Lane Powell Successfully Represents Former Electro Scientific Industries Inc. CEO
Lane Powell attorneys Milo Petranovich and Julie Engbloom convinced the District Court of Oregon to uphold an arbitration award of approximately $1.3 million in favor of Jim Dooley, the former CEO of Electro Scientific Industries, Inc. (“ESI”). Earlier, Petranovich and Engbloom won the award from the American Arbitration Association, arbitrator Phil Cutler, following a four-week arbitration.
Dooley was CEO of ESI in 2003, when ESI restated its financial statements for financial irregularities. Following an internal investigation by the Wilson Sonsini law firm, ESI terminated Dooley “for cause,” which, under the terms of Dooley’s employment agreement, terminated Dooley’s rights for severance benefits. Thereafter, Dooley pleaded guilty to one count of securities fraud, for omissions made in connection with statements made to ESI’s auditor in the course of the auditor’s quarterly review of ESI’s financial statements. In addition, Dooley settled a civil lawsuit brought by the Securities Exchange Commission without any payment of civil penalty.
Dooley filed an arbitration claim, asserting the termination “for cause” violated his employment agreement, because the employment agreement’s definition of “for cause” required Dooley to “willfully engage in illegal conduct,” and he had not acted with that state of mind. ESI claimed that the guilty plea to the securities law fraud established preclusively that Dooley acted with a mental state sufficient to justify the “for cause” termination. Dooley maintained that the mental state required “for cause” termination under the contract was much narrower than the scienter requirement for a securities fraud conviction, which can rest upon mere recklessness. The arbitrator agreed with Dooley’s position and awarded Dooley the $800,000 severance payment called for by his employment agreement, plus prejudgment interest of nine percent per annum.
ESI challenged the arbitration award in federal court, claiming both that the arbitrator had manifestly disregarded the law in his interpretation of the employment agreement and federal securities law, and also that the arbitration award offended public policy, given the SEC’s public position that executives departing from a company following a restatement should not profit from the restatement. Magistrate Acosta rejected both arguments and affirmed the award. The decision was featured in an article in the May 19 issue of the Portland Business Journal (“PBJ”) entitled “Judge Upholds Severance Pay for Ex-ESI CEO” and in an article in the May 18 issue of The Oregonian entitled “Court Upholds Severance Payment to ESI’s Ex-CEO Despite Guilty Plea.”