United States Court of Appeals
For the First Circuit
No. 10-1798
ANTHONY ARTUSO,
Plaintiff, Appellant,
v.
VERTEX PHARMACEUTICALS, INC.,
Defendant, Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. William G. Young, U.S. District Judge]
Before
Boudin, Circuit Judge,
Souter,* Associate Justice,
and Selya, Circuit Judge.
David W. Krumsiek, with whom Perry, Krumsiek & Jack, LLP was
on brief, for appellant.
Alan D. Rose, with whom Amy R. Silverman and Rose, Chinitz &
Rose were on brief, for appellee.
February 18, 2011
*
Hon. David H. Souter, Associate Justice (Ret.) of the Supreme
Court of the United States, sitting by designation.
SELYA, Circuit Judge. This case involves a dispute about
what emoluments are due to an ousted executive under an employment
agreement (the Agreement). The district court dismissed the
complaint for failure to state a claim upon which relief could be
granted. See Fed. R. Civ. P. 12(b)(6). The plaintiff now appeals
the dismissal of his claims for breach of contract and breach of an
implied covenant of good faith and fair dealing. Discerning no
error, we affirm.
I. BACKGROUND
Because this appeal follows a dismissal for failure to
state a claim, we draw the facts from the complaint and those
documents fairly incorporated into it. See SEC v. Tambone, 597
F.3d 436, 438 (1st Cir. 2010) (en banc); Nisselson v. Lernout, 469
F.3d 143, 150 (1st Cir. 2006).
The defendant, Vertex Pharmaceuticals, Inc., is based in
Cambridge, Massachusetts. In the spring of 2008, an executive
search firm acting on its behalf contacted plaintiff-appellant
Anthony Artuso to gauge his interest in changing jobs. The
plaintiff, then a highly paid executive at a rival pharmaceutical
company, turned a deaf ear to these initial overtures. But the
defendant persisted, and negotiations soon began.
The defendant stressed the availability of challenging
work: it envisioned that the plaintiff would assume major
responsibility in the marketing of a promising new drug. It also
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painted a glowing picture of the prospects for lucrative financial
rewards; in that regard, it proposed that the plaintiff would
receive equity — stock and stock options — as part of a generous
compensation package.
The plaintiff ultimately succumbed to these blandishments
and, on June 26, 2008, the parties signed the Agreement. Its terms
are of paramount importance here.
The Agreement specified that the plaintiff would serve as
an at-will employee of the defendant with the title of vice-
president for strategic planning. It displaced the earlier
negotiations through an integration clause, which stated that the
Agreement would "constitute the complete agreement between [the
plaintiff] and [the defendant] regarding employment matters and
will supersede all prior written or oral agreements or
understandings on these matters."
As to compensation, the Agreement provided for a hiring
bonus, an annual base salary, and "start-up equity." This start-up
equity included the following:
Restricted Shares — 3,000
You will receive a restricted stock grant
pursuant to Vertex's 2006 Stock and Option
Plan. One quarter of the restricted shares
will vest on each anniversary of your
employment start date for as long as you
remain employed by Vertex. Any shares that
have not vested at the end of your employment
will be forfeited.
Stock Options — 25,000
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In addition to your restricted stock grant,
you will be granted a non-qualified stock
option pursuant to Vertex's 2006 Stock and
Option Plan. . . . The common stock subject
to your stock option will vest in 16 quarterly
installments over four years.
The specific terms and conditions of the
equity grants will be set forth in grant
agreements, which, among other things, will
incorporate the terms and conditions of . . .
Vertex's 2006 Stock and Option Plan.
The Stock and Option Plan incorporated by reference into this
portion of the Agreement provided in pertinent part:
Except as otherwise provided in the applicable
Stock Agreement . . . , if a Participant
ceases to be an Employee . . . with the
Company . . . before the Participant has
exercised all Stock Rights, the Participant
may exercise any Stock Right granted to him or
her to the extent that the Stock Right is
exercisable on the date of such Termination of
Service. Any such Stock Right must be
exercised within three months after the date
of the Participant's Termination of Service
. . . .
In addition, the Agreement stipulated that the plaintiff
would be allowed to participate in the defendant's performance
bonus program. The Agreement cited that participants in this
program were eligible to receive cash bonuses at the end of each
calendar year. Awards were pegged to 30% of an employee's base
salary, modified by a factor in the range of 0-150%. The factor
depended on the performance of both the employee and the company.
