Opinion
No. 03 CV 10287 (GBD).
January 25, 2005
OPINION ORDER
Plaintiff brought an action alleging breach of contract to recover the value of three deferred compensation bonuses awarded to him in 1997, 1998 and 1999 while he was employed by defendants. Defendants bring this motion for judgment on the pleadings pursuant to Fed.R.Civ.P. 12(c) because plaintiff has failed to state a claim for constructive discharge. For the reasons stated below, defendants' motion is granted.
BACKGROUND
Schroders plc is a worldwide investment banking and asset management company. Defendant Schroder Investment Management North American Inc. ("SIMNA"), a subsidiary of Schroders plc, is incorporated in the State of Delaware with its principal place of business in New York. Schroders plc established SIMNA to manage the international and U.S. equity and fixed income portfolios for Schroders' North American clients, and to provide advice about investments in U.S. equity securities to Schroders plc's clients around the world.
On January 1, 1997, Defendant Schroder Capital Management International ("SCMI"), another subsidiary of Schroders plc, hired plaintiff Paul Morris to work in its New York office as the Senior Vice President and Head of U.S. Equities. In this position, plaintiff had responsibility for large and mid cap U.S. equity investments for SCMI and other segments of Schroder plc's worldwide operations. His duties included investment management and advice, as well as responsibility for U.S. equity research and expansion. SCMI and SIMNA merged in 1999. Plaintiff claims that he had management or advisory responsibility for over $7.5 billion in assets by 1999. After the 1999 merger, plaintiff continued in his position for SIMNA, and remained employed there until April 13, 2000.
Plaintiff claims that for each of his three full years of employment, he was paid an annual salary of $225,000. In addition, he received a year-end bonus, made up of both cash and stock. Part of the bonus was paid immediately to plaintiff, while some was deferred to be paid in later years. This deferred portion was known as a deferred compensation award. Plaintiff claims he was awarded deferred compensation bonuses for 1997, 1998, and 1999 as follows: (1) for the year 1997, SCMI awarded plaintiff $37,500 in deferred cash compensation; (2) for the year 1998, SCMI awarded plaintiff $234,000 in deferred cash compensation; and (3) for the year 1999, SIMNA awarded plaintiff $217,000 in deferred cash compensation, and 26,302.62 shares in deferred stock compensation.
The deferred compensation plans each provided that the award did not vest until three years after the date of issue. On the third anniversary of the award, the employee was to be paid the accrued value of the award. Thus, plaintiff's deferred compensation payments were to be made in 2001, 2002, and 2003. Plaintiff claims that the cumulative accrued value of his awards, which he elected to have invested in Schroders plc mutual funds, is approximately $2.9 million.
Each of the three deferred compensation plans in question had provisions for forfeiture of the award in the event the employee voluntarily terminated his employment. The plans specified that if, before the end of the three-year vesting period, the employee resigned and took employment with a company that Schroders considered to be a competitor, all deferred compensation would be forfeited.
Specifically, the 1997 plan provides that "for the purposes of the plan, a voluntary termination is defined as a termination initiated by the employee for purposes of seeking employment with a firm which Schroders considers a `competitor.' If a terminated employee is employed by another company engaged in any business conducted by Schroder Group; or if the employee is involved in any business which solicits business from clients of the Schroder Group, such employment will result in forfeiture of deferred compensation. Schroder Investment Management Group Deferred Compensation Award Plan Plan Description 1997 Performance Year ("1997 Plan"), Complaint, Exhibit A.
The 1998 plan similarly defines a voluntary termination as "a termination initiated by the employee." Schroder Investment Management Group Deferred Compensation Award Plan Plan Description 1998 Performance Year ("1998 Plan"), Complaint, Exhibit B. The 1998 Plan further provides for the forfeiture of all unvested or unpaid Plan awards if the terminated employee "takes up employment with a firm which Schroders considers to be a competitor; or establishes a company for purposes of engaging in business of a nature in any way similar to that of the Schroder Group; or solicits any business in competition with the Schroder Group from clients of the Schroder Group; or encourages any employee to leave the employment of the Schroder Group." 1998 Plan, Complaint, Exhibit B.
The 1999 Plan provides that "[i]f, having left the employment of Schroders plc. you do not maintain "good leaver" status throughout the vesting period, you will forfeit any right to payment of accrued values as yet unvested. . . . You will be considered a "good leaver" if during the vesting period you do not: take up employment with a firm that the Group considers a competitor; establish a company for the purposes of engaging in any business of a nature in any way similar to Group business. Schroder Investment Management Group Deferred Compensation Award Plan Plan Description 1999 Performance Year ("1999 Plan"), Complaint, Exhibit C.
