Walsh v. Zurich American Insurance Comp

United States Court of Appeals
For the First Circuit

No. 15-2245

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.

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW HAMPSHIRE

[Hon. Steven J. McAuliffe, U.S. District Judge]

Before

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

Charles P. Roberts, III, with whom Donald S. Prophete 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. were on brief, for appellee.

February 22 2017
 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

1
We note that defendants are a group of related corporate
entities whom we refer to collectively as "Zurich."

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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

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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

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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

2 The written model prepared by the company's compensation
specialists showed Walsh's projected incentive pay for the
multiple types of business for which he was responsible ranging
from a low-end total of about $48,000 to a maximum of about
$157,000. The targeted mid-point amount was $115,000, of which
$60,000 was attributed to the ADC.

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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

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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

3
The Plan stated that ADC incentive would be paid on "NET
DEALER REMIT (net of chargebacks) for reinsurance and retro
accounts sold through ALTERNATE DISTRIBUTION CHANNELS." The chart
was in the form of a nine-box matrix with different percentages
listed at each intersection of profitability and production goals.

4
A third reference to discretion appeared under the heading
"PURPOSE OF THE PLAN":

The purpose of the INCENTIVE PLAN is to
establish a formula whereby certain employees
. . . may, at the sole discretion of the
President, be paid an INCENTIVE PAYMENT for
the PLAN YEAR as a reward to encourage them to
help make the business of the COMPANY a
success.

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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.

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 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 compensation for 2009 would consist of a

continued guarantee of $250,000 in annual income (as Walsh had

been promised in October 2007), accomplished through base salary

and an extension of the supplemental pay agreement that was due to

expire in April 2009. In addition, the new incentive plan -- the

"February 2009 Plan" -- would entitle Walsh to $1,000 for each $1

million of ADC premium paid monthly. On February 19, Eldridge

reported to Walsh that Kane had formally approved that plan, with

minor revisions as Walsh and Eldridge had discussed, and that she

would be uploading it into Zurich's compensation database.

Pursuant to the February 2009 Plan, Walsh's ADC

incentive in 2009 for the APCO deal -- $77,000 -- was less than

one-tenth of the incentive he would have earned under the August

2008 Plan. Nonetheless, his total compensation for 2009 reached

$398,000, which consisted of base salary, supplemental payments,

and incentives.

Although the February 2009 Plan technically covered only

calendar year 2009, no new plan was put into effect for 2010, and

Walsh continued to operate under the February 2009 Plan. In the

late summer and early fall of 2010, another dispute about incentive

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pay arose when Zurich refused to pay Walsh $101,000 based on new

business with GAIC. Although the GAIC transaction was booked by

Zurich's accounting department as ADC income -- for which Walsh

would be entitled to incentive pay -- the company maintained that

the deal was unique and did not in fact fit within the ADC category.

Accordingly, in mid-October 2010, Zurich executives moved to amend

Walsh's still-operative February 2009 Plan to eliminate his

entitlement to the $101,000 incentive.

By that time, the relationship between Walsh and Zurich

had deteriorated even further. Kane had left Zurich in early 2010,

and Walsh's new boss, Tina Mallie, told him in June 2010 that his

future travel to meet with customers was being restricted. In

conversations with Mallie in September, and with another new boss,

Kathi Ingham, in October, Walsh learned that he would no longer be

responsible for reinsurance business, which had provided a

substantial portion of his incentive pay. On October 29, he sent

Ingham an email advising that he would be leaving Zurich in thirty

days. He was terminated later that day.

B. Procedural Background

In January 2012, Walsh filed a complaint against Zurich

in New Hampshire state court. Seeking more than $14 million in

damages, he alleged breach of contract, breach of the implied

covenant of good faith and fair dealing, wrongful discharge, and

willful violation of New Hampshire's wage and hour law. He claimed

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that Zurich owed him additional APCO incentive, as promised in the

August 2008 Plan, and GAIC incentive as provided by the February

2009 Plan. The case was removed to federal court based on

diversity jurisdiction, and a trial took place before a jury.

During the trial, the court granted Zurich's motion for

judgment as a matter of law on the wrongful discharge claim,5 but

it otherwise denied the company's motions for judgment as a matter

of law both at the close of plaintiff's case and at the close of

all evidence. The court rejected Zurich's contention that Walsh

did not produce sufficient evidence to establish that the August

2008 Plan was a binding agreement or that he was entitled to

incentive on the GAIC deal. The court also decided not to instruct

the jury on the implied covenant claim, concluding that the

contractual good faith issue was subsumed within the breach claim.

Specifically with respect to the APCO deal, the court ruled that,

if the jury found that the August 2008 Plan was not an enforceable

contract, there would be no basis for a claim that the company had

breached an implied contractual covenant. Conversely, the court

held, if the jury found that the August 2008 Plan was a binding

agreement, Zurich could not have had a good faith belief that the

5 Walsh has not appealed the court's ruling on the wrongful
discharge claim, and we do not further address it.

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Plan's discretion provisions permitted it to retroactively modify

Walsh's compensation for the APCO deal via the February 2009 Plan.

