Summary
upholding forfeiture of profit sharing benefits where the employee engages in activities that compete with the employer
Summary of this case from Rehmann, Robson v. McMahanOpinion
Docket No. 28703.
Decided January 4, 1978.
Appeal from Macomb, Hunter D. Stair, J. Submitted June 8, 1977, at Detroit. (Docket No. 28703.) Decided January 4, 1978.
Complaint by Robert E. Tweddle against Tweddle Litho Company and Margaret A. Tweddle, Michael Tweddle and Edward Matson, as trustees of the Tweddle Litho Company Profit Sharing Plan, seeking to compel the payment of funds allegedly due under the plan. Judgment for plaintiff. Defendants appeal. Affirmed in part and remanded for modification of judgment.
Robert L. Coburn, for plaintiff. Kerr, Wattles Russell (by Richard D. Weber and Patrick McLain), for defendants.
Plaintiff, a former employee of defendant company, brought an action to compel the payment of funds allegedly due him under a profit sharing plan. The administrative committee of the profit sharing plan decided that plaintiff had forfeited his benefits under a provision of the profit sharing plan as plaintiff had, after resigning from defendant company, gone to work for a competitor. The relevant provision states:
Plaintiff claimed and was awarded $31,687.48.
Plaintiff did not deny that he engaged in competitive activity after termination of his employment with defendant.
"* * * [A]nd provided further that upon severance of employment for the conviction of a criminal act, for fraud, stealing, unlawful conversion and use of company assets, or if a participant engages, directly or indirectly in the production, manufacture, distribution, or sales of any products or services, similar to or competitive with, those manufactured or sold by the company, either for his own benefit or for the benefit of any other person, firm, or corporation whatsoever, or if a participant disseminates or conveys, in any manner or form, information of a confidential nature, which information if disseminated or conveyed becomes detrimental to the best interests of the company, then that participant shall forfeit all credits to his account, made by the employer and earnings and adjustments thereon." (Emphasis supplied.)
The trial court, sitting as a trier of fact, interpreted this provision to apply only to competitive activities engaged in while employed by defendant. The trial court therefore held that the administrative committee had improperly forfeited plaintiff's benefits under the profit sharing plan. As "exemplary" damages, the trial court ordered plaintiff's benefits to be paid in a lump sum, rather than over a 15-year period as provided in the profit sharing plan. Defendant appeals as of right, claiming that the trial court erred in interpreting the forfeiture provision of the plan, because another clause of the plan makes interpretations of the language of the plan by the administrative committee binding absent bad faith. Defendant also claims that the court erred in awarding a lump sum distribution as punitive damages.
I.
We must first consider the validity of a provision in a profit sharing plan under which benefits are forfeited when an employee engages in competitive activities.
Despite a statute outlawing as against public policy "all agreements and contracts by which any person * * * promises or agrees not to engage in any * * * trade, profession, or business * * *", two Michigan cases have held that forfeiture of benefits provisions in pension or profit sharing plans are not per se illegal or void.
MCLA 445.761; MSA 28.61.
In Couch v Administrative Committee of the Difco Laboratories Inc Salaried Employees Profit Sharing Trust, 44 Mich. App. 44; 205 N.W.2d 24 (1972), this Court held that a forfeiture provision in a profit sharing plan was not within the statutory prohibition on contracts not to compete, reasoning that such a forfeiture provision merely restrains an employee from engaging in competitive employment while the statute bars agreements which prevent competitive activities.
Judge, now Justice, LEVIN authored the opinion of the Court in Couch v Administrative Committee of the Difco Laboratories Inc Salaried Employees Profit Sharing Trust, 44 Mich. App. 44; 205 N.W.2d 24 (1972).
See, also, Bannert v American Can Co, 525 F.2d 104 (CA 6, 1975) (following Michigan law).