In the end, however, bonus awards were "at the discretion" of the
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company's board of directors. The Agreement did not circumscribe
this discretion in any way.
The plaintiff worked under the Agreement for some sixteen
months, beginning on July 14, 2008. During this interval, he
received glittering performance reviews and the defendant
experienced exceptional growth (some of which was tied to the
marketing of the new drug).
Despite this auspicious beginning, the relationship did
not last. On December 1, 2009, the plaintiff was told that, as
part of a reorganization, his position would be eliminated and his
employment terminated. The defendant assured the plaintiff that
this decision was unrelated to any shortfall in his job
performance. The denouement came swiftly; the plaintiff's last day
of work was December 4, 2009.
At the time of the plaintiff's departure, some of his
stock options had vested. The defendant afforded him the
opportunity to exercise those options. Asserting that he was
entitled to more, the plaintiff sought to receive his unvested
stock options. He also asked for a prorated bonus for calendar
year 2009. The defendant rejected both of these requests.
Invoking diversity jurisdiction, see 28 U.S.C. § 1332(a),
the plaintiff brought suit in the United States District Court for
the District of Massachusetts. He sought through the suit to
obtain damages to compensate him for the loss of the unvested stock
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options and the denial of a prorated bonus. His complaint
propounded claims for negligent and intentional misrepresentation,
promissory estoppel, breach of contract, and breach of an implied
covenant of good faith and fair dealing. The defendant moved to
dismiss all of the plaintiff's claims.
On June 8, 2010, the district court granted the
defendant's motion. The court, ruling from the bench, concluded
that nothing in the Agreement entitled the plaintiff to either the
unvested stock options or a prorated bonus. This timely appeal
followed.
II. ANALYSIS
We review a district court's disposition of a motion to
dismiss for failure to state a claim de novo. See Centro Medico
del Turabo, Inc. v. Feliciano de Melecio, 406 F.3d 1, 5 (1st Cir.
2005). In conducting that review, we accept as true all well-
pleaded facts set forth in the complaint and draw all reasonable
inferences therefrom in the pleader's favor. Tambone, 597 F.3d at
441.
With certain exceptions not relevant here, a complaint
only needs to contain "a short and plain statement of the claim
showing that the pleader is entitled to relief." Fed. R. Civ. P.
8(a)(2). Although there is no need for "detailed factual
allegations," Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007),
the complaint must "contain sufficient factual matter, accepted as
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true, to 'state a claim to relief that is plausible on its face.'"
Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (quoting Twombly,
550 U.S. at 570). Accordingly, a complaint must include more than
a rote recital of the elements of a cause of action; it must
include "factual content that allows the court to draw the
reasonable inference that the defendant is liable for the
misconduct alleged." Id. "If the factual allegations in the
complaint are too meager, vague, or conclusory to remove the
possibility of relief from the realm of mere conjecture, the
complaint is open to dismissal." Tambone, 597 F.3d at 442 (citing
Twombly, 550 U.S. at 555).
Pleading standards are one thing; substantive law is
another. In a diversity case, pleading standards are a matter of
federal law. See Hanna v. Plumer, 380 U.S. 460, 473 (1965); Alt.
Sys. Concepts, Inc. v. Synopsys, Inc., 374 F.3d 23, 32 (1st Cir.
2004). Substantive law has a different source: a federal court
sitting in diversity must apply the substantive law of the forum
state. Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78 (1938). This
includes application of the state's conflict of law principles,
Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941), so
the choice of state law is not always mechanical.
For present purposes, we may eschew a choice of law
analysis. In determining which state's law applies, a diversity
court is free to honor the parties' reasonable agreement. See
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Borden v. Paul Revere Life Ins. Co., 935 F.2d 370, 375 (1st Cir.
1991). In this case, both parties have acknowledged that
Massachusetts law controls. We accept that plausible premise.
With this backdrop in place, we turn to the task at hand.
This appeal, as framed by the plaintiff, boils down to two sets of
claims. First, he contends that the defendant's refusal to afford
him the benefit of the unvested stock options and to pay him a
prorated bonus worked a breach of the Agreement. Second, he
contends that these same failures breached an implied covenant of
good faith and fair dealing. We address these sets of claims
separately.
A. Breach of Contract.
In Massachusetts, contract interpretation is in the first
instance a matter of law for the court. Basis Tech. Corp. v.
