February 12, 2001, 10:23 AM — Stock options are the grease that keeps the wheels of our New Economy turning. In the high-stakes race to attract IT talent, many high-tech companies offer candidates attractive and potentially lucrative stock options as a part of compensation packages.
But what happens when promised stock options do not materialize, thanks to an employee dismissal or the IPO-unfriendly market? More and more, employees turn to the courts to get the value of worthless or withheld stock options.
Stock option stakes
"Stock options are potential damages," says Pat Lucas, chair of the litigation group for Fenwick & West, in Palo Alto, Calif. Several employee lawsuits worth millions -- based on claims of stock options owed -- have been filed or litigated recently. The defendants in these "disappointment suits" make up a who's who of dot-coms and high-technology players, including InfoSpace, Oracle, DoubleClick, and Qualcomm.
Courts, depending on the circumstances surrounding the lawsuit, have granted awards in some cases and have dismissed others. But experts agree the "disappointment suit" trend is growing.
According to the U.S. Bureau of Labor Statistics, during 1999 5.3 percent of employees at publicly traded companies received options as a part of a compensation package. Despite this small number, stock options hold great power: They have changed the dynamics of termination lawsuits, making them the key monetary issue and the driving force behind many of these suits.
"In about the last year or two years, wrongful termination suits in Northern California have been all about stock options," says John C. Fox, chairman of the employment and labor law group at Fenwick & West. "Every week $5 [million] to $10 million lawsuits cross my desk."
Employees believe they have been wrongfully fired and are suing to get the compensation they feel they deserve. Historically wrongful termination cases revolved around claims of discrimination. Awards were based on back pay, damages, and court costs.
Not today. Wrongful termination suits often center around an employee who left a company under conditions perceived as unfair. The "wronged" employee, who often worked long hours for less than market pay, later files suit to recoup the value of stock options he or she might have received if everything had worked out as planned -- and promised.
Still, many successful lawsuits never live uup to the stock option potential. "The settlement of the largest employment discrimination case is less than the value of any typical individual stock option case," Fox says. "The value of lost stock options can exceed $100 million." Awards and settlements are unlikely to reach that amount.
Vesting schedules up ante
Part of the stock option claims rest on vesting schedules. "Historically, four or five years were the vesting schedule -- one year to vest with annual vesting of 25 percent," Fox says. "About two years ago, historical vesting schedules changed."
A high-flying stock market and keen business competition led to fast-track stock option packages designed to lure potential employees. "Now you see one-year vesting periods with immediate 25 percent vesting. Monthly vesting follows after this one-year period," Fox says.
But with the downturn in the economy and the "cash is king" attitude of employees, Fox says that options packages are returning to their more stringent forms. "We're seeing the results of mistakes made when things were red hot," Lucas says. "We're seeing prudence and caution reasserting itself."
Any simply defined vesting schedule allows plaintiffs to easily suppose that large monetary awards are due. "The plaintiff can [define] damages very easily," Fox says. "You're looking at a $10 to $20 million potential upside."
But the potential for big money damages only applies when a stock is doing well. As long as a stock is high-flying, damages based on stock options are large. Should the value of a stock drop, however, the potential damages become worthless. "A number of claims fizzled when the stocks went underwater," Fox says. "Even if they could prove the case, the value of the unvested options is worthless. This prompted some settlements. The poor market has galvanized the settlement of several hot cases."