The Court in Couch, however, did not hold that all forfeiture provisions were valid; it did not have before it the question of whether unlimited restraints were valid absent an applicable statute:
"It has been suggested by some commentators that the touchstone for determining the validity of agreements of this kind, absent a legislative solution, is the reasonableness of the restraint; that the courts should not enforce an unreasonable condition. Couch has not contended that this noncompetition clause should be denied enforcement because it constitutes an unreasonable or unconscionable restraint." Couch, supra, at 49-50.
The forfeiture provision at issue in Couch restrained competitive activities for only one year.
In Woodward v Cadillac Overall Supply Co, 396 Mich. 379; 240 N.W.2d 710 (1976), the Supreme Court reaffirmed Couch. The Court held that a noncompetitive forfeiture provision was not an illegal contract not to compete under MCLA 445.761; MSA 28.61. The majority went even farther than Couch, however, holding that any restriction on unlimited forfeiture provisions was for the Legislature to decide, not the courts.
Based on Woodward, supra, we hold that the noncompetition forfeiture provision in the instant case is valid despite being unrestricted in time and area.
II.
Defendants contend that the administrative committee's interpretation of the terms of the plan is final, absent bad faith and that the trial court erred in construing the terms of the noncompetition forfeiture provision.
The relevant portion of the profit sharing plan provides:
"The Committee shall have the power and duties specified in this instrument and, not in limitation, but in amplification of the foregoing, shall have power to construe the Plan, to determine all questions arising thereunder, including, particularly, questions submitted by the Trustee on all matters necessary for proper discharge of its duties, powers and obligations, and to establish policies with respect to the status of Participants under the Plan. The decisions of the Committee made in good faith upon matters within the scope of its authority shall be final, but the Committee shall at all times act uniformly and without discrimination and shall from time to time set forth rules of interpretation and administration, subject to modification as appropriate in the light of experience." (Emphasis supplied.)
A review of the record reveals that the committee was not acting in good faith when it interpreted the profit sharing plan.
The evidence presented at trial reveals: 1) strained relations between plaintiff and the chief operating officer of the company (also a committee member); 2) a recent reduction of almost 50% in plaintiff's salary; and 3) an ambiguous profit sharing plan.
Under these circumstances the trial judge could have, and should have found bad faith.
Having determined that the committee was acting in bad faith, there is no question that the trial court possessed the authority to review and construe the plan.
In 60 Am Jur 2d, Pensions and Retirement Funds, § 75, p 952, the following is stated:
"Private pension and retirement plans are liberally construed in favor of the employee, it being the general rule that pension plans formulated by an employer are to be construed most strongly against the employer, although there is some intimation that this rule does not apply to a gratuitous, noncontractual plan. However, where two constructions of a pension plan are possible, one of which requires a finding of fraudulent intent and the other of which permits a conclusion of good faith on the part of the employer, the courts will not hesitate to adopt the latter interpretation. And even where the plan creates a contractual obligation, the rights and obligations of the parties must be measured by the terms of the contract under the ordinary rules of construction."
The trial court analyzed the agreement and found that the competitive activity must occur while the participant is employed in order to bring into play the forfeiture provision. An examination of the language of the provision reveals that it is capable of two interpretations, and is therefore ambiguous. Any ambiguity in a contract is construed most strongly against the drafter. Stark v Kent Products, Inc, 62 Mich. App. 546; 233 N.W.2d 643 (1975), lv den, 395 Mich. 779 (1975). Also, pension plans are to be construed in favor of the employee. Becker v Pension Fund, Central States, Southeast and Southwest Areas, 59 Mich. App. 684; 229 N.W.2d 888 (1975), lv den, 395 Mich. 795 (1975).
An application of these well-settled rules of construction to the instant matter affirms the trial court's interpretation of the plan.
III.
Defendants also contend that the trial court erred in awarding a lump sum distribution as "exemplary" damages. The rule as to punitive or exemplary damages in contract actions is stated in Isagholian v Carnegie Institute of Detroit, Inc, 51 Mich. App. 220, 222; 214 N.W.2d 864 (1974):
"Punitive damages are not ordinarily recoverable for breach of contract. 5 Corbin on Contracts, § 1077, pp 437-446; 11 Williston on Contracts (3d ed), § 1358, pp 301-306; 1 Restatement Contracts, § 342, p 561. In those contract cases where punitive damages have been allowed there has been a showing that `the defendant acted recklessly, negligently, or maliciously'. Harbaugh v Citizens Telephone Co, 190 Mich. 421, 428; 157 N.W. 32, 34 (1916)."
