A latest California Courtroom of Enchantment opinion, Shah v. Skillz Inc., (2024) 101 Cal.App.5th 285, addressed two essential questions regarding the valuation of inventory choices which have been the topic of litigation for a few years: Are inventory choices wages? How are damages measured in a declare for breach of a inventory possibility settlement? Though the questions might sound esoteric and of curiosity solely to attorneys, the solutions have actual world penalties for firms dealing with claims from disgruntled former workers.
Shah’s Claims
Shah v. Skillsz Inc. concerned an worker of Skillz Inc., a privately held cell gaming firm, who was terminated for trigger. As a result of he was terminated for trigger, his inventory choices have been routinely terminated, and he was not capable of train them. He later sued Skillz for breach of contract. Shah joined Skillz in 2015. As is true for a lot of startups, Skillz supplied Shah much less money compensation in trade for choices to purchase Skillz inventory at a predetermined train value ($0.34 per share), vesting over time. In accepting the provide, Shah was betting on the chance that the corporate would go public in an preliminary public providing (IPO) and he would be capable of promote his inventory on the open market at a big revenue. Within the traditional course, an worker who separates from the corporate would have three months from his termination date to train his vested choices. Nonetheless, the inventory possibility agreements governing Shah’s choices offered that if he have been terminated for “trigger,” his choices would expire on the date of his termination.
In January 2018, Shah spoke with the Skillz founders about leaving the corporate until he acquired a promotion and a increase. Given his illustration about leaving the corporate and his compensation request, Skillz suspected he may need carried out one thing dangerous to the corporate’s pursuits. A forensic evaluation of his emails revealed that he had forwarded a confidential enterprise report back to himself, and the corporate concluded there was no reputable enterprise motive for him to have carried out so. Based on Shah, nonetheless, he had forwarded the e-mail to himself solely as a matter of comfort, and there was no proof he meant to commit theft or use the report for any improper goal. Shah was terminated “for trigger” primarily based on his purported violation of firm coverage on confidential info and theft. When he later tried to train a few of his choices, he was notified that the choices have been void below his inventory possibility settlement.
Skillz had an IPO in December 2020 by which different former and present Skillz workers made a big revenue. The opening value per share within the IPO was $17.89. Nonetheless, present and former Skillz workers have been topic to a six-month “lock-up” interval throughout which they might not promote their shares. Within the two weeks after the lock-up interval expired, the inventory offered for a mean value of $20.01 per share.
Shah sued Skillz for breach of contract, wrongful termination and retaliation, alleging that Skillz didn’t have trigger to terminate him and wrongfully prevented him from exercising the inventory choices he had earned as a Skillz worker. A jury awarded him over $11.5 million {dollars} in damages for his misplaced choices, impliedly discovering that he was not legitimately terminated for “trigger.”
Inventory Choices as “Wages”
Earlier than the trial started, the courtroom dominated as a matter of legislation that Shah’s inventory choices weren’t “wages” below the California Labor Code, despite the fact that Shah had accepted much less money compensation in trade for inventory choices. On account of this ruling, Shah’s claims for retaliation and wrongful termination have been dismissed, successfully eliminating any entitlement to tort damages, which in any other case might have entitled him to punitive damages and lawyer’s charges.
The viability of his tort claims turned on California Labor Code part 200, which defines “wages” as “all quantities for labor carried out by workers of each description, whether or not the quantity is fastened or ascertained by the usual of time, process, piece, fee foundation or different methodology of calculation” (emphasis added). The courtroom agreed with Skillz that inventory choices “will not be wages as a result of they don’t seem to be ‘quantities.’ They aren’t cash in any respect; they’re contractual rights to purchase inventory shares.” The courtroom concurred with the Ninth Circuit Courtroom of Appeals, which beforehand thought-about the difficulty, noting that the amount of cash for which shares may be offered available on the market varies unpredictably every so often, so it’s not “fastened or ascertainable.” The courtroom distinguished the current info from Schachter v. Citigroup, Inc. (2009) 47 Cal.4th 610, by which it was acknowledged in dicta that incentive compensation, together with restricted inventory, represent wages provided that restricted inventory models (RSUs) have an ascertainable worth and are instantly issuable to an worker. Inventory choices, in contrast, the Skillz courtroom held, merely grant the holder a contractual proper to purchase shares of inventory at a later date at an agreed upon train value. In so holding, the Skillz courtroom explicitly acknowledged that its ruling restricted workers’ capability to recuperate tort damages and lawyer charges, leaving workers with solely claims for breach of contract to recuperate the worth of any choices that have been wrongfully terminated.
