CHENG HING CHIU LIONEL v. CHAM TZE KWONG REIVLIN

HCA 2206/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2206 OF 2006

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J U D G M E N T

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1.  This is the trial of an action in which the Plaintiff is claiming damages for defamation and an injunction against the Defendant arising out of two e-mails sent by the Defendant.

Background

2.  At the material time, i.e., in the year 2006, the Plaintiff was the Acting President and responsible for the operation of a company by the name of Valence Technology Limited (“the Company”) and the Defendant was the Vice-President of Finance and Administration of the same.

3.  The Company was itself a wholly-owned subsidiary of a company incorporated in Bermuda which was registered in Hong Kong under Part XI of the Companies Ordinance and called ValenceTech Limited (“ValenceTech”).

4.  ValenceTech was itself a wholly-owned subsidiary of a company incorporated and listed on the stock exchange in the United States called SRS Labs, Inc. (“SRS Labs”) which developed audio, voice and surround sound technologies and provided patented techniques to consumer electronics manufacturers.

5.  The Chairman, Chief Executive Officer and President of SRS Labs was a person by the name of Tom C. K. Yuen (“TY”).

6.  The Chief Financial Officer of SRS Labs was a person by the name of Ulrich Gottschling (“UG”).

7.  It appears that the Company was carrying on its business of manufacturing and selling of semiconductors used as electronic parts in televisions, computers and electronic musical instruments also through its subsidiary Valence Semiconductor Design Limited.  In the evidence and submissions by Counsel, it does not seem that any distinction is made between the activities and transactions carried out by the Company and by Valence Semiconductor Design Limited.  In the circumstances, I shall likewise not make any distinction between the two companies but will refer to them under the umbrella of the Company.

8.  In or about September 2005, SRS Labs formed the intention to sell the Company (by selling off its shareholding in ValenceTech) to other investors.

9.  Eventually, the interest of SRS Labs in the Company was sold to a syndicate formed between the Plaintiff and certain other members of the staff of the Company (not including the Defendant) and a company by the name of Willas Array Electronics (Holdings) Limited which carried on its business in the sale of electronic components and integrated circuit sales through its subsidiary, Willas Company Limited.

10.  Again, in the evidence and submissions by Counsel, it does not seem that any distinction is made between the activities and transactions carried out by Willas Array Electronic (Holdings) Limited and by Willas Company Limited.  In the circumstances, I shall likewise not make any distinction between those companies but will refer to them under the umbrella of “Willas”.

11.  Willas had been a customer of the Company since mid-2005.  On or about 1^st June 2005, the Company entered into a Distributorship Agreement with Willas.

Events leading up to the two e-mails

12.  After SRS Labs had decided to sell its stake in the Company, various parties showed interest in acquiring the same.  They included senior members of the management staff of the Company.

13.  Without going into the details, a consortium had been formed amongst the management team of the Company, including the Plaintiff, the Defendant, a Mr. H. W. Poon (“Mr. Poon”), the Vice-President of Engineering, and a Mr. Pele Lai (“Mr. Lai”), the Sales Director (“the Management Consortium”).

14.  In or about February 2006, the Management Consortium submitted a leveraged buyout proposal to SRS Labs but the same was rejected by the latter.

15.  Subsequently, at the initiation or through the arrangement of Mr. Lai, Willas was invited to participate with the Management Consortium.  For reasons which I need not go into, the Defendant eventually dropped out.  I shall refer to the syndicate formed between Willas and members of the management team of the Company (excluding the Defendant) as “the Willas Syndicate”.

16.  There was also another syndicate formed between other persons and a company by the name of Bluechips Technology.  I shall refer to this as “the Bluechips Syndicate”.

17.  There is dispute between the parties as to whether the Defendant became a member of the Bluechips Syndicate.  The Defendant has denied that he was.  I shall deal with such controversy below.

18.  For present purposes, suffice it to say that, in about mid-May 2006, SRS Labs decided to accept the bid made by the Willas Syndicate and not that of the Bluechips Syndicate.

