Declaratory Judgment – General (Tel Aviv) 50607-05-22 Matan Budker – Clo Medical Ltd.

Judgment

Was the plaintiff entitled to cancel the employment agreement signed between the parties due to a defect in its conclusion? This is in essence the question that is being discussed in this proceeding.

Background to the proceeding and the main facts

1. The defendant (hereinafter also - the Company) is a start-up company that was established at the end of 2014 by three founders, Mr. Gal Salomon (hereinafter - Gal), Mr. Avigdor Fayanas (hereinafter - Avigdor) and Mr. Haim Nelken (hereinafter - Haim).[1] The defendant is engaged in developing a system with real-time access to medical data of patients hospitalized in intensive care units, which will be able to predict a  deterioration in patients' condition based on this data, and will be able to offer the medical teams preliminary treatments aimed at preventing this deterioration.
2. The plaintiff, who holds a doctorate in bioinformatics, worked for the defendant in the development department and in the position defined in the employment agreement as an algorithm scientist, from 01/2015 to 08/2015.
3. At the end of 2014, close to the establishment of the defendant, Gal approached the plaintiff following his acquaintance with his father, with whom he was friendly, and suggested that he join the development team. At the beginning of the negotiations between the parties, and since during this period Gal personally financed the defendant's activities, it was agreed that the plaintiff would begin his work at a low salary and after the option plan for the defendant was approved, he would be allocated options in accordance with the approved plan.
4. Finally, and since in December 2014 an investment transaction was signed in the defendant in the amount of $2 million, the plaintiff's terms of employment were changed and it was agreed to pay full wages for his work - as anchored in the employment agreement signed between the parties on January 27, 2015 (hereinafter - the employment agreement; Appendix 1 to the statement of defense).
5. In accordance with the employment agreement, which came into effect retroactively on 01.01.15, the plaintiff's position was defined at his request as part-time and his salary was set at half of the salary paid to the employee in his position, which at that time was ILS 24,000, i.e., a total of ILS 12,000, plus the payment of a one-time grant in the sum of ILS 13,000. In addition, the appendix to the employment agreement signed by the plaintiff states that the ownership of all the intellectual property that the plaintiff will develop during the period of his employment belongs to the defendant.
6. In the agreement that was signed, the plaintiff's entitlement to receive options was not anchored, since at that time the option plan for the defendant had not yet been approved, and the parties agreed that the issue of options would be settled in a separate agreement after the approval of the plan as aforesaid.
7. In May 2015, the company's option plan was approved. In June 2015, about six months after the work began, the relationship between Gal and the plaintiff came to a screeching halt against the background of the conditions for the plaintiff's entitlement to receive options.  As a result, the plaintiff unilaterally announced that he would go on unpaid leave for an unlimited period of time.
8. The Ottoman Settlement [Old Version] 1916On July 23, 2015, the plaintiff was summoned to a hearing that was scheduled for July 29, 2015, due to his absence from work on June 8, 2015 (Appendix 2 to the statement of defense). After receiving the summons to the hearing, correspondence between the parties was exchanged and the date of the hearing was postponed several times at the request of the plaintiff (Appendices 2 and 3 to the statement of defense).
