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Wilson v. Career Education Corp.

United States Court of Appeals, Seventh Circuit

December 22, 2016

RILEY J. WILSON, on behalf of himself and all others similarly situated, Plaintiff-Appellant,
Career Education Corporation, Defendant-Appellee.

          Argued September 23, 2016

         Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 1:11-cv-05453 - Geraldine Soat Brown, Magistrate Judge.

          Before RIPPLE, ROVNER, and SYKES, Circuit Judges.

          ROVNER, Circuit Judge.

         Riley Wilson sued Career Education Corporation (CEC) alleging that CEC owed him the payment of bonuses for students that he had recruited, as an admissions representative, to CEC's culinary arts college. This is the second appeal by Wilson in this case. Wilson initially argued that he was entitled to the bonuses under numerous legal theories, including that: (1) CEC breached its employment contract with him by failing to pay the bonuses; (2) CEC was unjustly enriched; and (3) CEC violated an implied covenant of good faith and fair dealing that is implicit in the contract. In his first appeal to this court, we upheld the dismissal of the claim on the first two grounds, but a majority held that the complaint survived dismissal on the claim that CEC violated the implied covenant of good faith and fair dealing. Wilson v. Career Educ. Corp., 729 F.3d 665 (7th Cir. 2013) (Wilson T). We remanded for further proceedings on that claim.

         The facts underlying the case are set forth in detail in our earlier opinion, and will only be briefly summarized here. Wilson worked for CEC as an admissions representative recruiting students to enroll in CEC's culinary arts college. Under the incentive compensation provision in his contract (called the Plan) with CEC, Wilson was entitled to a bonus for each student that he recruited above a definite threshold who either completed a full course or a year of study. If a representative was terminated, he was entitled only to bonuses already earned, which would not include students "in the pipeline" who had enrolled but had not yet completed a full course or a year of study as of the date of the representative's termination. Moreover, the Plan explicitly reserved to CEC the right to "terminate or amend the terms of this Plan at any time, for regulatory compliance purposes or any other reason that CEC determines, in its sole discretion." Accordingly, Wilson would have been entitled to a bonus only as to recruited students above his minimum threshold who completed the full course or a year of study, during a time at which he remained employed, and at a time in which CEC had not exercised its discretion to terminate the Plan before those conditions were met.

         In October 2010, the Education Department released regulations that would become effective in July 2011, that would prohibit institutions such as CEC which were participating in Title IV student financial aid programs from providing bonuses based directly or indirectly on securing enrollment. Accordingly, as of July 2011, CEC would be prohibited from paying bonuses under the Plan. CEC did not wait until July 2011 to cease the payment of bonuses, however. Instead, after internal discussions, CEC decided to pay only bonuses that were earned as of February 28, 2011, thereby depriving Wilson of bonuses that were in the pipeline at that time. In place of the incentive compensation structure, CEC implemented a revised compensation program. That program provided to every currently employed admissions representative a raise in base salary of at least the total of 3% plus 75% of his or her previous two years' bonuses. Some representatives received higher compensation under the revised plan, while others fared worse. Wilson sued on behalf of himself and others similarly situated; the only claim still remaining is his claim that the decision to terminate the bonus payments in February 2011 constituted a breach of the implied covenant of good faith and fair dealing.

         A majority held in Wilson I that CEC had the unambiguous right to terminate the contract and to refuse to pay the bonuses for students in the pipeline. Id. at 671. Although CEC retained the right to terminate the contract, we further held that under the implied covenant of good faith and fair dealing, CEC's discretion to terminate the Plan and refuse to pay the unearned bonuses was limited by the reasonable expectations of the parties. Id. at 673. Accordingly, we held that Wilson could succeed in his claim if he could prove that CEC exercised its discretion in a manner contrary to the reasonable expectations of the parties. Id. at 675 (citing Jordan v. Duff & Phelps, Inc., 815 F.2d 429, 438 (7th Cir. 1987)).

         Wilson argued to the district court on remand that cost savings, not the desire to comply with the regulations, was the primary driver in CEC's decision to terminate the Plan in February 2011. But the district court rejected that argument, holding that the facts did not support it. Among the facts refuting Wilson's contention, the court identified as most significant that Wilson admitted there were no cost savings to CEC, and that the alteration in the compensation structure left macro-costs stagnant. The court held that there was no evidence that CEC retained for itself $5 million in bonus payments that were due admissions representatives, as Wilson alleged. Because no reasonable jury could conclude that CEC chose February 28 as the date to end the Plan bonuses in order to retain the bonuses for itself, the court granted CEC's motion for summary judgment. Wilson now appeals that determination to this court.

         As we recognized in Wilson I, an avowedly opportunistic decision to terminate bonuses would not comport with the reasonable expectations of the parties. Id. at 675, citing Jordan v. Duff& Phelps, Inc., 815 F.2d 429, 438 (7th Cir. 1987). Thus, if CEC used the excuse of the impending regulations to prematurely terminate the bonuses in a "money grab" unrelated to any legitimate business expectations, that arbitrary termination of bonuses would violate the objectively reasonable expectations of the parties. The parties could reasonably expect that alterations in the Plan terms would be made in good faith, although the good faith requirement is a limited inquiry:

The element of good faith dealing implied in a contract 'is not an enforceable legal duty to be nice or to behave decently in a general way/ [citation omitted] It is not a version of the Golden Rule, to regard the interests of one's contracting partner the same way you regard your own. An employer may be thoughtless, nasty, and mistaken. Avowedly opportunistic conduct has been treated differently, however.

Jordan, 815 F.2d at 438. If CEC used the impending regulation as an excuse to avoid payments arbitrarily, that would be the type of avowedly opportunistic conduct that would evince a lack of good faith and fair dealing. Thus, "it was reasonable for Wilson to expect that avoiding the three conditions needed for Wilson to earn a bonus on a recruited student would not be the but-for reason for CEC exercising its discretion." Wilson I, 729 F.3d at 675. Wilson argues that CEC's decision to terminate the Plan was made in violation of the covenant of good faith and fair dealing in that it was inconsistent with Wilson's reasonable expectation that CEC would not terminate the Plan early and that CEC acted with improper motivation.

         As regards the first argument, Wilson acknowledges that the inquiry is an objective one, with the proper focus on whether the decision was inconsistent with the objectively reasonable expectations. In arguing that this standard was met, Wilson relies on evidence that: CEC had historically paid for all Plan compensation; CEC had never made substantive Plan changes during the period of performance; CEC promoted the Plan in late 2010 as if it was going to continue paying through 2011; and Wilson was surprised that the Plan was ending early. The last factor rested on Wilson's testimony that he did not think the Plan would be terminated early and that "it was a big surprise" to him. But the determination as to whether an expectation is reasonable is an objective not a subjective determination. If Wilson's belief that the Plan would not be terminated or altered was not objectively reasonable, it would not matter that he actually held that belief.

         The other arguments essentially amount to a contention that the Plan had never made changes in the past and had given no indication it was about to do so, and therefore any alteration in the Plan defied Wilson's objectively reasonable expectations. The failure of CEC to alter the Plan terms earlier did not create a reasonable expectation that it would never do so given the language in the contract preserving that right. As we recognized in Wilson 7, the contract by its plain language makes clear that bonuses are only actually earned once the student has completed the academic program or one year of study. In short, a reasonable expectation that the Plan will be continued cannot arise solely from CEC's failure to ...

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