Electro Scientific Industries, Inc., v. Dooley
Filing
29
OPINION AND ORDER - The Opinion was not completely irrational, the Arbitrator did not manifestly disregard the law, and the payment of severance benefits to Dooley will not violate public policy. Accordingly, this court does not have grounds to vacate the Arbitrator's award. ESI's Second Amended Motion 13 to Vacate the Arbitration Award is DENIED. Dated this 17th day of May, 2011, by U.S. Magistrate Judge John V. Acosta. (peg)
1I
UNITED STATES DISTRICT COURT
DISTRICT OF OREGON
PORTLAND DIVISION
Case No.: IO-CV-1564-AC
ELECTRO SCIENTIFIC INDUSTRIES,
INC., an Oregon corporation,
OPINION AND ORDER
Plaintiff,
v.
JAMES T. DOOLEY,
Defendant.
ACOSTA, Magistrate Judge:
Opinion
Plaintiff Electro Scientific Industries, Inc., ("ESI") seeks to vacate an arbitration award
finding against it and in favor of defendant James T. Dooe1y. ESI assetts that the arbitrator exceeded
his powers by refusing to give preclusive effect to Dooley's guilty plea and conviction for securities
fraud by finding that Dooley did not willfully engage in illegal conduct and that ESI's termination
Page I - OPINION AND ORDER
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of Dooley was not for cause. The comi finds that the arbitrator recognized and reasonably applied
relevant case law to the facts before it and that his decision was not completely inational.
Accordingly, ESI's petition to vacate the award is denied. l
PreliminCIIY Procedural Matter
In suppOli of its motion to vacate, ESI offers excerpts of arbitration proceeding transcripts.
The excerpts include cover pages identifying the action, the arbitrator, the date of the proceeding,
and the volume number, but do not include a cetiification by the court reporter. These exhibits have
not been properly authenticated under Rule 901(a) of the Federal Rules of Civil Procedure. In Orr
v. Bank ofAmerica, 285 F.3d 764 , 774 (9th Cir. 2002), the Ninth Circuit held that:
A deposition or an extract therefrom is authenticated in amotion for summary
judgment when it identifies the names ofthe deponent and the action and includes
the repotier's cetiification that the deposition is a true record of the testimony of the
deponent. See Fed. R. Evid. 901(b); Fed. R. Civ. P. 56(e) & 30(1)(1). Ordinarily, this
would be accomplished by attaching the cover page of the deposition and the
repotier's certification to evety deposition extract submitted. It is insufficient for a
party to submit, without more, an affidavit from her counsel identifying the names
of the deponent, the reporter, and the action and stating that the deposition is a "true
and conect copy." Such an affidavit lacks foundation even if the affiant-counsel
were present at the deposition.
Orr, 285 F.3d at 774 (footnote and case citations omitted). This court previously has applied Orr's
rule to exclude improperly submitted testimonial excerpts. See, e.g., Chao v. Westside Drywall, 709
F. Supp. 2d 1037 (D. Or. 2010), and Kesey v. Francis, No. CV. 06-540-AC, 2009 WL 909530 (D.
Or. April 3, 2009), The court sees no reason why this rule is not equally applicable to excerpts from
proceeding transcripts offered in support of a motion to confitm or vacate an arbitration award. The
proceeding transcript excerpts are not admissible evidence and will not be considered by the court.
lThe patiies have consented to jurisdiction by magistrate in accordance with 28 U.S.C.
§ 636(c)(1).
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Background
In June 2000, ESI hired Dooley as Chief Financial Officer, a position he held until December
2002, when he as promoted to Chief Executive Officer ("CEO"). On December 13, 2002, ESI and
Dooley memorialized the promotion and entered into an employment agreement setting forth the
tenTIs and conditions of Dooley's employment as CEO (the "Agreement"). (Rosenbaum Dec!. Ex.
3.) The Agreement provided for an employment term of just over three years terminating on
December 31, 2005. (Rosenbaum Dec!. Ex. 3 at 3.) ESI retained the ability to telminate Dooley
during that period with differing financial obligations. If ESI telminated Dooley without cause,
Dooley was entitled to a severance payment equal to two times Dooley's base salary' at the time of
termination. (Rosenbaum Dec!. Ex. 3 at 4.) In the event he was telminated for cause, Dooley was
entitled only to the base salmy and annual bonus earned and payable through the date oftelmination.
(Rosenbaum Dec!. Ex. 3 at 3-4.) The Agreement defined "cause" in relevant part as:
(ii) the willful engaging by [Dooley1 in illegal conduct which is materially and
demonstrably injurious to ESI. For purposes of this subsection (a), no act, or failure
to act, on [Dooley's1part shall be considered "willful" unless done, or omitted to be
done, by [Dooley] in knowing bad faith and without reasonable belief that his action
or omission was in, or not opposed to, the best interests of ESI. Any act, or failure
to act, based upon authority given pursuant to a resolution duly adopted by the Board
or based upon the advise of counsel for ESI shall be conclusively presumed to be
done, or omitted to be done, by [Dooley1in good faith and in the best interest of the
corporation.
(Rosenbaum Dec!. Ex. 3 at 2.)
In late Spring 2002, Dooley looked into the legality of eliminating termination-ofemployment benefits for employees working in ESI's Asian offices located in Japan, Taiwan, and
Korea which were substantially more generous than those offered to employees working elsewhere
(the "Benefits"). (Rosenbaum Dec!. Ex. 1 at 6.) The Benefits represented nearly one million dollars
Page 3 - OPINION AND ORDER
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in accrued reserves repOlted on ESI's financial statements which, if eliminated, would dramatically
improve the financial position of ESI. (Rosenbaum Dec!. Ex. 1 at 7.) Dooley directed his
accounting staff to research the legality of the elimination of the Benefits and was subsequently
advised that the Benefits were required in Taiwan and Korea, but not in Japan. (Rosenbaum Dec!.
