Zilincik v. Tesla, Inc.
| Decision Date | 29 March 2022 |
| Docket Number | A155840,A155819,A154464,A154463 |
| Parties | SCOTT ZILINCIK, et al., Plaintiffs and Appellants, v. TESLA, INC., Defendant and Appellant. GENE GLAUDELL, Plaintiff and Appellant, v. TESLA, INC., Defendant and Appellant. |
| Court | California Court of Appeals |
NOT TO BE PUBLISHED
(San Mateo County Super. Ct. No. CIV 511676, CIV 474656)
These appeals require us to decide a single question: when, several years after its founding but before it became practically the household name that it enjoys today, a pioneering automotive startup company called Tesla, Inc. offered stock options to its employees in its standard offer letter of employment what was the vesting schedule of the stock options? Specifically, could newly hired Tesla employees exercise a portion of their stock options immediately, beginning on the very first day they started working at Tesla, or was there a "cliff" that required them to work for one year before they could start to do so?
These two consolidated cases involved 47 former Tesla employees who sought redress for Tesla's allegedly wrongful refusal to allow them to exercise their stock options when their employment ended after less than one year. Following a two-month bench trial in the consolidated cases, the trial court concluded that Tesla employees could immediately exercise 25 percent of their stock options their first day on the job, and it awarded damages accordingly.
Applying ordinary rules of contract interpretation, we conclude the trial court erred in its construction of Tesla's standard offer letter. On de novo review of the undisputed extrinsic evidence, we hold the stock options were subject to a one-year vesting "cliff" that required one year of continued employment before employees could start exercising their stock options. For this reason, we reverse the judgments entered in favor of 18 former Tesla employees who prevailed against Tesla for breach of contract, and we affirm the judgments entered against (or, in some cases, dismiss the appeals by) the 29 other former employees whose same claims were rejected by the trial court on other, unrelated grounds.
Tesla was founded in 2003, by Martin Eberhard and Marc Tarpenning with the idea of "changing the world" by creating a classy and desirable all-electric car, and the following year, in April 2004, Elon Musk joined the company as the chairman of the company's board of directors (and later became its CEO). The former employees who brought this litigation worked there several years later, during the roughly four-year period from April 2007 to March 2011. During this period, Tesla's workforce grew from hundreds to literally thousands of employees.[1]
All 47 plaintiffs received Tesla's standard offer letter identical in material respects. In relevant part, it stated:
(Italics added.)
The italicized language, at issue here, was added by Tesla's then head of human resources (Craig Harding) around February 2007, who added the language (without consulting either his superiors or the company's board of directors), because he thought the prior version was not sufficiently clear as to when employee stock options would vest.[3] Harding testified he had been informed by someone "in company management" that Tesla's practice was to vest 25 percent of someone's stock options after one year and the remaining portion monthly over three years. Tesla used the revised version of the offer letter for about five years, until sometime in 2012.
None of the plaintiffs received any attachments or any of the documents referenced in their offer letter when they signed it (i.e., the Stock Option Agreement and Equity Incentive Plan); Tesla's standard practice was to provide such documents only after an employee started work.
After they started work, most of the plaintiffs received a standardized grant notice advising them that the board of directors had approved their award of stock options, and all parties agree the grant notice stated that the options were subject to a one-year vesting cliff.[4] It is not entirely clear how many plaintiffs received that document, but the parties agree in their briefing that at least 30 of them not only received that document but also signed it (plaintiffs say 30 did so and Tesla says 32, but the precise figure is immaterial).[5] The record shows that others also received it.[6]
Some plaintiffs also received a Stock Option Agreement, which was often included as separate document with the grant notice, and plaintiffs concede in their briefing that at least 18 of them signed that document. The Stock Option Agreement incorporated the terms of the grant notice, stating that "[s]ubject to the limitations contained herein, your option will vest as provided in your Grant Notice, provided that vesting will cease upon the termination of your Continuous Service."
The trial court found that some plaintiffs did not receive either a grant notice or a stock option agreement while employed at Tesla, but the court did not specify how many plaintiffs fell into this category, nor have the parties in their briefing. But it appears that, at most, 11 plaintiffs received neither document, although again the precise number is immaterial.[7] In 2010, following its initial public offering on June 29, 2010, Tesla combined the Stock Option Agreement and Grant Notice into a revised, consolidated agreement called the 2010 Stock Option Award Agreement, which applied to three plaintiffs who were hired in that period and signed the revised document. Like the earlier documents it replaced, the Stock Option Award Agreement also described a vesting schedule that included a one-year vesting cliff.
In July 2008, David Vespremi, a former employee who had been terminated shortly before his 12-month anniversary, brought suit against Tesla, seeking damages and other relief based upon the stock option provision of his offer letter (Vespremi v. Tesla Motors, Inc. (Super. Ct. San Mateo County, No. 474656). Another former employee, Gene Glaudell, joined the litigation, and their complaint was eventually narrowed to allege a single cause of action for breach of contract, based upon the vesting language of the offer letter.
The Vespremi pleadings were settled after an appeal to this court. Reversing an order sustaining a demurrer without leave to amend to the breach of contract cause of action, we held the vesting language of the offer letter was ambiguous and thus its meaning could not be resolved at the demurrer stage (Vespremi v. Tesla Motors, Inc. (May 5, 2011, A127008) [nonpub. opn.] (Vespremi I)). We discuss that opinion in greater detail below.
In 2013, the claims by the lead plaintiff, David Vespremi, proceeded to a bench trial ahead of Glaudell's claims. Vespremi prevailed, but on appeal we reversed the judgment entered against Tesla, and Vespremi's claims are not at issue here. (See Vespremi v. Tesla Motors, Inc. (Oct. 30, 2017, A142391, A143550) [nonpub. opn.].)
Meanwhile, on February 7, 2012, another former Tesla employee, Scott Zilincik, commenced a separate lawsuit against Tesla while the Vespremi case was underway (Zilincik v. Tesla Motors, Inc. (Super. Ct. San Mateo County, No. 511676). Zilincik was brought on behalf of all similarly situated former Tesla employees whose employment had ended before one year, alleging Tesla had breached the stock option provision in its standard offer letter by denying those employees "the option to vest stocks of Tesla Motors they were granted during their employment with the company." Class certification was denied, and the complaint eventually was brought on behalf of 47 individual plaintiffs.[8] The breach of contract cause of action in their operative pleading (the sixth amended complaint) alleged Tesla breached "an express written employment agreement" by denying plaintiffs the "option to vest on Tesla Motors' stock options they were granted during their employment" with Tesla.[9] The Zilincik case proceeded to a two-month, consolidated bench trial together with Glaudell's claims in Vespremi, at the conclusion of which the trial court rendered lengthy statements of decision in each case encompassing more than 200 pages combined. In all, 18 plaintiffs prevailed (17 in Zilincik plus Glaudell in Vespremi); 29 did not.
On the central issue as to the meaning of the ambiguous offer letter, the trial court sided with the plaintiffs. It interpreted the letter to mean that each plaintiff's "right to purchase Tesla common stock at a set price[] vested immediately upon the date that each started working for Tesla." It ruled that "[t]he stock options 'vested' immediately upon employment as stated in the Offer Letter; and 25% of the stock could be purchased through exercise of the options during the first year of employment."
Nonetheless Tesla prevailed on other grounds against 17 plaintiffs in Zilincik. Fourteen plaintiffs lost on the ground they never made any effort to exercise their stock options, 14 others were held to be bound by a broad...
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