Amazon.com, Inc., 878 N.E.2d 952, 958-59 (Mass. App. Ct. 2008).
Unless the court determines that an ambiguity exists, "the terms of
an employment agreement must be deduced, construed, and enforced as
written." Cochran v. Quest Software, Inc., 328 F.3d 1, 7 (1st Cir.
2003) (applying Massachusetts law). This is particularly true
where, as here, the contract contains an integration clause. See
New Engl. Fin. Res., Inc. v. Coulouras, 566 N.E.2d 1136, 1139
(Mass. App. Ct. 1991).
We begin our inquiry with the defendant's refusal to
allow the plaintiff to exercise his unvested stock options. An
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indispensable element in the pleading and proof of a breach of
contract claim is the promise that the plaintiff seeks to enforce.
See I & R Mech., Inc. v. Hazelton Mfg. Co., 817 N.E.2d 799, 802
(Mass. App. Ct. 2004). Here, the plaintiff asserts that he was
promised the balance of his stock options regardless of whether he
continued to work for the defendant.
Nothing in the Stock Options provision of the Agreement
states explicitly whether or not the plaintiff would be entitled to
unvested stock options upon the termination of his employment. But
the Stock and Option Plan, which is incorporated by reference in
that provision, explicitly and unambiguously precludes any such
entitlement. Section 11 of that plan states that within three
months of his termination, an option holder can "exercise any Stock
Right granted to him . . . to the extent that the Stock Right [was]
exercisable on the date of" his discharge. This language makes
pellucid that a terminated employee is entitled only to those
rights that were exercisable at the time of his discharge. Because
the plaintiff's unvested stock options were not exercisable at the
time he was sent packing, he was not entitled to those unvested
options.
We summarize succinctly. Pursuant to the continued-
employment clause of the Stock and Option Plan, the plaintiff's
stock options ceased to vest when his employment ended.
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Consequently, his rights associated with them vanished at that
time.
The plaintiff offers two reasons for disregarding the
continued-employment clause of the Stock and Option Plan. We find
neither reason persuasive.
First, the plaintiff points to the following phraseology
found at the beginning of the pertinent section of the plan:
"Except as otherwise provided in the applicable Stock Agreement
. . . ." This language does not help the plaintiff. Rather, it
enables the company and prospective employees to contract around
the provisions of the Stock and Option Plan. Here, however, the
parties did not specify any alternative arrangement in the
Agreement. Instead, the Agreement embraced the plan.
The plaintiff's second argument relies on a juxtaposition
of the Stock Options and Restricted Shares provisions of the
Agreement. The former contains no continued-employment language;
the latter does contain such language: it directs that those shares
will vest only as long as the employee is employed by the
defendant. In the plaintiff's view, this disparity signifies that,
as to stock options, there is no continued-employment condition.
See, e.g., Cofman v. Acton Corp., 958 F.2d 494, 497 (1st Cir. 1992)
(noting that the inclusion of specific language in one article of
a contract may lead to an inference that the exclusion of that
language in a separate article was deliberate).
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This argument is profoundly flawed. It overlooks the
Stock and Option Plan which is incorporated by reference in the
Agreement's Stock Options provision. It similarly overlooks a
fundamental distinction between the plaintiff's stock options and
his restricted shares. The Stock Options provision granted the
plaintiff rights to exercise options as the options vested. The
Restricted Shares provision, by contrast, granted the plaintiff the
shares themselves, with no requirement that he first exercise an
option. Because the continued-employment clause of the Stock and
Option Plan applied to "exercisable" rights, the plaintiff's stock
options fell within its scope. With respect to stock options, this
eliminated any need to write a continued-employment condition into
the text of the Agreement. The restricted shares, however, were
not "exercisable." They were granted outright when due. Thus,
these shares did not come within the coverage of the pertinent
language in the Stock and Option Plan. It was, therefore,
necessary for the defendant to state explicitly in the Agreement
that proper vesting of the restricted shares was tied to the
plaintiff's continued employment. Seen in this light, the so-
called disparity cannot bear the weight that the plaintiff piles on
it.
As a fallback, the plaintiff posits that the Agreement
must be read in the albedo of the parties' antecedent negotiations.
He insists that the start-up equity portion of the Agreement, which
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included both the Stock Options and Restricted Shares provisions,
was the linchpin of the deal and that the tenor of the negotiations
led him to consider the stock options as a kind of signing bonus
(which would inure to him, come what may).
