ANTHONY W. ISHII, Chief Judge.
This case stems from a Licensing Agreement ("the Agreement") between Petitioner Kim-C1, LLC ("Kim") and Respondent Valent Biosciences Corp. ("Valent").
From the submissions of the parties, in July 1999, Kim and Valent entered into the Agreement in order for Kim to provide Valent a license to market, sell, and promote for use on specified crops an agriculture chemical known as CPPU. See Respondent's Exs. 1.4, 1.7. As one of the Agreement's recitals states:
Id. at 1.4. The Agreement identifies the territory to which the license applies as the United States. See id. at 1.6, 1.7. As indicated in the quoted recital, the crop for which Valent is to sell CPPU is identified as grapes (kiwis appear to have been added through a later addendum). See id. at 1.4, 1.5, 1.7, 1.42. Section 2.2 of the Agreement, which is entitled "[Valent] Exclusivity," establishes five conditions that Valent must meet in order "to maintain its exclusive right and license" to sell CPPU. See id. at 1.7, 1.8. Section 2.2(c) sets one of the requirements as the purchase of a specified minimum quantity of CPPU. See id. Of particular note, the end of § 2.2 provides: "If [Valent] fails to meet the above conditions in the Territory, [Valent's] exclusive right to sell Products in the Territory shall be deemed non-exclusive...." Id. at 1.8.
In 2008, the parties had an arbitration with arbitrator Michael Roberts. The arbitrator found for Kim on 6 of 9 issues and declared Kim to be the prevailing party. See Respondent's Ex. 6.11.
In 2010, the parties had a second arbitration, again with arbitrator Michael Roberts. On March 30, 2010, the arbitrator issued a final award. The arbitrator found in favor of Kim on 5 of 6 issues and declared Kim to be the prevailing party. See Respondent's Ex. A at pp. 6-8.
On March 31, 2010, Kim filed a petition to confirm the 2010 arbitration award. On June 28, 2010, Valent filed a motion to vacate the 2010 award.
In the Petition to Confirm Arbitration, Kim requests that the Court confirm the arbitration award pursuant to 9 U.S.C. § 9. See Court's Docket Doc. No. 30. In the opposition to Valent's motion to vacate, Kim argues that the award should not be vacated under either the FAA or Illinois law. See Court's Docket Doc. No. 40 at pp. 6, 10-13. In the sur-reply, Kim argues that Illinois law applies due to the Agreement's choice of law provision. See Court's Docket Doc. No. 46 at pp. 2 (citing § 21.3 of the Agreement), 11-12.
Valent argues that there is no material distinction in the standard of review between the Illinois arbitration act and the FAA, and relies on both federal and Illinois case law to argue for vacatur. Valent also argues that the parties agreed that Illinois law applied to the Agreement and that Illinois state courts would have exclusive jurisdiction. Because the parties chose Illinois law to govern the contract, the Illinois arbitration act applies. Also, Kim sought, and continues to seek here, statutory interest as provided by Illinois law.
"When an agreement falls within the purview of the FAA, there is a strong default presumption ... that the FAA, not state law, supplies the rules for arbitration." Johnson v. Gruma Corp., 614 F.3d 1062, 1066 (9th Cir.2010); Fidelity Fed. Bank, FSB v. Durga Ma Corp., 386 F.3d 1306, 1311 (9th Cir.2004); Sovak v. Chugai Pharm. Co., 280 F.3d 1266, 1269 (9th Cir. 2002). "To overcome that presumption, parties to an arbitration agreement must
There are two provisions of the Agreement at issue, § 21.3 and § 21.4. Section 21.3 reads:
Section 21.4b
Respondent's Ex. 1.23.
There is no dispute that the Agreement falls within the general purview of the FAA. See 9 U.S.C. § 2 (contracts "involving commerce" are under the FAA); Johnson, 614 F.3d at 1066. As such, there is a strong default presumption that the FAA provides the governing procedural rules, including review of the arbitration award for purposes of confirmation and vacatur. The clause cited by the parties is a choice of law provision that adopts not only the laws of Illinois, but also the "laws of the United States of America." See Respondent's Ex. 1.23. As a federal law, the FAA is a law of the United States. As a law of the United States, it would appear that the FAA is incorporated into the Agreement through the choice of law clause. There is nothing in § 21.3 that indicates that the FAA does not apply. Indeed there is nothing in § 21.3 that even purports to specifically address arbitration. The rule is that a general choice of law clause will not defeat the strong presumption in favor of the FAA's applicability. Johnson, 614 F.3d at 1066; Chiron Corp. v. Ortho Diagnostic Sys., 207 F.3d 1126, 1131 (9th Cir. 2000). The general selection of both Illinois law and "the laws of the United States" does not show a clear intent that only Illinois law governs the procedures of arbitration. Cf. id. at 1066-67; Fidelity,
A portion of § 21.4b states that arbitration will be conducted in conformance with the rules of the CPR Institute for Dispute Resolution. See Respondent Ex. 1.23. In cases where contracts select the law of a particular state and then indicate that the rules of a particular arbitrator apply, the Ninth Circuit interprets such contracts as mandating the application of state substantive law regarding the contract and the application of federal procedural law regarding arbitration. See Fidelity, 386 F.3d at 1312; Sovak, 280 F.3d at 1269-70. Vacatur is considered to be a procedural issue. See Johnson, 614 F.3d at 1066-67; Fidelity, 386 F.3d at 1312. Sections 21.3 and 21.4b therefore indicate that federal procedural law, i.e. the FAA, govern the arbitration motion to vacate at issue. See Johnson, 614 F.3d at 1066-67; Fidelity, 386 F.3d at 1312; Sovak, 280 F.3d at 1269-70.
