Scully v. US Wats, Inc. , 238 F.3d 497 ( 2001 )

Opinions of the United
2001 Decisions States Court of Appeals
for the Third Circuit
2-1-2001
Scully v. US Wats, Inc.
Precedential or Non-Precedential:
Docket 99-1590 & 99-1653
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Filed February 1, 2001
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Nos. 99-1590 & 99-1653
MARK SCULLY
v.
US WATS, INC.; KEVIN O'HARE,
individually and in his
capacity as President of US WATS;
AARON BROWN, individually and in
his capacity as Chairman of
the Board of Directors of US WA TS;
STEPHEN PARKER, individually and
in his capacity as Executive
Vice-President of US WATS
US WATS, Inc.;
Aaron Brown;
Stephen Parker;
Appellants in 99-1590
Mark Scully,
Appellant in 99-1653
On Appeal from the United States District Court
for the Eastern District of Pennsylvania
District Court Judge: John P. Fullam
(D.C. Civ. No. 97-04051)
Argued July 10, 2000
Before: SCIRICA, ALITO, and FUENTES, Cir cuit Judges.
(Opinion Filed: February 1, 2001)
Steven M. Coren (argued)
Bruce Bellingham
Kaufman, Coren, Ress &
Weidman, P.C.
1525 Locust Street
17th Floor
Philadelphia, Pennsylvania 19102
Attorneys for Appellants/
Cross-Appellees
US WATS, Inc., Aaron Brown, and
Stephen Parker
Jonathan D. Wetchler (argued)
Amy Anderson Miraglia
Wolf, Block, Schorr &
Solis-Cohen LLP
1650 Arch Street
22nd Floor
Philadelphia, Pennsylvania 19103
Attorneys for Appellee/
Cross-Appellant
Mark Scully
OPINION OF THE COURT
FUENTES, Circuit Judge:
In this appeal, the primary issue is whether US W ATS
improperly denied Mark Scully the right to exer cise his
stock option following his wrongful ter mination, and, if so,
whether the District Court, in awarding damages,
improperly failed to apply a discount fr om market value
to account for the option shares' lack of marketability.
In May 1995, US WATS, Inc., a Pennsylvania based
telecommunications carrier, hired Mark Scully as president
and chief operations officer for a two-year period to
implement a financial turnaround of the company. As part
of Scully's compensation, US WATS of fered him an option
for a substantial amount of restricted shar es which US
WATS viewed as exercisable only so long as Scully remained
employed by the company. The shares wer e restricted
because they could not be transferred for up to one year of
2
the date of their purchase. Although Scully achieved some
success in making US WATS profitable, the company
terminated him before the end of his two-year employment
period and before he could exercise his stock option.
Scully sued US WATS, as well as thr ee of its former
officers and directors, Stephen Parker , Aaron Brown, and
Kevin O'Hare for breach of contract, conspiracy, fraudulent
and negligent misrepresentation and violation of
Pennsylvania's Wage Payment and Collection Law ("WPCL").
After a two-day bench trial, the District Court determined
that (1) US WATS had wrongfully terminated Scully in
violation of a two-year employment contract; (2) US WATS
wrongfully deprived Scully of his stock option; (3) Parker
and Brown were individually liable under theories of
conspiracy or "alter ego"; (4) O'Har e was not liable on any
claim; and (5) Scully was not entitled to attor ney's fees and
liquidated damages under Pennsylvania law. Based on
these findings, the District Court awarded Scully damages
in the sum of $626,442, which represented the value of
Scully's stock option, lost wages, and inter est. The parties
cross-appeal.
After careful consideration of the numer ous issues on
appeal, we will affirm the District Court's conclusion that
US WATS unlawfully discharged Scully. We will also affirm
the determination that US WATS wr ongfully deprived Scully
of his stock option and the District Court's damages
valuation method. However, we will reverse the judgments
entered against Parker and Brown because the evidence
does not support their individual liability for the actions of
the company. Lastly, because we conclude that under state
law US WATS's conduct entitles Scully to attorney's fees
and may entitle him to liquidated damages, we will r emand
this issue to the District Court for further pr oceedings.
I.
In October 1994 Mark Scully entered into a six-month
oral consulting agreement with US WA TS, a
telecommunications company with a principal office in Bala
Cynwyd, Pennsylvania. Scully had been hired by
defendants Parker and Brown, who founded US W ATS in
3
1989, to achieve a financial turnaround of their company.
Scully's consulting services proved so beneficial to US
WATS that, in May 1995, Parker and Br own offered him a
written contract to serve a two-year term of employment as
president and chief operating officer . He declined the
written contract, and instead, according to Scully, entered
into an oral employment agreement with the company for a
similar two-year term.
As an inducement for Scully to remain the full two years,
US WATS granted him an option to pur chase 850,000
shares of restricted stock that would vest over a two year
period. The option was granted pursuant to a written 1993
Executive Stock Option Agreement ("the Stock Option
Agreement"), which was governed by US WATS's 1993
Executive Stock Option Plan ("the Stock Option Plan").
When US WATS hired Scully in May 1995, the Stock Option
Plan provided that all options would extinguish upon
termination of employment. However, during Scully's term
as president, the Stock Option Plan was amended by a
1996 Executive Stock Option Plan to provide that employee
options would extinguish 30 days after termination from
the company.
Notwithstanding Scully's apparent success in turning US
WATS into a profitable company, in December 1996,
approximately eighteen months after he began as president,
Parker and Brown replaced Scully with Kevin O'Hare. The
District Court found that, although Scully would no longer
be president, O'Hare, Parker, and Brown promised him
"that his continued employment until May 1997 was
assured." Scully v. U.S. WA TS, Inc., No. CIV.A. 97-4051,
1999 WL 553474, at *1 (E.D. Pa. July 29, 1999). However,
on December 30, 1996, Scully was terminated without
warning, effective immediately.
On January 23, 1997, Scully attempted to exer cise his
option to purchase 600,000 shares that had vested by that
date. US WATS refused to honor the option. Instead, the
company claimed that since Scully had been fir ed, his stock
option automatically expired. As a result, Scully filed suit
against US WATS, Parker, Br own, and O'Hare. Following
the trial, the District Court determined that Scully and US
WATS had entered into a valid two year employment
4
contract and that "the defendants had no just cause for
terminating [Scully's] employment." Id. The Court set forth
the reasons for that termination as follows:
The real reason for the defendants' actions, or at least
a principal reason, lay in the fact that the corporation,
which was entirely controlled by Messrs. Brown and
Parker, had granted more stock options than it could
possibly fulfill; and, unless some of the outstanding
stock options could be eliminated before December 31,
1996, accurate filings with the SEC would r eveal the
true state of the corporation's affairs. Plaintiff 's options
to purchase 600,000 of the 850,000 shar es had
already vested; and in view of plaintif f 's forthcoming
termination in May 1997, and in view of defendants'
knowledge that plaintiff would be receiving a
substantial sum of money from another investment in
January 1997, and would therefore be likely to exercise
his options, (which were definitely "in the money") the
defendants Brown and Parker carried out their plan to
(1) replace plaintiff before the end of 1996, (2) persuade
him that he would remain in the company's employ
through May 1997, and would therefor e see no need to
take immediate action with respect to exer cising his
options, and (3) fire him as of December 30, 1996,
without advance notice, so that he would be unable to
exercise his options before the ter mination of his
employment.