We agree with the plaintiff that antecedent negotiations
may sometimes inform the "language, background, and purpose" of a
contract. USM Corp. v. Arthur D. Little Sys., Inc., 546 N.E.2d
888, 893 (Mass. App. Ct. 1989). But this principle has well-
defined limits. The plain language of the contract controls,
without embellishment, unless that language is imprecise or
equivocal. See Hubert v. Melrose-Wakefield Hosp. Ass'n, 661 N.E.2d
1347, 1351 (Mass. App. Ct. 1996). Only in the event of linguistic
uncertainty may a court refer to antecedent negotiations as a
method of clarifying the meaning of contractual terms. Id.
Nothing in the Agreement guarantees the plaintiff the
benefit of his unvested stock options regardless of his continued-
employment status. "[W]ords that are plain and free from ambiguity
must be construed in their usual and ordinary sense." Cady v.
Marcella, 729 N.E.2d 1125, 1129 (Mass. App. Ct. 2000) (citation and
internal quotation marks omitted).
In this instance, the plaintiff argues that the
interaction between the Agreement and the Stock and Option Plan is
sufficiently perplexing to create an ambiguity. This argument
elevates hope over reason.
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Incorporation by reference is a common tool in the
drafting of contracts. See, e.g., Warren Freedenfeld Assocs., Inc.
v. McTigue, 531 F.3d 38, 49 (1st Cir. 2008); Okmyansky v. Herbalife
Int'l of Am., Inc., 415 F.3d 154, 156 (1st Cir. 2005). Employing
this drafting technique does not, in and of itself, create
ambiguity. See Warren Freedenfeld Assocs., Inc., 531 F.3d at 49.
The relevant provision is clear as a bell. The Agreement states
not once, but three times, that the terms of the Stock and Option
Plan, which are themselves crystal clear, comprise a part of the
bargain between the parties. Under these circumstances, the
plaintiff cannot plausibly complain of an ambiguity. See E.
Holding Corp. v. Cong. Fin. Corp., 910 N.E.2d 931, 935 (Mass. App.
Ct. 2009).
That ends this aspect of the matter. Pursuant to the
clear terms of the Agreement, the plaintiff's stock options
continued to vest only in the event that his employment endured.
The plaintiff is entitled only to the benefit of the bargain that
he struck, nothing more. See Cochran, 328 F.3d at 7; Schwanbeck v.
Fed.-Mogul Corp., 592 N.E.2d 1289, 1292 (Mass. 1992). Because the
plaintiff had no right to exercise the unvested options, the
defendant did not breach the Agreement when it refused to grant him
the benefits of those options upon his termination.
The plaintiff's second breach of contract claim rests on
the notion that the defendant wrongfully declined to pay him a
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prorated bonus for the forty-nine weeks that he worked in 2009.
This claim, though it has a certain equitable attractiveness, lacks
force.
To begin, the plaintiff's claim of entitlement to a
prorated bonus depends on a misreading of the Agreement. The
provision dealing with bonuses reads in pertinent part: "If you
commence your employment prior to November 1 of a calendar year,
you will [be] eligible to participate in the bonus program for that
year on a pro-rated basis." Because the plaintiff commenced his
employment with the defendant prior to November 1, 2008, he
received a prorated bonus for that year.
The next year — 2009 — stands on a different footing.
The provision in question does not contemplate a prorated bonus for
an employee who was on the payroll at the start of a given calendar
year. The plaintiff was, of course, on the payroll at the start of
2009 (the year for which he now claims a prorated bonus).
Therefore, the "prorated bonus" provision in the Agreement does not
apply.
In all events, the Agreement only makes the plaintiff
"eligible to participate in [the defendant's] performance bonus
plan." The Agreement does not guarantee the plaintiff a bonus, nor
can such a guarantee plausibly be inferred. Under the Agreement
and the performance bonus program, "[a]ll bonus awards are made at
the discretion" of the defendant's board of directors.
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Furthermore, any such award can be as little as 0%, regardless of
performance. As these provisions make clear, even an employee who
works diligently and to good effect throughout the calendar year is
not assured of a bonus.
In an effort to salvage this claim, the plaintiff
suggests that discovery would supply evidence that the board's
discretion did not extend to specific bonus amounts but, rather,
was limited to formulating policy. This suggestion is fruitless
for at least two reasons.
