Tymshare, Inc. v. William J. Covell. William J. Covell v. Tymshare, Inc

Majority - Scalia, Circuit Judge

No, a contractual provision granting an employer 'sole discretion' to modify an employee's sales quota does not permit retroactive alterations implemented with the purpose of reducing an employee's already substantially earned commissions if such action is not for purposes implicitly envisioned by the contract. The court first acknowledged that the contract, governed by Virginia law, does permit retroactive quota adjustments in some circumstances. The language in the Compensation Plan stating that 'management reserves the right to change... individual quota and reserve payments at any time during the quota year within their sole discretion' is broad, and the system of monthly quotas (which are merely estimates of annual compensation, with 'true earned incentives... not known until year end') suggests flexibility. Tymshare had also made such adjustments in the past. However, the court rejected Tymshare's assertion that 'sole discretion' means an unfettered right to act 'for any reason whatsoever, no matter how arbitrary or unreasonable.' The doctrine of good faith performance, though sometimes seen as a modern development, is essentially a 'rechristening of fundamental principles of contract law' and a mechanism for identifying an 'implied obligation not to engage in the particular form of conduct which... constitutes 'bad faith'.' Citing Carpenter v. Virginia-Carolina Chemical Co., the court noted that even powers contingent on 'satisfactory use' implicitly require fair action, not action for ulterior motives like seeking better terms elsewhere. The court differentiated between express contractual powers that are implicitly absolute (like the power to call a demand note) and those that are not (like the power to terminate certain continuing contractual arrangements). When a power, even if accompanied by expansive modifiers like 'sole discretion,' concerns a 'central compensatory element of the contract — a large part of the quid pro quo that induced one party’s assent,' it is unlikely the parties intended such an absolute power. Instead, 'sole discretion' in this context is reasonably understood to be discretion to determine the existence of factors that would genuinely and reasonably justify altering the sales quota (e.g., unanticipated high volume from a customer not due to the employee's efforts, or a poor overall company sales year), not discretion to reduce a quota simply to deprive an employee of reasonably expected compensation. The court reversed the district court's summary judgment because, while the district court found a 'reasonable management judgment' for the quota increase and noted that retroactive application would normally not affect total commission unless employment was terminated, it did not establish beyond a reasonable doubt that Tymshare possessed the intent to terminate Covell at the time the retroactive quota increase was effected. Such an inference of intent is not 'inevitable' and thus inappropriate for summary judgment, requiring further factual determination. The court also clarified that its decision did not address other potential claims, such as wrongful termination.