Id.
During the trial, the parties presented expert testimony
to establish the value of the restricted shar es that US
WATS refused to deliver. Following the evidence, the Court
opined that "[r]estricted shares ar e generally regarded as
subject to a discount from market price, because of the
restriction." Scully v. US WA TS, Inc., No. Civ.A. 97-4051,
1999 WL 391495, at *4 (E.D. Pa. June 8, 1999). On this
basis, the Court concluded that the appropriate discount
would be 30%. Despite this initial observation, the Court
ultimately chose not to apply a discount, and instead,
based its damage award on the differ ence between the
exercise price of the option and the price of unrestricted
shares as of the date of the breach. The Court therefore
5
awarded Scully $595,000 in compensatory damages for US
WATS's failure to deliver the shar es and $31,442 for lost
wages. The District Court's jurisdiction was based upon
diversity of citizenship. See 28 U.S.C.S 1332(a). We have
jurisdiction pursuant to 28 U.S.C. S 1291.
II.
We first address the issue of whether US WATS and
Scully had entered into a two-year employment contract.
US WATS argues that the District Court's conclusion that
there was an oral employment contract is (1) based on
insufficient evidence, and (2) contrary to Pennsylvania's
presumption of at-will employment. This issue sets forth a
mixed question of fact and law. To the extent the issue
presented concerns narrative facts, r eview is for clear error.
We extend plenary review to whether the District Court
correctly applied the standard for over coming
Pennsylvania's presumption in favor of at-will employment.
See Ram Constr. Co. v. American States Ins. Co., 749 F.2d
1049, 1052-53 (3d Cir. 1984).
Pennsylvania presumes all employment to be at-will. See,
e.g., Geary v. United States Steel Corp., 319 A.2d 174, 176
(Pa. 1974); Scullion v. Emeco Indus., Inc., 580 A.2d 1356,
1358 (Pa. Super. Ct. 1990). This presumption is necessary
to prevent baseless assertions of oral employment contracts
for a definite term. See Greene v. Oliver Realty, Inc., 526
A.2d 1192, 1198 (Pa. Super. Ct. 1987). However, it is
merely a presumption, and courts must be careful in
protecting a litigant's right to prove that the parties
intended a specific employment period. See id. The party
attempting to overcome the presumption must show clear
and precise evidence of an oral employment contract for a
definite term. See Gorwara v. AEL Indus., Inc., 784 F. Supp.
239, 242 (E.D. Pa. 1992); Adams v. Budd Co., 583 F. Supp.
711, 713 (E.D. Pa. 1984); Oliver Realty, 526 A.2d at 1202.
Evidence of a subjective expectation of a guaranteed
employment period, based on employer practices or vague
employer superlatives, is insufficient. See Adams, 583 F.
Supp. at 713-14; Ross v. Montour R.R. Co., 516 A.2d 29, 32
(Pa. Super. Ct. 1986).
6
Based on the evidence presented, the District Court
concluded that Scully and US WATS had entered into a
two-year oral employment contract. Scully testified that
when he and US WATS entered into the original
employment contract, they discussed detailed ter ms of the
agreement, or "deal points," including Scully obtaining
(1) the same salary as Brown; (2) a car and an apartment at
company expense; and (3) the option to pur chase 850,000
shares of stock that would vest over two years. Brown
admitted that he had discussed these deal points with
Scully. The District Court concluded as follows:
I accept plaintiff 's testimony on this subject as entirely
credible. Both Brown and Parker admitted (1) that they
very much wanted plaintiff to stay with the company
for two years; (2) plaintiff agreed to stay for two years;
(3) they offered plaintiff a written contract for two
years, but plaintiff did not feel a written contract was
necessary; and (4) the stock options, which admittedly
were a key component of the transaction so far as
plaintiff was concerned, were exer cisable over a two-
year period. The company's stock option plan which
was then in effect specified that such options could be
exercised only during the continuation of employment
by the company; hence, it is quite clear that all
concerned contemplated that plaintiff would remain in
the company's employ for a two-year period.
Scully, 1999 WL 391495, at *2. The District Court further
concluded that:
both sides had agreed on a two-year ter m of
employment. [US WATS] . . . undoubtedly wanted
[Scully] to stay for two years, and contemplated that he
would do so. [Scully] did not refuse to agree to a two-
year term, he simply stated that a written contract was
not necessary.
Scully, 1999 WL 553474, at *2.
Because the record supports the District Court's factual
findings, we cannot say that the Court clearly err ed.1 As we
_________________________________________________________________
1. The District Court found in the alternative that the parties entered
into an oral employment contract, for a period of six months, on
December 18, 1996. However, as we have alr eady determined that there
is sufficient evidence to support the District Court's finding that a two-
year oral employment contract existed, we need not address this issue.
7
have recognized, the clearly erroneous standard of review
"does not permit an appellate court to substitute its
findings for those of the trial court. It allows only an
assessment of whether there is enough evidence on the
record to support those findings. That a different set of
inferences could be drawn from the r ecord is not
determinative. It is sufficient that the District Court
findings of fact could be reasonably inferr ed from the entire
trial record." Knop v. McMahan, 872 F.2d 1132, 1141 (3d
Cir. 1989) (quoting In re Consolidated Pretrial Proceedings in
Antibiotic Antitrust Actions, 676 F.2d 51, 54 (3d Cir. 1982)).
"Where there are two permissible views of the evidence, the
factfinder's choice between them cannot be clearly
erroneous." United States v. Pelullo, 173 F.3d 131, 135 (3d
Cir.), cert. denied, 528 U.S. 824 (1999).
In this case, the District Court based its deter mination
on the testimony of Scully, US WATS's principals, and the
surrounding circumstances. The Court had an opportunity
to observe the demeanor and appearance of the witnesses
as they testified and to evaluate their believability. In this
regard, we observe that "[t]he cr edibility of witnesses is
quintessentially the province of the trial court, not the
appellate court. ``Credibility determinations are the unique
province of a fact finder, be it a jury, or a judge sitting
without a jury.' Accordingly, we may only r eject a District
Court's finding concerning a witness's cr edibility in rare
circumstances." Dardovitch v. Haltzman, 190 F.3d 125, 140
(3d Cir. 1999) (quoting United States v. Kole, 164 F.3d 164,
177 (3d Cir. 1998), cert. denied, 526 U.S. 1079 (1999))
(other citations omitted).
Here, the District Court acted within its factfinding
authority in determining that US WA TS intended to be
bound for a definite employment term. See Scullion, 580
A.2d at 1358-59; Marsh v. Boyle, 530 A.2d 491, 494-95 (Pa.
Super. Ct. 1987). We therefor e agree with the Court's
conclusion that Scully and US WATS orally consented to a
two-year term of employment, and that Scully properly
overcame Pennsylvania's presumption of at-will
employment.
