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Title: Robert Lxxxx and XxxxInc Communications, Inc.
Date: June 25, 2001
Arbitrator: David Pesonen
Citation: 2001 NAC 115

The names have been redacted for protection and privacy 


American Arbitration Association

In re XxxxInc COMMUNICATIONS, INC,

          Claimant/Counterrespondent and

     ROBERT Lxxxx,

          Respondent/Counterclaimant

 

 

Case No.: 74 160 1558 00 RWH

Decision and Award

 

 

 

 

 

     This matter was heard in the San Francisco offices of the AAA on May 21 and 22, 2001. Robert Lxxxx was represented by Thomas H. Carlson, Esq. of the firm of Brobeck, Phleger & Harrison, LLP; XxxxInc Communications, Inc. (hereafter “XxxxInc”) was represented by Rona P. Layton, Esq. of the firm of Sims and Layton.  Mr. Carlson called three witnesses, Mr. Lxxxx, Joseph Parker and Ann Stephens.[1]  Ms. Layton called three witnesses, Bob Maguire, Thomas McConnell and Christopher Ryan.  The parties submitted 64 joint exhibits for identification, of which 51 were admitted in evidence.  The case was submitted for decision on June 12, 2001, upon the arbitrator’s receipt of the parties’ closing briefs.[2]

Summary of Evidence

     Mr. Lxxxx began his employment as CEO and President of XxxxInc (then known as [XXX] Communications, Inc.) on July 15, 1999.  He was recruited by Mohammed N. [Founder], Founder and Chairman of the company.  The objective of XxxxInc was to develop and market a new optical switching technology that promised a significant increase in the capacity or transmission speed of existing long distance telecommunication equipment.[3]

The technology had been developed by Mr. [Founder] and others while he was on the faculty of the University of Michigan in Ann Arbor.  Mr. [Founder] was involved with at least one other company in the same technical field and also had some sort of faculty involvement at Stanford University. 

That the technology was technically feasible had been demonstrated under controlled laboratory conditions at the University of Michigan but it had not yet been demonstrated on a commercial scale.  Essentially, Mr. Lxxxx’s duties were to design and implement a business plan for the technology, including developing the corporate infrastructure, recruiting staff, assembling facilities and staff for manufacturing the technology in California, obtaining financing and marketing the finished product.

Mr. Lxxxx’s employment agreement followed a pattern widely used at that time in start-up companies in Silicon Valley.  Its salient elements were outlined in an offering letter from Mr. [Founder] dated, July 14, 1999, and countersigned by Mr. Lxxxx.  It included (in addition to salary, health and vacation benefits, etc.): (1) a seat on the company’s board of directors; (2) options for 1.3 million shares of EXxxxInc stock, to vest in increments over a four year period of employment; and (3) further vesting of 200,000 shares “following the completion of a Series C financing round that is consistent with the business plan that you [Lxxxx] develop and that is approved by the Board of Directors.” 

This agreement also provided that, “In the event of a merger or acquisition, in which [a] majority of the ownership control changes to a new party. . .”  50% of any portion of the initial 1.3 million options that had not then vested would become vested.  And, in the event of Mr. Lxxxx’s termination without cause within 12 months of such a change of control, all of the options would become vested. 

By the end of 2000, after about 18 months in his position as CEO, Lxxxx had accomplished enough of his start-up responsibilities that the company was attracting interest from venture capitalists who focussed their investments in communications technology.  XxxxInc’s operations had moved from Ann Arbor to facilities in Sunnyvale, certain patent issues had been resolved, a qualified engineering staff had been recruited, and the necessary testing facilities to produce a beta product and design the necessary manufacturing capacity were maturing.

