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Codding v. Pearson Education, Inc.

United States District Court, N.D. California, San Francisco Division

November 8, 2019

JUDY CODDING, Plaintiff,


          LAUREL BEELER United States Magistrate Judge


         This is a breach-of-contract case regarding bonus payments under an employment agreement.

         In 2010, plaintiff Judy Codding, an education professional, began employment with defendant Pearson Education, Inc., pursuant to a written employment agreement (“Employment Agreement”), which was later amended in 2012 by a written exchange of emails (“Email Amendment”). The Employment Agreement provided that Dr. Codding would develop education-course offerings that came to be known as the “Pearson System of Courses” or “PSoC.” It also provided that Dr. Codding would receive an initial bonus of $1 million upon her delivery of PSoC to Pearson Education. Dr. Codding developed and delivered PSoC, and Pearson Education paid her that initial $1 million bonus. The Employment Agreement (as amended) set forth an additional bonus structure if PSoC sales met or exceeded certain dollar amounts. Specifically:

1. Dr. Codding would receive a $3 million lump-sum bonus if PSoC sales exceeded $75 million.
2. Dr. Codding would receive a 2% royalty for PSoC sales beyond the initial $75 million sales threshold. The Agreements provided that Dr. Codding could accrue royalties up to a ceiling of $3 million but provided that her initial bonus of $1 million would count against her royalties, thus allowing her to accrue up to a net $2 million in royalties.

         Dr. Codding thus was eligible to receive a maximum bonus of up to $5 million if PSoC sales were $225 million (in addition to the initial bonus of $1 million that she previously received).[1]

         Dr. Codding was not eligible to receive any additional bonuses or royalties if PSoC sales did not reach the initial $75 million sales threshold

         In 2016, the parties negotiated Dr. Codding's departure from Pearson Education, which cumulated in a written agreement and release (“Agreement and Release, ” and together with the Employment Agreement and the Email Amendment, “Agreements”). Among other things, the Agreement and Release provided that Pearson Education would extend the time period for calculating PSoC sales for the purposes of Dr. Codding's bonuses through the 2019 calendar year.

         PSoC sales have fallen well short of the initial $75 million sales threshold (much less the maximum $225 million sales threshold).

         Dr. Codding sued Pearson Education for breach of contract, claiming that Pearson Education owes her a $5 million bonus. Dr. Codding argues that the implied covenant of good faith and fair dealing that applies to all contracts required Pearson Education to use “best efforts” to market and sell PSoC. Dr. Codding claims that Pearson Education failed to use best efforts, thereby breaching its Agreements with her and wrongfully depriving her of her bonuses.

         The parties each filed motions for summary judgment. Dr. Codding argues that Pearson Education “completely abandoned” any effort to sell PSoC as early as 2016, thereby breaching its purported contractual obligation to use “best efforts” to sell PSoC. Pearson Education argues that (1) the Agreements do not require it to use best efforts (or any efforts) to sell PSoC, (2) it nonetheless expended significant efforts to sell PSoC and thus did not breach any duty to try to sell PSoC that it may have had, and (3) Dr. Codding cannot establish causation or damages because she fails to show that any efforts by Pearson Education would have caused PSoC sales to reach the initial $75 million sales threshold (much less the maximum $225 sales threshold).

         The court held a hearing and now rules as follows. Dr. Codding's claims fail because she presents no evidence that PSoC sales would have reached the initial $75 million sales threshold even if Pearson Education had used best efforts to sell PSoC, and thus presents no evidence that she would have been entitled to any additional bonuses. Dr. Codding thus fails to show causation or damages, essential elements of her breach-of-contract claim. The court grants Pearson Education's motion for summary judgment and denies Dr. Codding's motion for summary judgment.[2]


         1. The Parties

         Dr. Codding served as Chief Operating Officer and Vice President of the National Center on Education and the Economy (“NCEE”), a nonprofit policy and school reform company.[3] In 1998, in her capacity as COO and Vice President of NCEE, Dr. Codding co-founded America's Choice, Inc., as a nonprofit subsidiary of NCEE that later became a for-profit entity, and served as its Chief Executive Officer and President.[4]

