United States Court of Appeals
For the First Circuit
No. 01-1236
No. 01-1237
JANNY KERKHOF,
Plaintiff, Appellee/Cross-Appellant,
v.
MCI WORLDCOM, INC.,
Defendant, Appellant/Cross-Appellee.
APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MAINE
[Hon. D. Brock Hornby, U.S. District Judge]
Before
Boudin, Chief Judge,
Torruella, Circuit Judge,
and Cyr, Senior Circuit Judge.
James R. Erwin with whom Margaret Coughlin LePage, Joanne S.
Hanson and Pierce Atwood were on brief for defendant.
Robert C. Brooks with whom Daniel L. Rosenthal and Verrill &
Dana, LLP were on brief for plaintiff.
March 7, 2002
BOUDIN, Chief Judge. Janny Kerkhof and her former
employer, MCI WorldCom, Inc. ("WorldCom"), cross-appeal from the
district court's judgment resolving several disputes about employee
benefits claimed by Kerkhof. Kerkhof was hired in May 1995 as a
program coordinator in the Vienna, Virginia, office of the
telecommunications company MFS International, Inc. ("MFS"), which
later merged with WorldCom. She then became eligible not only to
receive salary bonuses of up to 20 percent but also to participate
in two then-existing employee stock benefit plans.
One plan, the MFS 1993 Stock Plan ("the MFS Plan"), which
the parties here construe under Virginia law, gave a compensation
committee comprised of MFS board members power to award stock
options to qualified employees. In September 1995, Kerkhof was
granted 600 MFS options whose terms were set forth in a separate
"stock option agreement" executed by Kerkhof and WorldCom. That
agreement specified the exercise price and provided for gradual
vesting over a five year period. When MFS later merged with
WorldCom, the MFS options were converted into options for 1,260
WorldCom shares with a restated exercise price.
The other plan, known as the ShareWorks Grant Plan,
allowed participants to have MFS shares valued at up to five
percent of base salary placed in a tax-qualified retirement plan,
see 26 U.S.C. § 401(a) (1994). The ShareWorks Grant Plan was
governed by ERISA, 29 U.S.C. § 1001 et seq. (1994 & Supp. V 1999).
Kerkhof elected to participate in this plan and in 1995 received a
grant of MFS shares equal to 268 WorldCom shares (plus a fraction)
-2-
after the merger. Under plan terms, these shares vested only when
Kerkhof attained three years of service.
Under both plans, an employee forfeited unvested options
or shares upon voluntary resignation; forfeiture was immediate
under the stock option agreement and at the end of the calendar
year under the ShareWorks Grant Plan. The ShareWorks Grant Plan
qualified this by providing that unvested shares would immediately
vest if the company terminated the plan. A second qualification,
contained in both that plan and the stock option agreement,
provided for immediate vesting upon "constructive involuntary
termination" within two years after a "change of control," the
former phrase being expressly defined to include any of three
events: "a material reduction in the Employee's compensation
(including applicable fringe benefits)"; "demotion or diminution in
the Employee's authority, duties, or responsibilities without
cause"; or involuntary relocation.
WorldCom and MFS merged on December 31, 1996, comprising
a change of control for MFS, and this was followed by changes both
for Kerkhof and for the plans. On April 3, 1997, Kerkhof was told
that she was being reassigned to a new position under a new
supervisor, Judy Cody. That same month, the MFS Plan was
terminated. In May, WorldCom eliminated its annual salary bonus
program, under which Kerkhof had received cash bonuses in the two
prior years; instead Kerkhof was told she would receive a small
annual holiday bonus ($400) and, later that year, a one-time grant
of 1,200 WorldCom options. At the same time WorldCom also
-3-
announced that no further contributions would be made under the
ShareWorks Grant Plan, and on June 30 it terminated the plan.
On June 6, 1997, Kerkhof resigned and submitted a claim
for accelerated vesting of all her existing but unvested stock
benefits: the 882 stock options under the MFS Plan that remained
unvested (out of the original 1,260) and all of the ShareWorks
Grant Plan shares (just over 268), which were due to vest after
three years of service. Kerkhof claimed that her reassignment was
a demotion comprising "constructive involuntary termination." The
compensation committee ruled otherwise and forfeited the unvested
shares and options.
