Scully v. US Wats, Inc.

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Precedential or Non-Precedential: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

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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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