A federal district court in Massachusetts upheld a jury verdict against Computer Associates finding that its compensation policy, which denied payment of sales commission to terminated employees on deals where payment was not received within 30 days of that employee’s termination, violated the covenant of good faith and fair dealing under Massachusetts law.
The compensation policy in question provided:
No Commission will be paid if the same shall not have been earned and otherwise become payable (as defined in the Sales plan) prior to termination with respect to a fully complete transaction. A “fully complete transaction” means that all of the conditions of a sale have occurred as described in this Sales Plan. The sole exception is that a Commission will be paid on an “incomplete” transaction if the only open condition is [Computer Associates’] receipt of payment and that payment is actually received by [Computer Associates] within 30 calendar days following the employee’s termination or resignation.
In upholding the jury verdict, the court noted that the CA policy allowed for payment of comission on sales where payment was received within 90 days for employees that were not terminated and that the sale in question was paid for within that 90 day window.
The opinion has a nice summary of various decisions which have used the covenant of good faith and fair dealing to override contractual termination clauses:
Massachusetts courts, as well as courts in other states, have applied the duty of good faith to override a range of express termination clauses. See Fortune v. National Cash Register Co., 373 Mass. 96, 101-02 (1977) (applying the covenant of good faith to override an express termination-at-will clause in an employment contract where termination was made in bad faith)5; see also K.M.C. Co. v. Irving Trust Co., 757 F.2d 752, 759-60 (6th Cir. 1985) (ruling that the obligation of good faith imposed a duty on the defendant to give a period of notice to K.M.C. before refusing to advance funds under the loan agreement, as was defendant’s right under the agreement); Rao v. Rao, 718 F.2d 219, 222-23 (7th Cir. 1983) (ruling that, under Illinois law, a restrictive covenant is not enforceable pursuant to the implied promise of good faith when an employee is terminated in ad faith and without good cause); Randolph v. New England Mut. Life Ins. Co., 526 F.2d 1383, 1386-87 (6th Cir. 1975) (concluding hat, under Ohio law, an insurance company could not terminate in ad faith a general agency contract with one of its agents); deTreville v. Outboard Marine Corp., 439 F.2d 1099, 1100 (4th ir. 1971) (applying South Carolina law to allow a claim for arbitrary termination of a franchise agreement where agreement
contained a clause allowing termination upon thirty-days’
notice); Shell Oil Co. v. Marinello, 307 A.2d 598, 600 (N.J. 1973) (holding that the implicit duty of fair dealing precluded arbitrary termination even though the franchise agreement provided for termination without cause, because of the franchisor’s “grossly disproportionate bargaining power”).Bohne v. Computer Associates International, Inc. (MA. Dist. Ct., Aug. 22, 2006, Civil Action NO. 04-10068-WGY)
