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I. INTRODUCTION
  A. Stock Options as Compensation
    1. Stock options have become an increasingly common form of compensation, not just to highly compensated executives or those employed by Internet start-ups. While the last year has put a damper on the "new economy" and has made stock options a less attractive form of compensation, the steady increase in the percentage of employees receiving stock options means that it is an increasingly common element of damages in employment litigation. Moreover, the Worker Economic Opportunity Act, signed into law on May 18, 2000, P.L. 106-202, makes stock options more readily available to hourly workers by exempting employees' profits on stock options, stock appreciation rights, and employee stock purchase plans from employees' "regular rate" of pay under the Fair Labor Standards Act, 29 U.S.C. 207 (e)(8).
      a. See also, Corey Rosen, Employee Options Are Here to Stay: Broad-Based Stock Option Plans Won't Be Fazed By Market Plunge, National Center for Employee Ownership.www.nceo.org/library/heretostay.html. (despite the common mythology, only a "very small fraction" of option holders work for start up dot.coms; also discusses the spread from technology companies to mainstream companies of the practice of offering all employees options).
    2. The plummeting stock market may mean an increase in fraudulent inducement litigation as individuals lured away from relatively secure jobs with the promise of stock options find themselves unemployed and/or with worthless or "under water" options in which the exercise price is greater than the market value of the stock. See e.g., Dot-Com Employees Get Mad, www.law.com/ 2/13/01.; Employees Taking Companies to Court for Loss of Stock Options, THE PHILADELPHIA INQUIRER, September 25, 2000; When Dot-Coms Cut the Cord, WALL ST. J., Oct. 17, 2000; When Stock Options Go Bad: Little Return But Big Tax Bill, N. Y. TIMES, February 18, 2001. Nevertheless, employment-related cases in which stock options are an element of damages are likely to grow given the increase of options as an element of compensation and the time it takes for lawsuits to get to trial.
  B. The Measure of Damages Applied By Courts to Stock Options
    1. The focus of these materials is limited to a review of the measure of damages applied by courts in employment cases to lost stock options or lost stock option appreciation. An historical review of the measure of damages relating to stock options, however, necessitates a review of many non-employment cases involving the conversion of stock or a failure to deliver, sell or purchase stock.
    2. The lynchpin of damages in employment-related lawsuits is to make the make the plaintiff "whole", putting the plaintiff in the position most closely reflecting the one he or she would have attained absent the breach of contract or wrongful termination. Stock options are particularly difficult to value in this context because of the fluctuating market values of stock and the equally challenging task of determining what a plaintiff would have done with stock options vesting in the future, but for termination or breach. Adding to the challenge are the countless variations of stock options, including the wide variety of vesting schedules and restrictions on transfer.
    3. As recently observed by the Third Circuit Court of Appeals, it is doubtful, given the myriad factors that might arise, "that any single universal damage theory could properly value stock options in all situations." Scully v. U.S. Wats, Inc., 238 F.3d 497, (3d Cir. 2001)(Fuentes, Scirica, and Alito, J.). Valuing employee stock options is "a complicated enterprise" made more so because, unlike other stock options, employee options are not publically traded. Id.
    4. Most court decisions addressing the valuation of stock options as an element of damages reflect an analysis based upon either a conversion loss measure of damages or a breach of contract theory of recovery, or some combination of the two. Recent cases, exemplified by the decision in Scully v. U.S.Wats, Inc., supra, also reflect an increasing inclination to rely on both theories to varying degrees to achieve the goal of making a plaintiff "whole" while accounting for economic reality.
      a. By their very nature, cases involving stock options as an element of damages are fact-intensive. Consequently, a review of pertinent cases requires a somewhat detailed review of the facts in each case.
  C. The Role of Advocacy in Valuating Stock Options
    1. The difficulty in valuing stock options as an element of damages presents an opportunity for advocacy. It also requires that plaintiffs and defense counsel carefully evaluate the issue in any employment-related litigation in which stock options may be an element of damages. A thoughtful and supported evaluation can literally mean a difference of hundreds of thousands of dollars in the event that an employer is found liable for wrongful termination or breach of contract.
    2. A discussion follows as to what the courts are doing, including the damage theories applied and the wide disparity in the valuation of the same stock options by plaintiff's experts, defense experts and the courts, concluding with a practical assessment of what factors can and should be considered in valuing stock options, whether the goal is to maximize or minimize the valuation.

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