19.  There is in evidence a Letter of Intent which sets out the gist of the terms of the buyout between SRS Labs and the Willas Syndicate.  It begins with the words : “This Letter of Intent is prepared on 18^th day of May, 2006 ……………….”.  It is not clear from the evidence as to which side actually prepared the Letter of Intent but it was signed by a Mr. Salakani of Willas, the Plaintiff and Mr. Poon for the Willas Syndicate on 19^th May 2006 and by UG for SRS Labs on 22^nd May 2006.

20.  According to the Plaintiff, whose evidence in this regard has not been challenged, in or about mid-May 2006, he was informed by SRS Labs (presumably by UG) that it was interested in the bid by the Willas Syndicate.  UG then asked him whether the new management of the Company and Willas would wish to retain the service of the Defendant after the change of ownership.  He had discussed the matter with Willas and it had been decided that the Defendant should remain on the board of the Company until all the matters in relation to the buyout of the Company had been completed.  He told UG about this.  UG then made a decision that the Company should give 6 months’ notice to the Defendant to terminate his employment with the Company and requested the Plaintiff to prepare the necessary termination arrangement.  Apparently, the Defendant was not aware of the fact that it was UG who made the decision that the Company should terminate his employment.

21.  On 17^th May 2006, the Plaintiff requested a Ms. Christie Liu (“Ms. Liu”), a Human Resources specialist in the Company, to prepare a letter of termination in respect of the Defendant for execution the next day which she duly did.

22.  It transpired that in the afternoon on 18^th May 2006 the Defendant had to go to see a doctor and the letter of termination was not served on him.  Nevertheless, Ms. Liu did inform the Defendant on the same day that the Company would terminate his employment.

23.  On 19^th May 2006, the Plaintiff presented the letter of termination to the Defendant but he refused to accept it.

24.  Eventually, there was further communication between the Plaintiff and the Defendant about the wording of the letter of termination and the final version of the same (as settled by them and which throws a more favourable light on the Defendant than the original version) was signed by the Plaintiff and the Defendant in the latter part of May 2006.

The two e-mails

25.  The Defendant sent the two e-mails (“the two E-mails”), the subject-matter of this action, to UG (copied to TY) as follows : -

(i)  the first one (“1^st E-mail”) at :

(a)    18/5/06 10:45 p.m. (HK Time)

(b)   18/5/06 7:45 a.m. (US Time)

(ii) the second one (“2^nd E-mail”) at

(a)    20/5/06 1:21 a.m. (HK Time)

(b)   19/5/06 10:21 a.m. (US Time)

26.  The 1^st E-mail reads as follows : -

“Dear Ulrich,

It was sometime since our last talk that I have verbally reported the operational errors over the mismanagement of AP8306 by our Sales and Operations functions.  Please be further informed that I recently discovered our sales people was using fictitious sales to boost up last year’s end sales figure.  It involved the sales of goods to a distributor (now our potential buyer) before year end and then reversed the sales after year end by means of goods returns.  This matter is now under investigation and I will report the progress in due course.

In addition, today, I have heard disturbing information which I would need to clarify with you.  I heard that Our Acting President, Lionel Cheng, is preparing to terminate my employment with Valence.  To me, it is quite surprising.  As you have told me during last telephone conversation that I have been doing a great job in Valence for years.  If you agree to the termination decision, I do really need to know what my problem is.  Is it not correct to make sure the compliance issue, such as SOX 404?  Is Lionel Cheng, with conflicting role against SRS participating in leverage buy-out, the right person to terminate a watch dog in this critical divesture period?

Ever since the shareholder decided to put Valence on sales, I have received tremendous pressure from Lionel Cheng to make provision which will significantly affect the bottomline.  The corresponding provision is either directly or indirectly related to the distributor which is now a potential buyer (in collaboration with Lionel Cheng).  With the precedent case of the fictitious sales, I am skeptical of these transactions and I also opine the provision assumptions are over-conservative and I don’t want to speculate whether this is a result of his conflicting role as a potential buyer and a collaborator of the distributor.

