Exhibit 10.14


 


EMPLOYMENT AGREEMENT


 


This
EMPLOYMENT AGREEMENT is entered
into as of May 15, 2002 by and between Specialty Laboratories, Inc., a
California corporation (the “Company”), and Douglas S. Harrington, M.D.
(“Executive”), and is effective upon approval of the Compensation Committee of
the Board of Directors.


 


1.             Duties and Responsibilities.


 


A.            Executive shall serve as the
Company’s Chief Executive Officer or such other title or position as may be
designated from time to time by the Company’s Board of Directors.  For no additional compensation, Executive
shall also serve as the Company’s Laboratory Director or Co-Laboratory
Director.


 


B.            Executive agrees to devote his full
time and attention to the Company, to use his best efforts to advance the business
and welfare of the Company, to render his services under this Agreement fully,
faithfully, diligently, competently and to the best of his ability, and not to
engage in any other employment activities.


 


C.            Executive shall be based at the
Company’s office located in Santa Monica, California (which may be moved to
Valencia, California), but Executive shall be required to travel to other
geographic locations in connection with the performance of his Executive
duties.


 


2.             Period of Employment.


 


Executive’s
employment with the Company shall be governed by the provisions of this
Agreement for the period commencing May 15, 2002 and continuing until this
Agreement terminates pursuant to written notification by either the Company or
Executive, which notification may occur at any time for any reason.  The period during which the Executive
provides services to the Company pursuant to this Agreement shall be referenced
in this Agreement as the “Employment Period.”


 


3.             Cash Compensation.


 


A.            Executive’s initial base salary
shall be Four Hundred Twenty Thousand Dollars ($420,000) per year payable in
accordance with the Company’s standard payroll schedule (“Base Salary”).  Executive’s compensation shall be subject to
periodic review by the Company, and may be increased or decreased in the
Company’s discretion.


 


B.            For each fiscal year during the
Employment Period, Executive shall be eligible for an incentive bonus in the
Company’s sole discretion (“Incentive Bonus”). 
For each full fiscal year of employment, Executive shall be eligible for
an Incentive Bonus of up to sixty percent (60%) of his annual base salary.
During the first year of employment, Executive shall be eligible for a pro rata
portion of the Incentive Bonus.  The Incentive
Bonus amount will be based on the following factors:  (1) the financial performance of the Company as determined and
measured by the Company’s Board of Directors, and (2) Executive’s achievement
of management targets and goals as set by the Company.  The Incentive Bonus amount is intended


 

















 


to
reward contribution to the Company’s performance over an entire fiscal year,
and on the basis of continuing, cumulative contribution, and consequently will
be paid only if Executive is employed and in good standing at the time of bonus
payments, which generally occurs within 45 days after the close of the
Company’s fiscal year.  Incentive Bonus
determinations will be made in the Company’s sole discretion.


 


C.            The Company shall deduct and
withhold from the compensation payable to Executive hereunder any and all
applicable Federal, state and local income and employment withholding taxes and
any other amounts required or authorized by Executive to be deducted or
withheld by the Company under applicable statutes, regulations, ordinances or
orders governing or requiring the withholding or deduction of amounts otherwise
payable as compensation or wages to employees.


 


4.             Equity Participation.


 


Pursuant
and subject to the terms and conditions of this Agreement and the Company’s
2000 Stock Incentive Plan and Stock Option Agreement, Executive will be granted
options to purchase Five Hundred Thousand (500,000) shares of the Company’s
common stock (the “Options”) as soon as possible following his commencement of
employment with the Company pursuant to this Agreement. The Options shall vest
as to twenty-five percent (25%) on the first anniversary of such commencement
date and in thirty-six (36) equal monthly installments thereafter over his
continued period of employment with the Company.


 


5.             Expense Reimbursement.


 


In
addition to the compensation specified in Section 3, Executive shall be
entitled, in accordance with the Company’s reimbursement policies in effect
from time to time, to receive reimbursement from the Company for reasonable
business expenses incurred by Executive in the performance of his duties
hereunder, provided Executive furnishes the Company with vouchers, receipts and
other details of such expenses in the form required by the Company sufficient
to substantiate a deduction for such business expenses under all applicable
rules and regulations of Federal and state taxing authorities.


 


6.             Fringe Benefits.


 


A.            Executive shall, throughout the
Employment Period, be eligible to participate in all group term life insurance
plans, group health plans, accidental death and dismemberment plans and
short-term disability programs and other Executive perquisites which are made
available to the Company’s Executives and for which Executive qualifies.  The Company’s Employee Handbook and Summary
Plan Descriptions set forth further information concerning these benefits.


 


B.            Executive shall earn vacation time
during the Employment Period at the rate of four weeks per year. Vacation shall
accrue and be taken pursuant to the Company’s vacation benefit policy set forth
in the Company’s Employee Handbook.


 


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C.            The Company shall reimburse
Executive for rental of an apartment for the first twelve (12) months of the
Employment Period in an amount not to exceed $4,000 per month.


