Newberger v. Rifkind
57 A.L.R. 3d 1232, 104 Cal. Rptr. 663, 28 Cal. App. 3d 1070 (1972)
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Rule of Law:
An employee's act of continuing employment after being granted stock options constitutes sufficient consideration to form a binding unilateral contract, even without an express request from the offeror to do so.
Facts:
- In 1962, five key employees of Avnet, Inc. (plaintiffs) were each granted written stock option agreements from the personal holdings of the company's principal shareholders, including Robert Avnet.
- The agreements allowed the employees to exercise the options in 20% increments each year, with the entire option becoming exercisable after five years.
- The employees remained in the employ of Avnet, Inc. for the full five-year period and beyond, relying on the option agreements.
- During the five-year period, the value of the corporation's stock increased greatly.
- In 1964, two years after granting the options, Robert Avnet died.
- In 1967, after the five-year period concluded, the employees attempted to exercise their options.
Procedural Posture:
- The five plaintiffs brought three actions for declaratory relief and damages against the executors of Robert Avnet's estate in a California trial court.
- The decedent's widow, Clare Avnet, filed complaints in intervention.
- A nonjury trial was held, and the court entered a consolidated judgment in favor of the defendant executors and the intervener.
- The trial court found that the stock options were not supported by consideration and were therefore revoked by the death of the grantor.
- The plaintiffs (appellants) appealed the trial court's judgment.
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Issue:
Does an employee's continued employment, without an express bargain or request, constitute sufficient consideration to make a stock option grant an enforceable unilateral contract that is not revoked by the offeror's death?
Opinions:
Majority - Kingsley, J.
Yes. An employee's act of continued employment provides sufficient consideration to make a stock option grant an enforceable unilateral contract. The court held that the stock options were offers for a unilateral contract, which became binding when the employees accepted the offer by performing the act of continuing their employment. The court reasoned that consideration is inherent when stock options are granted to employees who then continue their employment, as these options are not gifts but are inducements to retain valuable employees. It is not necessary for the offeror to make a formal or express request for the employee to remain; the bargain can be implied from the circumstances. The court, quoting Justice Cardozo, noted that the law has moved beyond 'primitive stage of formalism' and looks to the realities of the business context, where stock options are understood to be a form of incentive compensation. Therefore, the options were supported by consideration and were not revoked by Robert Avnet's death.
Analysis:
This case solidifies the principle that employee benefit plans, such as stock options, are generally construed as offers for a unilateral contract rather than gratuitous promises. The decision's significance lies in its holding that a bargain for consideration can be implied from the context of the employment relationship, removing the need for an express request by the employer. This lowers the burden for employees seeking to enforce such promises and reflects a modern, less formalistic approach to contract formation. The ruling makes it more difficult for employers or their estates to rescind benefit promises after an employee has rendered the expected performance of continued service.
