Edenholm v. Flytrap Network Security, Inc., No. 59053-7-I (Wash. App. 10/22/2007)
| Decision Date | 22 October 2007 |
| Docket Number | No. 59251-3-I (Consolidated Cases).,No. 59053-7-I.,59053-7-I.,59251-3-I (Consolidated Cases). |
| Court | Washington Court of Appeals |
| Parties | ULF PATRIK EDENHOLM, Appellant/Cross-Respondent, v. FLYTRAP NETWORK SECURITY, INC., a Washington corporation, Respondent/Cross-Appellant, VAUGHAN EMERY and JANE DOE EMERY, husband and wife, Defendants. |
Appeal from King County Superior Court. Docket No: 04-2-38250-5. Judgment or order under review. Date filed: 10/31/2006. Judge signing: Honorable Palmer Robinson.
Counsel for Appellant(s), Michael Charles Bolasina, Stafford Frey Cooper, 601 Union St Ste 3100, Seattle, WA 98101-1374.
Counsel for Respondent(s), Miles Aaron Yanick, Savitt & Bruce LLP, 1325 4th Ave Ste 1410, Seattle, WA 98101-2505.
Start-up business Flytrap Network Security hired Ulf Patrik Edenholm as a vice president under an employment contract stating that Edenholm would not receive or accrue salary until the company secured financing, but would be paid at least $100,000 a year thereafter. Edenholm was fired after working nine months, at which point Flytrap had not secured financing. Edenholm sued Flytrap for, inter alia, back wages based on the contract salary, double damages for the willful withholding of wages, and attorney fees. On cross-motions for summary judgment, the trial court found that Edenholm was not entitled to be paid under the contract, but that he earned minimum wage for the hours he worked for Flytrap. We agree with the trial court that the contract is enforceable and that Edenholm is not entitled to double damages because Flytrap's failure to pay minimum wage was not willful. Accordingly, we affirm the trial court's judgment. We do, however, remand the attorney fee award for recalculation and entry of findings of fact and conclusions of law.
Flytrap is a start-up company that develops technology to protect mobile wireless devices from viruses and other security breaches. Vaughan Emery is Flytrap's founder, president, and chief executive officer. One of Flytrap's board members introduced Emery to Edenholm, who has a law degree, a master's degree in public administration, and had 10 years of experience working with start-up companies. In November 2003, Emery verbally offered Edenholm a job with Flytrap, and they negotiated the terms of employment in the subsequent weeks.
Emery first quoted Edenholm an annual salary of $150,000, then reduced the offer to $140,000. In December 2003, Emery sent Edenholm a written offer. Emery offered Edenholm the vice president position, and the salary was linked to Flytrap obtaining financing.
Annual Salary. The Company will offer you an annual base salary of $140,000 which will be paid semi-monthly in accordance with the Company's normal payroll procedures. It is agreed that no salary will be paid, nor accrued, until the company closes an initial equity financing round. It is further understood that until a financing round (or series of rounds or partial rounds) totaling $2,500,000 is secured, the parties will agree to a lower interim salary. (It is the parties' expectation that such a salary will be $100,000 but this is subject to review as a function of the amount of the funds raised.) Clerk's Papers (CP) at 54 (emphasis added). Once Flytrap obtained $2.5 million in financing, Edenholm's salary would be $140,000; if Flytrap obtained some financing but less than $2.5 million, Edenholm's salary was expected to be $ 100,000. But during the period before Flytrap obtained any financing, Edenholm would not earn or accrue any salary. The contract also expressly characterized Edenholm as an employee at will, stating that "[Flytrap] is free to conclude its employment relationship with [Edenholm] at any time, with or without cause, and with or without notice." CP at 50. At the time this compensation arrangement was negotiated, Emery and the other Flytrap shareholder, Dave Rich, were not being paid a salary, but also expected to begin receiving $100,000 a year after Flytrap obtained financing.
Edenholm negotiated for options for 750,000 shares of Flytrap's common stock (7.5 percent of the company), with 250,000 shares vesting after 12 months and the remaining 500,000 vesting over the following 36 months.1 Edenholm also received 200,000 shares of stock as a signing bonus. An additional 200,000 shares of stock would vest upon Flytrap obtaining more than $400,000 in funding. Flytrap retained the right to buy back Edenholm's shares, and its right to do so decreased in increments over time. Flytrap lost the right to repurchase 250,000 shares after one year and lost the right to repurchase one third of the remaining shares over the following three years. Edenholm was automatically entitled to 125,000 shares if terminated in less than six months, or 250,000 shares if terminated between six months and one year, unless termination was for cause. Disputes as to the stock options were subject to arbitration under the stock purchase agreement.
