Employee Not Entitled to Carried Interest Payment Where Amount of Payment Not Agreed To

On February 3, 2016, Justice Friedman of the New York County Commercial Division issued a decision in Eagle v. Emigrant Capital Corp., 2016 NY Slip Op. 30195(U), granting summary judgment to the defendant employer in a breach of contract action brought by a former employee.

The contract at issue Eagle was an offer letter stating that the plaintiff was eligible to participate in the defendant's bonus program, but that any bonus was discretionary, and that also provided that the plaintiff could participate in the defendant's carried interest plan. It stated:

You will also be eligible to participate in ECC's carried interest plan, at a level determined by Executive Management. Additional information about this plan will be provided to you at a later date.

The plaintiff sued the defendant, alleging breach of contract and related causes of action arising from its failure to pay him any "carried interest" at all. The plaintiff's principal argument was that, although no specific amount of carried interest was specified, the offer letter obliged the defendant to pay him some carried interest, and that industry standards and various emails by defendant's employees could fill the gap. The court disagreed, explaining:

The court rejects plaintiff’s categorical argument that employment agreements that set forth categories of compensation but do not set forth the precise amounts of that compensation are not agreements to agree but rather enforceable agreements. On the contrary, it is well-settled that a term as to price, or amount of compensation, is material, and that a contract will be unenforceable if the contract is not definite as to such a term.

. . .

The requirement of definiteness can, however, be met, not only by an explicit contract term specifying the amount to be paid, but also where a methodology for determining the missing term can be found within the four corners of the contract, or where the contract invites recourse to an objective extrinsic event, condition or standard on which the amount was made to depend . . . . where a contract does not expressly state an amount of compensation to be paid, resort may be had to custom and usage to calculate the compensation, but only if there is custom and usage evidence to establish an extrinsic standard which is fixed and invariable in the industry in question.

(Internal citations and quotations omitted) (emphasis added).

The court then held that the defendant's internal emails making statements such as that, for carried interest purposes, the plaintiff would participate in any new transactions while he was a member of the group, and that this would be consistent with industry standards, were insufficient to satisfy the standard because they did not "evidence an agreed-upon methodology or standard by which the court might determine what carried interest should have been awarded." The plaintiff also did not present any evidence as to the existence of a "fixed and invariable custom in the industry."

The court rejected the plaintiff's good-faith-and-fair-dealing claim for similar reasons:

Even assuming that the duty of good faith and fair dealing can coexist in this context with a right of unfettered discretion, there is nothing on the face of the Offer Letter or in the record which would enable the court to objectively determine the carried interest compensation that [the defendant] should have paid . . . . [Plaintiff] also fails to submit evidence which shows, or raises a triable issue of fact as to whether, [the defendant] failed to act in good faith.

This ruling shows that an employee making a claim for "profit-based compensation" should not rely on more general contract principles—such as the availability of a good-faith claim when one party to a contract exercises discretion in such a way as to thwart another party's reasonable expectations—as opposed to specific rules governing employee compensation agreements. It also shows that any claim that relies on "industry standards" to fill a gap in a contract must be proven by clear evidence—perhaps by expert testimony.