Court of Appeals Division I
State of Washington
Opinion Information Sheet
Docket Number: 39909-8-I
Title of Case: Charles E. Knox, Appellant
v.
Microsoft Corporation, Respondent
File Date: 08/31/98
SOURCE OF APPEAL
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Appeal from Superior Court of King County
Docket No: 95-2-11369-9
Judgment or order under review
Date filed: 11/13/96
Judge signing: Hon. Carol Schapira
JUDGES
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Authored by Walter E. Webster
Concurring: C. Kenneth Grosse
William W. Baker
COUNSEL OF RECORD
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Counsel for Appellant(s)
Jerry R. McNaul
Mcnaul Ebel Nawrot et al
600 University St # 2700
Seattle, WA 98101-1129
Charles K. Wiggins
Attorney At Law
241 Madison Ave N
Bainbridge Is, WA 98110
Barbara H. Schuknecht
Mcnaul Ebel Nawrot et al
600 University St #2700
Seattle, WA 98101-3143
Kerry M. Regan
701 5th Ave Ste 6100
Seattle, WA 98104-7098
Counsel for Respondent(s)
Thomas E. Kelly Jr.
Preston Thorgrimson Shidler Gates & Ellis
5000 Columbia Center
701 5th Ave.
Seattle, WA 98104-7016
Robin L. Nielsen
5000 Columbia Center
701 Fifth Ave
Seattle, WA 98104-7078
IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
CHARLES KNOX, )
) No. 39909-8-I
)
Appellant, ) DIVISION ONE
)
v. ) PUBLISHED OPINION
)
MICROSOFT CORPORATION, )
)
) FILED:
Respondent. )
WEBSTER, J. A terminated employee sued the employer for breach of
contract. The issue on appeal is whether the employee was entitled to seek
money damages in his wrongful termination case for "lost" stock options,
where the stock option agreements provided that if the employee was
terminated, he would lose any unvested stock options and would be required
to exercise any vested stock options within a certain time period. We
conclude that the employee was entitled to pursue such damages.
Accordingly, we reverse.
FACTS
Appellant Charles Knox held a management position at Microsoft
Corporation for approximately 9° years. During those years, he was granted
stock options on several occasions.1 With each stock option grant, he
signed an agreement which provided that if he was terminated, any unvested
options would be canceled, and any vested options had to be exercised
within 90 days for the options granted under the 1981 Stock Option Plan,
and within three months for the options granted under the 1991 Stock Option
Plan.
Knox was terminated in January 1995. Apparently, he exercised his
vested options within the specified time periods, and Microsoft canceled
his unvested options. Knox subsequently sued Microsoft for wrongful
termination, claiming breach of an employment contract. Microsoft
maintained the position that Knox had an "at will" employment relationship
with the company, while Knox attempted to show that Microsoft's handbooks,
policies, and practices revealed a relationship that could be terminated
only for cause or only through certain internal procedures. The jury
returned a verdict in Knox's favor, awarding him $650,000 in damages.2
However, the trial court had previously granted Microsoft two summary
judgment motions which precluded the jury from awarding any damages for the
unvested stock options that were canceled, and for the "early exercise" of
the vested stock options.3 Knox appeals these summary judgment orders, and
also appeals the final judgment insofar as it precluded such damages.4
DISCUSSION
A. Damages for Breach of Employment Contract
A trial court's grant of summary judgment is reviewed de novo. Kruse
v. Hemp, 121 Wn.2d 715, 722, 853 P.2d 1373 (1993). Summary judgment is
proper if no genuine issue of material fact exists and the moving party is
entitled to judgment as a matter of law. CR 56(c). The moving party bears
the burden of demonstrating the absence of any genuine issue of material
fact and entitlement to judgment as a matter of law. Young v. Key Pharm.,
112 Wn.2d 216, 225, 770 P.2d 182 (1989); see CR 56(c), (e).
The only question presented here is the measure of damages Knox was
entitled to seek in his wrongful termination case. General contract
principles apply, as Knox's wrongful termination action was based on a
breach of employment contract theory. See Kloss v. Honeywell, 77 Wn. App.