Ex. 1 at 7.) Based on this information, Dooley ordered the telmination of the Benefits for ESI's
Japanese employees, and a reversal of the accrued reserves on the ESI's financial statements for the
first quatter of fiscal year 2003 (August 31, 2002).2 (Rosenbaum Dec!. Ex. 1 at 7.)
In September 2002, Dooley represented to Richard Callahan, a patiner of KPMG, LLP
("KPMG"), ESI's independent auditing firm, that the elimination of the Benefits for the Japanese
employees was legal. (Rosenbaum Dec!. Ex. 1 at 7.) There is conflicting evidence with regard to
whether Dooley specifically stated that the elimination of the Benefits had been approved by legal
counselor whether Callahan merely assumed that legal counsel had approved the elimination based
on Dooley's representation. (Rosenbaum Decl. Ex. 1 at 7.) In any event, the elimination of the
Benefits created legal and financial issues for ESI which had to be remedied. (Rosenbaum Dec!. Ex.
1 at 7-10.)
On June 9,2003, the Board adopted a resolution telminating Dooley's employment for cause
based, in large part, on Dooley's handling of the elimination of the Benefits. The resolution
indicated that:
[Dooley] has willfully engaged. in illegal conduct which is materially and
demonstrably injurious to ESI by (i) directing the misstatement of its financial
statements, (ii) knowingly and falsely celiifying to the accuracy of its financial
2The accrued reserves for ESI's employees in Taiwan and Korea, in the amount of
approximately $160,000, were inadvertently reversed at this time as well. This en'or was later
con·ected.
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statements, and (iii) knowingly participating in other improper and illegal conduct
relating to the financial affairs and repOlis of ESI.
(Rosenbaum Dec!. Ex. 1 at 5.) ESI did not provide Dooley with the severance package he would
have been entitled to had he been terminated without cause.
In 2004, a federal grand jury indicted Dooley on sixteen counts of financial fraud.
The'
original indictment was filed September 23, 2004, with a superceding indictment for the same
sixteen counts filed on June 17,2005. Count 11 of the superceding indictment ("Count 11") alleged
that:
2. On or about September 12, 2002, in the District of Oregon and elsewhere, the
defendant,
JAMES T. DOOLEY
knowingly and willfully caused to be made a materially false and misleading
statement, and omitted to state material facts necessary in order to make a statement
made, in light of circumstances under which the statement was made, not misleading,
to ESI's accountants in connection with the review and examination of the financial
statements ofESI, namely, ESI's quarterly reports, Form 10-Qs, required to be filed
with the SEC. Specifically, DOOLEY made a materially false oral representation to
a pminer of KPMG, that management, including DOOLEY, had resolved on or
before August 31, 2002, to reverse the Asian Benefit Accrual and eliminate the
retirement benefits and that management, including DOOLEY, had received input
from the Human Resource Department and had reviewed the decision with legal
counsel, when the defendant well knew the information was false and misleading.
All in violation of Title 15, United States Code, Sections 7Sm(a), 7Sm(b)(2), 7Sff;
Title 17, Code of Federal Regulations, Section 240.13b2-2; and Title IS, United
States Code, Section 2.
(Rosenbaum Dec!. Ex. 4 at 36-37.)
On June 25, 2007, Dooley pleaded guilty to Count 11 of the Indictment. In his plea petition,
Dooley represented that he was represented by counsel, that he had discussed his case with his
attorneys fully, and that he had been advised and understood that by pleading guilty to Count 11 he
Page 5 - OPINION AND ORDER
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was admitted the following elements of the charge alleged against him:
First, defendant was a director or officer of a publicly traded company;
Second, the defendant made or caused to be made a materially false or
misleading statement to an accountant or omitted to state or caused another person
to omit to state, any material fact necessmy in order to make statement made, in light
of the circumstances under which such statements were made, not misleading to an
accountant;
Third, the statement was made in connection with any audit, review, or
examination of the financial statements of the publicly traded company, or in
connection with the preparation or filing of any document or report required to be
filed with the SEC; and
Fourth, the defendant acting knowingly and willfully and with an intent to
defraud in making or causing the false statements to be made or acted knowingly and
willfully and with an intent to defraud in omitting or causing another to omit any
material fact.
(Rosenbaum Dec!. Ex. 5 at 2.) Dooley specifically requested the court accept his plea of guilty to
Count II recognizing that "the judge must be satisfied that a crime occurred and that I committed
that crime before my plea of "GUILTY" can be accepted." In support of his guilty plea, Dooley
represented that he "did the following and that the following facts are true:"
From 2000 to December 2002, I was the Chief Financial Officer of ESI.
From April 2002 to until December 2002, I was acting Chief Operating Officer of
ESI. Throughout the late spring and summer of 2002, I discussed with ESI's CEO
David Bolander and other ESI officers and employees the feasibility of eliminating
a benefit plan that ESI had in place for its employees in Taiwan, Japan, and South
Korea. This benefit plan was known as the Asian Benefit Account ("ABA"). The
ABA was more generous than similar plans in other countries in which ESI
maintained operations with employees, including domestically, where the majority
of ESI employees were located. In particulm', it provided for identical severance
benefits - one month's pay for each year that the employee served in the companyregardless of whether an employee retired, or was laid off for business reasons, was
terminated for cause, or left voluntarily to join a competitor. After speaking with a
number of company personnel, David Bolander, ESI's CEO, and I agreed that we
would telminate the ABA, if it were not legally required, and would install a benefit
plan more in line with the benefit plans in other ESI offices.
