974 F. 2d 1342 - Hendry v. Exide Electronics Corporation

MEMORANDUM*

This case involves a dispute between Exide Electronics Corporation ("Exide"), a manufacturer of electrical equipment including uninterruptible power supply ("UPS") systems and James Hendry, its former sales representative doing business as Synergy Sales Engineering ("Hendry" or "Synergy"). Exide appeals from a $14.9 million judgment entered on a general verdict for Hendry.1 Hendry cross-appeals from the district court's denial of his request for attorney's fees on the basis of Exide's alleged bad faith conduct before and during the litigation and requests review of the district court's jury instruction concerning punitive damages. Because we find that the district court erred as a matter of law in instructing the jury that North Carolina law implies a duty of good faith in the termination of an at-will employee and that Exide could not terminate Hendry in bad faith in order to avoid paying him commissions, we reverse.

Hendry's claims are based on Exide's alleged breach of two contracts, the Power Systems Agreement for Fiscal Year 1987 (the "Rep Agreement") and an oral agreement that Hendry contends he and Exide entered into sometime in late December 1986 or early January 1987.2

The written Rep Agreement executed by Exide and Hendry expressly superseded all prior contracts between the parties regarding UPS sales, and authorized Synergy to sell Exide UPS products in Northern California and most of Nevada. Synergy's performance under the contract was to be measured according to the volume and mix of products it sold. The Rep Agreement provided that it would expire automatically and without notice after one year, but also provided that either party could terminate the agreement without cause on 120 days notice.3 The agreement specifically contemplated payment of post-termination commissions. It set out a procedure for calculating those commissions whereby, after Hendry received a termination notice, the parties would negotiate a list of the pending UPS projects that Hendry was soliciting at the time he was terminated ("protect list"). If during the 120-day notification period any of those projects on the protect list resulted in "an acceptable purchase order delivered to Exide," Synergy was entitled to payment of the appropriate commission for that project. Id. at p I(9) (the "post-termination compensation provision").

On March 2, 1987 Exide invoked the without cause termination clause and terminated Synergy. The parties subsequently exchanged and negotiated lists of Synergy's pending UPS projects.

In addition, and while the Rep Agreement was still in effect, Hendry claims that he entered into an oral agreement with Philip Tompkins, Exide's Vice President for Domestic Sales. Exide disputes that any oral agreement ever was made. According to Hendry, sometime in late December 1986 Tompkins phoned him. During that call he claims that they agreed that Exide would pay him a reduced 30% commission on the $1 million UPS contract that Exide was awarded in October 1986 for Warner-Robbins Air Force Base ("Warner-Robbins contract") in exchange for a 100% commission (less destination credit if the shipment was outside Synergy's assigned territory), on all future UPS projects out of McClellan Air Force Base ("McClellan"). They also agreed that Exide would cooperate fully with and support Synergy's representatives at McClellan and that Exide would coordinate a meeting among Exide, Synergy, and McClellan.

On January 13, 1987 and February 12, 1987 Hendry wrote and sent two identical letters to Tompkins. Both letters reiterated the terms discussed during the alleged telephone call and contained no additional terms. Exide maintains that no one at Exide wrote back to Hendry or confirmed his understanding as set forth in these letters.

The heart of Hendry's case is that Exide acted in bad faith when it terminated him as its sales representative in order to avoid paying commissions he was entitled to in connection with three UPS contracts: a $621 million five-year Air Force UPS requirements contract that was solicited out of the Air Logistics Center at McClellan (the "ALC contract");4 the sale of UPS equipment to GTE Government Systems;5 and OEM sales made in Hendry's territory.6 Exide disputes that it terminated Hendry to deny him commissions and contends that he was terminated because of his poor sales performance in the western region.

