Eigerman v. Putnam Investments, Inc.

(Massachusetts Supreme Judicial Court)

• Urging Reversal of a Massachusetts Appeals Court Decision that Misapplies the Doctrine of Contract Waiver

In this putative class action a former Putnam employee alleged that he and other similarly situated employees were deterred through intimidation by Putnam from tendering their vested company stock for redemption by the company pursuant to Putnam’s employee equity plan (“Plan”) during specified “window” periods in or about 2002.  The plaintiff complained that, when he thereafter left Putnam’s employ and the company did redeem his vested shares, he received far less for them than he would have received in 2002.  The legal issue in the case was whether the plaintiff had stated a valid claim for breach of contract where the Plan expressly stated that Putnam had no obligation to redeem tendered shares.  The Massachusetts Superior Court dismissed the complaint based on this express reservation of discretion not to redeem tendered shares, but the Massachusetts Appeals Court reversed.  According to the Appeals Court, if the plaintiff could prove that Putnam had consistently redeemed tendered company shares in the past, he might be able to establish that Putnam had waived its expressly stated right under the Plan not to purchase tendered shares.  The Massachusetts Supreme Judicial Court granted further appellate review and NELF filed an amicus brief for itself and the Associated Industries of Massachusetts arguing that the Appeals Court misapplied contract waiver doctrine.   Contract waiver law deals with a party’s failure to exercise rights in the face of nonperformance by another party; it does not provide that one loses one’s own affirmative, discretionary contract rights by exercising them in a particular fashion.  NELF and A.I.M. argued that the Appeals Court decision was contrary to the express language of the Plan, inconsistent with the concept of an option (as opposed to an obligation), and unsupported by any legal doctrine.  Amici further argued that the Appeals Court decision, were it to stand, would discourage employers from providing equity ownership plans to the disadvantage of both employers and employees.  In a unanimous decision rendered on December 20, 2007, the SJC agreed with NELF and upheld the trial court judgment, ruling that plaintiff had not stated a claim for breach of express contract or breach of the implied covenant of good faith and fair dealing because, under the plain language of the Plan, Putnam had no legal obligation to purchase tendered shares.  The SJC did not discuss the Appeals Court’s invocation of contract waiver doctrine, apparently agreeing with NELF that the doctrine had no relevance to the case.