Opinion
NOT TO BE PUBLISHED
Appeal from a judgment and an order of the Superior Court of Los Angeles County Nos. BS115737 & BS115865, Joseph Kalin and Charles Lee, Judges. Affirmed.
Bryan Cave LLP, John W. Amberg and Shelly Gopaul for Appellant.
Kelly Lytton & Williams, Sheldon H. Lytton and Richard D. Williams for Respondent.
CROSKEY, J.
Frederick Lax is the former President and Chief Executive Officer of Tekelec. His employment was terminated as of January 1, 2006. At the time of his termination, Lax had unexercised stock options worth over $1,000,000. During February 2006, Tekelec’s auditors recommended that Tekelec revise its previously published financial statements for 2003 and 2004. Tekelec followed its auditors’ recommendation, and announced that it would restate its financials for that period. Tekelec was therefore precluded by federal securities law from issuing stock until it restated its financial statements. Lax’s options were set to expire, by agreement, on July 1, 2006. Tekelec did not issue all of its necessary financial statements until July 12, 2006. Thus, by the time Tekelec was legally permitted to issue stock, Lax’s options had expired. Pursuant to Lax’s employment separation agreement, Lax brought an arbitration proceeding against Tekelec, seeking compensation for his lost options. The arbitrator issued an award in favor of Lax, on the basis that Tekelec’s legal inability to issue stock during the term of Lax’s options was caused by Tekelec’s own inappropriate conduct in issuing false and misleading financial statements for 2003 and 2004. The arbitrator interpreted the stock option plan as containing “an implied term to the effect that [Tekelec] will not, through wrongful conduct, deprive the option holder of the value of his or her options.” Finding that implied term breached, the arbitrator awarded Lax damages.
Lax petitioned to confirm the arbitration award while Tekelec petitioned to vacate it. Tekelec argued that the arbitrator had exceeded his powers. Tekelec noted that the arbitration clause in Lax’s employment separation agreement provided that the arbitrator would have “no power or authority to add to or... detract from the agreements of the parties.” Tekelec took the position that by “impl[ying]” a term in the stock option plan which did not otherwise exist, the arbitrator “add[ed] to” that agreement when the parties had restricted him from doing so. The trial court disagreed and confirmed the arbitration award. We affirm.
FACTUAL AND PROCEDURAL BACKGROUND
As a court may not review the sufficiency of the evidence supporting an arbitrator’s award (Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 11), we take our discussion of the facts from the arbitrator’s award and, where necessary, the undisputed written documents governing the parties’ relationship.
Lax served as President and Chief Executive Officer of Tekelec from February 2003 to late 2005. He was asked to resign from the company in the fall of 2005; his formal last day of employment was January 1, 2006. At the time of his separation, he held fully vested option rights to purchase 146,875 shares at a strike price of $8.54. Based on the then market price of $17.00, these options had a value of approximately $1,243,000. Although the separation of Lax’s employment was governed by an individually negotiated separation agreement (separation agreement), the stock options were governed by the original stock option plan (option plan).
The termination date of January 1, 2006 was specifically chosen so that Lax would be vested with additional options as of December 31, 2005.
Lax planned to sell his shares after the company announced its 2005 earnings, as he expected the announcement to be positive. The announcement was to be made on February 16, 2006. On February 13, 2006, Lax gave formal notice of his desire to exercise his options and sell his stock (in a cashless transaction) on February 21. What Lax did not know, however, is that on February 12, Tekelec had been advised by its auditors to withdraw its previously published financial statements and restate its earnings for 2003 and 2004. On February 21, Tekelec filed a form with the Securities and Exchange Commission stating, in essence, that its 2003 and 2004 financial statements were inaccurate and may not be relied upon, and that the company would restate its financials for those periods. From and after the filing of this form, until such time as Tekelec issued its restated financial statements (and all subsequent statements that were then due), the company was prohibited by federal securities law from issuing any shares of stock – including shares to its option holders.
Additionally, the company has a longstanding policy of preventing the exercise of cashless options by employees, officers or directors between the end of a calendar quarter and the second trading day after the public release of the company’s financial statements for that quarter. The purpose of the closing of the trading window is to prevent any inadvertent insider trading prior to the public release of the most recent financial information. Although Lax was not a company officer or employee after January 1, 2006, he had been president through that date and could not trade on the basis of inside information.
Because of the holiday weekend, February 21 was two business days after the anticipated earnings announcement on February 16.
