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recognizing that Fifth Circuit has not approved of manifest disregard standard in commercial contract cases and declining to adopt it in such case
Summary of this case from Berk-Cohen Associates, L.L.C. v. Orkin Exterminating Co.Opinion
CIVIL ACTION NO. 01-CV-0607 SECTION "N"
September 11, 2001
ORDER AND REASONS
Before the Court are three motions arising out of an arbitration award. For the following reasons,
(1) Broadscape's Motion for Summary Judgment to confirm the arbitration award is GRANTED.
(2) KDS' Motion to Stay Pending Arbitration is DENIED.
(3) Broadscape's Motion to Stay Re-Arbitration is DENIED.
BACKGROUND
This case arises out of two agreements entered into between Broadscape and KDS in March, 2000. The first agreement was a Rebate and Supply Agreement ("First Agreement") dated March 2, 2000. The second agreement was a Financing, Rebate and Supply Agreement ("Second Agreement") dated March 6, 2000. Both agreements contained clauses requiring binding arbitration in the event of a dispute or claim arising out of or related to the agreement.Broadscape instituted an arbitration proceeding against KDS after Broadscape alleged KDS breached both agreements. The dispute was heard before a panel of arbitrators on December 4, 2000, and, on February 12, 2001, the arbitrators issued an award. The arbitration panel granted an award against KDS and in favor of Broadscape in the amount of $758,585.00. On March 7, 2001, Broadscape filed a complaint with this Court pursuant to Title 9 U.S.C. § 9 to have the arbitration award confirmed. On May 15, KDS filed an answer to the complaint alleging that the award contradicted the express terms of the contracts. As a result, KDS alleged that the arbitration panel exceeded its authority and failed to "draw its essence" from the contracts, manifestly disregarded the law, and was arbitrary, capricious, and contrary to the public policies underlying Louisiana's law of obligations. KDS further alleged that consent to the contracts was vitiated. KDS also reserved its right to invoke the provisions of Article 2.4 of the Second Agreement which they claim provides a separate mechanism for resolving the issue of the readiness for market of the software created by Broadscape. On July 10, 2001, Broadscape then filed a Motion for Summary Judgment to confirm the arbitration award. On July 17, 2001, KDS filed a Motion to Stay confirmation of the award pending a second arbitration on the issue of whether Broadscape's software was ready for market. Subsequent to KDS' filing of the Motion to Stay, Broadscape then filed a Motion to Stay the Re-Arbitration. All three motions are before the Court and each one will be considered in turn.
LAW AND ANALYSIS 1. Motion for Summary Judgment a. Standard of Review
Rule 56(c) of the Federal Rules of Civil Procedure provides that summary judgment should be granted "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). The mover must inform the court of the basis for its motion and set forth those portions of the record which it believes demonstrate that there is no genuine issue of material fact.Stults v. Conoco, 76 F.3d 651, 656 (5th Cir. 1996), citing Skotak v. Tenneco Resins, Inc., 953 F.2d 909, 912-3 (5th Cir. 1992), quoting Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Once the moving party has carried its burden, the opponent must come forward with "specific facts showing that there is a genuine issue for trial." Matsushita Elec. Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 588 (1986). If the record, taken as a whole, could not lead a rational trier of fact to find for the nonmoving party, then there is no genuine issue of material fact. Id.
b. Standard of Review of an Arbitration Award
Judicial review of an arbitration award is very limited. Anderman/Smith Operation Co. v. Tennessee Gas Pipeline Co., 918 F.2d 1215, 1218 (5th Cir. 1990). Courts must defer to the decision of the arbitrator. Id. If the basis for an award can be inferred from the underlying contract, the reviewing court must confirm the award. Id. Arbitrators need not "disclose or explain the reasons underlying an award." See Antwine v. Prudential Bache Securities, 899 F.2d 410, 412 (5th Cir. 1990).
Under certain circumstances, however, vacating an award may be appropriate. Title 9 U.S.C. § 10 sets forth the grounds on which a court may vacate an arbitration award. The following grounds set forth in 9 U.S.C. § 10 are relevant to the present inquiry:
(1) Where the award was procured by corruption, fraud, or undue means.
(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). KDS relies on these grounds as its basis for its motion to deny summary judgment and refuse to confirm the award.
