Opinion
CIVIL ACTION No. 3:02-CV-0570-K.
July 29, 2004
MEMORANDUM OPINION AND ORDER
Before the Court are Defendant Verio, Inc.'s Renewed Motion for Judgment as a Matter of Law or, in the Alternative, Motion for New Trial and Plaintiff Vannoy's Amended Motion for Judgment. Having considered the merits of the motions, and for the reasons stated below, Defendants motion for judgment is GRANTED, and Plaintiff's motion for judgment is DENIED.
I. Background
Plaintiff Wendalee Vannoy ("Vannoy") alleges that she and Defendant Verio, Incorporated ("Verio") had an employment agreement which Verio breached. Verio is in the business of internet web-hosting and sales of dial-up and DSL services, and Ms. Vannoy began her employment with Verio on November 30, 1998.
First, Vannoy alleges that the parties agreed to a compensation package which entitled Vannoy to stock options totaling 10,000 shares of Verio stock at a strike price of $12.25 per share. Vannoy states that the shares were to be given in 2,500 share increments on November 30 of 1999, 2000, 2001, and 2002. Vannoy claims that Verio failed to grant her the 2,500 shares of stock in 2001, thus breaching her employment contract. Additionally, Vannoy claims that on December 15, 1999, she and Verio agreed on a compensation package where Verio would give Vannoy 15,000 shares of Verio stock at a November or December strike price. Vannoy claims that Verio failed to grant the stock prior to January 1, 2001, by which time the stock had lost its value.
Verio denies that it is liable to Ms. Vannoy for breach of contract on either of her claims. Verio contends that it did not breach its contract with Vannoy by failing to grant her 2,500 shares of stock in 2001. Verio also contends that there was no enforceable contract between the parties relating to Verio's alleged failure to convey 15,000 shares of its stock to Vannoy. Additionally, Verio contends that because Ms. Vannoy was terminated as part of a reduction-in-force on November 27, 2001, she was not entitled to any continued vesting of the options previously awarded to her and, thus, there was no breach by Verio when it failed to allow Ms. Vannoy to continue to vest in her unvested options after her termination.
This case came before the Court by way of a jury trial beginning January 5, 2004 and ending January 7, 2004. The jury found that Verio did not breach the employment agreement with respect to the 2,500 shares of stock she alleges Verio owed her in November of 2001. However, the jury did find that Verio breached its employment contract with Vannoy by failing to give her 15,000 stock options, and awarded her compensatory damages of $195,000 as a result of the breach.
After trial, Verio moved for judgment as a matter of law or, in the alternative, for a new trial, arguing that Delaware law applied to Vannoy's claim for 15,000 shares, and as such, her claim failed as a matter of law. Vannoy responded by filing her motion for entry of judgment on the jury's verdict.
II. Verio's Choice of Law Argument
In its motion, Verio argues that Deleware law, not Texas law, applies to Vannoy's claim with respect to the 15,000 stock options she alleges her supervisor at Verio promised her. Vannoy responds that by waiting until the first day of trial to argue the proper choice of law, Verio has waived the issue, and even without waiver, Texas law applies to the claim.
A. Waiver
In the Fifth Circuit, a party need not plead the applicability of another state's law in order to preserve a choice-of-law question, nor must the party prove in federal court the content of any state's law, because federal courts are required to take judicial notice of the content of the laws of every state in the Union. See Kucel v. Walter E. Heller Co., 813 F.2d 67, 74 (5th Cir. 1987) (internal citations omitted). However, a party which chooses to raise a choice of law issue must call the court's attention to the applicability of another state's law "in time to be properly considered." Id.
Applying those enumerated standards, the court in Kucel held that the defendant had not waived his choice-of-law argument. In that case, the plaintiff sued defendant for money had an received based on an alleged overpayment of the loan. The court refused to find waiver of the choice-of-law issue where (1) the promissory note made the basis of the suit included a choice-of-law provision; (2) the defendant raised the choice of law issue in its motion to dismiss filed more than a year before trial; and (3) the joint pretrial order did not preclude consideration of the choice-of-law issue and did not contain any agreement as to the law applicable to the case. See id.