8
III.
The more difficult issues in this case r elate to Scully's
attempted exercise of his stock option and the question of
damages. Initially, US WATS contends that the District
Court erred in determining that it br eached a contractual
duty when it refused to honor Scully's attempt to exercise
his option. In its memorandum opinion, the District Court
concluded that "plaintiff 's attempted exercise of his stock
options on January [23], 1997 was timely and appropriate,
and that the defendants wrongfully refused to comply."
Scully, 1999 WL 391495, at *3. The Court elaborated on its
reasoning as follows:
Plaintiff 's options were issued originally in
accordance with the 1993 stock option plan adopted by
the company. Under the terms of that plan, stock
options could be exercised only during continued
employment. But, since plaintiff 's employment was
wrongfully terminated--i.e., since he had a contractual
right to continue to be employed on January [23], 1997
--the defendants' breach of that employment contract
cannot entitle the defendants to cancel the stock
options which were an essential part of that contract of
employment.
Id.
We perceive no error. The District Court correctly
reasoned that US WATS could not justify rejecting Scully's
January 1997 attempt to exercise his stock option by
invoking his December 1996 termination fr om employment
because Scully's discharge was based on US W ATS's
wrongful breach of its employment contract. See Greene v.
Safeway Stores, Inc., 210 F.3d 1237, 1243-44 (10th Cir.
2000) (wrongfully discharged executive entitled to damages
for unrealized stock option appreciation); Knox v. Microsoft
Corp., 962 P.2d 839, 841-43 (Wash. Ct. App. 1998)
(employee wrongly terminated in br each of employment
contract entitled to damages for cancellation of unvested
stock option), review denied, 980 P .2d 1280 (Wash. 1999).
IV.
Having determined that US WATS's wrongful termination
improperly denied Scully the right to exer cise his stock
9
option, we turn to whether the District Court properly
valued the stock option in awarding damages. The Stock
Option Agreement provides that it is to be interpreted
primarily under federal law, and secondarily by New York
state law. The parties, however, agree that the applicable
law is the same regardless of whether federal, New York, or
Pennsylvania law is applied. Therefore, we draw widely from
the law in these jurisdictions, as well as other analogous
decisions. Our standard of review is plenary because
whether the District Court applied the appropriate measure
of contract damages is a question of law. W illiam B. Tanner
Co. v. WIOO, Inc., 528 F.2d 262, 271 (3d Cir. 1975). After
careful consideration of the parties' contrasting approaches,
we will affirm the District Court's damage calculation.
We begin our analysis with a brief explanation of
executive stock options.
An executive stock option is a contract between two
parties which provides the option purchaser (the
executive) the right, but not the obligation, to acquire
a firm's common stock at an agreedfixed price for a
specified amount of time.
Les Barenbaum, Ph.D. & Walt Schubert, Ph.D., Measuring
the Value of Executive Stock Options, 12 No. 12 Fair$hare 3,
3 (December 1992) [hereinafter Measuring the Value]. As
observed by commentators, judicial adjudication of stock
option controversies is becoming more common due to the
widespread use of options as incentives and bonuses.
Stock options ("call options") allow an employee to buy
the employer's stock at a specified future date at a
price (the "strike price" [or "exer cise price"]) fixed on
the date that the stock is granted. Stock options ar e
granted with the expectation that the stock will
increase in price during the intervening period, thus
allowing the grantee the right to buy the stock
significantly below its market price. Traditionally the
preserve of corporate executives, stock options are now
becoming more widely available to employees
throughout a corporation, and may be given as a long-
term bonus or incentive, often not vesting for several
years into the future.
10
Stock options have become prominent over the past
decade, as many Internet "start up" companies
typically offer to their employees and applicants the
prospect of potentially lucrative stock options in order
to recruit and maintain their workforce. Stock options
are not only an "incentive" or rewar d to high-ranking or
high-performing employees, but also a form of deferred
compensation. Indeed, many start-up companies
dangle the prospect of lucrative stock options--that
can be exercised when the company "goes public"--in
order to entice job applicants to join a new company
with an unproven track record. Employees who are
terminated or constructively discharged usually forfeit
their ability to participate in their employer's stock
option plans, and may therefore seek judicial relief.
Lynne Bernabei & Alan R. Kabat, Stock Options and
Employment Discrimination Law, in 2 Nat'l Employment
Lawyers Ass'n, 2000 Eleventh Annual Convention Course
Manual at 709-10 (June 21-24, 2000). The Tenth Circuit
Court of Appeals has further observed:
The conferring of options on an executive cr eates an
incentive for the executive to work hard to increase the
market price of the employer's stock because that
increases the value of the executive's stock options.
Stock options are an increasingly common form of
executive compensation. Options are often conferred in
the place of more traditional forms of compensation
like salary . . . .
Safeway Stores, 210 F.3d at 1243 (citing Susan J. Stabile,
Motivating Executives: Does Performance-Based
Compensation Positively Affect Managerial Per formance?, 2
U. Pa. J. Lab. & Emp. L. 227 (1999)).
Initially, we note that valuing employee stock options is
a complicated enterprise, made more so because, unlike
other stock options, employee stock options ar e not publicly
traded. Cf. Everett v. Everett, 489 N.W.2d 111, 113 (Mich.
Ct. App. 1992) (noting that calculating "the value of stock
options[ ] [is] a formidable task given the numerous possible
contingencies and restrictions involving stock options").
This is exemplified by the stock option damage calculations
11
presented here, which span the terrain between $180,625
as proposed by US WATS, $531,250 in the District Court's
opinion, and $1,078,125 according to Scully.
In this case, the Stock Option Agreement granted Scully
the right to purchase 850,000 shares of r estricted stock at
$0.75 per share. The restriction pr ovided that, upon
exercising the option, Scully would not be able to transfer
the stock for a one-year period from the date of the
exercise. At the time of his termination in December 1996,
Scully's option had vested as to 600,000 shar es. On
January 23, 1997, when Scully attempted to exer cise his
option for those 600,000 shares, US WA TS's publicly traded
stock closed at $1.375 per share. The option to purchase
the remaining 250,000 shares vested just over three
months later, on May 1, 1997.
The District Court measured damages as of January 23,
1997, the date it determined US WA TS refused to allow
Scully to exercise his option. The Court calculated the
damages based on the difference between Scully's exercise
price (purchase price) of $0.75 per shar e and the $1.375
market price of unrestricted US WA TS stock on that day, or
$0.625 per share. The Court applied that calculation to the
total 850,000 shares obtainable under the Stock Option
Agreement, rather than only to the 600,000 that had vested
by January 23, 1997, reasoning that absent his wrongful
termination, Scully would have fully exer cised his option
after all shares had vested. This method yielded an award
of $531,250 ($0.625 x 850,000 shares), plus interest.
