Opinion
No. CV-04-2428-PHX-FJM.
August 14, 2006
ORDER
During the 2004 fiscal year, Deborah Olson was employed by McKesson Corporation ("McKesson") as a sales executive. Olson and McKesson entered into an employment contract — the Sales Incentive Compensation Plan — which identified Olson's sales quota and her commission rate. Olson substantially exceeded her quota and expected to receive commissions of over $400,000. However, following the close of the fiscal year, and after Olson completed all of her commission-earning sales, the McKesson Sales Incentive Compensation Committee informed her that her commission was retroactively capped at $187,500. Olson disputes this reduction, and accordingly filed this action against McKesson for breach of contract, unjust enrichment, and withholding of wages. We have before us Olson's motion for summary judgment (doc. 23), McKesson's response and cross-motion for summary judgment (doc. 28), Olson's reply in support of her motion and response to the cross-motion (doc. 34), and McKesson's reply in support of its cross-motion (doc. 37).
McKesson emphasizes that Olson did not earn her commissions at the end of the fiscal year because the amount of the commission was contingent upon various factors that could occur thereafter. However, Olson does not dispute a reduction pursuant to those factors. She disputes McKesson's unrelated decision to reduce her commission rate.
McKesson contends that Olson is barred from bringing this action because she failed to comply with the contractual dispute resolution process. The contract provides that "[a]ny payment questions/issues/disputes for the current Plan year should be documented in an e-mail, and sent to the Director of Sales Incentive Compensation Management" and that "[o]n a monthly basis a committee . . . will meet to review disputes and evaluate incentive compensation plan performance." PSOF, Ex. 1 at 16. The provision does not state that it is the exclusive or necessary method of dispute resolution, and therefore Olson's failure to comply will not bar her from bringing this action.See Demasse v. ITT Corp., 194 Ariz. 500, 515, 984 P.2d 1138, 1153 (1999) (finding a similar dispute resolution provision permissive, not mandatory); cf. Moses v. Phelps Dodge Corp., 818 F. Supp. 1287, 1290-91 (D. Ariz. 1993) (finding a dispute resolution provision mandatory that stated that the procedures "constitute the sole and exclusive procedure for the processing and resolution of any controversy, complaint, misunderstanding or dispute that may arise concerning any aspect" of the employment or its termination). Moreover, Olson had reason to disregard the provision; senior management notified her supervisor that they would not reconsider their decision to retroactively reduce her commission. PSSOF, Ex. 2 at 77.
McKesson next contends that three provisions in the contract permit it to unilaterally and retroactively reduce Olson's commission rate. First, McKesson identifies paragraph 8.6, which provides:
Senior Management of McKesson Information Solutions reserves the right to modify this Sales Incentive Compensation Plan as deemed appropriate to handle unusual and/or unanticipated situations. Examples of this include, but are not limited, to situations where: the Company goes at risk; the company shares risk with a customer; unusually large discounts are granted to win business; or a large transaction requires significant company resources to close business.PSOF, Ex. 1 at 15. Contrary to McKesson's interpretation, this provision is implicitly restricted to prospective modifications. When interpreting a contract, "an interpretation which gives a reasonable, lawful, and effective meaning to all the terms is preferred to an interpretation which leaves a part unreasonable, unlawful, or of no effect." Restatement (Second) of Contracts § 203 (1981). If this provision were interpreted to permit unilateral retroactive modifications, McKesson could revoke Olson's entire commission for work previously performed. Not only would no rational person agree to those terms, but any agreement that included those terms would be merely illusory because it would lack consideration. Therefore, we reject McKesson's interpretation and adopt a far more rational interpretation of this provision — McKesson may only unilaterally amend the contract prospectively.