In December 1999 or early January 2000, the venture  capital firm, New Enterprise Associates (“NEA”), began assembling a syndicate of investors to provide the Series C financing of XxxxInc’s next phase of development.  Some of these investors had been involved in other ventures with Mr. [Founder].  With respect to XxxxInc, however, they demanded as a necessary condition of their investment that (1) XxxxInc move its operations to Texas and that (2) Lxxxx be replaced as XxxxInc’s CEO.[4] 

These conditions were made known to Lxxxx in early January

by Thomas C. McConnell, a general partner in NEA.  At a duly convened meeting on January 19, 2000, attended by all members of XxxxInc’s Board of Directors, including Mr. Lxxxx and Mr. [Founder], the Board discussed the syndicate’s term letter for Series C financing.  It then resolved to terminate Lxxxx immediately as Chief Executive Officer and President of XxxxInc.  Two weeks later, on February 4th, the Series C financing was consummated in a stock purchase agreement signed by Mr. [Founder] for XxxxInc and by all of the principals in the investor group.

Over the next two months Lxxxx and XxxxInc negotiated a severance agreement while he explored other employment opportunities, including other start-up ventures in Silicon Valley.  As part of these negotiations, Lxxxx took the position that XxxxInc’s completion of Series C financing had two consequences that affected his compensation agreement with the company:  (1) it satisfied the provision in his July 14, 1999 employment letter for a grant of options for an additional 200,000 shares upon Series C financing; and (2) it constituted a

“change of control,” within the meaning of his employment agreement, triggering accelerated vesting of all of his original 1.3 million options.

     The parties finally signed a severance agreement in early March but it was back-dated to the January 19, 2000 board meeting at which Lxxxx had been terminated.  It provided for six months’ severance pay at Lxxxx’s previous salary in bi-monthly installments at the rate of $16,667 per month through July 19, 2000, forgiveness of an $80,000 loan made to Lxxxx at the time of his relocation to California in 1999, and payment of the balance of $30,000 on a $60,000 relocation payment, along with legal and executive search expenses related to his termination. 

With respect to stock options, in consideration of Lxxxx’s foregoing any claim to “change of control” vesting of all remaining of the original 1.3 million options[5], XxxxInc agreed to extend  his right to exercise already vested options for 362,500 shares[6] for two years and to loan Lxxxx the funds for full exercise of those options.

     Thereupon XxxxInc commenced paying the agreed upon severance.  It also advised Mr. Lxxxx on June 15th that the company had executed a stock split, so that his options under the severance agreement now applied to 725,000 shares, and that the per share price was reduced from $0.05 per share to $0.02, dropping the total exercise price from $18,125 to $14,500.

Until early July XxxxInc continued paying Lxxxx’s severance installments and some of his legal expenses. In late June Lxxxx formally inquired regarding the process for exercising his options.  Receiving no response, he sought unsuccessfully to contact several XxxxInc board members regarding his decision to exercise the options.  However, on June 29th, in a meeting attended by Mr. [Founder] and Mr. McConnell, XxxxInc’s board discussed—

Robert Lxxxx’s apparent solicitation of former Company employee Joe Parker as Chief Technology Officer of Mr. Lxxxx’s new company Opthos, as well as certain other facts and circumstances surrounding the founding of Opthos, which may have been in breach of one or more agreements previously entered into by Mr. Lxxxx with the Company.

The Board resolved that “no further payments would be made [of Lxxxx’s severance pay installments] and Mr. Lxxxx would be prohibited from any further exercise of his options vested pursuant to his settlement agreement with the Company.”  On July 17th  XxxxInc’s new Vice President for Finance, Chris Ryan, wrote to Lxxxx, following up on this board action: 

“We have in our possession documents we believe prove you are in violation of your termination agreement.  Although at this point the company has not decided to file an action against you to recover severance amounts paid to you so far, you are hereby notified that we do not intend to process any remaining severance pay or allow you to exercise any outstanding stock options.”

By letter of April 18th, almost three month’s earlier, XxxxInc’s counsel had tentatively signaled this position, writing to Lxxxx’s counsel that “certain actions” on Lxxxx’s part in establishing a new company “may violate” the severance agreement.  The letter pointed specifically to Opthos’ hiring of Joseph Parker. Despite this warning, however, XxxxInc continued paying Lxxxx the agreed severance installments and some of Lxxxx’s legal expenses until Ryan’s July 17th letter.