Page 6 - OPINION AND ORDER
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I directed employees in the Human Resources Department and in Finance
Depatiment at ESO to determine whether we were legally obligated to have such a
benefit for 'employees in those counfries. I was advised in August 2002 by the
International Controller that it had been determined that there was no legal
requirement for such a program in Japan, although there was such a requirement in
Korean and Taiwan. Consequently, and in accord with the decision I had reached
with Mr. Bolander, I determined, before the end of August 2002, to telminate the
plan in Japan and to begin work on the installation of a new benefits plan similar to
the plans in the majority of other ESI offices. I directed that the Asian Benefit
Accrual be eliminated in Japan.
On September 12, 2002, in connection with the review ofESI's first quatier
financial statements, I met with a partner from ESI's outside auditors, KPMG, and
informed him that ESI had detelmined that there was no legal requirement to
maintain the ABA for Japanese employees and the ESI management had detelmined
to eliminate the ABA program for Japanese employees. However, I failed to tell him
that as of that time ESI had not obtained an opinion from a law firm to that effect and
that the information was based upon research done by ESI personnel.
Subsequently, in early October 2002, I learned that ESI's Japanese law finn
had raised questions as to the absolute ability of ESI to unilaterally telminate the
ABA for Japanese employees without legal consequences. Immediately upon
learning that, I directed ESI's general counsel and ESI's director of Human
Resources to verify with the Japanese law firm ESI's ability to terminate the ABA
account for Japanese employees under the then-culTent circumstances, and I was
shody thereafter advised that they had confirmed that they had confirmed that we
could do so
(Rosenbaum Decl. Ex. 5 at 7-8.) In accepting Dooley's guilty plea, Judge Haggelty found that
Dooley had "admitted facts that prove each of the necessary elements of the crime(s) to which the
defendant has pled guilty." (Rosenbaum, Decl. Ex. 5 at 11.)
On June 2, 2008, Judge Haggerty sentenced Dooley to two years probation with six months
of home detention and 500 hours of community service work. (Rosenbaum Decl. Ex. 6.) Just over
a year later, Dooley filed a demand for arbitration asseliing that he was entitled to severance benefits
from ESI because ESI did not have the requisite "cause" to terminate him under the telms of the
Page 7 - OPINION AND ORDER
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Agreement. (Petranovich Dec!. Ex. 10.) On September 17,2009, Judge Haggerty issued a final
judgment in a civil action filed by the Securities and Exchange Commission ("SEC") against Dooley.
Judge Haggerty enjoined Dooley from ever serving as an officer or director of a public corporation
and from future violations offederal securities laws. (Rosenbaum Dec!. Ex. 9 at 2-6.) However, he
elected not to assess a civil penalty against Dooley based on Dooley's Statement of Financial
Condition dated May 20,2009. 3 (Rosenbaum Dec!. Ex. 9 at 6.)
In May 2010, ESI filed a motion for summary judgment in the arbitration proceedings
arguing, among other things not relevant here, that Dooley's guilty plea constituted a judicial
admission that his actions satisfied the requirements for cause under the terms of the Agreement and
that Dooley was barred from arguing otherwise. ESI asserted that Dooley's admission that he acted
knowingly and willfully and with an intent to defi'aud clearly established that Dooley willfully
engaged in illegal conduct which qualified as "cause" under the Agreement. ESI offered a summaty
of Oregon and federal case law on the effect ofa guilty plea and its application ina subsequent civil
action based on the same conduct. In response, Dooley asserted that the issues in the criminal action
were not the same as those presented in the arbitration. Dooley explained that the definition of cause
in the Agreement required proof that Dooley knew his conduct was illegal and that because a
defendant may be found guilty of securities fraud without knowing at the time of his actions that the
conduct was illegal, a conviction for securities fraud may stand where the defendant knew his actions
to be wrongful but not necessarily unlawfu!' Dooley relied on recent Ninth Circuit case law
addressing the culpability requirements for violation of the statutes Dooley was found guilty of
3Dooley infOlmed the SEC on May 21, 2009, in the interest of full disclosure and out of an
abundance of caution, that he was considering pursuing severance benefits under the Agreement.
(Petranovich DecL Ex. 9.)
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violating. In United States v. Reyes, 577 F.3d 1069, 1080 (9th Cir. 2009), the Ninth Circuit stated:
A "knowing" falsification does not require knowledge of the securities laws being
violated. On its face, the provision means only that the defendant must knowingly
commit the act of falsification. On the basis of the language and structure of the
statute, there is no textual reason to hold "knowingly," as used in § 78m(b)(5), was
intended to modify or connote a higher scienter requirement than "willfully," as used
in § 78ff(a).
Additionally, in support of his general statement that his position is "consistent with the wellestablished principle that a defendant may commit securities fraud throught reckless, rather than
intentional, conduct", Dooley relied on Gebhart v. SEC, 595 F.3d 1034, 1041 (9th Cir. 2010)
("Scienter may be established, therefore, by showing that the defendants knew their statements were
false, or by showing that defendants were reckless as to the truth or falsity of their statements.") and
United States v. Farris, 614 F.2d 634, 638 (9th Cir. 1979) ("[T]he reckless disregard for truth or
falsity is sufficient to sustain a finding of securities fraud. "). (Petranovich Dec!. Ex. 2 at 7.) ESI
countered by arguing that Dooley's admission that he had an intent to defraud establishes that he
intentionally violated a known legal duty and references In re Silicon Graphics, Inc., Securities
Litig., 183 F.3d 970-976-77 (9th Cir. 1999) for the proposition that "under Ninth Circuit law, even
recklessness connotes intentional 01' knowing misconduct. (Petranovich Dec!. Ex. 3 at 4.)