In April 1999, Kerkhof brought suit in federal district
court in Maine. Excluding counts later dropped, the complaint
contained three basic charges: that Kerkhof was entitled to vesting
of her MFS Plan stock options after having been constructively
involuntarily terminated (count 1); that she was entitled to
accelerated vesting of her ShareWorks Grant Plan shares for the
same reason and, in addition, because WorldCom terminated that plan
in June 1997, before the shares were forfeited at year's end
(counts 3 and 4); and that she was due civil penalties for
WorldCom's failure to provide specified benefits information
described below (counts 5 and 10).
On cross motions, the magistrate judge recommended
summary judgment in Kerkhof's favor on counts 3 and 4 (the
ShareWorks Grant Plan shares) and in WorldCom's favor on counts 5
and 10 (the civil penalties). On count 1 (the stock options), the
-4-
magistrate judge recommended a trial because a factual dispute
existed as to whether Kerkhof's pay or duties had been diminished
after the change in control. The district court adopted the
recommendations, but denied a post-summary judgment request by
Kerkhof to obtain class action status for her successful claim for
the ShareWorks Grant Plan shares under counts 3 and 4.
At the ensuing trial in October 2000, the jury delivered
a general verdict on count 1 in Kerkhof's favor, and the parties
stipulated to an award of $23,391. Each side has appealed adverse
rulings against it. Importantly, WorldCom has appealed on multiple
grounds from the judgment based on the jury verdict in favor of
Kerkhof on count 1; its brief also attacks the summary judgment for
Kerkhof on counts 3 and 4, but (as we shall see) that is no longer
a live issue. Kerkhof seeks review of the district court's denial
of her motion for class certification on counts 3 and 4 and the
summary judgment against her on counts 5 and 10.
While these appeals were pending, WorldCom concluded that
Kerkhof was entitled to vesting of her shares under the ShareWorks
Grant Plan on a ground previously unnoticed by either party: that
Kerkhof's two-plus years of employment (May 22, 1995, to June 6,
1997) satisfied the three-year service requirement because the plan
defines a year of service as any calendar year in which an employee
attains at least 1,000 hours of service (each work week counting as
45 hours). Kerkhof crossed this threshold in all three years.
Because WorldCom then vested the shares, both sides agree that the
-5-
claims as to counts 3 and 4 are moot, but they disagree as to
whether we should vacate the judgment below.
Unvested stock options under the MFS Plan. As to count
1, WorldCom says that it was entitled to judgment as a matter of
law because the compensation committee's denial of Kerkhof's claim
was not "arbitrary and capricious." This standard is normally used
where an ERISA-governed plan clearly gives the plan administrator
discretion as to the issue in question. Firestone Tire & Rubber
Co. v. Bruch, 489 U.S. 101, 109-12 (1989). Here, neither side
argues that the MFS Plan or the stock option agreement is governed
by ERISA, and we do not independently address the question. See
Mauldin v. WorldCom, Inc., 263 F.3d 1205, 1211 & n.2 (10th Cir.
2001).
Instead, WorldCom's argument is that it is entitled to
the arbitrary and capricious standard under state-law trust and
contract principles. At trial, the district court rejected the
argument. It ruled that the agreement was a stand-alone integrated
contract which neither contained, nor adopted by cross-reference to
the MFS Plan, any grant conferring discretionary authority on the
committee to resolve disputed claims.
WorldCom initially relied on the arbitrary and capricious
standard only as to the shares under the ShareWorks Grant Plan,
which is subject to ERISA. Kerkhof now says that failure to
include this argument in the answer as a defense to the MFS Plan
claims or to raise it until shortly before trial constitutes waiver
under Fed. R. Civ. P. 8(c). See Knapp Shoes, Inc. v. Sylvania Shoe
-6-
Mfg. Corp., 15 F.3d 1222, 1226 (1st Cir. 1994).1 Whether the
arbitrary and capricious standard in this context comprises an
affirmative defense subject to Rule 8(c) might be debated. See
generally 5 Wright & Miller, Federal Practice & Procedure §§ 1270-
71 (1990). Since we agree with the district judge that the stock
option agreement was a completely integrated contract, we bypass
the waiver claim.
WorldCom's argument on the merits begins with the fact
that the MFS Plan contains a somewhat broad provision granting the
committee "plenary authority in its discretion," subject to the
express provisions of the plan, to determine "the terms of all
Benefits" granted under the plan, "including without limitation" an
array of listed matters. Most of these are directed to the terms
on which stock or options might be granted (e.g., price, vesting,
number of shares); but a catch-all phrase allows the committee to
"interpret the Plan and to make all other determinations deemed
advisable in the administration of the Plan."