The jury found in favor of Walsh on the claims for breach

of contract and willful violation of New Hampshire wage law, the

latter finding providing the basis for doubling the contractual

damages. See N.H. Rev. Stat. Ann. § 275:44(IV).6 The court

subsequently denied Zurich's post-trial motion for judgment as a

matter of law on those claims, and it granted Walsh's motion for

attorney's fees and expenses. The monetary awards, before

doubling, were $791,353 on the APCO deal and $101,000 on the GAIC

6 Section 275:44 is titled "Employees Separated From Payroll
Before Pay Days," and it generally provides for the prompt payment
of wages owed. At issue here is subsection (IV), which states, in
pertinent part:

If an employer willfully and without good
cause fails to pay an employee wages as
required under . . . this section, such
employer shall be additionally liable to the
employee for liquidated damages in the amount
of 10 percent of the unpaid wages for each day
except Sunday and legal holidays upon which
such failure continues after the day upon
which payment is required or in an amount
equal to the unpaid wages, whichever is
smaller . . . .

N.H. Rev. Stat. Ann. § 275:44(IV). The New Hampshire Supreme Court
deems an employer's failure to pay owed compensation "willful and
without good cause" when the nonpayment is done "voluntarily, with
knowledge that the wages are owed and despite financial ability to
pay them." Ives v. Manchester Subaru, Inc., 498 A.2d 297, 302
(N.H. 1985) (Souter, J.).

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deal. The parties stipulated to an award of $595,000 in attorney's

fees and $9,171.52 in other legal expenses.

This appeal followed.

II.

On appeal, Zurich argues that the district court

incorrectly concluded that sufficient evidence supported the

jury's breach-of-contract and willfulness findings on the APCO and

GAIC deals and, hence, the court erred by denying its motions for

judgment as a matter of law on every claim submitted to the jury.

On the question of breach, Zurich argues that Walsh failed to prove

two facts necessary to find the company liable for the disputed

incentive amounts: (1) the August 2008 Plan was an enforceable

contract covering the APCO deal, and (2) the GAIC deal involved

ADC business covered by the February 2009 incentive plan. In

addition, Zurich maintains that the court made a legal error in

handling the APCO breach claim when it refused to instruct on the

covenant of good faith and fair dealing or "to submit any issue

regarding Zurich's right under the August 2008 Plan to modify the

plan and/or limit incentive before the plan became effective on

April 1, 2009."

Zurich further claims that the evidence failed to

establish that the company acted willfully and without good cause

when it paid Walsh incentive for the APCO deal under the February

2009 Plan, rather than the August 2008 Plan, and in refusing to

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pay incentive on the GAIC deal. As may be appropriate based on

the outcome of its claims on the merits, the company also seeks

reversal of the attorney's fee award or remand for reconsideration

of the fee amount.

We review de novo the district court's denial of Zurich's

motions for judgment as a matter of law, "viewing the evidence in

the light most favorable to the nonmoving party." T G Plastics

Trading Co. v. Toray Plastics (Am.), Inc., 775 F.3d 31, 37 (1st

Cir. 2014) (quoting Monteagudo v. Asociación de Empleados del

Estado Libre Asociado de P.R., 554 F.3d 164, 170 (1st Cir. 2009)).

We also apply de novo review to the asserted instructional error.

See Burke v. McDonald, 572 F.3d 51, 57 (1st Cir. 2009) ("Where, as

here, a claim of instructional error challenges the very basis for

instructing or refusing to instruct on a particular subject, we

review that claim of error de novo.").

A. The August 2008 Plan

1. Sufficiency of the Evidence

In the circumstances of this case, whether the August

2008 Plan was an enforceable contract is a question of fact, see,

e.g., Durgin v. Pillsbury Lake Water Dist., 903 A.2d 1003, 1006

(N.H. 2006), and we may overturn the jury's finding that it was a

finalized agreement only if we can say that no reasonable jury

could have reached that conclusion, see, e.g., T G Plastics Trading

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Co., 775 F.3d at 38. Zurich is unable to satisfy this "stringent

standard." Id.

Three witnesses testified that they understood the

contract was effectively a done deal by the time Stoothoff left

Zurich at the end of August. Walsh reported that the discussions

among him, Stoothoff, Kane, and Eldridge through the summer of

2008 culminated with a meeting in Eldridge's office on August 27

for the purpose of "finaliz[ing] this plan." Walsh testified that,

during that meeting, Stoothoff "called in . . . and gave his

blessing," and Walsh left Eldridge's office "satisfied that my

plan was done." Stoothoff similarly testified that he believed

"all of the essential terms [had] been agreed to," and he therefore

"thought we were done" and "assumed [the plan] was final" when he

left Zurich. He agreed that a reasonable person in Walsh's shoes

would "have reasonably believed that he would be paid on that

incentive plan for 2009." Stoothoff also testified that Kane had

approved the plan as it stood on August 27.

