California Supreme Court Grants Review of Stock Forfeiture Case
The California Supreme Court has granted a petition for review in Schachter v. Citigroup, Inc. 159 Cal.App.4th 10 (2008), which held that Citigroup’s stock forfeiture provisions do not violate Labor Code sections 201 and 202 because employees who elect to participate in the plan’s stock-purchase program are paid all wages they designate to invest in company stock. Labor Code sections 201 and 202 require an employer to pay all earned, but unpaid compensation following the employee’s discharge or voluntary termination of employment.
On December 21, 1994, while employed as a securities salesperson for Salomon Smith Barney (Smith Barney), a subsidiary of Citigroup, Inc., David B. Schachter elected to participate in Smith Barney’s voluntary Capital Accumulation Plan (the Plan). Under the terms of the Plan, Schachter directed Smith Barney to pay him 5 percent of his total compensation "in the form of restricted stock out of all cash compensation paid to me" during the specified periods. An employee’s restricted Citigroup shares acquired under the Plan were purchased at a 25 percent discount below the stock’s then-current market price.
The Plan’s restrictions summarized in pertinent part: If the employee voluntarily terminates his or her employment or is terminated for cause during the two-year vesting period, which commences on the date of stock acquisition, he or she forfeits the shares, as well as the money used to purchase them.
Employees who were involuntarily terminated without cause or who retired from employment were not subject to the same forfeiture provisions.
On July 1, 1995, Schachter received 44 shares of restricted stock, and on January 2, 1996, he received 38 additional shares in accordance with the Plan’s terms. On March 31, 1996, Schachter voluntarily terminated his employment, forfeiting the 82 shares of restricted stock and the money used to purchase those shares.
The trial court denied the defendants’ motion for summary judgment and ruled that Schachter’s forfeiture of the restricted stock as well as the funds used to purchase it when he left Smith Barney within the two-year period, constituted a forced employee rebate in violation of the Labor Code. On August 21, 2001, the trial court certified a class of similarly situated former employees. On February 27, 2002, Schachter filed a third amended complaint. On November 8, 2002, Citigroup filed a second motion for summary judgment. The court granted the motion and entered judgment in favor of Citigroup.
Schachter appealed from the judgment, arguing that the court had erred both procedurally in considering the second summary judgment motion and substantively in granting the motion on its merits. On February 8, 2005, the appellate court reversed the judgment, concluding the Citigroup defendants’ filing of the second summary judgment motion violated Code of Civil Procedure section 437c, subdivision (f)(2), which prohibits a party from filing a summary judgment motion based on issues asserted in a prior summary judgment motion absent a showing of newly discovered facts or circumstances or a pertinent change of law. In reversing the trial court’s order and judgment, however, the court noted that Code of Civil Procedure section 437c, subdivision (f)(2), did not, and could not, vitiate the court’s inherent power under the California Constitution to reconsider its own rulings sua sponte. Upon the appellate court’s reversal and remand, the trial court granted summary judgment in favor of the Citigroup defendants, concluding the Plan did not authorize an unlawful forfeiture of earned wages in violation of the Labor Code. The appellate court affirmed.