294, 298, 890 P.2d 480 (1995) ("Employment contracts are governed by the
same rules as other contracts."); see generally Henry H. Perritt, Jr., 1
Employee Dismissal Law and Practice sec.sec. 4.1, 4.62 (3d ed. 1992). As
such, back pay is a ""make whole' remedy,' intended to return the claimant
to the financial position he would have been in had the initial unlawful
firing (or, in this case, breach of contract) not occurred." Kloss, 77 Wn.
App. at 303; see Mason v. Mortgage Am., Inc., 114 Wn.2d 842, 849, 792 P.2d
142 (1990) ("Contract damages are ordinarily based on the injured party's
expectation interest and are intended to give that party the benefit of the
bargain by awarding him or her a sum of money that will, to the extent
possible, put the injured party in as good a position as that party would
have been in had the contract been performed."); see also Restatement
(Second) of Contracts sec. 347 (1981); Local 2750, Lumber and Sawmill
Workers Union, AFL-CIO v. Cole, 663 F.2d 983, 987 (9th Cir. 1981).
In fact, our Supreme Court has reaffirmed the venerable Hadley v.
Baxendale doctrine in the context of a wrongful termination case:
All authorities agree the seminal case defining contract damages is Hadley
v. Baxendale, 9 Ex. 341, 354, 156 Eng. Rep. 145, 151 (1854) in which the
court stated that damages recoverable for a breach of contract are those
which "may fairly and reasonably be considered either arising naturally,
i.e., according to the usual course of things, from such breach of contract
itself, or such as may reasonably be supposed to have been in the
contemplation of both parties, at the time they made the contract, as the
probable result of the breach of it."
Gaglidari v. Denny's Restaurants, Inc., 117 Wn.2d 426, 445-46, 815 P.2d
1362 (1991) (discussing whether or not emotional distress damages were
recoverable for breach of an employment contract). In short, the general
measure of damages for breach of contract -- which is applicable to
employment contract cases -- is that the injured party is entitled (1) to
recovery of all damages that accrue naturally from the breach, and (2) to
be put into as good a position pecuniarily as he would have been had the
contract been performed. Diedrick v. School Dist. 81, et al., 87 Wn.2d
598, 609-10, 555 P.2d 825 (1976).
Knox contends that a wrongfully terminated employee is entitled to
seek damages for any cancellation or early exercise of stock options
resulting from the termination. Microsoft does not dispute this premise.
That is, Microsoft does not dispute that "lost" stock options are generally
recoverable as damages in breach of employment contract cases.5 Rather,
Microsoft contends that Knox's stock option agreements bar any such
recovery, arguing that to allow such damages would render the option
agreements unenforceable.
Knox signed stock option agreements under both the 1981 Stock Option
Plan and the 1991 Stock Option Plan. Agreements made under the 1981 Plan
provided, in relevant part:
2. This option shall expire at the earliest of the following:
. . .
(b) Ninety (90) days after voluntary or involuntary termination of
Optionee's employment other than {discharge for misconduct, willfully or
wantonly harmful to the Company} . . . .
3. In the event of Optionee's termination of employment . . . the options
to purchase Option Shares which have yet to vest pursuant to Section 1(a)
above shall lapse as of the date of termination, death or disability.6
7. This is not an employment contract and while the benefits, if any, of
this option are an incident of the Optionee's employment with the Company,
the terms and conditions of such employment are otherwise wholly
independent hereof. . . .
See, e.g., CP 729, 731. Agreements made under the 1991 Plan contained
similar language:
4. Termination of Optionee's Status as an Employee. In the event of
termination of Optionee's Continuous Status as an Employee (as such term is
defined in the 1991 Stock Option Plan (the "Plan")),7 Optionee may exercise
this option to the extent exercisable on the date of termination. Such
exercise must occur within three (3) months after the date of such
termination (but in no event later than the date of expiration of the term
of this option as set forth in Section 3 above). To the extent that
Optionee does not exercise this option within the time specified in this
Section 4, this option shall terminate.
