COMPUTER SCIENCES CORPORATION v. FERGUSON

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Court of Appeal, Second District, Division 1, California.

COMPUTER SCIENCES CORPORATION, Plaintiff and Appellant, v. David E. FERGUSON, Defendant and Respondent.

David E. FERGUSON, Cross-complainant and Respondent, v. COMPUTER SCIENCES CORPORATION, and Bank of America National Trust & SavingsAssociation, Cross-defendants and Appellants.

Civ. No. 32263.

Decided: December 24, 1968

Pollock & Palmer, and John P. Pollock, Dennis K. Metzler and Edmond F. Shanahan, Los Angeles, for plaintiff, cross-defendants, and appellants. Rosenfeld, Meyer & Susman, and George C. Zachary, Beverly Hills, for defendant, cross-complainant, and respondent.

This is an action by Computer Sciences Corporation (company hereinafter) to recover a bonus ($6,000) paid to defendant David E. Ferguson during the course of his employment with the company. Defendant cross-complained against the company and the Bank of America to recover vacation pay ($795.20) and profit sharing funds ($989.32) allegedly unpaid to him during his employment. (The bank administered the profit sharing plan.) In a jury trial, the judge directed a verdict in favor of defendant on the complaint and in favor of cross-complainant on the cross-complaint. Plaintiff and cross-defendants (company and bank) appeal from the judgment on the verdict.

In reviewing appellant's contention that the judge erred in directing the verdict, the evidence will be viewed in the light most favorable to plaintiff and cross-defendants, disregarding conflicts in the evidence and giving their evidence full value, together with every legitimate inference deducible therefrom.1

Defendant Ferguson is a professional mathematician and an expert in computer programming. From October 1, 1959, through May 21, 1963, he was a salaried employee of the company. His employment was ‘at will’—i.e., he could be discharged by the company at any time with or without cause, and he could voluntarily terminate his employment. His salary ($1,000 a month in 1959) was based upon a 40-hour week, he was entitled to an annual vacation of two weeks with pay, and he could accumulate overtime to add a maximum of two additional weeks of vacation a year with pay. He was also entitled to participate in a profit sharing plan which was initiated in March 1962 and which was administered by the bank. On May 21, 1963, he was discharged by the company. As of that date, his interest in the profit sharing plan was $989.22.

In February 1962, Ferguson and Mr. Jones, who was the president of the company, discussed Ferguson's desire to leave the company and the company's desire to retain Ferguson. After the discussions, the company prepared an agreement, referred to as a bonus agreement, which was dated January 1, 1962, and was signed by Ferguson and Jones. Recitals therein are in substance that Ferguson notified the company of his intention to terminate his employment, the company desired that Ferguson continue in its employ for 27 months from the date of the agreement to assist the company in the performance of certain contracts, and as an inducement for Ferguson to continue to perform services for the company, the company offered, and Ferguson accepted, a special bonus. The agreement provides in part as follows: Ferguson shall remain employed by the company to and including March 31, 1964. His compensation shall not be less than that which he was receiving as of September 30, 1961, and the other terms and conditions of his employment shall remain unchanged. As a bonus for his remaining employed by the company, the company shall pay him $10,000 payable $3,000 upon execution of the agreement, $3,000 in December 1962, $3,000 in December 1963, and $1,000 on April 1, 1964. Ferguson shall not disclose the bonus arrangement to anyone other than his attorney, his tax counselor, and such other persons as may be required by law. Should Ferguson fail to continue his employment through March 31, 1964, or should he disclose the bonus arrangement in violation of his covenant herein, the bonus shall be deemed not earned in any part and Ferguson shall repay all installments of bonus received by him. However, should Ferguson be discharged by the company ‘other than for cause,’ the company shall not be entitled to a return of the installments paid.

Mr. Jones (president of company) testified that there was very little discussion about the terms of the agreement after it had been prepared by the company. There was no evidence that any of the parties discussed the meaning of the provision (section 4) relating to the discharge of Ferguson other than for cause. Mr. Jones testified that the provisions of the agreement with reference to Ferguson's continuing in the service of the company dealt with Ferguson's ‘voluntarily remaining,’ and that the only provision relating to discharge of Ferguson was the provision in section 4 that should the company discharge Ferguson other than for cause, the company would not be entitled to return of installments paid. Ferguson testified that there was no discussion regarding return of money if he were discharged with or without cause.