On June 25, 2010, Philip E. Cutler, acting as arbitrator under the authority of the American
Arbitration Association (the "Arbitrator"), denied ESI's motion for summmy judgment. On the issue
of how Dooley's guilty plea relates to his claim for severance benefits under the Agreement, the
Arbitrator noted that "[w]hile one would think that the guilty plead and conviction for a former CFO
of a public company on a charge of securities fraud would give ample grounds for his employer to
telminate his employment for cause, the issue is not so simple here." The Arbitrator then referenced
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the definition of cause found in the Agreement and explained that:
While both parties have cited to case law defining "willfully and knowingly" in the
context of a securities violation like that which Dooley plead guilty to, I cannot say,
on this record, that as a matter of law Dooley's guilty plea and conviction satisfY the
employment agreement's requirement that Dooley have, "in knowing bad faith" and
"without reasonable belief that his action or omission was in, or not opposed to, the
best interests of ESI" engaged in "illegal conduct." Nor is it clear that there is no
genuine issue of material fact relevant to a detelmination of that question even as a
a matter of law or that I can resolve these issues without resorting to evaluating the
credibility of witnesses. Moreover, does the just-quoted clause in the employment
agreement mean that Dooley must have known at the time that his actions or
omissions were illegal? Such knowledge is not an element of the offense with which
he was charged. US. v. Reyes, - FJd -, 2009 U.S. App. LEXIS 24575 (9th Cir.
2009).
In December 2010, the Arbitrator issued his final opinion again finding in favor of Dooley
and awarding him $800,000 (the "Opinion"). (Rosenbaum Dec!. Ex. 1 at 13.) In the Opinion, the
Arbitrator quoted the definition of "cause" found in the Agreement and then explained that"
in order for Dooley to be telminated "for cause," he must have:
•
"willfully" - i. e., "in knowing bad faith" and "without
reasonable beliefthat his action or omission was in, or
not opposed to, the best interests ofESI" - engaged in
"illegal conduct;" and
•
the illegal conduct must have been "materially and
demonstrably injurious" to ESl.
However, if Dooley acted (or failed to act) based on advice or counsel of ESI's
attorney, or pursuant to Board resolution, he must be found to have acted in good
faith and in ESI's best interest in acting or failing to act.
(Rosenbaum Dec!. Ex. 1 at 4.) The Arbitrator found that ESI suffered material and demonstrable
injury based on Dooley's actions and that the Board followed the proper procedures in telminating
Dooley. (Rosenbaum Dec!. Ex. 1 at 11-12.) The Arbitrator then addressed the specific reasons
given by the Board for Dooley's telmination.
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The Arbitrator acknowledged that Dooley's handling of the Benefits was the primmy reason
for the Board's action and addressed Dooley's conduct with regard to the elimination ofthe Benefits.
(Rosenbaum Dec!. Ex. 1 at 6-10.) In the paragraph specifically addressing Dooley's actions in
September, 2002, which suppOlied Dooley's conviction on Count 11, the Arbitrator explained that:
Richard Callahan testified that on September 12 or 13 Dooley advised him
that the elimination of the Japanese termination benefits had been approved by EST's
lawyer. One would expect that, had Dooley done so, Callahan would have
memorialized that representation in some fashion. He did not. Other witnesses
testified that Dooley made the same representation to the Audit Committee at its
September 17th meeting. One would also expect that the minutes of that meeting
(either by the note-taker at the meeting or in the final minutes) would memorialize
that representation had it occUlTed. They did not. Accordingly, I conclude that
Dooley did not make such a representation either to Callahan 01' to the Audit
Committee and the witnesses who so testified were in en·or.
(Rosenbaum Dec!. Ex . 1 at 7.) After discussing other conduct relevant to the Benefits, the
Arbitrator concluded that:
It is clear that Dooley approached the whole issue of termination of the
Japanese benefits from the wrong perspective. I, as a lawyer, would have asked a
different question to the Japanese lawyers, or to Dooley's staff, and would have
followed up differently; Dooley, however, is not a lawyer and cannot be expected to
think 01' act like one. The evidence is sufficient to establish that Dooley believed that
the benefits were not required, that terminating them was a business decision, and
that under his understanding of accounting rules the accrual for them could be
reversed. Moreover, the evidence is insufficient to establish that his actions were
motivated by personal gain, even though reducing ESI's FY 2003 1st or 2nd quarter
losses, 01' bringing the qumierly results more in line with prior projections would
potentially benefit him either by increasing his bonus or giving him a leg up in the
search for a new CEO. The totality of the evidence is insufficient to establish that
Dooley acted, 01' failed to act, in such a way as to bring his conduct with the" scope
ofthe "for cause" definition in the employment agreement.
