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Lost Stock Options Give Rise to Suits Over Job Termination

Compensation: Some workers say employers fired them so they would be unable to exercise valuable benefit.

November 24, 2000|KAREN ALEXANDER | TIMES STAFF WRITER

When Eric Erickson was fired from Broadcom Corp. nearly two years ago, he lost a lot more than his $50,000 salary as a technical writer.

Like legions of tech workers, the San Gabriel Valley resident stood to reap several times his annual salary over the next few years from valuable Broadcom stock options, which he would have received had he remained employed longer.

Last week, Erickson, 55, filed a wrongful-termination lawsuit against the Irvine chip maker, and as his lawyer readily acknowledged, a prime motivation was the options. "The big part of his damages is going to be the stock options. That's the part that's making him angry," Douglas C. Vanderpool said.

Erickson's lawsuit, which Broadcom dismissed as frivolous, is but one recent example from a surging wave of employment-related claims over stock options.

Some workers are saying that employers fired them explicitly to avoid issuing stock options or to prevent them from exercising or cashing in the options. But more often, lawyers say, workers who have been fired or pushed out, such as Erickson, are choosing to go to court over their dismissals because of lucrative stock options. More than ever, even garden-variety termination claims hold the promise, for workers and their attorneys, of recovering huge sums from options packages.

"The value of stock options that are lost is sometimes so big, it forms a tremendous incentive to litigate or threaten to litigate," said Frederick Baron, a management-side employment lawyer in Palo Alto.

Erickson's suit says he suffered losses from promised stock options that never vested--a package that could have been worth more than $700,000 in early July, when Broadcom stock traded as high as $235 a share. (Broadcom's shares have since plunged, to $111.13 as of Wednesday, making Erickson's options now worth about $333,000.)

Even though many other technology stocks have also fallen, options are still widely dispensed by tech start-ups and "new-economy" companies. In fact, attorneys say, the recent downturn in the "dot-com" world may spur even more options-related lawsuits because of the spate of layoffs.

William C. Quackenbush, a Silicon Valley plaintiff's attorney, estimates that 90% of his active cases involve stock options. "There's a lot more at stake now when you're dealing with termination," he said. "A lot of these cases are potentially worth hundreds of thousands of dollars."

Indeed, a few publicized cases have highlighted the potential for large damage awards based on lost options. In August, a San Francisco jury ruled that software giant Oracle Corp. had wrongfully fired a vice president; it awarded her $2 million in canceled options, as well as $700,000 in other damages. The case is on appeal.

Stock options give employees the right to buy a given number of shares of company stock at a specified price. If the company's share price goes higher than the option price, employees can sell their shares for a profit. But most compensation plans require that an employee remain with the company for a period of time, usually a year, before they are entitled to any of the options.

Quackenbush says he has clients who were fired weeks, or even just one day, before a substantial chunk of options were to vest--depriving them of something they believed they had been working toward for a year. In many of those cases, workers are saying they were fired so their companies could avoid issuing the stock options.

Quackenbush says none of those cases has made its way to a court docket yet, but he and other plaintiff's attorneys have been encouraged by an obscure footnote in an October ruling by the California Supreme Court.

Buried within the landmark Guz vs. Bechtel court ruling--which otherwise gave employers wider leeway to fire employees--the court went out of its way to explain that under the long-established doctrine of good faith and fair dealing, it's not all right to fire someone as "a mere pretext to cheat the worker out of another contract benefit to which the employee was clearly entitled, such as compensation already earned."

Experts say young companies in particular might have strong financial incentive to dismiss workers before their options vest. To attract workers, start-ups have long offered stock options in lieu of a big salary. But a company's supply of options is not unlimited.

"New companies that are growing very quickly can fail to anticipate their growth. In the excitement of their early stages, they give out a larger portion of the total options [than] they would ever feel comfortable giving out," said Corey Rosen, executive director of the National Center for Employee Ownership, a nonprofit group based in Oakland. "Then they find they don't have options left to give."

By Rosen's estimates, 7 million to 10 million Americans receive stock options as part of their compensation, up from only about 1 million in 1992. With such a dramatic increase, it's no wonder that the amount of litigation has also seen a sharp rise.

In the Broadcom case, Erickson's main contention is that he was wrongfully fired and discriminated against on the basis of his age and gender after a female supervisor gave him a negative job review. The lawsuit says that Erickson helped Broadcom Chairman Henry T. Nicholas III with his doctoral dissertation and that he worked at Broadcom from November 1996 to January 1999. Erickson filed suit after his complaint to the state Department of Fair Employment and Housing was investigated and denied.

Erickson's attorney said that if stock options were not involved, his client might not have pursued the case this far. "He wouldn't have had any damages," Vanderpool said. "And he might not have bothered to file it because he went out and got another job right away."

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