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Stock options may trigger more wrongful termination suits

Bosses may want to think twice before firing employees who hold stock options, given a recent court ruling against database giant Oracle.

Dawn Kawamoto Former Staff writer, CNET News
Dawn Kawamoto covered enterprise security and financial news relating to technology for CNET News.
Dawn Kawamoto
4 min read
Bosses may want to think twice before firing employees who hold stock options, given a recent court ruling against database giant Oracle.

Last week, former Oracle vice president Sandy Baratta won her wrongful termination lawsuit against the company and was awarded approximately $2.6 million. Nearly $2 million of the award came from the value of her unvested stock options at the time of her termination.

Labor attorneys say this case will likely create a ripple effect among terminated employees holding large stock option grants. Regardless of whether workers earn annual salaries of $40,000 or $250,000, stock options can make them worth millions of dollars during the course of their employment with a given company--and workers are increasingly loathe to forfeit their projected earnings.

Lawyers say that terminated options holders are more likely to sue their employers for the value of their earnings, rather than take the more common route of reaching a settlement. They speculate that once-rare multimillion-dollar wrongful termination awards may become increasingly common as companies give out more stock options.

Oracle is embroiled in another multimillion-dollar wrongful termination suit in which the options account for a large part of the award being sought. Randy Baker, a former executive vice president, is seeking $18.5 million in lost compensation and damages, of which $16 million represents the value of his unvested stock options.

Meanwhile, the company is suing former executive Pier Carlo Falotti, claiming he has no right to $10 million in unvested options. Oracle fired Falotti four days before his options were to vest.

"It's only very recently where we've seen a large number of cases in which options are listed as a major component of the damages sought," said Jeff Tanenbaum, senior partner with law firm Littler Mendelson in San Francisco.

Typically, stock options have a strike price that is based on the day the employee joins a company, and they vest over a period of several years.

For example, an employee might receive 3,000 shares with a strike price of $60 that vest in equal amounts over three years. After one year on the job, this employee would be allowed to buy 1,000 shares at $60 per share and immediately sell the shares at a higher price.

Although employees must normally stay on the job a year or more to turn their stock options into cash, accounting experts insist that stock options have a monetary value unto themselves. The Black-Scholes method is the most widely used tool for valuing unvested stock options.

Relatively complicated accounting methodologies mean that attorneys suing on behalf of terminated options holders must take the time to educate juries. Many randomly selected jurors are unfamiliar with the concept of stock options or their financial significance, attorneys say.

"In our case, I had to explain to the jury, who didn't work in the options world, why options are valuable and why they should be an element of the damages," said Alan Exelrod, an attorney for Rudy, Exelrod, Zieff & True, who represented Baratta.

In the past, few wrongful termination cases have made it to court. The majority are settled or dismissed in a pretrial motion.

But given the increasing pool of stock option holders--and the size of Baratta's precedent-setting award--the number of plaintiffs willing to accept settlements may change, attorneys say.

"I suspect that cases will become more difficult to settle. Employees are more likely now to see a bigger potential upside to taking their cases to trial," said Cynthia Jackson, an attorney with Baker & McKenzie in Palo Alto, Calif. "On the other hand, an employer who believes it can defend the case is unlikely to write a settlement check to the employee for such an amount.

"The farther apart the parties are in the monetary assessment of their cases, the harder it is to (settle) their disputes," she said.

Twenty years ago, several California appellate courts temporarily raised employees' expectations of awards in wrongful termination cases by ruling that certain employment claims must include contract damages such as back pay and benefits. The case also determined that claims must include tort damages for punitive and emotional distress damages, Jackson said.

During the eight years that followed those court rulings, the gap between the employee's hope of receiving both contract and tort damages and the employer's goal of obtaining a verdict that required no award was enormous, she added.

"When that sort of disparity exists in assessing the value of cases, they are difficult to settle," Jackson said.

The climate changed, however, when Foley v. Interactive Data went to the California Supreme Court. The court overruled the appellate courts, noting that employment claims could result only in contract claims. That decision led to more wrongful termination cases reaching a settlement.

The Baratta case could spur other terminated employees to sue, or it could have a chilling effect on employers' generous use of stock option grants, Jackson said. The popularity of stock options has been under assault since the spring, when the Nasdaq Stock Market's tumble evaporated the value of many employees' equity stakes.

"After hearing about this case, employers may think twice about the exposure they get from stock options," Jackson said.