Jensen v. IBM ( 2006 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
NIELS C. JENSEN, 
Plaintiff-Appellant,
v.
 No. 05-1611
INTERNATIONAL BUSINESS MACHINES
CORPORATION,
Defendant-Appellee.

Appeal from the United States District Court
for the Eastern District of Virginia, at Alexandria.
Leonie M. Brinkema, District Judge.
(CA-04-1316-1)
Argued: May 25, 2006
Decided: July 24, 2006
Before WILKINSON, NIEMEYER, and KING, Circuit Judges.
Affirmed by published opinion. Judge Niemeyer wrote the opinion,
in which Judge Wilkinson and Judge King joined.
COUNSEL
ARGUED: Michael Alan Dailey, ANDERSON DAILEY, L.L.P.,
Atlanta, Georgia, for Appellant. Janine Cone Metcalf, JONES DAY,
Atlanta, Georgia, for Appellee. ON BRIEF: Mark Ford, ANDER-
SON DAILEY, L.L.P., Atlanta, Georgia; Tameka M. Collier,
TROUTMAN SANDERS, L.L.P., McLean, Virginia, for Appellant.
Jordana R. Sternberg, JONES DAY, Atlanta, Georgia; Gregory A.
Castanias, JONES DAY, Washington, D.C., for Appellee.
2 JENSEN v. IBM
OPINION
NIEMEYER, Circuit Judge:
Niels Jensen, a successful software salesman for IBM Corporation,
commenced this breach of contract action against IBM for $2.1 mil-
lion in additional commissions that Jensen claims he earned in 2001
under IBM’s Software Sales Incentive Plan. The district court con-
cluded that the plan did not create an enforceable contract obligating
IBM to pay the commissions and granted summary judgment to IBM.
For the reasons that follow, we affirm.
I
IBM hired Jensen in 2000 as a software sales representative. He
was hired as an at-will employee whose employment at IBM could be
"ended by the employee or IBM at any time with or without cause."
His compensation consisted of base pay plus variable pay, commis-
sions, awards, and other forms of earnings designed to "attract, retain
and motivate high-performing employees."
In 2001, IBM announced the 2001 Software Sales Incentive Plan
("the Sales Incentive Plan"), a unified compensation plan for all of its
sales employees, and presented the plan to its employees at "e-
Business University," an instructional conference for IBM employees.
Jensen attended the conference with over a thousand other salesmen
and there received a glossy brochure, entitled "Welcome to the fabu-
lous world of your 2001 Software Sales Incentive Plan," which out-
lined the Sales Incentive Plan. The brochure trumpeted the simplicity
and advantages of the new plan under which a salesman’s commis-
sions turn on his success in attaining his sales quota, instead of being
calculated as a straight percentage of sales, as they had been before.
Announcing its function, the brochure stated: "This booklet explains
the basic principles that guided design of the new plan, and provides
information to help you understand how the plan works . . . for you
and for IBM." Describing the concept of incentives, the brochure
stated: "[B]ecause your sales plan is based on a self-funding model,
there are no caps to your earnings; the more you sell, the more reve-
nue and incremental profit for IBM; and the more earnings for you."
The brochure described how the plan worked, set forth some rates,
JENSEN v. IBM 3
and provided a full example of how the income for a hypothetical
software account manager is to be computed. It cautioned, however:
Disclaimer: This example is provided for illustration pur-
poses only. Actual sales incentive payments will be different
than the numbers displayed here. In cases of conflict
between what is shown in this booklet and local documenta-
tion, local plan documentation prevails.
The brochure directed employees to visit the "Sales Incentives" sec-
tion of IBM’s corporate intranet for "lots of useful content that helps
you focus on big payout opportunities, and easily calculate your earn-
ings."
The Sales Incentive section of IBM’s corporate intranet contained
various documents, including one entitled "IBM Software Group
2001 Sales Incentive Plan Management Guide" (commonly referred
to as the "Playbook") and one entitled "Field Management Guidance:
2001 Software Sales Incentive Plan." The latter provided in much
detail the way in which the Sales Incentive Plan operates and was to
be managed. Explaining that it is "a companion piece to the ‘2001
Software Sales Incentives Plan’ booklet," the Field Management
Guidance described the implementation and management of the plan
under headings such as "Implementing the Incentive Plan," "Deter-
mining Eligibility," "Setting Quotas/Targets," "Evaluating Perfor-
mance and Paying Incentives," and "Achieving a Competitive
Distribution of Earnings." The Field Management Guidance con-
cluded with references to additional materials for further information.