To be sure, other evidence suggested that the August

2008 Plan was never finalized, at least in the way incentive plans

ordinarily were implemented at Zurich. Eldridge testified that

she never received a formal sign-off from Kane on the August 2008

Plan, noting that "[t]he only approval I received from him was in

February of '09." Hence, she never submitted the August 2008 Plan

for inclusion in Zurich's compensation database. Even Walsh

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testified that he did not know what steps needed to be taken to

implement his plan once it had been agreed upon. He acknowledged

that "finalized to me and finalized to the managers above me may

mean two different things," and he recognized that Stoothoff "may

have [had] other things to do to get it through and get through

the system." Indeed, Stoothoff testified that he did not remember

Kane saying the plan was final, but he "assumed it was [based] on

the way the interactions were going."

The record thus presents mixed messages about the status

of the August 2008 Plan, and that conflict was for the jurors to

resolve. It is not our role to second-guess their determination

that a meeting of the minds -- and, hence, a binding agreement --

was reached when the discussion of terms ended on August 27, with

everyone's apparent approval. See Chisholm v. Ultima Nashua Indus.

Corp., 834 A.2d 221, 225 (N.H. 2003) ("A meeting of the minds is

present when the parties assent to the same terms."); see also

Durgin, 903 A.2d at 1006 ("A valid, enforceable contract requires

offer, acceptance, consideration, and a meeting of the minds.").

The missing formal steps -- including entry into Zurich's

compensation database -- could be attributed to the fact that

implementation of the Plan was more than seven months away rather

than to its non-final status.7

7Zurich also highlights the absence of any written protest
by Walsh about the subsequent change in incentive as an indication

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 Accordingly, we reject Zurich's contention that the

record does not support the jury's finding that the August 2008

Plan was an enforceable contract.

2. Breach of Contract Instructions

a. Background

Throughout the trial, Zurich's counsel argued that, even

if the August 2008 Plan was a binding agreement, the company was

free to reduce Walsh's incentive for the APCO deal pursuant to the

language giving management discretion on whether to pay incentive

and, specifically, to "limit INCENTIVE in unique situations." The

district court ultimately decided that New Hampshire law barred

Zurich from relying on the Plan's discretion provisions, and, over

Zurich's objection, it instructed the jury on that point as

follows:

Now, you have heard some evidence in this case
suggesting that the August 2008 incentive plan
contained language reserving discretion to
Zurich to change the incentive rates with
respect to the APCO deal as it deemed
appropriate. That reservation of rights does
not permit Zurich to change incentive pay
rates for the APCO deal after it was closed.
If you find that the August 2008 incentive
plan is a binding contract, Zurich is

that he understood the August 2008 Plan was not final under "the
established procedure at Zurich for approving and finalizing pay
plans." That inference is countered, however, by Walsh's testimony
that he felt compelled either to accept the new plan "or walk out
the door and try to find another job" -- with the latter choice
not feasible at that time.

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 obligated to pay plaintiff in accordance with
its terms with respect to the APCO deal.

In rejecting Zurich's reliance on the discretion

provisions, the district court took the view that Walsh's incentive

pay from the APCO deal, though not labeled as such, was akin to a

commission that, under New Hampshire case law, necessarily vested

in December 2008 and could not be withheld absent extenuating

circumstances, such as a financial disaster for the company.8 See,

e.g., New Eng. Homes, Inc. v. R.J. Guarnaccia Irrevocable Tr., 846

A.2d 502, 504 (N.H. 2004) (stating the general rule that "a person

employed on a commission basis to solicit sales orders is entitled

to his commission when the order is accepted by his employer"

8 In its oral ruling on Zurich's renewed motion for judgment
as a matter of law following the presentation of all evidence, the
court stated, inter alia, the following:

So New Hampshire common law is pretty
clear, it seems to me. You cannot
retroactively divest an employee of a deferred
compensation amount that he's already earned
under an agreement that was extant. And if
that weren't enough, New Hampshire statutory
law and regulatory law is pretty clear.
. . . Certainly Zurich could change the terms
of employment with respect to incentive pay,
but only prospectively, not retroactively.
. . .
So to the extent that language purports
to vest Zurich with discretion to
retroactively change a vested deferred
compensation entitlement, it's contrary to
statutory law, and therefore is ultra vires
and against public policy and totally
unenforceable.

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(quoting Galloway v. Chicago-Soft, Ltd., 713 A.2d 982, 984 (N.H.

1998))); see also Gilman v. Cheshire Cty., 493 A.2d 485, 488 (N.H.

