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Arbitrator Partially Restores Composer O'Donnell's Bungie Shares

Award cites 'long-term, invaluable and unique contributions'

Over at VentureBeat, Dean Takahashi has written what is probably the best article to date on the resolution of the dispute between former Bungie composer and Audio Director Marty O'Donnell and the developer that fired him last year before the release of their latest game, Destiny. It goes into the background of how the dispute arose and resulted in O'Donnell being fired from his position as Audio Director, and how Bungie also took action to attempt to strip O'Donnell of his then-unvested shares in the developer, even going so far as to reissue shares at a secret board meeting.

What the article mostly leaves out, though, are the grounds on which the arbitrator made the award-- those details are available in the full award document, available at Scribd.

There is a tendency to view the result as a complete victory and vindication for O'Donnell, and there is no doubt that the sequence of events reflects poorly on Bungie management, especially studio president Harold Ryan. However, it is worth looking at the award itself to see what O'Donnell asked for, what he actually got, and why.

What has also gone largely uncommented-upon since O'Donnell's firing is that it presumably also means the end of the creative partnership between O'Donnell and Michael Salvatori, who remains at Bungie and is working on Destiny, while O'Donnell is moving on to found his own game company, Highwire Games, with other ex-Bungie employees. That partnership spanned multiple decades and predated both composers involvement with Bungie, with began with Myth in the mid-90s.

O'Donnell submitted several claims to arbitration, and Bungie submitted its own counter-claims. Most of these either failed, or succeeded without significant consequence.

O'Donnell requested he be continued to be paid his base salary as Audio Director through 2020 or at least 2017, arguing that the following clause in his employment contract was ambiguous, and since Bungie wrote it, the ambiguity had to be resolved in his favor:

Term of Employment. Subject to Section 11, the Company hereby employs the Employee [specifically defined as O'Donnell] and the Employee hereby accepts such employment for the period (the "Term of Employment") commencing on the Effective Date and ending on April 21, 2017; provided, however, that the Term of Employment shall be automatically extended to April 21, 2020, unless written notice of non- extension is provided by either Party to the other Party on or before March 22, 2017. NOTWITHSTANDING THE FOREGOING OR ANYTHING HEREIN TO THE CONTRARY, THE EMPLOYEE'S EMPLOYMENT WITH THE COMPANY IS TERMINABLE AT WILL WITH OR WITHOUT CAUSE; PROVIDED, HOWEVER, THAT A TERMINATION OF THE EMPLOYEE'S EMPLOYMENT SHALL BE GOVERNED IN ACCORDANCE WITH THE TERMS HEREOF.

The conflict here is between the term of employment being first defined as until April 2017, but then stating that it is "terminable at will with or without cause". The arbitrator called it "non-sensical" but pointed out that another agreement was unambiguous about O'Donnell's employment being at-will, and attributed the conflict to a drafting error.

With O'Donnell's base salary being $165,000, if he had prevailed on this count, Bungie would have owed him at least three and perhaps as many as six years of salary for the years remaining on his contract, or as little as $495,000 or as much as $990,000.

So while O'Donnell sought to continue getting a salary for the full contract term, the arbitrator affirmed that Bungie had the right to fire O'Donnell, with or without cause, and so O'Donnell's employment term ended on April 11, 2014.

Next, O'Donnell argued that only an employee voluntarily leaving Bungie would forfeit unvested stock, based on a slight change in wording between an agreement made in April of 2010 and a newer one made in December 2010. In the years following their spinoff from Microsoft, Bungie was briefly Arete Seven, LLC, then Bungie, LLC, and then in 2010 became Bungie, Inc. At that time, all shareholders with vested stock in Bungie LLC were given unvested stock in Bungie, Inc, and a new vesting schedule was put in place.

The April 2010 agreement stated:

(k) Equity 'Interests in the Company. In the event of the termination for any reason of the Employee's employment, (i) all of the Employee's unvested equity interests in the Company shall be automatically forfeited to the Company without the payment of any consideration

This early wording is unambiguous. Anyone with unvested stock who leaves the company for any reason, voluntarily or not, forefeits their unvested stock. This is normal in many LLC partnerships such as law firms, where partners buy in but hold equity only so long as they continue to work for the firm and generate revenue that justifies their profit participation. If you quit, or the other partners vote you out for any reason, you lose any shares that are unvested.