 


7.             Severance Pay for Exercise of the At-Will Clause.


 


Notwithstanding
any of the provisions of this Agreement, Executive’s employment with the
Company is at will, which means that it is not for a specific term and may be
terminated by either the Company or Executive at any time, for any reason, without
advance notice.  Similarly the Company
may change the terms and conditions of Executive’s employment at any time, for
any reason, without advance notice.


 


Should
the Company terminate Executive’s employment for Cause, as defined below, or
should Executive voluntarily resign other than for Good Reason, as defined
below, the Company shall have no obligation to Executive under this Agreement
other than for accrued but unpaid salary and vacation as of the date of
termination.  If during the first two
years of the Employment Period, the Company terminates Executive’s employment
other than for Cause or Executive resigns for Good Reason, the Company shall
have no further obligation under this Agreement, except that the Company shall
continue to pay Executive’s Base Salary on the normal payroll dates (subject to
Section 3.C), and an Incentive Bonus of up to thirty percent (30%) of Base
Salary (pursuant to the terms and conditions set forth in Section 3.B), for a
one-year period following termination of Executive’s employment.  If after the first two years of the
Employment Period, the Company terminates Executive’s employment other than for
Cause or Executive resigns for Good Reason, the Company shall have no further
obligation under this Agreement, except that the Company shall continue to pay
Executive’s Base Salary for a two-year period on the normal payroll dates
(subject to Section 3.C), and an Incentive Bonus of up to thirty percent (30%)
of Base Salary (pursuant to the terms and conditions set forth in Section 3.B)
for a one-year period following termination of Executive’s employment.


 


8.             Good Reason.


 


For
Purposes of this Agreement, “Good Reason” shall mean:


 


A.            Except after a Change in Control (as
defined below), a material reduction in the duties, responsibilities, status,
reporting responsibilities, title, or offices that Executive had with the
Company immediately before the reduction (other than as Laboratory Director or
Co-Laboratory Director);


 


B.            A reduction by more than 10% of the
total annual cash compensation (defined as Base Salary and Incentive Bonus)
that Executive was eligible to receive from the Company and its affiliates
immediately before the reduction, except a reduction that is part of, and
consistent with, an across-the-board reduction in the salaries of senior
officers of the Company;


 


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C.            A Change in Control after which the
Executive is not offered a similar position at no less than ninety percent
(90%) of Executive’s last total compensation (defined as Base Salary plus
Incentive Bonus of sixty percent (60%) of Base Salary (“Last Total
Compensation”));


 


D.            The failure of any successor to the
Company by merger, consolidation or acquisition of all or substantially all of
the business of the Company to assume the Company’s obligations under this
Agreement; or


 


E.             A material breach by the Company of
its obligations under this Agreement.


 


9.             Cause. 


 


For
purposes of this Agreement, “Cause” shall mean a reasonable belief by the Board
of Directors that Executive has engaged in any one of the following:  (i) financial dishonesty, including, without
limitation, misappropriation of funds or property, or any attempt by Executive
to secure any personal profit related to the business or business opportunities
of the Company without the informed, written approval of the Company’s Board of
Directors; (ii) refusal to comply with reasonable directives of the Board of
Directors; (iii) gross negligence or reckless or willful misconduct in the
performance of Executive’s duties; (iv) failure to perform, or continuing
neglect in the performance of, duties assigned to Executive; (v) misconduct
which has a materially adverse effect upon the Company’s business or
reputation; (vi) the conviction of, or plea of nolo contendre to, any felony or
a misdemeanor involving moral turpitude or fraud; (vii) the material breach of
any provision of this Agreement; (viii) violation of Company policies
including, without limitation, the Company’s policies on equal employment
opportunity and prohibition of unlawful harassment; (ix) death of the
Executive; or (x) a disability which continues for a period in excess of 365
days.  A termination as a result of a
Change in Control shall not constitute “Cause”.


 


10.           Special
Change In Control Payments.


 


A.            Change
in Control Acceleration. The Options, to the extent outstanding at
the time of a Change in Control but not otherwise vested and exercisable for
all the shares of Common Stock subject to those Options will, immediately prior
to the effective date of that Change in Control, vest and become exercisable
for all of the shares of Common Stock at the time subject to the Options and
may be exercised for any or all of those shares as fully-vested shares of
Common Stock provided
and only if any of the following conditions are satisfied with respect
to that Change in Control:


 


(i)            Executive is not
offered employment with the surviving entity (“Successor Company”) upon a
Change of Control.


 


(ii)           The Options are not
to be assumed by the Successor Company (or its parent company) or otherwise
continued in effect pursuant to the terms of the Change in Control
transaction,  or the Options are not to
be replaced with


 


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substitute
Options or cash incentives which preserve the spread existing at the time of
the Change in Control on any shares for which the Options are not otherwise at
that time vested and exercisable (the excess of the Fair Market Value of those
shares over the applicable option exercise price) and which vest at the same or
faster rate as in effect under the vesting schedule applicable to the Options;


 


(iii)          Executive is
offered employment with the Successor Company at less than ninety percent (90%)
of Executive’s Last Total Compensation; or


 


(iv)          Executive is offered
employment at a location which is more than one hundred (100) miles from the
Company’s principal office at the time of Change in Control.