However, the plan also provides that each option grant
"shall be evidenced by a written agreement containing terms and
conditions" set by the committee. In this case, the stock option
agreement issued to Kerkhof, and executed by both sides, appears on
1
WorldCom raised the argument for the first time in its reply
brief in support of its motion for summary judgment. The
magistrate judge felt that the argument was not timely and chose
not to address its merits in his recommended decision, but the
district court did address the issue extensively at trial. Kerkhof
does not claim on appeal that the failure to raise the argument in
the opening summary judgment motion constitutes waiver, so we have
no occasion to address the issue.
-7-
its face to contain everything needed to comprise an ordinary stock
option agreement. Nothing in the agreement speaks of discretion
residing in the committee; nor does the agreement expressly adopt
by cross reference any of the plan's provisions.2 Nothing in the
plan itself is inconsistent with treatment of the agreement as a
completely integrated document. If treated as completely
integrated, this would exclude evidence of any other prior or
contemporaneous understanding that varied or added to the terms of
the option agreement. High Knob, Inc. v. Allen, 138 S.E.2d 49, 52
(Va. 1964); Restatement (Second) of Contracts § 213(2) (1981).
Both sides assume that whether the stock option agreement
is treated as completely integrated determines whether the MFS Plan
provision affording the committee discretion applies to disputes
under the agreement. Although this is not certain, it is at least
plausible, and in the absence of argument on the point, we will
hold the parties to this premise. However, extrinsic evidence is
often admitted for the purpose of showing that a seemingly complete
agreement is not so intended. Restatement, supra, § 210 cmt. b.
Here, even if the extrinsic evidence is considered,
nothing in it is of great help to WorldCom. For example, WorldCom
places weight on its claim (which Kerkhof disputes) that a form
cover letter accompanied the stock option agreement sent to
2
The only references in the agreement to the plan are in the
caption ("Stock Option Agreement, 1993 Stock Plan") and in the
preamble, which states that the grant is intended to "carry out the
purposes" of the plan. Neither of the references, explicitly or by
necessary implication, suggests that the plan's provisions relating
to administration are to be read into option agreements.
-8-
Kerkhof; the form letter, according to WorldCom, referred to the
plan and appended a copy of it. But the reference merely says that
to participate in the plan, Kerkhof had to sign the stock option
agreement. This is perfectly consistent with the view that the
agreement is a free standing obligation.3
There is nothing odd in making decisions to grant options
discretionary while embodying the grant itself in an independent
contract. Further, both documents in this case were drafted by the
employer and it would have been easy to include a clause in the
agreement giving the committee discretion or adopting the plan's
discretionary authority by cross reference. The district court
properly treated the agreement as a completely integrated contract
under ordinary rules of contract interpretation.4
We turn next to a second issue of contract
interpretation. Kerkhof, it will be remembered, based her claim
to immediate vesting under the stock option agreement on
"constructive involuntary termination," defined by the agreement to
3
WorldCom also relies on references to the plan in Kerkhof's
initial offer of employment and in a letter after the merger
converting MFS stock into WorldCom stock; but the former merely
says that Kerkhof will be eligible to participate in the plan
according to its terms, and the latter says that the vesting of
options will continue in accordance with "the applicable Plan
and/or related agreements."
4
We note that one district court came to the opposite
conclusion as to apparently identical stock option agreements
executed between MFS and another employee. See Mauldin v.
WorldCom, Inc., 2000 U.S. Dist. LEXIS 19626 (N.D. Okla. May 16,
2000). But its treatment of the issue was brief and unaided by
extensive briefing by the parties, id. at *13, and its decision was
reversed by the appeals court on another ground, Mauldin v.
WorldCom, Inc., 263 F.3d 1205 (10th Cir. 2001).
-9-
include inter alia (1) material reduction in compensation or (2)
demotion or diminution in responsibilities. WorldCom says that
Kerkhof had to show not only that one of these two events occurred
but that Kerkhof's resignation was subjectively motivated by it.
The district court disagreed, concluding that if either
event occurred, vesting was required even if the employee would
have left anyway for other reasons. Based on this reading, the
district judge excluded substantial evidence proffered by WorldCom
that Kerkhof planned to move to Maine in the same time frame (and
therefore necessarily would have resigned) regardless of any change
in pay or duties. If Kerkhof was required to prove causation,
WorldCom at the very least would be entitled to a new trial.