Plaintiff alleges that in 1999 and 2000, SIMNA and its parent company made various business decisions that drastically reduced his duties and responsibilities — specifically, plaintiff claims that they took away his responsibilities with respect to operations in Japan, Hong Kong, and London; sold their New York brokerage business; decided not to fund the U.S. equity research operation that plaintiff had developed; and rejected plaintiff's proposal for setting up a hedge fund. Plaintiff claims that, as a result of these decisions, the value of the assets over which he had responsibility dropped from over $7.5 billion in mid 1999 to approximately $1.5 billion at the time he left the company.
All this led plaintiff to believe — by early 2000 — that SIMNA's large and mid cap U.S. equity operation "was no longer a viable business" that it "could not survive for long"; that SIMNA "was no longer willing or able to employ [him] in the same position, with the same duties and responsibilities, and with the same compensation potential and career potential and basic job security" as when he began employment. Complaint p. 14-15, ¶¶ 68, 74, 77. In February 2000, plaintiff "informed SIMNA that he intended to leave his job" and that "he had decided to establish a hedge fund business in New York." Id. p. 11, ¶ 53. Plaintiff left the company on April 13, 2000.
Thereafter, plaintiff established a hedge fund business, and has been working for various hedge funds ever since. In May, 2000, SIMNA informed plaintiff that it regarded working at a hedge fund as a forfeiture of his deferred compensation awards. Though plaintiff disagreed with the company's position, SIMNA continually rejected his demands that he be paid the value of the deferred compensation awards. Plaintiff thereby brought this action for breach of contract to recover the value of the awards.
DISCUSSION
Defendants have moved to dismiss this action on the pleadings pursuant to Fed.R.Civ.P. R. 12(c). The standard for granting a Rule 12(c) motion for judgment on the pleadings is the same as a Rule 12(b)(6) motion for failure to state a claim. See Patel v. Contemporary Classics of Beverly Hills, 259 F.3d 123, 126 (2d Cir. 2001). In deciding such a motion, the district court must accept all of plaintiff's allegations in the complaint as true and draw all inferences in plaintiff's favor. See id., 259 F.3d at 126. Dismissal is proper only when the court is satisfied that the plaintiff cannot state any set of facts that would entitle him to relief. See id.Neither party contests that New York state law governs this dispute. Ordinarily, a New York court will consider an employment covenant not to compete under the test of reasonableness — whether the covenant unreasonably restricts the employee's ability to earn a living. See IBM v. Martson, 37 F. Supp. 2d 613, 619-620 (S.D.N.Y. 1999; see also Purchasing Assoc. v. Weitz, 13 N.Y.2d 267, 272 (1963) ("a covenant by which an employee simply agrees, as a condition of his employment, not to compete with his employer after they have severed relations is . . . subject to the overriding limitation of reasonableness.").
However, New York recognizes an exception to the reasonableness test in the context of covenants that concern employee benefits. See IBM, 37 F. Supp. 2d at 619. This exception is known as the employee choice doctrine. It provides that where an employee has the choice between not competing — thus retaining her benefits — or competing and losing them, the court will enforce the covenant without regard to its reasonableness. Id. at 620. This is because "[i]t is no unreasonable restriction of the liberty of a man to earn his living if he may be relieved of the restriction by forfeiting a contract right or by adhering to the provisions of his contract." Kristt v. Whelan, 4 A.D.2d 195, 199, 164 N.Y.S.2d 239, 243 (1st Dep't 1957); see also Lucente v. IBM, 310 F.3d 243, 254 (2d Cir. 2002) ("This `employee choice doctrine' assumes that an employee who elects to leave a company makes an informed choice between forfeiting a certain benefit or retaining the benefit by avoiding competitive employment."). Thus, SIMNA's non-compete agreement would fall within the employee choice doctrine. Plaintiff had the choice between competing and non-competing, with knowledge that if he chose to compete, he would lose the value of his deferred compensation plans.
The employee choice doctrine, however, protects covenants not to compete only where the employee voluntarily left his employment. A covenant not to compete is unenforceable against an employee who is involuntarily terminated without cause. Nisselson v. DeWitt Stern Group, Inc., 225 B.R. 51, 55-56, 1998 U.S. Dist. LEXIS 15216, *9 (S.D.N.Y. 1998). "Where the employer terminates the employment relationship without cause, . . . his action necessarily destroys the mutuality of obligation on which the covenant rests as well as the employer's ability to impose a forfeiture." Post v. Merrill Lynch, Pierce, Fenner Smith, Inc., 48 N.Y.2d 84, 89, 421 N.Y.S.2d 847, 849 (1979); see also SIFCO Indus., Inc. v. Advanced Plating Technologies, Inc., 867 F. Supp. 155, 158-159 (S.D.N.Y. 1994) (holding that as a matter of New York law, covenants not to compete are unenforceable where the employer did not show continued willingness to employ the employee).
