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William J. Tuma, Doing Business As, Tuma and Associates v. Eaton Corporation

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF CALIFORNIA


May 23, 2011

WILLIAM J. TUMA, DOING BUSINESS AS, TUMA AND ASSOCIATES PLAINTIFF,
v.
EATON CORPORATION, DEFENDANT.

The opinion of the court was delivered by: Honorable Barry Ted Moskowitz United States District Judge

SUMMARY JUDGMENT ORDER RE MOTION FOR

Defendant Eaton Corporation, formerly doing business as Cutler-Hammer, Inc., moves for summary judgment on Plaintiff's claims for breach of contract, breach of duty of good faith and fair dealing, and violation of the Independent Wholesale Sales Representative Contractual Relations Act (Civil Code § 1738.10 et seq.). In the alternative, Defendant moves for partial summary judgment on the issue of the maximum amount of damages recoverable by Plaintiff. For the reasons that follow, this motion is GRANTED in part and DENIED in part.

I. BACKGROUND

On June 2, 2003, Plaintiff entered into a written Manufacturer's Representative Agreement ("2003 Contract" or "contract") to act as an outside sales representative in the spa market for Defendant -- a manufacturer of electrical components, including spa circuit breakers and spa breaker panels. Plaintiff was granted the right to solicit orders for Defendant's products in a defined sales territory from customers that included Watkins Manufacturing ("Watkins") -- a major spa company. See Pl. Ex. 7 at 175, 188. The contract provides that Plaintiff would be paid commissions "on all sales of Products within the Territory." (Id. at 178). The contract also addresses payment of commissions following termination of the agreement, limiting such payment to orders placed "within thirty (30) days after the effective date of the termination." (Id. at 181)

Plaintiff alleges that he worked for four years before finally persuading Watkins to start purchasing Defendant's products. (FAC ¶ 4, 5) On July 20, 2007, Watkins placed an order with OneSource, a wholesale electrical distributor, for 500 Eaton breakers to be used in a field test ("field test order"). Defendant does not challenge Plaintiff's contention that Tuma played a major role in securing this order even though this order was placed through a third-party distributor. See generally mem. at 4. Although it is unclear from the complaint or Plaintiff's opposition, Plaintiff may be seeking recovery of a commission on this order.*fn1

On August 27, 2007, Defendant's employee, Brian Hulse, sent Plaintiff an email stating that Eaton and Tuma "have mutually agreed to separate our relationship." See Def. Ex. 4; see also Opp. at 7. On November 1, 2007, Defendant sent Plaintiff a letter stating that the 2003 Contract would terminate the following day. (Def. Ex. 5) Presumably because of the contract's 30-day notice requirement for terminations without cause, the parties agree that December 1, 2007 is the effective date of termination. See Mem. at 6; Def. Statement of Fact # 4; Opp. at 7; Pl. Statement Of Fact # 4. This letter also states that "even though One Source actually placed the order," Eaton would pay additional compensation of $10,000 to Plaintiff for the field test order "as an accommodation" in exchange for Plaintiff's release of all claims under the 2003 Contract. Def. Ex. 5.

On March 21, 2008, Defendant and Watkins signed a multi-year pricing agreement ("Watkins Agreement"). Plaintiff contends that he is owed commissions on this agreement, which he characterizes as a "multi-year contract for a three to five year minimum term at a fixed price for sales of circuit breakers." (Compl. ¶ 5) Although Plaintiff asserts that he worked with Defendant and Watkins to finalize this agreement prior to his termination, he does not dispute that this agreement was signed -- and, a fortiori, all orders using the fixed prices set forth in the agreement were placed -- later than one month after the effective date of termination. See Pl. Statement Of Fact # 8.

II. STANDARD

Summary judgment is appropriate under Rule 56 of the Federal Rules of Civil Procedure if the moving party demonstrates the absence of a genuine issue of material fact and entitlement to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). A fact is material when, under the governing substantive law, it could affect the outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); Freeman v. Arpaio, 125 F.3d 732, 735 (9th Cir. 1997). A dispute is genuine if a reasonable jury could return a verdict for the nonmoving party. Anderson, 477 U.S. at 248.