Hence, the judgment must be modified to provide that plaintiff be paid in conformity with the terms of the profit sharing plan.
Affirmed and remanded for entry of an order not inconsistent with this opinion. Costs to appellee.
R.E. ROBINSON, J., concurred.
I respectfully dissent from two aspects of the majority opinion.
First, while I agree that under Woodward v Cadillac Overall Supply Co, 396 Mich. 379; 240 N.W.2d 710 (1976), the forfeiture provision at issue is not illegal, I have some doubts as to whether the opinion of the Court in Woodward remains viable today. In Woodward, a 3-2 decision, the Supreme Court held that noncompetitive forfeiture provisions such as the one at issue in the case at bar did not violate the statutory prohibition on covenants not to compete, MCLA 445.761; MSA 28.61. I do not disagree with this holding. However, the majority in Woodward also held that noncompetitive forfeiture provisions did not violate any common-law doctrine, citing Couch v Administrative Committee of the Difco Laboratories Inc Salaried Employees Profit Sharing Trust, 44 Mich. App. 44; 205 N.W.2d 24 (1972). The reference to Couch was questionable for that holding; the Court in Couch expressly stated that the issue of a common-law restraint on forfeiture provisions was not before it:
The majority opinion was authored by Justice LINDEMER and joined by Justices COLEMAN and FITZGERALD. Justice WILLIAMS' dissent was joined by Chief Justice KAVANAGH. Thus, present members of the Court split 2-2 on this issue.
"It has been suggested by some commentators that the touchstone for determining the validity of agreements of this kind, absent a legislative solution, is the reasonableness of the restraint; that the courts should not enforce an unreasonable condition. Couch has not contended that this noncompetition clause should be denied enforcement because it constitutes an unreasonable or unconscionable restraint." 44 Mich App at 49-50.
Furthermore, the majority in Woodward did not discuss substantial authority holding that unlimited forfeiture provisions are void as unreasonable under common law. See, e.g., Woodward v Cadillac Overall Supply Co, supra (WILLIAMS, J., dissenting), Alterman, Trade Regulation in Michigan: Covenants Not to Compete, 23 Wayne L Rev 275 (1977), Note, Forfeiture of Pension Benefits for Violation of Covenants Not to Compete, 61 NW L Rev 290 (1966). See, also, Van Hosen v Bankers Trust Co, 200 N.W.2d 504 (Iowa, 1972), Food Fair Stores, Inc v Greeley, 264 Md. 105; 285 A.2d 632 (1972), Almers v South Carolina National Bank of Charleston, 265 S.C. 48; 217 S.E.2d 135 (1975). I would urge the Supreme Court to reexamine Woodward. The case at bar certainly affords an opportunity to do so.
Second, my reading of the record in this case indicates that the trial court made no finding of fact as to the bad faith of the administrative committee. Rather, the trial court based its decision solely on its own interpretation of the profit sharing plan. It is not the function of this Court to act as a fact finding tribunal in this type of case.
"It is not the function of an appellate court to decide disputed questions of fact in the first instance and then choose between affirmance or reversal by testing its factual conclusion against that which the trial court might have or, if the trial judge's reasoning at the time of the judgment were identical with that of the appellate court at the time of review, must have reached for it to issue the judgment it did." Nicpon v Nicpon, 9 Mich. App. 373, 378; 157 N.W.2d 464 (1968) (emphasis in original).
See McCarty v Mercury Metalcraft Co, 372 Mich. 567; 127 N.W.2d 340 (1964); GCR 1963, 517.1. I cannot concur in the majority's independent finding of bad faith; I would remand to the trial court for findings of fact on whether the administrative committee acted in bad faith. See McCarty v Mercury Metal Co, supra, at 577.