By the terms of the option plan, Lax’s options would expire on April 1, 2006. Tekelec’s board of directors had the power under the option plan to extend the deadline by an additional three months. As the deadline approached and Tekelec was still precluded from issuing stock, Lax sought an extension of time. Ultimately, a few days before April 1, 2006, Tekelec offered Lax an extension. The extension was conditioned on Lax executing a release of any and all claims that relate, or were attributable, to Lax’s rights, ability or inability to exercise his options prior to or due to the stock issuance “blackout” implemented by Tekelec in February 2006. The extension and release were written in an amendment to Lax’s separation agreement. On March 31, 2006, Lax signed it. Tekelec thus extended the term of Lax’s options to July 1, 2006.
By July 1, 2006, Tekelec had issued most, but not all, of the necessary financial statements, and Lax’s options expired in accordance with their terms. On July 12, 2006, the company filed the last of the necessary financial statements, and it was permitted to resume the issuance of stock. A number of employees other than Lax held options that expired during the blackout period. With the exception of only two or three members of the board of directors and Lax, arrangements were made to compensate the option holders for some measure of the loss of their vested rights. Lax requested compensation as well; Tekelec decided to take no action with respect to the value of Lax’s expired options.
Lax instituted an arbitration proceeding against Tekelec. Hearings were held over seven days before the arbitrator, retired judge Eli Chernow. Lax’s primary argument was that Tekelec had been legally able to permit the exercise of Lax’s options between February 13 and February 21, 2006. The arbitrator disagreed. Lax also pursued theories of fraud (in not informing him of the pending blackout) and intentional delay in issuing the final financial statements; both of these theories were also rejected. Finally, Lax argued for breach of contract; on this theory, he was successful.
The arbitrator first addressed the issue of the release Lax had executed as part of his amended separation agreement; Lax argued the release was unenforceable as unconscionable. The arbitrator “conclude[d] that the fair reading of the release is that Mr. Lax released claims based on the literal failure of Tekelec to honor his notice of exercise of his options in February 2006.” As the arbitrator rejected this claim on the merits, the release is irrelevant. However, the arbitrator also concluded that the release “does not purport to cover conduct by the company after the date of the release.” While the release “is susceptible of being read to include all claims of Mr. Lax for damages as a result of the company’s failure to issue stock pursuant to his vested options before or after March 31, 2006,” the arbitrator concluded that such a reading “would render the release unconscionable.” Thus, the arbitrator concluded the release did not release any claim Lax might have for Tekelec’s inability to issue shares during the extended period of the option.
While it is not for this court to review the substance of the arbitrator’s decision, we note our agreement with the arbitrator’s conclusion that the release could not bar Lax’s claim for his inability to exercise the options during the additional three month period. Lax had been granted the options as part of his compensation package. The options were also a key part of the separation agreement in that the January 1, 2006 termination date was specifically chosen so that Lax would receive additional options which vested on December 31, 2005. By the time the release was signed, Tekelec was legally barred from honoring the options (as we discuss below) by reason of its own wrongdoing. In exchange for the release, Tekelec gave Lax an additional three months in which to exercise the options – yet this right was illusory because Tekelec, still by reason of its own wrongdoing, was legally barred from performing during that period. Whether these circumstances give rise to a conclusion that: (1) there was a failure of consideration; (2) Tekelec should be equitably estopped from relying on the release; (3) the release is unconscionable when applied to Lax’s inability to exercise the options during the extended option period; or (4) the option period should be equitably tolled during the period in which Tekelec was barred from issuing stock, is irrelevant. The fact is that Lax bargained for options which could be enforced, and Tekelec cannot hide behind a release given in exchange for a grant of three additional months in which the options still could not be enforced.
The question on which the arbitrator next focused was whether Tekelec “was the company required to compensate Mr. Lax for the loss of value of his options under the circumstances of this case.” The arbitrator concluded that there was such a duty, as a matter of “simple contract law.” Lax acquired his vested option rights as part of compensation for his services. At the time of his departure, his three years of service included actions that substantially expanded the company’s business and increased its share price. “In short, as the company agrees, he had earned and was entitled to his vested options.” Tekelec argued that while Lax had earned his options, there was no promise that he would receive any particular value for them. The arbitrator agreed that “the risks of the market fall upon the option holder.” The arbitrator continued, “The essential analysis, however, is that these options expired unexecuted not because of the vagaries of the market, but because of inappropriate conduct by the company. The stock option plan surely contains an implied term to the effect that the company will not, through wrongful conduct, deprive the option holder of the value of his or her options. While the company could not literally issue new shares of stock under its registration statement upon an exercise by Mr. Lax, the company was not prohibited from otherwise compensating Mr. Lax for the value to which he was entitled. [¶] In other words, the problem preventing the company from literally issuing options under the plan was that the company had issued false and misleading financial statements for two prior annual periods. It is the company’s responsibility to ensure that its statements are accurate and reliable. In essence, the company is taking the position that it was disabled by its own improper conduct from literally performing, and therefore should have no liability. That is an untenable proposition.” In sum, the arbitrator concluded that, although the option plan provides that the stock will only be issued if it is legal to do so, “that provision can not be read to say that the company can disable itself from the ability to comply literally through misconduct and thereby be exonerated from liability.” “[T]he fact that Tekelec can not literally issue new shares to meet its obligations, because of its own inappropriate conduct, does not mean that it is excused from damages for its non-performance.”
