Employers are likely to benefit from a ruling that says they need not grant unvested stock options to workers whose jobs end before they meet all conditions of earning the incentives, legal experts say.
The Maryland Court of Appeals reversed a lower-court decision that said Rockville-based Catalyst Health Solutions Inc. had to pay Martin A. Magill, a former vice president of sales, just over $849,000 worth of options that were scheduled to vest 11 days after his employment ended. A Montgomery County Circuit Court judge had ruled in October 2008 that the unvested options were protected by state law, which requires employers to pay all wages for work performed before employment is terminated.
But in a June 2 filing, the Court of Appeals said Magill's unvested stock options were not protected under the wage payment law because Magill left his employer before the option vesting dates.
Attorneys who specialize in labor law characterized the opinion as a victory for employers who rely on stock options as incentives.
"Employers all over the country use stock options as a way to keep employees long-term," said Steven Kaplan, an attorney in the Washington office of Littler Mendelson, which specializes in labor and employment law. "And they are typically unvested until the employee has been there a certain amount of time."
The appeals court's decision goes beyond saying that an employee has to comply with all conditions of a stock option plan, said Larry Seegull, a partner with Jackson Lewis in Baltimore.
"That principle can have applications and undoubtedly will be applied in other contexts," he said, "such as bonus plans, commission plans or other incentive arrangements."
According to the appeals court's June 2 opinion, Magill took a job as Catalyst's vice president of sales in February 2004 and his compensation included the right to acquire stock options that would become exercisable on certain dates and, in some cases, were tied to sales objectives.
In February 2006, Magill accepted a job with a competitor and resigned but continued working at Catalyst while negotiating a severance agreement, according to the court filing. When negotiations failed, Magill's employment was terminated 11 days before 8,750 stock options were to vest, the filing said. Magill attempted to exercise his options but the company had placed a block on his account, the court documents said.
Magill could not be reached Friday, but an attorney for Catalyst Health said the case affirms the company's strategy.
Stock options "are intended to retain employees' services for an extended period of time and have them devote their full time and effort and energy to the success of the company," said Joseph Mott, the company's deputy counsel.
lorraine.mirabella@baltsun.com
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