The Sales Incentive Plan allowed IBM’s separate divisions to indi-
vidualize a salesman’s sales targets and balance his salary and com-
missions. Accordingly, Doug Martin, Jensen’s manager, provided
Jensen with an "employee quota letter" tailoring the Sales Incentive
Plan to Jensen. Jensen’s quota letter identified his sales territory and
outlined the structure of the incentive plan as it was applicable to him.
The employee quota letter placed Jensen in the 50/50 bracket — 50%
salary/50% incentive pay. As the letter explained, Jensen would earn
$75,000 as salary and, if he attained 100% of his sales quota — which
was fixed at $2.5 million for the year 2001 — he would earn $75,000
4 JENSEN v. IBM
as incentive pay, split between $60,000 in commissions and $15,000
in bonus pay. At the bottom of the letter, in bold italics, IBM wrote:
Right to Modify or Cancel: While IBM’s intent is to pay
employees covered by this program according to its provi-
sions, this program does not constitute a promise by IBM to
make any distributions under it. IBM reserves the right to
adjust the program terms or to cancel or otherwise modify
the program at any time during the program period, or up
until actual payment has been made under the program.
Modification or cancellation may be applicable to all per-
sons covered by the program, or to any subset as defined by
management. Even though you may be given progress
reports regarding plan achievement during the year, no one
becomes entitled to any payment in advance of his or her
receipt of the payment.
On September 28, 2001, Jensen closed an exceptionally large trans-
action with the IRS that he determined was worth over $24 million
to IBM. Jensen calculated that he would receive approximately $2.6
million in commissions from this transaction. In reaching this figure,
Jensen relied on the figures included in the glossy brochure and on
the practice that IBM had followed in calculating his commissions
during the previous 18 months. The glossy brochure showed that for
sales constituting up to 100% of his sales quota, he would receive 1%;
for sales amounting to 100 to 125% of his quota, he would receive
4%; and for sales above 125% of his quota, he would receive 6%. In
addition, Jensen applied to the $24-million sale a 13.04% reduction,
carving out from the gross sale value an amount for maintenance
costs that IBM would have to book and incur over the life of the con-
tract. According to Jensen, for other sales that he had made during the
previous 18 months — all of which were small by comparison with
the IRS transaction — IBM deducted 13.04% as a "maintenance
carve." Thus, in estimating his commissions, Jensen reduced the $24
million contract by 13.04% to $20.8 million, and to that number, he
applied the commission rates given in the brochure describing the
Sales Incentive Plan. Jensen asserts that these calculations resulted in
a figure of $2.6 million.
When IBM paid Jensen, however, it awarded him less than
$500,000 on the IRS transaction. First, because of the size and com-
JENSEN v. IBM 5
plexity of the IRS contract and the requirements of general accounting
principles, IBM valued the deal at less than $20 million; Jensen attri-
butes this to IBM’s booking a 31% maintenance carve. Also, IBM
applied a 200% Rule, also known as the Large Opportunities Clause,
which the Field Management Guidance explained as follows:
Occasionally, a sales employee will be involved in a very
unique transaction that is significantly larger than anything
anticipated, such as when a rep with a $5M quota has a sin-
gle transaction that is $12M. Due to the unusual size of
these types of transactions compared with the quota
assigned, IBM management reserves the right to review any
single transaction that results in attainment of 2X quota or
greater. Management will decide if an adjustment to the
payment is appropriate based on the contribution of the sales
employee to that transaction, therefore, managers should
fully understand the sales employee’s involvement in the
transaction. Managers are encouraged to discuss these situa-
tions with employees as soon as they are identified, prefera-
bly prior to the opportunity closing.
The 200% Rule was also described in the "Playbook." In the Play-
book’s more particularized description of the 200% Rule, IBM stated
that a 1% commission would be paid for that portion of a single sale
that exceeds 200% of the salesman’s annual quota. Below the 200%
level, however, the percentages identified in the glossy sales brochure
applied.