KDS also claims that there are additional, non-statutory grounds upon which an arbitration award can be vacated, namely, if the award was issued in "manifest disregard of the law." Except in cases involving federal employment rights statutes, the Fifth Circuit has not yet approved of the "manifest disregard" standard and has limited a district court's review of an arbitration award in a commercial contract case to those grounds set forth in Section 10 of the Federal Arbitration Act.Williams v. Cigna Financial Advisors, Inc., 197 F.3d 752 (5th Cir. 1999). Contrary to the position of KDS, the only grounds upon which a commercial arbitration award can be set aside are statutory. In Cigna, the Fifth Circuit made very clear the distinctions between labor and commercial arbitration requiring different standards for reviewing such awards. 197 F.3d at 761. The Fifth Circuit stated that commercial arbitration "is a cheap and efficient form of trial for resolving transactional disputes. The second model (commercial arbitration) requires arbitrators to act as judges." Id. While KDS cites a recent opinion by the U.S. District Court for the Northern District of Texas for the proposition that the manifest disregard standard should be applied to commercial arbitrations, this Court declines to assert an additional standard when the Fifth Circuit has made it clear that there is a distinction between commercial and employment rooted arbitrations.
Defendant's Opposition to Plaintiff's Motion for Summary Judgment, p. 7.
Title 9 U.S.C. § 10 is the only basis on which KDS can prevent the confirmation of the arbitration award. KDS asserts that the arbitration panel (1) exceeded their powers by contradicting the terms of the contracts which invalidated the contracts on which the award was based, (2) that because of this, "the arbitration panel failed to draw its essence from the contracts at issue, manifestly disregarded the law and was arbitrary, capricious, and contrary to the public policies underlying Louisiana's law of obligations, and (3) that consent to the contracts was vitiated by the failure of the principal cause making the award impermissible. In its challenge to the arbitration award, KDS also reserved its right to invoke Article 2.4 of the Second Agreement which they allege provides a separate mechanism to arbitrate the dispute as to the quality and fitness of Broadscape's software. KDS alleges that this matter was not an issue in the first arbitration. Broadscape disputes this assertion and claims that conformity of the software was an issue in the first arbitration.
Defendant's Opposition to Plaintiff's Motion for Summary Judgment, p. 3.
Id.
Id.
Broadscapes Reply Memorandum in Support of its Motion for Summary Judgment, p.
In its Supplemental Memorandum in Opposition to Plaintiff's Motion for Summary Judgment filed with this Court on August 14, 2001, KDS asserts that there is an additional ground for challenging the confirmation of the arbitration award. Subsequent to the arbitration proceeding, Broadscape filed suit in state court for professional malpractice against their former attorneys in connection with the drafting of the contracts at issue, KDS asserts that the allegations made by Broadscape in the state suit are inconsistent with the position it took in the arbitration proceedings. One of KDS' defenses in the arbitration was that the contracts contained vague provisions which were drafted by Broadscape such that any ambiguity should be construed against Broadscape as the drafter of said contracts. In the arbitration proceeding, KDS failed at its attempts to have the panel apply the principal of contract law that ambiguities in a contract are to be construed against the drafter. KDS asserts that the reason why the panel did not use this principle is because of the claims by Broadscape that both parties were involved in drafting the agreements. KDS argues that the allegations set forth in Broadscape's state court suit against its former counsel require KDS to challenge confirmation of the award on the grounds that it was obtained by corruption, fraud, or undue means. 9 U.S.C. § 10(a). Broadscape maintains that nothing in the state court suit is inconsistent with its position in the arbitration proceeding that both parties participated in drafting the agreements. KDS seems to base its position that the award was obtained by fraud, corruption or undue means on the statements made by Broadscape that the contracts were drafted by and negotiated between both parties. Nowhere in these statements does it define the word "parties" to mean Broadscape without the assistance of counsel. The issue before the arbitration panel was whether Broadscape and KDS jointly participated in drafting the agreements, the fact that Broadscape did this with the assistance of counsel has no moment as to the arbitration panel's decision not to adopt KDS' position that Broadscape alone drafted the agreements. KDS' supplemental claim that the award was obtained by fraud, corruption or undue means is without merit.
KDS' Supplemental Memorandum in Opposition to Plaintiff's Motion for Summary Judgment, p. 2.
Id., p. 3.
Id., p. 5.
Plaintiff's Reply to Defendant's Supplemental Memorandum in Opposition to Plaintiff's Motion for Summary Judgment, p. 2.
Turning to the other grounds on which KDS seeks to prevent the award from being confirmed, the Court reiterates that review of the arbitration award is very deferential. Anderman, 918 F.2d at 1218. In determining whether the arbitration panel exceeded its authority, all doubts must be resolved in favor of arbitration. Executone Information Systems, Inc. v. Davis, 26 F.3d 1314, 1320 (5th Cir. 1994). It is not the function of this Court to review the factual findings or legal conclusions of the arbitration panel. Local Union 59, Int'l Brotherhood of Elec. Workers, AFL-CIO v. Green Corp., 725 F.2d 264, 268 (5th Cir.), cert. denied, 469 U.S. 833, 105 S.Ct. 124, 83 L.Ed.2d 66 (1984).
c. Did the Arbitration Panel Exceed its Powers?