Being a professional CFO, it’s my role to make sure the accounts is fairly stated and I always position myself to be an objective professional who will take care of our shareholders’ interest until the last moment.

Therefore, I worried my termination will be part of the plot to remove the final obstacle.

Could you please advise what the situation is so that I can plan for my next step?

I would really love to talk to you more in detail tomorrow 9:00 am Hong Kong time or 6:00 pm LA time if you could call my mobile phone on (852) 9883-9008.  Thank you for taking it seriously in advance.

Yours sincerely,

Reivlin Cham

Vice President, Finance & Administration

ValenceTech Limited

www.valencetech.com

A Subsidiary of SRS Labs, Inc.

Direct : (852) 2784 2099”

27.  The 2^nd E-mail reads as follows : -

“Hi Ulrich,

Further to our last night telephone conversation, I am sending you my findings over our sales and sales returns activities with our distributor, i.e. Willas, from Q2 2005 to May 15, 2006.  An excel file of “Willas.xls” has summarized those activities by individual part nos.  Lastly and accordingly, a conclusion with recommendation has been drawn up at the end.

(A)    Summary of findings

(1) Goods returns problem from Willas

-  Sales for the period Jan to May 15, 2006 amounted to HK$3,398K.  Goods returned for the same period amounted to HK$1,508K (44.4%).  For the year Jan to Dec 2005, sales amounted to HK$6,532K, Goods returned for the same period amounted to HK$156K (2.3%).

-  The 44.4% was considered exceptional if compared to the average good return rate of the whole company.  A summary is hereby attached for your reference.

-  I received an e-mail today originated from Pele that another HK$712K of returned goods will be made in late May 2006 and July 2006.

-  The significant amount of returned goods had led to provision for diminution in value of stocks.  The exceptionally high % will also raise the attention of the auditors.

(2) Provision for slow moving stocks AP 8306

-  According to the meeting held on May 8, 2006, Lionel had requested to provide HK$702K for all stock on hand and WIP.

-  Willas is the sole distributor of AP8306.  The cumulative sales up to now amounted to HK$2,881K only.  According to the May 8 meeting, I was advised that Willas planned to return the whole HK$1,778K worth of goods which I objected strongly during the meeting.  Therefore, I was wondering whether Pele’s e-mail today is the first part of another big goods returns.

(B) Conclusion

-    Most of the goods returned were booked as sales in Q3 & Q4 of 2005 and Q1 of 2006.  In view of the significant amount involved, there is a risk that the auditor will challenge the genuineness of the sales and re-state the 2005 accounts and the Q1 2006 result.

-    This goods return saga will indicate a major internal control weakness and might have adverse implication under SEC rules.

-   Of the total sales of $9.93m from Willas, Valence had suffered $1.64 m on goods return.  If we included the provision for slow moving stocks $0.70m, Pele’s proposed goods return of $0.72m, Valence suffered a total loss of $2.98m or 32% of the total sales.

-    Summarizing all the points above, I strongly believe we have a very serious issue and I strongly recommend we should involve compliance professionals to investigate the two above mentioned points and all the company’s transactions with Willas.

Best regards,

Reivlin Cham”

The parties’ contentions

28.  The Plaintiff complains that the accusations against him in the two E-mails are false and defamatory of him, that the Defendant knew the same to be false and defamatory of him and that the Defendant published the same with an ulterior motive/ill will for revenge.

29.  The Defendant originally adopted in gist the following lines of defence : -

(i)  the two E-mails were not defamatory of the Plaintiff;

(ii) further or alternatively, the statements about the Plaintiff in the two E-mails were true in substance and in fact (the plea of justification);

(iii)    further or alternatively, the statements about the Plaintiff in the two E-mails insofar as the same consisted of expressions of opinions were fair comments on matters of public interest (the plea of fair comment);

(iv)    further or alternatively, the defence of qualified privilege was available to him.

30.  By the time of the opening submissions by Miss Ng, Counsel for the Defendant, it was made plain that the Defendant was no longer relying on the defences of justification and fair comment.

