Multinational company gets stinging message

Ontario courts will protect Ontario workers — a cautionary tale for multinational corporations

Geotel Communications (now Cisco Systems Inc.) defended a wrongful dismissal suit brought by Carlyle Buchanan, a former district sales manager. The decision of Justice Ferguson reviewed a number of issues, including the assessment of damages.

In part one of this article (published on page 3013 of issue #386), CELT reviewed the court’s award of compensation in lieu of notice and additional notice awarded because of misconduct during the hiring and firing process. The case is also important because it reviews the legal implications of employment-related documents that refer to the laws of a different country.

As a senior employee of Geotel, Buchanan participated in the company’s employee stock option plan. The plan was governed by the laws of the U.S. state of Delaware. The plan stipulated, upon termination, the employee could only exercise stock options which had accrued as of the date the employee ceased to be an employee of the company.

Delaware is an employment “at will” jurisdiction. This means an employee can be terminated in Delaware without reasonable notice or compensation in lieu of, even if there was no just cause. The court accepted that Buchanan’s “rights to the vesting of shares and to purchase vested shares” ended April 12, 1999 — the date of termination.

But Buchanan claimed he had a right to damages for the loss of the value of his stock option rights during the notice period. Geotel took the position that under Delaware law, he could neither enforce his rights under the stock option plan nor seek damages. Geotel sought to invoke the Delaware employment “at will” doctrine in its interpretation of the stock option agreement.

The court disagreed. It emphasized there were at least three written documents governing Buchanan’s rights and obligations. There was a letter of hire which was subject to Ontario law. There was a non-competition, non-disclosure and developments agreement expressly subject to Massachusetts law.

And there was the disputed stock option plan expressly subject to Delaware law. Despite the existence of three separate documents, the court found they all dealt with one matter – Buchanan’s employment with Geotel. The entire employment relationship was subject to Ontario’s common law which required the employer to provide reasonable notice of termination in the absence of just cause.

Justice Ferguson reviewed the leading Ontario cases on post-termination stock option rights and concluded:

•In general, the rights and obligations under a stock-option agreement should be interpreted by the agreement itself and “not by importing the broader principles of Ontario’s common law relating to employment, such as reasonable notice.”

•Where rights are dependant on when the employee ceases to be an employee and the wording of the stock option plan is ambiguous as to whether the parties meant the options to expire or cease to vest on the actual date of termination or at the end of the notice period, then the court will construe the ambiguity as extending the stock option rights to the end of the common law notice period.

Geotel relied on a 1991 decision of the Ontario Court of Appeal, Brock v. Matthews Group Ltd., to support its contention that no damages should be awarded under Ontario law for loss of stock option benefits as such rights ceased as of the date of termination.

Justice Ferguson relied on two subsequent Ontario Court of Appeal decisions, Veer v. Dover Corp. (Canada) and Gryba v. Moneta Porcupine Mines Ltd., in finding for Buchanan. The court observed any ambiguity should be construed in favour of the employee. An employer should not be permitted to take advantage of its own wrongful conduct, such as dismissal without providing adequate notice.

The decision in Geotel is consistent with the underlying policy of compensation in lieu of notice in Ontario. An employee should be given a damage award which provides him the economic equivalent of proper working notice. Nonetheless, multinational corporations like Geotel will be surprised at the extent of their exposure due to the existence of stock option plans.

During the eight-month notice period, the court found Buchanan would have had a further 13,701.28 Geotel/Cisco options vest and he would have exercised these stock options in the same manner and on the same dates as his vested options. The court found he was entitled to a lump sum of more than $352,000 US for loss of these stock option benefits. The court further ruled the lump sum was not subject to income tax withholding.

Multinational corporations should read Justice Ferguson’s decision as a cautionary tale. The Ontario court will strive to protect an Ontario employee from the full impact of the employment “at will” doctrine, even in the presence of specific stipulations that state that foreign law, and not Ontario law, will apply.

For more information see:

•Buchanan v. Geotel Communications Corporation [2002], 18 C.C.E.L. (3d) 17, additional reasons, [2002] 26 C.P.C. (5th) 87 (Ont. S.C.J.)

Brock v. Matthews Group Ltd. (1991), 34 C.C.E.L. 50

Veer v. Dover Corp. (Canada) (1999), 45 C.C.E.L. (2d) 183

Gryba v. Moneta Porcupine Mines Ltd. (2000), 6 C.C.E.L. (3d) 43

Neena Gupta is a partner with Goodman and Carr LLP in Toronto. She is a member of the firm’s Human Resource Management Group and can be reached at 416.595.2480 or [email protected].

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