1985) (holding that an employer may not "impair its obligation to

pay [certain] benefits by changing its . . . policy after the

compensation was earned"). The court also construed regulatory

and statutory provisions to allow "only prospective[]" changes to

Walsh's incentive pay. See N.H. Code Admin. R. Lab. 803.03(c)

(requiring employers to provide written notice of a change in an

employee's rate of pay or salary "prior to the effective date of

such change"); see also N.H. Rev. Stat. Ann. § 275:49(II)

(requiring notice of changes in rates of pay "prior to the time of

such changes").

In addition, the court observed that Zurich's promise to

pay Walsh at a specific rate was designed to incentivize him to

sell ADC products. Once he did so, the court ruled, the company

had no discretion to change the incentive formula solely to "[m]ake

Zurich richer [and] [m]ake the plaintiff poorer." The court thus

held that any exercise of discretion to retroactively deny Walsh

"a vested deferred compensation entitlement" was "against public

policy and totally unenforceable." See supra note 8. Accordingly,

it refused to instruct the jury on the covenant of good faith and

fair dealing "because I'm not going to allow the defense of we

have discretion to not pay him."

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 On appeal, Zurich reiterates its contention that the

August 2008 Plan and New Hampshire law allowed the company to

change Walsh's incentive formula, limited only by the obligation

to do so reasonably and in good faith. The company asserts that

the record unequivocally demonstrates that it complied with this

obligation, and, hence, it is entitled to judgment as a matter of

law on the breach of contract claim. At a minimum, the company

argues, the jurors should have been instructed on the implied

covenant of good faith and told that, if they found the August

2008 Plan to be a binding agreement, they must go on to determine

whether Zurich's substitution of a new plan in February 2009 was

a reasonable and good-faith exercise of the discretion explicitly

given to company management by the Plan. As we explain below, we

agree that Zurich was entitled to such an instruction.

b. Interpreting the Plan

The district court reached its conclusion that Walsh's

incentive for the APCO deal vested in December 2008, barring its

retroactive reduction, by "reading [the August 2008 Plan] in

context and properly construing it." The court's focus on the

terms of the agreement is consistent with both employment law

generally and New Hampshire's approach to employment contract

disputes. See Restatement of Employment Law § 3.02(b) ("Whether

incentive compensation has been earned is determined by the

agreement on incentive compensation between the employer and

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employee or any binding employer promise or binding policy

statement.");9 New Eng. Homes, 846 A.2d at 508 (finding that

ambiguity in a Letter of Understanding setting forth commission

structure created "a legitimate dispute as to whether the plaintiff

owed wages to the employees"); Galloway, 713 A.2d at 985 (examining

employment agreement to determine whether contract specified

departure from general rule that "employees paid on a commission

basis earn commissions when their employer accepts an order"); see

also Pachter v. Bernard Hodes Grp., Inc., 891 N.E.2d 279, 285 (N.Y.

2008) ("[W]hen a commission is 'earned' and becomes a 'wage' for

purposes of [the New York wage-payment statute] is regulated by

the parties' express or implied agreement . . . .").

However, the district court did not identify which

specific terms of the August 2008 Plan it relied on, and our own

9 Section 301 of the Restatement of Employment Law, titled
"Right to Earned Compensation," includes the following comment:

Earned compensation. The employer's
obligation to pay compensation depends on
whether the employee has earned it. In the
case of a salary or wage, the employee is
typically paid for a period of service, and
the compensation is earned when that period
ends . . . . In the case of commissions, the
employee is paid for sales made or other unit
of output produced, and whether the
compensation is earned depends on whether the
sales have been made or other unit of output
has been produced in accordance with the
parties' agreement.

Id. § 3.01, cmt. d.

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review of the Plan's language leads us to a contrary view. See

Clukey v. Town of Camden, 797 F.3d 97, 101 (1st Cir. 2015) (stating

that a trial court's contract interpretation is reviewed de novo);

Birch Broad., Inc. v. Capitol Broad. Corp., 13 A.3d 224, 228 (N.H.

2010) (same). Before detailing our reasoning, we note that we

agree with the underlying premise of the district court's ruling

-- i.e., if the August 2008 Plan gave Walsh "a vested deferred

compensation entitlement," equivalent to an ordinary commission,

for his work on the APCO deal, Zurich could not reduce that

entitlement retroactively. Hence, the first inquiry is whether,

under the August 2008 Plan, the incentive promised to Walsh for

the APCO business vested when he closed the deal in December 2008.

In interpreting the Plan, we "give the language used by

the parties its reasonable meaning, considering the circumstances

and the context in which the agreement was negotiated, and reading

the document as a whole." Birch Broad., 13 A.3d at 228. When we

conduct that examination, we find multiple indicators that Walsh

did not "earn" incentive when the APCO deal closed in December

2008; rather, his entitlement to incentive pay vested when Zurich

received ADC premiums and could apply the variables specified in

the August 2008 Plan to determine the amount of incentive due.

