Opinion
Civil Action No. 3:02-CV-2434-D
May 9, 2003
MEMORANDUM OPINION AND ORDER
This is an action to confirm, and a counterclaim to vacate, an arbitration award of unpaid bonus compensation. On cross-motions for summary judgment, the court must decide whether the award is in manifest disregard of the law, fails to draw its essence from the terms of the relevant agreement, or is arbitrary and capricious, and whether defendant-counterplaintiff waived its challenge to the arbitrator's award of attorney's fees. Finding no infirmity in the award and that the attorney's fee challenge was waived, the court renders summary judgment confirming the award and dismissing the vacatur counterclaim.
I A
Defendant-counterplaintiff Stonhard, Inc. ("Stonhard") employed plaintiff-counterdefendant Mike Fountoulakis ("Fountoulakis") as a Division Sales Manager until it terminated his employment for performance-related reasons. Before his discharge took effect, Stonhard and Fountoulakis entered into a Separation Agreement and Release ("Agreement") that provided that Fountoulakis was entitled, inter alia, to accrued bonus payments for parts of FY 1999, to be processed by July 31, 1999. The Agreement required binding arbitration of disputes arising thereunder.
His full name is John M. Fountoulakis.
Stonhard paid Fountoulakis $18,300 as his bonus. Fountoulakis contended that he should have received bonus compensation of $158,636.69 and submitted his claim to arbitration. The parties mutually selected an arbitrator, who conducted a hearing and entered an Interim Award in favor of Fountoulakis for $50,270.90 in damages for the unpaid bonus, plus interest. The arbitrator also entered a Supplemental Opinion and Award ("Supplemental Award") in favor of Fountoulakis for $29,287.50 in attorney's fees and for additional sums in costs. The Interim Award and Supplemental Award were incorporated into a Final Award of Arbitrator ("Award").
The parties do not dispute that the instant controversy was subject to binding arbitration.
After Stonhard failed to pay the Award, Fountoulakis sued in Texas state court seeking confirmation. Stonhard removed the case to this court based on diversity of citizenship and counterclaimed for vacatur. Both sides move for summary judgment.
Fountoulakis objects to certain evidence on which Stonhard relies in support of its summary judgment motion. Because this evidence, even if considered, does not change the result, the court need not decide the objection. Fountoulakis also maintains that he is entitled to confirmation of the Award because Stonhard has not produced a transcript of the arbitration hearing. The court concludes that the absence of a transcript has not precluded review based on the grounds presented in Stonhard's challenge to the Award.
B
To understand this decision upholding the Award, the court will recount the relevant background facts as the arbitrator determined them and set out the arbitrator's pertinent conclusions and reasoning.The dispute in the case arises principally from a September 4, 1998 memorandum ("Memorandum") that Stonhard's Executive Vice President-Sales, Donald R. Zikmund ("Zikmund"), prepared and sent to Fountoulakis. The Memorandum set out Division Sales Manager bonus targets for FY 1999 sales involving Stonhard, Fibergrate, and Plasite products. Stonhard's parent company had acquired Fibergrate and Plasite in 1998. Division Sales Managers were responsible for marketing these two new products. The bonus for Fibergrate sales was set at $20,000 for a budget level 2 net contribution of $2.26 million and $30,000 for a budget level 1 net contribution of $2,312,500. The Memorandum stated that Fountoulakis would later be provided bonus curves for the Fibergrate business. The Memorandum did not contain the bonus curves because they were not yet ready. The following "data points," however, were set out: $20,000 bonus for budget level 2 net contribution and $30,000 bonus for budget level 1 net contribution. The Memorandum also stated: "The curves will not be capped at BL1 performance, but they will not be straight-lined out either." D. App. 20. The Memorandum established the bonus for the Stonhard sales segment as 5% of the actual net contribution over the FY 1999 target of $2.25 million.
The same bonus formulation applied to Plasite business, which is not at issue.
Net contribution equaled division gross revenue less sales expenses, cost of sales, and office expense. It was not a true accounting figure but was instead a compensation tool used to create incentives for the sales force.
The net contribution amounts for calculating the Fibergrate bonus amounts were not set out in the Memorandum but were established later, in October 1998. It is undisputed that these figures correctly state the net contribution thresholds for budget levels 1 and 2.