(Rosenbaum Dec!. Ex. 1 at 10.) In two paragraphs, the Arbitrator summarily addressed other
conduct umelated to the Benefits but relied on by the Board in telminating Dooley:
In addition to finding that Dooley directed the misstatement, and knowingly
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and falsely certifYing to the accuracy, ofESI's financial statements, the Board also
found that Dooley "knowingly [participated] in other improper and illegal conduct
relating to the financial affairs and reports ofESI." These latter charges relate to the
second through fifth bullet points in the summmy of the Audit Committee's finding
concerning Dooley which underlay the Board's action. (The ·creation of "an
environment bereft of meaningful accounting controls which resulted in significant
restatement of expenses in the first three quarters of2003"; the "hunt for credits" and
Dooley's knowledge concerning questionable, unsupported adjustments undisclosed
to the Audit Committee, the Board and the auditors; Dooley's failure "to establish
reasonable accounting practices to ensure proper recognition of revenue for "high
risk" transactions"; and the fostering of a "tone from the top" creating an atmosphere
of undue pressure to book revenue and meet quarterly forecasts without regard to
proper practices and procedures").
There is insufficient credible evidence to support a finding or conclusion that,
even if Dooley was guilty of these charges, his conduct (or his failures or omissions)
met the "for cause" standard required under his employment agreement. Nor is there
sufficient credible evidence to SUppOlt a finding or conclusion that any other act or
omission by Dooley met the "for cause" standard.
(Rosenbaum Decl. Ex. 1 at 10"11 (citations omitted).) In the Opinion, the Arbitrator addressed the
issue of judicial estoppel as it relates to Dooley's guilty plea to and conviction of securities fraud as
follows:
Dooley was indicted by a federal grand jUly in 2004 on a variety of counts of
financial andlor securities fraud. This indictment was amended by a superseding
indictment :filed in June 2005. The superceding indictment charged Dooley with 16
counts of financial andlor securities fi·aud. One count of the latter indictment charged
him with a violation of federal securities law, which makes [it] a crime for one to
"willfully and knowingly" make false or misleading statements to a public company's
accountants in connection with their work on the company's publicly-:filed financial
statements, a charge which stemmed from Dooley's September 2002 interactions
with ESI's outside auditors regarding reversal of the Asian benefits accrual.
In June 2007 Dooley plead guilty to and was convicted on that count of the
indictment; under the terms of his plea agreement, the remaining counts were to be
dismissed upon sentencing, and those counts were thereafter dismissed. At the
hearing on his plea petition, Dooley made a statement to the COUlt that set forth the
facts conceming his plea. Neither those facts nor his conviction by the Court, nor
any papers submitted in connection with his plea, are sufficient to establish that
Dooley wilfully engaged in illegal conduct within the meaning of the employment
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agreement. Nor do the legal authorities submitted by the parties in connection with
this issue compel such a finding or conclusion. Similarly, these events do not
constitute a judicial admission that he wilfully engaged in "illegal conduct" within
the meaning of the employment agreement, thus estopping him to contend otherwise
at the Hearing."
(Rosenbaum Dec!. Ex. 1 at 12-13 (footnotes omitted).)
Legal Standard
The Federal Arbitration Act (9 U.S.C. § 1 et seq.)(the "Act") controls the arbitration of
employment contracts, with the exception of contracts of employment for transportation workers.
Circuit City Stores Inc. v. Saint Clair Adams, 532 U.S. 105, 119 (2001) ("SeCtion 1 exempts from
the [Act] only contracts of employment oftransportation workers.") Under the Act, a district court
may vacate an arbitration award only:
(1) where the award was procured by cOl1'uption, fraud or undue means;
(2) where there was evident partiality or corruption in the arbitrators, or either of
them;
(3) where the arbitrators were guilty of misconduct in refusing to postpone the
hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and
material to the controversy; or of any other misbehavior by which the rights of any
party have been prejudiced; or
(4) where the arbitrators exceeded their powers, or so imperfectly executed them that
a mutual, final, and definite award upon the subject matter submitted was not made.
9 U.S.C. § 10(a) (2007). "These grounds afford an extremely limited review authority, a limitation
that is designed to preserve due process but not to pelmit unnecessmy public intrusion into private
arbitration proceedings." Kyocera Corp. v. Prudential-Bach Trade Services, Inc., 341 F.3d 987,998
(9th Cir. 2003). To that end, a district court's review of an arbitration awm'd is "both limited and
highly deferentia!''' Comedy Club, Inc. v. Improv West Associates, 553 F.3d 1277, 1288 (9thCir.
Page 13 - OPINION AND ORDER
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2009) (quoting POlVeragent Inc. v. Elec. Data Sys. Corp., 358 F.3d 1187, 1198 (9th Cir. 2004).
A district court cannot review the merits of arbitration awards, and the question of whether
an arbitrator's finding are supported by the evidence is beyond the scope of the court's review.
Lagstein v. Certain Underwriters at Lloyd's, London, 607 F.3d 634, 640-42 (9th Cir. 2010).
However, the Ninth Circuit has held that in the rare instance where an arbitration award is
"completely irrational" or exhibits a "manifest disregard of law," the arbitrator has exceeded his
powers under subsection four and an otherwise procedurally proper arbitration award may be
vacated. Id. at 641 (quoting Kyocera, 341 F.3d at 997). "Manifest disregard of the law means
something more than just an error in the law or a failure on the pmt of the arbitrators to understand
or apply the law. It must be clear from the record that the arbitrators recognized the applicable law
and then ignored it." },;/ich. Mut. Ins. Co., v Unigard Sec. Ins. Co., 44 F.3d 826, 832 (9th Cir.