8. Value of Unvested Options. In consideration of the grant of this
option, Optionee agrees that upon and following termination of Optionee's
Continuous Status as an Employee for any reason, any unvested portion of
this option shall be deemed to have a value of zero dollars ($0.00).
11. No Employment Right. Nothing in this option or the Plan shall confer
upon Optionee any right with respect to continuation of employment with the
Company, nor shall it interfere in any way with Optionee's right or the
Company's right to terminate the employment relationship at any time, with
or without cause. . . .
See, e.g., CP 210, 212, 213.
Microsoft points to the above language to argue that the option
agreements "contemplated" Knox's termination. Indeed, it is undisputed
that these agreements created certain obligations in the event of Knox's
termination. But it is also undisputed that Knox complied with these
requirements -- neither party has claimed breach of the stock option
agreements. That is, Knox does not seek "reinstatement" of the options.
He does not challenge Microsoft's actions in canceling his unvested options
or requiring the early exercise of vested options, pursuant to the
agreements. In other words, Knox does not challenge the terms of the stock
option agreements, and Microsoft's "enforceability" arguments are
misplaced.
Attempting to address Knox's "benefit of the bargain" discussion,
Microsoft further contends that because there was no breach of the
individual stock option agreements, Knox has received "the benefit of the
bargain" of the option agreements. But it cannot be emphasized enough in
this case that Knox has not claimed any breach of the option agreements
he does not contend that he has not received the benefit of his bargain for
the stock options. Hence, any such discussion bears no relevance on the
issue of damages for breach of Knox's employment contract.
Put another way, Knox does not dispute that the terms of the option
agreements govern the cancellation and early exercise of his options -- he
is simply seeking the money damages he incurred from the cancellation and
early exercise of the options, which naturally flowed from Microsoft's
breach of his employment contract. As Knox contends, such recovery is
necessary to return him to the financial position he would have been in had
the initial wrongful termination not occurred. See Kloss, 77 Wn. App. at
303; Diedrick, 87 Wn.2d at 609-10.
In sum, Microsoft has provided no relevant argument or authority
supporting its position that the stock option agreements bar recovery for
damages arising from the cancellation and early exercise of Knox's options
in his wrongful termination case.8 As such, Microsoft has not demonstrated
entitlement to judgment as a matter of law on this issue. We reverse the
summary judgment orders and remand for further proceedings.
B. Dismissal of Appeal
1. Procedural Background
The trial court's March 14, 1996 order seemingly granted Microsoft's
summary judgment motion precluding damages for "lost" stock options, but
yet permitted further briefing on the matter: "{T}he court grants
Microsoft's motion to preclude recovery by Plaintiff for lost stock
options. Plaintiffs may provide the court briefing on recovery for lost
stock options under benefit of bargain' theory." CP 1022. There was some
confusion about the impact of this ruling. Knox subsequently submitted
further briefing on the issue, after which the trial court entered its
April 29, 1996 order, which provided:
THE COURT HEREBY GRANTS Microsoft's motion for summary judgment on any
claim arising out of the written stock option agreements entered into
between the Plaintiff and Microsoft prior to the termination of his
employment for damages for the value of unvested stock options and for the
early exercise of vested options, including any claim that Plaintiff is
entitled to such stock options damages as a benefit of the bargain' of any
express or implied employment agreement.
CP 1059-1060.
Final judgment on the verdict was filed on November 13, 1996. Knox
filed his notice of appeal to this court on December 9, 1996. He
specifically appealed the March 14 order and referred to the Final
Judgment, but he failed to reference the April 29 order:
CHARLES E. KNOX, plaintiff, seeks review by the designated appellate court
of the trial court's order on Microsoft's Summary Judgment Motion, which
was entered in this action on March 14, 1996, to the extent that order
precluded recovery by plaintiff of damages for lost stock options. The
final judgment in this action was entered on November 13, 1996.
CP 1068.