In its reply brief on appeal, Tekelec argues, “The wrongful conduct referenced by the arbitrator consisted of earlier events – namely, the issuance of allegedly false and misleading financial statements over a period of years when Lax was president of the company. It is highly disingenuous of Lax to charge the company with wrongdoing since as CEO, he certified every one of the misleading financial statements.” It is not for the courts to determine whether “[i]t is highly disingenuous of Lax to charge the company with wrongdoing” in this circumstance. The arbitrator found the company’s conduct to be “inappropriate” and “wrongful”; we – and Tekelec – are bound by these findings. (Moncharsh v. Heily & Blase, supra, 3 Cal.4th at p. 11.)
The arbitrator calculated damages not based on the value of the options in February 2006, but at the end of June 2006. The arbitrator made this determination because the market risk falls on Lax, not Tekelec, and “the most appropriate measure of damages would be the value Mr. Lax could have obtained well after the news of Tekelec’s restatements of earnings was public.” As “the closest measure in evidence” is the stock price as of June 30, 2006, the arbitrator used that value. The market price on that date was $12.34. The total damages based on this figure (and the strike price of $8.54) were calculated to be $558,125. The arbitrator also awarded Lax attorney’s fees, costs, and expert witness fees. The final award was served on the parties on June 20, 2008.
There followed cross-petitions to confirm and vacate the award. Tekelec argued the award must be vacated on the basis that the arbitrator exceeded his powers under the arbitration agreement. The arbitration clause of the separation agreement states, in pertinent part, “The arbitrators shall have no power or authority to add to or... detract from the agreements of the parties.” Tekelec’s primary argument was that the arbitrator violated this limitation by holding it liable for breaching an “implied” term in the option plan. Tekelec also argued that this limitation was violated by the arbitrator’s award of damages, and the award of expert witness fees.
The trial court rejected Tekelec’s arguments. It denied the petition to vacate, granted the petition to confirm, and entered judgment in favor of Lax. The trial court then awarded Lax his attorney’s fees as the prevailing party. Tekelec filed timely notices of appeal from both the judgment confirming the award and the order awarding attorney’s fees. We have consolidated the two appeals.
ISSUES ON APPEAL
On appeal, Tekelec pursues the same three arguments it made before the trial court. It argues the arbitrator exceeded his powers by: (1) basing the award on breach of an “implied” contract term; (2) awarding monetary damages; and (3) awarding expert witness fees. We reject each argument.
DISCUSSION
1. Standard of Review
An award must be vacated if the arbitrator “exceeded [his] powers and the award cannot be corrected without affecting the merits of the decision upon the controversy submitted.” (Code Civ. Proc., § 1286.2, subd. (a)(4).) An arbitrator does not exceed his powers simply by making an erroneous decision. “[I]t is the general rule that, with narrow exceptions, an arbitrator’s decision cannot be reviewed for errors of fact or law.” (Moncharsh v. Heily & Blase, supra, 3 Cal.4th at p. 11.)
We do not mean to imply by anything we may say in this opinion that we believe the arbitrator’s decision was in any way erroneous.
“An exception to the general rule assigning broad powers to the arbitrators arises when the parties have, in either the contract or an agreed submission to arbitration, explicitly and unambiguously limited those powers.” (Gueyffier v. Ann Summers, Ltd. (2008) 43 Cal.4th 1179, 1185.) “Absent an express and unambiguous limitation in the contract or the submission to arbitration, an arbitrator has the authority to find the facts, interpret the contract, and award any relief rationally related to his or her factual findings and contractual interpretation.” (Id. at p. 1182.)
Here, we are concerned with a clause stating, “The arbitrators shall have no power or authority to add to or... detract from the agreements of the parties.” Tekelec argues that this clause, and the language of the governing agreements, limits the arbitrator’s power in a way that the arbitrator could not have issued the award that he did. It is clear that this provision would have been effective to bar any attempt by the arbitrator to add or delete contract terms (Gueyffier, supra, 43 Cal.4th at p. 1185). However, the arbitrator’s acts in this case did not rise to this level, as we explain below.
