Monday, July 31, 2017

Curtis Cox v. SNAP, Inc. (4th Circuit)

Filed: June 13, 2017

Opinion by: Diana Gribbon Motz, Circuit Judge


            When reviewing a contract providing for a non-qualified stock option to purchase shares of common stock, Defendant corporation's argument that the contract only promised to issue options in the future was without merit because the prevention doctrine provides, "if a promisor prevents or hinders fulfillment of a condition to his performance, the condition may be waived or excused." Consequently, the fourth circuit court of appeals affirmed the district court, holding Defendant corporation liable for breach of contract, awarding Plaintiff damages in the amount of $637,867.42.


             “In 2006, SNAP, a Virginia corporation, sought to expand its business in the field of federal procurement by contracting with Curtis Cox, a Maryland resident and the president of C2 Technologies, an established government contracting firm. On January 12, 2006, the parties executed a memorandum of understanding in which Cox agreed ‘to promote and market [SNAP] in exchange for obtaining an equity stake’ in the company.” There was no dispute that the memorandum constituted a binding contract.

            Under the terms of the contract, Cox and C2 Technologies agreed to provide various forms of assistance to SNAP, including using their best efforts to help SNAP obtain specific contracts, to consider SNAP for any potential leads, and to provide SNAP with approximately $240,000 worth of marketing support and assistance.

            “In return, the contract provides that ‘on January 12, 2006,’ the same day the parties executed the contract, SNAP ‘will issue a non-qualified stock option to Mr. Cox granting him the right to purchase 308 shares, representing five (5%) percent of the total authorized shares of stock of [SNAP].’ The contract announces SNAP’s intention to execute a stock split, under which Cox’s options at any time after January 1, 2008 and gives Cox the right to require SNAP to repurchase his options – a “put option” – any time after January 1, 2011. The repurchase price is payable to Cox ‘over a five-year period with interest at the then current prime rate.’”

            “Cox attempted to exercise his put option on March 18, 2011 in a letter to SNAP President Navneet Gupta. The parties discussed but never came to a resolution regarding Cox’s request. On October 6, 2015, Cox sent Gupta a second letter demanding that SNAP pay him the full value of his options. On October 9, 2015, Gupta replied that ‘[SNAP] owed you nothing.’”

            “A month later, in November 2015, Cox filed suit for breach of contract against SNAP in Virginia state court. SNAP removed the case to the district court for the Eastern District of Virginia. After removal, Cox filed an amended complaint alleging breach of contract for failure to repurchase, breach of contract for failure to issue his options, and quantum meruit.”

            In August 2016, the parties filed cross-motions for summary judgment. The district court granted Plaintiff summary judgment, reasoning, “the plain language of the contract showed that SNAP issued the stock options to Cox and that the contract did not require any further steps as a condition precedent before those options issued. In the alternative, the court held that the language at issue was patently ambiguous and must therefore be construed against SNAP. Applying the contract’s formula for calculating the value of Cox’s options and interest owed, the court awarded cox a total of $637,867.42.” Defendant appealed.


(1)  Liability and breach of contract

The court held Defendant liable because as the contract conveyed the stock options to Plaintiff, and Defendant breached the contract by refusing to repurchase them when Plaintiff exercised his put option. Defendant argued that the contract did not actually convey stock options to Plaintiff, rather, the contract merely promised to issue stock options in the future, and therefore the issuance of stock options was a condition precedent to Defendant’s obligation to repurchase them.

The court found this defense without merit, calling the defense a “self-defeating position.” The court explains, “even if issuing the stock options was a condition precedent to [Defendant]’s obligation to repurchase, [Defendant] has excused that condition by breaching its promise to issue the options, and so the prevention doctrine dooms its case. Under the prevention doctrine, ‘if a promisor prevents or hinders fulfillment of a condition to his performance, the condition may be waived or excused…For the prevention doctrine to apply, [Plaintiff] need only show that [Defendant] materially contributed to the non-occurrence of the condition.”