A party seeking summary judgment always bears the initial burden of establishing the absence of a genuine issue of material fact. Celotex, 477 U.S. at 323. The moving party can satisfy this burden in two ways: (1) by presenting evidence that negates an essential element of the nonmoving party's case; or (2) by demonstrating that the nonmoving party failed to establish an essential element of the nonmoving party's case on which the nonmoving party bears the burden of proving at trial. Id. at 322-23.

Once the moving party establishes the absence of genuine issues of material fact, the burden shifts to the nonmoving party to set forth facts showing that a genuine issue of disputed fact remains. Celotex, 477 U.S. at 314. The nonmoving party cannot oppose a properly supported summary judgment motion by "rest[ing] on mere allegations or denials of his pleadings." Anderson, 477 U.S. at 256. When ruling on a summary judgment motion, the court must view all inferences drawn from the underlying facts in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).

III. CHOICE OF LAW

The Court has diversity jurisdiction over this matter pursuant to 28 U.S.C. § 1332. In a diversity action, it is well-settled that a federal court must apply the choice of law rules of the state in which the action was filed, and thus, the Court applies California choice-of-law rules. See Trans Meridian Trading, Inc. v. Empresa Nacional de Comercializacion de Insumos, 829 F.2d 949, 953-954 (9th Cir. 1987). Under California choice-of-law rules, California state law applies, unless the parties raise an objection. See Hurtado v. Superior Court, 11 Cal. 3d 574, 580 (1974); see also Plaspro GMBH v. Gens, No. C 09-04302 PSG, 2011 U.S. Dist. LEXIS 28808, at *8 (N.D. Cal. Mar. 21, 2011).

Here, none of the parties object to the application of California law, and in fact, both raise arguments based exclusively on California state law. California state law applies to the instant action.

IV. DISCUSSION

A. Breach Of Contract Claim (First Cause Of Action)

1. Contractual Right To Commissions On The Watkins Agreement Defendant argues that it is entitled to summary judgment on Plaintiff's breach of contract claim for commissions on the Watkins Agreement because the 2003 Contract precludes payment of commissions on orders accepted more than 30 days after the effective date of termination and the Watkins Agreement was not signed until after this "tail period." The Court agrees.

i. Meaning Of The Termination Clause

The parties assert competing views on the meaning of language in the contract regarding the payment of commissions after termination. Defendant argues that Section 15(b) of the 2003 Contract controls the issue of whether Eaton must pay commissions more than thirty days after the effective date of termination. This provision provides:

Termination of this Agreement shall not . . . release Cutler-Hammer from its obligations to the Representative for payment of commissions on orders accepted by Cutler-Hammer prior to the effective date of the termination or on orders in Cutler-Hammer's possession which are thereafter accepted by Cutler-Hammer, or on orders accepted by Cutler-Hammer within thirty (30) days after the effective date of the termination. (Pl. Ex. 7 at 181)

Plaintiff, in turn, contends that this provision is not applicable because Plaintiff had not worked to procure "individual 'orders'" from Watkins, but rather worked to procure "a 'specific project' and [worked] for 'the establishment of long term (multi-year) purchasing contracts.'" (Opp. at 9-10) For those reasons, Plaintiff asserts that Exhibit C is the "key provision" that exclusively applies to Plaintiff's work on the Watkins Agreement. (Opp. at 10) Exhibit C provides in relevant part, "Note: For specific project negotiations or the establishment of long term (multi-year) purchasing contracts for any product(s) listed, Cutler-Hammer reserves the right to establish with the Representative a project specific commission rate at the time of quote for sales made under this particular agreement." (Ex. 7 at 185)*fn2

The Court holds that the only reasonable interpretation of Section 15(b) is that it bars commission payments on all "orders" accepted more than "thirty (30) days after the effective date of the termination," including commissions on any orders made under the long-term pricing agreement allegedly procured by Plaintiff. "Orders", as the term is commonly understood and as used elsewhere in the contract, can be a single purchase at a negotiated price or be one placed pursuant a long-term pricing agreement. C.f. Section 4, Pl. Ex. 7 at 177 (describing procedure for acceptance of orders and payment of commissions without reference to the manner by which the order was procured).