1995)(internal quotation omitted). "Moreover, to rise to the level of manifest disregard' [tJhe
governing law alleged to have been ignored by the arbitrators must be well defined, explicit, and
clearly applicable.'" Collins v. D.R. Horton, Inc., 505 F.3d 874, 879-80 (9th Cir. 2007) (quoting
Carter v. Health Net of Cal., Inc., 374 F.3d 830, 838 (9th Cir. 2004». On the other hand, an
arbitration award is "completely irrational" if the decision fails to draw from the essence of the
agreement or, in other words, is not derived from the agreement when viewed in light of the word
of the contract and the conduct ofthe pmties. Lagstein, 607 F.3d at 642 (citing Bosack, v. Soward,
586 F.3d 1096, 1106 (9th Cir. 2009». While the COUlt may conduct a very limited review of an
arbitrator's legal conclusions, factual findings are generally not subject to the manifest disregard
standard.
See Coutee v. Barington Capital Group, L.P., 336 F.3d 1128, 1133 (9th Cir.
2003)("Manifest disregard of the facts is not an independent ground for vacatur in this circuit.").
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However, "because facts and law are often intertwined, an arbitrator's failure to recognize
undisputed, legally dispositive facts may properly be deemed a manifest disregard for the law." Id.
at 1134.
Discussion
1. Arbitrator Exceeded. or Imperfectly Executed, Powers
ESI contends that the Arbitrator failed to give preclusive effect to Dooley's guilty plea in
finding that Dooley did not knowingly engage in illegal conduct. ESI argues that Dooley was
collaterally estopped from claiming that he acted negligently or recklessly based on his admission
that he acted knowingly and willfully and with an intent to defraud when he informed Callahan that
the elimination of the Benefits was legal.
Collateral estoppel, or issue preclusion, arises when an issue of ultimate fact has been
determined in a prior proceeding. Nelson v. Emerald People's Utility Dist., 318 Or. 99, 102-103
(1994). In Nelson, the Oregon Supreme Court set forth a five-part test which provides that:
If one tribunal has decided an issue, the decision on that issue may preclude
relitigation of the issue in another proceeding if five requirements are met:
1. The issue in the two proceedings is identical.
2. The issue was actually litigated and was essential to a final decision on the merits
in the prior proceeding.
3. The party sought to be precluded has had a full and fair opportunity to be heard
on that issue.
4. The party sought to be precluded was a party or was in privity with a pmiy to the
prior proceeding.
5. The prior proceeding was the type of proceeding to which this court will give
preclusive effect.
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Id. at 104 (citations and footnote omitted). In Oregon, as in the Ninth Circuit, a criminal conviction
based on a guilty plea can have preclusive effect in a later civil proceeding. State Farm Fire and
Cas. Co. v. Sallak, 140 Or. App. 89,94 (1996)(citing United States v. Bejar-Matrecios, 618 F.2d
81, 83 (9th Cir. 1980». "A guilty plea is an admission of the ultimate facts that ai'e the material
elements of the crime charged in the indictment." Sedlak, 140 Or . App. at 93 (citing State v.
Hetland, 31 Or. App. 529, 534 (1977». "Arbitrators are not free to ignore the preclusive effect of
prior judgments under the doctrines of res judicata and collateral estoppel, although they generally
are entitled to detelmine in the first instance whether to give the prior judicial determination
preclusive effect." Collins, 505 F.3d at 880 (quoting Aircraft Braking Sys. Corp. v. Local 856, 97
F.3d 155, 159 (6th Cir. 1996».
While ESI argues that all of the elements are met, Dooley's asselts, and the Arbitrator found,
that the issues in the two proceedings were not identical. The Arbitrator determined that the word
"willfull" means something different in the context of a securities fraud violation as opposed to
under the Agreement and that collateral estoppel does not apply in this instance. Therefore, the
pivotal question before the court is whether the Arbitrator properly identified, but then ignored,
relevant case law in detelmining that the definition of the term "cause" as used in the Agreement
included an element that Dooley act with the knowledge that his conduct was illegal and that his plea
of guilty and subsequent conviction on Count 11 did not necessarily support such a finding.
ESI does not contest here the Arbitrator's construction of the definition of cause as set forth
in the Agreement. The Arbitrator analyzed the definition and determined that, for the purposes of
the Agreement, the term "willful" comprised three elements: 1) knowing bad faith; 2) without
reasonable belief that the actions or omissions were in, or not opposed to, the best interests ofESI;
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and 3) illegal conduct. Based on these elements, the Arbitrator found that for cause to exist under
the terms of the Agreement, Dooley must have known at the time that the conduct he intentionally
engaged in was illegal. This analysis and finding does not fly in the face of clearly established case
law and is, in fact, a reasonable construction of that law. There is no evidence that the Arbitrator
ignored clearly established lawinreaching this conclusion. Similarly, this construction ofthe telms
of the Agreement respects the essence of the Agreement and is not clearly irrational.
What ESI does object to, and strongly, is the Arbitrator's finding that Dooley's admission,
t1U'ough his plea of guilty to securities fraud, that he willfully, knowingly, and with the intent to
defraud, made material and misleading statements to his accountant is not equal to an admission that
Dooley knew that this intentional conduct was illegal. The Arbitrator found that knowledge of the
defendant at the time that his actions
01'
omissions were illegal is not an element of the offense to
which Dooley pled guilty. In doing so, he relied on Ninth Circuit case law which establishes that
to be found guilty of the crime of securities fraud based on willful false and misleading statements,
a defendant must be aware that his statements are false, not .that the conduct is illegal. See United
Statesv. Reyes, 577 F.3d 1069, 1079-81 (9th Cir. 2009). Here, the Arbitrator referenced relevant
case law and abided by it, following it to the letter. His finding that Dooley's guilty plea to securities
fraud did not necessarily establish that he knew he was engaging in illegal or unlawful conduct at
the time he told Callahan that the elimination of the Benefits for Japanese workers complied with
Japanese laws similarly complied with applicable law. Accordingly, the Arbitrator's decision to
allow Dooley to present evidence regarding his mental state at the time he made the false
representations was not in manifest disregard of the applicable law but, rather, in compliance with
it and was not adverse to the essence of the Agreement.