Both parties take issue with the District Court's damage
calculation. Scully contends that the District Court erred in
calculating his damages by reference to the breach of
contract date. Scully argues that, instead, his damages
should have been calculated as of the end of the r estricted
periods because only then could he have sold all the
shares. Applying that calculation would benefit him
because US WATS's stock increased significantly in value
over the relevant time periods. For instance, on January
23, 1998, when the restricted period expir ed for the
600,000 shares Scully would have obtained thr ough his
exercise one year earlier, US WA TS's stock closed at $2.00
per share. Had Scully sold the stock on that date, he would
12
have realized a profit of $1.25 per shar e ($2.00 - $0.75).
Thus, Scully seeks damages relating to those 600,000
shares in the sum of $750,000 ($1.25 x 600,000 shares).
Scully's remaining option for 250,000 shar es of stock did
not vest until May 1, 1997. Scully asserts that he could
have exercised that option on May 24, 1997, the day after
his two-year oral contract of employment expir ed. Scully's
first opportunity to have sold that stock would have been
on the first business day after the applicable one-year
restricted period expired, which would have been May 26,
1998. On that day, US WATS's stock closed at $2.0625.
Had Scully sold his last 250,000 shares then, he would
have realized a profit of $1.3125 per share ($2.0625 -
$.075). Thus, with respect to the 250,000 shar es, Scully
claims damages of $328,125 ($1.3125 x 250,000 shar es).
Accordingly, Scully's total damage claim r elated to US
WATS's refusal to honor his stock option is $1,078,125
($750,000 + $328,125), plus interest.
By contrast, US WATS argues that, while the District
Court's valuation date was proper, the court incorrectly
valued the option by failing to apply a discount fr om fair
market value, which was necessary to account for the
restricted shares' lack of marketability. See Simon v.
Electrospace Corp., 269 N.E.2d 21, 27 (N.Y. 1971) (noting
that plaintiff 's damages would be subject to a discount if
he were entitled to restricted shar es, as opposed to shares
that were "freely salable"). In other words, US WATS
emphasizes that what Scully lost was an opportunity to
obtain less valuable, restricted shares, not more valuable,
freely tradable shares. Consequently, US W ATS submits
that, since the District Court additionally found that the
restrictions on marketability would render the restricted
stock 30% less valuable, Scully's actual loss fr om the non-
delivery of the stock was $180,625. US WA TS calculates
this sum by taking the $1.375 market price of unr estricted
stock on January 23, 1997 and applying the 30% discount,
for a hypothetical market price of $0.9625 for r estricted US
WATS stock. According to US W ATS, Scully lost the
difference between the hypothetical market price of US
WATS restricted stock and his option exercise price, or
$0.2125 per share ($0.9625 - $0.75). Since the District
Court correctly assessed liability under a br each of
13
employment contract, pursuant to which Scully was
deprived of his ability to purchase all 850,000 shares of
restricted stock, US WATS's damage theory would result in
an award of $180,625 ($0.2125 x 850,000 shar es), plus
interest.
The District Court rejected both of these appr oaches. The
Court considered Scully's position unacceptable because it
gave him the benefit of hindsight, thereby putting him in a
better position than if the breach in employment contract
had never occurred. This is so because the period between
the breach and the District Court's adjudication revealed to
Scully precisely when the market prices of US W ATS stock
were at their highest. By the same token, the Court was
unwilling to adopt US WATS's position because it deprived
Scully of the important advantage he enjoyed pursuant to
the option, namely the prospect of reaping a significant
profit should the value of the stock rise. The Court
considered this result unacceptable because it would
essentially reward US WATS for its breach of contract.
Moreover, although the Court noted that after the breach
Scully could have "covered" by pur chasing the same
number of unrestricted stocks on the open market as to
which he held an option, he would have had to risk a much
larger amount of money, given that on January 23, 1997
the market price for unrestricted US WA TS stock ($1.375)
was significantly higher than his option exer cise price
($0.75) for restricted US WATS stock.
In resolving this issue, we concentrate on two competing
damages theories upon which the parties have focused:
(1) conversion, and (2) breach of contract. Under the
conversion theory, damages are intended to compensate a
plaintiff for actual loss. Schultz v. Commodity Futures
Trading Comm'n, 716 F.2d 136, 139 (2d Cir. 1983); see also
Galigher v. Jones, 129 U.S. 193, 200-01 (1889). As
presently conceived, conversion damages ar e based on lost
profits, which are computed by comparing the plaintiff 's
exercise price to (1) the value of the stock at the time of
conversion, or (2) the highest intermediate stock price
between the notice of conversion and a reasonable time
thereafter during which the stock could have been replaced,
or whichever is greater. See Schultz , 716 F.2d at 141.
14
Courts have often used this loss theory in cases involving
stock because it is particularly germane to goods having
fluctuating market values. See id. at 139-40; Clements v.
Mueller, 41 F.2d 41, 42 (9th Cir. 1930).
Stocks have also been valued pursuant to a br each of
contract theory under which the goal is to put the plaintiff
in the same position he would have held had the br each
never occurred. Under this approach, the court calculates
damages as of the date of the breach. "The proper measure
of damages for breach of contract is deter mined by the loss
sustained or gain prevented at the time and place of
breach. The rule is precisely the same when the breach of
contract is nondelivery of shares of stock." Electrospace,
269 N.E.2d at 26 (citations omitted); accor d Indu Craft, Inc.
v. Bank of Baroda, 47 F.3d 490, 495 (2d Cir. 1995); Buford
v. Wilmington Trust Co., 841 F .2d 51, 55-56 (3d Cir. 1988).
Under the contract theory, damages are calculated by
taking the difference between a stock option's exercise price
and the market price of the same stock at the time of
breach. See Hermanowski v. Acton Corp., 580 F. Supp. 140,
146 (E.D.N.Y. 1983), aff 'd in relevant part, 729 F.2d 921
(2d Cir. 1984). This measurement pr oduces the option's
"intrinsic value," which is the differ ence between an
option's exercise price and the market price for the same
stock. See Measuring the Value, at 3.
Both the conversion and contract theories pr esume that
a plaintiff has the ability to "cover ," in other words, mitigate
damages by protecting prospective pr ofit, by entering the
market to purchase the lost shares. However, the theories
differ markedly as to when that ability to cover is relevant.
The conversion theory extends the cover date to a
"reasonable time" into the future, and therefore allows a
plaintiff to recover from the defendant some prospective
profit that may have accrued after the wr ongful act. In
contrast, the contract theory, as most strictly employed in
the stock context, puts the onus on a plaintif f to cover
immediately upon the breach because damages ar e fixed as
of the breach date. Therefore, in the stock context, the
contract theory does not allow a plaintiff to recover any
prospective profit from the defendant.