The revised December 2010 version stated:

Forfeiture of Unvested Shares upon Termination as a Service Provider. Notwithstanding any contrary provision of this Agreement, if Employee terminates service as a Service Provider for any or no reason prior to vesting in all Shares, then, unless otherwise agreed to by the Board of Directors, the then Unvested Shares will thereupon be forfeited and automatically transferred to and reacquired by the Company at no cost to the Company upon the date of such termination and Employee will have no further rights thereunder.

Two things to note there: O'Donnell used the change from the phrase "in the event of the termination for any reason" and the later "if Employee terminates service" wording to mean that the latter clause applies only to employees voluntarily leaving the company, rather than those like him, who were fired.

To bolster this interpretation, he said that it was done intentionally to protect the founding shareholders against retaliation from new shareholders. However, the arbitrator found no evidence for this and found it could not accept O'Donnell's interpretation of the clause, finding it inconsistent with the rest of the agreement and other submitted agreements.

The other thing to note is that the latter clause gives the Board of Directors the authority to decide otherwise; so they could voluntarily choose to allow a departing employee to keep stock if they so chose. This becomes extremely important later.

O'Donnell also alleged tortious interference against Bungie CEO, President and Chairman of the Board, Harold Ryan. However, tortious interference requires proving four things: existence of a contract, knowledge of the contract, intentional interference with that contract which results in breach, and interference "for improper purpose or by improper means".

This boils down to-- Bungie employed O'Donnell, Ryan knew Bungie employed O'Donnell, Ryan's actions caused breach to that agreement (O'Donnell's firing). However, since it was Ryan's job to run Bungie, including making decisions about who to fire and who to hire, Ryan's actions were not "for improper purpose or by improper means".

As Bungie's President and CEO, Ryan had responsibility to oversee Bungie's business operations and had a legitimate role in recommending termination of employees, a task clearly within his scope of employment. It is evident that he was enraged by O'Donnell's conduct at E3 2013, recommended his firing at the time, and barely spoke with O'Donnell thereafter. He may have been gathering evidence over time to support O'Donnell's firing. Such conduct does not constitute either an improper purpose or improper means.

Most likely O'Donnell's counsel is either throwing everything at the wall to see what sticks, or O'Donnell was upset enough at Ryan to make sure that anything remotely actionable could be put into a claim so Ryan could be named personally, instead of just Bungie as a whole.

So far, then, things were not looking good for O'Donnell's claims. He wanted to continue to receive salary, which was denied, and he wanted his stock returned to him on the basis that he was still entitled to it because he was fired and did not quit, which was denied. He wanted damages for interference against Ryan. The arbitrator denied all these claims.

O'Donnell's next claim was the one that ultimately succeeded-- not based on any specific contractual language, but on the underlying "covenant of good faith and fair dealing" which applies "when one party has discretionary authority to determine a contract term".

In other words, Bungie's board reserved for themselves the power to dictate a lot of the terms in their relationship with O'Donnell. They could have done a lot of things once the dispute arose-- they could have changed his duties or his place of work, for instance. They can also terminate his employment, which they did, and they kept for themselves the discretionary power to decide whether or not a fired employee should forfeit shares or not. This becomes the rope with which Bungie hangs itself.

Bungie could either have altered the date of O'Donnell's termination, or made an exception from the stock forfeiture clause, resulting on O'Donnell getting either 20% or 60% of his stock on the date of Destiny's release. Instead, the board forfeited all of his stock, and then offered a Transition and Separation Agreement, under which O'Donnell would continue to work on Destiny and be paid, be given a performance bonus, and would vest 20% of his shares, forfeiting the rest. Under the agreement, O'Donnell's termination would be for cause. Disagreeing with those terms and the deliverable schedule for the remaining audio work, O'Donnell declined the agreement and was terminated without cause in April 2014. Bungie wrongfully withheld O'Donnell's unpaid vacation time in an attempt to pressure him into waiving his equity rights, which prompted O'Donnell to seek the temporary injunction to preserve his equity rights. Within a week of that injunction, Bungie converted all Bungie preferred stock into common stock. This move was in fact already planned to occur before Destiny's release, but could be interpreted as a way for Bungie to block O'Donnell from exercising other rights as a preferred stock holder should he prevail.

