Qualcomm-Ericsson Accord Sets Off Dispute Over Options

Wireless phone rivals Qualcomm Inc. of San Diego and Sweden’s Ericsson have touched off a rancorous dispute involving Qualcomm’s employee stock option plan as a result of the truce they reached a month ago in their lengthy patent dispute.

The options involved are potentially worth millions of dollars--a fact that has elevated employee discontent and brought several workers to the brink of suing their employer.

The feud unfolding in San Diego could have broad implications throughout the high-tech industry, where stock options are common currency among firms hoping to lure and retain workers without dishing out huge salaries.

The Qualcomm employees involved--about 1,700 people--work at the company’s wireless infrastructure equipment business, which is being sold to Ericsson as part of the wide-ranging settlement.

Within hours of the deal’s announcement, Qualcomm and Ericsson faced a sticky question: What happens to unvested Qualcomm stock options held by the affected employees? The immediate answer from the companies--that the options would be forfeited--sparked an employee outcry that grew louder as Qualcomm’s stock began to soar.

Qualcomm’s share price, which ended last year at $51.81, has more than tripled since, skyrocketing to a recent record high of $218.50. On Friday, the stock closed up $1.75 at $200 on Nasdaq.

Facing mutiny, the two companies later offered an option-replacement package to offset a portion of the losses. But employees say discontent is still coursing through the division.

“A lot of employees feel that they’ve essentially been betrayed by the company,” said a manager at the Qualcomm unit, who asked not to be identified. “We were given something of value, and now they’re taking it away.”

At the affected unit, up to 70% of the employees hold options, Qualcomm said. The prices at which the options can be exercised vary, but many are between $30 and $60 per share--representing a potential gain of $140 to $170 per share based on Friday’s close. Most employees hold options for at least 1,000 shares, sources say.

“Qualcomm has been very generous in awarding options, so a good percentage of the infrastructure group has them, and it’s the No. 1 topic in the halls,” said an employee who stands to lose about $300,000 in potential profit and who also asked not to be named. “It’s pretty volatile right now.”

Typically, stock options are awarded to employees in blocks, as bonuses or as supplemental compensation. The options allow employees to buy company shares at a preset price (in Qualcomm’s case, at the market price at the time of the award). The options to buy stock cannot be exercised before certain vesting dates, which are usually spread out over several years to encourage employees to stay with the firm.

Stock options that have not yet reached those preset dates are known as unvested options. Typically, such options are surrendered when an employee leaves the company before the vesting dates.

Often, however, company option plans include a “change of control” provision that allows employees to exercise unvested options early when the company is acquired or has an ownership change.

While employees at Qualcomm’s infrastructure group assumed the unit’s sale would trigger a change-of-control provision, the clause most often applies only when the entire company changes ownership.

Qualcomm’s option plan is silent on what to do when only part of the company is sold, one attorney noted. Experts believe any employee suit on the matter would be somewhat weak, but attorneys point out that Qualcomm’s omission nonetheless leaves room for a legal challenge.

“Traditionally, the sale of a division was not considered a change of control and people used to accept that,” said Robin Ferracone, president of SCA Consulting, a Los Angeles-based executive compensation firm. “But the rules are changing almost daily now . . . and this could be the first of many examples that we’re going to see.”

Some employees are indeed considering legal action. Many have consulted attorneys independently, and about 100 employees attended a legal briefing hosted on a recent Saturday by a local law firm and personal injury attorney.

Irwin Jacobs, Qualcomm chairman and a company founder, believes the company’s plan does not obligate Qualcomm to make good on the unvested options involved. However, he stressed that both companies have a strong interest in making sure the unit’s sale goes well and that employees who transfer to Ericsson are happy.

Faced with a tight talent market, Qualcomm wants to be viewed as a good employer, and Ericsson doesn’t want to inherit a business filled with unhappy employees, he said.

“The legal issue is not what’s important here; what is at issue is employee morale and a sense of fairness,” Jacobs said. “It’s an expensive proposition, but we are trying to find the right balance between fairness to employees as well as fairness to our shareholders.”

Without some sort of replacement plan, Ericsson’s new workers may be especially receptive to headhunters, said Steve Patchel of Watson Wyatt Worldwide, a consulting firm in Bethesda, Md. “This is indeed a major, major dilemma.”

Under a complex “retention bonus plan” jointly funded by Qualcomm and Ericsson, the affected employees will be offered a percentage of the value of their unvested options. The employees must stay at Ericsson for two years to get the entire payout.

The retention bonus plan is available only to employees hired by Ericsson and who sign a document by May 7 waiving their right to sue either company.

Even under the retention plan, employees will lose all options that vest after May 31, 2001.

Neither firm would quantify the cost of the bonus plan. But Jacobs said Qualcomm will report about $100 million in sale-related charges next quarter and that a “significant part” of the charge stems from the planned retention bonus.

“I don’t think people foresaw that this could happen,” said a Qualcomm manager. “And with mergers and acquisitions increasing in high tech, I bet you it’s going to be happening more and more.”

Times staff writer Elizabeth Douglass can be reached at elizabeth.douglass@latimes.com.