15
These differences give each damage theory divergent
strengths and weaknesses. The conversion theory allows a
plaintiff to recover, to a limited extent, a relevant benefit of
his bargain, namely the prospect of futur e profits which
provide the fundamental underpinning to stock options. In
this respect, it is an attractive alter native because it does
not "reward" a defendant for its wr ongful conduct. However,
this advantage comes at the price of injecting uncertainty
into the damage calculation by, for example, r equiring
speculation as to the expiration of a reasonable time by
which the plaintiff should have covered. Cf. Schultz, 716
F.2d at 140 ("what constitutes a r easonable period between
the act complained of and the time when reentry into the
market would be both warranted and possible will vary
from case to case"). Moreover, the extended cover period
may give a plaintiff the improper benefit of hindsight. See
Tamari v. Bache & Co. (Lebanon) S.A.L., 838 F.2d 904, 907
(7th Cir. 1988) (conversion theory "is a generous--maybe
too generous--measure of damages; it assumes that the
customer would have had the clairvoyance to sell when the
stock hit its peak during the relevant period, and by so
assuming systematically overcompensates defrauded
investors").
By comparison, the contract theory will likely lead to a
more scrupulous damage calculation because it avoids any
uncertainty concerning the amount of futur e profit or
future loss. However, this advantage is achieved at the cost
of distorting the damage calculation because it fails to
consider the benefit the plaintiff held pursuant to his
option, namely a reduced risk of loss and a gr eater
likelihood of profit. This is because the contract theory
measures damages by reference to the lost option's intrinsic
value. As a general rule, the intrinsic value of an option is
lower than its true value, the hypothetical price at which
the option would be traded on an open market. "A common
misconception in the valuation of executive stock options is
that option value is best represented by its intrinsic value."
Measuring the Value, at 3-4. The intrinsic value generally
fails to reflect the true value because an option holder can,
within contractual constraints, wait to exer cise his option
until the market price for the stock exceeds the exercise
price. The holder is thereby able to (1) decrease his risk of
16
incurring a loss, and (2) increase his likelihood of obtaining
a future profit. "Options generally sell for more than their
intrinsic value because they offer an investor the
opportunity to earn large gains if the underlying security
goes up in price while, because the option need not be
exercised should the underlying security value fall, losses
are limited to the cost of the option." Measuring the Value,
at 3-4. Thus, the contract theory fails to r ecognize that,
even when an option has an intrinsic value of zer o, its true
market value will be positive so long as the stock's value
has the potential to increase. As an example, under a strict
breach of contract approach, where an option's intrinsic
value is zero, the plaintiff 's damages will also be zero even
though the plaintiff 's lost option may have a positive value.
Against this backdrop, it can be said that the contract
theory arguably "rewards" a defendant for its breach
because, as in this case, it does not compensate the
plaintiff for all the benefits he lost when denied the option.
Courts have not taken a consistent approach in
computing damages concerning the loss of securities or
stock options. For example, several breach of contract cases
have measured damages based on the lost option's intrinsic
value. See, e.g., Hermanowski, 729 F.2d at 922, aff 'g 580
F. Supp. at 146; Rosen v. Duggan's Distillers Prods. Corp.,
256 N.Y.S.2d 950, 951 (App. Div. 1965); see
also Richardson v. Richardson , 659 S.W.2d 510, 512-13
(Ark. 1983) (in divorce proceeding necessitating division of
property, stock option valued according to intrinsic value).
Other breach of contract cases, however , have avoided
the standard contract damage computation. For instance,
in one recent decision involving stocks, a District Court
held that the failure to honor a contract for the delivery of
warrants, which are analogous to stock options, presented
a breach of contract claim rather than a conversion.
Commonwealth Assocs. v. Palomar Med. Techs., Inc., 982 F.
Supp. 205, 211 (S.D.N.Y. 1997). Nevertheless, the Court
awarded damages based on a calculation that was more
akin to the conversion model, determining the plaintiff 's
lost profit by reference to a pr ospective sale of the stock
that the plaintiff should have been able to ef fectuate, had
the defendant not breached the contract. Id. at 209, 212.
17
Clearly, this was not a strict breach of contract damage
computation, which would have limited damages to those
calculable on the earlier breach date.2 In another decision
which has blurred the distinction between br each of
contract and conversion damage theories, the Court held as
follows:
"[T]he measure of damages for the failur e to sell or to
deliver stocks and like speculative property, or for the
conversion thereof, is the highest market value which
the property attains between the time when the
contract required its sale or delivery, or the time of its
conversion, and the expiration of a reasonable time, to
enable the owner to put himself in statu quo, after
notice to him of the failure to comply with the contract,
or of the conversion."
Clements, 41 F.2d at 42 (quoting McKinley v. Williams, 74
F. 94, 102 (8th Cir. 1896)); see also Schultz, 716 F.2d at
141 (noting in dicta that "[m]any cases" have followed the
conversion model "where stock . . . wer e converted, [or] not
delivered according to contractual or other legal obligation")
(citation omitted); Rauser v. LTV Electr osystems, Inc., 437
F.2d 800, 803-05 (7th Cir. 1971) (in suit brought against
former employer for failure to deliver stock option, in which
plaintiff asserted breach of stock option agreement,
damages calculated using conversion model).
Depending on the circumstances of the case, the blurring
between conversion and breach of contract r emedies may
be justified. As explained above, the conversion theory
allows a plaintiff, who was wrongly denied a stock option,
a limited recovery for his lost opportunity to enjoy a
reduced risk of loss and a greater likelihood of profit.
Because that opportunity constituted part of the benefit of
_________________________________________________________________
2. US WATS argues that Palomar offers no support for Scully's position
because damages there were calculated as of the date of the breach.
That is incorrect. The Palomar Court determined that the breach date
occurred in March 1996. Palomar, 982 F. Supp. at 211 ("the relevant
breach occurred when defendant failed to honor plaintiff 's request for
registration and issuance of the shares in March 1996"). Nonetheless,
the Court calculated damages by reference to a June 1996 stock sale
that the plaintiff had intended. Id. at 209, 212.
18
his bargain, providing a remedy for that loss is consistent
with a goal of damage awards in the breach of contract
setting. See Restatement (Second) of Contracts S 344(a)
(1981) ("Judicial remedies under the rules stated in this
Restatement serve to protect . . . a pr omisee[``s] . . .
``expectation interest,' which is his inter est in having the
benefit of his bargain by being put in as good a position as
he would have been in had the contract been per formed");
22 Am. Jur. 2d Damages S 43(a) (1988) (same).
Indeed, given the myriad factors that might arise in each
case, we doubt that any single universal damage theory
could properly value stock options in all situations.
Consequently, we agree with the District Court's damage
calculation because it properly weighed and balanced the
strengths and weaknesses of competing damage calculation
methods to achieve the requisite end of putting Scully in
the position most closely reflecting the one he would have
held absent US WATS's breach.
In this case, the District Court adhered to the general
breach of contract rule by calculating damages as of the
date of breach. The Court's decision is consistent with the
view that a failure to deliver securities or stock options,
pursuant to a legally binding agreement, constitutes a
breach of contract. See Palomar, 982 F . Supp. at 211;
Hermanowski, 580 F. Supp. at 145; Electrospace, 269
N.E.2d at 26; see also Buford, 841 F .2d at 55-56; Knox, 962
P.2d at 841 (approving application of general contract
principles to wrongful termination claim brought by former
employee seeking damages for lost stock option).