First, as the district court recognized, the August 2008

Plan does not set forth a classic commission arrangement, whereby

the employee is entitled to a certain percentage of the amount of

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a sale of goods or real estate.10 See, e.g., New Eng. Homes, 846

A.2d at 504 (specifying three and one-half percent "commission"

for modular home sales); Galloway, 713 A.2d at 984-85 (specifying

"commission rate[s]" "to be paid on sales closed"). Although

commission in the insurance industry would more likely be based on

premiums received than on "products" (i.e., policies) sold, and

the Plan establishes a premium-based measure, the agreement does

not say that Walsh "earns" a specified percentage of the premiums

resulting from the sale of ADC insurance products. Rather, the

Plan's self-proclaimed purpose is to set up a "formula whereby

certain employees . . . may, at the sole discretion of the

President, be paid an INCENTIVE PAYMENT for the PLAN YEAR as a

reward to encourage them to help make the business of the COMPANY

a success." The "Purpose" paragraph goes on to say that "[t]he

amount of INCENTIVE to each PARTICIPANT is related to VEHICLE

SERVICE CONTRACT new business & service." (Emphasis added.)

Specifically with respect to ADC incentive, the Plan

states:

ALTERNATIVE DISTRIBUTION CHANNEL incentive
shall be paid on Net Dealer, Third Party
Administrator, Agency Business and Original
Equipment Manufacture Remit (net of

10 Early in the trial, the court observed that the promised
incentive "looks like commission, but neither side is claiming
it's a commission," and it noted at another point that Walsh
"didn't have a deal per commission when he made the sale." The
court properly looked beyond the terminology in attempting to
discern the nature of the incentive.

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 chargebacks) sold through ALTERNATIVE
DISTRIBUTION CHANNELS. . . . Quarterly
INCENTIVE shall be calculated on year to date
performance against prorated production and
profitability goals . . . [and] when
calculation results in a negative amount, no
INCENTIVE shall be paid in that quarter.

The amount of incentive pay, which is described generally as

"related to" new ADC business, thus depends specifically on

developments occurring after the deal -- "year to date" factors

that, as Walsh explained at trial, include the "loss ratio" for

the new products. Indeed, the Plan contemplates the possibility

that no incentive will be paid in some fiscal quarters.

In other words, the incentive arrangement in the August

2008 Plan is framed as a computation based on the company's net

income from certain new business, not as a calculable entitlement

triggered by sales consummated by Walsh. In fact, in its ruling

on Zurich's post-trial motion for judgment as a matter of law on

the GAIC deal, the district court noted the parties' concession

"that Walsh did not have to personally sell anything in order to

receive incentive pay on this, or any other, deal producing

Alternative Distribution Channel revenue; he was compensated based

on premiums realized through the ADC." Order at 24 n.1. The

acknowledged reliance on premiums collected to determine

incentive, rather than on Walsh's own efforts, underscores the

distinction between the Plan and a typical commission arrangement.

That is, the incentive promise here was premised on the receipt of

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premiums, starting in April 2009, and not on the acquisition of

the new business that would produce those premiums.

Second, the Plan by its terms went into effect on January

1, 2009, and Walsh's incentive payments were not scheduled to begin

until April. There is no dispute that, at least until the first

of the year, the only operative agreement governing Walsh's

compensation above his base salary was the October 2007

Supplemental Pay Agreement. Thus, when the August 2008 Plan was

adopted (according to the jury), it provided a promise of future

payment, not an immediate entitlement. The district court noted

this prospective effect, observing that, as of December 2008, the

pertinent "employment period hasn't commenced." Walsh's testimony

reinforces the future focus of the August 2008 Plan. In describing

how the ADC incentive program was set up, Walsh noted that he and

his superiors expected premiums to come in on a monthly basis,

"[s]o at the end of my supplemental pay on April 1st of 2009, I

would need to have premiums coming in the door in order for me to

earn income." (Emphasis added.) At another point, he similarly

stated that his incentive was based on "the actual premium that

came in the door."

Third, the Plan states that departing employees are

entitled to "INCENTIVE earned prior to termination," and specifies

that the incentive due "shall be calculated based on production

and profitability at the time of termination and paid at the next

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regular INCENTIVE pay date." Once again, the focus is on

performance factors that can only be established when premiums

start to be paid. Under this provision, if Walsh had left Zurich

in February or March of 2009, he would not be entitled to an

incentive payment because his compensation package did not

incorporate the incentive formula until April 2009. Hence, this

provision seems at odds with a determination that he had "earned"

incentive as soon as he closed the deal.