2. The “Implied” Contract Term
Tekelec argues the arbitrator exceeded his powers by implying into the option plan a term “that the company will not, through wrongful conduct, deprive the option holder of the value of his or her options.” The arbitrator did not exceed his powers by implying this term. The implied term is simply a restatement of the implied covenant of good faith and fair dealing which California law implies in all contracts. (Carma Developers (Cal.), Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342, 371, 373.) A breach of that covenant will necessarily result in a breach of contract. (Archdale v. American Internat. Specialty Lines Ins. Co. (2007) 154 Cal.App.4th 449, 468.) Thus, the arbitrator did not add to the option plan; the implied covenant of good faith and fair dealing was part of the option plan all along. Tekelec argues, however, that the implied covenant cannot vary express contractual duties. (Id. at p. 373.) Tekelec is correct; however, the term implied by the arbitrator is wholly consistent with all relevant contract terms.
Tekelec mischaracterizes the term implied by the arbitrator, stating that the arbitrator “found that Tekelec was contractually ‘required’ to ensure that Lax received the value of the stock options.” On the contrary, the arbitrator simply found that the contract required Tekelec to not deprive Lax of the value of his options by Tekelec’s own wrongdoing. The amount Tekelec had to pay constituted damages for its breach of that implied term; paying Lax was not itself an implied term of the contract.
Tekelec argues that this implied term cannot be considered to be the implied covenant of good faith and fair dealing because the arbitrator did not expressly use the words “good faith and fair dealing” and the issue was never before the arbitrator. There is no evidence in the record as to whether the issue was or was not before the arbitrator. At the hearing on the cross-petitions, Lax’s counsel represented to the trial court that he could submit, if the court wished, his arbitration brief in which “page after page we talked about they breached the implied covenant of good faith and fair dealing.” Moreover, “an arbitrator has the power to decide the submitted matter on any legal or factual basis, whether or not any party has relied upon that particular basis.” (Moshonov v. Walsh (2000) 22 Cal.4th 771, 777.) In any event, breach of the implied covenent is a breach of contract, which was an issue concededly before the arbitrator.
There is no dispute that Lax’s separation agreement incorporates by reference the option plan with respect to Lax’s vested option rights. Tekelec argues that the option plan “contained a single limited remedy if the options could not be exercised.” The provision on which Tekelec relies in the stock option plan is the subdivision entitled “Termination of Eligibility,” which provides that if an optionee’s employment is terminated, option rights continue for only three months after termination. The provision goes on to state that Tekelec “may at any time” extend the period for no more than a total of six months following an employee’s termination. This provision simply discusses the period in which a terminated employee may exercise its option; it discusses a possible extension, but there is no description of the possible extension as a remedy for a legal inability to exercise the option. Indeed, it is equally likely that the provision exists to give the employee an additional three months in which to ride out a drop in share price. In short, the termination provision is not a contractual “limited remedy” for an inability to exercise the option; the option plan is instead silent on the remedy for an inability to exercise the option, and equally silent on the remedy when the inability to exercise the option is the result of Tekelec’s wrongdoing. The arbitrator’s decision to require a remedy for breach of the implied covenant does not contradict or vary the terms of the contract at all.
We note that “[f]ashioning remedies for a breach of contract or other injury is not always a simple matter of applying contractually specified relief to an easily measured injury. It may involve, as in the present case, providing relief for breach of implied covenants, as to which the parties have not specified contractual damages.” (Advanced Micro Devices, Inc. v. Intel Corp. (1994) 9 Cal.4th 362, 374.)
Tekelec also relies on the release Lax signed as part of the amendment to his separation agreement. Tekelec notes that, in the release, Lax acknowledged that Tekelec made no assurances that Lax would be able to exercise his options under the extended option period, nor did it guarantee any value of the options if they could be exercisable. Neither of these terms is contradicted by a requirement that Tekelec compensate Lax when the options are unexercisable due to Tekelec’s own misconduct. Moreover, the arbitrator concluded the release was unenforceable if applied to claims for Lax’s inability to exercise the options during the extended period due to Tekelec’s own misconduct. Tekelec’s reliance on the release is therefore barred.
See footnote 5, ante.