Further, by relying on the breach date, and thereby
measuring damages as of the one date in the r ecord when
Scully was clearly willing to risk capital, the District Court
avoided the speculativeness and hindsight pr oblems
attendant to the conversion theory. Thus, we r eject Scully's
argument that the District Court should have measured his
damages as of the expiration of the restricted holding
periods. Not only is his approach contrary to the general
rule that damages for a breach of contract ar e determined
on the breach date, it is unduly speculative because it
presumes that the shares would be sold immediately at the
end of the restricted period, which further pr esumes that
19
the stock will have the same or a higher value on the first
date it can be sold as compared to the price at which it was
bought. Therefore, in the absence of a district court's
express credibility finding or other convincing evidence, we
cannot accept a plaintiff 's after-the-fact assertion that he
would have sold stock at a time that, in hindsight, would
have been particularly advantageous.3 Were Scully's
approach accepted, he would receive mor e than the benefit
of his bargain because the stock option mer ely (1) reduced
his risk of incurring a loss, and (2) incr eased the likelihood
that he would reap a profit. However , the stock option
neither extinguished all risk, nor guaranteed a pr ofit.
In addition, Scully's assertion that damages should be
calculated as of the end of the restricted period would be
particularly problematic in cases where the restricted
period ended after trial. Such a problem could occur with
a five- or perhaps even a two-year r estriction period. This
problem intensifies as the end of the r estricted period
moves farther into the future because the vagaries of the
stock market render valuation of the security interest more
speculative.
Just as we approve the District's Court's use of the
breach date for calculating damages, we also approve of the
_________________________________________________________________
3. The District Court's ruling expressed an unwillingness to simply
accept Scully's position concerning the dates he would have sold the
shares had US WATS delivered them. Moreover, this is not a case where
adequate evidence confirmed a plaintif f 's professed intent concerning
the exercise of security interests. Cf. Safeway Stores, 210 F.3d at 1243
(plaintiff 's assertion that he would have exercised stock option later
than
his wrongful termination forced him to, which would have significantly
increased his profit, confirmed by his planned retirement date); Kers &
Co. v. ATC Communications Group, Inc. , 9 F. Supp. 2d 1267, 1271 (D.
Kan. 1998) (partnership's contention that, absent defendant's wrongful
conduct, it would have sold shares during significantly profitable time
frame confirmed by evidence that its trustees, before benefitting from
hindsight, had "explicitly agreed" to sell stock at first opportunity);
Palomar, 982 F. Supp. at 207, 209 (fir m's assertion, which benefitted
from hindsight, that it would have sold stock during a particularly
advantageous period was confirmed by thefirm's demonstrable need at
the time to quickly raise cash in order to satisfy two impending financial
obligations).
20
District Court's valuation method because both of these
aspects of the District Court's formula wer e designed to put
Scully in the position most closely reflecting the one he
would have held absent US WATS's br each of contract. See
Knox, 962 P.2d at 841 (damages in a wr ongful termination
case are intended to put former employee"into as good a
position pecuniarily as he would have been had the
contract been performed"). Absent the breach, and
consistent with the District Court's findings, Scully would
have obtained 850,000 shares of US WA TS stock at $0.75
per share by risking a total of $637,500 ($0.75 x 850,000
shares). The District Court's damage calculation came close
to achieving this result because it placed on US WATS the
added risk, caused by its breach, of obtaining the same
number of shares on the open market, the only r emaining
source for the shares. The Court did so by taking the
$0.625 difference between the $1.375 market price for
unrestricted shares and Scully's $0.75 exercise price to
obtain restricted shares, and multiplying that difference by
850,000 shares for an award of $531,250.
US WATS protests, on several gr ounds, the District
Court's failure to apply a 30% discount to the $1.375
market price of unrestricted stock. First, we r eject US
WATS's contention that the District Court was necessarily
obligated to apply the 30% discount to the $1.375 share
price of unrestricted stock on January 23, 1997 in order to
account for the lower value of the restricted stock. There is
some validity to the point that the hypothetical value of
similarly restricted US WATS stock selling on the open
market would have been lower than the value of the non-
restricted stock in order to account for the decreased
marketability. See Sowell v. Butcher & Singer , Inc., 926 F.2d
289, 300 (3d Cir. 1991) (an unregister ed stock's lack of
transferability "will have an impact on its value"); see also
Hagerman v. Yukon Energy Corp. , 839 F.2d 407, 412-13
(8th Cir. 1998) (recounting evidence that decreased
marketability reduces unregistered stock's market value);
Eastern Serv. Corp. v. Comm'r of Inter nal Revenue, 650 F.2d
379, 383-84 (2d Cir. 1981) (explaining that r estricted
securities are subject to a discount to objectively determine
hypothetical fair market value if they were traded on an
open market); Rochez Bros., Inc. v. Rhoades, 527 F.2d 891,
21
894-95 (3d Cir. 1975) (remanding for evidentiary
proceedings to determine proper discount to apply to
restricted stock).
Nonetheless, we find no fault in the District Court's
decision not to apply the 30% discount. If the District Court
had applied the discount to all 850,000 shar es, as of the
date of breach, it would have calculated Scully's damages
using the intrinsic value of his option, resulting in a
$180,625 award.4 This clearly would have undervalued
Scully's loss because intrinsic value, which does not
account for an option's reduced risk of loss and increased
likelihood of profit, generally understates an option's true
value. Although the District Court's damage calculation
disregards the restricted period applicable to Scully's
shares by omitting the discount, we think the Court's
approach was warranted. Therefore, we agree with the
District Court's determination that application of a discount
was not necessarily a reasonable method of calculating
damages. See Palomar, 982 F. Supp. at 212 (refusing to
limit plaintiff 's damages on a cover theory because covering
would have added to plaintiff 's risk).
Second, we reject US WATS's contention that Scully was
not entitled to any damages beyond that computed using
the discount unless he actually covered by entering the
market to mitigate his losses. At oral argument, US WATS
posited that it would have been enough for Scully to risk
only the $637,500 that he would have had to pay pursuant
to his option. We disagree with this ar gument for two
reasons.
As an initial matter, the cover/mitigation principle does
not actually require plaintiffs to enter the market. Schultz,
_________________________________________________________________
4. The $180,625 figure is computed by applying the 30% discount to the
$1.375 market price of US WATS unr estricted stock on January 23,
1997. The result, $0.9625 ($1.375 x 30%), would represent the
hypothetical market value of US WATS stock having the same one year
holding restriction applicable to Scully's option. The difference between
that market value and Scully's exercise price for the same stock results
in the option's intrinsic value of $0.2125 ($0.9625 - $0.75), which leads
to a total intrinsic value damage award of $180,625 for all 850,000
shares ($0.2125 x 850,000 shares).
22
716 F.2d at 140. It is merely a method of establishing "the
outer time limit of a reasonable period during which the
highest intermediate value of the lost stock[can] be
ascertained. . . . [B]ut the injured party is not actually
required to reenter the market in or der to determine when
he might have done so." Id. Further , requiring actual
reentry would improperly increase the risk to which a
plaintiff was exposed since such a rule would not account
for possibly unfavorable market conditions, which"would
frustrate the rule which seeks to make an investor whole."
