Baker's Choice: November 2007

We're not sure what happened to this year. . . but as Thanksgiving approaches we're linking you to a wide range of legislative, case law and regulatory changes: some good, some bad -- as always, its depends on where you sit! Plus, downloads of our annual review articles: Rick's update on key 2007 employment law cases (including the recent Google age discrimination case ) and my summary of last year's equity comp developments.

• Telling an employee he is "too old to matter" not a good idea, even in Silicon Valley. It's tough for a plaintiff to prevail in an age discrimination claim. Indeed, when Google fired a 54-year old Ph.D. Director of Engineering/former Stanford professor after telling him his opinions and ideas were “obsolete,” his knowledge was “ancient,” he was “too old to matter,” he “lacked energy,” he was “slow” and “sluggish,” an “old man,” and an “old fuddy-duddy” (among other insults), his case was initially thrown out on summary judgment! The California Court of Appeal, however, has now reversed the trial court's decision. The astounding thing about Reid v. Google, Inc. is not that Dr. Reid won on appeal, but that Google won summary judgment in the trial court. . . .In Gentry v. Superior Court, the California Supreme Court invalidated a clause prohibiting class action arbitrations that was included in Circuit City's boilerplate pre-dispute employee arbitration agreement. Perhaps more significantly, the Gentry court found that the agreement itself was "procedurally unconscionable." This interesting decision suggests that the justices are increasingly uncomfortable with pre-dispute arbitration agreements in the inherently unequal-bargaining-power context of the employment relationship. Rick's got opinions on both of these cases: for some more analysis, check out his 2007 Employment Law Update article.


• Good news for executives who hold restricted stock. . . . unless you're relying on a 10b5-1 trading plan. On the one hand, on July 5, 2007 the SEC proposed significant revisions to Rule 144 that would (among other things) shorten the current one-year minimum holding period for restricted securities to six months as part of its attempt to "modernize and improve capital raising and reporting requirements for smaller companies". On the other hand, SEC enforcement director Linda Chatman Thomson recently confirmed that the agency is continuing to look closely into whether 10b5-1 plans -- which were developed as a way to prevent insider trading abuses -- are actually providing cover for such abuses. Like the option backdating scandal, the 10b5-1 plan focus was triggered by an academic paper that found statistical evidence of price manipulation under the plans. While 10b5-1 plans certainly continue to be viable, any executive who wants to terminate or modify an existing plan should proceed with caution.


• If we keep complaining, maybe Section 409A will just go away completely. . . . In your dreams! However, at the end of October the IRS finally bowed to public pressure and extended transition relief for general compliance with the final Section 409A regulations through December 31, 2008. The IRS has been dribbling out extensions over the past year, but Notice 2007-86 looks like it will actually help individuals cope with the new rules. But don't get too confident: not everything is covered by the extension, and there's still an active IRS industry directive on option backdating that demonstrates the agency's continuing interest in enforcing Section 409A.


• And in passing: Effective as of July 9, 2007 new equity compensation plan rules went into effect for California private companies. Again, good news/bad news. From the company side, some changes loosen up restrictions that were widely viewed as archaic (e.g., on eligibility, percentage of shares allocable to the plan, exercise price discounts, transferability). However, from the employee side, other changes take away important protections that have been in place for decades (5 year maximum vesting schedule, repurchase restrictions, rights to financial statements). These rules, of course, affect California plans only. For an overview of other recent developments in equity compensation nationwide, we invite you to download a copy of my 2007 Equity Compensation Update article.

With the end of another year upon us, we'd like to take this opportunity to send our best wishes to our clients and friends for a joyous 2007 holiday season and a wonderful new year. Both Rick and I look forward to continuing to work with you in 2008.