In March 1962, the company initiated the profit sharing plan, which provided in part that the committee administering the plan could forfeit a participant's share therein when he was guilty of any misconduct involving substantial loss or detriment to the company. Ferguson was eligible to participate in the plan, and he signed an application which included a recital to the effect that he was bound by the provisions of the plan and that he would abide by the decisions of the committee.

On March 30, 1962, the company distributed a memorandum to all of its employees with reference to changes in compensation. The memorandum changed the compensation payable to Ferguson—it provided that he would not receive overtime pay and that he would not receive additional vacation time as an allowance to compensate him for accrued overtime work. The company did not discuss the changes with Ferguson, and he did not consent thereto. The changes in compensation were thereafter applied, and Ferguson did not complain about the changes.

In the three and one-half years of his employment with the company, Ferguson worked many hours overtime, and after March 1962 he was not paid for his overtime work. He did not take any vacation except when the company closed business for a week during the Christmas holidays. The company never complained about his technical ability or the performance of his duties. He did not receive an increase in pay after the bonus agreement was made. Pursuant to said agreement, he received $6,000—$3,000 on the execution of the agreement and $3,000 in December 1962; and the payments were taxable as wages. As of the date of his discharge (May 21, 1963), his salary was $1,250 a month, and he had worked 62 per cent of the 27-month period of the bonus agreement, and he had received 60 per cent of the $10,000 bonus.

In the pretrial statement it was admitted in substance that between March 1963 and May 1963, Ferguson and Mr. McCarty (an employee of Univac, which was a customer of company) had discussions at Ferguson's home about the formation and financing of a corporation to sell computer services. The discussions were to the effect that if McCarty obtained financing then McCarty would receive an interest in the proposed corporation; Ferguson also had discussions with Mr. Nelson, Mr. Richards, and Mr. Moss, who were employees of the company, regarding a proposed corporation; the discussions were to the effect that they were dissatisfied with their employment with the company and were considering going into the computer programming business on their own in March 1963. Mr. Paul, another employee of the company, approached Ferguson and said that he had heard that Ferguson and others were planning to leave the company and set up their own corporation, and that he (Paul) would like to join them; and in April 1963 Ferguson had an attorney prepare and file articles of incorporation for Programmatics, Inc. Ferguson also permitted McCarty to use his (Ferguson's) name in a prospectus which McCarty used for the purpose of obtaining financing for a company, referred to as International Computer Services. The prospectus also included the names of Nelson, Richards, Moss, and Paul. There was no evidence that Ferguson or the other employees sought to obtain any business from Univac, either through McCarty or otherwise.

In April 1963, Jones, who had received information from a representative of Univac that Ferguson was forming ‘a competitive organization,’ told Ferguson about the information and said that Ferguson's participation in such a venture was serious because it related to the company's ability to perform contracts, to the company's ability to plan Ferguson's future services, and to the company's relationship with Univac, which was the company's largest customer. Jones asked Ferguson whether he had participated in the development of the prospectus, and Ferguson said that he had contributed a background sketch. Jones then told Ferguson not to continue his participation in the venture because it would undermine the customer's confidence in the company. Jones also said that such participation by him ‘was actionable,’ and ‘was cause for dismissal,’ and it would be ‘so treated’ if it continued.

On May 14, 1963, Ferguson had a conversation with Mr. Zemlin, of Control Data Corporation, for whom the company had previously prepared a critique of a computer manufactured by Control Data. In the conversation, Ferguson said that he and other employees of the company were forming a corporation to engage in the programming business, and he asked Zemlin what kind of work might be available from Control data. Zemlin indicated that Ferguson's group might be eligible to bid on a contract for a compiler for a computer manufactured by Control Data, a contract for which the company was not eligible and for which the company had not made a bid. Ferguson did not make an offer or proposal to do work for Control Data (and he did not make any such offer at any time while he was employed by the company). Ferguson did not say anything derogatory about the company in his conversation with Zemlin.

Jones, who had learned of the conversation between Ferguson and Zemlin, telephoned Zemlin. Zemlin told Jones about the conversation and said that, as far as he was concerned, what happened in the conversation (and in a conversation which Zemlin had with Nelson) had ‘no effect on the possibility of any business dealings.’

