EXHIBIT 10.1**EMPLOYMENT AGREEMENT**     This EMPLOYMENT AGREEMENT (“Agreement”), dated as of December 21, 2005 (the “EffectiveDate”), is made by and between AVANIR PHARMACEUTICALS, a California corporation having itsprincipal offices at 11388 Sorrento Valley Road, San Diego, California, 92121 (the“Company”), and Randall Kaye (“Employee”).**AGREEMENT**     1. Commencement Date.          Employee’s employment under this Agreement shall commence on January 16, 2006(“Commencement Date”).     2. At-will Employment.          Employee’s employment relationship with the Company (“Employment”) is at-will,terminable at any time and for any or no reason by either the Company or Employee. While certainsections of this Agreement describe events that could occur at a particular time in the future,nothing in this Agreement shall be construed as a guarantee of employment of any length.     3. Employment Duties.          a. Title. Employee shall be Vice-President of Medical Affairs of the Company andshall be assigned duties and responsibilities consistent with that position at the discretion ofthe Company, including but not limited to working closely with the R&D organization.          b. Full-Time Attention. Employee shall devote his full time, attention, energy andskills to the Company during the period he is employed under this Agreement.          c. Policy Compliance. Employee shall comply with all of the Company’s policies,practices and procedures, including the terms of the Confidentiality Agreement (defined below).     4. Compensation.          a. Base Salary. The Company shall pay Employee a base salary of $21,666.67 per month(an annual rate of $260,000), or such higher amount as the Company may determine from time to time(“Base Salary”), payable in accordance with the Company’s regular payroll practices.
 

 
          b. Bonus Compensation. In addition to the Base Salary, Employee shall be eligible foran annual discretionary bonus of up to 30% of the then-current annual Base Salary, which is payablein October and annually thereafter, provided that the actual bonus may behigher or lower than the target amount, at the discretion of the Company. No bonus will bepayable if Employee is not employed by the Company at the normal time of bonus payment. Any bonuspayable in October 2006 will not be prorated on account of commencement of employment less than oneyear prior to October 2006.          Employee must be employed by the Company when bonuses are distributed in order to be eligibleto receive any portion of such bonus.          c. Signing Bonus. Four months from Commencement Date, assuming Employee is stillemployed by the Company Employee shall receive a signing bonus in the amount of $50,000 tocompensate him for forfeiture of his annual bonus at his prior employer. In the event thatEmployee receives his annual bonus from his prior employer in an amount equal to or greater than$50,000, the Company will not be obligated to pay this signing bonus. The signing bonus shall beimmediately repaid to the Company if, within one year from the Commencement Date, Employee resignsexcept for good cause.          d. Equity Compensation. The Company will recommend to its Board of Directors thatEmployee be granted the following equity awards as additional compensation:                i. Subject to Board approval, Employee shall be granted the option to purchase 50,000 sharesof Class A common stock (the “RestrictedShares”) at a purchase price of $0.001 per share.The Restricted Shares shall vest in full upon Employee’s completion of two full years of employmentand will be governed by the terms and conditions of the 2003 Equity Incentive Plan of the Companyand the form of Restricted Stock Grant Notice, Restricted Stock Agreement and other relateddocuments attached hereto as Exhibit A. The fair market value of the Restricted Shares as of thegrant date will be determined by the Board.                ii. Subject to Board approval, Employee shall be granted the option to purchase 150,000 sharesof Class A common stock, with an exercise price equal to 100% of the fair market value of theunderlying shares on the date of grant, subject to a four-year vesting schedule (25% vesting as ofJanuary 16, 2007 and the remainder vesting in 12 equal installments on April 16, 2007, July 16,2007, October 16, 2007, January 16, 2008, April 16, 2008, July 16, 2008, October 16, 2008, January16, 2009, April 16, 2009, July 16, 2009, October 16, 2009, and January 16, 2010. ) This optionshall be subject to the terms and conditions of the Company’s 2003 Equity Incentive Plan. Theoptions will be intended to be incentive stock options under Internal Revenue Code Section 422 tothe extent permitted by law, and any excess will be intended to be nonstatutory stock options. TheCompany has no responsibility as to actual tax treatment, however.
2