     The “certain actions” referred to in the April 18th letter   were the same circumstances referred to in the board’s June 29th meeting and Ryan’s July 17th letter. They implicated what had been a sticking point in the protracted negotiation of the severance agreement regarding the language of a non-solicitation clause.  XxxxInc’s initial draft would have precluded Lxxxx from “hiring” any XxxxInc employee for any new venture he might undertake.  Lxxxx objected to this language but agreed that he would not “solicit, induce, or recruit” any XxxxInc employee to leave XxxxInc for another enterprise.  The final agreement did not preclude his hiring any XxxxInc employee, so long as such employee initiated the departure.[7]

Once it became known that most of the XxxxInc operation would be moved to Texas, Joseph Parker advised XxxxInc’s management that he would not follow the company to Texas.  Parker had earned advanced degrees in mathematics at Stanford and the University of California; he had more than 10 years of industrial and executive experience in the field of optical networking and switching.  He was recruited by Mr. [Founder] and hired by Mr. Lxxxx in November 1999 as Director of Systems, reporting to the Vice-President of Engineering.  He was a key employee overseeing refinement and testing of XxxxInc’s product and he had received his own stock options.  His title and reporting responsibility changed after Lxxxx had been terminated and he became uneasy about his future with XxxxInc. 

Parker made clear to the company, including the Board of Directors that he would not move to Texas.  He was assured at first that he could remain with XxxxInc in Sunnyvale because the company planned to maintain a small testing facility in Sunnyvale; but he was skeptical that such an arrangement was practical or that it would endure.[8] 

In anticipation of leaving XxxxInc, Parker developed a concept for another optical interface technology that, he testified, would be marketable to a different segment of the telecommunications industry from the one being developed by XxxxInc.  He believed that it would not be competitive with XxxxInc’s technology.  He further testified that this idea was one the development of which he had followed in the technical literature since long before his employment with XxxxInc and that it did not derive from any proprietary information he had acquired at XxxxInc. 

In late January and early February, 2000, while Lxxxx was still looking for other employment, Parker and Lxxxx began to discuss the technical and commercial viability of Parker’s idea.  By late February these discussions ripened into serious exploration of whether Parker’s idea could become the basis for a new company, Opthos, that he and Lxxxx would found.

Around this same time, in late February, XxxxInc hired Ann Stephens, a mathematician who had been an XxxxInc consultant since the fall of 1999, as a full time vice-president and general manager, to whom Parker now reported.  Stephens testified that she was aware that Parker would not transfer to Texas.  She began to believe that for that reason Parker was not devoting his full attention to his duties at XxxxInc.  Several events involving Parker’s performance raised her suspicions about Parker’s commitment to XxxxInc.  On the advice of XxxxInc’s human resources consultant, Bob Maguire, she placed Parker on administrative leave while she looked further into the matter.  These events occurred in mid-March.

After Parker had been escorted from XxxxInc’s facilities, Stephens found on Parker’s laptop computer a great many e-mail communications between Parker and Lxxxx addressing the evolution, staffing and financing of Opthos.  Stephens concluded that these communications were ample grounds to fire Parker for pursuing a new venture with Lxxxx that was competitive with XxxxInc and for doing so on XxxxInc’s time and equipment.  Stephens fired Parker in early April.  About a month later Parker joined Opthos as its Chief Technology Office.  Parker’s having been hired by Opthos and the activities reflected in these e-mails were the matters addressed in XxxxInc’s June 29th board meeting and Ryan’s July 17th letter abrogating Lxxxx’s severance agreement.

  XxxxInc now contends that Lxxxx breached the non-solicitation provision of his severance agreement in that he solicited, induced or recruited Parker to join Opthos, and that this breach relieved XxxxInc of its obligations under the agreement.  Parker and Lxxxx, on the other hand, both testified that it was Parker who initiated these communications because he already intended to resign from XxxxInc when the company’s operations moved to Texas.

Claims for Relief

     Mr. Lxxxx denies any breach of his severance agreement, specifically the non-solicitation clause, with respect to Parker or any other former XxxxInc employee.  He contends that under that agreement he is entitled to: (1) specific performance of the exercise of options for 725,000 shares of XxxxInc stock at $0.02 per share, (2) $8,333.50 as the unpaid last installment of severance pay, (3) $16,667.00 as a statutory penalty under Calif. Labor C. Sec. 203, (4) compensation for certain adverse tax consequences based on the timing of exercise of his stock options, (5) prejudgment interest at 10% on the items in (2) and (3) above, (6) punitive damages of $500,000, and (7) attorneys’ fees and costs.  He further contends that if the severance agreement is void for any reason, his remedies revert to his original employment agreement, which provided for the vesting of far more options than were provided for in the severance agreement because of the “change of control” condition.