The contract's reference to "long term (multi-year) purchasing contracts" in Exhibit C does not alter or create ambiguity in this interpretation of Section 15(b). Exhibit C provides Defendant with the right to establish a project specific commission rate for long-term contracts. Presumably, pursuant to this provision, Defendant could reach an agreement with a sales representative to create a project specific commission rate that allows for payment of post-termination commissions after the 30-day cut-off date. However, absent such an agreement, Exhibit C in no way limits the language in Section 15(b) setting an end date for commissions on all orders -- including orders made under long-term pricing agreements.

ii. Triggering Event For Payment Of Commissions

Although Plaintiff concedes that "[t]he long term multi-year purchase agreement with Watkins was finalized after Eaton terminated Tuma" (opp. at 12), Plaintiff argues that he is owed commissions that accrued before termination because he is entitled to commissions at the moment he "procured" the sale, irrespective of when the transaction was finalized. In support of this position, Plaintiff contends, by quoting a phrase in Section 9(a), that "[t]he Contract at issue called for commissions on sales 'procured by the Representative.'" (Opp. at 12).*fn3

Plaintiff's position lacks merit. Conferring a right to commissions on orders placed more than thirty days after the effective date of termination based solely on when the order was procured conflicts with the plain language of Section 15(b). Section 15(b) provides that the triggering event for the payment of commissions after termination is an accepted order.

Other relevant contractual provisions make clear that an order constitutes the final act of a sale. Section 4 of the agreement directs that commissions on orders are to be determined after acceptance by Defendant and final shipment. See Pl. Ex. 7 at 177 ("Acceptance or rejection of such orders and the determination of whether to make final shipment of any order, even though previously accepted, shall be in the sole discretion of Cutler-Hammer. . . As to any rejected orders, or any orders which are accepted but for which, for any reason, final shipment is not made, the Representative shall not be entitled to a commission."). Similarly, Section 9(a) -- the provision relied upon by Plaintiff -- provides that the amount of commission is to be computed by taking into account the cost of delivery. See Pl. Ex. 7 at 178 ("The commission will be computed on the amount of the order procured by the Representative . . . , less any deductions (e.g. freight and transportation charges, taxes, handling charges for minimum orders . . . ) which are included and shown upon such invoice." ). Thus, the 2003 Contract cannot be reasonably interpreted to allow Plaintiff to recover commissions on orders placed more than thirty days after the effective date of termination based on pre-termination efforts to secure the order.

An email stating that Tuma "had landed 'the big fish' at Watkins" and other extrinsic evidence of Tuma being assured that his commission will be protected does not alter this conclusion.*fn4 Although extrinsic evidence can be admissible even if the contract is unambiguous on its face, such evidence must be "relevant to prove a meaning to which the language of the instrument is reasonably susceptible." Pacific Gas & E. Co. v. G. W. Thomas Drayage etc. Co., 69 Cal. 2d 33, 37 (1968); see also Bionghi v. Metro. Water Dist., 70 Cal. App. 4th 1358, 1365 (2d Dist. 1999). This rule is "restricted to its stated bounds; it does no more than allow extrinsic evidence of the parties' understanding and intended meaning of the words used in their written agreement. " Id.