Valent argues that the language of § 21.3 that vests Illinois courts with "exclusive jurisdiction" shows that Illinois law regarding vacatur applies. The Court cannot agree. First, there are no cases cited that interpret this language in connection with arbitration. Second, the particular language is in the nature of a venue selection clause, it does not deal with arbitration. If a general choice of law clause will not overcome the presumption that the FAA applies, the Court fails to see how language that merely sets the location where lawsuits are to be filed would overcome the strong presumption. Since Abbott (as well as Valent) is an Illinois corporation, the clause suggests that it has more to do with Abbott's convenience than with the law governing arbitration.
Because the clauses cited do not clearly show the Illinois arbitration law was intended to govern arbitration, federal law and the FAA govern whether to confirm or vacate the arbitration award in this case. See Johnson, 614 F.3d at 1066-67; Fidelity, 386 F.3d at 1311-12; Sovak, 280 F.3d at 1269-70 (applying the FAA instead of Illinois arbitration law);
Kim argues that the arbitrator's award is not subject to review by any court. As part of the Agreement, the arbitrator's award may be confirmed by courts, but the
Valent argues that, under Illinois law, arbitration awards are subject to vacatur under the Illinois arbitration act, irrespective of contractual language that would forbid review. Accordingly, the arbitration award may be reviewed.
Paragraph 9 of the Agreement's Exhibit 5 reads: "The rulings of the [arbitrator] and the allocation of fees and expenses shall be binding, non-reviewable, and non-appealable and may be entered as a final judgment in any court having jurisdiction." Respondent's Exhibit 1.36 (hereinafter "Paragraph 9").
Valent relies on two Illinois cases, Johnson v. Baumgardt, 216 Ill.App.3d 550, 159 Ill.Dec. 846, 576 N.E.2d 515 (1991) and First Merit Realty Servs. v. Amberly Square Apts., 373 Ill.App.3d 457, 311 Ill.Dec. 720, 869 N.E.2d 394 (2007), in contending that the arbitration award is reviewable despite Paragraph 9. However, as discussed above, vacatur of arbitration awards is a procedural matter that is governed by the FAA, not Illinois law. See Johnson, 614 F.3d at 1066-67; Fidelity, 386 F.3d at 1311-12; Sovak, 280 F.3d at 1269-70. Neither Johnson nor First Merit apply to this case. See id.
In terms of federal cases, the effect of a clause like Paragraph 9 is not clear. The Second Circuit has reviewed a clause that provided that an arbitrator's decision was not "subject to any type of review or appeal whatsoever." Hoeft v. MVL Group, Inc., 343 F.3d 57, 63 (2d Cir.2003). Fearing that interpreting the clause so as to foreclose any judicial review would turn the federal courts into mere rubber stamps, the Second Circuit held that the non-appealability clause could not prevent review of the arbitration award under the vacatur standards of 9 U.S.C. § 10(a). See id. at 64-66; see also Team Scandia, Inc. v. Greco, 6 F.Supp.2d 795, 798 (S.D.Ind. 1998).
The Eleventh Circuit has reviewed an agreement that provided for "binding, final, and non-appealable" arbitration. The Eleventh Circuit held that a "binding, final, and non-appealable" arbitration award "does not mean the award cannot be reviewed. It simply means the parties have agreed to relinquish their right to appeal the merits of their dispute; it does not mean that the parties relinquish their right to appeal an award resulting from an arbitrator's abuse of authority, bias, or manifest disregard of the law." Rollins, Inc. v. Black, 167 Fed.Appx. 798, 799 n. 1 (11th Cir.2006); see also Team Scandia, 6 F.Supp.2d at 798 (interpreting a non-appealability clause that provided for binding, final, and non-appealable arbitration).