On May 21, 1963, Jones told Ferguson that he had received information that Ferguson had solicited business from Control Data, and he told Ferguson that since Ferguson's activities had occurred after Jones' previous warning, Ferguson was ‘discharged for cause.’ (In the pretrial statement it was admitted that the company discharged Ferguson on May 21, 1963.) On May 22, 1963, Jones and Mr. Layser, acting as a quorum of the committee administering the profit sharing plan, had a meeting and voted that all of Ferguson's interest, vested and unvested, in the profit sharing plan was forfeited. On May 29, 1963, the company sent a letter to Ferguson stating that he would not have any money due to him from the profit sharing plan and demanding that Ferguson return the $6,000 which had been paid to him under the bonus agreement.

Soon after Ferguson was discharged, the company discharged Nelson, Richards, and Mr. Jones' secretary. Those persons thereafter became associated with Programmatics, Inc. For approximately one and a half years after Ferguson's discharge, Programmatics, Inc., did not receive any work or contract of any kind from Control Data. In 1965, the plaintiff company received a large contract from Control Data. Prior to Ferguson's discharge, he had never written a program for Control Data, and the company's records did not show that Ferguson had devoted any time to the critique which had been prepared by the company for Control Data.

There was no evidence that Ferguson had discussed the availability of work with any person or firm other than as hereinabove indicated, and there was no evidence that Ferguson suggested or advised any employee of the company to leave the company's employ, or that he offered any such employee a job. Mr. Moss, who was the only employee of the company (other than Ferguson) called as a witness, testified that Ferguson did not advise him to leave the company and did not offer him a job. (In the pretrial statement, it was admitted that Mr. Paul approached Ferguson and expressed an interest in joining him if he formed a company.) Ferguson testified that he did not offer a job to anyone at the company. When Ferguson was discharged, he was not working on any job for a customer of the company—he was working on a job for the ‘company itself,’ and he had virtually completed that job when he was discharged. (He had the job ‘finished enough’ so that his taking a vacation would not interfere with its completion. He was discharged near the end of his vacation.)

As previously stated, the company, in its complaint, seeks the return of the $6,000 paid to Ferguson under the bonus agreement; and Ferguson, in his cross-complaint, seeks his accrued vacation pay and his interest in the profit sharing plan. In the joint pretrial statement, issues remaining for trial included the issues as to whether Ferguson's discharge was ‘with or without cause’ and whether, if his discharge was for cause, plaintiff is entitled to recover the $6,000. (There were also several issues relating to affirmative defenses alleged by Ferguson to the effect that the forfeiture provisions of the bonus agreement were illegal.)2

In ruling on the motion for a directed verdict, the judge construed the bonus agreement to mean that the company was entitled to the return of installments paid if Ferguson was discharged for cause, and he determined that Ferguson was not discharged for cause.

Appellant (company) contends that the court erred in directing a verdict. With reference to the complaint, appellant argues that the bonus agreement was ambiguous as to the meaning of the word ‘cause’ and as to whether Ferguson would be required to return the bonus if he were discharged for cause—and that the jury, and not the judge, should have determined the intent of the parties, and should have determined whether Ferguson's conduct constituted cause for his discharge. With reference to the cross-complaint, appellant argues that there was a question of fact whether the company's memorandum to all employees affected Ferguson's right to vacation pay, and that there was a question of fact whether Ferguson's conduct constituted grounds for forfeiture of his rights under the profit sharing plan.

As previously stated, the provision (section 4) of the bonus agreement under which the company seeks return of the bonus payments is in part as follows: Should Ferguson fail to continue his employment through March 31, 1964, or should be disclose his bonus arrangement, the bonus shall be deemed not earned in any part by Ferguson, and in that event he agrees to repay to the company all installments of bonus received by him. However, if prior to March 31, 1964, he should die or suffer illness or accident, or should he be discharged by the company ‘other than for cause,’ the company shall not be entitled to a return of the installments paid.