Taken together, the Plan's express language and its

context -- notably, that it did not govern Walsh's compensation

until April 2009 -- persuade us that the legally correct reading

of the August 2008 Plan does not give Walsh vested incentive pay

at the time he closes a deal. Rather, when the Plan took effect

on January 1, Walsh acquired a contractual right to receive ADC

incentive pursuant to the Plan's formula -- a right that, as

explained below, constrained Zurich's discretion to alter the

formula -- but he had not yet earned any incentive. Walsh's

testimony is compatible with this reading, and the interpretation

gains further strength from the Plan's multiple references to the

company's discretion to withhold or change the incentive pay

specified therein. Walsh was told in express terms that,

notwithstanding the formula in the Plan, the incentive pay he will

receive in the future may be limited by management in "unique

situations." In other words, he was warned that his incentive pay

- 26 -
may differ from the Plan's terms. He accepted the Plan with that

warning. See Olbres v. Hampton Coop. Bank, 698 A.2d 1239, 1243

(N.H. 1997) ("[P]arties generally are bound by the terms of an

agreement freely and openly entered into, and courts cannot make

better agreements than the parties themselves have entered into or

rewrite contracts merely because they might operate harshly or

inequitably." (quoting Mills v. Nashua Fed. Sav. & Loan Assoc.,

433 A.2d 1312, 1315 (N.H. 1981) (alteration in original)).

Of course, as we explain in the next section, this

interpretation of the Plan does not mean that Zurich possessed

unbridled authority to revise the incentive formula for 2009 to

Walsh's detriment. Rather, it means only that the February 2009

Plan did not effect a retroactive diminution of earned compensation

that would be barred as a matter of law.11 The question remains

whether the particular adjustment that Zurich made, even though

facially permissible under the discretion provisions of the August

2008 Plan, nonetheless constituted a breach of contract.

11 Under this construction of the August 2008 Plan, the
district court's reliance on New Hampshire provisions requiring
notice of changes in compensation "prior to the time of such
changes" was also misplaced. N.H. Rev. Stat. Ann. § 275:49(II);
see also N.H. Code Admin. R. Lab. 803.03(c). Walsh had notice of
the February 2009 Plan before the change in his incentive pay took
effect in April.

- 27 -
 c. The Obligation of Good Faith

Under New Hampshire law, a contract giving one party

unlimited discretion to modify the agreement is permissible, but

subject to "an implied obligation of good faith to observe

reasonable limits in exercising that discretion, consistent with

the parties' purpose or purposes in contracting." Centronics Corp.

v. Genicom Corp., 562 A.2d 187, 193 (N.H. 1989) (Souter, J.)

(emphasis added). Hence, when discretionary action adverse to the

complaining party is taken, the question is whether "the

defendant's exercise of discretion exceeded the limits of

reasonableness." Id.

The answer to this question depends on
identifying the common purpose or purposes of
the contract, against which the reasonableness
of the complaining party's expectations may be
measured, and in furtherance of which
community standards of honesty, decency and
reasonableness can be applied.

Id. at 193-94; see also Milford-Bennington R.R. Co. v. Pan Am Rys.,

Inc., 695 F.3d 175, 179-80 (1st Cir. 2012) (describing New

Hampshire law); Livingston v. 18 Mile Point Dr., Ltd., 972 A.2d

1001, 1005-06 (N.H. 2009) (stating that the function of the implied

good-faith duty, in the context of "limitation of discretion in

contractual performance," is "to prohibit behavior inconsistent

with the parties' agreed-upon common purpose and justified

expectations, as well as 'with common standards of decency,

- 28 -
fairness and reasonableness'" (quoting Richard v. Good Luck

Trailer Court, 943 A.2d 804, 808 (N.H. 2008)) (citation omitted)).

As described above, the district court refused to allow

the jury to consider the reasonableness of Zurich's substitution

of the February 2009 Plan for the August 2008 Plan with respect to

the APCO incentive. Instead, the court resolved that issue as a

matter of law, incorrectly ruling that Zurich had acted

unreasonably because, in its view, the company impermissibly

withheld an amount of incentive that Walsh had already earned.

Zurich asks us for the converse ruling: a determination

as a matter of law that it acted reasonably and in good faith.

The company asserts that the reduction in Walsh's incentive was

reasonable, and thus proper, because it was driven by the enormous,

unanticipated value of the APCO deal. As noted above, Walsh would

have been entitled to nearly $870,000 in APCO incentive alone in

2009 under the August 2008 Plan -- giving him total compensation

for the year of about $1.1 million. That salary far exceeds the

annual income discussed in 2007 when Walsh was persuaded to stay

at Zurich, and it also eclipses by a large margin the high-end

salary predicted for 2009 by the modeling for the August 2008 Plan

($292,000). More pertinently, Walsh's claimed incentive amount

dwarfs the incentive modeling for the first year of ADC business,

which predicted a high point of $90,000. Hence, Zurich argues,

the roughly $400,000 income that resulted from the February 2009

- 29 -
incentive arrangement -- combined with the company's decision to

extend Walsh's guaranteed monthly supplemental payments12 -- was

patently reasonable and consistent with the parties' "common

purpose or purposes." Centronics Corp., 562 A.2d at 194; see also

id. ("[T]he good faith requirement is not a fail-safe device

barring a defendant from the fruits of every plaintiff's bad

bargain, or empowering courts to rewrite an agreement even when a

defendant's discretion is consistent with the agreement's legally

contractual character.").