The Third Circuit has reviewed a clause that read, "the decision of the arbitrators shall be final and unreviewable for error of law or legal reasoning of any kind and may be enforced in any court having jurisdiction of the parties." Communications Consultant, Inc. v. Nextel Communs. of the Mid-Atlantic, Inc., 146 Fed.Appx. 550, 552 (3d Cir.2005) (hereinafter "Nextel"). The Third Circuit explained that it had read "similar language" as eliminating the ability to challenge the arbitration panel's "legal determinations in federal court." Id. (explaining Tabas v. Tabas, 47 F.3d 1280, 1288 (3d Cir.1995)). The Third Circuit continued, "In the presence of such language, the only permissible basis upon which a litigant may challenge the panel's award is if the litigant can show that the panel's actions were influenced by `corruption, fraud, or partiality,' or that the panel failed to provide a hearing to consider each party's views prior to issuing its decision." Nextel, 146 Fed.Appx. at 552-53.
In a case that pre-dates Kyocera, the Ninth Circuit acknowledged, "While it has been held that parties to an arbitration can agree to eliminate all court review of the proceedings, the intention to do so must clearly appear." Aerojet-General Corp. v. American Arbitration Ass'n, 478 F.2d 248, 251 (9th Cir.1973); see also Bowen v. Amoco Pipeline Co., 254 F.3d 925, 931 (10th Cir.2001) (citing Aerojet as authority that, "although parties to an arbitration agreement may eliminate judicial review by contract, their intention to do so must be clear and unequivocal.").
As noted above, Paragraph 9 states that the arbitrator's "rulings" are "binding, non-reviewable, and non-appealable." The clause is not limited simply to finality or making an appeal, rather it seeks to prohibit review of the arbitrator's "rulings." Hoeft and Nextel have non-appealability clauses that use a variation of the word "review," either the actual word "review" or the word "unreviewable." See Nextel, 146 Fed.Appx. at 552; Hoeft, 343 F.3d at 63. The clauses in Aerojet and Rollins do not contain any form of the word "review." See Rollins, 167 Fed.Appx. at 799 n. 1; Aerojet, 478 F.2d at 251-52. Because of its broad scope through the use of the term "unreviewable," Paragraph 9 is more comparable to the clauses in Hoeft and Nextel, than the clauses in Aerojet and Rollins.
The Court understands the concerns raised by, and the rationale of, Hoeft. However, Hoeft cited Aerojet as one of the "far more scarce" decisions that appear to be willing to narrow the scope of review of an arbitration award. See Hoeft, 343 F.3d at 64. Hoeft parenthetically described Aerojet as noting in dicta that "parties to an arbitration agreement may eliminate judicial review by contract." Id. Hoeft's characterization of Aerojet is the same as Bowen's characterization of Aerojet, and appears to be correct.
In Kyocera, the Ninth Circuit indicated that parties agreeing to a narrower scope of review may be less problematic than parties agreeing to a broader scope of
In contrast to Hoeft, the Nextel decision acknowledges that parties may limit the scope of review of an arbitration award. The Third Circuit read the clause in that case, which made the arbitrator's "decisions... unreviewable for errors of law or legal reasoning," as allowing the parties to seek review of whether the arbitrator was "influenced by corruption, fraud, or partiality," or whether the arbitrator did not provide a hearing that considered a party's views prior to issuing a decision. Nextel, 146 Fed.Appx. at 553. Essentially, the Third Circuit's interpretation of that clause permitted review under § 10(a)(1), § 10(a)(2), and § 10(a)(3), but not § 10(a)(4). Cf. 9 U.S.C. § 10(a). This is consistent with language of that clause because that clause made the arbitrator's "decisions ... unreviewable...."
Here, Paragraph 9 clearly intends to limit the parties' ability to seek review of the arbitration rulings. It expressly states that the "rulings" are to be "non-reviewable," in addition to being final and non-appealable. See Respondent's Ex. 1.36. The 2010 arbitration award is made in terms of "Rulings on Issues." Respondent's Ex. A at pp. 6-8. The Court believes that Paragraph 9's focus on the arbitrator's "rulings" is similar to Nextel's focus on the arbitrator's "decisions." Both terms encompass the actual awards made. Since § 10(a)(4) permits limited review of the substance of the arbitration rulings/awards, see Kyocera, 341 F.3d at 997, by agreeing to Paragraph 9, both parties agreed to waive their ability to seek vacatur
Valent does not argue that the arbitrator engaged in any misconduct or denied a party the opportunity to be heard, see 9 U.S.C. § 10(a)(3), or that the arbitrator was biased or partial, see 9 U.S.C. § 10(a)(2), or that the award was procured through fraud or undue influence. See 9 U.S.C. § 10(a)(3). Instead, Valent relies exclusively on theories that fall under § 10(a)(4). Since Valent agreed not to seek review of the arbitrator's rulings, that is to attack the arbitration award through § 10(a)(4), Valent's motion to vacate will be denied. See Nextel, 146 Fed.Appx. at 553; Aerojet, 478 F.2d at 251.