The question presented in this appeal involves interpretation of North Carolina law. We review the district court's state law determinations de novo and its determinations of the applicable state law are not entitled to any deference. Salve Regina College v. Russell, 111 S.Ct. 1217, 1221-25 (1991); see In re McLinn, 739 F.2d 1395, 1403 (9th Cir.1984) (en banc).

Hendry contends that the judgment below must be upheld if it can be supported on any theory properly presented to the jury and argues that, because Exide failed to challenge the fraud verdict and it was properly presented to the jury, under this rule the court should affirm the judgment on the basis of that claim. Kern v. Levolor Lorentzen, Inc., 899 F.2d 772, 777 (9th Cir.1990); Begnini v. City of Hemet, 879 F.2d 473, 478 (9th Cir.1988); Roberts v. College of The Desert, 870 F.2d 1411, 1417 (9th Cir.1988). Exide responds that we must reverse the general verdict if any one theory of liability improperly was presented to the jury and argues that we should not apply the narrow exception articulated in the decisions cited by Hendry in this case.

The general rule in this Circuit is that "a general jury verdict will be upheld only if there is substantial evidence to support each and every theory of liability submitted to the jury." Kern, 879 F.2d at 777 (quotation & citations omitted). This rule is in accord with a long line of precedent in which the Supreme Court has held that, when faced with a general verdict where "upon any one issue error was committed, either in the admission of evidence, or in the charge of the court [such a general] verdict cannot be upheld...." City of Columbia v. Omni Outdoor Advertising, Inc., 111 S.Ct. 1344, 1356 (1991); Sunkist Growers, Inc. v. Winckler & Smith Citrus Prods. Co., 370 U.S. 19, 29-30 (1962); United New York & New Jersey Sandy Hook Pilots Ass'n v. Haleki, 358 U.S. 613, 619 (1959); Maryland v. Baldwin, 112 U.S. 490, 493 (1884).

Despite this general rule, in our discretion, we may "construe a general verdict as attributable to one of several theories if it was supported by substantial evidence and was submitted to the jury free from error." Kern, 899 F.2d at 777.7 In deciding whether it to exercise this discretion, however, the factors we must consider are: (1) the potential for confusion of the jury that may have resulted from erroneous submission of a particular claim or cause of action; (2) whether the losing party's defenses apply to the count upon which the verdict is being sustained such that they would have been considered by the jury with reference to that count; (3) the strength of the evidence supporting the count being relied on to sustain the verdict; and, (4) the extent to which the same disputed issues of fact apply to the various legal theories. Traver v. Meshriy, 627 F.2d 934, 938 (9th Cir.1980); Kern, 899 F.2d at 777.

We balance these factors in an ad hoc manner, without any one factor being accorded particular weight and without necessarily considering all four factors in each case. See, e.g., Beningi, 879 F.2d at 478 (exercising discretion on basis of strong evidence of two factors); Syufy, 793 F.2d at 1002 (reversing and refusing to exercise discretion on poor showing of only two factors).

Hendry urges us to affirm the general verdict under the Traver exception arguing that the fraud theory properly was submitted to the jury and that there was substantial evidence to support that theory of liability. We conclude that the Traver exception is not applicable in this case and decline to exercise our discretion.

Only two of our opinions have considered the potential for jury confusion as a significant factor in applying the Traver factors. In Syufy Enterprises we noted that the potential for jury confusion "was great" because the case was complex, involved multiple antitrust theories, and each claim involved distinctive factual and legal components. Id. at 1001-02. In Kern, although the jury improperly was instructed on an age discrimination claim, we concluded that the jury was unlikely to be confused because Kern's counsel had stressed the properly presented contract claim in closing argument and the age discrimination claim only presented as a possible ground for the defendant's disparate treatment of Kern and never was offered as an independent ground for recovery. Kern, 899 F.2d at 777.