On the motion for directed verdict, defendant's (Ferguson's) counsel argued that said provision should be interpreted to mean that the company was not entitled to a return of the bonus if the company discharged Ferguson for cause; and the company's counsel argued to the contrary. During the course of the hearing on the motion, the judge stated that he thought he should construe the contract as a matter of law, and said: ‘Don't you?’ Counsel for plaintiff replied: ‘I do.’ On appeal, counsel for plaintiff-appellant now asserts that the contract was ambiguous and that its interpretation was a question of fact for the jury to determine in light of the evidence presented.

With reference to the evidence presented, Mr. Jones and Mr. Ferguson testified that they did not discuss the provisions in section 4 (discharge other than for cause). No evidence was presented as to the meaning of the provision. The company prepared the contract, and, if the contract was ambiguous, it had the burden of presenting evidence explaining the ambiguity. The judge noted that in the absence of such evidence, he should interpret the contract as a matter of law. He then stated in effect that since the contract provides that the company is not entitled to a return of the installments if Ferguson should be discharged other than for cause, it is implicit therein that the company is entitled to a return of the installments if Ferguson should be discharged for cause. Such interpretation, which is the reasonable import of the language of section 4, was favorable to plaintiff. If it had been interpreted to the contrary, i.e., that the company was not entitled to a return of the installments upon discharge of Ferguson for cause, then plaintiff would not have had a remedy even if it were assumed that Ferguson was discharged for cause. The judge did not err in interpreting the contract as a matter of law.

With reference to appellant's further argument that the judge erred in determining as a matter of law that Ferguson was not discharged for cause, it is to be noted that no evidence was presented as to the intent of the parties with reference to the provisions of section 4 of the agreement (discharge ‘other than for cause’). Plaintiff (company) prepared the contract; and the provisions thereof, including the meaning of the above-quoted phrase, should be interpreted most strongly against the company. (Civ.Code, s 1654.) Since those provisions involve a forfeiture of the installments which had been paid to Ferguson (which installments were in effect wages taxable against him), the provisions must be strictly construed against the company. (Civ.Code, s 1442.) (The bonus arrangement was made in order to induce Ferguson not to leave the employ of the company for a more remunerative position; and that, by the terms of the agreement. Ferguson was bound not to disclose to other employees that he was receiving additional compensation in the form of a bonus. Thus, he was in effect receiving additional wages in secrecy; and, as previously stated, section 221 of the Labor Code provides that it is unlawful for an employer to collect or receive from an employee any part of wages theretofore paid by the employer to the employee.) In view of the above-mentioned rules as to strictly construing the agreement against the company and against a forfeiture of Ferguson's wages, the evidence as to Ferguson's conduct while in the employ of the company does not show that there was ‘cause’ for his discharge. Such evidence was in effect that he retained an attorney to file articles of incorporation for Programmatics, Inc., which proposed to engage in the computer programming business; he permitted a representative (McCarty) of Univac, a customer of the company, to use his name and information about him in a prospectus used to obtain financing for a proposed company, International Computer Services, which proposed company never materialized (it appears that McCarty approached Ferguson about such proposed company); Ferguson had conversations with other employees of the company about the formation of Programmatics, Inc., but said employees approached him, and he did not offer them jobs or suggest that they leave the employ of the company; he asked Mr. Zemlin, of Control Data, for whom the company had once prepared a critique, whether work might be available to his proposed corporation, and Zemlin said that the proposed corporation might be eligible to bid on a compiler project (upon which the company was ineligible to bid and did not submit a bid); for one and a half years after Ferguson's discharge Programmatics, Inc., did not receive any work from Control Data; and when plaintiff's president (Jones) telephoned Zemlin regarding the latter's conversation with Ferguson, Mr. Zemlin said that the conversation had ‘no effect on the possibility of any business dealings.’ There was no evidence that at any time during his employment with the company Ferguson failed to perform his work competently. (The evidence shows that he worked overtime many hours, and that he did so without overtime pay after March 1962. There was also evidence that when he was discharged, he had in effect completed all work which he had been performing for the company.) There was no evidence that he induced other employees to leave the company or that he offered them jobs, and there is no evidence that he disclosed trade secrets of, or utilized confidential information of, the company, or that he sought to obtain, or obtained, any business which might have been available to the company. Ferguson was not an officer of the company, although he was obviously an important employee. In Bancroft-Whitney Co. v. Glen, 64 Cal.2d 327, 346, 49 Cal.Rptr. 825, 839, 411 P.2d 921, 935, in referring to conduct of an officer who leaves a corporation to join a competing enterprise, it was said: ‘The mere fact that the officer makes preparations to compete before he resigns his office is not sufficient to constitute a breach of duty.’ (See Rest.2d Agency, s 393, com. e, which provides that an agent can make arrangements to compete with his principal even before the termination of his agency, but that he cannot properly use confidential information peculiar to his employer's business and acquired therein.) In the present case, Ferguson did not utilize confidential information of the company, his conduct related to preparations to compete, he did not voluntarily leave the company or induce other employees to leave the company, and there was no evidence that he intended to leave the company before expiration of the 27-month period of the bonus agreement. The court did not err in directing a verdict in favor of defendant Ferguson on the complaint.