Bonus curves represented the commission amounts that an employee would earn when he attained an agreed sales target.
Although Stonhard sales are not at issue, this fact is notable because the arbitrator relied on the 5% commission rate to calculate unpaid commissions owed Fountoulakis for Fibergrate sales.
Fountoulakis contended in the arbitration proceeding that he was entitled to the additional sum of $158,636.69. He reached this figure by applying the percentage of 19.04761 to the sum of $771,418.00, the amount by which Fibergrate division's net contribution of $3,083,918.00 exceeded the budget level 1 target of $2,312,500. The 19.04761 percentage was obtained by calculating the bonus rate represented by the additional sum of $10,000 (i.e., $30,000 versus $20,000) to be earned for the additional net contribution of $52,500 (i.e., $2,312,500 versus $2.26 million). He multiplied $771,418.00 by 19.04761% and obtained the sum of $146,936.69. To this amount Fountoulakis added $11,700 (the difference between the $30,000 budget level I bonus and the sum of $18,300 that he was paid), resulting in the total of $158,636.69. Stonhard maintained that Fountoulakis was not entitled to any additional bonus amount because no agreement was reached regarding the calculation of a bonus since no formula had been determined at the time Fountoulakis signed the Agreement.
His demand letter was in the amount of $159,453.10, which was based on the bonus formula set out in a November 12, 1999 letter from Zikmund, modified to substitute budget level 1 and 2 figures for the sales figures that Zikmund had used in calculating the $18,300 bonus payment.
It appears that Fountoulakis' request can be stated in terms of the following equation:
B = ((A - 2,312,500) × 19.04761%) + 30,000
where A represents the total sales for Fountoulakis and B represents the calculated bonus. Assuming that A is equal to Fountoulakis' net contribution of $3,083,918, his bonus — B — would equal $176,936.69. When $18,300 (the sum Fountoulakis received from Stonhard) is subtracted, the result is $158,636.69, the payment that Fountoulakis initially demanded.
The court is unable to determine conclusively from either party's appendix how Stonhard calculated the $18,300 payment that it made to Fountoulakis, other than that Stonhard decided to use sales figures and calculated the bonus amount on that basis. According to the arbitrator, after Fountoulakis signed the Agreement, Stonhard decided to calculate bonuses on net sales rather than on net contributions. Zikmund realized that application of the historic bonus formula to the Fibergrate net contribution figure would result in payment of excessive bonuses to Division Managers. He thus developed a new bonus formula in which he substituted a net sales figure for the net contribution figure previously published to all Division Managers.
The arbitrator concluded that Stonhard owed Fountoulakis the additional sum of $50,270.90. He reached this result by multiplying $771,418.00 (the amount by which the net contribution exceeded $2,312,500) by 5%, which totaled $38,570.90. The arbitrator used the 5% figure because this was the percentage that applied to sales of Stonhard products other than Fibergrate and Plasite (i.e., Stonhard segment sales). To this sum he added $11,700 (the difference between the $30,000 budget level 1 bonus and the sum of $18,300 that he was paid), resulting in a total indebtedness of $50,270.90.
The arbitrator followed this reasoning in concluding that a 5% bonus rate should be supplied as a missing term in the Memorandum. The Agreement provided that it was to be construed and interpreted in accordance with New Jersey law; accordingly, that state's law applied in deciding whether Fountoulakis was entitled to unpaid bonus compensation. The Memorandum established a right to bonuses greater than $30,000 for exceeding budget level 1 net contribution targets because it stated that bonus curves would not be capped. It did not, however, adopt a formula for calculating such bonuses, and it stated that they would not be straight-lined out.
Fountoulakis periodically inquired of Zikmund as to whether bonus curves for Fibergrate had been established, but no final decision had been made before his termination took effect. After Zikmund informed Fountoulakis that he was being terminated effective at the conclusion of FY 1999 (i.e., May 31, 1999), the two discussed severance pay. Fountoulakis again asked Zikmund about bonus curves, and Zikmund responded that he would prepare them in the immediate furture. Zikmund later advised Fountoulakis that everything had been resolved in his favor and that a letter would be forthcoming.