Although Zurich offers a plausible view of the evidence,

we cannot say that it is the only permissible view. A jury could

have found that the amount of the reduction in Walsh's anticipated

APCO incentive was excessive in light of the parties' intentions

when the August 2008 Plan was developed. Zurich knew that Walsh

was hoping for unlimited potential in his new position, and the

company's stated goal was to keep Walsh at Zurich. A jury could

thus find that, when they agreed to the August 2008 Plan, the

parties' underlying objective was to provide Walsh, as soon as

possible, with substantially higher income than the minimum he had

12As noted above, the October 2007 Supplemental Pay Agreement
ended by its terms in March 2009. The monthly payments it provided
were specifically "in lieu of any incentives earned." When Zurich
switched to the February 2009 Plan for Walsh's incentive pay, it
also prepared a new Supplemental Pay Agreement that provided a
monthly allotment of $12,777.77 from April to December 2009 "in
addition to any incentives earned."

- 30 -
been guaranteed when he agreed to remain at Zurich. Though no one

anticipated such a lucrative deal to materialize so early in

Zurich's acquisition of ADC business, a jury could view the switch

to a much less favorable incentive formula for the APCO business

as inconsistent with the wide-open compensation potential the

parties had agreed upon. In addition, Walsh's testimony suggested

that he acted to his disadvantage based on the terms of the August

2008 Plan because its incentive structure motivated him to take

"the chance" of focusing solely on the APCO business, rather than

pursuing multiple other deals.

Given that the evidence presented at trial could have

supported either of these scenarios, the district court erred by,

in effect, directing the jury to find a breach if it found the

August 2008 Plan to be a binding, enforceable agreement. Instead,

the court should have instructed the jurors that, because the Plan

expressly gave Zurich discretion to limit incentive pay, they must

go on to determine whether the company reasonably and in good faith

exercised that authority -- i.e., whether the particular changes

to Walsh's compensation package in February 2009 satisfied the

implied contractual covenant of good faith. See Centronics Corp.,

562 A.2d at 193.

Put another way, Zurich's adoption of a less favorable

formula would not in itself be a breach of the contract's explicit

terms because the August 2008 Plan on its face allowed Zurich to

- 31 -
make whatever changes it wanted to Walsh's incentive pay. Walsh's

APCO-related breach claim thus depended on whether, in making that

change, Zurich breached the covenant of good faith and fair dealing

implicit in the August 2008 Plan. If the jury were to find no

violation of the implied covenant, there would be no contractual

breach. Consequently, the portion of the district court's judgment

incorporating the finding of breach must be vacated.

3. Willfulness

Our decision invalidating the finding of breach with

respect to the APCO incentive necessarily also invalidates the

jury's finding that Zurich "willfully and without good cause"

failed to pay wages owed, in violation of New Hampshire law. N.H.

Rev. Stat. Ann. § 275:44(IV); see supra note 6. Zurich argues

that it is entitled to judgment as a matter of law on the statutory

claim, which provided for doubling the breach-of-contract damages.

New Hampshire courts have construed the phrase

"willfully and without good cause" to mean "voluntarily, with

knowledge that the wages are owed and despite financial ability to

pay them." Chisholm, 834 A.2d at 226 (quoting Ives v. Manchester

Subaru, Inc., 498 A.2d 297, 302 (N.H. 1985) (Souter, J.)).

Although an employer cannot avoid a willfulness finding simply by

disputing an employee's entitlement to pay, see Chisholm, 834 A.2d

at 225-26, "no liquidated damages are available when an employer's

refusal to pay wages is based upon bona fide belief that he is not

- 32 -
obligated to pay them," New Eng. Homes, 846 A.2d at 507-08 (quoting

Richmond v. Hutchinson, 829 A.2d 1075, 1077 (N.H. 2003)). New

Hampshire law contemplates legitimate disputes "over the amount of

wages," and employers are directed by statute to pay "without

condition" and within specified time periods "all wages, or parts

thereof, conceded by [them] to be due, leaving to the employee all

remedies he might otherwise be entitled to . . . as to any balance

claimed." N.H. Rev. Stat. Ann. § 275:45(I).

We leave this willfulness issue for resolution on

remand. In a new trial, additional evidence may be offered on the

parties' expectations and understandings when they agreed to the

August 2008 Plan. The question of willfulness should be assessed

on the basis of any such new record. However, we take no view as

to whether the issue of willfulness should reach the jury. Hence,

as with the issue of breach, we vacate the judgment entered on the

statutory wage claim with respect to the APCO incentive.

B. The GAIC Incentive

1. Sufficiency of the Evidence

Zurich attempted to persuade the jury that the type of

business involved in the GAIC deal was never intended to trigger

incentive pay for Walsh, and that the company's decision to amend

the February 2009 Plan to exclude that payment was merely an

attempt to clarify his compensation. The record, however,

permitted the jury to conclude otherwise.