31.  The two main issues regarding liability left at that stage were therefore whether the words complained of in the two E-mails (“the Words”) were defamatory and, if so, whether the defence of qualified privilege was available to the Defendant.

Whether the Words are defamatory

32.  I deal first with the first main issue.

33.  The crucial paragraph in the pleaded of the Plaintiff is in paragraph 7 of the Statement of Claim which reads as follows : -

“7. The Words in their natural and ordinary meaning meant and were understood to mean that :

(a) In the First E-mail, under the first paragraph :

This paragraph, when read in conjunction with the entire email, means that the Plaintiff was mismanaging the Company, using fictitious sales to boost up year end figures by sales return, thereby committing an act of deceit and/or fraud and/or dishonesty to the Company;

(b) In the First E-mail, under the second paragraph :

This paragraph means that the Plaintiff has a conflict of interests with the Company and that the Plaintiff was terminating the Defendant’s employment in order to remove the Defendant as an alleged watch dog.

(c) In the First E-mail, under the third paragraph :

This paragraph means that the Plaintiff had been unfairly/unlawfully exerting pressure on the Defendant to conduct acts that would harm the Company’s business.  It also refers to the Plaintiff’s alleged conflict of interests with the Company’s business and the Plaintiff’s potential improper transactions that might be an act of deceit and/or fraud and/or dishonesty to the Company.

(d) In the First E-mail, under the fourth and fifth paragraphs :

These two paragraphs when read together mean that the Plaintiff has made a plot to conduct acts of deceit and/or fraud and/or dishonesty to the Company and part of that alleged plot was to remove the Defendant, who was allegedly overseeing the accounts of the Company’s operations, from the Company.

(e) In the Second E-mail :

This e-mail when read as a whole, means that the Plaintiff was part of a “goods return saga” whereby the Plaintiff committed serious misconduct causing significant loss to the Company.”

34.  In the Defendant’s Closing Submissions, Miss Ng has dealt with such pleading in the manner set out below.  She labels the allegations set out in paragraph 7(a) to (e) of the Statement of Claim as the “1^st Imputation”, “2^nd Imputation”, “3^rd Imputation”, “4^th Imputation” and “5^th Imputation” respectively.  She then says in paragraphs 21 and 22 of the Defendant’s Closing Submissions as follows :-

“21.   It is conceded that the 1^st to 4^th Imputations give rise to the said natural and ordinary meaning and are defamatory.

22.    As to the 5^th imputation, it is submitted that the Words complained of in the Second Email does not bear the alleged natural and ordinary meaning as suggested by P.”

35.  Thus, the Defendant makes a further concession regarding the 1^st E-mail but still maintains a denial regarding the 2^nd E-mail.

36.  In my judgment, the 2^nd E-mail is clearly a continuation of the 1^st E-mail because of their proximity in time and the fact that the 2^nd E-mail was a follow-up on the matters referred to in the 1^st E-mail.  They must be read together.

37.  I find as a fact that the accusations against the Plaintiff in both the 1^st E-mail and the 2^nd E-mail are untrue and defamatory of the Plaintiff.

38.  I should add that although the Plaintiff has also pleaded an innuendo, I do not think that it is necessary or appropriate for me to find in favour of the Plaintiff in that respect.  The Words and their meaning on the face of them are quite plain and obvious.  It is not a case of words bearing special meanings for a reader who has special knowledge.

