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International Business Machines Corporation v. Khoury

Supreme Court of New Hampshire, Rockingham

December 21, 2017


          Argued: March 30, 2017

          Jackson Lewis P.C., of Portsmouth (Martha Van Oot on the brief and orally), for the appellant.

          Honig & Barnes LLP, of Haverhill, Massachusetts (Robyn Frye Honig and Timothy H. Barnes on the brief, and Ms. Honig orally), for the appellee.

          DALIANIS, C.J.

         The appellant, International Business Machines Corporation (IBM), appeals an order of the Superior Court (Schulman, J.) upholding a wage claim decision issued by the New Hampshire Department of Labor (DOL) in favor of the appellee, Gary Joseph Khoury. We affirm.

         Before addressing the merits of this appeal, we note that we are dismayed by the tone of the dissent. The dissent impugns our motives, stating that we have have "rewrit[ten] the contract to strike a better deal" for Khoury "than he made for himself" because of our "paternalistic instinct, " which, the dissent states, "contravenes the proper bounds of judicial authority." It is unfortunate that our dissenting colleague views our contract interpretation as result-oriented merely because he disagrees with it.


         The following facts were found by the DOL hearing officer, are established in the record, or are otherwise not in dispute. In January 2013, Khoury began working for IBM as a sales representative in the federal business unit, and remains a current employee of IBM. Khoury earns both a base salary and commissions.

         As part of his work, Khoury sells IBM's products to the federal government. At the DOL hearing, Khoury explained that IBM occasionally sells software to a certain "business partner, " who, in turn, has the "rights, so to speak, to the sales that the sales teams were transacting with the" federal government. He further explained that IBM does not profit from the distribution of its products to the government by this business partner, but IBM assists in the subsequent deployment process.

         Khoury testified that, prior to July 2014, IBM paid its sales representatives commissions based solely upon revenue-generating sales. According to Khoury, under this arrangement, sales representatives lacked an incentive to promote the deployment of IBM products that had previously been sold to the intermediary business partner, and a number of sales representatives had quit and found other jobs within IBM. In July 2014, IBM rolled out a new pilot program that allowed sales representatives to earn commissions on both the sale and deployment of IBM's products. Under this program, sales representatives would receive a "primary" commission for reaching a revenue or sales quota and a "secondary" commission for reaching a deployment quota. Khoury testified that, approximately every six months, IBM sent each sales representative an individualized Incentive Plan Letter (IPL) defining the method by which the sales representative's commissions would be calculated for sales and new deployments.

         In mid-July 2014, IBM presented Khoury with an IPL for the period of July 1, 2014, to December 31, 2014. Pursuant to the terms of the IPL, Khoury would receive the "secondary" commission at issue in this case after meeting a quota of $571, 000 for certain specified signings. The IPL contained several prominent disclaimers, however:

Right to Modify or Cancel: The [IPL] does not constitute an express or implied contract or a promise by IBM to make any distributions under it. IBM reserves the right to adjust the [IPL] terms, including, but not limited to, changes to sales performance objectives (including management-assessment objectives), changes to assigned customers, territories, or account opportunities, or changes to applicable incentive payment rates or quotas, target incentives or similar earnings opportunities, or to modify or cancel the [IPL], for any individual or group of individuals, at any time during the [IPL] period up until any related payments have been earned under the [IPL] terms. . . . Employees should make no assumptions about the impact potential [IPL] changes may have on their personal situations unless and until any such changes are formally announced by IBM.
Adjustment for Errors: IBM reserves the right to review and, in its sole discretion, adjust or require repayment of incorrect incentive payments resulting from incomplete incentives processes or other errors in the measurement of achievement or the calculation of payments, including errors in the creation or communication of sales objectives. Depending on when an error is identified, corrections may be made before or after the last day of the full-[IPL] period, and before or after the affected payment has been released.
Plan-to-Date Advance Payments: Regardless of the start date of your assignment to [an IPL], the full-[IPL] period ends on the last day of the last month of the full-[IPL] period. Incentive payments you may receive for [IPL]-to-Date achievement (before the full-[IPL] period is over and before its business results are complete) are a form of advance payment based on incomplete business results. As each month's or quarter's business results become available, [IPL]-to-Date achievement against any full-[IPL] performance objectives will be updated and the amount of your [IPL]-to-Date advance payments will be recalculated. Deductions for overpayments or reversed achievement may be made from any such [IPL]-to-Date advance payments until the full-[IPL] payments are earned under the [IPL] terms after the full-[IPL] period and its business results are complete.
Full-Plan Earnings: Regardless of your start date, your incentive payments are earned under the [IPL] terms, and are no longer considered [IPL]-to-Date advance payments, only after the measurement of complete business results following the end of the full-[IPL] period or (if applicable) after the measurement of complete business results after the date you left the Incentive Plan early. Incentive payments will be considered earned only if you have met all payment requirements, including: (1) you have complied with the [IPL], the Business Conduct Guidelines and all other applicable IBM employment policies and practices; (2) you have not engaged in any fraud, misrepresentation or other inappropriate conduct relating to any of your business transactions or incentives; (3) and the customer has paid the billing for the sales or services transaction related to your incentive achievement.
Significant Transactions: IBM reserves the right to review and, in its sole discretion, adjust incentive achievement and/or related payments associated with a transaction which (1) is disproportionate when compared with the territory opportunity anticipated during account planning and used for the setting of any sales objectives; or for which (2) the incentive payments are disproportionate when compared with your performance contribution towards the transaction.