 


Should
Executive’s employment with the Company or Successor Company terminate within
twelve (12) months after a Change in Control by reason of (i) a resignation
qualifying as an Authorized Resignation, (ii) a resignation for Good Reason, or
(iii) an involuntary termination of Executive’s employment other than a
termination for Cause (“Involuntary Termination”), then Executive will become
entitled to receive the severance benefits set forth below in this Section 10, provided and only if
Executive executes and delivers to the Company or Successor Company, at the
time of Executive’s Authorized Resignation, resignation for Good Reason or
Involuntary Termination, a general release (in form and substance reasonably
satisfactory to the Company or Successor Company) in which Executive releases
the Company or Successor Company, as applicable, and its officers, directors,
employees and agents from any and all claims Executive may otherwise have with
respect to the terms and conditions of Executive’s employment with the Company
and Successor Company and the termination of that employment.  Such benefits shall be in lieu of any other
severance benefits to which Executive might otherwise, by reason of the
termination of Executive’s employment, be entitled under any other severance
plan, program or arrangement of the Company or Successor Company.


 


(i)            Option Acceleration.   Each outstanding Option which Executive
holds at the time of Executive’s Authorized Resignation, resignation for Good
Reason or Involuntary Termination, to the extent not otherwise vested and
exercisable for all the shares subject to that Option, will immediately vest
and become exercisable for all those option shares and may be exercised for any
or all of those shares as fully vested shares. 
Each Option so accelerated shall remain exercisable until the earlier
of (i) the expiration of the option term or (ii) the end of the limited
post-employment exercise period specified in the option agreement for that
Option.  Such acceleration may result in
the loss of favorable tax treatment under Internal Revenue


 


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Code Section 422 for
Executive’s Options which might have otherwise qualified as incentive stock
options under Internal Revenue Code Section 422.


 


(ii)           Salary
Continuation.  If the resignation or
termination event which triggers his benefit entitlement under this Section 10
occurs during the first two years of the Employment Period, Executive will
receive Executive’s Base Salary on the normal payroll dates (subject to Section
3.C) for a period of twelve (12) months following Executive’s Authorized
Resignation, resignation for Good Reason or Involuntary Termination. If the
resignation or termination event which triggers his benefit entitlement under
this Section 10 occurs after the first two years of the Employment Period,
Executive will receive Executive’s Base Salary on the normal payroll dates
(subject to Section 3.C) for a period of twenty-four (24) months following
Executive’s Authorized Resignation, resignation for Good Reason or Involuntary
Termination.


 


(iii)          Incentive Bonus.  Executive will be entitled to up to thirty
percent (30%) of Executive’s Incentive Bonus (pursuant to the terms and
conditions set forth in Section 3.B) for the fiscal year in which Executive’s
Authorized Resignation, resignation for Good Reason or Involuntary Termination
occurs on the normal payroll dates (subject to Section 3.C).


 


B.            For purposes of this Agreement
“Change In Control” shall mean any of the following transactions effecting a
change in ownership or control of the Company:


 


(i)            a merger,
consolidation or reorganization approved by the Company’s stockholders, unless
securities representing more than fifty percent (50%) of the total combined voting
power of the voting securities of the Successor Company are immediately
thereafter beneficially owned, directly or indirectly and in substantially the
same proportion, by the persons who beneficially owned the Company’s
outstanding voting securities immediately prior to such transaction, or


 


(ii)           any
stockholder-approved transfer or other disposition of all or substantially all
of the Company’s assets, or


 


(iii)          the acquisition,
directly or indirectly, by any person or related group of persons (other than
the Company or a person that directly or indirectly controls, is controlled by,
or is under common control with, the Company), of beneficial ownership (within
the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than
fifty percent (50%) of the total combined voting power of the Company’s


 


6

















 


outstanding
securities pursuant to a tender or exchange offer made directly to the
Company’s stockholders, or


 


(iv)          a change in the
composition of the Board over a period of thirty-six (36) consecutive months or
less such that a majority of the Board members ceases to be comprised of
individuals who either (A) have been Board members continuously since the
beginning of such period or (B) have been elected or nominated for election as
Board members during such period by at least a majority of the Board members
described in clause (A) who were still in office at the time the Board approved
such election or nomination; or


 


C.            For the purposes of this Agreement,
Authorized Resignation means Executive’s voluntary resignation from employment
with the Company for any reason within the period beginning nine (9) months
after the closing of a Change in Control and before twelve (12) months after
the closing of such Change in Control. 
Executive’s resignation at any other time or under any other
circumstances will not constitute an Authorized Resignation and, unless such
resignation is otherwise for Good Reason, will not entitle Executive to any
severance benefits under Section 10 of this Agreement.