Valent argues that Ruling 2 must be vacated because the arbitrator exceeded his powers. First, the plain language of the Agreement states that, if Valent does not purchase the minimum quantity of CPPU, Valent can proceed under the Agreement as a nonexclusive seller of CPPU products without terminating the Agreement or buying minimum quantities. Doc. 35 at 11:15-17. Nothing in the Agreement requires Valent to chose between buying minimum quantities or forfeiting the licensing agreement. Ruling 2 does not give effect to Valent's rights and expectations under the contract. Second, Ruling 2 is completely irrational in that it cannot be reconciled with Ruling 1. Ruling 1 concludes that Valent did not breach the Agreement by not buying minimum quantities of CPPU and operating under a non-exclusive license. Ruling 2 contradicts this by concluding that Valent "has no right to sell CPPU (neither exclusive nor nonexclusive) unless [Valent] buys the `minimum quantities.'" Id. at 13:7-14:1. The premises of Ruling 2 are that Valent has no right to a non-exclusive license and that Valent's failure to buy minimum quantities is a breach, which forces termination. These premises were rejected in Ruling 1. Third, Ruling 2 is contradictory to, and irreconcilable with, undisputed facts. Specifically, it was undisputed that Valent could sell CPPU products as a non-exclusive licensee without buying minimum quantities of CPPU from Kim. In a March 2009 e-mail, in the pre-hearing brief, and in the testimony of Bruce Brown at the arbitration, Kim indicated that Valent could continue to buy CPPU without buying any minimum quantity. Because it was undisputed that Valent had a non-exclusive right to continue to sell CPPU under the Agreement without the purchase of minimum quantities, the arbitrator could not have found that the Agreement required Valent to elect to either terminate or purchase minimum quantities. Finally, the prior 2008 arbitration award did not dictate Ruling 2. As the arbitrator indicated, the 2008 award did not consider exclusivity or non-exclusivity of the license or the effect nonexclusivity had on Valent's failure to purchase minimum quantities. Further, the 2008 award did not limit Valent to only two choices. The 2008 award gave Valent two choices, but did not foreclose others, it merely stated that Valent "can elect...."
Valent argues that Rulings 3 and 4 exceed the arbitrator's powers because they
Valent argues that Rulings 5 and 6 should be vacated because they were premised entirely on Rulings 2, 3, and 4. Because these rulings exceeded the arbitrator's powers, Rulings 5 and 6 should also be vacated.
Kim argues that the arbitrator made a reasonable and rationale interpretation of the Agreement. When read in its entirety, the Agreement is ambiguous. The Agreement does not clearly define the circumstances that render the Agreement nonexclusive. The arbitrator acknowledged that, despite § 2.2, it appeared that the parties were contemplating an exclusive relationship. The Agreement does not set forth how to proceed under a non-exclusive relationship. No provision of the Agreement identifies the conditions or requirements in a nonexclusive relationship. It would be highly prejudicial for Kim to be kept in limbo by letting Valent not purchase minimum quantities without the requirement that Valent terminate the agreement. Further, at the arbitration, Kim presented evidence that it was still willing to negotiate with Valent over the purchase of CPPU if the Agreement was terminated.
Additionally, the 2008 award required Valent to either purchase minimum quantities or terminate the Agreement. Valent did not appeal the 2008 award and cannot now challenge it.
Kim argues that Rulings 1 and 2 are not contradictory. Ruling 1 addresses whether Valent should be responsible for breaching the prior award. Because the 2008 award did not consider the issue of nonexclusivity and the Agreement does not clearly define the circumstances that render the contract non-exclusive, Ruling 1 forgives Valent for acting in a manner that it believed was lawful. Ruling 2 clarifies how Valent must act going forward.
Kim argues that Rulings 2 is not irreconcilable with undisputed facts. The undisputed facts are simply admissions. The admissions are not enough to vacate the award and do not amount to legally dispositive facts. Further, Brown's testimony indicated that, upon Valent's failure to purchase minimum quantities, the license agreement becomes nonexclusive and leaves open the question of what remedies are available to Kim.
As to Rulings 3 and 4, Kim argues that the 2008 award did not consider the effect of a nonexclusive relationship. Under a nonexclusive relationship, Kim can only be considered its own distributor or unrestricted seller of CPPU, and the price can be set by Kim. Any other conclusion would put Kim in a crippling commercial disadvantage. The arbitrator recognized the possibility that the Agreement's quantity and pricing scheme may not apply in a nonexclusive relationship. Further, evidence was admitted from someone with 40 years experience in the agriculture chemical business. That person testified that he was aware of no instance where a nonexclusive customer was able to control the purchase price of the product based on its sales to someone else. The Agreement's pricing structure was intended to apply when the parties had an exclusive relationship,
Finally, Kim argues that, because the arbitrator's award is reasonable and rational, Kim remains the prevailing party and should be awarded fees, as set by Rulings 5 and 6. Kim also argues that it has incurred substantial legal fees in connection with efforts to confirm the 2010 award, including defending an action initiated by Valent in Illinois. Under Illinois 710 ILCS 5/14, it is appropriate for Kim to be awarded additional attorney's fees (to be determined in a subsequent motion).