     XxxxInc denies that Lxxxx is entitled to any monetary award or specific performance.  It claims that, as a result of his breach of the severance agreement’s non-solicitation provision, Lxxxx should be ordered to disgorge payments already made to him by XxxxInc, consisting of:  (1) severance benefits in the amount of $91,668.50, (2) a $30,000 relocation payment, (3) all post-termination medical premiums paid by XxxxInc for Lxxxx; (4)    reinstatement and repayment of the $80,000 relocation loan; and (5) its attorneys fees and costs.[9] 

Analysis and Basis for Award

     Whether Lxxxx solicited or recruited Parker to join Opthos is a question of fact.  The evidentiary centerpiece of that issue is Exhibit 63, the collection of 152 pages of e-mail printouts discovered on Parker’s laptop.  The legal centerpiece is the precise language of the non-solicitation clause in the severance agreement.

The only witness who testified from personal knowledge about the content of the e-mail communications was Ms. Stephens herself.  Tom McConnell testified that they justified XxxxInc’s actions against Parker and Lxxxx, but he did not personally review them; rather he relied on Ms. Stephens representations.  Similarly, Bob Maguire, XxxxInc’s HR consultant, also rendered advice based on Ms. Stephens’ characterization of the e-mails without personally reviewing their contents.  Ryan, who joined XxxxInc after it had moved to Texas and who had no involvement in the events leading to termination of either Lxxxx or Parker, also had not review these communications when he sent Lxxxx the July 17th letter abrogating the severance agreement.[10]  And Stephens testified that there was “nothing explicit” in the e-mails to suggest that Lxxxx had solicited Parker to join Opthos.  

     Parker and Lxxxx both testified that the e-mails reflected their jointly exploring a technical and business concept that originated with Parker and that Parker had  proposed to Lxxxx. 

I have reviewed all of Exhibit 63 independently in

preparation of this award with a focus on the issue of whether they suggest that Lxxxx solicited or otherwise enticed Parker to come over to Opthos.  Whether the relationship revealed in the Parker-Lxxxx e-mail communications justified XxxxInc’s termination of Parker is not before me.  I find nothing in these communications suggesting that Lxxxx solicited, enticed or recruited Parker as an employee of Opthos. 

Furthermore, Parker had a strong incentive to seek out Lxxxx and propose a new venture because he was unhappy with the way events were unfolding at XxxxInc.  He had decided to resign from XxxxInc as soon as his own stock options vested in April, 2000.[11] He had developed respect for Lxxxx’s business skills while at XxxxInc. He knew that Lxxxx was an experienced CEO, seeking new ventures, including ventures in the field of optical transmission technology.  He was an expert in such technology.  Thus he had confidence in Lxxxx as a partner to develop the idea he had conceived for an optical interface for the “metro” or “campus” sector of the telecommunications market.

The bulk of the e-mail communications between Parker and

Lxxxx dealt with Lxxxx’s attempts to understand and be able to present Parker’s idea to venture capitalists.  These included Lxxxx’s numerous questions to Parker about other companies and optical switching technologies in the metropolitan segment of the telecommunications industry, whether they were potentially competitive with Opthos, and how other optical technologies mentioned in the technical press might be related to the technology Parker had proposed.  They are consistent with Parker’s and Lxxxx’s testimony that Parker was the technical/engineering author of the Opthos technology and that

he proposed it to Lxxxx as a joint business venture.  Lxxxx became the founder and start-up executive of Opthos but he lacked a deep understanding of Parker’s idea and thus would  have been an unlikely author of the venture. 

In these circumstances, Lxxxx would naturally plan to hire Parker for Opthos but he did not solicit Parker; it was the reverse. Lxxxx specifically declined to agree not to hire XxxxInc employees during the negotiation of his severance agreement--most likely because he knew that he and Parker were conceiving a new venture that would employ Parker in a central technical role. The evidence does not support XxxxInc’s claim that Lxxxx’s actions with respect to Parker’s ultimately joining Opthos violated Lxxxx’s severance agreement.

