your employment by the Company should
be terminated by the Company other than for
Cause or Disability or if you should
terminate your employment for Good Reason,
then you shall be entitled to the benefits
below:
(i) the Company shall pay you your
full base salary and all other earned or
accrued compensation through the Date of
Termination at the rate in effect at the
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time the Notice of Termination is given,
plus all other amounts to which you are
entitled under any compensation plan of the
Company at the time such payments are due
and, in lieu of further salary payments for
periods subsequent to the Date of
Termination, the Company will pay you a lump
sum cash payment as severance pay . . . .
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