The defence of qualified privilege at common law

39.  The nature and basis of the defence of qualified privilege is well explained by Lord Diplock in the case of Horrocks v. Lowe [1975] A.C. 135 where he said at 149B – 150G as follows : -

“My Lords, as a general rule English law gives effect to the ninth commandment that a man shall not speak evil falsely of his neighbour.  It supplies a temporal sanction : if he cannot prove that defamatory matter which he published was true, he is liable in damages to whomever he has defamed, except where the publication is oral only, causes no damage and falls outside the categories of slander actionable per se.  The public interest that the law should provide an effective means whereby a man can vindicate his reputation against calumny has nevertheless to be accommodated to the competing public interest in permitting men to communicate frankly and freely with one another about matters in respect of which the law recognises that they have a duty to perform or an interest to protect in doing so.  What is published in good faith on matters of these kinds is published on a privileged occasion.  It is not actionable even though it be defamatory and turns out to be untrue.  With some exceptions which are irrelevant to the instant appeal, the privilege is not absolute but qualified.  It is lost if the occasion which gives rise to it is misused.  For in all cases of qualified privilege there is some special reason of public policy why the law accords immunity from suit – the existence of some public or private duty, whether legal or moral, on the part of the maker of the defamatory statement which justifies his communicating it or of some interest of his own which he is entitled to protect by doing so.  If he uses the occasion for some other reason he loses the protection of the privilege.

So, the motive with which the defendant on a privileged occasion made a statement defamatory of the plaintiff becomes crucial.  The protection might, however, be illusory if the onus lay on him to prove that he was actuated solely by a sense of the relevant duty or a desire to protect the relevant interest.  So he is entitled to be protected by the privilege unless some other dominant and improper motive on his part is proved.  “Express malice” is the term of art descriptive of such a motive.  Broadly speaking, it means malice in the popular sense of a desire to injure the person who is defamed and this is generally the motive which the plaintiff sets out to prove.  But to destroy the privilege the desire to injure must be the dominant motive for the defamatory publication; knowledge that it will have that effect is not enough if the defendant is nevertheless acting in accordance with a sense of duty or in bona fide protection of his own legitimate interests.

The motive with which a person published defamatory matter can only be inferred from what he did or said or knew.  If it be proved that he did not believe that what he published was true this is generally conclusive evidence of express malice, for no sense of duty or desire to protect his own legitimate interests can justify a man in telling deliberate and injurious falsehoods about another, save in the exceptional case where a person may be under a duty to pass on, without endorsing, defamatory reports made by some other person.

Apart from those exceptional cases, what is required on the part of the defamer to entitle him to the protection of the privilege is positive belief in the truth of what he published or, as it is generally though tautologously termed, “honest belief.”  If he publishes untrue defamatory matter recklessly, without considering or caring whether it be true or not, he is in this, as in other branches of the law, treated as if he knew it to be false.  But indifference to the truth of what he publishes is not to be equated with carelessness, impulsiveness or irrationality in arriving at a positive belief that it is true.  The freedom of speech protected by the law of qualified privilege may be availed of by all sorts and conditions of men.  In affording to them immunity from suit if they have acted in good faith in compliance with a legal or moral duty or in protection of a legitimate interest the law must take them as it finds them.  In ordinary life it is rare indeed for people to form their beliefs by a process of logical deduction from facts ascertained by a rigorous search for all available evidence and a judicious assessment of its probative value.  In greater or in less degree according to their temperaments, their training, their intelligence, they are swayed by prejudice, rely on intuition instead of reasoning, leap to conclusions on inadequate evidence and fail to recognize the cogency of material which might cast doubt on the validity of the conclusions they reach.  But despite the imperfection of the mental process by which the belief is arrived at it may still be “honest,” that is, a positive belief that the conclusions they have reached are true.  The law demands no more.

Even a positive belief in the truth of what is published on a privileged occasion – which is presumed unless the contrary is proved – may not be sufficient to negative express malice if it can be proved that the defendant misused the occasion for some purpose other than that for which the privilege is accorded by the law.  The commonest case is where the dominant motive which actuates the defendant is not a desire to perform the relevant duty or to protect the relevant interest, but to give vent to his personal spite or ill will towards the person he defames.  If this be proved, then even positive belief in the truth of what is published will not enable the defamer to avail himself of the protection of the privilege to which he would otherwise have been entitled.  There may be instances of improper motives which destroy the privilege apart from personal spite.  A defendant’s dominant motive may have been to obtain some private advantage unconnected with the duty or the interest which constitutes the reason for the privilege.  If so, he loses the benefit of the privilege despite his positive belief that what he said or wrote was true.”

