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4th Circuit Holds That IBM Can’t Have Their Cake and Eat It Too

Justin Fessler, a sales information specialist, brought suit in Alexandria, Virginia against IBM for allegedly capping his sales commission on several large transactions. Fessler claimed that IBM represented to him orally, through PowerPoint presentations, and in practice, that his sales would not be capped.   In Fessler v. IBM, the United States Court of Appeals for the Fourth Circuit reversed a lower court’s decision granting IBM’s Motion to Dismiss and ruled that Fessler could proceed with his claims for fraudulent misrepresentation, constructive fraud, unjust enrichment, and quantum merit.

According to the Court, “IBM engages in a practice where it tells salespeople that their commissions will be uncapped, in written documents such as PowerPoint presentation and through oral communication by IBM executives, and then caps certain high-commission deals.”

IBM argued that Fessler’s claims were precluded by the Incentive Plan Letters (IPLs) provided to Fessler. Over the course of employment, Fessler received multiple IPL’s that outlined the commission formulas guiding his sales. The IPL’s contained a “Right to Modify or Cancel” disclaimer giving IBM broad discretion to unilaterally change the commission structure. The IPLs also contained a disclaimer for “Review of a Specific Transactions” which gave IBM sole discretion to adjust payments after the sales transaction had occurred.

In a previously decided Fourth Circuit case from 2006 (Jenson v. IBM), the Court ruled in favor of IBM, holding that the IPL did not create an enforceable contract obligating IBM to pay the expected commission. The Court found that the commission details outlined in the IPL did not contractually bind IBM to pay the entire commission due to disclaimers similar to those included in Fessler’s IPL. IBM argued that the Fourth Circuit should rely on its previous holding in Jenson and rule that the IPLs permit a cap on commissions.

The Court held that Jenson was not applicable in this case because Jensen did not involve an alleged misrepresentation made to the employee that their commission would not be capped. Additionally, the Jenson case’s sole claim was for breach of contract, a claim Fessler did not raise. The Court noted that it was illogical that the IPL, which it previously held to be an unenforceable contract, would preclude Fessler’s claims.

The lower court’s decision to grant IBM’s Motion to Dismiss relied heavily on the disclaimers included in Fessler’s IPL. Specifically, the trial court held that the disclaimers permitted IBM to adjust commission payments and thus prevented Fessler from having any reasonable expectation that Fessler was entitled to the full amount he expected. In holding that (1) the IPL’s did not preclude Fessler’s claims, and (2) IBM represented to Fessler on numerous occasions that his commissions would not be capped, the Fourth Circuit found that Fessler adequately alleged facts to allow his claims for fraudulent misrepresentation, constructive fraud, unjust enrichment and quantum merit.to survive a Motion to Dismiss. The case was remanded for proceedings in line with this decision.

The Fessler decision is a good lesson for employers who may think that a well drafted commission plan can insulate them from liability for claims of unpaid commissions.  The court found that the allegations in the complaint portray IBM as promoting a notion that sales would be uncapped in order to attract employees, while in practice, using the disclaimers included in the IPLs to cap high-commission deals. In this way, IBM was trying to have it both ways: recruit high-performing salespeople without the large payout. This case makes it clear: whatever commission program a company selects should be implemented uniformly. The methods through which a company communicates these policies to employees should provide consistent information. Employers expose themselves to litigation by saying one thing to get employees through the door while doing the opposite in practice. As Fessler’s lawyers argued in their brief, employers can’t “have their cake and eat it too.”

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