Executive Who Says She Was Falsely Promised Equity in Company Cannot Proceed with Lawsuit

Allegations of fraud, breach of contract and wrongful termination were properly dismissed, Calif. court rules

By Joanne Deschenaux, J.D. September 29, 2017
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Executive Who Says She Was Falsely Promised Equity in Company Cannot Proceed with Lawsuit

​A former distillery president who claimed that she was induced to leave a higher paying job with false promises of equity in the business and later was terminated after she objected to the company's failure to grant her an ownership share could not pursue claims of fraud, breach of contract or wrongful termination in violation of public policy, the California Court of Appeal ruled.

The court concluded that any discussions about the former president's equity were too vague to constitute a misrepresentation in support of the fraud claim or to create an enforceable contract. The court rejected the wrongful termination claim because company owners provided a legitimate business reason for the discharge—poor job performance.

The plaintiff spoke to the chief financial officer (CFO) of a beverage distribution company and the company's founder about the prospect of her becoming president of a subsidiary of the company in Napa, Calif.

The plaintiff claimed that, during these recruitment discussions, the CFO and founder agreed to make her a 5 percent equity owner of the subsidiary. The CFO sent the plaintiff an offer letter that contained the following language: "It is anticipated that you will share in a meaningful manner in a liquidity event incentive program that will align you with the owner in building and capturing equity value."

[SHRM members-only toolkit: Designing Executive Compensation Plans]

After the plaintiff started her new position, she received a letter from the founder that described the liquidity event incentive program, which stated that any reward of equity in the company "will most likely occur many years down the road once we have further grown the business and its profitability." The plaintiff subsequently saw a stock certificate stating that the founder's daughter owned all of the subsidiary. The plaintiff contacted company officials in one e-mail and one phone call over the next few months to question why the stock certificate did not reflect her 5 percent equity stake, but she did not receive an answer.

The plaintiff raised the issue again by contacting company lawyers, who told her she did not have any equity. The plaintiff raised the issue of her ownership interest with the CFO, who told her that she had no equity. The CFO also expressed criticisms about the subsidiary's financial state.

The CFO then terminated the plaintiff, providing financial statements in support of his claim that she was being fired because she had failed to grow the company profitably. The statements show that earnings were in the negative and that profits were significantly behind what the plaintiff had predicted.

The plaintiff filed a complaint against the company and the subsidiary. The trial court granted summary judgment on all her claims, dismissing them before trial. She appealed, and the appellate court affirmed the dismissal of the lawsuit.

No Proof of Misrepresentation by Company or Evidence of Contract

In order to prove that the company fraudulently induced her to leave her prior employment by offering her an equity share in the business, the plaintiff must show that her employers misrepresented important facts. The fraud claim therefore fails, the court said, because she could not show that the pre-employment verbal discussions or the subsequent letters promised her an ownership interest in the subsidiary. Although the plaintiff argued that the CFO and the founder told her orally that she would have such an interest, she showed nothing in support of this claim, and the CFO and the founder denied that they had made any promises to her. The two letters also made no promises.

Similarly, the contract claim fails because neither the verbal discussions nor the subsequent letters were specific enough to form a contract to make the plaintiff an owner of the subsidiary, the court said.

No Connection Shown Between Termination and Protected Activity

To establish a claim of wrongful termination in violation of public policy, the appellate court noted that the plaintiff was required to show that 1) she engaged in activity protected by a public policy, 2) the subsidiary terminated her, and 3) there was a nexus between the termination and the public policy.

The court then concluded that the plaintiff failed to establish a connection between her termination and any alleged protected activity. Because the subsidiary's financial statements show negative earnings and sluggish sales during her employment, the company presented a legitimate business reason to fire her, and the plaintiff did not show that the proffered reason for discharging her was pretextual.

Although she was terminated one month after asking the CFO about equity, "a retaliatory termination claim supported by nothing more than temporal proximity alone fails as a matter of law," the court concluded.

Nollette v. LRICO Services LLC, Calif. Ct. App., No. A143223 (Sept. 14, 2017).  

Professional Pointer: Temporal proximity between an employee's protected conduct and his or her discharge may be evidence of retaliatory termination, but it will not be enough, by itself, to show that an employer's assertion of a legitimate business reason for the discharge should not be believed.

Joanne Deschenaux, J.D., is a freelance writer based in Annapolis, Md.

 

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