The Measure of Damages
The second essential holding in Skillz is that damages in a case for breach of inventory possibility agreements needn’t essentially be measured on the time of breach, as is customary with most breach-of-contract claims. Had Shah’s damages been measured on the time of “breach” (i.e. the date of his termination, earlier than the IPO occurred), his damages would have been nominal – the distinction between the train value of his vested inventory choices and the worth of Skillz inventory on the time of his termination, usually set by a “409A” valuation of an organization’s inventory. If Shah’s damages have been measured on the time of breach, he would have been entitled to solely $41,032 in damages as a result of lack of his inventory choices. Alternatively, Skillz’ professional opined that the measure of damages ought to have been measured utilizing the typical value between the date the lock-up ended and the day earlier than his testimony. This might have yielded about $6.7 million in damages. In distinction, Shah’s professional opined that Shah suffered roughly $11.5 million in damages by assuming that he would have offered the majority of his shares within the two-week interval instantly following the lock-up. Though the jury awarded Shah the complete quantity of $11.5 million, the award was later lowered to the $6.7 million various calculation made by Skillz’ professional.
The appellate courtroom rejected Skillz’ argument that damages needs to be measured on the time of breach, noting that the objective below contract legislation is to place the injured social gathering in nearly as good a place because the social gathering would have been had efficiency been rendered as promised. When there isn’t a available marketplace for the inventory on the time of breach, a plaintiff can not cowl his damages by buying the misplaced shares instantly upon the breach. In such circumstances, a valuation date after the date of breach could also be justified as a way to replicate the association that was “fairly contemplated” by the events on the time they entered into the settlement. “A opposite ruling below these circumstances would permit a non-public startup firm to remove inventory choices earned by a terminated worker with relative impunity earlier than the corporate has been offered or goes public as a result of the monetary penalties of doing so can be negligible,” the courtroom discovered. The appellate courtroom concluded that the correct measure of damages ought to have been the worth of Skillz’ inventory after the lock-up interval ended, when Shah was free to promote his inventory for the primary time on the open market like some other former and present worker of Skillz.
Implications for Employers
The holding that inventory choices will not be wages is sweet information for employers. It implies that damages in a go well with for breach of a inventory possibility settlement usually won’t embrace punitive damages or lawyer’s charges that in any other case could be out there if the breach have been handled as a tort.
Nonetheless, on a extra cautionary word, though the Skillz courtroom refused to just accept Shah’s speculative assumption that he would have exercised and offered all his shares on the highest doable value, it additionally refused to just accept the normal measure of damages as measured on the time of breach, which might have yielded Shah a negligible quantity. Because the courtroom famous, if the worth of the inventory on the time of termination is all that’s in danger when terminating an worker, an organization could determine to terminate an worker, understanding that there could be few monetary penalties for doing so. In distinction, if, because the courtroom dominated right here, damages are to be measured after expiration of the lock-up interval, an organization looking for to void an worker’s inventory choices primarily based on a discovering of “trigger” ought to proceed with warning. Lastly, this case could trigger employers to revisit the construction of their fairness compensation when it comes to RSUs vs. inventory choices. Though there are lots of issues that come into play when figuring out whether or not to grant RSUs or inventory choices, the monetary threat in a go well with involving a breach of an RSU plan could also be extra readily ascertainable on the time the choice to terminate the worker is made.