In 2008, an arbitrator made inter alia the following relevant rulings:
Respondent's Exs. 6.9 (under "Ruling On Issue 5"), 6.10 (under "Ruling On Issue 9").
As part of their Agreement, the parties agreed that they would submit proposed rulings on the issues presented. See Respondent's Ex. 1.36. The arbitrator was to adopt the entirety of a proposed ruling. See id. The arbitrator was prohibited from issuing a written opinion or otherwise explaining the basis of a ruling. See id.
Various disputes arose, and, in 2010, the parties submitted the following issues for the arbitrator to determine:
Respondent's Ex. A at pp. 5-6.
Prior to hearing closing arguments, the arbitrator explained various thoughts and concerns regarding the case, but emphasized that he had not made up his mind. See Petitioner's Ex. C at 298:18-299:5. The arbitrator stated:
Petitioner's Ex. C at 302:1-5, 303:14-305:9 (emphasis added).
After taking evidence and reviewing the submitted answers to the above issues and hearing closing arguments, the arbitrator issued the following final award in March 2010:
Id. at pp. 6-8.
The FAA provides that, if a party seeks a judicial order confirming an arbitration award, "the court must grant such an order unless the award is vacated, modified, or corrected as prescribed in sections 10 and 11 of [the FAA]." 9 U.S.C. § 9; Bosack v. Soward, 586 F.3d 1096, 1102 (9th Cir.2009); Kyocera Corp. v. Prudential-Bache Trade Servs., 341 F.3d 987, 997 (9th Cir.2003) (en banc). The FAA permits vacatur only: (1) where the award was procured by corruption, fraud, or undue means; (2) where there was evident partiality or corruption in the arbitrators, or either of them; (3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or (4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made. 9 U.S.C. § 10(a); Kyocera, 341 F.3d at 997. The burden of establishing grounds for vacating an arbitration award is on the party seeking to vacate the award. United States Life Ins. v. Superior National Ins. Co., 591 F.3d 1167, 1173 (9th Cir.2010); Employers Ins. of Wausau v. National Union Fire Ins. Co. of Pittsburgh, 933 F.2d 1481, 1485 (9th Cir.1991). The review of an arbitration award is "both limited and highly deferential." Comedy Club, Inc. v. Improv West Assocs., 553 F.3d 1277, 1288 (9th Cir.2009); Schoenduve Corp. v. Lucent Techs., Inc., 442 F.3d 727, 731 (9th Cir.2006). An "arbitrator does not exceed its authority if the decision is a `plausible interpretation' of the arbitration contract," and "the court must defer to the arbitrator's decision as long as the arbitrator... even arguably constru[ed] or appl[ied] the contract." United States Life Ins., 591 F.3d at 1177. However, "[a]n award that conflicts directly with the contract cannot be a `plausible interpretation.'" Frederick Meiswinkel, Inc. v. Laborer's Local Union 261, 744 F.2d 1374, 1377 (9th Cir.1984); Pacific Motor Trucking v. Automotive Machinists Union, 702 F.2d 176, 177 (9th Cir.1983).
For purposes of § 10(a)(4), "[a]rbitrators exceed their powers when they express a `manifest disregard of law,' or when they issue an award that is `completely irrational.'" Bosack, 586 F.3d at
"An award is completely irrational only where the arbitration decision fails to draw its essence from the agreement." Lagstein, 607 F.3d at 642; Comedy Club, 553 F.3d at 1288. This standard is "extremely narrow." Bosack, 586 F.3d at 1106. "An arbitration award draws its essence from the agreement if the award is derived from the agreement, viewed in light of the agreement's language and context, as well as other indications of the parties' intentions." Lagstein, 607 F.3d at 642; Bosack, 586 F.3d at 1106. "[T]he question is whether the award is `irrational' with respect to the contract, not whether the panel's findings of fact are correct or internally inconsistent." Lagstein, 607 F.3d at 642; Bosack, 586 F.3d at 1106. Further, "[courts] do not decide the rightness or wrongness of the arbitrators' contract interpretation, only whether the panel's decision `draws its essence' from the contract." Bosack, 586 F.3d at 1106; New Meiji Market v. United Food & Comm'l Workers Local Union 905, 789 F.2d 1334, 1335 (9th Cir.1986).
