Skillz Inc., is a mobile gaming company founded in 2012 by Andrew Paradise and Casey Chafkin. The company provides an online platform where users can play video games and compete with others on their mobile devices. Paradise is Skillz’s Chief Executive Officer and Chafkin is its Chief Revenue Officer. The company is headquartered in Las Vegas and has offices in San Mateo, Seattle, Vancouver and Los Angeles.

Gautam Shah joined Skillz as an employee in 2015 as Director of Skillz Live, a new program Skillz was launching at the time. Shah’s title later changed to Director of Finance and Strategy in mid-2017. Like many people in Silicon Valley who join startups, Shah accepted less cash compensation in exchange for options to buy Skillz stock at a predetermined exercise price.

For startup employees like Shah, the hope is that the company will undergo an initial public offering (IPO) – which would allow those employees to sell their stock on the open market at a significant profit. Indeed, the primary value of stock options like the ones granted to Shah lies with the ability to cash out those options if the company is successful and goes public.

On January 18, 2018 Shah met with Chafkin and told him he wanted a promotion and more compensation. Chafkin responded that a promotion was not appropriate given Shah’s current performance. Shah commented that it did not make sense for him to remain at the company if Skillz did not plan to promote him or increase his compensation.

On January 22, 2018, Shah forwarded an email from his work account to his personal email account. That email contained a confidential business report prepared by Mike Termezy. Termezy was a consultant hired by Skillz to analyze its “most confidential business data to determine where [it] had opportunities to grow [its] business in . . . a very competitive market space.” After a forensic investigation confirmed that he had taken a personal copy of this report he was terminated for cause.

Skillz had an IPO in December 2020. But Shah was not able to realize the Silicon Valley dream because he lost all of his stock options when Skillz terminated him for cause in 2018. As a result, Shah could not exercise his options and sell the Skillz stock he would have acquired upon doing so at a huge profit after the IPO like other former and current Skillz employees.

Shah sued Skillz for breach of contract, alleging that Skillz did not have cause to terminate him and wrongfully prevented him from exercising the stock options he had earned as a Skillz employee. A jury found that Skillz breached its contracts with Shah and awarded Shah over $11.5 million in damages for the lost options. The trial court, however, conditioned the denial of Skillz’s new trial motion on Shah’s acceptance of a remittitur in the amount of $4,358,358. After Shah accepted the remittitur, the court entered judgment for Shah in that amount.

Both parties appealed. Skillz contends that the judgment must be reversed due to defects in the jury instructions and special verdict forms. Skillz further contends that the damages awarded to Shah are “contrary to law” because they were not measured as of the date of breach, requiring either a far lower award or a new trial on damages. Meanwhile, Shah contends that the jury verdict in excess of $11.5 million should be reinstated because of errors in the trial court’s new trial orders and remittitur. Shah also contends that the court erred in dismissing his tort claims before trial because his stock options are “wages” under the Labor Code.

The Court of Appeal affirmed in part, and reversed in part in the partially published case of Sah v Skillz Inc., -A165372 (April 2024). In the published component of the decision, it was concluded that “stock options are not wages under the Labor Code.” The reasoning of this conclusion is very relevant to the employment law community.

“In the last argument of his cross-appeal, Shah contends we should reverse the trial court’s directed verdict dismissing his tort claims for retaliation and wrongful termination. According to Shah, the court erred when it concluded that stock options are not “wages” under the Labor Code. Shah therefore requests that we remand these claims for a new trial so he may pursue “tort damages, including punitive damages and attorneys’ fees.’ We review de novo a directed verdict and find no error here.”

The Court of Appeal agreed with Skillz that stock options are not wages because they “are not ‘amounts.’ They are not money at all. They are contractual rights to buy shares of stock.” (International Business Machines Corp. v. Bajorek (9th Cir. 1999) 191 F.3d 1033, 1039 (IBM); see Falkowki v. Imation Corp. (9th Cir. 2002) 309 F.3d 1123 [stock ” ‘options are not “wages” ‘under [the Labor Code’s] definition of the term ‘wages’ “].) This conclusion comports with the purpose behind Labor Code section 221. As the Ninth Circuit explained in IBM, “[t]he amount of money for which the shares can be sold on the market varies unpredictably from time to time, so it is not ‘fixed or ascertainable’ by any method of calculation when the agreements are made or exercised.” (Ibid.) Thus, the purposes behind Labor Code section 221 of “avoiding secret kickbacks enabling an employer to avoid minimum wage laws” and “protecting employees’ reliance interests in their expected wages, do not apply to stock options.” (IBM, at p. 1039.)”

Employee Stock Options are Not Wages Under the Labor Code