Claim By Former Conoco Manager Runs Out of Gas

Corporate mergers aren’t just about the bottom line.  They also have a human side, impacting employees who are laid off as a cost-cutting measure and employees whose responsibilities change as a result of the transition.

Contracts between executives and employers can play a role in this transition.  Many employment contracts and benefit plans feature change-in-control provisions.   These provisions can allow executives to obtain benefits if they are terminated after a change in corporate control, or even if they resign for “good reason” after their responsibilities are meaningfully altered.

In 2006, John D. Clayton, the Director of Worldwide Acquisitions and Divestitures for Burlington Resources, Inc., had one of these arrangements when Burlington merged with ConocoPhillips.  Burlington’s severance plan provided a right to benefits if an employee quit for “good reason” within two years of a change in control.  If there was a “substantial reduction” in the employee’s responsibilities, that would be a “good reason” for resigning, entitling the employee to benefits upon resignation.

Just before the March 2006 merger, Conoco offered Clayton a position as its Manager of A&D, and he signed a waiver of benefits under the plan.  But then, shortly after the merger, it reassigned him to the position of Manager of Business Development.  As Manager of A&D, he would have worked with properties that were already yielding petroleum, while as Manager of Business Development, he would only work with exploratory or developmental properties. 

Clayton was disgruntled with the change, and filed a claim for severance benefits – without resigning – in August 2006.  The trustee of the severance plan denied the claim because Clayton hadn’t actually quit.  Clayton worked for Conoco for two more years, but then resigned in March 2008 (within two years of the change in control) and claimed severance benefits.  The trustee denied his claim, determining that he had not suffered a “substantial reduction” in his responsibilities and therefore had not resigned for “good reason.”

Clayton then filed a claim in state court.  Conoco, however, removed the dispute to federal court, on the ground that the severance plan required an “ongoing administrative program” and therefore fell within federal jurisdiction under ERISA (the Employee Retirement Income Security Act).  And in federal court, Clayton’s claim met its end.

First, the U.S. District Court for the Southern District of Texas granted summary judgment on his claims for the severance benefits, ruling that Clayton’s March 2006 waiver of benefits was enforceable and that he did not resign for “good reason” in 2008. 

On appeal, Clayton argued that he had in fact suffered a significant reduction in responsibilities when his title changed to Manager of Business Development.  But the Fifth Circuit found the argument unpersuasive, and affirmed the judgment against him.  Clayton v. ConocoPhillips Co., No. 12-20102.  Judge Carl Stewart wrote that Clayton’s offer letter from Conoco had already told him that he would only be working in the Business Development division of the company, so his change in title wasn’t meaningful.  Further, the court found it important that Clayton had participated in a number of large projects for Conoco, which was a much larger company than Burlington.  Thus, Clayton’s responsibilities weren’t significantly reduced when he became a somewhat smaller fish in the bigger Conoco pond.

The court also rejected Clayton’s argument that his waiver of benefits was unenforceable because it was induced by fraud.  First, it said, Clayton failed to show that Conoco breached the promise – the offer letter – that it made in exchange for the waiver.  Second, even if Conoco had breached, Clayton “ratified the alleged fraud” by continuing to work at Conoco for two years after he knew that he would be the Manager of Business Development instead of the Manager of A&D.

Thus, Clayton might have been better off if he had quit when he first sought severance benefits in August 2006, rather than drawing his $17,000-a-month salary for another two years of work and only quitting as the severance period was coming to an end.  In 2006, the atmospherics of his claim that Conoco pulled a bait-and-switch when it promised him one title, got him to waive benefits, and then gave him a different title would have been significantly stronger.  Further, he wouldn’t have built a record of working on large projects for Conoco, which the court used against him when it determined that his responsibilities hadn’t changed meaningfully. 

• Breach of Contract
• Change-in-Control Provisions
• Civil Litigation