Here, the evidence offered by Plaintiff does not "concern the 'circumstances surrounding the making of the agreement' or allow a court to 'place itself in the same situation in which the parties found themselves at the time of contracting.'" Id. at 1367 (quoting Pacific Gas & Electric, 69 Cal. 2d at 40). Plaintiff points to no evidence that predates contract formation that would provide an alternative meaning for contractual language that requires commissions to be paid after acceptance of the order by Defendant and delivery. Moreover, Plaintiff does not and cannot assert that the individuals who provided assurances to Plaintiff regarding commission payments had authority to enter into or alter the contract on behalf of Defendant. See Pl. Statement Of Fact # 37 (referencing statements by Watkins employee); Pl. Ex. 1 at 7-9 (deposition of Brian Hulse, Plaintiff's "direct liaison", referencing a conversation with Plaintiff where Mr. Hulse stated his belief that Plaintiff would be compensated for the Watkins Agreement but acknowledging that he has never seen "any agreements the company has with sales reps" and that the payment of commissions was "outside the scope" of his job). Accordingly, the Court holds that as a matter of law, the express terms of the 2003 Contract bar Plaintiff from recovering commissions on the Watkins Agreement.*fn5

2. Contractual Right To Commissions On The Field Test Order

Unlike the Watkins Agreement, the field test order was made prior to Plaintiff's termination. Thus, a claim for commission on this order would be unaffected by contract provisions limiting post-termination commission payments. Accordingly, it is necessary to address Defendant's additional basis for summary judgment on all breach of contract claims: that it "had a contractual right to sell through distributors." (Mem. at 6) Defendant asserts that when sales are made through distributors but with the cooperation of a sales representative, Defendant has sole discretion to determine how the commission is apportioned, thereby negating Plaintiff's right to full commission on the field test order, which was sold through OneSource. See mem. at 6-7.

Plaintiff does not challenge Defendant's contention that Eaton had a contractual right to sell through distributors in Tuma's territory and that the field test order was placed through a distributor and not through Tuma. However, Plaintiff asserts that Section 9(c) -- the contractual provision providing Defendant with the sole right to determine the apportionment of commissions on sales involving the efforts of a sales representative and a distributor -- does not apply to sales made within Tuma's territory. Plaintiff argues that "[t]he introductory clause states that the provision is in reference to sales outside an assigned territory rather than to all sales." (Opp. at 16) Section 9(c) reads in full:

Commissions will generally be paid to the Representative only on sales of products within the territory. However, Cutler-Hammer and the Representative recognize that occasions may arise which will require cooperation of Representatives, Cutler-Hammer's distributors, and/or Cutler-Hammer. When such occasions arise, Cutler-Hammer will make the sole determination of whether the Representative will receive the commission or whether the commission will be apportioned. (Pl. Ex. 7 at 179)

Contrary to Plaintiff's position, the introductory sentence of this provision merely reiterates a limitation found elsewhere in the contract -- that a sales representative is only entitled to commission on sales inside an assigned territory.*fn6 The remainder of this provision, sets forth an exception to this general rule.

Because the contract precludes payment of commissions outside of an assigned territory, Plaintiff's asserted meaning of this provision is unreasonable. Defendant has the right to apportion a commission when sales are made with the "cooperation of Representatives, Cutler-Hammer's distributors, and/or Cutler-Hammer." It is undisputed that the field test order was made with the cooperation of a distributor, thus triggering Defendant's right to apportion a commission.

Nevertheless, an issue of fact remains as to whether Defendant's offer to pay Plaintiff $10,000 for the field test order in exchange for Plaintiff's release of all claims under the 2003 Contract constitutes such an apportionment. Defendant asserts no authority for the proposition that an offer made over three months after acceptance of an order that requires a release of claims could be considered a commission payment. Similarly, Defendant offers no details as to the amount of commission paid to the distributor in the field test order. Thus, even though Defendant has the right to apportion commission on sales within an assigned territory, Defendant has not established that it met its contractual obligation to pay Plaintiff a commission on the field test order. Accordingly, summary judgment is DENIED as to Plaintiff's breach of contract claims on the field test order. Because Defendant has not established that the $10,000 offer constitutes an apportionment of commission and because as set forth below, such an apportionment is subject to the covenant of good faith, Defendant's alternative ground for summary judgment -- that Plaintiff's damages are limited to $10,000 -- is DENIED.