This case, like Syufy and Counts v. Burlington Northern Railroad, 952 F.2d 1136 (9th Cir.1991), involved five theories upon which Hendry sought recovery, each involving differing legal components, and many requiring evaluation of distinct factual circumstances. Id. at 1140; Syufy, 793 F.2d at 1001-02. Moreover, unlike in Kern, Hendry's counsel apparently did not even mention the fraud claim in closing arguments and requested a damages calculation under the written contract rather that on the basis of a fraud damages calculation. Kern, 899 F.2d at 777. This factor, therefore, weighs against our exercising discretion.

Similarly, the only two opinions in which we applied the second Traver factor regarding defenses both involved claims for which the defenses offered were identical. Traver, 627 F.2d at 939 (defenses of reasonable conduct and action in good faith apply to the improperly presented section 1983 claim as well as to the properly instructed state tort actions); Kern, 899 F.2d at 777 (defense of treatment in accordance with company policy and discharge for legitimate business reason same for both proper contract claim and improper age discrimination claim). In Kern we noted that this fact meant that "[t]he jury could not have found in favor of Kern under any of her theories without rejecting these defenses." Id.

Conversely, in this case Exide offered different defenses to each theory of liability and thus the jury could have found for Hendry on any one claim without necessarily being compelled to reject a valid defense that was applicable only to that separate claim. Thus, this factor also weighs against exercise of discretion.

Significantly, in every case in which we have applied the Traver exception to uphold a general verdict under the final Traver factor, the various legal theories at issue involved virtually identical disputed issues of fact.

In Kern, under both the age discrimination and the contract claims, Kern urged that, without adequate explanation, he was treated differently from other employees. Kern, 899 F.2d at 778. In Beningi we stated that, although the fourteenth amendment claim was not supported on the equal protection ground, we nonetheless could uphold the general verdict under the due process theory because both claims involved the same disputed issues of fact "both being grounded on the allegation of arbitrary law enforcement activity for the purpose of harassment and interference." Beningi, 879 F.2d at 478; see also Roberts, 870 F.2d at 1417. Finally, in Traver we noted that the section 1983 claim, which improperly was submitted to the jury, was "all but derivative" of the state tort claims on which we sought to uphold the general verdict. Further, in that case a finding of section 1983 liability "would necessarily encompass a finding of liability on one or more of the state law claims," that were properly before the jury. Id. at 939.

In contrast, Hendry's claims involve largely differing disputed issues of fact. The fraud claim, for example, was distinct in its requirement of evidence establishing that Exide was aware that its alleged promises were false. This case is more like Syufy where we held that the Traver exception was inapplicable, in part, because "although many of the claims shared common issues of fact each also involved distinctive legal and factual components." Syufy, 793 F.2d at 1002.

Finally, with regard to the strength of the evidence supporting the fraud count, under the Traver factors we require more than "marginal evidence," id., although precisely what level of proof must be present is unclear. Kern, 899 F.2d at 798 (evidence "while not overwhelming, strong"); Begini, 879 F.2d at 478 ("clearly supported"); Traver, 627 F.2d at 939 ("ample evidence"). We need not attempt an evaluation of this factor--an investigation that particularly would be onerous given the parties' disagreement over the facts presented at trial--because all three of the other Traver factors clearly weigh against our exercising discretion in this case.

In conclusion, we reject Hendry's request to uphold the general verdict on the basis of the fraud verdict and adhere to the general rule that requires reversal of the district court judgment if any one theory improperly was presented to the jury.

B. North Carolina Does Not Imply a Covenant of Good Faith to Prohibit Termination in Bad Faith of an At-Will Employee

Exide contends that the district court erred when it instructed the jury that Exide was bound by the implied covenant of good faith in terminating Hendry and that if Exide terminated Hendry in bad faith in order to avoid paying him commissions, it would have breached the Rep Agreement.8 Our review of North Carolina law confirms that the district court erred in instructing the jury on implied good faith.