In connection with negotiation and consummation of the Agreement, the two also discussed the bonus payment, which Zikmund stated would be made by the end of July. Fountoulakis' division had already exceeded the budget level 1 net contribution target for Fibergrate sales, and he pressed for immediate partial payment. Zikmund declined, stating, inter alia, that his total bonus might be more, based on the curve, and that he would be paid by the end of July. Zikmund assured him that the figures would not be subject to manipulation and that the curve might be similar to the bonus curve used to calculate bonuses due for the sales of other Stonhard products. He did not indicate that there was any mistake in the net contribution figure or that a bonus formula might be used other than the one contained in the Memorandum. Fountoulakis signed the Agreement on May 27, 1999.
The arbitrator concluded that New Jersey law implied a duty of good faith and fair dealing in the interpretation of written agreements. He cited Nolan v. Control Data Corp., 579 A.2d 1252 (N.J.Super.Ct. A.D. 1990), for the proposition that an employer's authority retroactively to alter sales quotas and compensation rates is subject to a duty of good faith and fair dealing, even when the employment contract confers the right to do so. The arbitrator held that the Memorandum and the Agreement may be read together as a single document that reflected the parties' intent.
The arbitrator also reasoned that, as of May 27, 1999, Fountoulakis and Stonhard had agreed that he would be paid a bonus of at least $30,000 if the budget level 1 net contribution target was met, that an additional bonus would be calculated based on an excess over the net contribution target, and that all that remained in arriving at the bonus amount for FY 1999 was to supply the factor by which the bonus would be increased. After Fountoulakis signed the Agreement, Stonhard decided to calculate Division Manager bonuses based on net sales rather than on net contributions. This decision was controversial among Division Managers. Others accepted Zikmund's decision to reformulate the Fibergrate bonus formula, but there is no evidence that Fountoulakis was advised about this decision. The Agreement provided that it could only be altered in writing and that bonuses due would be paid by July 31, 1999. The parties intended at the time they signed the Agreement that the bonus would be calculated based on the net contribution figures set out in the Memorandum. It was not until well after May 27, 1999 that Zikmund realized that application of the historic bonus formula to the Fibergrate net contribution figure would result in payment of excessive bonuses to Division Managers. Zikmund thus developed a new bonus formula in which he substituted a net sales figure for the net contribution figure previously published to all Division Managers. He could not exercise this authority unilaterally concerning Fountoulakis because he had promised him on May 27, 1999 that no modification of the Agreement would be made without Fountoulakis' written consent. The arbitrator thus concluded that Fountoulakis was entitled to an additional bonus payment based on the budget level 1 net contribution figure of $2,312,500.
The arbitrator also concluded that Fountoulakis knew the Fibergrate bonus curve had not been determined on May 27, 1999 and that it would not be "straight-lined." Fountoulakis left open to Zikmund the prerogative of establishing a bonus calculation based on net contribution, but Zikmund never did so. While Zikmund could revise the bonus formula prescribed by the Memorandum, he was not entitled to "scrap it altogether," because the Agreement expressly prohibited him from doing so without Fountoulakis' written consent.
The arbitrator rejected in part Stonhard's contention that the parties had failed to reach agreement concerning the calculation of a bonus because the formula had not been determined as of the date of the Agreement. He concluded that, as of May 27, 1999, the parties had agreed that a $30,000 Fibergrate bonus would be paid if the budget level 1 net contribution target was met, that an additional bonus would be calculated based on an excess over the budget level 1 net contribution, and that all that remained was to supply the factor by which the bonus would be increased over $30,000. The arbitrator then applied New Jersey and Texas law, which it found to be consistent, and concluded that, absent the parties' agreement to a particular contractual term, he was permitted to supply a price or percentage to known figures to enforce the parties' written agreement.
The arbitrator rejected Fountoulakis' claim on the basis that it would result in compensation that was clearly excessive, would have resulted in a windfall, and would not have been paid to him had he not been terminated. This fact was evidenced by Stonhard's decision to reformulate the bonus calculation once it realized that the cost-of-sales component used to calculate the net contribution was faulty. Stonhard could, in good faith, have revised the bonus formula on this basis. But because it was obligated to calculate the bonus based on net contribution, as prescribed in the Memorandum and the Agreement, Zikmund could not disregard the net calculation figure.