 
The foregoing share amounts and share purchase prices shall be adjusted, as necessary, to giveeffect to any stock split, reverse stock split, stock dividend, recapitalization or similartransaction affecting the Company’s Class A common stock that is effected after the Effective Date.          e. Employee Benefits. Employee shall be entitled to participate in all employeebenefit plans, programs and arrangements maintained by the Company and made available to employeesgenerally. The Employee’s participation in such Company plans orprograms shall be on the same basis and terms as are applicable to other executive employeesof the Company.          f. Reimbursement of Expenses. During his employment with the Company, Employee shallbe entitled to reimbursement for all reasonable and necessary business expenses incurred on behalfof the Company, in accordance with the Company’s policies and procedures.          g. Reimbursement of Moving/Housing Expenses. The Company shall pay Employee $50,000as reimbursement for moving and housing expenses related to his employment with Company. Paymentshall be made on the Commencement Date.     5. Confidentiality Agreement. Employee shall concurrently herewith execute anddeliver to the Company the Employee Confidential Disclosure Agreement (“ConfidentialityAgreement”) in the form attached hereto as Exhibit B.     6. Non-Competition. During his Employment, Employee shall not, directly orindirectly, either as an employee, employer, consultant, corporate officer or director, investor,or in any other capacity, engage or participate in any business that is a Competitor of theCompany, unless such participation or interest is fully disclosed to the Company and approved bythe Board. “Competitor” as used in this paragraph refers to any company that has therapeuticproducts (i) on the market or in clinical development and (ii) that are in competition with theproducts the Company has on the market or that have entered clinical development. Notwithstandingthe above, Employee may own securities in any Competitor that is a public company, so long asEmployee does not own, of record or beneficially, more than an aggregate of five percent of theoutstanding securities of such company.     7. Non-Solicitation. During his Employment, and for a period of 12 months thereafter,whether for Employee’s own account or the account of any other person, Employee shall not solicit,directly or indirectly, any employee to leave his or her employment with the Company. For purposesof this Agreement, the phrase, “shall not solicit, directly or indirectly,” includes, withoutlimitation, that Employee shall not: (i) identify any Company employees to any third party aspotential candidates for employment, such as by disclosing the names, backgrounds, compensation orqualifications of any Company employees; (ii) personally or through any other person approach,recruit or otherwise solicit employees of Company to work for any other employer; or (iii)participate in any pre-employment interview with any person who was employed by the Company whileEmployee was employed by the Company whether under this Agreement or otherwise.
3

 
     8. Agreement with Previous Employers. Employee represents and warrants to the Companythat he does not have any agreement with any previous employer that prevents him from performinghis duties and responsibilities under this Agreement or (other than customary confidentialityagreements) that in any way limits his performance hereunder. Employee understands andacknowledges that his employment with Avanir is contingent upon his compliance with any and allagreements between him and his prior employers.     9. Change of Control. Employee shall be eligible to participate in any future changeof control plan or policy generally applicable to Officers of the Company which, will supersede anythen-existing agreement inconsistent with its terms.     10. Dispute Resolution Procedures. Except as expressly provided in this Agreement,Employee agrees that any dispute or controversy arising out of, relating to, or in connection withthis Agreement, or the interpretation, validity, construction, performance, breach, or terminationthereof shall be settled by arbitration, to the extent permitted by law, to be held in San DiegoCounty, California in accordance with the National Rules for the Resolution of Employment Disputesthen in effect of the American Arbitration Association (the “Rules”) and in accordance withthe accompanying Mutual Arbitration Agreement attached hereto as Exhibit B. Thearbitrator’s decision shall be final, conclusive and binding on the parties to the arbitrationpursuant to the Mutual Arbitration Agreement. Judgment may be entered on the decision of thearbitrator in any court having competent jurisdiction.     11. Notices. Any reports, notices or other communications required or permitted to begiven by either party hereto, shall be given in writing by personal delivery, overnight courierservice, or by registered or certified mail, postage prepaid, return receipt requested, addressedto each respective party at the address shown below or other current address:     If to AVANIR:                     Avanir Pharmaceuticals