"`Manifest disregard of the law' means something more than just an error in the law or a failure on the part of the arbitrators to understand or apply the law." Lagstein, 607 F.3d at 642. "[T]o demonstrate manifest disregard, the moving party must show that the arbitrator underst[ood] and correctly state[d] the law, but proceed[ed] to disregard the same." Bosack, 586 F.3d at 1104; Collins v. D.R. Horton, Inc., 505 F.3d 874, 879 (9th Cir. 2007). "[T]here must be some evidence in the record, other than the result, that the arbitrators were aware of the law and intentionally disregarded it." Bosack, 586 F.3d at 1104; Collins, 505 F.3d at 879. In some cases, "legally dispositive facts are so firmly established that an arbitrator cannot fail to recognize them without manifestly disregarding the law." Coutee v. Barington Capital Group, L.P., 336 F.3d 1128, 1133 (9th Cir.2003).
The rulings of the arbitrator in this case are pursuant to a "baseball style" arbitration. See Abbott Labs. v. Orasure Techs., Inc., 2004 WL 887383, *1, 2004 U.S. Dist. LEXIS 7063, *3 (N.D.Ill. April 23, 2004). As per the parties' agreement, the arbitrator adopts the entirety of one party's proposed ruling on an issue, and the arbitrator cannot make changes to that ruling or explain his rationale for choosing that ruling over the other. See Respondent's Ex. 1.36. This style of arbitration makes review by the Court difficult. Depending on how detailed a ruling is, the format may require a court to speculate as to the arbitrator's rationale for choosing one side's proposed ruling over the other side's ruling.
The statements made by the arbitrator in this case indicate that he had a serious concern about the scope of the Agreement. Specifically, whether the Agreement was meant to govern the parties' relationship only when Valent maintained its exclusive license or whether the Agreement was meant to govern the parties' relationship under either an exclusive or nonexclusive license.
Of particular importance is the recital that states that the parties wish to provide to Valent an "exclusive right to use, market, promote, and sell certain products containing the [Kim] technology for use on Grapes...." Respondent's Ex. 1.4. Valent has pointed to only the single portion of § 2.2 that references a nonexclusive license. Valent does not discuss the "exclusive right" recital, Kim's contention that the Agreement as a whole is designed for governing an exclusive relationship, or point the Court to any other provision of the Agreement that references or discusses a "nonexclusive" license. Further, although the arbitrator did not reference what specific negotiations or which specific documentation caused him to question the scope of the Agreement, Valent has pointed the Court to no pre-Agreement document that indicates that the Agreement was meant to govern the parties relationship if Valent's license became non-exclusive. It is Valent's burden to show that vacatur is appropriate. See United States Life Ins., 591 F.3d at 1173.
From the arbitrator's statements, it is clear that in his mind he was required to resolve the scope of the Agreement in relation to a nonexclusive license by Valent. The arbitrator could have relied on the structure of the Agreement and the recitals (particularly the recital that the parties intended to provide Valent with an "exclusive right"), various documentation, and negotiations to conclude that, although Valent has the option of having a nonexclusive license, the Agreement is not meant to govern the relationship between the parties once Valent's license becomes nonexclusive. Cf. United States Life Ins., 591 F.3d at 1177 ("An arbitration award draws its essence from the agreement if the award is derived from the agreement, viewed in light of the agreement's language and context, as well as other indications of the parties' intentions." (emphasis added)); Bosack, 586 F.3d at 1106 (same). That is, the arbitrator could have interpreted § 2.2 as merely giving Valent the option of obtaining a nonexclusive license, but not setting the terms of the relationship under the nonexclusive license going forward. Such an interpretation is not an express contradiction of § 2.2, and relying on inter alia the recitals of the contract to help interpret the effect of § 2.2 and the contract as a whole does not exceed the arbitrator's powers. See United States Life Ins., 591 F.3d at 1177; Bosack, 586 F.3d at 1106. While perhaps not a correct interpretation of the contract, it is an interpretation that draws its essence from the contract. See Bosack, 586 F.3d at 1106.
Consistent with the questions and concerns voiced by the arbitrator, if the Court assumes that the arbitrator found that the Agreement does not govern the parties' relationship in the event that Valent's license becomes nonexclusive, then Rulings 2 through 6 do not exceed the arbitrator's powers.
The Court is not persuaded by Valent's arguments that Ruling 2 exceeds the arbitrator's powers.
First, although the Court is not aware of a provision in the Agreement that expressly requires Valent to make an election
Second, Ruling 1 and Ruling 2 are not irreconcilable. Ruling 1 addresses the question of whether Valent, in light of the Agreement's nonexclusivity provision, should pay for not following the 2008 award's requirement to either purchase minimum quantities or terminate the Agreement. Ruling 2 addresses the question of whether Valent, in light of the Agreement's nonexclusivity provision, is relieved of its obligation under the 2008 award to either purchase minimum quantities or terminate.
The nature of the arbitration mandated by the parties amounts to a series of all or nothing propositions. The parties forced the arbitrator to choose, without comment or modification, between two competing rulings. In Ruling 1, the arbitrator chose the only ruling that reflected the conclusion that Valent's choice to go nonexclusive was within the terms of the Agreement. Because going nonexclusive was a possibility provided by the Agreement, it was reasonable for the arbitrator to choose the only proposed ruling that acknowledged that option.