 


D.            For purposes of this Agreement, Fair
Market Value shall have the same meaning as set forth in the Company’s 2000
Stock Incentive Plan.


 


11.           Special Tax Gross-Up.


 


A.            In the event that (i) one or more of
the Change in Control payments to which the Executive becomes entitled under
Section 10 of this Agreement (“Change in Control Payments”) or any Other
Parachute Payments to which he may become entitled are deemed, in the opinion
of the Independent Auditors or by the Internal Revenue Service, to constitute
an excess parachute payment under Section 280(G) of the Internal Revenue Code
and (ii) it is determined that the Present Value (measured as of the Change in
Control) of the Parachute Payment attributable to those Change in Control
Payments and the Present Value of any Other Parachute Payments to which the
Executive is entitled exceeds 110% of the Permitted Parachute Amount, then
Executive shall be entitled to receive from the Company an additional payment
(the “Gross-Up Payment”) in a dollar amount determined pursuant to the
following formula:


 


X  = 
Y  ÷  [1 - (A + B + C)], where


 


X
is the total dollar payment of the Gross-Up Payment


 


Y
is the total excise tax (the “Excise Tax”) imposed on the Executive pursuant to
Internal Revenue Code Section 4999 (or any successor provision) with respect to
the excess parachute payment attributable to one or more of the Change in
Control Payments provided the Executive under Section 10 of this Agreement or
any Other Parachute Payment to which he is entitled,


 


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A
is the Excise Tax rate in effect under Internal Revenue Code Section 4999 for
such excess parachute payment,


 


B
is the highest combined marginal federal income and applicable state income tax
rate in effect for the Executive for the calendar year in which the Gross-Up
Payment is made, determined after taking into account the deductibility of
state income taxes against federal income taxes to the extent actually
allowable for that calendar year , and


 


C
is the applicable hospital insurance (Medicare) tax rate in effect for the
Executive for the calendar year in which the Gross-Up Payment is made.


 


Should the 
Present Value (measured as of the Change in Control) of the Parachute
Payment attributable to those Change in Control Payments plus the Present Value
of any Other Parachute Payments to which the Executive is entitled not exceed
110% of the Permitted Parachute Amount, then no Gross-Up Payment shall be made
under this Paragraph 11, and the Change in Control Payments shall instead be
subject to reduction in accordance with the benefit limitation provisions of
Appendix I to this Agreement.


 


B.            Determination
Procedures.  All
determinations required to be made under this Section 11 shall be made by the
Independent Auditors in accordance with the following procedures:


 


(i)            Within ten (10) business days after
each receipt of notice from the Company or the Executive that a Change in
Control Payment or Other Parachute Payment has or is to be made, the
Independent Auditors shall provide both the Executive and the Company with a written
determination of the Parachute Payment attributable to that Change in Control
Payment, together with detailed supporting calculations with respect to the
Gross-Up Payment to which the Executive is entitled by reason of that Parachute
Payment or Other Parachute Payment.  The
Company shall pay the resulting Gross-Up Payment to the Executive within three
(3) business days after receipt of such determination or (if later)
contemporaneously with the Change in Control Payment or Other Parachute Payment
triggering such Gross-Up Payment.


 


(ii)           In the event temporary, proposed or
final Treasury Regulations in effect at the time under Internal Revenue Code
Section 280G (or applicable judicial decisions) specifically address the status
of any Change in Control


 


8

















 


Payment or Other Parachute
Payment or the method of valuation therefor, the characterization afforded to
such payment by the Regulations (or such decisions) shall, together with the
applicable valuation methodology, be controlling.  All other determinations by the Independent Auditors shall be
made on the basis of “substantial authority” (within the meaning of Section
6662 of the Internal Revenue Code).


 


(iii)          The value of the Executive’s
non-competition covenant under Paragraph 13.A of this Agreement shall be
determined by independent appraisal by a nationally-recognized business
valuation firm acceptable to both the Executive and the Company, and a portion
of the Change in Control Payments shall, to the extent of that appraised value,
be specifically allocated as reasonable compensation for such non-competition
covenant and shall not be treated as a Parachute Payment.


 


(iv)          The Company and the Executive shall
each provide the Independent Auditors with access to and copies of any books,
records and documents in their possession which may be reasonably requested by
the Independent Auditors and shall otherwise cooperate with the Independent
Auditors in connection with the preparation and issuance of the determinations
contemplated by this Section 11.


 


(v)           All fees and expenses of the
Independent Auditors and the appraisers shall be borne solely by the Company.