The arbitrator concluded that it would be more reasonable to calculate the additional bonus that Stonhard owed Fountoulakis at 5% of the actual net contribution over the budget level 1 target, which is the percentage set out in the Memorandum relating to bonuses for the sale of Stonhard's products other than Fibergrate and Plasite.
II
The district court's "review of an arbitration award is extraordinarily narrow." Harris v. Parker College of Chiropractic, 286 F.3d 790, 792 (5th Cir. 2002). When, as here, the parties have agreed to arbitrate a matter under the Federal Arbitration Act ("FAA"), 9 U.S.C. § 1 et seq., "the court will set that decision aside only in very unusual circumstances." See Williams v. CIGNA Fin. Advisors Inc., 197 F.3d 752, 757 (5th Cir. 1999). Stonhard argues that (1) the Award is in manifest disregard of the law; (2) if the Memorandum can be considered a contract, the Award fails to draw its essence from the terms of the Memorandum; (3) the Award is arbitrary and capricious; and (4) the arbitrator exceeded his authority in awarding attorney's fees. Under the FAA, each of these is a ground on which an award can be vacated. See id. at 758-59 (manifest disregard of the law, fails to draw its essence, and arbitrary and capricious); Harris, 286 F.3d at 792 (arbitrator exceeded powers).
Fountoulakis contends that, although from a practical standpoint, there is very little difference between Texas and federal arbitration law, Texas, not federal, decisions control whether the Award should be confirmed. The court disagrees. The Agreement is a contract involving a transaction in interstate commerce. The Federal Arbitration Act ("FAA"), 9 U.S.C. § 1 et seq., controls in such circumstances. See Bank One, N.A. v. Shumake, 281 F.3d 507, 513 (5th Cir. 2002); Specialty Healthcare Mgmt., Inc. v. St. Mary Parish Hosp., 220 F.3d 650, 654 (5th Cir. 2000) ("The FAA is "applicable to any arbitration agreement within the coverage of the Act' which includes written agreements to arbitrate if the contract "evidenc[es] a transaction involving commerce.' Assuming that the parties' management agreement involved `commerce,' a broadly construed term under the FAA, the parties' agreement to arbitrate was governed by the FAA, a creature of federal law." (footnotes omitted)).
III A
Stonhard maintains that the Award should be vacated as in manifest disregard of the law. It argues first that the Memorandum is not an enforceable contract because its terms are too indefinite for a court to ascertain with reasonable certainty what the parties promised to do. It also posits that there is no meeting of the minds, and no binding agreement, when an agreement leaves matters open for future adjustment that never occurs. Stonhard argues that, because the parties never agreed to an amount of, or method for, calculating bonus amounts that exceeded budget level 1, there was no enforceable agreement as a matter of law and the Award must be vacated to the extent based on an unenforceable contract.
Stonhard maintains second that the arbitrator erred in fabricating his own essential terms for the Memorandum and in using a 5% straight-line bonus rate despite the parties' testimony that they had not agreed to such a calculation and the Memorandum's clear statement that bonuses for contributions over budget level 1 would "not be straight-lined out." According to Stonhard, the arbitrator fabricated his own essential terms for the Memorandum that directly contradict the parties' intentions, and the legal authorities on which he relied are distinguishable and do not support his decision to supply an essential contractual term.
B
"[T]he `manifest disregard' standard is an extremely narrow, judicially-created rule with limited applicability." Prestige Ford v. Ford Dealer Computer Svcs., Inc., 324 F.3d 391, 395 (5th Cir. 2003).
[I]t clearly means more than error or misunderstanding with respect to the law. The error must have been obvious and capable of being readily and instantly perceived by the average person qualified to serve as an arbitrator. Moreover, the term "disregard" implies that the arbitrator appreciates the existence of a clearly governing principle but decides to ignore or pay no attention to it. To adopt a less strict standard of judicial review would be to undermine our well established deference to arbitration as a favored method of settling disputes when agreed to by the parties. Judicial inquiry under the "manifest disregard" standard is therefore extremely limited.Id. (quoting Merrill Lynch, Pierce, Fenner Smith, Inc. v. Bobker, 808 F.2d 930, 933-34 (2d Cir. 1986) (citation omitted)).