First, a plaintiff whose complaint does not state an
actionable claim has no license to embark on a fishing expedition
in an effort to discover a cause of action. See McCloskey v.
Mueller, 446 F.3d 262, 271 (1st Cir. 2006); DM Research, Inc. v.
Coll. of Am. Path., 170 F.3d 53, 55 (1st Cir. 1999). Second, even
if the plaintiff discovered extrinsic evidence of how the board
habitually exercised its discretion, that evidence would be
irrelevant because the clear contractual language itself affords
the board unfettered discretion to deny him a bonus.
B. Implied Covenant of Good Faith and Fair Dealing.
A covenant of good faith and fair dealing is "implicit in
all Massachusetts contracts, including contracts for employment at
will." Harrison v. NetCentric Corp., 744 N.E.2d 622, 629 (Mass.
2001). Traversing the same ground that we have just explored, the
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plaintiff presses counterpart claims premised on this covenant.
These claims go down a blind alley.
We begin with bedrock. Under Massachusetts law, an
employer has "an unfettered right to discharge" an at-will
employee. Cochran, 328 F.3d at 7. The discharged employee may
nonetheless recover "unpaid compensation if the employee [was]
terminated in bad faith and the compensation is clearly connected
to work already performed." Harrison, 744 N.E.2d at 629. So
viewed, the implied covenant serves to "preclude an employer from
taking an unfair financial advantage." Cochran, 328 F.3d at 8.
In the case at hand, the plaintiff's implied covenant
claims founder because his complaint contains only a threadbare
allegation that "the defendant terminated [him] in bad faith."
This statement is unaccompanied by any factual allegations that
might give rise to an inference of bad-faith conduct — an essential
component of a claim under the implied covenant. See Harrison, 744
N.E.2d at 629; see also Sargent v. Tenaska, Inc., 108 F.3d 5, 8
(1st Cir. 1997).
While an allegation of "bad faith" is in a sense a
factual allegation, it is so subjective that it fails to cross "the
line between the conclusory and the factual." Twombly, 550 U.S. at
557 n.5. Such a bare-boned allegation cannot, without more, defeat
a motion to dismiss for failure to state a claim. See Iqbal, 129
S. Ct. at 1951; Peñalbert-Rosa v. Fortuño-Burset, ___ F.3d ___, ___
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(1st Cir. 2011) [No. 09-2391, slip op. at 6]; Tambone, 597 F.3d at
442; see also Harrison, 744 N.E.2d at 629. It is reasonable to
expect that, if the plaintiff had any basis beyond speculation for
asserting a claim of bad faith, he would have described that basis
in some detail in his complaint, or at the very least mentioned it
in opposing the motion to dismiss. Peñalbert-Rosa, ___ F.3d at ___
[slip op. at 8].
The defendant's stated reason for terminating him was a
reorganization at the company. The plaintiff did not challenge
this reason, either below or on appeal. Although the defendant
praised his job performance and the termination occurred shortly
before he would otherwise have been eligible to collect a bonus and
more stock, the plaintiff neither tied these facts directly to his
bad faith claim nor suggested that the reorganization was a sham.2
If he had intended to ground his bad faith claim on those facts, he
should have done more to develop that position. If he made
inquiries of the management or his friends in the company as to
whether a real reorganization was planned or had ensued and got
insufficient answers, he should have said so; if he did not pursue
the inquiry, that is his fault. It was up to him to make the
effort to adduce the evidence for inclusion in the complaint.
2
Indeed, at oral argument in this court, the plaintiff's
counsel conceded that his breach of contract claims and his bad
faith claims were inextricably intertwined and rested on the same
factual premise.
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Because implied covenant claims are all too often attempts to mend
an infirm contract claim, it is especially prudent in such cases to
insist on a real showing.
Without such specific information, the plaintiff's
allegation "bears insignia of its speculative character,"
betokening that it constitutes only mere possibility. Id. at ___
[slip op. at 7]; see Tambone, 597 F.3d at 442. It follows from the
above that the plaintiff's conclusory allegation of bad faith
cannot satisfy the applicable pleading standard. The plaintiff's
claims under the implied covenant are, therefore, subject to
dismissal.
III. CONCLUSION
We need go no further. For the reasons elucidated above,
we uphold the district court's dismissal of the plaintiff's
complaint.
Affirmed.
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