         Pearson Education, Inc. is an indirect wholly owned subsidiary of Pearson plc and sells and distributes educational products.[5]

         On August 3, 2010, Pearson plc acquired America's Choice for $80 million in cash.[6]

         2. The Employment Agreement

         In December 2010, following Pearson plc's acquisition of America's Choice, Pearson plc and Dr. Codding entered into a letter Employment Agreement.[7] In December 2012, Pearson plc and Dr. Codding amended the Employment Agreement by a written exchange of emails.[8]

         In relevant part, the Employment Agreement described Dr. Codding's duties as follows: “For comprehensive K-10/12 mathematics and literacy courses designed to apply the philosophy of the Common Core State Standards: These courses will cover approximately 150 days of instruction, use multi-media delivery platforms, and have the distinction of being a system of learning through the grades, of engaging students and of being easy for teachers to use.”[9] These courses were referred to as the “Pearson System of Courses, ” or “PSoC.”[10] Pearson Education paid Dr. Codding a salary and employment benefits for her services.[11]

         The Employment Agreement, as amended by the Email Amendment, provided that, in addition to her salary and other bonuses she received for other work, Dr. Codding would be eligible for bonuses based on PSoC sales, as follows:

For doing all this work, you'll receive the following (less taxes of all kinds, of course):
i. On delivery and acceptance of all the courses, $1m in cash or stock (your choice). This payment will count against the royalty you'll get for future sales . . . .
ii. $2m in cash and $1m in stock once the sales exceed $75m.
iii. a 2% royalty for all sales over that number described above, paid in cash to a ceiling of $3m (which includes the $1m you've already received). Thus, if royalties earned pursuant to this paragraph equals $3m, you shall be entitled to receive up to $2m ($3m less the $1m received pursuant to paragraph (i) above).[12]

         Dr. Codding affirms that Pearson Education paid her the initial $1 million bonus.[13]

         3. The September 2015 KPCC Article

         In September 2015, the Southern California public-radio station KPCC issued an article regarding the Los Angeles Unified School District (“LAUSD”) and PSoC.[14] KPCC reported that:

Los Angeles Unified Superintendent Ramon Cortines told board members this week he's negotiated a $6.4 million settlement with Apple Inc. and tech company Lenovo to resolve a dispute over faulty software on the tablets they sold to the district.
The settlement covers problems with the software created by Apple subcontractor Pearson Education. The software wasn't ready when the district began distributing the iPads to students two years ago and teachers complained of missing math problems and other issues.
Meanwhile, a Pearson spokeswoman confirmed to KPCC this week that the company is laying off the people who developed the software for LAUSD's iPad program.
That team included Judy Codding, Sherry King, and Susan Sclafani, three people who had email exchanges with top LAUSD officials about Pearson's software before Apple and Pearson submitted their proposal to L.A. Unified. Those exchanges raised questions about whether the bid process for the iPads were appropriately conducted.
A Pearson spokeswoman said the disbanding of the development team was not related to LAUSD's trouble with the company's software on the iPads.
“The core development team has completed the work that we hired them to do. Unfortunately, there are not comparable roles for them available within Pearson, ” said Laura Howe, Pearson vice president for media and communities, by email.[15]

         4. 2016 Discussions Between Dr. Codding and Pearson Education

         At some point before 2016, Dr. Codding and Pearson Education entered into discussions regarding the future of their relationship.