With respect to whether Opthos’s technology derived from

anything Lxxxx had learned at XxxxInc, the preponderance of the evidence is that it was not competitive with XxxxInc’s technology.  In any event, it was not “confidential information” acquired by Lxxxx during his tenure at XxxxInc.  Numerous of the e-mails are messages from Parker to Lxxxx explaining that the other technologies and companies Lxxxx kept asking him about were related to “long haul” transmission, the market to which XxxxInc’s technology applied; they were not useful to or competitive with Opthos’s proposed technology for the “metro” or “campus” segment of the market.  If indeed the Opthos technology contained elements of proprietary information obtained by Parker during his employment with XxxxInc, there is no evidence that Lxxxx knew of it.           

   Since I conclude that Lxxxx did not violate his severance agreement, XxxxInc’s sole defense—that it is absolved of any duty to perform its obligations under the severance agreement because of Lxxxx’s breach—must fail.  Likewise, XxxxInc’s claim that Lxxxx should disgorge benefits already paid by XxxxInc under the severance agreement, must also fail.

     Accordingly, Lxxxx is entitled to receive all of the benefits of his bargain in the severance agreement, including attorneys fees and costs and statutory remedies under the California Labor Code. 

However, his request for punitive damages must be denied.    The gist of this case is breach of contract.  Lxxxx contends that punitive damages nevertheless are appropriate because XxxxInc’s refusal to permit him to exercise his options   constituted the tort of conversion and breach of a fiduciary duty respecting Lxxxx’s property interest in the underlying stock.  The cases cited by Lxxxx for this proposition, however, all involve stock certificates already issued.  The stock in those cases evidenced a present property interest at the time of the conversion, free of any conditions precedent to possession and dominion by the rightful owner. 

Lxxxx cites no authority holding that an option to acquire stock is a property right distinct from a contractual right.  That the options had vested means only that a condition precedent had arisen, i.e. that they had matured in a contractual, not a proprietary, sense.  They would acquire a property characteristic only after the options had been exercised.  Punitive damages for XxxxInc’s refusal to permit his attempted option exercise are not available.     

     With respect to the tax consequences of Lxxxx’s delayed exercise of stock options, the issue is more complex.  Lxxxx argues that XxxxInc must compensate him for frustrating his attempt to exercise his options in July 2000, on two distinct theories. 

First, Lxxxx contends that XxxxInc should be liable for its “failure to advise” him of the tax consequences flowing from his having sought to exercise the options more than three months after his termination.  Had he acted within ninety days of his termination, they would have been treated as incentive stock options (ISOs) under the tax code rather than non-statutory options (NSOs).  As ISOs, exercise of the options is not itself a taxable event; there is no taxable event until the stock is sold.[12]  As NSOs, exercise of the option is the taxable event and the tax is computed at ordinary income rates on the difference between the exercise price and the fair market value at the time of exercise.

Lxxxx contends that, had he received proper tax advice, he would have sought to exercise the options within the ninety day window.  He claims, therefore that XxxxInc should now put him in the position he would have been in had XxxxInc given him proper tax advice and not wrongfully frustrated his attempted exercise of the options. 

This theory is flawed, legally and factually.  Legally, Lxxxx advances no authority in support of the contention that XxxxInc had a legal duty to advise him of the NSO vs. ISO tax consequences.  Factually, at the time of his severance the parties were at arms’ length, Lxxxx was represented by his own counsel, he was experienced in the field of corporate finance and executive compensation, and XxxxInc’s stock option agreement (which Lxxxx signed as part of the severance negotiations) contained an extensive disclosure of the different tax consequences of NSOs and ISOs.[13]  Any delay beyond ninety days was the result of his own neglect.

Mr. Lxxxx’s official termination as CEO was January 19, 2000.  His termination as a member of the board of directors was February 28, 2000.  He signed the severance agreement on March 2, 2000.  XxxxInc received his attempt to exercise his options in full compliance with the company’s stock plan on July 22nd, more than three months after the latest of any of these termination events.  Had he successfully exercised the options at that time, he would have been subject to tax on the stock as NSOs.  Under this award, he will be in no different a position in that   respect.