 


C.            Additional
Claims. The Executive shall provide written notification to
the Company of any claim made by the Internal Revenue Service which would, if
successful, require the payment by the Company of an additional Gross-Up
Payment.  Such notification shall be
given as soon as practicable after the Executive is informed in writing of such
claim and shall apprise the Company of the nature of such claim and the date on
which such claim is requested to be paid. 
The Executive shall not pay such claim prior to the expiration of the
thirty (30)-day period following the date on which such notice is given to the
Company (or such shorter period ending on the date that any payment of taxes,
interest and/or penalties with respect to such claim is due).  Prior to the expiration of such thirty
(30)-day or shorter period, the Company shall ether (i) make the additional
Gross-Up Payment to the Executive attributable to the Internal Revenue Service
claim or (ii) provide written notice to the Executive that the Company shall
contest the claim on the Executive’s behalf. 
In the event, the Company provides the Executive with such written
notice of its decision to contest the claim, Executive shall:


 


(i)            give the Company any information
reasonably requested by the Company relating to such claim;


 


9

















 


(ii)           take such action in connection with
contesting such claim as the Company may reasonably request in writing from
time to time, including (without limitation) accepting legal representation
with respect to such claim by an attorney reasonably selected by the Company
and reasonably satisfactory to the Executive, with the fees and expenses of
such attorney to be the sole responsibility of the Company without any tax
implications to the Executive in accordance with the same tax
indemnity/gross-up arrangement as under Section 11(C)(iv) below;


 


(iii)          cooperate with the Company in good
faith in order to effectively contest such claim; and


 


(iv)          permit the Company to participate in
any proceedings relating to such claim; provided,
however, that the Company shall bear and pay directly all additional
Excise Taxes  imposed upon the
Executive and all costs, legal fees and other expenses (including additional
interest and penalties) incurred in connection with such contest and shall
indemnify the Executive for and hold him harmless from, on an after-tax basis,
any additional Excise Tax (including interest and penalties with respect thereto)
imposed upon the Executive and any Excise Tax or income or employment  tax (including interest and penalties with
respect thereto) attributable to the Company’s payment of that additional
Excise Tax on Executive’s behalf or  imposed
as a result of such representation and payment of all related costs, legal fees
and expenses.  The amounts owed to the
Executive by reason of the foregoing shall be paid to him or on his behalf as
they become due and payable.  Without limiting the foregoing
provisions of this Section 11(C)(iv), the Company shall control all proceedings
taken in connection with such contest and, at its sole option, may pursue or
forgo any and all administrative appeals, proceedings, hearings and conferences
with the taxing authority in respect of such claim and may, at the Company’s
sole option, either direct the Executive to pay the tax claimed and sue for a
refund or contest the claim in any permissible manner, and the Executive shall
prosecute such contest to a determination before any administrative tribunal,
in a court of initial jurisdiction and in one or more appellate courts, as the
Company shall determine; provided, however,
that should the Company direct the Executive to pay such claim and sue for a
refund, the Company shall advance the amount of such payment to the Executive,
on an interest-free basis, and shall


 


10

















 


indemnify the Executive for
and hold him harmless from, on an after-tax basis, any Excise Tax or income tax
(including interest or penalties with respect thereto) imposed with respect to
such advance or with respect to any imputed income with respect to such advance
and any income resulting from the Company’s forgiveness of such advance; provided, further, that the Company’s
control of the contest shall be limited to issues with respect to which a
Gross-Up Payment would be payable hereunder, and the Executive shall be
entitled to settle or contest, as the case may be, any other issue raised by
the Internal Revenue Service or any other taxing authority.


 


D.            Definitions.  For the purposes of this Section:


 


(i)            Acquisition-Accelerated Options means any
outstanding Option (or installment thereof) which immediately accelerates upon
a Change in Control pursuant to the acceleration provisions of Section 10 of
this Agreement.


 


(ii)           Average
Compensation means the average of Executive’s W-2 wages from the Company for
the five (5) calendar years (or such fewer number of calendar years of
employment with the Company) completed immediately prior to the calendar year
in which the Change in Control is effected. 
Any W-2 wages for a partial year of employment will be annualized, in
accordance with the frequency which such wages are paid during such partial
year, before inclusion in Executive’s Average Compensation.


 


(iii)          Independent
Auditors  means the accounting firm
serving as the independent auditors of the Company immediately prior to the
Change in Control; provided, however, that in the event such accounting firm also
serves as the independent auditors of the company or other entity effecting the
Change in Control transaction with the Company, then the Independent Auditors
shall mean a nationally-recognized accounting firm mutually acceptable to both
the Company and the Executive.


 


(iv)          Option Parachute Payment means, with respect to
any Acquisition-Accelerated Option or any Severance-Accelerated Option, the
portion of that Option deemed to be a parachute payment under Internal Revenue
Code Section 280G and the Treasury Regulations issued thereunder.  The portion of such Option which is categorized
as an Option


 


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Parachute
Payment will be calculated in accordance with the valuation provisions
established under Internal Revenue Code Section 280G and the applicable
Treasury Regulations and will include an appropriate dollar adjustment to
reflect the lapse of Executive’s obligation to remain in the Company’s employ
as a condition to the vesting of the accelerated installment.


 


(v)           Other
Parachute Payment means any payment in the nature of compensation (other than
the payments and benefits to which Executive becomes entitled under Section 10
of this Agreement) which is made to Executive in connection with the Change in
Control and which constitutes a parachute payment within the meaning of
Internal Revenue Code Section 280G(b)(2) and the Treasury Regulations issued
thereunder.