The parties’ contentions

40.  In pleading the defence of qualified privilege, as I understand it, the Defendant argues as follows : -

(i)  The Defendant as the person in charge of the financial side of the Company had a duty to report to the ultimate parent company, SRS Labs, any financial irregularity in the Company.

(ii) The recipients of the two E-mails were limited to only two persons, UG and TY.

(iii)    UG and TY, as the persons at the top level of SRS Labs responsible for overseeing the finances and operation of the Company, had a duty and interest to receive such a report from the Defendant.

(iv)    The Defendant honestly believed in the truth of the two E-mails.

(v) There was no malice of any sort on the part of the Defendant.

41.  In reply, the Plaintiff puts his case as follows : -

(i)  It is accepted that the Defendant had a duty to report any financial irregularity in the Company to SRS Labs.

(ii) It is accepted that UG and TY had a duty and interest on behalf of SRS Labs to receive such a report from the Defendant.

(iii)    The Defendant knew or did not honestly believe that the accusations made against the Plaintiff in the two E-mails were true.

(iv)    The Defendant was actuated by malice in sending the two E-mails in that he wanted to take revenge on the Plaintiff because : -

(a)    he had been informed that the Plaintiff was in the process of terminating his employment with the Company;

(b)   the Willas Syndicate (including the Plaintiff) was successful in buying the stake of SRS Labs in the Company.

The Court’s findings

42.  Having heard and seen the witnesses on both sides and considered all the documentary evidence, I have come to the conclusion that the Defendant knew that the accusations made by him against the Plaintiff in the two E-mails were not true.  I shall set out my reasons below.

43.  After having received the 1^st E-mail, UG had further communications with the Defendant both by e-mail and telephone.  At the same time, UG communicated with the Plaintiff in order to find out more in relation to the complaints made by the Defendant.  Thus, in an e-mail received by the Plaintiff on 22^nd May 2006 at 9:47 p.m. (HK Time), UG informed the Plaintiff about the two E-mails and the fact that he had had several conversations with the Defendant.  He further said that he wished to speak to the Plaintiff and asked the Plaintiff not to speak to the Defendant in the meantime.  UG was not asked to attend Court to give evidence although his witness statement dated 31^st July 2007 was filed on behalf of the Plaintiff.  UG’s witness statement of course does not form part of the evidence, although the said e-mail does.

44.  Within the same day of receipt of the e-mail referred to in paragraph 43 above, the Plaintiff was able to set out in another e-mail received by UG on 22^nd May 2006 at 12:39 p.m. (US Time) details of all the return transactions from Willas, including the reasons for the returns.

45.  Eventually, an internal investigation into the complaints made by the Defendant on the two E-mails was carried out by a Ms. Maria Oppegard (“Ms. Oppegard”), the Financial Controller of SRS Labs.  There is filed a witness statement by her dated 27^th July 2007 for the Plaintiff.  In the witness statement, she has exhibited her report intituled “Willas Company Returns Review, June 2006” (“the Report”).  Although Ms. Oppegard was not called to give evidence and, therefore, her witness statement as such does not form part of the evidence, the Report has been quite extensively referred to and relied on by both parties.  The Report is thus part of the evidence in this case.

46.  The Report was compiled by Ms. Oppegard after she had queried and received replies supported by documentation from the Plaintiff.  Although the Defendant was still in the employment of the Company, it transpired that he declined to assist in the investigation on the basis that it was inappropriate for him to say anything further because he was “the whistle blower”.

47.  In the Report, Ms. Oppegard sets out the detailed figures, the comments by the Plaintiff and her own comments in relation to each of the return transactions with Willas in question.  In fact, it is clear that, on at least one occasion, the return by Willas was at the request of the Company so as to enable it to supply to another of the Company’s customers called Musical.  Willas was in fact doing a favour for the Company.  She in fact verified and accepted all the reasons for the returns as set out in the Plaintiff’s e-mail referred to in paragraph 44 above.