WorldCom relies heavily on the word "involuntary" in the
phrase "constructive involuntary termination," saying that every
term in a contract should be given meaning. See Ames v. Am. Nat'l
Bank of Portsmouth, 176 S.E. 204, 217 (Va. 1934); Restatement,
supra, § 203(a). It also cites to a "Q&A" document, distributed by
management shortly before the merger, which says the accelerated
vesting clause would be triggered if the participant "actually
terminate[d] employment on account of" a listed occurrence.
WorldCom might have added that, from the standpoint of purpose,
immediate vesting is something of a windfall if the employee
planned to resign anyway.
Yet the quoted phrase expressly includes the list of
three events without any further suggestion that causation need be
shown; the vesting provision then says that if a change of control
-10-
occurs, and the Employee's "subsequent" constructive involuntary
termination occurs "within two years thereafter, the full number of
the Option Shares shall immediately vest." It is hard to give much
weight to a management-prepared summary created well after
Kerkhof's agreement was executed. See Allen v. Green, 331 S.E.2d
472, 475 (Va. 1985). Further, while causation is a staple of tort
claims, contracts often contain provisions (e.g., liquidated
damages) to provide clear demarcations or simplify administration.
In change of control provisions, it eases administration, and gives
the employee more protection, to make the occurrence conclusive
without a separate inquiry into employee motive.
On our facts the proper reading is debatable but absent
disputed, admissible extrinsic evidence, interpretation is
appropriately resolved by the court. Torres Vargas v. Santiago
Cummings, 149 F.3d 29, 33 (1st Cir. 1998). Neither side offers any
precedent closely in point and neither set of interpretive
arguments is conclusive. Under these circumstances, we think that
the district court's reading can fairly be justified, partly by
literal language and partly by the canon that contracts of this
sort are construed against the drafter, who could easily have
included language to resolve the matter. See Martin & Martin, Inc.
v. Bradley Enters., 504 S.E.2d 849, 851 (Va. 1998).5
5
WorldCom argues in the alternative that evidence of Kerkhof's
motive should have been allowed in order to preclude a false
inference that Kerkhof's decision to leave was itself evidence that
her pay or duties had been diminished; but given the court's
reading of the contract, motivation evidence could have caused
unfair prejudice to Kerkhof and any false inference could have been
negated by an instruction.
-11-
Ranked in order of importance, WorldCom's next argument
is that Kerkhof's claim of reduction in compensation should have
been taken from the jury as a matter of law because the evidence
introduced to support it was inadequate and, as a result, that a
new trial should be granted solely on the issue of diminution in
duties. This claim of error rests on the fact that Kerkhof offered
no evidence as to the value of the 1,200 options that WorldCom said
it would substitute, along with an annual $400 holiday bonus, when
it abolished the pre-merger salary bonus regime in May 1997.
Kerkhof says that we should apply the Supreme Court's
rule in criminal cases and uphold the verdict on the ground that
the evidence was sufficient on another ground also available to the
jury; the rationale is that the jury can by common sense alone
recognize insufficient evidence and should be presumed to have done
so. See Griffin v. United States, 502 U.S. 46, 49-50 (1991).
Here, WorldCom does not dispute that the evidence permitted a
rational jury to find a reduction in Kerkhof's duties.
Although it is not easy to explain the discrepancy, the
Supreme Court has not used the same presumption in civil cases.
Instead, the general rule, adopted by this circuit, is that a new
trial is usually warranted if evidence is insufficient with respect
to any one of multiple claims covered by a general verdict.
Wilmington Star Mining Co. v. Fulton, 205 U.S. 60, 78-79 (1907);
-12-
Maryland v. Baldwin, 112 U.S. 490, 493 (1884); Lattimore v.
Polaroid Corp., 99 F.3d 456, 468 (1st Cir. 1996).6
At first blush, WorldCom's evidentiary claim looks
plausible: Kerkhof had the burden of proof, and one might think
that her failure to offer evidence of value of a seemingly
significant number of stock options--on WorldCom's side of the
"before versus after" ledger--would doom the comparison. We think
that Kerkhof's argument on appeal--that the options were irrelevant
because Kerkhof never received them--is remarkably unpersuasive.