         The IPL also stated that IBM was "not obligated to offer . . . an alternative [IPL] . . . [or] another job role within the company" to any sales representative who did not accept the IPL terms.

         Khoury acknowledged the terms of the IPL and accepted it on July 16, 2014. By the end of the IPL period, he had met and surpassed his quota for the specified signings. At the DOL hearing, he testified that, in December 2014, his manager informed him that this entitled him to a commission payment of $154, 124.21. That same month, he received $47, 619.23 in advances from IBM towards this commission. Khoury testified that he subsequently made repeated unsuccessful inquiries about the additional funds.

         In March 2015, Khoury filed a wage claim with the DOL for $106, 504.65, the balance of the commission. One month later, Khoury was informed that IBM planned to change his IPL terms by increasing the original quota from $571, 000 to $1, 000, 000. Khoury testified that he was told that he could expect to receive a final payment of approximately $35, 000 to $36, 000. He stated that he then received a payment of $34, 558.71 in May. Upon receiving this payment, Khoury reduced his wage claim against IBM from $106, 504.65 to $71, 946.27.

         Khoury testified that participation in the pilot program was mandatory, and that sales representatives "ha[d] to accept the terms of [the IPL], or [they] ha[d] to either change [their] position within the company or find a new place to work." He also stated that IBM did not begin to describe the pilot program as "a pilot program" until "later in 2014 and into 2015" and that, before that, it was considered "the program you're going to sell under." Khoury explained that his understanding, after reading the IPL, was "that all of the work that I did during the [IPL] term . . . and all of the commissions that I earned would be paid during the term[] of this [IPL]."

         Khoury testified that, although IBM had recognized him as a "Global Sales Hero" for his sales achievements in the third quarter of 2014, it delayed paying him the commissions he was owed. According to Khoury:

[I]n early November 2014, we were on a conference call in which we were told not that anyone was being capped, not that commissions were changing, or anything else, that it was a new pay system, and therefore it was taking a little bit longer.
. . . They were trying to get our commissions to [route] through this new system, and there was going to be a check paid to us in full at the end of November 2014. That didn't happen.
. . . [E]verything that was spoken to us was around this common lie that it was just a matter of time, that the system was broken, you gentlemen did a wonderful job, you're going to get your money, and it's -- just wait a little bit longer. Trust us and wait.

         Khoury stated that it was not until May 2015 that he was informed by "IBM federal leadership" that his sales quota would be adjusted upward, thereby reducing his commission.

         Susan Deyo, IBM's Vice President of Sales Strategy and Transformation for North America, testified that IBM started getting "customer reports" in October 2014 that showed that the majority of IBM sales representatives in the pilot program had already made their quota amount. She stated that, in January 2015, "more reports" came in, and that by January 15, 2015, they had the results of the plan period; it was around that time that she and several other IBM executives began to discuss "what [they] were going to do on adjusting the quotas because [they] had determined the quotas were set incorrectly." She testified that these discussions were started again in February and led to an assessment in March. She stated that employees in the pilot program were notified in April that there would be a change, but not what the change was, or when it took effect.

