As Options Spread, So Too Do Suits From Workers Fired Before They Vest

Case law in the area isn't set, and legal experts expect a flood of new disputes.
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Think a big bundle of stock options will send you skipping down the yellow brick road to Internet riches?

Think again. If you still need convincing, just ask former

DoubleClick

(DCLK)

software engineers Nikolay Butvin and Mehran Sedaghatpour.

When Butvin and Sedaghatpour signed on with the fledgling DoubleClick in 1996 and 1997, they were given pre-IPO options -- 25,000 shares between them. But last week, as shares of the Internet ad concern rose to almost 120 -- up sixfold from the company's initial public offering at 17 in February 1998 -- the two weren't counting the riches from their employee options packages.

Instead, they are two more names on two more lawsuits challenging a former employer for firing them before they could reap the full proceeds of their options. The suits, which DoubleClick declined to comment on, represent one of the more contentious trends to emerge from the Internet boom, and one whose course is difficult to chart because case law provides few clues to how these disputes might end.

Big Stakes

With more employees receiving stock options as part of their compensation than ever before and markets booming, millions of dollars are at stake for individual workers.

But an increasing number of employees, seeing fabled stock option wealth evaporate in disputes with their employers, are filing lawsuits to recoup losses. And with huge sums dangling before workers and their lawyers, that trend is bound to increase in coming years, legal experts predict.

"You are seeing more litigation. I predict you'll see a lot more," says Scott McDonald, a lawyer with the San Francisco law firm

Littler Mendelson

, which specializes in employment and labor law.

So far, this is largely uncharted legal territory and the legal standing of both the companies and the employees they grant options to is murky.

"There is no standard stock option agreement," McDonald said. "One of the hallmarks of stock options is that you can be more creative with them."

The Issue of Timing

Butvin and Sedaghatpour found out there was a hitch to their options. Shortly after DoubleClick went public, but well before most of their options vested, the company fired them.

Butvin learned of his firing one day before the IPO. The dismissals turned their hoped-for stock wealth into ether. The company claimed the options that hadn't yet vested were only valid as long as they remained employees.

Butvin and Sedaghatpour now have filed separate federal lawsuits in the

U.S. District Court for the Southern District of New York

seeking compensation from DoubleClick for gains they weren't able to realize from the options.

The two computer software engineers are claiming they were recruited by the company with promises of stock option wealth that never materialized. Their lawyer declined to comment on the case. DoubleClick also declined to comment.

In a court hearing earlier this year, a DoubleClick lawyer said the firm fired Sedaghatpour "because his performance at the company was not up to par." Butvin, the company argued in his case, "was employed at will, such that he could be terminated at any time for any lawful reason."

Both Sedaghatpour and Butvin claim in court papers that they weren't told their unvested options would be void if they were fired.

DoubleClick, in its response in the court proceedings, claims the two software engineers both signed agreements that made the options contingent on continued employment with the firm.

Growing Discontent?

But Butvin and Sedaghatpour aren't alone.

In at least a half dozen other lawsuits filed in state and federal courts across the country, employees of Internet start-up and technology companies are claiming they lost out on potentially valuable stock options because they were fired.

Employees of another technology firm have filed a suit claiming their rights to exercise stock options were curtailed when their company was sold to a new owner.

In yet another case, female workers at a publishing company sued, claiming their male colleagues at the firm were given disproportionately large stock option allotments.

McDonald says the law on stock options is in an embryonic stage because using such devices for broad employee compensation became a popular phenomenon only in recent years.

As a result, few lawsuits on the issue have reached the appellate courts, where legal precedent is set. "This is a very hot area of litigation with no published decisions out there," he says.

Why the Suits?

There's sure to be plenty of fodder, though. Between 7 million and 10 million employees now have been given stock options in the U.S., according to estimates from the

National Center for Employee Ownership

, a California nonprofit group that studies employee stock ownership issues. That's 10 times more than had a decade earlier, the group says.

Once a benefit extended chiefly to top executives, stock ownership and options now are regularly offered to employees much further down the company ranks, the center says.

The fact that this is being done with options doesn't bode well for the American workplace, says Andrew Ross, director of the American Studies Program at

New York University

. And he says he's not surprised lawsuits have resulted.

Stock options have made indentured servants of workers who toil for long hours with a "mostly futile hope" of getting rich, he says.

"It's certainly become quite common in the Internet industry as a carrot to sweat equity," he says.

The workplace "shouldn't be like a visit to the casino, a prolonged visit to the casino, which is what stock options are," he says. "I don't think it's particularly healthy myself."

The Empire Strikes Back

Arthur Meyers, a compensation lawyer at the Boston firm

Hutchins Wheeler & Dittmar

who often represents companies in employment matters, says many firms have begun changing features of employee stock option agreements because of lawsuits.

One element that's become popular with employers is what's called a clawback provision. It requires employees who leave a company not only to forgo stock options that haven't been exercised yet, but also to return some proceeds of stock options an employee exercised while with the company.

IBM

(IBM) - Get Report

includes such a provision in stock option agreements with its employees, requiring them to forfeit proceeds of any stock options they exercise within six months before leaving the company to take work with a competitor. IBM won rulings in two cases last year -- one in California and another in New York -- upholding the provision.

"Employers are throwing these things into their plans and agreements like mad," Meyers says.