Edenholm's employment was terminated in August 2004, approximately nine months after he was hired, due to disputes between Edenholm and other Flytrap officers over business decisions. Flytrap had not obtained any financing at the time Edenholm was terminated and has still not obtained financing to date.
After Edenholm was terminated, he demanded stock certificates for all the stock shares that he purchased. In response, Flytrap sent Edenholm a $75 check for the repurchase of the 750,000 shares it believed Edenholm had purchased. It asserted that Edenholm was not entitled to the 200,000 signing-bonus shares because he was terminated and stated that any disputes about amount of stock owned must be resolved by arbitration.2
Edenholm sued Flytrap for salary owed (based on the $100,000 per year rate),3 double damages for the willful withholding of wages, reimbursement for business expenses, prejudgment interest, and attorney fees. Edenholm also requested that Emery be held personally liable for the amount owed. Flytrap contended that Edenholm was not entitled to any compensation under the contract, but offered to settle the case by paying Edenholm minimum wage for the hours he worked and reimbursing certain out-of-pocket expenses. Edenholm rejected this offer. After a mediation attempt failed, Flytrap sent a letter to Edenholm offering to settle the dispute for minimum wage compensation as well as attorney fees. Edenholm rejected this offer.
The parties filed cross motions for summary judgment. Edenholm argued that the "no salary will be paid or accrued" clause of the contract was unenforceable, but that he should be paid his contract rate and not minimum wage because he was exempt from the Minimum Wage Act (MWA). Flytrap argued that the only source of an obligation to pay Edenholm wages could be the MWA, because the contract (which it contended was enforceable) did not provide for salary before financing was obtained. But Flytrap also stipulated that Edenholm was exempt from the MWA and therefore not entitled to any wages. Flytrap's motion explained that it would reimburse Edenholm for the business expenses with interest once it obtained financing.
The trial court found the contract to be enforceable and rejected the parties' agreement that Edenholm was exempt from the MWA. The court ruled that Edenholm was not exempt because he could not meet the "salary or fee test" for exemption and was therefore entitled to minimum wage for work performed. The court also rejected Edenholm's claims for double damages because there was a bona fide dispute as to whether wages were owed and did not find Emery personally responsible for wages owed. The trial court entered judgment against Flytrap for Edenholm's back wages and unreimbursed business expenses ($11,429.95), prejudgment interest on the business expenses ($2,138.91), and attorney fees and costs ($40,169.02).4 The trial court did not enter findings of fact or conclusions of law as to the attorney fee award. Edenholm appealed the judgment for various reasons discussed below, and Flytrap cross-appealed only the award of attorney fees.
Edenholm contends that the trial court erred in finding the employment contract enforceable because its clause providing that "[i]t is agreed that no salary will be paid, nor accrued, until the company closes an initial equity financing round" is substantively unconscionable and contravenes public policy.
Whether a bargain is unconscionable is a question of law. Nelson v. McGoldrick, 127 Wn.2d 124, 131, 896 P.2d 1258 (1995). A substantively unconscionable contract provision is one sided, "`monstrously harsh,'" or "`[s]hocking to the conscience.'" Nelson, 127 Wn.2d at 131 (quoting Montgomery Ward & Co. v. Annuity Bd. of S. Baptist Convention, 16 Wn. App. 439, 444, 556 P.2d 552 (1976). The two Washington cases where a court found an employment contract clause to be substantively unconscionable both involved standardized arbitration agreements that employees were required to sign as a condition of employment. Adler v. Fred Lind Manor, 153 Wn.2d 331, 103 P.3d 773 (2004); Zuver v. Airtouch Communications, 153 Wn.2d 293, 103 P.3d 753 (2004). Edenholm has not cited a case in which a court found a contract clause to be unconscionable where sophisticated parties negotiated and bargained for that term. In fact, one case Edenholm cites is particularly instructive here, although it does not support his position.
In American Nursery Products, Inc. v. Indian Wells Orchards, 115 Wn.2d 217, 797 P.2d 477 (1990), Indian Wells negotiated with American Nursery for the growing of apple trees. The parties negotiated a contract under which Indian Wells would provide apple tree rootstocks to American Nursery, and American Nursery would grow grafted apple trees and budded apple trees for Indian Wells. The contract included a clause that "`in no event shall [American Nursery] be subject to or...
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