Privacy, Business and Law

The Tenth Circuit has affirmed a case where the measure of damages included the appreciation of stock, after the employee was forced to prematurely exercise stock options. Greene v. Safeway Stores, Inc. , Nos. 99-1215, 99-1228, 2000 WL 504738, at *1 (10th Cir. Apr 28, 2000).

At the time of Greene’s termination, he had 250,000 fully vested Safeway stock options. The exercise price was $1 per share. Greene also had roughly 250,000 more options that had not yet vested. The subscription agreement required plaintiff to exercise his vested options within ninety-five days of his separation from Safeway. Had Greene not exercised the vested options within ninety-five days, they would have expired.

Greene exercised all of his vested opinions on December 21, 1993 and acquired Safeway stock with a market value in excess of $3,000,000. Greene’s gain on the transaction was roughly $2,160,000. Greene immediately incurred a tax liability of roughly $850,000.

Greene testified at trial that, had he not been terminated, he would have refrained from exercising his stock options until the date he planned to retire. Greene also testified he sold all of the shares he acquired within a few months of exercising them because he needed to pay the Internal Revenue Service and because he was without income to cover his daily living expenses.

During the trial, Greene had an accountant testify that, had Greene exercised his vested options on January 31, 1996, instead of December 21, 1993, he would have reaped the benefit of increases in the market value price of Safeway stock for an incremental gain in excess of $3,000,000. The accountant also testified that, had Greene retired from Safeway in November 1995, as he had planned, options that had not yet vested at the time of Greene’s termination would have vested and could have been exercised to purchase additional Safeway stock for a gain of more than $1,000,000. The appellate court agreed that stock appreciation could be included in the damage award.

In reaching its decision, the court rationalized that when the company terminated Greene’s employment, it forced him to exercise his options sooner then he had planned to do so. The Court further stated that the difference in the value of the options at the time Greene was forced to exercise them, and their value when he otherwise would have exercised them, is contingent compensation Greene would have received but for his termination. The Court said that failure to compensate Greene for his unrealized stock option appreciation would be a failure to “return[ ] him as nearly as possible to the economic situation he would have enjoyed but for the defendant’s illegal conduct.”

The Court added that Safeway “cites no case holding that stock options cannot be a basis for ADEA damages or that the appreciated value of the options is not the correct measure of damages.”

The company responded by arguing that the unrealized stock options appreciation constituted “consequential damages” because Safeway had no control over the market price of its stock and Greene made a choice to sell his stock a short time after exercising the options. The Court found Safeway’s argument unavailing because Safeway had conferred on Greene the right to buy shares of its stock at a set price. In other words, the value of that right to buy stock at a prefixed price went up and down with the market price of the stock. Thus, the court reasoned that by forcing Greene to exercise the options earlier than he otherwise would have, Safeway curtailed Greene’s right to choose the date on which he would exercise his right to buy the stock in order to maximize his profit on the sale of the shares acquired.

The company argued that the district court should have at least instructed the jury that Greene had a duty to mitigate by holding on to the shares of stock he acquired. The district court considered the issue to be one of proximate cause as opposed to mitigation and did not issue the proposed instruction On appeal, the Court of Appeal did not find the lack of the “mitigation” instruction to be in error.

This decision demonstrates that substantially more than lost wages can easily be at risk should an employee wrongfully terminate an employee with options.