Baker's Choice: September 2006

The weather may be cooling down, but executive compensation and employment law issues are hotter than ever. As we celebrate Levine & Baker LLP’s first year anniversary, option “backdating” has taken center stage, and we link you to a selection of materials that may help you wade through this executive compensation morass. On the employment law side, we've seen a surprising number of important case law developments in a short time period, and Rick's written a brief overview to give you some guidance. Plus: SEC and IRS developments, California minimum wage increase and my new book on equity compensation litigation.

• Option backdating: the latest witch hunt? The option scandal du jour was kicked off by an academic paper that concluded, based purely on statistical analysis, that 18.9% of "unscheduled, at-the-money option grants to top executives [between 1996 and 2005] were backdated or otherwise manipulated." But it should be apparent that there’s a huge difference between companies that follow --and publicly disclose-- granting procedures that result in lower prices and those, like the ones uncovered at Mercury Interactive, Brocade and Comverse where execs allegedly altered grant dates intentionally to avoid otherwise high strike prices. For better or worse, the fallout now includes finger-pointing at both inside and outside counsel, along with industry-wide investigations by the SEC, the the IRS and the DOJ. Even Congress has gotten in the election year act, although Senate hearings largely resulted in recommendations that the legislature stay out of the fray. One thing’s for sure: issue spotting for executives has only just begun.


• Courts focus in on employment law issues: 2006 has been a big year for employment law cases. Just two weeks ago, the California Court of Appeal in Edwards v. Arthur Andersen LLP emphatically rejected the Ninth Circuit's "narrow restraint" exception to California's public (and statutory) policy against post-employment noncompete agreements. That judicially-created exception --which only seemed to exist in the federal courts-- has been a source of confusion for California lawyers (and their clients)for years. Assuming it doesn't get overruled or depublished, we're happy to see it go. In another important decision, Murphy v. United States, the U.S. Court of Appeals for the D. C. Circuit held unconstitutional the 1996 amendment to the Internal Revenue Code that resulted in taxation of all emotional distress damages arising from an employment law claim. If not overruled by the Supreme Court, this decision is a big win for both employees and employers. Finally, the U.S. Supreme Court in Burlington Northern Santa Fe Railway v. White held that actionable retaliation under Title VII need not be a measurable or "ultimate" job detriment. Each of these decisions are well worth noting; you can get more details from Rick's case law summary.


• Short Takes: SEC issues its final rules on executive compensation disclosure, amidst lots of discussion about whether such disclosure can be depended on to prevent option backdating in the future. . . the third set of IRS proposed regulations to Section 409A continue to be delayed, with Treasury officials suggesting (in discussions with practitioners) that compliance dates will ultimately be moved out another year. . . California minimum wage goes up to $7.50 in 2007 and $8.00 in 2008, the highest in the country.


• My newest book available now: The Law of Equity Compensation (co-authored with NCEO executive director Corey Rosen) surveys litigation on stock option and related equity issues over the past five years. In August we did a webcast on the key cases; if you want the quick overview you can download the presentation slides (NASPP members can also hear the audio archive online). Or, better yet, come hear me talk about the state of the law at the NASPP Annual Conference in Las Vegas this October. If you do, make sure to stop by and say hello!

And last but definitely not least: Rick and I want to thank all of you for helping to make our first year as Levine & Baker LLP such a good one. As always, we truly value our relationships with clients and friends, and look forward to continuing to work with you for many years to come. And we encourage you to call with feedback on this e-letter and the articles we are sending your way: Alisa is at (415) 391-3510, Rick at (415) 391-8177.