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ESI argues that Reyes is not applicable to the case at hand because the defendant in Reyes was
accused of conduct under the first clause of 15 U.S.C. § 78ff(a) addressing only "willfull" violations
while Dooley was sentenced under the second clause for "willfully and knowingly" making a false
statement. ESI argues that the addition of the term "knowingly" in the second clause requires proof
of a higher standard of culpability. It is important to note that Dooley admitted to engaging in
activity made unlawful under § 78(m) and that § 78ff(a) merely provides the penalties for violations
of other sections of the Securities Act. Therefore, the language in §78ff(a) does not define the
elements of the underlying criminal conduct. In any event, ESI's argument is not supported by the
language of Reyes.
In Reyes, the court refened to § 78ff(a) in its entirety - it did not differentiate between the
clauses contained therein. Furthermore, the Reyes cOUli specifically addressed the use ofthe telm
"knowingly" in § 78ff(a), noting that there was no textual reason to construe "knowingly" in §
78ff(a) as modifYing or connoting a higher scienter requirement than "willfully" as used in § 78(m),
and relying on legislative histmy in which Congress explained its understanding of the term
"knowingly" in connection with amendments to § 78(m) as follows:
The committee believes that the inclusion of the "knowingly" standard is
appropriate because of the danger, inherent in matters relating to financial
recordkeeping, that inadvelient misstatements or minor discrepancies arising from
an unwitting error in judgment might be deemed actionable. The committee does
not, however, intend that the use of the term "knowingly" will provide a defense for
those who shield themselves from the facts. The knowledge required is that the
defendant be aware that he is committing the act which is false - not that he know
that his conduct is illegal.
Reyes, 577 F.3d at 1080-81 (quoting S. Rep. No. 95-114, at 9 (1977), reprinted in 1977
U.S.C.C.A.N. 4098, 7107).
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In its reply brief, ESI argues that in addition to manifestly disregarding the law, the Arbitrator
ignored legally dispositive facts with regard to Dooley's illegal actions and state of mind. ESI
presents evidence to establish that Dooley knew, or at the very least, should have known, that his
actions were illegal at the time of the conduct, including declarations from Callahan and an ESI
board member representing that Dooley informed them in September 2002 that the telmination of
the Benefits had been approved by legal counsel. Dooley denied representing that he had obtained
approval from legal counsel to terminate the Benefits in both his guilty plea and before the
Arbitrator. A genuine issue of fact existed with regard to Dooley's state of mind at the time the false
statements or omissions occurred. The Arbitrator acknowledged this and found in Dooley's favor
and explained his reasons for doing so. This court "has no authority to re-weigh the evidence" and,
as such, is unable to find that the Arbitrator manifestly disregarded the law by finding that Dooley
did not act with the knowledge that his conduct was illegal. Coutee, 336 F.3d at 1134.
An arbitrator exceeds his powers only when an arbitration award is completely irrational or
exhibits a manifest disregard of the law. Here, the Arbitrator recognized federal securities law,
reasonably constmed that law, and applied the law so construed to the facts before him. The
Arbitrator's conclusion was not completely irrational nor did it exhibit a manifest disregard for the
law. Accordingly, the Arbitrator did not exceed his powers arId this court has lacks authority to
vacate the Arbitrator's finding that ESI's telmination of Dooley was not for cause.
II. Public Policy
A. Dooley's Representations to the SEC
ESI also argues that the Arbitrator's award of nearly one million dollars in severance benefits
to Dooley is "an affront to the well-established public policy against allowing corporate executives
Page 19 - OPINION AND ORDER
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who willfully violate federal securities laws from benefitting from their illegal conduct at the
company's - and the public's - expense." (Memo. In Supp. ofPI.'s Mot. to Vacate Arbitration
Award at 18.) In support of this argument, ESI points to Dooley's Statement of Financial Condition
on which the SEC relied in not seeking a civil penalty against Dooley, a statement which did not
include the possibility of a severance payment from ESI. This argument fails for two reasons. First,
Dooley advised the SEC ofthe possibility that he might seek severance benefits under the Agreement
by letter dated May 21,2009. Therefore, the SEC was aware of this possible asset before presenting
the proposed final judgment to Judge Haggerty for signature in September 2009. Second, ESI did
not make the argument to the Arbitrator and is, therefore, precluded from rasing that issue for the
first time before this court.
Section 10 of the Act provides the exclusive grounds for expedited
vacatur of an arbitration award. Hall Street Assoc. 's, L.L.e. v. MatteI, Inc., 552 U.S. 576, 584
(2008) ("We now hold that §§ 10 and 11 respectively provide the [Act's] exclusive grounds for
expedited vacatur and modification.) In the absence of allegations of cOTI'uption, fraud, partiality
01'
misconduct, the only ground relevant to this argument is subsection four - exceeding the
arbitrator's powers. There is no evidence that the Arbitrator recognized, and then rejected, law
relating to the public policy argument 01' that the public policy argument altered the essence of the
agreement making the Opinion completely iTI'ational. ESI's public policy argument related to
Dooley's representations to the SEC does not warrant vacation of the Arbitrator's award.