In light of Kucel, this Court has refused to find waiver of the choice-of-law issue in two cases. In Thomas v. Dow, 2003 WL 222630 (N.D. Tex. Jan. 28, 2003) (Buchmeyer, J.), the court considered whether the defendant raised the issue of choice of law in a timely manner. There, the court held that although the defendants raised the issue for the first time in a trial brief which was filed three days before the beginning of the trial, they nevertheless met the obligation imposed by Kucel. See id. at *1. The court held that because New York law and Texas law on the issue to be tried were virtually identical on the issue of liability, the court could determine the applicable law only if liability were established at trial. The court found that while the issue was raised very close to trial, it was raised in time for the court to consider it, and thus that the issue was not waived. See id.
Similarly, in Robbins Hardwood Flooring, Inc. v. Bolick Distributors, Corp., 2003 WL 21730142 (N.D. Tex. March 18, 2003) (Sanders, Senior J.), the court considered whether, under Kucel, the defendant raised the choice of law issue in a timely manner. In Robbins, the case had not yet come to trial, as the court was considering the plaintiff's motion for partial summary judgment. In response to the plaintiff's motion, the defendant argued for the first time that the law of Louisiana, not Texas, applied to the plaintiff's claims. The court allowed the defendant's choice of law argument, "despite the belated nature of [the] issue." Id. at *2.
While distinguishable from the above-cited cases, the circumstances of this case nevertheless show that Verio did not waive its choice-of-law argument. While the defendant in Thomas raised its choice-of-law argument on the eve of trial, Verio raised its argument the morning of trial. Still, Verio raised the issue of the potential applicability of Delaware law in time for the Court to consider it. Vannoy complains that since she "has spent the entire course of the trial preparing her entire argument and strategy around Texas law," applying Delaware law would prejudice her. This argument is without merit. There is no question that Vannoy put forth her strongest evidence in attempting to show a valid contact existed regarding the options to purchase 15,000 shares of Verio stock. Thus, Vannoy cannot argue that she would have put on different evidence had she known Delaware law would apply. All the Court must determine in deciding this issue is whether Verio raised the issue in time for this Court to consider it. The Court holds that Verio has timely raised the issue.
Accordingly, because Verio raised the issue of the potential applicability of Delaware law in time for the issue to be considered, the issue is not waived. The Court will now consider if, indeed, Delaware law applies to Vannoy's claim for 15,000 stock options.
B. Article 8.02
A federal court must apply the choice of law rules of the state in which is sits. See Amoco Production Co. v. Hydroblast Corp., 90 F.Supp.2d 727, 735 (N.D. Tex. 1999). The Texas Supreme Court has adopted Section 6 of the Restatement (Second) of Conflict of Laws for determining the proper law to apply to a case. See Duncan v. Cessna Aircraft Co., 665 S.W.2d 414, 421 (Tex. 1984). Section 6 provides that, subject to constitutional limitations, a court will first look to a statutory directive of its own state in deciding the proper law to apply to a case. See id. n. 5 (quoting Restatement (Second) of Conflict of Laws § 6).
Verio claims that the Texas Business Corporations Act includes a statutory directive which calls for the application of Delaware law in this case. Specifically, Verio points to article 8.02 of the Act, which states the following:
only the laws of the jurisdiction of incorporation of a foreign corporation shall govern (1) the internal affairs of the foreign corporation, including but not limited to the rights, powers, and duties of its board of directors and shareholders and matters relating to its shares. . . .
Tex. Bus. Corp. Act art. 8.02. As Vannoy does not dispute that Verio is incorporated in Delaware, the only question for the Court to determine regarding the application of the statute is whether Vannoy's claim deals with the "internal affairs" of Verio.
Verio argues that Vannoy's breach of contract claim involves the internal affairs of Verio based on the fact that she claims she was promised 15,000 shares of Verio stock as part of her compensation package. Indeed, as Verio points out, Delaware courts have held that the internal affairs doctrine deals with the issuance of a company's shares. See In re Harnischfeger Indus., Inc., 293 B.R. 650, 662 (D. Del. 2003) (holding that the internal affairs doctrine generally applies to the issuance of corporate shares); see also Beard v. American Airlines, Inc., 160 A.2d 731, 735 (De. 1960) (holding that the issuance of stock option plans involves the internal affairs of a corporation).