Id.
Moreover, US WATS ignor es that its suggested approach
would necessarily deprive Scully of some part of the
advantage, either the decreased risk or the potential profit,
that he held pursuant to his option. If, after US W ATS
refused to deliver the shares, Scully had chosen to obtain
the full 850,000 shares, he would have had to risk much
more money than he would have risked in exer cising his
option, specifically $1,168,750 ($1.375 x 850,000 shares)
as compared to the $637,500 he had to risk under his
option for the same number of shares. Thus, he would have
been risking an additional $531,250 ($1,168,750 -
$637,500), in an attempt to preserve his ability to obtain
the same potential profit. Similarly, if he had chosen to
equalize his risk by spending only $637,500 on the open
market, he would have obtained less than 850,000 shares
because the purchase price would have been $1.375 rather
than $0.75 per share. Thus, he would have been at a
disadvantage in terms of potential profit since that profit
would have been for less than the full 850,000 shar es to
which he had a right under the option.
The District Court rejected Scully's damage computation
and US WATS's discount approach because "they did not
reflect the realities of the situation." Scully, 1999 WL
553474, at *5. Numerous decisions have agr eed with the
principle that damage calculations should reflect economic
reality. See Palomar, 982 F. Supp. at 210 (rejecting damage
computation in stock case as "unrealistic"); Electrospace,
269 N.E.2d at 27 (reaching damage award in stock case by
"[l]ooking to the economic realities and eschewing legalisms
or verbalisms"). Accordingly, we agr ee with the District
23
Court's decision to ignore the restricted period, to refuse to
apply the discount, and to award Scully damages for his
lost opportunity.
Undoubtedly, the District Court's damage calculation was
to some extent imprecise. But so were the calculations that
Scully and US WATS advocated. Importantly, we are
satisfied that, in the circumstances pr esented, the District
Court's damage calculation with respect to the stock option
adequately puts Scully in a position most closely r eflecting
the one he would have occupied absent US WA TS's breach.
"[T]he law does not command mathematical pr eciseness
from the evidence in finding damages." Rochez, 527 F.2d at
895. Instead, all that is required is that"sufficient facts . . .
be introduced so that a court can arrive at an intelligent
estimate without speculation or conjecture." Id.; accord
Indu Craft, 47 F.3d at 496 (damages for breach of contract
need only be proved with "reasonable certainty").
In assessing damages, particularly for lost pr ofits, we
recognize the inevitability of some impr ecision in the
proof, and note that certainty as to the amount of
damages is not required, particularly when it is the
defendant's breach that has made such impr ecision
unavoidable.
Palomar, 982 F. Supp. at 208.
V.
We now turn to the issue of individual liability. The
District Court found that Parker and Brown wer e
individually liable based on alternate theories of "alter ego"
responsibility and civil conspiracy. As we explain below in
separately addressing each theory, we believe that neither
one was properly invoked.
A.
US WATS asserts that imposing liability on "alter ego"
grounds is legal error because plaintif fs never raised that
theory at trial. We agree. This Court has stated that "[t]he
fundamental proposition which probably no one would
dispute is that a court's power is judicial only, not
24
administrative nor investigative. A judgment may only be
properly given for something raised in the course of a
litigation between the parties." Webster Eisenlohr, Inc. v.
Kalodner, 145 F.2d 316, 318 (3d Cir . 1944); see also
Reynolds v. Stockton, 140 U.S. 254, 265-66, 268-69 (1891).
This right derives not only from the pr oper role of an Article
III court but also from due process pr otections. "The core of
due process is the right to notice and a meaningful
opportunity to be heard." LaChance v. Erickson, 522 U.S.
262, 266 (1997); accord Reynolds, 140 U.S. at 268-69.
A review of the complaint shows that plaintif fs never
raised an alter ego liability theory in the initial pleadings or
at any point during pretrial proceedings. The trial
transcript indicates only one instance where the issue is
raised, a mere inference where the District Court asked
whether US WATS abided by corporate for malities. In its
opinion, the Court predicated alter ego liability only on its
finding that US WATS did not observe corporate formalities.
It is apparent from the recor d that plaintiffs did not
properly present this issue to the Court, and thus US
WATS had no opportunity to present a defense. Thus, the
District Court's alter ego ruling cannot stand.
B.
By contrast, Scully pleaded the civil conspiracy theory in
his complaint and therefore US WA TS, Parker, and Brown
were on notice of the claim. Under Pennsylvania law, a
plaintiff must show that " ``two or more persons combined or
agreed with intent to do an unlawful act or to do an
otherwise lawful act by unlawful means.' " Doe v. Kohn,
Nast & Graf, P.C., 862 F. Supp. 1310, 1328 (E.D. Pa. 1994)
(quoting Thompson Coal Co. v. Pike Coal Co., 412 A.2d 466,
472 (Pa. 1979)). This showing "may be proved by acts and
circumstances sufficient to warrant an infer ence that the
unlawful combination had been in point of fact for med for
the purpose charged. While conspiracy may be proved by
circumstantial evidence, the evidence must be full, clear
and satisfactory. . . . Mere suspicion or the possibility of
guilty connection is not sufficient, nor pr oof of acts which
are equally consistent with innocence." Fife v. Great Atl. &
Pac. Tea Co., 52 A.2d 24, 27 (Pa. 1947) (citations omitted).
25
Under this standard, the record does not support a
finding of civil conspiracy. The District Court stated as its
basis for civil conspiracy liability that "it is clear that
[Parker and Brown] conspired to cheat the plaintiff of the
fruits of his employment and the ``turnar ound' success he
had achieved for them." Scully, 1999 WL 553474, at *2.
While a review of the record shows support for the
proposition that Brown was indeed inter ested in ousting
Scully for devious reasons, neither the District Court, the
parties, nor our own review of the recor d have revealed any
evidence proving that Parker agreed to wr ongfully terminate
Scully's employment in order to avoid the exer cise of his
stock option. For instance, Parker testified that the decision
to terminate Scully had been made befor e Parker was
informed of it. This indirect involvement is reinforced by
evidence that Parker's last day of work was two weeks
before Scully's termination. At that point, Parker had
vacated his office and was preparing to withdraw entirely
from the business. The absence of evidence that Parker
participated in a plot to terminate Scully pr ecludes our
finding the active involvement or collaboration of at least
two people. Therefore, we will reverse the holding of civil
conspiracy.
VI.
Scully next appeals the District Court's ruling that US
WATS did not violate Pennsylvania's WPCL when it refused
to allow him to exercise his stock option after his
termination. Legal interpretations of the WPCL constitute
questions of law subject to our plenary review. Cf. Voest-
Alpine Trading USA Corp. v. Vantage Steel Corp., 919 F.2d
206, 211 (3d Cir. 1990). Scully invokes the WPCL in an
effort to obtain the attorney's fees and liquidated damages
that Pennsylvania law authorizes. See 43 Pa. Stat. Ann.
SS 260.9a(f), 260.10 (1992).