In its recent decision in Amos v. Oakdale Knitting Co., 416 S.E.2d 166 (N.C.1992), the North Carolina Supreme Court made clear that North Carolina would not imply a covenant of good faith to prohibit Exide from terminating Hendry in bad faith. In Amos the court clarified the scope of its decision in Coman v. Thomas Manufacturing Co., 381 S.E.2d 445 (N.C.1989) in which it explicitly had recognized a public policy exception to the employment at-will doctrine and authorized a tort claim for the wrongful discharge of an at-will employee who has been terminated in violation of public policy. Id. at 447.9

In addition to this holding, the court discussed in dictum the more general question of bad faith discharge. In this regard the court stated that it had "never held that an employee at will could be discharged in bad faith," id. at 448 (citing Haskins v. Royster, 70 N.C. 601 (1874) & Malever v. Jewelry Co., 25 S.E.2d 436 (1943)), and that courts in other states "have recognized wrongful discharge theories characterized either as the bad faith exception to the at-will doctrine or under the implied covenant of good faith and fair dealing." Id. at 448 (citations omitted). Finally, the court added that "[b]ad faith conduct should not be tolerated in employment relations, just as it is not accepted in other commercial relations." Id.

In the aftermath of the Coman decision courts interpreting this bad faith dictum split as to its meaning.10 Amos, however, settled any debate as to the scope and meaning of Coman by explicitly holding that the Coman discussion of bad faith discharge was merely dictum, and that the Coman holding only established a limited exception to the employment-at-will doctrine that prohibits the termination of at-will employment contracts for an unlawful reason or a purpose that contravenes public policy, but does not recognize an independent claim for wrongful discharge in bad faith. Amos, 416 S.E.2d at 173.

The Rep Agreement was an at-will employment contract because, although it was not indefinite in duration and was scheduled to expire automatically in one year, during that year either party was free to terminate the agreement "without cause." Thus, given Amos, the district court's instruction regarding good faith termination was erroneous.

Hendry, however, urges that the district court's implied good faith instruction was proper under North Carolina's "procuring cause rule."11 Because the North Carolina Supreme Court's holding in Amos did not discuss and apparently left intact this rule, we address whether, despite the Amos decision, the district court's good faith instruction nonetheless was proper under this rule.

North Carolina's procuring cause rule implies a good faith obligation in the termination of agency agreements, and specifically in real estate listing agreements. See, e.g., Realty Agency, Inc. v. Duckworth & Shelton, 162 S.E.2d 486, 491 (N.C.1968); White v. Pleasants, 36 S.E.2d 227, 229 (N.C.1945); Jaudon v. Swink, 276 S.E.2d 511, 513 (N.C.Ct.App.1981). Courts have construed this good faith obligation as prohibiting a principal from terminating the agency in order to avoid paying the agent a commission. Jaudon, 276 S.E.2d at 513 (citing Cromartie v. Colby, 108 S.E.2d 228 (N.C.1959) & Martin v. Hooy, 10 S.E. 83, 84 (N.C.1889).12

Notably, however, North Carolina courts impose an important limitation on the operation of the procuring cause rule that specifically excludes from the rule's reach circumstances where the parties involved expressly have contracted out from under the rule. Id. at 491; Brown v. Fulford, 316 S.E.2d 220, 222 (N.C.1984); Castle & Assocs. v. Custom Molders, Inc., 311 S.E.2d 640, 641 (N.C.Ct.App.1984); Cooper v. Henderson, 284 S.E.2d 756, 758 (N.C.Ct.App.1981); accord Masajarian v. Mark Lighting Fixtures Co., 595 F.Supp. 869, 872 (D.Conn.1984); Ullmann v. May, 72 N.E.2d 63, 67-68 (Ohio S.Ct.1947); Willis v. Champlain Cable Corp., 748 P.2d 621, 627-28 (Wash.1988); see also Balzer/Wolf Assocs. v. Parlex Corp., 753 F.2d 771, 774-75 (9th Cir.1985). Thus, when stated its entirety, the procuring cause rule provides that "[i]f any act of the broker in pursuance of his authority to find a purchaser is the initiating act which is the procuring cause of a sale ultimately made by the owner, the owner must pay the commission, provided the case is not taken out of the rule by the contract of employment." Realty Agency, 126 S.E.2d at 491 (emphasis added).13