Jensen was not aware of the 200% Rule, nor were some of his
immediate colleagues, including managers. He was both shocked and
angered by IBM’s calculation, which amounted to a commission far
smaller than he had anticipated. He claimed that he did not become
aware of the 200% Rule until October 11, 2001, roughly two weeks
after he closed the IRS sale. When IBM first alerted Jensen it was
planning on paying him only $500,000, he conducted a lengthy search
on the IBM corporate intranet and only then discovered the docu-
ments describing the 200% Rule.
Jensen commenced this action for breach of contract, alleging that
once he closed the IRS transaction, he became entitled to a commis-
6 JENSEN v. IBM
sion, which he computed using the glossy brochure and his quota let-
ter, amounting to $2.6 million. He also alleges that IBM breached its
contract with him in carving from the $24 million IRS transaction a
31% maintenance reserve because IBM’s course of dealing for other
transactions in which Jensen had been involved were booked with
only a 13.04% maintenance carve.
On IBM’s motion, the district court entered summary judgment in
favor of IBM, holding that IBM and Jensen had never entered into a
binding contract because there had never been a meeting of the minds
as to the shape, extent, and firmness of the commission arrangement.
This appeal followed.
II
Jensen contends that specific documents issued by IBM to describe
its Sales Incentive Plan — the glossy brochure and his employee
quota letter — constituted a unilateral offer by IBM that could ripen
into a binding contract if he performed the offer’s sole condition of
closing a sale. Jensen argues that "IBM made a promise to pay him
compensation upon performance of a specified act; the offer made
was in reasonably sufficient terms; and Jensen actually performed the
act requested," in this case, closing the $24 million sale to the IRS.
On this argument, Jensen contends that based on his calculations,
allegedly as described in the glossy brochure and his quota letter, he
is contractually entitled to $2.6 million in commissions. His argument
does not take account of the other documents referred to in the glossy
brochure because, he contends, they were not adequately communi-
cated to him.
The legal principles upon which Jensen rests his claim are not in
dispute. While both parties agree that Virginia law applies in this
diversity case, the principles of Virginia law are representative of
contract law generally. An employer can make a unilateral offer to its
employees, and the offer becomes a contract when its conditions are
fulfilled. See Nicely v. Bank of Va. Trust Co., 277 S.E.2d 209, 212
(Va. 1981) ("Full performance by the employee constitutes accep-
tance of the offer, and his previously inchoate rights to receive pay-
ments under the plan vest and become legally enforceable").
Employers can make unilateral offers even to at-will employees,
JENSEN v. IBM 7
whose employment is otherwise without a contract, and these offers
can be communicated in employee handbooks. See Progress Printing
Co. v. Nichols, 421 S.E.2d 428, 430 (Va. 1992) ("Many of the provi-
sions customarily included in an employee handbook are consistent
with an at will employment relationship such as policies regarding
vacations, severance pay, or employee grievance procedures"). But
consistent with the nature of at-will employment, an employer can
modify its offer until the offer’s conditions are satisfied. At that point,
the employee’s right under the unilateral contract is deemed to have
accrued or become vested, and the employer no longer can modify the
terms of the offer. See id. ("Normally, the employer retains the right
to alter these policies at any time, although rights which have already
vested in the employee are enforceable for the period of time during
which those rights existed" (citing Hercules Powder Co. v. Brook-
field, 53 S.E.2d 804, 809 (Va. 1949) and White v. Fed. Express Corp.,
729 F. Supp. 1536, 1548-49 (E.D. Va. 1990)); see also Pitts v. City
of Richmond, 366 S.E.2d 56, 58 (Va. 1988) ("Prior to acceptance by
full performance, an employee has no vested rights in the System, and
the [employer] is free to modify its provisions"); Nicely, 277 S.E.2d
at 212 (finding no vested right because the employee had not fully
satisfied the conditions placed on his right to receive benefits).
An employer can control when an employee’s right to an offer
vests by imposing conditions through clear statements in the offer.
See Hepner v. Am. Fidelity Life Ins. Co., 258 S.E.2d 508, 512 (Va.