- 33 -
 As with the August 2008 Plan, the evidence was not one-

sided, and Zurich offered testimony that could have supported a

verdict in its favor. Kathi Igham, the vice president for finance

and insurance in the fall of 2010, testified that the disputed

GAIC deal was "purely a financial transaction[] that didn't fall

under [Walsh's] responsibilities of the sale and service of the

alternative distribution channel." She elaborated that the

agreement was "just a transfer of liability from Great American to

Zurich," and, as such, it was not "appropriate" for Walsh to

receive incentive on that deal. In addition, she explained that

this type of transaction was not "contemplated within th[e]

definition" of ADC, but was placed there "from an accounting

perspective" because it was even less suitable for placement on

the "direct side" of the business -- i.e., "it ended up to be a

good sort of path of least resistance to put it in the alternate

channel." Terry McCafferty, a Zurich senior vice president

involved in the GAIC deal, likewise described that business as "a

very unusual transaction" -- "not something we normally do" -- and

stated that "there was really no place else to put it per se that

made sense."

Walsh, however, presented evidence permitting the jury

to find that the 2009 Plan awarded him incentive on the GAIC deal.

Indeed, an email sent on September 8, 2010 from a payroll employee

- 34 -
to Tina Maillie -- Ingham's predecessor as vice president --

explicitly said as much. In pertinent part, the email stated:

The financial statements for August include
$105M in premium on the GAIC reinsurance deal.
Based on the 2009 plan, we would pay $105,000
to Jim Walsh on this premium. How would you
like to handle the August incentive due to the
current review of the 2009 plan and the dollar
amount of the incentive payment?13

A month later, on October 13, Ingham sent an email to Eldridge

containing the following directive: "[A]s we discussed, we should

have an amendment that stipulates that Jim [Walsh] will not receive

incentive related to the GAIC UPR transaction that posted in

September for $101m." McCafferty, despite his statement that the

deal was "very unusual," said he could offer no guidance on whether

it was -- or was not -- properly categorized as ADC business.

Zurich's contention is that these communications about

amending Walsh's incentive plan simply reflect the company's

effort to reconcile the language of the plan with the understanding

that the GAIC deal was not, in fact, ADC business and, hence,

should not be treated as a basis for incentive for Walsh. Given

the competing evidence, however, we cannot say that it was

13It appears that there were two separate GAIC deals that
closed at about the same time, totaling $105 million. The parties'
dispute concerns only $101 million in GAIC business -- hence, an
incentive of $101,000 (at the rate of $1,000 per $1 million under
the February 2009 Plan).

- 35 -
unreasonable for the jury to accept Walsh's claim that he was

entitled to incentive pay for the $101 million GAIC deal.

2. Willfulness

The evidence described above also was sufficient to

permit the jury's finding that Zurich acted willfully in refusing

to pay Walsh incentive on the disputed GAIC deal. Given the jury

finding that the February 2009 Plan covered that deal, the

communications above permit the inference that Zurich

"voluntarily, with knowledge of the obligation and despite the

financial ability to pay it," withheld the $101,000 incentive owed

to Walsh. Ives, 498 A.2d at 302.

III.

To briefly recap our holdings, we find no error in the

district court's denial of judgment as a matter of law to Zurich

on the APCO breach-of-contract claim. The evidence was sufficient

to support the jury's finding that the August 2008 Plan was an

enforceable agreement. However, because the district court

erroneously instructed the jury that Zurich lacked discretion to

change Walsh's incentive pay, and it consequently failed to

instruct the jury on the implied covenant of good faith, we vacate

the portion of its judgment incorporating the jury's breach-of-

contract finding on the APCO incentive and the related violation

of statutory wage law (the willfulness issue). Accordingly, we

vacate the award on the APCO deal of $1,582,706 (the claimed

- 36 -
incentive of $791,353, doubled by statute). On the GAIC claim, we

affirm the judgment incorporating the jury's findings and, hence,

uphold the award on that deal of $202,000 (the claimed incentive

of $101,000, doubled). Given these holdings, and the need for the

district court to reconsider its award of attorney's fees, we

vacate that award.

Going forward, this case will be in a considerably

different posture. Neither the enforceability of the August 2008

Plan nor the GAIC claims will be retried. In addition, we have

found, as a matter of law, that the August 2008 Plan does not

entitle Walsh to incentive payments for the APCO deal pursuant to

the formula set forth in that plan. Hence, the focus will be on

whether Zurich's exercise of its reserved discretion to change

Walsh's incentive arrangement "exceeded the limits of

reasonableness." Centronics Corp., 562 A.2d at 193. Relatedly,

the issue of willfulness under the New Hampshire wage statute must

be revisited. See N.H. Rev. Stat. Ann. § 275:44(IV). Given this

landscape, we believe both parties would be well advised to

consider settlement.

Affirmed in part, vacated in part, and remanded for

proceedings consistent with this opinion. Each party to bear his

or its own costs.

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