In a case with facts similar to this case, the Seventh Circuit Court of Appeals held that an employment agreement dealing with an employee's right to stock options does involve the internal affairs of a corporation. See Munson Trans., Inc. v. Hajjar, 148 F.3d 711 (7th Cir. 1998). In that case, the plaintiff signed an employment contract setting out the terms of the plaintiff's employment, including: (1) a base salary; (2) a bonus based on profits of the defendant corporation; (3) vacation time; (4) severance terms; and (4) a grant of stock options for 6% of the outstanding stock of the defendant corporation. See id. at 713. After the plaintiff was fired, the corporation brought suit, seeking a declaration that the plaintiff had no right to exercise the stock options. See id. Before considering the merits of the question of whether the plaintiff was entitled to the stock options, the Seventh Circuit briefly and succinctly held that Delaware law applied, citing the Delaware Supreme Court's opinion in Beard, which held that "`the issuance of stock option plans by Delaware corporations involves the internal affairs of a Delaware corporation and is, therefore, controlled by the laws of Delaware.'" Id. at 714 (quoting Beard, 160 A.2d at 735).
Hajjar is instructive in analyzing the facts of this case. Vannoy points to an alleged oral contract to support her claim for 15,000 options of Verio stock. While Vannoy's claim only involves the issuance of the options to her, and does not deal with the issuance of company-wide stock plans, Hajjar also dealt with the issuance of stock options to an individual. Regardless of whether the question centers around the issuance of shares to one person or many, such a question inherently concerns the internal affairs of a corporation. As the ability of a corporation to issue stock is a matter peculiar to the relationships among or between the corporation and its officers, directors, and shareholders, the internal affairs doctrine dictates that only one state's laws should regulate such conduct. See Edgar v. MITE Corp., 457 U.S. 624, 645 (1982). Because Verio is incorporated in Delaware, Delaware law applies to Vannoy's claim for 15,000 stock options.
III. Verio's Motion for Judgment as a Matter of Law
Having found that Delaware law applies to Vannoy's claim for options to purchase 15,000 shares of Verio stock, the Court now will discuss the effect of Delaware law on her claims and on Verio's motion for judgment as a matter of law.
A. Standard
In considering a motion for judgment as a matter of law, the Court examines the entire record in the light most favorable to the nonmoving party, drawing all reasonable inferences in favor of that party. See Stockstill v. Shell Oil Co., 3 F.3d 868, 870 (5th Cir. 1993). Before a judgment as a matter of law will be granted, the facts and inferences must point so strongly and overwhelmingly in favor of the moving party that no reasonable jury could arrive at a contrary conclusion. See id.
B. Vannoy's Claim Fails as a Matter of Law
Multiple provisions of the Delaware Code set forth the formal requirements for the issuance of capital stock, the consideration for the issuance of stock, and formalities regarding rights, options, and subscriptions relating to capital stock. See Grimes v. Alteon, Inc., 804 A.2d 256, 260 (Del. 2002). Specifically, section 157 of title 8 of the Delaware Code states that board approval and a written instrument is required to create rights and options respecting stock. See id. at 261 (citing Del. Code Ann. tit. 8 § 157). Indeed, the duty of a corporation's board of directors to approve a sale of stock is so important that the board cannot delegate it to the corporation's officers. See id.
At trial, Vannoy herself testified that no written agreement existed regarding the alleged agreement for options on 15,000 shares of Verio stock, and that her supervisor, Doug Armentrout, gave her an option to purchase the shares orally. Additionally, Vannoy presented no evidence that Verio's board of directors approved Mr. Armentrout's oral grant of stock options to Vannoy. Without any sort of writing memorializing the alleged agreement between Vannoy and Mr. Armentrout, and absent the approval of Verio's board of directors, no valid agreement for stock options existed, and Vannoy's claim for the 15,000 stock options fails as a matter of law.
No reasonable jury could conclude that Vannoy established the existence of a written instrument entitling her to options for 15,000 shares of Verio stock, or that Verio's board of directors approved such an instrument. Accordingly, Verio's motion for judgment as a matter of law is GRANTED, and judgment will enter that Vannoy take nothing on her claim for breach of contract relating to options for 15,000 shares of Verio stock
IV. Conclusion
For the reasons stated above, Verio's Motion for Judgment as a Matter of Law is GRANTED, Vannoy's Motion for Judgment is DENIED, and Verio's Motion for New Trial is DENIED.
As stated above, the jury in this case found against Vannoy on her claim for damages relating to Verio's alleged failure to give her 2,500 shares of stock in November of 2001. Thus, the Court's ruling on Verio's motion for judgment as a matter of law mandates that each of Vannoy's claims in this case fails as a matter of law. Accordingly, judgment will enter that Vannoy take nothing in this suit against Verio, and that her claims be DISMISSED with prejudice.
SO ORDERED.