 


(vi)          Parachute Payment means (i) the Option Parachute
Payment attributable to the Executive’s Acquisition-Accelerated and
Severance-Accelerated Options and (ii) any other payment or benefit to be
provided Executive under Section 10 of this Agreement  which is deemed to constitute a parachute payment within the
meaning of Internal Revenue Code Section 280G(b)(2) and the Treasury
Regulations issued thereunder.


 


(vii)         Permitted Parachute
Amount  means a dollar amount equal
to 2.99 times the Executive’s Average Compensation.


 


(viii)        Present Value means the value, determined as of
the date of the Change in Control, of any payment in the nature of compensation
to which Executive becomes entitled in connection with the Change in Control or
Executive’s subsequent Authorized Resignation, resignation for Good Reason or
Involuntary Termination, including (without limitation) the Option Parachute
Payment attributable to Executive’s Acquisition-Accelerated and
Severance-Acceleration Options and the Parachute Payment attributable to the
additional benefits to which Executive becomes entitled under Section 10 of
this Agreement.  The Present Value of
each such payment shall be determined in


 


12

















 


accordance
with the provisions of Internal Revenue Code Section 280G(d)(4), utilizing a
discount rate equal to one hundred twenty percent (120%) of the applicable
Federal rate in effect at the time of such determination, compounded
semi-annually to the effective date of the Change in Control.


 


(ix)           Severance-Accelerated
Options means any outstanding Option (or installment thereof) which, pursuant
to Section 10 of this Agreement, accelerates upon Executive’s Authorized
Resignation, resignation for Good Reason or Involuntary Termination.


 


12.           Restrictive
Covenants During Employment Period.


 


During
the Employment Period:


 


(i)            Executive
shall devote Executive’s full time and energy solely and exclusively to the
performance of Executive’s duties described herein, except during periods of
illness or vacation periods.


 


(ii)           Executive
shall not directly or indirectly provide services to or through any person,
firm or other entity except the Company, unless otherwise authorized by the
Board in writing.


 


(iii)          Executive
shall not render any services of any kind or character for Executive’s own
account or for any other person, firm or entity without first obtaining the
Company’s written consent.


 


Executive,
however, shall have the right to perform such incidental services as are
necessary in connection with (a) Executive’s private passive investments, but
only if Executive is not obligated or required to (and shall not in fact)
devote any managerial efforts which interfere with the services required to be
performed by him, or (b) Executive’s charitable or community activities, or
participation in trade or professional organizations, or Boards, but only if
such incidental services do not interfere with the performance of Executive’s
services to the Company.


 


13.           Additional Restrictive Covenants.


 


A.            Executive acknowledges and agrees
that given the extent and nature of the confidential and proprietary
information he will obtain during the course of his employment with the
Company, it would be inevitable that such confidential information would be
disclosed or utilized by the Executive should he obtain employment from, or
otherwise become associated with, an entity or person that is engaged in a
business or enterprise that directly competes with the Company.  Consequently, during the Employment Period
and for any additional period thereafter during which the Executive is
receiving payments from the Company as a severance benefit, including but not limited to severance
pay pursuant to Section 6 or any Change in Control Payments under Section
10,  Executive shall not, without prior
written consent of the


 


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Company’s
Board of Directors, directly or indirectly own, manage, operate, join, control
or participate in the ownership, management, operation or control of, or be
employed by, render service to or be connected in any manner with, any
enterprise which is engaged in any business competitive with or similar to that
of the Company; provided, however, that such restriction shall not apply to any
passive investment representing an interest of less than two percent (2%) of an
outstanding class of publicly-traded securities of any Company or other
enterprise which is not, at the time of such investment, engaged in a business
competitive with the Company’s business.


 


B.            During the Employment Period and for
any additional period thereafter during which the Executive is receiving
payments from the Company as a severance benefit, including but not limited to severance pay pursuant to
Section 6 or any Change in Control Payments under Section 10, Executive shall
not encourage or solicit any of the Company’s employees to leave the Company’s
employ for any reason or interfere in any other manner with employment
relationships at the time existing between the Company and its employees.  In addition, Executive shall not solicit,
directly or indirectly, business from any client of the Company, induce any of
the Company’s clients to terminate their existing business relationship with
the Company or interfere in any other manner with any existing business
relationship between the Company and any client or other third party.


 


C.            Executive acknowledges that monetary
damages may not be sufficient to compensate the Company for any economic loss
which may be incurred by reason of his breach of the foregoing restrictive
covenants.  Accordingly, in the event of
any such breach, the Company shall, in addition to the termination of this
Agreement and any remedies available to the Company at law, be entitled to
obtain equitable relief in the form of an injunction precluding Executive from
continuing such breach.


 


14.           Proprietary Information.


 


As
a condition precedent to Executive’s employment with the Company, Executive
will execute the Company’s standard Confidential Information and Assignment of
Inventions Agreement attached hereto as Exhibit A.  Executive’s obligations pursuant to the Confidential Information
and Assignment of Inventions Agreement will survive termination of Executive’s
employment with the Company.