The court holds that Stonhard has failed to demonstrate that the Award was in manifest disregard of the law. The question is whether the arbitrator understood the law of New Jersey and Texas concerning when missing terms can be supplied in a contract and deliberately ignored it. See Merrill Lynch, 808 F.2d at 934. The law of both states permits missing compensation terms to be supplied in contracts. See, e.g., Lo Bosco v. Kure Eng'g Ltd, 891 F. Supp. 1020, 1026 (D.N.J. 1995) (New Jersey law) (holding that "[t]he courts will not scruple at filling gaps . . . where there is evidence of a manifestation of assent to enter into a bargain," and noting that, in Leitner v. Braen, 51 N.J. Super. 31, 39-40 (App.Div. 1958), a court had held that "a promise to provide `the usual sponsorship fees' for a bowling team was sufficient"); Lone Star Steel Co. v. Scott, 759 S.W.2d 144, 152 (Tex, App. 1988, writ denied) (holding that employee was entitled to recover payment for suggestion that benefited company, despite fact that company suggestion plan did not specify amount of award, because failure of contract to specify amount of payment did not render it ineffective and that law would imply that reasonable amount was intended) (citing Bendalin v. Delgado, 406 S.W.2d 897 (Tex. 1966)). Here, the arbitrator had ample basis to conclude that Stonhard intended to pay Fountoulakis additional bonus amounts if his division's Fibergrate sales exceeded the budget level 1 net contribution target. The Memorandum itself stated that the bonus curves "will not be capped." D. App. 20. And Zikmund, who wrote the Memorandum, represented to Fountoulakis that the bonus curves were yet to be established but would be set in the immediate future. Zikmund did not contradict Fountoulakis' understanding that bonuses were to be paid for sales in excess of the budget level 1 net contribution. As the arbitrator concluded, all that remained in arriving at the bonus amount for FY 1999 was agreement concerning the factor by which the bonus would be calculated. The law of New Jersey and of Texas permitted him to imply a reasonable factor. See Harsen v. Bd of Ed. of W. Milford Township, 333 A.2d 580, 586 (N.J.Super.Ct. Law Div. 1975) (noting that arbitrator may imply terms in contract where necessary to give efficacy to contract); Executone Info. Sys., Inc. v. Davis, 26 F.3d 1314, 1329 (5th Cir. 1994) (applying Texas law) (upholding arbitrator's decision where arbitrator was faithful to central purpose of agreement and court's failure to say that arbitrator violated express terms of agreement required court to uphold award).
The arbitrator likewise did not act in manifest disregard of the law when he adopted a 5% commission rate. This is the rate the Memorandum established for sales involving the Stonhard segment. Because the law of New Jersey and of Texas permitted the arbitrator to imply a reasonable rate, and because he found that this rate was reasonable, he did not act in manifest disregard of the law in adopting it.
Moreover, contrary to Stonhard's assertion, the 5% bonus rate that the arbitrator adopted is not a "straight-lined out" bonus that the Memorandum precluded. The Memorandum established two data points for budget level 1 and 2 net contribution levels that could be extrapolated based on an equation. See supra note 10. It appears that Fountoulakis sought unpaid bonus compensation based on just such an extrapolation when he requested 19.04761% of his net contribution exceeding budget level 1. The arbitrator could have determined that Fountoulakis was seeking a straight-lining out of the bonus levels based upon an extrapolation of the curve created by the two data points in the bonus level 1 and 2 net contribution levels. By awarding a 5% commission, the arbitrator provided for a straight-lined bonus but not a straight-lining out of the bonus, which would have been contrary to the terms of the Memorandum.
The 19.04761% figure was obtained by dividing the difference between the budget level 1 and 2 bonuses by the difference between the budget level 1 and 2 net contribution levels.
Accordingly, the court holds that the Award was not in manifest disregard of the law.
IV
Stonhard next contends that, assuming the Memorandum is an enforceable contract, the Award must be vacated because it fails to draw its essence from the terms of the Memorandum.
