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A federal appeals court on Thursday upheld an award of more than $625,000 to the former president and CEO of US Wats Inc., who said he was fired for no reason in December 1996 — about five months before his two-year commitment was to expire — and that he was later cheated out of lucrative stock options. But the unanimous three-judge panel in Scully v. US Wats found that the lower court erred in holding two officers of US Wats personally liable under theories of conspiracy and “alter ego.” And, in a ruling that could significantly swell the award to Mark Scully, the panel found that Senior U.S. District Judge John P. Fullam of the U.S. District Court for the Eastern District of Pennsylvania erred in refusing to award Scully attorneys’ fees under the Pennsylvania Wage Payment and Collection Law. For the most part, however, the appellate panel upheld Fullam’s rulings, saying it agreed with his conclusion that Scully was illegally fired and deprived of his stock options, and endorsed Fullam’s methods for calculating the damages. Fullam found there was “overwhelming evidence” that US Wats breached its contract with Scully and that its attempts to show just cause for his firing “cannot be taken seriously.” In his findings from a non-jury trial, Fullam said that US Wats had “freely admitted” that Scully had “accomplished all that he was expected to accomplish and more.” Scully, who was represented by attorneys Jonathan D. Wetchler and Amy Anderson Miraglia of Wolf Block Schorr & Solis-Cohen, was first hired by US Wats, a Bala Cynwyd, Pa.-based long distance company, as a consultant in the fall of 1994 at a salary of $7,500 per month. Fullam found that US Wats’ co-founders, Aaron Brown and Stephen Parker, were “so impressed” with Scully’s services that they decided to hire him full time to lead the company through a “turnaround.” But Scully insisted that he wanted to share in the benefits of ownership, Fullam found, and contract talks soon focused on stock options. Ultimately, Scully struck an oral two-year employment contract with US Wats and a written contract relating to his stock options over those two years. Fullam found that Scully “entered upon his duties with enthusiasm, and the fortunes of the company greatly improved.” But by mid-1996, Fullam said, Scully was beginning to feel that Parker and Brown were taking actions that would be detrimental to the company’s long-term welfare. The owners, in turn, started thinking that Scully was getting too close to certain employees and worried that they might become loyal to Scully rather than to the owners. In December 1996, without consulting Scully, the owners hired Kevin O’Hare to replace him as president. Scully said he learned of the switch when O’Hare took him out to dinner but said he was assured that his two-year contract would be honored and that he would stay on as CEO until it expired in May 1997. However, just two weeks later, Scully was fired. And when he tried to exercise his option to buy 600 shares of US Wats stock in January 1997, the offer was rejected. Fullam found that Scully’s credible testimony proved there was an oral contract for two years’ employment and that a second oral contract was struck for the final six months when O’Hare assured him that he was being kept on until the expiration date. But Scully was awarded relatively little on his employment contract claim. Instead, the bulk of the award came in the form of lost profits on the stock options that he claimed he was denied. Although Scully was earning $165,000 per year at the post, Fullam found that he had a duty to mitigate his damages when he was fired and that Scully in fact “landed on his feet within two months.” As a result, Fullam found that Scully was entitled to just two months’ lost pay with interest, or $31,442. On the stock options contract, Fullam found that by January 1997, Scully had a vested right to options on 600 shares at 75 cents per share and that his attempt to exercise that right was timely and illegally denied. Since the shares were selling at $1.375 and had risen to more than $2 after the one-year period that Scully would have been required to hold them, Fullam found through a series of calculations that he was denied $595,000 in lost profits. US Wats’ lawyer, Steven M. Coren of Kaufman Coren & Ress, argued that Scully never went into the open market to cover himself by buying stock at ordinary prices. But Fullam said that Scully “should not be made to suffer because, as a result of his illegal firing, he lacked the ready funds to make such an investment, or because less expensive, restricted shares were not available for purchase.” On appeal, US Wats argued that Fullam’s finding of a two-year employment contract was based on insufficient evidence and contrary to Pennsylvania’s presumption of at-will employment. But U.S. Circuit Judge Julio M. Fuentes, in an opinion joined by Judges Anthony J. Scirica and Samuel A. Alito, found that US Wats failed to show that Fullam’s factual findings were “clearly erroneous.” Wrote Fuentes, “In this case, the district court based its determination on the testimony of Scully, US WATS’ principals, and the surrounding circumstances. The court had an opportunity to observe the demeanor and appearance of the witnesses as they testified and to evaluate their believability.” He wrote: “Credibility determinations are the unique province of a factfinder, be it a jury, or a judge sitting without a jury. Accordingly, we may only reject a district court’s finding concerning a witness’s credibility in rare circumstances.” Both sides argued on appeal that Fullam had erred in calculating Scully’s damages from the lost stock options. Fullam measured the damages as of Jan. 23, 1997 — the date that US Wats refused to allow him to exercise them — and then calculated them based on the difference between Scully’s exercise price of 75 cents per share and the market price that day, which was $1.375. Scully’s lawyers said Fullam should have looked to the end of the restrictions period when the stock was selling at $2, when Scully could have reaped $750,000 in profits on his $600,000 shares. But US Wats argued that while Fullam was correct in the date he chose, he erred by failing to apply a discount from the stock’s fair market value to account for the restricted shares’ lack of marketability. Fullam had rejected both approaches, saying Scully’s theory would give him the benefit of hindsight and put him in a better position than if the breach of the employment contract had never occurred, while US Wats’ theory would reward US Wats for the breach and deprive Scully of an important advantage that he enjoyed in the options. Fuentes found that courts have not taken a consistent approach to computing damages from the loss of stocks or stock options, but have split in applying one of two competing theories — conversion and breach of contract. Without endorsing one over the other, Fuentes found that Fullam’s approach to the problem was a wise one. “Given the myriad factors that might arise in each case, we doubt that any single universal damage theory could properly value stock options in all situations. Consequently, we agree with the district court’s damage calculation because it properly weighed and balanced the strengths and weaknesses of competing damage calculation methods to achieve the requisite end of putting Scully in the position most closely reflecting the one he would have held absent US WATS’ breach,” Fuentes wrote. NO CIVIL CONSPIRACY But Fuentes found that Fullam erred in holding both Stephen Parker and Aaron Brown personally liable under a civil conspiracy theory. Fullam found that Parker and Brown “conspired to cheat the plaintiff of the fruits of his employment and the ‘turn around’ success he had achieved for them.” But the appellate panel found that no conspiracy was possible because the evidence against Parker was lacking. “While a review of the record shows support for the proposition that Brown was indeed interested in ousting Scully for devious reasons, neither the district court, the parties, nor our own review of the record have revealed any evidence proving that Parker agreed to wrongfully terminate Scully’s employment in order to avoid the exercise of his stock option,” Fuentes wrote. Finally, the appeals panel found that Fullam erred in holding that US Wats had not violated Pennsylvania wage payment laws for its illegal withholding of the stock options. The ruling is significant because it allows Scully to seek an award of attorneys’ fees as well as liquidated damages. “We are confident that the Pennsylvania Supreme Court would conclude that the stock option granted to Scully, essentially a call option, constitutes ‘wages or compensation’ within the meaning of the WPCL,” Fuentes wrote.

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