 


15.           Successors and Assigns.


 


This
Agreement is personal in its nature and the Executive shall not assign or
transfer his rights under this Agreement. 
The provisions of this Agreement shall inure to the benefit of, and be
binding on each successor of the Company whether by merger, consolidation, transfer
of all or substantially all assets (whether or not such transaction qualifies
as a Change in Control) or otherwise and the heirs and legal representatives of
Executive.


 


16.           Notices.


 


Any
notices, demands or other communications required or desired to be given by any
party shall be in writing and shall be validly given to another party if served
either personally or if deposited in the United States mail, certified or
registered, postage prepaid,


 


14

















 


return
receipt requested.  If such notice,
demand or other communication shall be served personally, service shall be
conclusively deemed made at the time of such personal service.  If such notice, demand or other
communication is given by mail, such notice shall be conclusively deemed given
forty-eight (48) hours after the deposit thereof in the United States mail
addressed to the party to whom such notice, demand or other communication is to
be given as hereinafter set forth:


 


To
the Company:


 


Human
Resources Department


Specialty
Laboratories, Inc.


2211
Michigan Avenue


Santa
Monica, California 90404-3900


 


To
Executive:


 


Douglas
S. Harrington, M.D.


Current
address as noted in


personnel
file at Company


 


Any
party may change its address for the purpose of receiving notices, demands and
other communications by providing written notice to the other party in the
manner described in this Section.


 


17.           Governing Documents.


 


This
Agreement along with the documents expressly referenced in this Agreement
constitute the entire agreement and understanding of the Company and Executive
with respect to the terms and conditions of Executive’s employment with the
Company and the payment of severance benefits and supersedes all prior and
contemporaneous written or verbal agreements and understandings between
Executive and the Company relating to such subject matter.  This Agreement may only be amended by
written instrument signed by Executive and an authorized officer of the
Company.  Any and all prior agreements,
understandings or representations relating to the Executive’s employment with
the Company are terminated and cancelled in their entirety and are of no
further force or effect.


 


18.           Governing Law.


 


The
provisions of this Agreement will be construed and interpreted under the laws
of the State of California. If any provision of this Agreement as applied to any
party or to any circumstance should be adjudged by a court of competent
jurisdiction to be void or unenforceable for any reason, the invalidity of that
provision shall in no way affect (to the maximum extent permissible by law) the
application of such provision under circumstances different from those
adjudicated by the court, the application of any other provision of this
Agreement, or the enforceability or invalidity of this Agreement as a
whole.  Should any provision of this
Agreement become or be deemed invalid, illegal or unenforceable in any


 


15

















 


jurisdiction
by reason of the scope, extent or duration of its coverage, then such provision
shall be deemed amended to the extent necessary to conform to applicable law so
as to be valid and enforceable or, if such provision cannot be so amended
without materially altering the intention of the parties, then such provision
will be stricken and the remainder of this Agreement shall continue in full
force and effect.


 


19.           Remedies.


 


All
rights and remedies provided pursuant to this Agreement or by law shall be
cumulative, and no such right or remedy shall be exclusive of any other.  A party may pursue any one or more rights or
remedies hereunder or may seek damages or specific performance in the event of
another party’s breach hereunder or may pursue any other remedy by law or
equity, whether or not stated in this Agreement.


 


20.           Arbitration.


 


A.            To the fullest extent allowed by
law, any controversy or claim arising out of or relating to the termination of
the Executive’s employment with the Company or the benefits to which the
Executive may be entitled by reason of such termination shall be settled by
binding and non-appealable arbitration, conducted in the city in which the
Executive is at the time residing, by an arbitrator selected in accordance with
the procedure set forth below.  Possible
disputes covered by the foregoing, include (without limitation) claims pursuant
to Title VII of the Civil Rights Act, the California Fair Employment and
Housing Act and comparable statutes in other states if applicable, the
Americans with Disabilities Act,  the
Age Discrimination in Employment Act, and any other statutes relating to an
employee’s relationship with his employer. The Executive and the Company shall
initially confer and attempt to reach agreement on the individual to be
appointed as the arbitrator.  If no
agreement is reached, the Executive and the Company shall request from the
Judicial Arbitration and Mediation Services (“JAMS”) office in the city where
the arbitration is to be held a list of five retired judges affiliated with
JAMS. The Executive and the Company shall each alternately strike names from
such list until only one name remains, and such person shall thereby be
selected as the arbitrator.  Except as
otherwise provided for herein, such arbitration shall be conducted in
conformity with the procedures specified in the California Arbitration Act
(Cal. C.C.P. §§ 1280 et
seq.) or the comparable statute of the state in which the arbitration
proceedings are to be held.  The
arbitrator shall allow the discovery authorized by California Code of Civil
Procedure section 1283.05 (or the comparable statute of the state in which the
arbitration proceedings are to be held) 
or any other discovery required by law in arbitration proceedings.  To the extent that anything in this
Agreement conflicts with the arbitration procedures required by applicable law,
the arbitration procedures required by applicable law shall govern.  The arbitrator shall issue a written award
that sets forth the essential findings and conclusions on which the award is
based.  The arbitrator shall have the
authority to award any relief authorized by law in connection with the asserted
claims or disputes.  The arbitrator’s
award shall be subject to correction, confirmation or vacation, as provided by
any applicable law setting forth the standard of judicial review of arbitration
awards.