The District Court determined that US W ATS had not
violated the WPCL because the stock option mer ely
constituted potential future, not earned, compensation. In
other words, the District Court analogized the stock option
to salary -- just as Scully would have no WPCL claim for
unearned salary payments that post-dated his termination,
26
the District Court reasoned that he had no WPCL claim in
exercising the stock option after the date of his discharge.
We agree with the general proposition that the WPCL does
not give rise to claims for unearned compensation.
Numerous decisions have held that the WPCL does not
create a new right to compensation, but rather , merely
establishes a right to enforce payment of wages and
compensation that the employer has legally obligated itself
to pay. See, e.g., Weldon v. Kraft, Inc., 896 F.2d 793, 801
(3d Cir. 1990); Harding v. Duquesne Light Co., 882 F. Supp.
422, 427-28 (W.D. Pa. 1995); Doe v. Kohn, Nast & Graf,
P.C., 862 F. Supp. 1310, 1325 (E.D. Pa. 1994); Sendi v.
NCR Comten, Inc., 619 F. Supp. 1577, 1579 (E.D. Pa. 1985).
We differ with the District Court in that, based on its
factual findings, we believe Scully's stock option constituted
earned compensation.
The WPCL provides a statutory remedy to employees
whose former employers fail to timely pay ear ned
compensation. The WPCL states in relevant part:
[w]henever an employer separates an employe[e] from
the payroll . . . the wages or compensation earned shall
become due and payable not later than the next
regular payday of his employer on which such wages
would otherwise be due and payable.
43 Pa. Stat. Ann. S 260.5(a) (1992) (emphasis added).
As an initial matter, we are confident that the
Pennsylvania Supreme Court would conclude that the stock
option granted to Scully, essentially a call option,
constitutes "wages or compensation" within the meaning of
the WPCL. The WPCL defines wages as including:
all earnings of an employe[e], r egardless of whether
determined on time, task, piece, commission or other
method of calculation. The term "wages" also includes
fringe benefits or wage supplements whether payable
by the employer from his funds or from amounts
withheld from the employe[e]s' pay by the employer.
43 Pa. Stat. Ann. S 260.2a (1992) (emphasis added). In
turn, "fringe benefits or wage supplements" are defined as
including:
27
all monetary employer payments to provide benefits
under any employe[e] benefit plan, as defined in
section 3(3) of [ERISA], as well as separation, vacation,
holiday, or guaranteed pay; reimbursement for
expenses; union dues withheld from the employe[e]s'
pay by the employer; and any other amount to be paid
pursuant to an agreement to the employe[e], a third
party or fund for the benefit of employe[e]s.
Id. (emphasis added) (citation and footnote omitted). The
"call" option extended to Scully falls within the definition of
fringe benefits or wage supplements because it r epresents
an "amount to be paid pursuant to an agreement to the
employee."5 See Regier v. R
hone-Poulenc Rorer, Inc., No. Civ.
A. 93-4821, 1995 WL 395948, at *4-7 (E.D. Pa. June 30,
1005) (WPCL covers call options); Bowers v. NETI Techs.,
Inc., 690 F. Supp. 349, 353 (E.D. Pa. 1988) (employer's
agreement to repurchase stock fr om employee subject to
the WPCL).
Concerning the more central issue, a stock option may
qualify as earned compensation under the WPCL if the
employer specifically agreed to deliver the option as
employment compensation. See Keck v. Trifoods Int'l, Inc.,
No. Civ. A. 96-3016, 1996 WL 665536, *4-5 (E.D. Pa. Nov.
12, 1996); Harding, 882 F. Supp. at 427-29. Scully
presents exactly this situation. Stock options provide an
incentive to an employee to work to increase the stock's
value and thereby benefit the company. See Safeway
Stores, 210 F.3d at 1243. The company benefits because
_________________________________________________________________
5. Although the District Court assumed that the WPCL covered the stock
option, the Court initially opined that the stock option was likely not
subject to WPCL protection because the statutory definition of "wages"
requires that they be payable by cash and check, "a requirement that
cannot very well be applied to stock-options." Scully, 1999 WL 553474,
at *3 (relying upon 43 Pa. Stat. Ann. S 260.3(a)). It is true that the
WPCL
requires that "[w]ages other than fringe benefits and wage supplements"
be payable "in lawful money of the United States or check." 43 Pa. Stat.
Ann. S 260.3(a) (1992). However, the second subsection of the same
statute, which applies to "[f]ringe benefits or wage supplements,"
contains no such restriction, instead r equiring merely that employers
must pay such compensation within specified time frames. See 43 Pa.
Stat. Ann. S 260.3(b) (1992).
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the stock option lowers the amount of up-front
compensation costs that must be paid directly to the
employee, but the employee bears a considerable risk since
his compensation will not increase unless the stock value
increases. See id. Thus, stock options are often termed
"contingent compensation." Id. (inter nal quotations and
citation omitted).
Scully and US WATS entered into this precise
arrangement. As the District Court noted, "[t]he entire
thrust of the overall arrangement between plaintif f and the
defendants was that plaintiff 's ef forts in improving the
fortunes of the company would be rewarded on the basis of
the company's improved condition as of a year after the
exercise of the option." Scully v. US W ATS, Inc., No. CIV. A.
97-4051, 1999 WL 592695, at *1 (E.D. Pa. June 10, 1999).
[I]t is quite apparent that plaintif f 's whole purpose in
entering into these arrangements was the expectation
that, as a result of his efforts, the company would
experience a big improvement in its fortunes, and
plaintiff would share in that prosperity. Defendants
wrongfully deprived plaintiff of that opportunity, and
should not be permitted to insist that plaintiff 's
chance for future profit ended as of January 23, 1997
. . . .
Scully, 1999 WL 553474, at *5.
Under these circumstances, we think it clear that, once
Scully entered into the two-year oral employment contract,
he needed to do no more to bind US WA TS to the stock
option. Scully's stock option was thus "ear ned within the
meaning of the WPCL because [he] was not r equired to
render any further services before they vested and became
exercisable." Regier, 1995 WL 395948, at *8.
In this matter, we conclude that US W ATS violated the
WPCL when it discharged Scully while r efusing to honor his
attempted exercise of his stock option. Because Scully
established that US WATS violated the WPCL, the District
Court should have awarded him attorney's fees. See 43 Pa.
Stat. Ann. S 260.9a(f) (1992) (court "shall, in addition to any
judgment awarded to the plaintiff . . . allow costs for
reasonable attorneys' fees of any natur e to be paid by the
29
defendant") (emphasis added). We ther efore remand to allow
the District Court to address the proper amount of those
fees.
In addition to attorney's fees, Scully seeks liquidated
damages also available under the WPCL. The Act entitles
plaintiffs to liquidated damages only when there is "no good
faith contest or dispute of any wage claim." 43 Pa. Ann.
Stat. S 260.10 (1992). As the District Court has not
addressed the liquidated damages issue, we will remand for
a specific finding on this question.
VII.
For the foregoing reasons, this Court will affirm the
District Court's order in part, reverse in part, and remand
for further proceedings consistent with this opinion.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
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