In comparing pre- and post-merger compensation, what Kerkhof would
have gotten if she had stayed is plainly relevant.
The district court refused to withdraw the compensation
issue from the jury for a related but different reason that could
be justified in theory, namely, that the evidence did not compel
the jury to find that Kerkhof would have received the one-time
grant of options. But Kerkhof does not repeat this defense, and
more important, does not provide us with any record references that
would support it--clearly needed since the document announcing the
grant appears unqualified.
6
Despite seemingly unequivocal pronouncements by the Supreme
Court, the law in the circuits on this point is disparate. Compare
McGrath v. Zenith Radio Corp., 651 F.2d 458, 464 (7th Cir. 1981)
(adopting the criminal rule in civil cases), with Traver v.
Meshriy, 627 F.2d 934, 938-39 (9th Cir. 1980) (adopting a
discretionary standard with multiple factors), and McCord v.
Maguire, 873 F.2d 1271, 1273-74 (9th Cir. 1989) (limiting Traver to
situations where multiple claims are submitted for general verdict
rather than those where a single claim is submitted based on
multiple factual theories). Even in this circuit, although not on
our facts, harmless error might resolve the issue. See Brochu v.
Ortho Pharm. Corp., 642 F.2d 652, 662 (1st Cir. 1981).
-13-
Yet the issue is more complicated than it seems.
Although Kerkhof received a modest increase in salary after the
merger (from $56,282 in 1996 to $60,045 in 1997), before her
departure the company eliminated or announced the elimination of
three continuing plans, over and above salary, that had
substantially benefitted Kerkhof in the past: the MFS Plan under
which she had received stock options in September 1995; the
ShareWorks Grant Plan under which she had received stock shares
worth $3,100 in 1995; and the annual bonus program under which she
had received $4,812 and $6,000 (out of a possible bonus of 20
percent of annual salary) in 1995 and 1996, respectively.
By contrast, the proposed grant of 1,200 options was
described as a one-time bonus. Whether there was any contingency
about its payment is unclear (Kerkhof sought to raise doubts); but
obviously the value of the options would depend on the spread
between the prescribed exercise price and the price of the
underlying stock at some future point, which might be quite high.
Because they are often not marketable, employee options are often
hard to value even for a sophisticated analyst. See Scully v. US
Wats, Inc., 238 F.3d 497, 508 (3d Cir. 2001). The question is
whether omission of an estimate of this value precluded a jury
verdict for Kerkhof.
Here, the "before and after" comparison depended on more
than a simple salary comparison and was inherently uncertain; but
even without evidence of value of the options, a fair comparison
was possible. The jury knew that salary had not gone up much and
-14-
that three continuing discretionary bonus plans, from which Kerkhof
had done well, were eliminated and a one-time grant of stock
options (plus a small annual bonus of $400) substituted. We think
that a jury could find on this evidence, and evidence that WorldCom
was concerned about the effects on employees of eliminating the
plan, that more likely than not her compensation had been
materially reduced.
WorldCom also attacks the count 1 verdict based on a
statement by Kerkhof's counsel in rebuttal that Judy Cody's group
was dissolved in 1999, two years after Kerkhof's resignation; the
arguable implication was that Kerkhof would have been fired anyway
had she not resigned. Evidence of the later dissolution was
specifically excluded by the district court, so reference to it in
summation was improper. See Adams Labs., Inc. v. Jacobs Eng'g Co.,
761 F.2d 1218, 1226-27 (7th Cir. 1985); Brown v. Royalty, 535 F.2d
1024, 1028 (8th Cir. 1976).
Despite this, the district judge denied WorldCom's motion
for a new trial and instead instructed the jury to consider only
"the circumstances as they existed at the time [Kerkhof] left the
company, not what happened thereafter." Given that the comment was
isolated, tangential to the main issue of diminution in pay or
duties, and mitigated by the curative instruction, the risk of
prejudice was slight and there was no abuse of discretion in
denying a new trial. P.R. Aqueduct & Sewer Auth. v. Constructora
Lluch, Inc., 169 F.3d 68, 81-82 (1st Cir. 1999); Forrestal v.
Magendantz, 848 F.2d 303, 309 (1st Cir. 1988).