In light of Valent's nonexclusive license, Ruling 1 and Ruling 2 answer separate questions about liability for breach of duty and about the continued effect of the 2008 award's election requirement. The rulings are not irreconcilable. Cf. Bosack, 586 F.3d at 1106.
Finally, the Court is not convinced that Ruling 2 is contrary to firmly established, legally dispositive facts. Valent points to the live testimony of Bruce Brown (a witness for Valent), one line from a letter dated August 14, 2008, one line from an e-mail from March 2009, and one line from Kim's arbitration pre-hearing brief.
The full line from the August 2008 letter, which is a letter from Kim's attorney to Valent's attorney, is, "During their discussion, I am told that both [Kim] and [Valent] indicated that they intended to sell products containing CPPU into the market in 2009 and that neither side objected to the other making such sales." Respondent's Ex. 59. This line simply states that there is no objection to both Kim and Valent selling CPPU, which is consistent with a nonexclusive license. The line says nothing about whether the Agreement will govern in a nonexclusive relationship.
The March 25, 2009, e-mail is from an officer of Kim to an officer of Valent. The cited line reads, "Although the parties are in agreement that [Valent's] failure to order the minimum quantities required rendered the agreement non-exclusive, we are unclear as to the geographic market and crop for which you intend to use the 13 kg of CPPU if delivered." Respondent's Ex. 62. A portion of the line does indicate that the agreement is non-exclusive. However, it is not clear what is meant by "the agreement." In the same line, Kim's officer goes on to require clarification about what geographic area the CPPU will be sold and for use upon what crops. See id. The
The line of the arbitration pre-hearing brief reads, "Thereafter, the contract became nonexclusive as a result of Valent's breach." Respondent's Ex. C-33. This line clearly states that the Agreement became nonexclusive. However, it does not state expressly that, once Valent's license became non-exclusive, the Agreement would continue to govern the relationship of the parties going forward. Further, and as discussed above, the line cited by Valent from the March 25 e-mail indicates that it was not clear that the Agreement governed going forward since Kim requested to know the territory and crop that Valent would target.
Finally, Valent cites the following lines from Bruce Brown's arbitration testimony:
Respondent's Ex. B at 110:8-111:8. Brown's testimony confirms that Valent's license was nonexclusive and that Valent could be nonexclusive going forward. It does not say that the Agreement governed the parties' relationship going forward under Valent's nonexclusive license. Brown's testimony concludes by saying the issue is how Valent goes nonexclusive. If the Agreement governed the relationship of the parties when Valent has a nonexclusive license, there would not necessarily be an issue as to how Valent goes forward. The fact that Brown testified that there was an issue as to how Valent goes forward shows that Kim was not clearly admitting that the Agreement governed the nonexclusive license going forward.
The arbitration pre-hearing brief comes closest to an undisputed fact in Valent's favor. However, an arbitrator only exceeds his powers when the award is contrary to a legally dispositive fact that is "firmly established." Coutee, 336 F.3d at 1133. The evidence indicates that there
Valent has the burden of showing that Ruling 2 exceeded the arbitrator's powers. See United States Life Ins., 591 F.3d at 1173. Valent has not met its burden. Accordingly, the Court will not vacate Ruling 2.
The 2008 award stated that the price for orders of CPPU to Valent in or after 2008 was no more than 35% of the net distributor's price on a per acre basis. See Respondent's Ex. 6.9. The 35% price appears to be derived from Paragraph 6.4 of the Agreement. See Court's Docket Doc. No. 50 at 10 n. 2 (Valent cited Paragraph 6.4 for the proposition that the "transfer price formula set in the 2008 award ... had its genesis in the Agreement...."). The 2008 award was made with the understanding that Valent would have an exclusive license. However, as both parties acknowledge, and as the arbitrator stated, the 2008 award did not consider the effect of Valent opting for a nonexclusive license. If the arbitrator concluded that the Agreement was not meant to govern a nonexclusive relationship, then reliance on the Agreement for setting the price of future purchases would not necessarily be required. This is especially true in light of Brown's testimony that in 40 years in the business, he had never heard of a nonexclusive seller being able to set the purchase price based on its sales to a third party. Just as consideration of the nonexclusive license caused the arbitrator to excuse Valent's failure to terminate or purchase minimum quantities, i.e. Ruling 1, the nonexclusive license caused the arbitrator to set a new purchase price. The different contexts of the 2008 award and Rulings 3 and 4 of the 2010 award make the rulings reconcilable, and justify the arbitrator in setting a price that differs from the 2008 award. The 2008 award sets the purchase price when the parties are in an exclusive license relationship, but the 2010 award sets the purchase price when the parties are in a nonexclusive license relationship. Given the new issue of nonexclusivity, Rulings 3 and 4 are not irreconcilable with the 2008 award. Vacatur is not appropriate.