9. 12-34-56-78 Chekhov v. State of Israel, P.D. 51 (2)On August 13, 2015, the defendant notified the plaintiff of the immediate termination of his employment in its ranks, after the plaintiff "evaded" the company's requests to attend the hearing (Appendix 4 to the statement of defense).
10. On August 20, 2015, the plaintiff, through an attorney, addressed the defendant in a letter, in which he claimed that since the employment agreement between the parties was signed by misleading him, it was essentially null and void (hereinafter - the cancellation letter). For this reason, the plaintiff demanded that the defendant immediately cease "making use, of any kind, of the inventions described in paragraph 13 above", otherwise the plaintiff would apply "to the courts for the purpose of obtaining injunctions and compensation".
11. The defendant rejected the plaintiff's claims and asked that he return the company's computer. The parties conducted additional correspondence on the same matter, the most recent of which was on October 7, 2015 (Appendices 12-15 to the statement of claim).
12. From the date of the exchange of correspondence between the parties in 2015 until the filing of the lawsuit before us in May 2022, there was no communication between the parties. Thus, in fact, the plaintiff sent a notice of cancellation of the employment agreement in 2015, about six months after the date of signing the agreement, and about seven years later he took this procedure.
13. According to the plaintiff's version, the reason for filing the lawsuit lies in a chance encounter that occurred on the morning of March 5, 2022, on a street in Ra'anana, between him and Prof. Itay Pesach (who served as the company's counsel at the relevant times of the proceeding), in which he decided to "clarify and document" whether the defendant had made use of his property. After Prof. Pesach noted that the algorithm developed by the plaintiff (DML - Dynamic Machine Learning) "helped to understand...  to understand who is against whom, where to go" the plaintiff decided to demand his rights from the defendant (paragraph 27 of the statement of claim).
14. The claim before us was initially filed with the District Court. On November 3, 2022, following the defendant's motion to dismiss the claim in limine due to lack of jurisdiction, the hearing of the claim was transferred to this court (decision of the Honorable Judge Rami Amir).
15. In the framework of the proceeding before us, the plaintiff petitions to order the cancellation of the employment agreement mainly due to defects in its conclusion, to grant declaratory relief according to which he is the sole owner of all the copyrights in his proprietary works from the period of his employment with the defendant; to issue a permanent injunction prohibiting the defendant from making any use of his property; and to order the decommissioning of all copies of his works that are in the defendant's possession.
16. Copied from Nevoin accordance with the Tribunal's decision of August 20, 2023, the decision in this proceeding was split into two stages, so that in the first stage , the plaintiff's claims of deception and lack of good faith in the negotiations prior to the conclusion of the employment agreement will be discussed, and in the second stage, to the extent that the plaintiff passes the hurdle of the first stage, the remedies claimed will be discussed.
17. On November 27, 2024, an evidentiary hearing was held, during which the plaintiff and Haim, who served as VP of Development and worked during the period in which the plaintiff was employed, testified. On behalf of the defense, Gal and Avigdor testified.
18. After the submission of the parties' summaries, the case was transferred to our decision.