-15-
Disposition of Moot Claims. As to counts 3 and 4, the
district court held on summary judgment that Kerkhof remained an
"affected Participant" under the ShareWorks Grant Plan even after
her resignation and was therefore entitled to vesting of her shares
when WorldCom terminated the plan before the end of the year. It
came to this conclusion because it thought that the exclusion of
former employees from eligibility for accelerated vesting would
jeopardize the plan's status as a tax-qualified plan under the
Internal Revenue Code. See 26 U.S.C. § 411(d)(3) (1994). WorldCom
disputes this conclusion and, while conceding the mootness of its
appeal as to counts 3 and 4, asks us to vacate the district court's
judgment.
WorldCom is not entitled to vacatur as a matter of right;
the decision rests in the equitable discretion of this court. U.S.
Bancorp Mortgage Co. v. Bonner Mall P'ship, 513 U.S. 18, 25 (1994).
A primary concern is whether the appellant deliberately mooted the
appeal. Id. at 24. Thus, vacatur is generally appropriate where
mootness arises through "happenstance," United States v.
Munsingwear, Inc., 340 U.S. 36, 40 (1950), or the unilateral action
of the party prevailing below, see U.S. Bancorp, 513 U.S. at 25,
but not where the appellant moots the case by settlement or
withdrawing the appeal, id. at 25-26.
These end points mark the extremes; for gray-area cases
such as this one, the result depends on particular circumstances.
U.S. Bancorp, 513 U.S. at 29; see, e.g., Motta v. Dist. Dir. of
INS, 61 F.3d 117, 118 (1st Cir. 1995) (per curiam). Here, WorldCom
-16-
mooted the case unilaterally by vesting Kerkhof's shares, but it
did so based on a perceived legal obligation under the ShareWorks
Grant Plan. Given the express language defining a year of service
as 1,000 hours, there is no reason to doubt WorldCom's good faith.
The impact of our choice is on future claims of other
employees similarly situated. Kerkhof's counsel would like to
preserve the district court's ruling, doubtless hoping that it can
be used preclusively in favor of plaintiffs to be added if the
request for class action status prevails on this appeal. WorldCom,
by contrast, is presumably concerned that a ruling that it has had
no opportunity to test on appeal would be not mere precedent but
actually binding in this case as to class plaintiffs situated like
Kerkhof. As between these two considerations, WorldCom's case for
vacating the judgment is by far the stronger.
Appellate review is no cure-all, but it allows three
judges to reflect, with more leisure and often more complete
briefing, on a complicated legal issue that may be one of dozens
that the lower court had to resolve with dispatch. Certainly the
issue mooted in this case--whether the tax status of the ShareWorks
Grant Plan requires a specific reading of its terms adverse to
WorldCom--is complicated. Vacating the judgment on this issue
fairly preserves both sides' chance to litigate the issue in an
appeals court in the future. Nat'l R.R. Passenger Corp. v. Int'l
Ass'n of Machinists and Aerospace Workers, 915 F.2d 43, 48 (1st
Cir. 1990).
-17-
Post-judgment class certification. Kerkhof cross-appeals
from the district court's refusal to allow her post-judgment motion
to amend her complaint to assert a class-action claim under counts
3 and 4. In substance the motion to amend was a motion for class
certification and we, like the district court, treat it as such.
The issue is not mooted by the fact that Kerkhof's own ShareWorks
claim has been resolved. Kerkhof might still adequately represent
the class despite the mootness of her individual claim, and she
thus retains a sufficient personal interest in seeing the class
certified. U.S. Parole Comm'n v. Geraghty, 445 U.S. 388, 402-04
(1980); Sosna v. Iowa, 419 U.S. 393, 402-03 (1975).
Kerkhof delayed filing her motion until September 22,
2000, more than a month after the district court granted her
summary judgment as to counts 3 and 4. It is unclear just how much
earlier Kerkhof's counsel knew or should have known that other
employees were similarly situated to Kerkhof, but depending on how
one reads the record, this likelihood might have been discerned
from discovery material as early as September 1999; Kerkhof says
that the right date is May 1, 2000.
Whether a class should ever be certified after judgment
on the merits can be debated. Compare Peritz v. Liberty Loan
Corp., 523 F.2d 349, 352-54 (7th Cir. 1975), with Postow v. OBA
Fed. Sav. & Loan Ass'n, 627 F.2d 1370, 1383-84 (D.C. Cir. 1980).
Fed. R. Civ. P 23(c)(1) directs district courts to decide on
certification promptly after a class action begins, and envisions
any alterations being made "before the decision on the merits."