1979) (holding that, although the employee was terminated on
November 21, the employer was not bound to pay a bonus for the 12
months ending October 31 because the contract provided that the right
would not vest unless the employee was still employed on December
1); see also Nicely, 277 S.E.2d at 212 (holding that employer can con-
dition vesting of a right to disability benefits on more than the onset
of a disability). But merely including in the offer the general state-
ment that the employer retains the power to alter or end a benefit does
not preclude the formation of a contract if the employee satisfies the
conditions of the offer before the offer is altered or withdrawn; such
a vague statement does no more than restate the employer’s common-
law right to modify the terms of at-will employment. An employer
must use clearer language to change the time when an employee’s
right vests.
8 JENSEN v. IBM
Thus, to succeed on his contract claim, Jensen must show that IBM
made an offer, that under the offer he would be paid $2.6 million in
commissions on a $24 million sale, that he could and did accept the
offer by making the sale, and that his right to that commission vested
such that IBM’s refusal to pay him the full amount was a breach of
contract. Jensen fails on the very first requirement because the docu-
ments on which he relies do not manifest IBM’s willingness to extend
any offer to enter into a contract. The terms of IBM’s Sales Incentive
Plan make clear that they are not to be construed as an offer that can
be accepted to form a contract. See Restatement (Second) of Con-
tracts § 24 ("An offer is the manifestation of willingness to enter into
a bargain, so made as to justify another person in understanding that
his assent to that bargain is invited and will conclude it").
In its employee quota letter sent to Jensen, which Jensen asserts is
one of the documents forming IBM’s offer to him, IBM states:
While IBM’s intent is to pay employees covered by this pro-
gram according to its provisions, this program does not con-
stitute a promise by IBM to make any distributions under it.
IBM reserves the right to adjust the program terms or to
cancel or otherwise modify the program at any time during
the program period, or up until actual payment has been
made under the program. . . . No one becomes entitled to any
payment in advance of his or her receipt of the payment.
(Emphases added). By this language, IBM did not invite a bargain or
manifest a "willingness to enter into a bargain." To the contrary, it
manifested its clear intent to preclude the formation of a contract.
IBM expressly stated (1) that Jensen could not rely on the intended
commissions described in the Sales Incentive Plan "until actual pay-
ment has been made"; (2) that IBM could modify or cancel the Sales
Incentive Plan at any time before commissions under it are paid; and
(3) that Jensen was not entitled to any payment "in advance of his . . .
receipt of the payment." Thus, IBM made clear that there were no
conditions that Jensen could satisfy to create a binding contract before
IBM decided to pay him. IBM unambiguously characterized sales
commissions as a form of incentive pay that it intended to make but
which it reserved the right to calculate or even not make, even after
sales were closed.
JENSEN v. IBM 9
We agree with the district court that the documents describing
IBM’s Sales Incentive Plan did not constitute an offer which Jensen
could accept to form a binding contract. At most, IBM announced a
policy of payment in which it reserved discretion to itself to make the
payment and to determine its amount, much like it might handle year-
end bonuses.
III
Even if we overlook the language of Jensen’s quota letter in which
IBM expresses its intent not to make an offer to enter into a binding
contract, Jensen also requires us (1) to overlook the 200% Rule for
large transactions that was included in materials posted on IBM’s
intranet; (2) to incorporate a custom of maintenance carves that
existed for the much smaller transactions in which Jensen had been
involved during the previous 18 months; and (3) to overlook the pro-
vision that in any event IBM’s "offer" could be altered at any time
before IBM made payment to Jensen.
If Jensen advances the glossy brochure describing the Sales Incen-
tive Plan as IBM’s offer to him, he must accept the brochure at its
word — that it was only a general description of the plan (explaining
only its "basic principles") and that the employee should consult the
IBM intranet as well as local arrangements authorized under the plan,
such as the "Playbook" and his quota letter, for further details. The
brochure’s reference to these matters amounts to an incorporation by
reference to intranet materials that establish a special rate of commis-
sions in "large opportunity" transactions that are "significantly larger
than anything anticipated" by the employee’s quota letter. These are
all terms of the "offer" on which Jensen relies.