2. Final Judgment
Microsoft "renews" its motion to dismiss for Knox's failure to
designate the Final Judgment in its notice of appeal. However, this court
has already twice denied Microsoft's motion to dismiss on this basis. A
Commissioner of this court found that while Knox's notice of appeal did not
specifically state that he seeks review of the Final Judgment, the notice
sufficiently complies with RAP 5.3(a). A panel of this court subsequently
denied Microsoft's motion to modify the Commissioner's ruling. We likewise
deny Microsoft's "renewed" motion with respect to the Final Judgment.
3. April 29, 1996 Order
Microsoft also moves to dismiss review of the April 29 order on the
basis that it was not actually appealed in accordance with RAP 5.2(a).
However, such a request ignores RAP 1.2(a), which provides:
These rules will be liberally interpreted to promote justice and facilitate
the decision of cases on the merits. Cases and issues will not be
determined on the basis of compliance or noncompliance with these rules
except in compelling circumstances where justice demands, subject to the
restrictions in rule 18.8(b).
In addition, our Supreme Court has stated that appellate courts should
normally exercise its discretion to consider cases and issues on their
merits unless there are compelling reasons not to do so -- even despite
technical flaws in an appellant's compliance with the Rules of Appellate
Procedure. State v. Olson, 126 Wn.2d 315, 323, 893 P.2d 629 (1995). We
deny Microsoft's motion to either dismiss the appeal or to preclude review
of the April 29 order.
We reverse the March 14, 1996 and April 29, 1996 summary judgment
orders and the Final Judgment to the extent that they preclude recovery for
damages arising from (1) the cancellation of Knox's granted but unvested
stock options, and (2) the early exercise of his vested stock options.
We remand for further proceedings.
WE CONCUR
1 The record shows that he was granted stock options on 8 separate
occasions, under both the 1981 Stock Option Plan and the 1991 Stock Option
Plan.
2 The record does not show any special verdict forms, so it is unclear how
the jury arrived at that figure. The jury was permitted to award damages
for "{t}he reasonable value of lost past earnings and benefits," as well as
"{t}he reasonable value of lost future earnings and benefits" caused by
wrongful termination. CP 1095.
3 But it appears that the jury was permitted to award damages for any future
stock options that were lost as a result of the termination. See CP 1060,
1095; see also Appellant's Opening Br. at 14 n.6, 15.
4 Microsoft urges this court to dismiss the appeal on the basis that the
Judgment on Verdict and the April 29, 1996 Order were not properly
appealed. As discussed below, we decline to do so.
5 In fact, as noted above, it appears that Knox was permitted to seek
damages for any future (not yet granted) stock options he lost as a result
of the wrongful termination. Furthermore, Microsoft does not contend that
an award of money damages for Knox's "lost" stock options would be too
speculative for calculation.
6 In two of the later stock option agreements made under the 1981 Stock
Option Plan, this clause further provided: "In consideration of the grant
made hereunder, the optionee agrees that upon and following termination of
employment for any reason, any unvested options shall be deemed to have a
value of zero dollars ($0.00)." CP 745, 749.
7 The amended 1991 Stock Option Plan defines "continuous status as an
employee" to mean "the absence of any interruption or termination of
service as an Employee. Continuous Status as an Employee shall not be
considered interrupted in the case of sick leave, maternity leave, infant
care leave, medical emergency leave, military leave, or any other leave of
absence authorized in writing by a Vice President of the Company prior to
its commencement." CP 325.
8 It appears that Microsoft is, in effect, asking this court to construe or
interpret the terms of the stock option agreements as a "limitation on
damages" or "limitation on remedies" provision for Microsoft's breach of
Knox's employment contract. But Microsoft has not actually attempted to
show, or even assert, that the terms of the option agreements contain a
"limitation on damages" clause for breach of Knox's employment contract.
Thus, if Microsoft indeed maintains this position, we decline to consider
the issue, as Microsoft has not briefed it. See Bohn v. Cody, 119 Wn.2d
357, 368, 832 P.2d 71 (1992) (an argument will not be considered if
inadequately briefed). At most, Microsoft vaguely states that the terms of
the option agreements demonstrate that the parties "contemplat{ed}
employment termination." Resp't Br. at 23. However, as discussed in the
text, it is undisputed that Knox's stock options were cancelled and
exercised early upon his termination, as required under the option
agreements.