 


B.            The Company shall bear the entire
cost of (i) the arbitrator’s fee, (ii) any other type of expense or cost that
the Executive would not be required to bear if the Executive


 


16

















 


were
free to bring the dispute or claim in court and (iii) any other expense or cost
that is unique to arbitration.  The parties intend that this
Paragraph 30 shall be valid, binding, enforceable and irrevocable and shall
survive the termination of this Agreement. 
Any final decision of the arbitrator so chosen may be enforced by a
court of competent jurisdiction.  The
Executive acknowledges and agrees that he is waiving his right to a jury trial
and agrees that the decision of the arbitrator shall be final and binding.  If the Executive is determined by the
arbitrator to be the prevailing party in the arbitration, then the Executive
shall be entitled to reimbursement from the Company of all the reasonable fees
(including attorney fees) and expenses the Executive incurs in connection with
such arbitration.


 


21.           No
Waiver.


 


The
waiver by either party of a breach of any provision of this Agreement shall not
operate as or be construed as a waiver of any later breach of that provision.


 


22.           Counterparts.


 


This
Agreement may be executed in more than one counterpart, each of which shall be
deemed an original, but all of which together shall constitute but one and the
same instrument.


 


	
   

  	
  SPECIALTY
  LABORATORIES, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  THOMAS R. TESTMAN

  	
   

  
	
   

  	
  Title:

  	
  Chairman
  of the Board

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
  /s/  DOUGLAS S. HARRINGTON

  	
   

  
	
   

  	
  DOUGLAS
  S. HARRINGTON, M.D.

  
							



 


17

















 


APPENDIX I


 


BENEFIT LIMIT


 


1.             Benefit Limit.  Should it be determined that the Present Value (measured as of
the Change in Control) of the Parachute Payment attributable to the Change in
Control Payments, when added to the Present Value of any Other Parachute
Payment to which the Executive may be entitled, does not exceed 110% of the
Permissible Parachute Amount, then no Gross-Up Payment shall be made to
Executive under Section 11 of the Agreement. 
Instead, the limitations set forth in this Appendix I to the Agreement
shall apply.  Accordingly, the amount of
the Change in Control Payments otherwise due the Executive under Section 10 of
the Agreement shall be reduced to the extent necessary to assure that the
Present Value of the Parachute Payment attributable to his Change in Control
Payments, together with the Present Value of any Other Parachute Payments to
which the Executive may be entitled, does not exceed the greater of the
following dollar amounts (the “Benefit Limit”)


 


(a)           the
Permitted Parachute Amount, or


 


(b)           the
amount which yields the Executive the greatest after-tax amount of benefits
under Section 10 of the Agreement after taking into account any excise tax
imposed under Internal Revenue Code Section 4999 on the Change in Control
Payments which are provided to Executive under Section 10 or any Other
Parachute Payments.


 


For
purposes of applying the Benefit Limit to the Change in Control Payments under
Section 10 of the Agreement, the value of the Executive’s non-competition
covenant under Paragraph 13.A of the Agreement shall be determined by
independent appraisal by a nationally-recognized business valuation firm
acceptable to both the Executive and the Company, and a portion of the Change
in Control Payments shall, to the extent of that appraised value, be
specifically allocated as reasonable compensation for such non-competition
covenant and shall not be treated as a Parachute Payment.


 


2.             Reduction of
Benefits.  Once the
requisite determinations under Section 1 hereof have been made, then to the
extent the aggregate Present Value, measured as of the Change in Control, of
(i) the Option Parachute Payment attributable to the Acquisition-Accelerated
and Severance-Accelerated Options (or installments thereof) plus (ii) the
Parachute Payment attributable to the Executive’s other benefit entitlements
under Section 10 of the Agreement would, when added to the Present Value of all
of the Executive’s Other Parachute Payments, exceed the Benefit Limit, the
following reductions shall be made to the Change in Control Payments to which
the Executive is otherwise entitled under Section 10 of the Agreement, to the
extent necessary to assure that such Benefit Limit is not exceeded:


 


first, the Executive’s salary continuation/Incentive Bonus
payment shall be reduced,


 


then the period of his continued healthcare coverage, if
any, shall be shortened.


 


18

















 


To
the extent such Benefit Limit is still exceeded following such reductions, then
the number of shares purchasable under the Options which are to vest on an
accelerated basis pursuant to Section 10 (based on the amount of the Option
Parachute Payment attributable to each Option) shall be reduced to the extent
necessary to eliminate such excess.


 


19