Jensen seeks to avoid the terms applicable to large opportunities —
the 200% Rule — by arguing that its terms were not effectively com-
municated to him because they were buried in the intranet materials
and he did not find them until after he had made the IRS sale. He also
argues that in any event the language of the glossy brochure advertis-
ing that commissions were "uncapped" conflicted with the 200%
Rule, which he characterizes as a "cap," and that conflicting terms
should be construed in his favor. On the lack-of-communication argu-
ment, Jensen is imputed with knowledge of what was expressly incor-
10 JENSEN v. IBM
porated into the materials describing the plan; the glossy brochure
referred him to the intranet materials. That he chose not to read them
does not provide a legal excuse to exclude them from the terms of the
"offer." And his argument that IBM’s advertisement of "uncapped"
commissions conflicts with the 200% Rule is simply the product of
misreading the 200% Rule. The 200% Rule does not cap Jensen’s
commissions; it does not impose a ceiling on the amount of sales to
which commissions apply. While the 200% Rule’s rate of 1% is less
than some of the rates on sales under the 200% quota, varying com-
mission rates do not suggest that commissions are capped. As the
glossy brochure correctly stated, "your earnings for performance
above quota continue to be uncapped in 2001," and the 200% Rule
does not conflict with that statement.
Jensen can point to no custom that fixes the maintenance carve as
13.04% for every transaction, however large. He recites only his
experience over 18 months that involved much smaller and more uni-
form transactions. Because the maintenance carve is an accounting
reserve for future expenses that must be charged against the gross
amount of a contract, IBM maintains that general accounting princi-
ples required that it book a 31% maintenance carve for the $24 mil-
lion contract with the IRS, which required performance over a
number of years. Jensen offers no rebuttal to IBM’s explanation.
Even if Jensen were correct in reading the 200% Rule as a cap and
in holding IBM to a 13.04% maintenance carve, he also does not
address why the language of the "offer" — that it does not vest until
commissions are paid — can be overlooked. It is true that in the
absence of such vesting language, a commission might be earned
when the sale is made. But the language of the "offer" that he
advances imposes a different condition, directing that any right does
not vest until commissions are paid. Therefore, IBM would have been
within its rights under Jensen’s purported contract to introduce the
200% Rule or change its standard maintenance carve for the first time
after he closed the IBM deal.
Thus, even taking the IBM descriptions of its Incentive Sales Plan
as an offer, Jensen fares no better under its expressed terms. He is
bound by both the 200% Rule and by the language that would permit
JENSEN v. IBM 11
IBM to impose a 200% Rule even after the sale was made, so long
as it is applied before payment is made.
IV
Jensen treats this case as a dispute over what the contract between
him and IBM provided — what was communicated, what was offered
to him, what was accepted. Based on the text of the various communi-
cations about the Sales Incentive Plan, however, we view this case as
an effort by Jensen to create an enforceable contract out of a policy
that expressed IBM’s contrary intentions. We see IBM’s Sales Incen-
tive Plan as no more than an announcement of a policy expressing its
intent to pay incentives in specified amounts but retaining full discre-
tion to determine amounts until the time that they are actually paid.
Seen in this light, descriptions of the plan did not amount to an offer
to enter into a contract, but the announcement of a nonbinding inten-
tion, much like that in which an employee is told that he will be paid
a bonus if the company does well, without being promised specific
amounts. Here, of course, specific amounts were expressed, and,
according to IBM, even paid to Jensen. But any disagreement over
what was announced does not form the basis for a lawsuit for breach
of contract.
If we were to take the plan as an offer, as Jensen urges us to do,
he would nonetheless be bound by its full terms and could not select
only the terms that he elected to read. Under this assumed analysis,
he would fare no better.
At bottom, IBM’s Software Sales Incentive Plan expressed only the
company’s desire and intention to reward Jensen in 2001 based on his
overachievement in sales, and when taking into account all of the doc-
uments describing the plan, IBM fulfilled its expressed intention, pay-
ing him over $1 million in 2001 when his targeted compensation for
the year was in the range of $150,000. Whatever acrimony this litiga-
tion may have engendered traces only to a misunderstanding of IBM’s
program, not to the breach of a legal obligation.
AFFIRMED