B. Breach Of Duty Of Good Faith And Fair Dealing (Second Cause Of Action)

Defendant seeks summary judgment on Plaintiff's claim for breach of duty of good faith and fair dealing. The heart of Plaintiff's claim is that Defendant breached the implied covenant of good faith and fair dealing by terminating Plaintiff for the purpose of preventing Plaintiff from obtaining commissions on the Watkins Agreement.

Under California law, "[e]very contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement . . . . The covenant of good faith finds particular application in situations where one party is invested with a discretionary power affecting the rights of another."Carma Developers, Inc. v. Marathon Dev. Cal., Inc., 2 Cal. 4th 342, 371-72 (1992) (quotation omitted). Nevertheless, "if the express purpose of the contract is to grant unfettered discretion, and the contract is otherwise supported by adequate consideration, then the conduct is, by definition, within the reasonable expectation of the parties and can never violate an implied covenant of good faith and fair dealing." Wolf v. Walt Disney Pictures & Television, 162 Cal. App. 4th 1107, 1120-21 (2nd Dist. 2008) (quotation omitted).

Of particular relevance to the instant case, the California Supreme Court has observed in a footnote that "the covenant might be violated if termination of an at-will employee was a mere pretext to cheat the worker out of another contract benefit to which the employee was clearly entitled, such as compensation already earned." Guz v. Bechtel National, Inc., 24 Cal. 4th 317, 353 n.18 (2000). Subsequently, several courts have recognized that a cause of action for the breach of the implied covenant can be sustained in such circumstances, as an exception to the general proposition that the exercise of a contractual right agreed to by the parties cannot violate the implied covenant. See Daly v. United Healthcare Ins. Co., No. 10-CV-03032-LHK, 2010 U.S. Dist. LEXIS 116048, at *14-15 (N.D. Cal. Nov. 1, 2010) (citing cases); Creager v. Yoshimoto, No. C 05-01985, 2007 U.S. Dist. LEXIS 77309, at *6-7 (N.D. Cal. Oct. 9, 2007); Xnergy v. Hess Microgen, LLC, No. 06cv343 WQH 2007 U.S. Dist. LEXIS 63812, at *28-29 (S.D. Cal. Aug. 29, 2007).*fn7 Nevertheless, case law applying this exception to cases where an at-will employee is terminated for the purported purpose of depriving him of earned commissions is limited. See McCollum v. Xcare.net, Inc., 212 F. Supp. 2d 1142, 1153 (N.D. Cal. 2002); Schuman v. IKON Office Solutions, Inc., No. C 03-4976, 2005 U.S. Dist. LEXIS 10039, at *29-32 (N.D. Cal. May 10, 2005), aff'd, 232 Fed. Appx. 659, 663 (9th Cir. 2007); c.f. Nein, 174 Cal. App. 4th at 852 (declining to consider whether claim for breach of implied covenant could be supported by assertion that employer terminated at-will employee in order to avoid paying his commission because this assertion was not raised before the trial court).

Although it is a close question, Plaintiff's breach of the implied covenant claim fails as to the Watkins agreement. Plaintiff has not made a sufficient showing of bad faith to create a genuine issue of material fact. See Schuman, 232 Fed. Appx. at 663 ("In the absence of evidence of bad faith, or evidence that IKON removed Schuman for the express purpose of denying him commissions, Schuman failed to create a genuine issue of material fact that IKON breached the implied covenant of good faith and fair dealing.") The gravamen of Plaintiff's assertion of bad faith is that because "Tuma cost Eaton nothing, other than commissions" his termination prior to consummation of a long-term pricing agreement could only be for the purpose of depriving him of commissions on Watkins orders. (Opp. at 15) However, Plaintiff acknowledges a business purpose, independent from a desire to prevent Plaintiff from collecting commissions on future sales, for the decision to use OneSource, and not Plaintiff, to place future orders. See opp. at 10 ("As a result of Eaton's alignment with OneSource its business in the market has gone up dramatically.") To the extent that Plaintiff is arguing that in order to be compensated for soliciting Watkins business, he should have been kept on the payroll indefinitely, so long as Watkins places orders under the Watkins Agreement, such an expectation would not be legitimate. See Schuman, 2005 U.S. Dist. LEXIS 10039, at *31-32.