His second tax related theory, however, has merit.  Since the fair market value of the stock is now greater than it was when he sought unsuccessfully to exercise the options, any increase in his tax liability from exercising the options as ISOs now is a direct result of XxxxInc’s wrongfully frustrating that earlier attempt. 

  The fair market value of XxxxInc stock in July 2000 was

$0.06 per share.  The taxable difference for the entire block of 725,000 shares is $29,000.  XxxxInc now asserts that its stock have a fair market value of $0.20 per share, as of March 22, 2001.  Assuming that there have been no further stock splits and that the current FMV is unchanged, the current value of 725,000 shares is $145,000 and the difference between the July 2000 FMV and current FMV is $116,000.  Put another way, if the options were currently exercised, Mr. Lxxxx would be subject to tax at ordinary income rates on $130,500 but would have been subject to tax at those rates on only $29,000 in 2000.      

     Lxxxx suggests that the arbitrator in this case should take judicial notice that his state and federal tax rate is “approximately 40%.”  I decline to take such judicial notice.    In light of his changed circumstances and the recently adopted Federal tax revisions, Mr. Lxxxx may be currently in a lower bracket than he was in 2000; his proposal for an assumed net tax rate could improperly result in a windfall.  There is not sufficient evidence in this record to compute the amount of an award for the difference between the two tax consequences.

Award

1.  XxxxInc Communications, Inc. (or any successor in interest) is ordered to convey to Robert Lxxxx, free and clear of all encumbrances,[14] 725,000 shares of that company’s common stock   and promptly to take all steps necessary to carry out such conveyance, upon the tender by Robert Lxxxx of the exercise purchase price in effect on July 22, 2000, that is $0.02 per share.

2.  XxxxInc Communications, Inc., or any successor corporation, is ordered to pay to Robert Lxxxx:

a.  $8,333.50 as the last installment of his severance pay;

b.  $16,667.00 pursuant to Calif. Labor C. Sec. 203;

c.  Prejudgment interest at the legal rate on the sum of $8,333.50 from July 19, 2000 until paid, and prejudgment interest at that rate on $16,667.00 from August 19, 2000 until paid;

d.  in the event that Lxxxx exercises all or any of the options specified in paragraph 1 above, a sum equal to
            the difference in Mr. Lxxxx’s federal and state income tax liabilities resulting from exercise of such options for
            NSO shares, assuming exercise in 2000 at an FMV of $0.06/share and exercise in 2001 at an FMV of
            $0.20/share.[15]

e.  Reasonable attorneys fees and costs pursuant to Paragraph 15 of the severance agreement.

f.  Reimbursement of any sums he has advanced to the AAA on account of this arbitration, 
            pursuant to Rule 34.d. of the AAA

Rules.

3.  XxxxInc Communications, Inc. is to pay all fees and expenses of this arbitration, including (a) administrative fees due to the American Arbitration Association and (b) the arbitrator’s compensation and expenses.  (Under separate cover, the arbitrator will promptly submit to the AAA an itemized statement of his compensation and expenses.)

4.  XxxxInc Communications, Inc. takes nothing on its claim.

5.  The arbitrator retains jurisdiction for 60 days from the date of this decision and award, in order to address and resolve computation of the amounts awarded in Paragraphs 2.d. and 2.e. above, in the event the parties are unable to agree on those amounts.[16]

 

Dated this 25th day of June, 2001

 

By:

 

 

 David E. Pesonen

 

 



[1] Ms. Stephens testified under subpoena.

 

[2] In a preliminary hearing and scheduling conference on January 3, 2001, the arbitrator ruled that the matter would proceed under the AAA National Rules for the Resolution of Employment Disputes.  Under those rules and, in light of the underlying alignment of the parties’ claims for relief, Mr. Lxxxx, as the former employee of XxxxInc, was deemed the principal claimant and bore the burden of going forward with his claim, even though XxxxInc’s arbitration demand was filed first in time.