Moreover, McKesson did not identify an unusual or unanticipated situation to justify modification. It described its rationale for the commission modification as follows: "as attainment exceeds the 150% attainment level, the percentage commission for one individual relative to the incremental contract margin becomes disproportionate due to the rapid increase in commission accelerators" and the "impact of this scenario with a total quota less than $2[million] magnifies the imbalance and results in earnings that exceed expectations and audit parameters." PSOF, Ex. 5. That is, following an audit, McKesson realized that some of its commission rates were too large. McKesson does not identify a sudden and unexpected change in risk, a downturn in markets, or any of the reasons identified in paragraph 8.6. The examples in that paragraph are merely illustrative, not exhaustive, but paragraph 8.6 clearly does not permit modifications for mere buyer's remorse.
Next, McKesson identifies two bolded sentences preceding Olson's signature on Appendix A to the contract: "I have read, understand and agree to the FY2004 Sales Incentive Compensation Plan. I understand that McKesson Information Solutions has the right to amend or modify this Plan at any time without notice."PSOF, Ex. 2. As above, the only rational interpretation of this provision is that McKesson can prospectively modify the commission rate. And this provision is logically limited to the specific contingencies outlined in the paragraph 8.6, none of which are present. Otherwise paragraph 8.6 would be meaningless.
Finally, McKesson identifies paragraph 8.7, which provides in part that "[a]mendments, modifications or notices to this Plan will be issued in writing and shall be effective upon the date specified in the correspondence." Id. This is also insufficient. That a modification is effective on the date of the notice does not mean that it is retroactive. McKesson therefore breached its employment contract with Olson by retroactively reducing her commission. Accordingly, McKesson is liable for the unpaid portion of Olson's commission.
Olson, however, seeks treble the amount of her unpaid commission. If an employer fails to pay "wages" due an employee, that employee may recover treble the amount of the unpaid wages in a civil action. A.R.S. § 23-355. "Wages" means "nondiscretionary compensation due to an employee in return for labor or services rendered by an employee for which the employee has a reasonable expectation to be paid whether determined by a . . . commission or other method of calculation" and "include . . . commissions . . . when the employer has a policy or a practice of making such payments." A.R.S. § 23-350. While McKesson could modify Olson's commission in some circumstances, it did not have the discretion to do so here. And Olson had a reasonable expectation to be paid the commission. Therefore, the commission is a "wage."
Treble damages are not, however, available where there is a reasonable good faith dispute as to the amount of wages due. A.R.S. § 23-352. The parties do not dispute any material facts; they merely dispute the meaning of the contract. McKesson's position, although erroneous, finds some support in the contract and extra-jurisdictional caselaw and nothing causes us to conclude that it interpreted the contract in bad faith. Therefore we reject Olson's request for treble damages. See Abrams v. Horizon Corp., 137 Ariz. 73, 79, 669 P.2d 51, 57 (1983) (concluding that damages were not subject to trebling where there is a good faith dispute over the contract interpretation).
Olson also raises a claim for unjust enrichment and seeks punitive damages therefor. Because a valid contract governs the relationship between the parties, "the doctrine of unjust enrichment has no application." Brooks v. Valley Nat'l Bank, 113 Ariz. 169, 174, 548 P.2d 1166, 1171 (1976). Therefore, Olson's unjust enrichment claim fails.
IT IS THEREFORE ORDERED GRANTING plaintiff's motion for summary judgment with regard to the contract claim and DENYING with regard to all other claims (doc. 23).
IT IS FURTHER ORDERED DENYING defendant's motion for summary judgment with regard to the contract claim, and GRANTING with regard to all other claims (doc. 28).
Within 20 days of the docketing of this order, plaintiffs shall file a motion for summary judgment and memorandum of points and authorities in its support on the issues of damages arising from this breach of contract, and attorney's fees. Defendant will have 10 days from service thereof to file a responsive memorandum, and plaintiffs will have 5 days from service of the responsive memorandum to file a reply memorandum. Because plaintiffs shall file any request for attorney's fees now, rather than after the entry of judgment, these timing dictates apply rather than those identified in LRCiv 54.2.