The court further bolsters its analysis with Supreme Court of Virginia case law (Parish v. Wightman), which held, “where a contract is performable on the occurrence of a future event there is an implied agreement that the promisor will place no obstacle in the way of the happening of such even, particularly where it is dependent in whole or in part on his own act; and, where he prevents the fulfillment of a condition precedent or its performance by the adverse party, he cannot rely on such condition to defeat his liability.” The court further noted the failure to act can be considered, “contributing to the non-occurrence of the condition.”

Here, “[Defendant] controlled whether the stock options issued, and, even under its own interpretation, it had a contractual obligation to issue those options. By refusing to do so, [Defendant] plainly forfeited its right to rely on their issuance as an unfulfilled condition precedent to its obligation to repurchase [Plaintiff’s] options.”

Finally, the court referred to the Restatement, which reiterates that “when a condition in a contract fails to occur solely because a party breached one of its other obligations in the very same contract, there is no doubt that the party caused the non-occurrence for the purposes of the prevention doctrine.”

Holding that Defendant cannot avoid liability, the court affirmed the district court, explaining, “there is no doubt that [Defendant] had an obligation to bring about the condition it now tries to hide behind.”

(2)  Calculating Damages

Finding that the district court’s natural reading of the contractual language was appropriate, the court affirmed the district court’s holding, awarding Plaintiff a total of $637,867.42. The contract stipulated a formula for calculating the repurchase price of Plaintiff’s options:

“The price shall be determined based on the excess of the then fair market value of [SNAP], with such value determined based on .8 times [SNAP’s] annual sales during the most recently preceding twelve-month period, over the initial strike price…For purposes of determining the strike price of the options issued pursuant to paragraph 1, the value of [SNAP] will be based on a valuation of .8 times [SNAP’s] sales in calendar year 2005. This amount is estimated to be approximately $12,000,000.” [Amount payable] over a five-year period with interest at the then current prime rate [3.25%].
            The parties agreed that the value of Plaintiff’s options may be expressed as: ((80% of Defendant’s 2010 sales) – (80% of Defendant’s 2005 sales)) x 0.05. The district court found Defendant’s 2010 sales were $18,365,265 and that its 2005 sales were $4,938,584. Applying the above formula, the court found that Plaintiff’s options were worth $537,067.25. Defendant concedes that the district court used the proper formula to calculate damages, but it contends that the district court erred when it found that Defendant’s 2005 sales were $4,938,584. Specifically, Defendant relies on its contractual language, contending that its actual sales are immaterial because the contract stipulates that the 2005 sales were an estimated $12,000,000. The court disagreed.

The court found Defendant’s argument without merit, and instead held, “the contract provides that the value of [Plaintiff’s] options depends on the growth in [Defendant’s] value from 2005 to the time that [Plaintiff] finally exercises his put option. Under these circumstances, it stands to reason that the parties would have established a rough benchmark against which they could track the value of [Plaintiff’s] options.”

The court provided three reasons why Defendant’s logic was flawed. First, “the ordinary meaning of ‘estimate’ connotes a ‘rough or approximate calculation,’ not a fixed assumption. Common sense recommends we adhere to this meaning, since the parties estimated that the amount described is ‘approximately’ $12,000,000.” Second, the court argued, “it is not clear whether ‘this amount’ refers to [Defendant’s] 2005 sales or an estimate of the initial strike price, that is, 80% of [Defendant’s] sales. This unresolved ambiguity suggested that the parties did not mean for the estimate to serve as a stipulation.” Finally, the court argued, “[Defendant’s] reading would leave the parties and the court no way to establish a concrete strike price, and therefore no way to determine the value of [Plaintiff’s] options…for the purposes of establishing a strike price, it would be exceedingly strange for the parties to stipulate to an indeterminate figure."

In conclusion, the court found that “sales in calendar year 2005” referred to Defendant’s actual sales in 2005, and affirmed the district court’s award to Plaintiff of $637,867.42.

The full opinion is available in PDF.

No comments:

Post a Comment

Please Post Comments Here