48.  In the end, Ms. Oppegard came to the view that every one of the return transactions was justified.  She wrote her conclusion as follows :-

“Conclusion:

Although Valence was not obligated to accept the returned goods, there appears to be a reasonable and valid business purpose for accepting each return.  The largest return was for $93,984 for the AP8202 chip, and the sole reason for accepting this return was to be able to fill another customer’s order (Musical).  Valence requested via verbal communications to buyback this inventory from Willas.  The return was not instigated by Willas.  Further in almost every situation, the Company has been able to subsequently sell the returned goods to another Valence customer.  In each case other than #3 and #7 (AP8002 and AP903 chip, respectively), Valence’s Sales Director, Pele Lai, and Sales Manager, Aaron Lai, requested that the inventory items be returned, primarily via verbal communications, in order to fill other outstanding purchase order requirements.

Further, the returned inventory and credit to revenue has been immaterial to Valence and the Company’s consolidated revenue for the quarter and year to date (Please see below).

	Credit Memo Recorded	Revenue derived from Willas	%	Total Valence Revenue	%	Total Consolidated Revenue	%
Q2 2006	138,924	87,857#	158%	2,400,000*	6%	6,400,000*	2%
Q1 2006	54,450	498,686	11%	2,213,613	2%	6,549,281	1%
Q4 2005	7,944	330,194	2%	1,997,000	0%	6,266,000	0%
Q3 2005	12,024	298,708	4%	1,930,000	1%	5,653,000	0%
Q2 2005	-	188,616	0%	2,521,000	0%	6,061,000	0%
Q1 2005	-	-		1,985,000	0%	5,249,000	0%
FY 2005	19,968	817,518	2%	8,432,449	0%	23,229,000	0%
To Date	213,342	1,404,062	15%	13,046,062	2%	36,178,281	1%

Notes:

# - Revenue as of 6/12/06

* - Q2 2006 Revenue represents an estimate

Based on discussions with the President of Valence and review of the supporting documents of the transactions, the returns appear reasonable and do not indicate any fraudulent activity.”

49.  Both the Plaintiff and Mr. Lai gave evidence to the effect that before a return transaction could be effected, it had to be approved by the Plaintiff, Mr. Lai and the Defendant who would have to put their signatures on an “RMA-Request Application” form.  If a return was caused by a quality defect, then the Vice-President-Engineering would also have to give his approval and signature.  Both the Plaintiff and Mr. Lai said that the Defendant was very careful in giving his approval for return applications and that, if there was any problem or if there was something he was not clear about, the Defendant would have a discussion with them.  On occasions, the Defendant wanted to see the signatures of the Plaintiff and Mr. Lai on the “RMA-Request Application” forms before he would sign the same.

50.  On the other hand, the Defendant said that he would usually not be concerned with the true reasons for a return transaction and that he would simply trust the Plaintiff and Mr. Lai to be doing the right thing.

51.  I accept the evidence of the Plaintiff and Mr. Lai.  I take the view that they are honest witnesses and give their evidence in a straight forward manner.

52.  I do not accept the evidence of the Defendant that he did not inquire into the reasons for the return transactions (except in relation to the returns of the parts No. AP8202) and just trusted the Plaintiff and Mr. Lai.  Generally, I have formed the impression that the Defendant is a somewhat evasive witness.

53.  There are in evidence eight “RMA-Request Application” forms all signed by the Defendant between September 2005 and April 2006 covering all the return transactions investigated into by Ms. Oppegard and dealt with in detail in the Report.  The Defendant has given me the impression that he is a very careful and meticulous person and I do not believe that he would have agreed to sign those forms unless he was satisfied about the propriety of the transactions.