Looking at the powers the Board reserved for itself, the Arbitrator concluded that:

The duty of good faith and fair dealing required the Board to exercise its discretion by considering O'Donnell's long-term, invaluable and unique contributions to Bungie. Over O'Donnell's many years with the company, Bungie had promoted and capitalized on his extraordinary composing gifts, featuring him on promotional releases and at conferences. Bungle was well aware of his loyal fan following when it assured the gaming community that O'Donnell, the famous composer of Halo, was composing the Destiny music. The Board had a duty to give proper weight to the fact that, at the request of Bungle management, by early 2013 O'Donnell had composed and recorded all the theme music that would carry the Destiny franchise for the following years. Without O'Donnell's unique contribution and his fan loyalty, Destiny might not succeed.

It is also important to note that this is not actually a court proceeding, but binding arbitration. As such, arbitrators have recourse to statute and precedence, but also their own set of rules, such as Rule 24c:

Rule 24 (c) of the JAMS Employment Arbitration Rules and Procedures authorizes the Arbitrator to grant any remedy or relief that is just and equitable and within the scope of the Parties' agreement, including but not limited to specific performance of a contract or any other equitable or legal remedy.

This is where Bungie's shoddy lawyering goes beyond the kind of ambiguous and conflicting phrases you'll see in a lot of employment contracts, and they get bit in the behind by the broad powers they reserved for the board. Because the revised 2010 agreement gives the Board the discretion to alter the stock forfeiture-- instead of it being merely automatic-- under the JAMS rules,the arbitrator is empowered to "grant any remedy or relief" the Board could have, and substitute his own judgement for theirs. Because Bungie could have decided to fire O'Donnell, but let him keep a portion of his shares, and participate in the profit-sharing, the Arbitrator is empowered to make that decision for them. Since O'Donnell could not prevail on the language of the agreements, he was wholly dependent on the fair dealing argument, and presumably if the Board had not given itself the authority to alter the stock forfeiture scheme, then the arbitrator would also have been unable to do so, even if they felt it was fair.

As a result, O'Donnell was awarded 192,188 shares of vested Bungie common stock, plus three years in the profit participation program, the first year's payment of which was $142,500.

Bungie's counterclaims also had little result; O'Donnell is not allowed to publish, distribute, or perform Music of the Spheres without Bungie's permission, and must return all work materials. Bungie alleged that O'Donnell had broken the non-compete clause of his contract by performing unpaid consulting work for Red Lens, a firm also associated with ex-Bungie employee Jaime "Case" Griesemer, a claim which not only failed, but led to Greisemer testifying to the arbitrator about the definition of "first person shooter".

The arbitrator finds him to be the most credible witness who testified on the topic.

O'Donnell's noncompete apparently was not triggered because the games Red Lens was working on were not first person shooters.

O'Donnell and Griesemer would later go on to form Highwire Games.

Bungie alleged that O'Donnell broke the confidential Information clause of his contract, and this was found to be false, but he was ordered to return all Bungie property in any case. Bungie also alleged that O'Donnell's distribution of Music of the Spheres in an attempt to drum up publisher interested violated Bungie's copyrights-- which was found to be true, but Bungie was prevented from collecting any damages; as an unpublished work, no actual damages can be calculated, and because of a technicality, infringement that starts before copyright registration and continues afterwards for an unpublished work cannot trigger statutory damages. If Bungie had been awarded damages here the result might very well have been a wash.

Finally, Bungie alleged that O'Donnell's twitter revelation that he did not compose the music used in a promotional trailer for Destiny in 2014 constituted "breach of fiduciary duty" as it harmed Bungie, and he had a responsibility as a member of the Board to avoid conduct that would harm the company. Unfortunately for Bungie, they could not constitute that any actual harm or damages occurred as a result of O'Donnell's actions-- Activision did not declare breach of contract against Bungie, and there's no evidence that Destiny sales were affected.

For those who are fans both of Bungie's games and the music of O'Donnell and Salvatori's music, this series of events is rather like a messy public divorce where the kids are enjoined to take the side of one parent against the other. It is clear that this sequence of events was both regrettable and entirely avoidable and preventable-- probably from both sides. O'Donnell is fortunate that while he could not take advantage of certain contractual inconsistencies to his benefit, another error made by Bungie's lawyers allowed the Arbitrator the latitude to decide that it was fair and equitable that he get some of his stock back. One can only hope that both parties continue to do work in the future that all the fans can enjoy.