         Following the hearing, the DOL hearing officer concluded that IBM violated RSA 275:49 (Supp. 2016) and New Hampshire Administrative Rules, Lab 803.03(c) (Lab 803.03(c)) because IBM had changed the amount of Khoury's quota from $571, 000 to $1, 000, 000 and had failed to notify him of the change "prior to the change becoming effective." The relevant provisions of RSA 275:49 provide that "[e]very employer shall . . . [n]otify the employees, at the time of hiring of the rate of pay, and of the day and place of payment, " RSA 275:49, I, and "[n]otify his or her employees of any changes in the arrangements specified [in paragraph I] prior to the time of such changes, " RSA 275:49, II. Lab 803.03(c) states that "every employer shall inform his or her employees in writing of any change to such employees['] rate of pay, salary, or employment practices or policies . . . prior to the effective date of such change." N.H. Admin. R., Lab 803.03(c). The hearing officer found unpersuasive IBM's "argument that Courts have consistently upheld the right to modify, change or cancel terms of a commission policy, providing there is notice in the policy itself." Thus, the hearing officer determined Khoury was owed the full amount of his wage claim. The hearing officer did not address the issue of whether the IPL constituted a contract.

         IBM appealed to the trial court. See RSA 275:51, V (2010). In November 2015, the trial court held a non-evidentiary hearing based upon the record established at the DOL. See id. The court concluded "that the IPL established a default commission scheme that would automatically ripen into a contractual right to commissions calculated under that scheme, unless the incentive plan was altered or eliminated prior to the measurement of business results. IBM changed Khoury's incentive plan after this deadline and communicated this fact to him in writing after the change became effective." (Emphasis omitted.)

         The court reasoned:

The IPL purports not to be a contract. However, IBM committed itself to pay all incentives that have actually been "earned." These two statements, contained in the same paragraph, are oxymoronic. The only way to round the circle is to construe the paragraph as giving the employee no contractual rights up until the moment the incentive payments have been earned.

         The court determined that Khoury had "earned" his incentive payments on January 15, 2015, the date when IBM had available to it the business results for the IPL period ending on December 31, 2014. The court acknowledged that the IPL provided that incentive payments are "earned" "only after the measurement of complete business results following the end of the full-Plan period, " but concluded that the plain and ordinary meaning of "measurement" as used in the IPL is "ministerial bean counting and the application of accounting principles rather than discretionary or strategic planning." The court further concluded that the provision of the IPL dealing with "Adjustments for Errors" was "a safety valve for ministerial mistakes in measurement, calculation and communication, " and that "[t]he ability to 'correct errors' does not entitle IBM to rethink its commission scheme after commissions have been fully earned." Thus, the court concluded that "[a] reasonable employee would view the document as a whole as establishing a default commission formula, albeit one that could be changed prior to the measurement of business results." Having ruled that IBM changed Khoury's incentive plan after the measurement of business results, the court affirmed the DOL's decision. In addition, the trial court awarded Khoury attorney's fees and statutory interest pursuant to RSA 275:53 (2010) and RSA 524:1-b (2007), respectively. Khoury's request for an award of liquidated damages pursuant to RSA 275:44 (2010) was denied. This appeal followed.


         On appeal, IBM argues that the trial court erred by finding Khoury's wage claim valid, asserting that: (1) IBM had no obligation to pay commissions to Khoury in any set amount, including on the basis of the original quota, because the IPL was not an enforceable agreement; and (2) RSA 275:49 and Lab 803.03(c) do not apply to the IPL presented to Khoury because the IPL, which is not an enforceable agreement, does not establish "wages" or a "rate of pay" under the terms of those laws. See RSA 275:49; N.H. Admin. R., Lab 803.03(c). IBM alternatively argues that, even if the IPL is an enforceable contract, IBM did not violate its obligations to Khoury because the IPL's terms granted IBM an "unfettered right to reduce [Khoury's] commissions and adjust his quota" after the measurement of business results for 2014. Finally, IBM asserts that the trial court erred by awarding Khoury attorney's fees and statutory interest.

         Any party aggrieved by a DOL wage claim decision may appeal to the trial court by petition, setting forth that the decision is erroneous, in whole or in part, and specifying the grounds upon which the decision is claimed to be in error. See RSA 275:51, V. "The scope of review by the superior court shall be limited to questions of law." Id. "After hearing and upon consideration of the record, the court may affirm, vacate or modify in whole or in part the decision of the commissioner, or may remand the matter to the commissioner for further findings." Id. "We, in turn, review de ...

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