3. The “Unauthorized” Remedy
The arbitrator concluded Lax was entitled to the amount he would have received had he exercised his options after Tekelec’s corrected financial statements had been released. Tekelec argues that this remedy was not authorized by the contract terms. Tekelec relies on the language in the separation agreement stating, “[I]n any action or proceeding arising out of, relating to or concerning this Agreement, including any claim of breach of contract, liability shall be limited to compensatory damages proximately caused by the breach and neither party shall, under any circumstances, be liable to the other party for consequential, incidental, indirect or special damages, including but not limited to lost profits or income....” Tekelec argues that the arbitrator improperly awarded consequential and lost profit damages, by characterizing the remedy awarded as “the profits [Lax] would have received, if he lawfully could have exercised his options, he had been issued shares by the company, and he had sold them in the market for a profit on June 30, 2006 – risks that Lax exclusively had assumed.” The arbitrator did not award consequential damages or lost profits; the arbitrator awarded the value of the options which Lax was deprived of the right to exercise by Tekelec’s misconduct. That a determination of the value of the options necessarily depended on the amount for which the stock was trading does not transform the award into one for improper “lost profits.” The options constituted the right to purchase 146,875 shares of Tekelec stock at a price of $8.54; their value depends on the market value of the stock at the time of exercise.
In contrast, an improper award of lost profits would have considered subsequent increases to the market value of Tekelec’s stock and awarded Lax an amount based on a hypothetical situation in which he exercised the options and held the stock until its value increased.
Tekelec next argues that Lax never submitted to the arbitrator evidence of the market value of the stock on June 30, 2006 – the date on which the arbitrator based his valuation. The record does not include the evidence before the arbitrator; we therefore cannot determine whether Lax put the June 30, 2006 stock price before the arbitrator. We do note, however, that the arbitrator specifically referred to the market price on June 30, 2006 as “the closest measure in evidence.” We therefore decline to accept Tekelec’s representation to the contrary.
4. Improper Expert Fees
The arbitrator awarded Lax expert witness fees, in addition to damages, attorney’s fees and costs. Tekelec argues that this was in violation of the express terms of the separation agreement. Paragraph 16.10 relates to arbitration. It provides that “the prevailing party shall recover costs and attorneys’ fees incurred in arbitration.” Paragraph 16.12 relates to lawsuits. It provides that, “the prevailing party in such lawsuit shall be entitled to recover from the losing party all reasonable attorneys’ fees, costs of suit and expenses (including the reasonable fees, costs and expenses of appeals).” Tekelec argues that expert witness fees are “expenses,” which are awardable to the prevailing party in a lawsuit, but not in an arbitration.
This “lawsuit” provision clearly applies to the instant action, a court proceeding brought to vacate the arbitration award.
The arbitrator’s decision on the matter stated, “Whether or not such fees would be recoverable in a court proceeding, the parties agreed that the prevailing party could recover from the losing party ‘all reasonable attorney’s fees, costs of suit and expenses.’ Such a contractual agreement in an arbitration provision clearly is intended to permit the damaged party to be made whole for damages caused by the other party, without discount for litigation costs.” Tekelec argues that the arbitrator mistakenly read the provision governing recoverable costs in lawsuits as governing in arbitrations, when, in fact, the separate arbitration provision did not provide for the recovery of “expenses.” To the extent that the separation agreement does not provide for the recovery of expert witness fees in an arbitration, it is of no matter. First, we would be hard pressed to say the award of expenses was an act in excess of the arbitrator’s powers rather than a simple mistake of fact or law. (Moshonov v. Walsh, supra, 22 Cal.4th at p. 773 [when an arbitrator’s denial of attorney’s fees to a prevailing party rests on the arbitrator’s interpretation of a contractual provision within the scope of the issues submitted for binding arbitration, the arbitrator has not exceeded his powers].) Second, an arbitration award is to be vacated only when the arbitrators “exceeded their powers and the award cannot be corrected without affecting the merits of the decision upon the controversy submitted.” (Code Civ. Proc., § 1286.2, subd. (a)(4).) When the award can be corrected without affecting the merits, the court may correct the award. (Code Civ. Proc., § 1286.6, subd. (b).) This is such a case. (See Moshonov v. Walsh, supra, 22 Cal.4th at p. 773 [successful party at arbitration sought to correct the award when it alleged it was improperly denied attorney’s fees].) Even if the award of expert witness fees was an act in excess of the arbitrator’s jurisdiction, it does not provide a basis to vacate the award. The trial court therefore did not err in declining to vacate the award.
Tekelec never sought correction of the award – not from the arbitrator, the trial court, or this court.
DISPOSITION
The judgment confirming the arbitration award and the order granting Lax’s motion for attorney’s fees are affirmed. Tekelec is to pay Lax’s costs on appeal.
We Concur: KLEIN, P. J., KITCHING, J.