For these reasons, a case applying California law where a court has found triable issues on allegations of termination for the purpose of depriving plaintiff of commission payments is distinguishable. See McCollum, 212 F. Supp. 2d 1142. In McCollum, the court held that there was a triable issue of fact as to whether the plaintiff was terminated just two weeks before a $10 million sales signing, so as to "frustrate [the] plaintiff's legitimate expectations" of receiving commission on the sale. Id. at 1153. Here, the Watkins Agreement was not signed until at least three months after the effective date of Plaintiff's termination and would not, in of itself, have entitled Plaintiff to commissions. Plaintiff presents no evidence that Defendant sought to delay finalizing the Watkins Agreement or placing orders pursuant to it, in order to avoid payment of commissions to Plaintiff during the contract's tail period. To the contrary, Plaintiff does not challenge Defendant's contention that the terms related to price and other conditions in the Watkins agreement were heavily negotiated during the period of time after Plaintiff's termination, and thus, the signing of the Watkins Agreement was delayed for reasons extraneous to Plaintiff. Finally, nothing in the 2003 Contract suggests that Plaintiff should have "legitimately expect[ed]" to remain employed indefinitely in order to collect commissions on orders made under this pricing agreement. Therefore, the Court GRANTS summary judgment in Defendant's favor on Plaintiff's claim for the breach of the duty of good faith and fair dealing on payment of commission on the Watkins Agreement.

However, Defendant is not entitled to summary judgment on a claim for breach of the implied covenant with respect to the field test order. As noted above, under the contract, Defendant has sole discretion to determine apportionment of commission on this order. Assuming, arguendo, that Defendant's offer of a $10,000 payment constitutes an apportionment of commission owed on this sale, a jury could conclude that tying this offer to a requirement that Plaintiff release all of its claims negates all value to Plaintiff. Effectively refusing to pay any commission on a sale within Plaintiff's territory could constitute the exercise of discretion in a manner that "no one could have reasonably expected." Indymac Fed. Bank, 2009 U.S. Dist. LEXIS 14837, at *5. Accordingly, a triable issue of fact remains as to whether the apportionment of commission on the field test order violated the implied covenant.

C. Violation Of Independent Wholesale Sales Representatives Relations Act (Third Cause Of Action)

1. Failure To Pay Commissions

Cal Labor Code § 1738.15 establishes liability for willful failure "to pay commissions as provided in the written contract." Plaintiff asserts that Defendant breached this provision "by failing to pay commissions as provided by the express or implied terms of Plaintiff's written contract." (FAC ¶ 15(a)) For the reasons set forth above, the only commission Plaintiff may be entitled to under the express or implied terms of the contract is for the field test order. Plaintiff's § 1738.15 claim fails as to all other orders.

2. Rate And Method To Calculate Commission

Defendant is not entitled to summary judgment on Plaintiff's § 1738.13 claim. Cal Labor Code § 1738.13 requires, inter alia, that a written contract with a sales representative include "[t]he rate and method by which the commission is computed." As set forth above, Defendant has the sole right to apportion commissions on sales made with the "cooperation of Representatives, Cutler-Hammer's distributors, and/or Cutler-Hammer." However, this provision does not set forth either the rate or method of computation of commission.

V. CONCLUSION

Defendant's motion for summary judgment is GRANTED as to (1) Plaintiff's breach of contract claims for commission payments on the Watkins Agreement; (2) Plaintiff's breach of the implied covenant claim regarding commission payments on the Watkins Agreement; and (3) Plaintiff's Independent Wholesale Sales Representatives Relations Act claims for failure to pay commissions on the Watkins Agreement.

Defendant's motion for summary judgment is DENIED as to Plaintiff's breach of contract, breach of implied covenant, and Cal Labor Code § 1738.15 claims for commission payments on the field test order, as well as Plaintiff's § 1738.15 claim. Defendant's alternative motion for summary judgment to limit the amount of damages is DENIED.

IT IS SO ORDERED.


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