Valent's arguments against Rulings 5 and 6 are completely dependent upon the Court vacating Rulings 2, 3, and 4. Valent offers no independent arguments for vacating Rulings 5 and 6. As discussed above, Rulings 2, 3, and 4 will not be vacated because Valent has not established that the arbitrator exceeded his powers. Accordingly, the Court will not vacate Rulings 5 and 6.
Under 9 U.S.C. § 9, "the court must grant such an order [to confirm an arbitration award] unless the award is vacated, modified, or corrected as prescribed in sections 10 and 11 of [the FAA]." 9 U.S.C.
However, in its petition and in opposition to Valent's motion to vacate, Kim requests attorneys fees pursuant to Illinois law. The opposition clarifies that Kim is relying on 710 ILCS 5/14. See Court's Docket Doc. No. 40 at p. 23. That statute is part of the Illinois arbitration act. It reads, "Upon the granting of an order confirming, modifying, or correcting an award, judgment shall be entered in conformity therewith and be enforced as any other judgment. Costs of the application and of the proceedings subsequent thereto, and disbursements may be awarded by the court as to the court seems just." 710 ILCS 5/14.
Kim's reliance on 710 ILCS 5/14 is problematic. First, the Court has determined that the procedures of the FAA, not the Illinois act, govern in these motions. Second, Illinois case law has determined that attorney's fees may not be awarded under 710 ILCS 5/14. See Negro Nest, LLC. v. Mid-Northern Mgmt., 362 Ill.App.3d 640, 298 Ill.Dec. 436, 839 N.E.2d 1083, 1090-91 (2005); International Fed'n of Profl & Tech. Eng'rs, Local 153 v. Chicago Park Dist., 349 Ill.App.3d 546, 285 Ill.Dec. 587, 812 N.E.2d 407, 412-13 (2004). Because Kim has not shown that 710 ILCS 5/14 applies in this case, and because 710 ILCS 5/14 does not authorize the award of attorney's fees, Kim's request for attorney's fees beyond those awarded by the arbitrator (Rulings 5 and 6 above) will be denied.
First, Valent seeks to vacate five of six rulings of the 2010 arbitration award. Vacatur is not appropriate. The parties agreed that the arbitration award was binding, non-reviewable, and non-appealable. Whether to vacate the award is determined by the FAA, and Ninth Circuit and Third Circuit law indicate that Paragraph 9 prohibits review under 9 U.S.C. § 10(a)(4). Since the grounds Valent relies upon fall exclusively under 9 U.S.C. § 10(a)(4), Valent has waived its ability make these arguments. Denial of the motion is justified on this basis alone. However, even if the Court does not uphold Paragraph 9, the arbitrator's rulings do not exceed his powers if it is assumed that he determined that the Agreement was not meant to govern the relationship of the parties going forward once Valent's license became nonexclusive. Such an interpretation of the Agreement, while perhaps not correct, is not implausible, draws its essence from the Agreement, and has not been shown to contradict the express language of the Agreement.
Second, Kim seeks to confirm the 2010 award and also seeks attorney's fees. As vacatur of the award is inappropriate, the Court must confirm the award. However, because the Illinois law cited by Kim appears to be inapplicable, and in any event has been held to not authorize attorney's fees, Kim has shown no basis for the Court to award attorney's fees beyond the amount authorized by the arbitrator.
Accordingly, IT IS HEREBY ORDERED that:
1. Respondent Valent's motion to vacate the 2010 arbitration award is DENIED;
2. Petitioner Kim's motion to confirm the 2010 arbitration award is GRANTED;
3. The arbitration award issued by arbitrator Michael Roberts and dated March 30, 2010, is CONFIRMED in its entirety;
3. Petitioner Kim's request for attorney's fees is DENIED; and
IT IS SO ORDERED.
[Valent] has prevailed on Issue No. 1 whereby [Kim] seeks to recover $1,527,484.69 for [Valent's] alleged breach of the Agreement. [Kim] has prevailed on Issue No. 2 relating to the requirement that [Valent] make an election to purchase the minimum quantities set forth in the Agreement and the prior award or terminate the Agreement. [Kim] has prevailed on the issue of the transfer price to be paid for the orders described in Issues Nos. 3 and 4.
The Agreement requires the Arbitrator to allocate fees and expenses in a way that bears a reasonable relationship to the outcome of the arbitration, with the party prevailing on more issues or on issues of greater value or gravity, recovering a relatively larger share of its legal fees and expenses. Based on the weight of the respective issues, the Arbitrator determines that overall, [Kim] was 60% successful and [Valent] was 40% successful. Accordingly, I hereby determine that [Kim] is the prevailing party and entitled to recover reasonable legal fees and expenses to the extent it was successful....