B. Securities Law and Its Public Policy
Assuming a public policy defense remains available under the Act in light of the Supreme
Court's ruling in Hall Street and that it is appropriate for this court to consider this argument despite
the failure of ESI to raise the issue in the arbitration proceeding, the court is convinced that the
Page 20 - OPINION AND ORDER
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public policy argument is not applicable to the facts at hand. In situations where a party may rely
on a public policy argument to prevent the enforcement of an arbitration award, the asselied public
policy must be explicit, well defined, and dominant. WR. Grace and Co. v. Rubber Workers, 461
U.S. 757, 765 (1983). Such a public policy "is to be asceliained 'by reference to the laws and legal
precedents .... '" Id. (quoting lvluschanyv. United States, 324 U.S. 49, 66 (1945). "A formulation
of public policy based only on 'general considerations of supposed public interests' is not the SOli
that pennits a cOUli to set aside an arbitration award .... " United PaperlVorkers Int'l Union, v.
Misco, Inc., 484 U.S. 29, 44 (1987) (quoting WR. Grace, 461 U.S. at 765). ESI relies on provisions
of the Sarbanes-Oxley Act of2002, specifically 15 U.S.C. § 78u-3(c)(3) and 15 U.S.C. § 7243, in
support of its argument that public policy would be violated if Dooley was allowed to receive his
severance benefits under the Agreement.
The Sarbanes-Oxley Act was the congressional response to the then-recent corporate
accounting scandals that left persons, companies, and pension plans "holding an empty bag after
corporate insiders committed fraud and other corporate crimes and misdeeds at the ultimate expense
of the corporation's shareholders, creditors, and innocent employees." SEC v. Gelllstar-TV Guide
Int'!, Inc., 401 F.3d 1031, 1035 (9th Cir. 2005). Congress clearly intended to "provide a strong
shield for third-pUliy creditor and corporate investors once the SEC beings an investigation of
corporate malfeasance." Id. at 1036. Generally, "[d]isgorgement is designed to deprive a wrongdoer
of unjust enrichment, and to deter others from violating securities laws by making violations
unprofitable." SEC v. First Pacific Bancorp, 142 F.3d 1186, 1191 (9th Cir. 1998). To this end, the
Sarbanes-Oxley Act creates a mechanism to hold those who control the distribution of illegally
obtained funds personally liable for both dissipated and retained funds. SEC v. Platforllls Wireless
Page 21 - OPINION AND ORDER
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Int'!. Corp., 617 FJd 1072, 1098 (9th Cir. 2010).
15 U.S.C. § 78-3(c)(3) authorizes the SEC to retain in escrow "extraordinary' payments
scheduled to be made to possible securities law violators. In Gemstar-TV, the Ninth Circuit defined
the term "extraordinary" as used in the statute to mean "a payment that would not typically be made
by a company in its custommy course of business" with the standard of comparison being the
"company's common or regular behavior." /d. at 1045. In determining whether a specific payment
is "extraordinmy", a court should concentrate on the size, nature, purpose, and circumstance of the
payments. Id. at 1046. The court then distinguished fixed amounts due under a long-standing
employment contract from newly negotiated termination benefits which exceeded base salary by
more than five times, bonuses and salary based on the company's financial results which had
dramatically increased as a result ofthe possible securities law violations, and accrued unused salmy
that was not allowed under the original employment agreement, and found only the latter qualify as
"extraordinmy" payments under the statute. Id. at 1043-44. Similarly, 15 U.S.C. § 7243 requires
a chief financial officer or chief operating officer to reimburse its employer for "any bonus or other
incentive-based or equity-based compensation received by that person during the 12-month period
following the first public issuance or filing" of a financial document which fails to comply with
financial reporting requirements under federal securities and "any profits realized from the sale of
securities of the issuer during that 12-month period." The Ninth Circuit has held that this statute
does not create a private right of action but may be enforced only through the SEC and the equitable
power of the courts. In Re Digimarc Corp. Derivative Litig., 549 FJd 1223, 1233 (2008).
The specific language of the statutes, and the cases construing them, make it clear that they
do not clearly and unequivocally apply to the severance benefits Dooley is seeking under the
Page 22 - OPINION AND ORDER
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Agreement. Payments required to be disgorged by a securities law violator under the Sm'banesOxley Act of2002 are limited to those directly related to violators' conduct and the change in the
financial condition of corporation caused by the violating conduct. The challenged payments do not
include those set by the parties in the initial employment agreement, except to the extent the amounts
paid under the agreement m'e based on the company's financial condition. Dooley's entitlement to
severance benefits was set forth in the Agreement, was based on his base salary, and was in no way
contingent upon or linked to ESI's financial condition. Additionally, only the SEC and the court
have the authority to enforce the statutes relied on by ESL Here, the SEC, with the knowledge that
Dooley may seek severance benefits under the Agreement, determined that disgorgement was not
necessary or appropriate in these circumstances. The severance benefits are not covered by either
statute or by the public policy concerns motivating Congress at the time the statutes were enacted
as established by reference to cutTent laws and legal precedents. Accordingly, the court finds that
ESI has not clearly shown that payment of severance benefits to Dooley under the terms of the
Agreement violates an explicit, well-defined and dominant public policy.
Conclusion
The Opinion was not completely irrational, the Arbitrator did not manifestly disregard the
law, and the payment of severance benefits to Dooley will not violate public policy. Accordingly,
this court does not have grounds to vacate the Arbitrator's award. ESP s Second Amended Motion
(#13) to vacate the arbitration award is DENIED.
DATED this 17th day of May, 2011.
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