Plaintiff argues that SIMNA's covenant not to compete is unenforceable because he was involuntarily terminated through the mechanism of constructive discharge. Constructive discharge of an employee occurs "when an employer, rather than directly discharging an individual, intentionally creates an intolerable work atmosphere that forces an employee to quit involuntarily." Whidbee v. Garzarelli Food Specialties, Inc., 223 F.3d 62, 73 (2d Cir. 2000). An employer who is constructively discharged is involuntarily terminated for the purpose of finding his or her covenant not to compete unenforceable. See IBM v. Martson, 37 F. Supp. 2d 613, 620 (S.D.N.Y. 1999) (recognizing that, under New York law, a termination without cause automatically voids a non-compete clause, and that constructive discharge is for all intents and purposes a termination without cause).
Claims of constructive discharge are weighed by an objective standard. The work atmosphere will be considered intolerable only if conditions "are so difficult or unpleasant that a reasonable person in the employee's shoes would have felt compelled to resign." Whidbee, 223 F.3d at 73 (quoting Chertkova v. Connecticut Gen. Life Ins. Co., 92 F.3d 81 at 89 (2d Cir. 1996)). The Supreme Court recently held that for a plaintiff to prevail on a constructive discharge claim "he must show that the abusive working environment became so intolerable that [his] resignation qualified as a fitting response." Pennsylvania State Police v. Suders, 124 S. Ct. 2342, 2347, 159 L.Ed.2d 204 (2004). The intolerable working conditions may be premised on an "adverse action officially changing [the employee's] employment status or situation, for example, a humiliating demotion, extreme cut in pay, or transfer to a position in which she would face unbearable working conditions." Id., 124 S. Ct. at 2347.
Here, plaintiff's complaint cannot state a claim of constructive discharge, even taking all factual allegations as true. Plaintiff's working conditions at the time of his resignation were not so intolerable that a reasonable person would have been forced to leave the job. Despite plaintiff's allegation that his responsibilities for certain operations were greatly reduced, plaintiff retained the same job title, received the same salary, and received bonuses each year he worked. In fact, in the year 1999 when plaintiff contends his responsibilities were decreased, he was awarded $217,000 in deferred cash compensation and over 26,000 shares of deferred stock. At the time he decided to resign, his alleged reduction in responsibilities was arguably the only adverse condition plaintiff had experienced.
In the Second Circuit, such circumstances are insufficient to create objectively intolerable working conditions. In Stetson v. NYNEX Serv. Co., 995 F.2d 355, 360 (2d Cir. 1993), the court found that an employee who was dissatisfied with his work assignments but had faced no salary reduction and had been given bonuses or raises yearly was not constructively discharged when he resigned. In Petrosino v. Bell Atl., 385 F.3d 210 (2d Cir. 2004), the court found that where plaintiff employee was faced with reduced promotion opportunities, but retained her job title, pay, and seniority, her resignation did not constitute constructive discharge. See also Pena v. Brattleboro Retreat, 702 F.2d 322 (2d Cir. 1983) (finding no constructive discharge claim where employer wanted plaintiff to continue working with no change in pay or title but with less authority and responsibility, since plaintiff had shown "only that she strongly disagreed with the business judgments of [her employer]").
Plaintiff argues that the reduction in his responsibilities indicated that "his career at SIMNA was drawing to an end." Complaint p. 12, ¶ 63. By his own account, plaintiff resigned because he believed that his working conditions would soon be intolerable, not because they already were. Plaintiff resigned from SIMNA because of his speculations that he was "stuck in a dead-end job, with drastically reduced responsibilities and income potential," Complaint p. 16, ¶ 78, and because he believed that SIMNA would make further decisions reducing the U.S. Equity operations and that the operation "could not survive for long." Complaint p. 13-15, ¶ 74. Plaintiff chose to resign before the onset of any adverse working conditions which might constitute constructive discharge. His complaint, therefore, fails to state a claim of constructive discharge. As plaintiff was not involuntarily discharged, defendants' covenant not to complete is protected by the employee choice doctrine. See IBM v. Martson, 37 F. Supp. 2d 613, 621 (S.D.N.Y. 1999) (where plaintiff cannot show involuntary dismissal, the employee choice doctrine applies). Accordingly, defendants' motion is granted, and plaintiff's claim is dismissed.
SO ORDERED.