         4.1 The January 2016 Codding Letter

         On January 8, 2016, Dr. Codding's husband Richard Codding, who is an attorney who represented Dr. Codding, wrote a letter to George B. Costello, Associate General Counsel at Pearson Education (the “January 2016 Codding Letter”).[16] Among other things, the Coddings raised issues regarding PSoC sales for the purpose of calculating Dr. Codding's bonuses. Mr. Codding wrote that because Pearson Education had not meaningfully marketed PSoC, the time period in the Employment Agreement for calculating PSoC sales for the purposes of Dr. Codding's bonuses - “over the four years from when [Pearson] start[s] selling them (i.e., 2012)” - should extend through the 2019-2020 school year.[17] He wrote that Pearson Education had no plans to market PSoC for the 2016-2017 school year and questioned whether PSoC's reputation was so tarnished by the technical issues that arose with LAUSD that PSoC might never be widely sold.[18] He wrote that the Employment Agreement did not require Dr. Codding to market or sell PSoC but that Dr. Codding nonetheless had been the one to line up potential clients and to respond to LAUSD's request for proposal, which led to clients' adopting PSoC.[19] Mr. Codding concluded by writing:

We have now gone back and forth a couple of times on these issues. We hope that this matter can be resolved amicably and without litigation. To do so, we have the following proposal. In view of the facts:
• that the LAUSD iPad program collapsed because Pearson failed to take appropriate steps to develop the technology necessary to fulfill its obligations to LAUSD notwithstanding repeated warnings and notifications from Dr. Codding that the technology was not performing properly;
• that the Pearson technology group consistently and repeatedly made false and misleading statements regarding the status and functionality of the technology;
• that, had Pearson delivered on its commitments to LAUSD to make the technology work, the program would have gone through phrase 3 which would have resulted in far more than the [REDACTED] in sales required to reach the threshold necessary for additional bonus payments under Dr. Codding's agreement;
• that Pearson has made no efforts to sell the PSoC during 2014 and 2015 and appears to have no intention of trying to sell the courses for the 2016-2017 school year;
• that Pearson's egregious failure to develop the technology to make the product work as designed and to fulfill the commitments made to LAUSD and others may have so tainted the product that it may never sell;
• that Pearson's extensive and inexcusable delay in addressing the problems with the technology has so delayed the marketing of the product that Pearson may have missed the market window for the product even if it is ultimately able to fix the technology;
• that Dr. Codding performed substantial services on Pearson's behalf far beyond those contemplated by her agreement[, ] which services were instrumental in setting up the initial potential successes of the PSoC but for which she was neither evaluated nor compensated; and
• that the statements to KPCC by a Pearson spokeswoman as reported in the article by Mr. Guzman-Lopez were inaccurate, embarrassing and defamatory;

         Pearson should pay Dr. Codding the additional [$5 million] that, under the long term bonus plan, would have been paid to her already had Pearson fulfilled its obligations and theoretically will be paid to her under the agreement if Pearson fixes the technology and actively markets PSoC either as a whole or in component parts. In addition, Pearson should pay $1 million to Dr. Codding for the damage to her personal and professional reputation resulting from the comments made to KPCC[, ] which surely violated Pearson's policies with respect to the discussion of confidential personnel matters. Also, Dr. Codding should receive the one year's severance salary provided for in her agreement.[20]

         4.2 The February 2016 Pearson Letter

         On February 19, 2016, Mr. Costello wrote a letter responding to Mr. Codding (the “February 2016 Pearson Letter”).[21] He rejected Mr. Codding's demand that Pearson Education pay Dr. Codding $6 million and instead reiterated an offer to pay her one year of severance in exchange for her release.[22] He additionally offered to extend the time period for calculating PSoC sales for the purposes of Dr. Codding's bonuses through 2019.[23] He wrote:

It is clear that your client is not now entitled to any payment under the long-term bonus plan contained in her employment agreement with Pearson (“Long-term Bonus Plan” or “Plan”) under any legal theory whatsoever. The Long-term Bonus Plan is still in force and your client's right to payment is governed by the terms of the Plan and by actual sales of PSoC.
We do not agree with your position that the sales performance of PSoC is at its current level because of “Pearson's failures”. Specifically, we do not agree with the “facts” that you allege in the bullet points appearing in the last two pages of your letter. There are many reasons why sales of PSoC are at their current level, and it is just not the case that Pearson is solely at “fault” for the actions of LAUSD with regard to the PSoC courses. This will become quite clear in any litigation you choose to commence.
More importantly for our discussions, however, it is clearly not true that the PSoC product is “tainted” to the point where it “may never sell”. As I shared in my email to you last week, Pearson is updating the product and will be relaunching it later this year. We certainly anticipate further sales of the courses.
Regarding the KPCC article, we have already stated our position on your claims for damages related to the article, and it is not necessary for us to repeat them here, except to reiterate that even if the facts regarding Ms. Howe's statements to the KPCC reporter were as you allege them, your client would still have no valid claim against Pearson as a result of such alleged statements.
Offer of Resolution
Despite our differences, however, and in an effort to reach an amicable resolution of your dispute with Pearson, we are prepared to offer another significant concession in the terms of the Long-term Bonus Plan: we would agree to further toll the period during which your client would be eligible to earn compensation under the Plan (we had previously offered to extend the period through 2017). Subject to your client's signing her release, we would be willing to extend the period during which PSoC sales would be credited to her account under the Long-term Bonus Plan for two additional years, through the 2019 calendar year. (We note that we are under no obligation to offer this concession: the terms of the Long-term Bonus Plan clearly state that the earnings period under the Plan expires in 2016.)[24]

         4.3 The March 2016 Codding Letter

         On March 18, 2016, Mr. Codding wrote a letter responding to Mr. Costello (the “March 2016 Codding Letter”).[25] He wrote that Dr. Codding was prepared to accept Mr. Costello's proposal “with a few modifications and clarifications.”[26] With respect to the calculation of Dr. Codding's bonus, Mr. Codding wrote:

As for the sales period for the payments under the agreement, Dr. Codding appreciates Pearson's agreement to extend the cutoff. However, as a point of clarification, under the agreement[, ] the expiration of the earnings period would not have expired in 2016 as suggested in your letter. The agreement specifically states that the period extends for four years from when Pearson starts selling the courses. Although at the time the parties entered the agreement they anticipated that Pearson would begin selling the courses in 2012 as suggested in the agreement, Pearson did not, in fact, begin selling the courses until 2013. Consequently, the four year sales period provided for in the agreement would expire in 2017, not 2016. Dr. Codding is prepared to accept the three year extension of the sales period under the agreement but, in view of the uncertainty regarding when Pearson will actually begin selling the courses again (we understand that Pearson is still having trouble making some of the important features of the courses work on the app), proposes that the sales period be extended for three years from the time when Pearson commences a bona fide commercial effort to sell courses which are substantially functional. If Pearson commences such an effort during 2016 as you suggest it will, then the sales period will expire at the end of 2019 as proposed in your letter. However, if Pearson's sales efforts are delayed because of technical difficulties or some other reason, then the sales period under the agreement will be extended accordingly.
If this matter can be resolved as proposed here, Dr. Codding and her team, pursuant to mutually agreeable terms, would be willing to assist Pearson in marketing and selling the PSoC.[27]

         Mr. Codding additionally proposed several other modifications and clarifications to Pearson Education's proposal.[28]

         4.4 The April 2016 Pearson Letter

         On April 29, 2016, Mr. Costello wrote a letter responding to Mr. Codding (the “April 2016 Pearson Letter”).[29] Mr. Costello sent Mr. Codding a draft of a proposed Agreement and Release that he said “reflects, in Paragraph 2, the clarifications and amendments to the Employment Agreement to which we have already agreed in previous letters, and also our agreement on certain of the additional clarifications and amendments that you requested in your March 18 letter.”[30] Mr. Costello summarized Mr. Codding's requests from the March 2016 Codding Letter as:

1. A clarification of the rules relating to the sale of identifiable “component parts” of the PSoC courses in other Pearson products.
2. Agreement that your client would receive credit for shipments to certain “First Implementers” for which Pearson did not receive payment, but for which you believe that the materials were provided “with the clear understanding that the course materials would be paid for”.
3. An agreement that Pearson would credit your client with sales of identifiable Professional Development services that are related to PSoC.
4. An agreement to leave open the possibility of extending the earnings period described in Paragraph 2(c) of ...

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