[a]t the time of termination, a list of pending orders will be received by the parties and appropriate compensation will be due on all such quotations which resulting an acceptable purchase order delivered to Exide Electronics within the required notification period. An acceptable order shall be an order which satisfies all requirements as set forth in the Exide Electronics Sales Manual current at the time of submission of order.

Rep Agreement at p I(9). This post-termination compensation provision unambiguously establishes that Hendry was entitled to receive commissions only on those projects identified on his protect list at the time he received notice of termination and that resulted in "acceptable purchase orders" within the 120-day notification period. Moreover, there are no other provisions in the Rep Agreement that create any ambiguity or that call into question the obvious reading of this provision. St. Yves v. Mid State Bank, 757 P.2d 1384, 1386-87 (Wash.1988) (en banc). But see Caton v. Leach Corp., 896 F.2d 939, 944 (5th Cir.1990).14

The post-termination compensation provision illustrates that Hendry and Exide contracted out from under the procuring cause rule and that they did not intend Hendry to receive commissions solely as a result of his role in soliciting or procuring UPS contracts. Rather, they contemplated that Exide's receipt of acceptable purchase orders would trigger Hendry's entitlement and that absent this, Hendry would not receive commissions.15

We conclude that the district court erred in instructing the jury that Exide had an implied duty of good faith in terminating Hendry because the North Carolina Supreme Court's recent decision in Amos makes clear that North Carolina does not recognize a separate claim for wrongful discharge in bad faith, and because the procuring cause rule does not apply on these facts since the Rep Agreement contains an express provision regarding post-termination commissions and Exide and Hendry therefore contracted out from under that rule.

REVERSED and REMANDED to the district court which shall order retrial of such of the claims for relief other than covered by our decision, which the district court determines are still viable.

HUG, Circuit Judge, dissenting.

I respectfully dissent because I conclude that the district court's implied good faith instruction was proper under North Carolina's "procuring cause rule." As the majority notes, the North Carolina Supreme Court's holding in the recent case of Amos v. Oakdale Knitting Co., No. 278A92, 1992 WL 96892 (S.Ct.N.C. May 8, 1992), left intact the procuring cause line of authority. The majority correctly states the controlling principles of this line of authority. "North Carolina's procuring cause rule implies a good faith obligation in the termination of agency agreements, specifically in real estate listing agreements.... Courts have construed this good faith obligation as prohibiting a principal from terminating the agency in order to avoid paying the agent a commission." (Majority Opinion p. 15).

The Amos case deals with the termination of at-will employees who were being paid hourly wages. There is no issue in this type of case of the amount of compensation due for services rendered--instead, the issue is the duration of continued employment. In the "procuring cause" cases, the issue is whether the principal is terminating an agency agreement in bad faith to deprive the agent of his fair commission. That is the issue faced in this case. Hendry was a sales agent, not an employee earning wages, and the issue is whether Exide, in bad faith, maneuvered the termination of the agency agreement and ultimate sales-Hendry procured so as to deprive Hendry of his commission. The district court instructed the jury in virtually the exact words of the North Carolina decision in Jaudon v. Swink, 276 S.E.2d 511 (N.C.Ct.App.1981), which was applying prior North Carolina Supreme Court authority on procuring cause.

The majority, however, believes this was error because the parties had expressly contracted out from under the rule. The contract did provide for commissions to be paid on all acceptable purchase orders received within 120 days of termination. This, however, does not contract out from under the rule. It merely advances by 120 days the maneuvering time for Exide to delay sales that Henry had procured. Whether Exide did so was a question of fact properly submitted to the jury.