 

[3] The esoterics of the technology Mr. [Founder] had developed and that XxxxInc was to bring to market were not explained at any length in the hearing of this case and this arbitrator does not imply that he comprehended it or understood its function in the telecommunications business.  A detailed description of the technology appears in Exhibit 28, XxxxInc’s Series C Preferred Stock Purchase Agreement, discussed later in this decision.  A flavor of the subject can be sensed from the descriptions in that agreement of the various intellectual property rights and licenses conveyed to XxxxInc by Mr. [Founder] or the University of Michigan, including “Broadband Sagnac Raman Amplifiers and Cascade Lasers,”  “Non-Linear Fiber Amplifiers Used for A 1430-1530nm Low-Loss Window in Optical Fibers,”  “Chirped Period Gratings for Raman Amplification in Circular Loop Cavities,” “Active Gain Equalizers and Bi-Directional Raman Amplifiers Pumped by 1310nm Laser Diodes,” etc. 

[4] The reasons behind these conditions were not explored in the hearing but there was evidence that by this time Lxxxx and [Founder] had sharply divergent views regarding the company’s business plan as it applied to “packaging” and marketing XxxxInc’s central technology.

[5] Consideration for this concession turned on whether the Series C financing was a “merger or acquisition” within the meaning of Lxxxx’s employment agreement and whether it occurred before or after his termination.

 

[6] These consisted of vested options for 162,500 shares out of the 1.3 million   in his employment agreement and 200,000 accrued as a result of the Series C financing.

[7] Both parties rely on Loral Corp. v. Moyes, 74 Cal.App.3d 268 (1985), which holds that a severance provision prohibiting a departed executive from “raiding” for another company any employees of his former employer is valid and not a restraint of trade in violation of Calif. Bus. & Prof. C. Sec. 16600.  Under the broad language of that statute, arguably XxxxInc’s “no hire” proposal could run afoul of its proscription because it might “restrain” “anyone”--including XxxxInc employees and not just Lxxxx--from pursuing a lawful trade or profession, even though they were not parties to Lxxxx’s severance agreement.  Without the “no hire” limitation, however, the non-solicitation clause was clearly valid under Loral and the statute. 

[8] XxxxInc closed the remaining Sunnyvale facility in July and laid off the few employees who had remained at that facility after most of the company’s operations had moved to Texas. 

[9] XxxxInc’s original demand for arbitration also sought an order enjoining Lxxxx from soliciting XxxxInc employees, but that demand has been abandoned now that more than one year has elapsed since Lxxxx’s termination.

 

[10] Neither party called Mr. [Founder] as a witness, despite the fact that he was a central observer and apparently a moving party in virtually all of the events surrounding Lxxxx’s hiring and termination and the decision to abrogate XxxxInc’s performance of the severance agreement.

[11] Parker was fired by Ann Stephens about two weeks before his stock options in XxxxInc were to vest in mid-April.

[12] I am informed, however, that there would be other taxable consequence if Mr. Lxxxx’s total tax computations gave rise to alternative minimum tax liability.

[13] Apparently the parties never executed XxxxInc’s standard employment documents for Lxxxx himself while he was employed.  This oversight was caught during negotiations over the severance agreement and such documents were then signed simultaneously with the severance agreement on March 2nd.  They included an “Employment, Confidential Information and Invention Assignment Agreement” and the 1999 XxxxInc “Stock Plan” for a potential 1.8 million shares if all conditions addressed in the July 14, 1999, employment letter materialized.

[14] Except endorsements or restrictions applicable to other outstanding XxxxInc shares acquired pursuant to options by other XxxxInc officers and key employees in the ordinary course of business.

[15] An appropriate assumption for computing Lxxxx’s 2001 hypothetical tax liability to be used in computing this component of the award would be to project his 2001 income from all other sources to the end of the calendar year at the same rate as his 2001 income to the present.

 

[16] Under the authority of Rule 34(d) of the AAA Rules applicable to this case, if the parties are unable to agree on the appropriate amount of these components of the award, the arbitrator is prepared to appoint a special master, at XxxxInc’s expense, to assemble the necessary documents, perform the necessary calculations and submit a report to the arbitrator.

 

 

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