As to the directed verdict on the cross-complaint, appellant argues, with reference to the award to Ferguson of his interest ($989.22)3 in the profit sharing plan, that Ferguson's conduct while in the employ of the company was misconduct within the meaning of the profit sharing plan which provided that the committee could forfeit a participant's share in the plan when the participant was guilty of any misconduct involving substantial loss or detriment to the company. As previously stated, on the day after Ferguson was discharged by Jones, Jones and Layser, acting as a quorum of the committee, voted that Ferguson's interest in the plan be forfeited. As above shown, the evidence showed that Ferguson, while in the employ of the company, engaged in preparations to compete with the company—he did not misconduct himself as an employee—and there was no evidence that his conduct resulted in loss or detriment to the company. The court did not err in determining as a matter of law that Ferguson did not forfeit his vested interest in the plan. (In view of said conclusion, it is unnecessary to discuss respondent Ferguson's contention that the action taken by Jones and Layser, as a quorum of the committee, did not comply with certain procedural and substantive requirements of the plan relating to action by the committee.)

As to the part of the directed verdict that Ferguson is entitled to recover (on cross-complaint) vacation pay of $795.20, appellant argues that there was a question of fact whether the company's memorandum of March 20, 1962, to all employees was incorporated in the basic agreement of employment so as to change Ferguson's rights to overtime pay (and to overtime hours accrued as vacation pay).

It was stipulated that Ferguson had 14 days of accrued vacation as of the date of his discharge. When Ferguson entered the employ of the company in 1959, and until the memorandum was issued on March 30, 1962, Ferguson was entitled to the agreed terms of his original employment to overtime pay and he was entitled to accrue overtime to a maximum of two weeks' vacation with pay. (The bonus agreement, dated January 1, 1962, provided in part that, except as to the bonus, the terms and conditions of his employment should remain unchanged.) The memorandum provided in part that any employee ‘who leaves the service of company’ forfeits any unused vacation pay. It was admitted that Ferguson was discharged—that he did not voluntarily leave the company. There was no evidence that Ferguson intended to leave the company voluntarily. The memorandum was issued by the company without notice to Ferguson and without his consent. The memorandum, prepared by the company, provided that only employees who voluntarily leave the company should forfeit unused vacation pay. Furthermore, the record shows that the vacation time in question accrued prior to the date the memorandum was issued. It thus appears that even if it were assumed that the memorandum was incorporated in the basic employment agreement, and if it were assumed that the forfeiture provision of the memorandum applied to employees discharge by the company, it would only have affected Ferguson's rights to vacation time which accrued after the memorandum was made. The court did not err in directing the verdict on the cross-complaint.

The judgment is affirmed.

FOOTNOTES

1.  Facts admitted in the joint pretrial statement will be included in the review of the evidence.

2.  Some of the affirmative defenses were based upon section 1442 of the Civil Code which provides that the condition involving a forfeiture must be strictly construed against the party for whose benefit it is created; section 221 of the Labor Code which provides that it is unlawful for an employer to collect or receive from an employee any part of the wages theretofore paid by the employer to the employee; and section 16600 of the Business and Professions Code which provides that a contract which restricts a person from engaging in a lawful profession, trade, or business, is void.

3.  When Ferguson was discharged, there was $4,946.12 in his profit sharing account. Under provisions of the plan, however, only 20 per cent thereof (or $989.22) was ‘vested.’

WOOD, Presiding Justice.

FOURT and LILLIE, JJ., concur.