54.  According to the Defendant, he finally did something in relation to the proposed return by Willas of the parts No. AP8306 which had been manufactured to the specifications laid down by Haier.  He said that he spoke out against accepting the proposed return at a meeting held on 8^th May 2006 because he thought that it would harm the Company.  He said that although he was under tremendous pressure to approve the proposed return, he refused to sign the “RMA-Application Request” form dated 16^th May 2006.  He said that he felt that the position was so bad that he even rang up a Ms. Janet Biski, the former Chief Financial Officer of SRS Labs, the very next day after the meeting on 8^th May 2006 to consult her as to what to do.  According to him, she advised him to draw the attention of SRS Labs to the matter.  In answer to questions by me, he said that he then telephoned UG about this and UG said he would wait for his further reporting.  However, he did nothing until when he wrote the 1^st E-mail.  It was a gap of 9 days between 9^th and 18^th May 2006.

55.  Although a witness statement of Ms. Biski was filed by the Defendant, she was not called as a witness.

56.  According to the Plaintiff, the proposed return of the parts No. AP8306 was a large transaction and it would have a significant impact on the Company.  He therefore called a Supply and Demand Review Meeting on 8^th May 2006 when the senior management team, including the Defendant, met and discussed the matter.  It was agreed by everyone at the meeting that the return should be accepted and what further action should be taken.  It was only after the “RMA-Request Application” form was made up on 16^th May 2006 that the Defendant indicated his unwillingness to sign the same.

57.  I accept the Plaintiff’s evidence in this regard.  I do not accept the Defendant’s evidence that he made an objection about the proposed return of the parts No. AP8306 at the meeting referred to above.  If, as alleged by the Defendant, he felt that the matter was so serious that he even rang Ms. Biski and then UG, it would have been very strange for him not to have done anything further until when he wrote the 1^st E-mail, despite the fact that UG had said that he would wait for his further reporting.  I take the view that by the time it came to the Defendant’s turn to sign on the “RMA-Request Application” form made up on 16^th May 2006, he would have got wind about the termination of his employment and/or the successful bid by the Willas Syndicate.

Conclusion

58.  I find on the balance of probabilities that the Defendant knew the details and reasons for all the return transactions from Willas and that he knew that the accusations made by him against the Plaintiff and the sales and operation team in the Company in the two E-mails were not true when he wrote them.

59.  I further find that the Defendant was triggered into writing the 1^st E-mail by the information given to him by Ms. Liu that the Plaintiff was in the process of terminating his employment with the Company.  Whether he also did it for the purpose of revenge for the termination of his employment or whether he was trying to do something to try and save his career or both is not really material.

60.  Further, in view of the above, it is not necessary for me to make a finding as to whether the Defendant had become a member of the Bluechips Syndicate or whether he sent out the two E-mails for the purpose of revenge because the Bluechips Syndicate was not successful in its bid for the Company.

61.  I therefore find that the Defendant is not entitled to rely on the defence of qualified privilege.

62.  I find the Defendant to be liable to the Plaintiff for damages for defamation in sending the two E-mails to UG and TY.

Damages

63.  As regards the quantum on of damages, I have been referred to a number of cases by the parties most of which relate to defamation by publication in the media.  Each case has to be decided on its own facts.

64.  In the present case, although the accusations are quite serious, I bear in mind the fact that the publication was only to two persons in the ultimate parent company who did not accept the Defendant’s accusations at face value and that the Plaintiff was vindicated by the Report within a relatively short time.  Further, the Plaintiff’s interest in the bid by the Willas Syndicate has not really been affected.  I take the view that the damage suffered by the Plaintiff is limited.

65.  I assess damages in the sum of $40,000-.

66.  In view of the fact that I have come to the view that the Defendant knew that the accusations in the two E-mails were untrue and that he sent them, probably as a result of his reaction to the information that his employment would be terminated, and further that the Defendant has not apologised to the Plaintiff or retracted the falsehood, I also award aggravated damages which I assess to be in the sum of $40,000-.

67.  The total damages therefore amount to $80,000-.

Costs

68.  In view of the fact that the damages awarded amount to only $80,000-, the Plaintiff should have instituted this action in the District Court.  See Yuen Yiu Kwong V. Chan Kwok Chuen [2003] 2 HKLRD 70.

69.  I make an order nisi that the Defendant should pay the costs of this action to the Plaintiff to be taxed on the District Court scale.