Seyfarth Synopsis: On November 27, 2019, the United States Court of Appeals for the First Circuit held that, under Massachusetts law, a terminated employee asserting a claim for being deprived of lost compensation in breach of the implied covenant of good faith and fair dealing must demonstrate that the lost compensation was clearly related to past services that were already performed. The Court concluded that a former executive’s implied covenant claim failed where he had made progress in achieving, but had not fully achieved the milestone that would have entitled him to additional equity compensation under his employment agreement.
Under Massachusetts law, the general rule is that at-will employees may be terminated at any time for any reason or no reason at all, and with or without notice. But what about an employee close to receiving a bonus or some form of equity compensation? Some might see terminating such an employee as inequitable under certain circumstances. Accordingly, Massachusetts courts have allowed terminated at-will employees close to receiving a bonus or other compensation to bring claims for breach of the implied covenant of good faith and fair dealing. The claim is generally limited to instances where the at-will employee is terminated without cause and where the employee has been deprived of compensation that is clearly related to services that the employee has already performed.
In its recent decision in Suzuki v. Abiomed, Inc., the First Circuit clarified the narrow scope of such implied covenant claims. The defendant, a company that designs, manufactures, and markets medical devices, hired plaintiff in April of 2010 as its vice president of Asia. In this position, the plaintiff was responsible for shepherding one of the company’s heart pumps through the Japanese regulatory approval process. The plaintiff executed an offer letter and non-disclosure agreement which provided for, among other forms of compensation, the issuance of shares of the company’s common stock, but only upon approval of the heart pumps by a Japanese regulatory agency. The documents specified that the plaintiff must be actively employed at the time of the regulatory approval to receive the equity award. The documents also made clear that the plaintiff’s employment could be terminated at any time and for any reason, subject to a 28-day written notice provision.
After significant delays in obtaining Japanese approval of the heart pumps, Abiomed fired the plaintiff. Although the plaintiff took steps towards obtaining regulatory approval for Abiomed, he had not obtained regulatory approval at the time he was fired. Abiomed, therefore, did not pay him the equity compensation. Abiomed did not obtain regulatory approval for another fifteen months after the plaintiff was fired.
The plaintiff brought suit against Abiomed in the United States District Court for the District of Massachusetts, claiming that, in not paying the equity compensation, Abiomed breached the implied covenant of good faith and fair dealing. The plaintiff’s argument was that he had worked towards regulatory approval and was entitled to be compensated for that. The district court granted summary judgment to Abiomed, concluding that the plaintiff did not have a valid implied covenant claim because he was not on the brink of earning the equity compensation at the time he was fired.
On appeal, the First Circuit first found that despite the fact that the plaintiff’s employment could only be terminated with 28 days written notice, the plaintiff was still an at-will employee. Thus, the plaintiff could bring an implied covenant claim if he could establish that he had been deprived of compensation clearly related to services that had already been performed. However, the court found that, while the plaintiff did some groundwork to achieve regulatory approval, Abiomed still had to do significant work — fifteen months’ worth of work — after the plaintiff’s discharge to obtain approval. The court further found significant that regulatory approval was not inevitable when the plaintiff was fired. In short, the equity compensation at issue was for obtaining regulatory approval, and the ultimate achievement of regulatory approval was not clearly related to services that the plaintiff had performed before he was fired. Therefore, the First Circuit agreed with the district court in ruling against the plaintiff.
This decision serves as a reminder that employees who are fired while on the brink of receiving a bonus or other compensation may have a claim under the implied covenant of good faith and fair dealing, but only under limited circumstances. To avoid such a claim, employers who fire an employee on the brink of receiving bonuses or similar compensation should carefully review whether the employee may have earned the compensation based on services that the employee has already performed. While the plaintiff in Suzuki did not have a viable claim because achievement of the compensation milestone was not inevitable when he was fired, the result may have been different if achievement of the milestone had been inevitable or imminent at that time.