The main arguments of the parties[2]

19. According to the plaintiff, Gal approached him due to his professional experience and expertise in the defendant's field of practice. The parties negotiated the terms of the engagement for several weeks, which were based on three principles - flexibility in the scope and place of execution of the work, the plaintiff's commitment to work for a maximum period of 12-18 months, and the payment of remuneration on the basis of shares/royalties and not salary/consulting hours.  These principles stemmed from the fact that the plaintiff was involved in other technological ventures and could not commit to an extended period of work.  The plaintiff proposed to examine other ways of contracting besides being hired as an employee, such as an external consultant, but he was told that it would be better for him to be hired as an employee and was promised that he would be given options (which provide a tax benefit) even if he did not actually work.
20. Already at the time of receiving the first draft of the employment agreement, the plaintiff understood that he had been presented with a false representation since the draft did not include reference to his terms and constraints, and when he complained about this, he was answered by Gal that "everything will be fine" or that the amendments would be made later.
21. After exchanging several drafts, the parties signed the employment agreement and the plaintiff was offered options at a rate of 2% (before dilution) as part of their separate negotiation agreement.  Since Gal made a representation that the company had a 'proof of feasibility', the plaintiff agreed to settle for the rate of options offered to him and did not demand a higher rate or  royalties, and he relied on Gal that this matter would be settled in a separate agreement and that the company would not dismiss him before receiving the options.
22. In June 2015, the plaintiff approached Gal regarding the options agreement, and the latter made the receipt of the options conditional for the first time on the demand that the plaintiff work for the company for 4 years. To the plaintiff's dismay, he understood that the company had reneged on its obligations and therefore he announced that he was going on unpaid leave.
23. After the company notified the plaintiff of his dismissal, the plaintiff sent a notice of cancellation of the employment agreement, given that his signature was made on the basis of a misrepresentation, in bad faith and clear deception, and demanded that the company make no use of his inventions from the period of his employment.
24. According to the plaintiff's version, his engagement with the company was carried out because he was misled into thinking that an options agreement would be signed with him in an outline agreed upon between him and Gal, and only in retrospect did it become clear to him that he was presented with a false representation amounting to deception, which entitles him to cancel the employment agreement with all his obligations under it. According to him, the company received an unlawful benefit and therefore, he is entitled to remedies that were requested even by virtue of  the Enrichment Law and not in law, 5739-1979.
25. According to the defendant, the claim was statute of limitations, or at least was filed with considerable delay, taking into account that the cause of action was created about 7 years before the date of filing the statement of claim. In addition, due to the considerable delay in filing the claim, the company's ability to defend itself, in particular, from an evidentiary point of view, was substantially impaired, without derogating from the fact that the plaintiff's failure to contact the company for so many years, unequivocally testifies to the abandonment of his claims against it.
26. On the merits of the matter, the company claimed that at the time of its establishment, recruitments were made for a software development team when the plaintiff's father, who was Gal's lecturer, approached him and asked him to employ the plaintiff in the defendant's venture.
27. The negotiations between the parties continued for a long period of time, during which drafts were exchanged and meetings were held, and all the while it was explained to the plaintiff that an options agreement would be signed separately. The company made it clear to the plaintiff several times that no changes would be accepted in connection with the granting of the intellectual property rights in full to the defendant, and he accepted it.  The employment agreement signed between the parties cancelled any prior agreement or undertaking and unequivocally anchored the agreement that any development and/or invention for which he received full wages would belong exclusively to the defendant and the plaintiff would have no right to them.  The plaintiff signed an informed employment agreement, after he understood and approved the terms and conditions of the agreement of his own free will, and after conducting intensive and lengthy negotiations.
28. With regard to the representation regarding the 'proof of feasibility', the defendant claimed that the plaintiff was told that the company was in the stage of building the system, but that the development of the product itself would take a long time, with a material difference between a theoretical proof of feasibility and an actual product.
29. The plaintiff was hired as a junior employee and the only offer offered to him was to employ him as an employee. The plaintiff was informed that the options were not included in his employment agreement, but rather in an agreement that would be signed separately and at a later stage, since at the time of signing the employment agreement, the option plan for the defendant had not yet been approved.  This plan was approved only at the end of March 2015 and the company's board of directors approved for the first time the allocation of options to employees only in May 2015.
30. In June 2015, the plaintiff contacted Gal regarding the arrangement of the options and demanded that they be granted to him immediately, without a commitment to any period of work or minimum working hours, and in fact asked to retract his commitment to a minimum period of work. Gal replied to the plaintiff that the options would be granted in accordance with the approved plan as he had been told from the beginning of the negotiations, when the allocation to someone who is not an employee of the company is not possible and is contrary to the law.  It was once again made clear to the plaintiff that he would receive the options subject to the existence of an employment relationship even if he worked only a minimum of 4-5 hours a month, but the plaintiff entrenched himself in his position.
31. The defendant did not undertake not to fire the plaintiff before the date of receipt of the options arrived and did not agree to give him options regardless of his status as an employee, but it was explained to the plaintiff from the beginning of the engagement that he must be a regular employee at the time of the allocation and on the date of exercise as required by law.
32. In any event, in accordance with the option plan approved for the defendant, from the date of the option allocation there is a period of one year known as a cliff, after which the first batch of options matures. Therefore, the plaintiff who terminated his employment with the company before a year had elapsed was not entitled to exercise any option.

Discussion and Decision