The standard the court must apply is whether the arbitrator's award "was so unfounded in reason and fact, so unconnected with the wording and purpose of the [arbitration agreement] as to "manifest an infidelity to the obligation of an arbitrator."` Executone, 26 F.3d at 1325 (citations omitted). The single question is whether the award, however arrived at, can rationally be inferred from the contract. Id. All doubts about whether an award draws its essence from the contract must be resolved in favor of the arbitrator. See Valentine Sugars, Inc. v. Donau Corp., 981 F.2d 210, 213 (5th Cir. 1993). An arbitrator's selection of a particular remedy is given "even more deference than his reading of the underlying contract[.]" Executone, 26 F.3d at 1325.
Stonhard asserts that because the Memorandum, if it can be considered an enforceable agreement, states that the bonus curve would "not be straight-lined out," the parties expressly declined to agree to a straight 5% bonus curve. The arbitrator noted, however, that straight-lining out the bonus figures for Fibergrate based on the additional bonus between levels 1 and 2 would result in a bonus of approximately 19%, which Fountoulakis demanded in the arbitration. Moreover, the arbitrator apparently felt that the straight-lined bonus curve was the approximately 19% bonus that Fountoulakis requested. The arbitrator determined that such a bonus was improper and scaled back the Award to the 5% bonus figure provided for in the Stonhard bonus levels.
The Award did not fail to draw its essence from the terms of the Memorandum. The arbitrator concluded that a 19% bonus could not be awarded and, in accordance with his view of New Jersey law, fashioned an appropriate remedy in part based on the bonus figures for Stonhard products and interpreting the intentions of the parties in accordance with the terms provided in the contract. This amount can rationally be inferred from the terms of the Memorandum and can be said to draw its essence from it. Giving the arbitrator the deference appropriate under Fifth Circuit precedent, the court declines to vacate the arbitrator's decision on this basis.
VI
Stonhard argues next that the Award must be vacated as arbitrary and capricious. An award is arbitrary and capricious if it "is so palpably faulty that no judge, or a group of judges, could ever conceivably have made such a ruling." Safeway Stores v. Am. Bakery Confectionary Workers, Local 111, 390 F.2d 79, 82 (5th Cir. 1968); see also Ala. Educ. Ass'n v. Ala. Prof'l Staff Org., 655 F.2d 607, 609 (5th Cir. Unit B Sept. 1981). The award must contain more than an error of law or interpretation and must either exhibit a wholesale departure from the law or not be grounded in the contract that provides for the arbitration. See Brown v. Rauscher Pierce Refsnes, Inc., 994 F.2d 775, 781 (llth Cir. 1993).
Stonhard maintains that the arbitrator acted arbitrarily and capriciously by awarding sums greatly in excess of what the parties contemplated and by doing so in direct contradiction to the Memorandum. As the court has already explained, however, the arbitrator acted in accordance with his reading of New Jersey law, rejected Fountoulakis' view of what a straight-lined out bonus would be, and supplied an appropriate remedy based on the intention of the parties, drawing the essence of the Award from the terms of the contract. Stonhard has failed to make the required showing to vacate the Award as arbitrary and capricious, and the court declines to disturb the Award on this basis.
VI
Stonhard contends the attorney's fees part of the Award exceeds the arbitrator's authority because the Agreement does not provide for an award of attorney's fees. Fountoulakis maintains that Stonhard has waived this argument. Stonhard posits that it has not because it properly raised the argument before the trial court.
According to the arbitrator's Supplemental Award, Stonhard only objected to Fountoulakis' application for attorney's fees on the basis that it was excessive. Fountoulakis also notes that, in a filing before the arbitrator, Stonhard stated that it "does not contest that Claimant is entitled to an award of attorneys' fees[.]" See P. App. 26. A party "cannot stand by during arbitration, withholding certain arguments, then, upon losing the arbitration, raise such arguments in federal court." Gateway Techs., Inc. v. MCI Telecom. Corp., 64 F.3d 993, 998 (5th Cir. 1995) (quoting Nat'l Wrecking Co. v. Int'l Bhd. of Teamsters, Local 731, 990 F.2d 957, 960 (7th Cir. 1993)). The court therefore holds that Stonhard waived the right to seek vacatur of the attorney's fee award.
* * *
Stonhard has failed to establish a basis for vacatur of the Award. Fountoulakis' motion for summary jugment is granted, and Stonhard's motion is denied. The award is confirmed and Stonhard's counterclaim is dismissed with prejudice by judgment filed today.