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Rosen v. Smith Barney

June 25, 2008


On appeal from the Superior Court, Appellate Division, whose opinion is reported at 393 N.J. Super. 578 (2007).


(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).

The issue in this appeal as of right -- arising from the dissent filed by Judge Harvey Weissbard -- is whether the plaintiffs' agreement to divert earnings to an incentive compensation plan violated the New Jersey Wage and Hour Law (Wage law), N.J.S.A. 34:11-4.1 to -67, or the statute's public policy.

Plaintiffs Melvin Rosen and James D. Fox are former employees of defendants Smith Barney, Inc., Salomon Smith Barney, Inc., and Salomon Brothers, Inc. (collectively Smith Barney) and participated in their employer's "Capital Accumulation Plan" (CAP). Both Rosen and Fox voluntarily executed agreements that allowed Smith Barney to use a percentage of their compensation to purchase parent company stock (Plan stock) after an initial six-month deferral period. The CAP afforded Rosen and Fox shareholding voting rights and dividends, as well as other benefits, and Plan stock ownership fully vested after a period of two years. The CAP enrollment form provided, however, that all unvested funds would be forfeited should the participant resign or be terminated before expiration of the two-year vesting period. The forfeiture provisions were consistent with the Internal Revenue Code provision permitting tax deferral.

Rosen voluntarily resigned from his employment with Smith Barney on July 1, 1994, and Fox on February 16, 1999. In each case Smith Barney invoked the CAP's forfeiture clause and retained the participant's unvested Plan stock. On October 1, 1999, plaintiffs filed a complaint alleging the CAP violated the Wage law because its terms required the forfeiture of earned wages. Plaintiffs also asserted common law tort claims of breach of contract, conversion, breach of fiduciary duty, and unjust enrichment. On January 24, 2003, Smith Barney filed a motion for summary judgment seeking to dismiss plaintiffs' tort claim. Plaintiffs cross-moved for partial summary judgment and asserted that the CAP's forfeiture provisions were incompatible with the Wage law and New Jersey public policy.

On April 23, 2004, the trial court issued a bench decision granting Smith Barney's motion for partial summary judgment on the common law tort claims. The trial court further determined that the forfeiture provision of the CAP contravened public policy and granted plaintiffs' motion for partial summary judgment. Smith Barney appealed. On June 15, 2007, the Appellate Division, in a published decision, affirmed the dismissal of the tort claims but reversed the partial summary judgment declaring the CAP null and void. The Appellate Division concluded that the CAP violated neither the Wage law nor the State's public policy, finding that public policy strongly favors freedom of contract. The Appellate Division determined that, after full disclosure, the parties freely, willingly, and knowledgably consented to the use of their compensation to be placed in this deferred investment vehicle.

Judge Weissbard filed a separate opinion, concurring in part and dissenting in part. Judge Weissbard would affirm the dismissal of the common law claims, but would also affirm the Law Division's ruling that the Smith Barney CAP violated New Jersey public policy as expressed in the Wage law. Boiled down to its essence, Judge Weissbard writes, the CAP forfeiture provision amounts to a restrictive covenant of the broadest type imaginable.

HELD: The judgment of the Appellate Division is AFFIRMED substantially for the reasons expressed in the Appellate Division's majority opinion.

1. Incentive compensation plans in general, and the CAP in particular, find their authorization within the terms and provisions of the Wage and Hour Law itself. Neither the fact that there was a vesting period attached to full and complete ownership of the interest, nor the fact that the CAP included a forfeiture provision, violates any of the provisions of that statute. There were two significant benefits of the CAP that made it attractive to plaintiffs, namely, the ability to purchase securities at a deep discount and the tax benefits accorded to it as a deferred compensation plan. The very features of the CAP about which plaintiffs now complain were part and parcel of the latter. Moreover, the Court rejects the assertion that the CAP's inclusion of, and defendants' potential invocation of, a forfeiture provision, operates as a penalty that therefore violates public policy in some fashion. The Court discerns nothing to support the conclusion that the forfeiture provisions which were an integral part of defendant's CAP deferred incentive compensation program and in which plaintiffs voluntarily participated, violate the Wage and Hour Law or the public policy that it represents and embodies. (Pp. 2-7)

JUSTICES LaVECCHIA, WALLACE, RIVERA-SOTO, and HOENS, and JUDGE EDWIN H. STERN, temporarily assigned, join in the Court's opinion. CHIEF JUSTICE RABNER and JUSTICES LONG and ALBIN did not participate.

Per curiam.

Argued March 26, 2008

We affirm substantially for the reasons expressed in the thorough and persuasive Appellate Division majority opinion authored by Judge Lihotz. See Rosen v. Smith Barney, Inc., 393 N.J. Super. 578 (App. Div. 2007). We add only the following comments by way of further explanation for our decision to affirm, in which we focus only on the issues raised in the dissent. See R. 2:2-1(a)(2).

This dispute concerns a challenge by plaintiffs, Melvin Rosen, James D. Fox, and others similarly situated, to an incentive compensation plan, called the Capital Accumulation Plan (CAP). The CAP was offered to them during the time when they were employed by defendants, Smith Barney, Inc., Salomon Smith Barney, Inc. and Salomon Brothers, Inc., and plaintiffs concede that they were voluntary participants in the CAP. Their ...

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