CSC v. Ferguson

Citation: Computer Sciences Corp. v. Ferguson, 74 Cal. Rptr. 86 (App. 1968).

Factual Background
Appellant, David Ferguson (Ferguson) worked for Computer Sciences Corporation (CSC) as a salaried, at-will employee. From the period of October 1, 1959 through May 21, 1963, Ferguson performed the function of professional mathematician and expert computer programmer for the company. Ferguson was paid $1,000.00 a month based on a 40-hour work week and was entitled to two weeks of vacation yearly with the potential of accumulating two additional weeks based on the amount of overtime hours worked. In addition, CSC initiated a profit-sharing plan in 1963 that Ferguson elected to participate in. The program provided that the committee administering the plan could forfeit a participant’s share if they were guilty of misconduct that involved "substantial loss or detriment to the company." Ferguson was aware of the terms and signed an application to that affect in order to take part in the program.

In February 1962, Ferguson and the president of CSC discussed Ferguson’s desire to leave the company. In an attempt to retain Ferguson’s services, CSC’s president offered Ferguson a "bonus" of $10,000.00, payable in four installments over a 27-month period during which time Ferguson was to remain in his position with the company. In addition to the bonus, CSC’s offer ensured Ferguson that his compensation and "all other terms and conditions of his employment" would remain unchanged. The contingencies of the agreement provided that Ferguson could not disclose the bonus agreement to anyone and required the return of all sums disbursed except in the case of firing "other than for cause." After the discussion between Ferguson and CSC’s president, the company prepared an agreement, which was dated January 1, 1962, and was signed by both Ferguson and CSC’s president.

On March 20, 1962, CSC distributed memorandum’s to all of its employees, including Ferguson, informing them that overtime pay would no longer be provided and the ability to accrue additional vacation hours no longer existed. In the months after the memorandum was disbursed, Ferguson spoke with employees of CSC and various corporations that patronized CSC about the formation a corporation that would sell computer services. In April 1963, CSC’s president was informed that Ferguson was attempting to form a "competitive organization." A warning was issued to Ferguson and he was instructed to discontinue participation in the venture due to its tendency to undermine customer confidence in CSC. Ferguson continued to speak with various employee’s affiliated with CSC after the warning was issued. On May 21, 1963, CSC’s president fired Ferguson "with cause," stating that Ferguson continued to illicit business from CSC-affiliated companies after he was given a formal warning not to. Eight days after Ferguson was fire, CSC sent a letter demanding that the $6,000.00 in "bonus" money be returned to the company. Ferguson refused to do so. As a result, CSC brought suit against Ferguson to recover the $6,000 that had been disbursed to him under the agreement. Ferguson filed a cross-claim against CSC, claiming that he was entitled to vacation pay in the amount of $795.20 as well as profit-sharing funds in the amount of $989.32.

Trial Court Proceedings
At trial, the judge directed a verdict in favor of Ferguson on both the complaint and cross-complaint. In arriving at this decision 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. The judge determined that CSC had no legitimate explanation in firing Ferguson and therefore his discharge from CSC would not be labeled "with cause." As a result, the company was not entitled to repayment of the $6,000.00.

In addition, the trial court found that Ferguson did not take part in the type of misconduct that would affect his vested interest in the profit-sharing plan. The judge determined that engaging in preparations to compete with CSC did not constitute misconduct in and of itself and that no loss or detriment resulted due to Ferguson’s actions. Further, the trial court determined that Ferguson was entitled to the $795.20 of vacation time since the agreed terms of his original employment allowed for overtime pay to accrue and the memorandum on March 20th did not erase the vacation time earned between Ferguson’s start date on October 1, 1959 and the day the memorandum was distributed.

CSC claimed that the court erred in directing a verdict for Ferguson on the complaint and cross-complaint and appealed the ruling on both the complaint and cross-complaint.

Appellate Court Proceedings
On appeal, the Second District Court of California affirmed the trial court's ruling, holding that Ferguson was entitled to keep the $6,000.00 that had already been disbursed as part of the bonus agreement. Additionally, the Second District Court found that the trial court had properly ruled in regards to Ferguson’s ability to collect the vacation pay and profit-sharing interest that had accumulated while he was employed at CSC. In affirming the trial court ruling in regards to the complaint, the district court cited the Second Restatement of Agency §393, which states: "the mere fact the [employee] makes preparations to compete before he resigns his office is not sufficient to constitute a breach of duty." Additionally, Ferguson did not partake in any conduct that would lead to firing with "cause" such as utilizing confidential information of CSC in setting up a competing entity, encouraging employees to leave the company, or breaching the "bonus agreement" by leaving before the 27 months period was up. Since the district court determined that there was no "cause" when Ferguson was discharged, the money that was disbursed as part of the bonus agreement did not have to be returned to the company.

The appellate court also affirmed the trial court's directed verdict in favor of Ferguson on the cross-complaint. The court reasoned that Ferguson did not engage in any misconduct or cause any economic loss or detriment to the company by preparing to compete against CSC after he left. Since Ferguson’s actions did not fail into any of the exceptions listed in the profit-sharing agreement, he was entitled to the profit-sharing interest that had vested (20% of $4,946.12 for a total of $989.22). Additionally, the appellate court determined that the memorandum that changed the compensation structure for overtime pay and vacation hours did not pertain to Ferguson. In arriving at this decision, the court referred to CSC’s memorandum, which required forfeiture of vacation pay for all employees that "leave the service of the company." The court concluded that Ferguson was involuntarily discharged and did not "leave the service" by his own will.

Furthermore, Ferguson was protected against the memorandum's amended terms through the provisions of the bonus agreement that allowed for “all terms and conditions of [Ferguson’s] employment” to remain unchanged. Since Ferguson was protected against the amended terms through both his bonus agreement and involuntary discharge, he was entitled to the $795.20 in vacation time.