-18-
See Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 177-78 (1974);
Rodriguez v. Banco Central, 790 F.2d 172, 174-75 (1st Cir. 1986).
Post-judgment certification also would frustrate the opt-out
mechanism for Rule 23(b)(3) classes provided in Rules 23(c)(2) and
(c)(3), which were intended to avoid situations in which class
members could choose to join only when the judgment favored the
class. Am. Pipe & Constr. Co. v. Utah, 414 U.S. 538, 545-49
(1974); Advisory Committee's Note to Proposed Amendments to Rule
23, 39 F.R.D. 69, 105 (1966).
Assuming that there are ever exceptions, see Banco
Central, 790 F.2d at 175 & n.4, this case is not one of them. The
standard on review is abuse of discretion, Andrews v. Bechtel Power
Corp., 780 F.2d 124, 130 (1st Cir. 1985), and the district court
committed no such abuse by deciding that in this case the proposed
certification was untimely. Such a delay in adding class
allegations deprives a defendant of fair warning as to the true
stakes and, by eliminating mutuality, leaves the defendant liable
on class claims (if he loses the summary judgment motion) without
protecting him (if he wins). See, e.g., Developments in the Law--
Multiparty Litigation in the Federal Courts, 71 Harv. L. Rev. 877,
936 (1958).
ERISA and COBRA penalties. In counts 5 and 10, Kerkhof
claimed that WorldCom failed to respond to her request for certain
ShareWorks Grant Plan documents within 30 days, as required by
ERISA, 29 U.S.C. § 1024(b)(4) (1994 & Supp. V 1999), and failed in
timely fashion to inform her after her resignation of her right to
-19-
continue coverage under its health insurance plan, as required by
COBRA, 29 U.S.C. §§ 1161(a), 1163(2), 1166(a)(4)(A) & (c) (1994).
She sought civil penalties for these violations under 29 U.S.C. §
1132(c)(1) (1994 & Supp. V 1999), which allows the court to impose
penalties of up to $100 per day on the plan administrator.
WorldCom was admittedly quite late in sending both the
requested ERISA documents and the COBRA notification.
Nevertheless, the district court denied Kerkhof's claim for
statutory penalties because WorldCom's failure was not in bad faith
and did not harm Kerkhof. The court found that WorldCom belatedly
disclosed the ShareWorks Grant Plan documents because it had
misplaced Kerkhof's request and then inadvertently sent the wrong
documents. Why the COBRA notification was sent late is unclear,
but the court noted that WorldCom gave Kerkhof the full 60 days to
elect coverage, and she declined.
No specific challenge to these findings was raised in
Kerkhof's initial brief on appeal, Keeler v. Putnam Fid. Trust Co.,
238 F.3d 5, 10 (1st Cir. 2001); Kerkhof instead argued that it was
error for the district court to require bad faith and prejudice.
The penalty provision expressly leaves it "in the court's
discretion" to determine whether penalties are appropriate for a
failure to disclose. 29 U.S.C. § 1132(c)(1). The gist of
Kerkhof's argument is that the district court did not properly
exercise its discretion; instead, says Kerkhof, it relied on a per
se rule that it would not award penalties absent either harm to the
plaintiff or bad faith on the part of the defendant.
-20-
As we read the district court's remarks, it merely
described its past precedents and said that it saw no reason to
deviate here, without foreclosing the possibility of a case in
which other factors might justify an award despite the absence of
both harm and bad faith. This is correct as a matter of law:
although the district court need not find bad faith or prejudice to
impose penalties, it may give weight--even dispositive weight--to
these factors in the exercise of its discretion. See Rodriguez-
Abreu v. Chase Manhattan Bank, 986 F.2d 580, 588 (1st Cir. 1993);
see also Sullivan v. Raytheon Co., 262 F.3d 41, 52 (1st Cir. 2001).
Finally, Kerkhof argues that the grant of summary
judgment should be reversed as to liability (as opposed to
penalties) because WorldCom concededly sent the notices and
disclosures late. But the only cause of action plausibly asserted
in counts 5 and 10 is an action for discretionary statutory
penalties, 29 U.S.C. §§ 1132(a)(1), (c)(1). Thus, the district
court's supportable refusal to grant relief warranted summary
judgment for WorldCom.
The district court's judgment on counts 3 and 4 is
vacated as moot and the matter is remanded for dismissal of those
claims. In all other respects the district court's judgment is
affirmed.
It is so ordered.
-21-