KDS argues that the arbitration panel exceeded its powers by ignoring that the contracts contemplated and mandated that KDS would receive something of value in return for the financing it was to provide. As a result of this, KDS asserts that the award failed to draw its essence from the contracts. KDS also claims that consent to the contracts was vitiated by error as to the principal cause of the contracts which was the marketability and viability of Broadscape's product. Finally, KDS asserts that Summary Judgment should be denied because there is an issue of material fact as to whether KDS has a contractual right to arbitrate the issue of fitness of Broadscape's software under Article 2.4 of the Second Agreement.
KDS' Opposition to Plaintiff's Motion for Summary Judgment, p. 10.
Id., p. 3.
Id., p. 5.
Id.
First, the only grounds on which to vacate an arbitration award available to a district court are those set out in 9 U.S.C. § 10 and 11. The Court has already dismissed KDS' attempts to insert additional non-statutory grounds as the Fifth Circuit has clearly held that they do not apply to contractual disputes such as the one at issue. Therefore, KDS can only rely on the statutory grounds for vacating the award of the arbitration panel. This Court must uphold the decision of an arbitration panel as long as the decision "`draws its essence'" from the contract.Executone, 26 F.3d at 1321, citing, Anderman, 918 F.2d at 1218 ( quoting United Paperworkers Int'l Union v. Misco. Inc., 484 U.S. 29, 36, 108 S.Ct. 364, 369-70, 98 L.Ed.2d 286 (1987)). "We must affirm the arbitrator's decision if it is rationally inferable from the letter or the purpose underlying the contract." Id.
Based on the abundance of documents submitted by both parties, the Court finds that the arbitration panel did not exceed its powers in awarding Broadscape $758,585 and refusing to give KDS any equity interest in Broadscape. The fact that the arbitration panel did not give reasons for its decision has no impact. The Fifth Circuit consistently has held that "arbitrators are not required to disclose or explain the reasons underlying an award." See Antwine v. Prudential Bache Securities, 899 F.2d 410, 412 (5th Cir. 1990). KDS contends that Broadscape's Motion for Summary Judgment should be denied because it is based on the faulty assumption that the arbitration panel discounted the award to Broadscape because of KDS' position that it was entitled to equity in Broadscape. Broadscape's motion is not based on such an assumption. Broadscape's position in its Motion for Summary Judgment is based on the deference owed to the decision of the arbitration panel. Considering that Broadscape sought recovery in excess of $6,000,000 it is clear to the Court that the arbitration panel took into consideration KDS' argument that the contracts provided that KDS would receive something of value in return for the financing it provided. KDS' Post Hearing Brief asserted that the panel should reduce any award to Broadscape by the amount of stock KDS was to receive. Just because the panel declined to award KDS an equity interest in Broadscape does not mean that they ignored the contractual provisions that KDS would receive something of value from Broadscape.
Defendant's Opposition to Plaintiff's Motion for Summary Judgment, p. 4.
Plaintiffs Motion for Summary Judgment, p. 5.
Defendant's Supplemental Memorandum in Opposition to Plaintiff's Motion for Summary Judgment, Exhibit 4, p. 36.
Plaintiff's Motion for Summary Judgment, Exhibit D, p. 25.
KDS also claims that the contracts are void because there was error as to the principal cause of the contracts, namely the marketability and viability of Broadscape's software. However, KDS was not persuasive in making this argument to the arbitration panel and the Court cannot review the factual or legal determinations made by the arbitration panel. Based on the contracts, the decision of the arbitration was "rationally inferable" from the contracts.
Finally, Broadscape asserts that KDS did not file a motion to vacate or modify the award, and, as a result, any attempt to do so is untimely under 9 U.S.C. § 12. Although KDS did not file an independent motion to vacate the award, KDS made it abundantly clear in its answer to Broadscape's Complaint for Confirmation that it was moving to vacate the award. Therefore, KDS' affirmative defenses and the relief sought therefrom were the equivalent of a motion to vacate.
Defendant's Answer and Counterclaims to Plaintiff's Complaint, p. 7.
KDS further contends that Summary Judgment should be denied as there is an issue of material fact as to whether KDS has a contractual right to arbitrate the issue of fitness of Broadscape's software. As will be discussed in greater detail below, KDS' right to conduct a second arbitration is not for the Court to decide. Nevertheless, it does not preclude the Court from confirming the first arbitration award.
The law is clear as to the scope of a reviewing court's authority of an arbitration award. The defendant has not persuaded the Court that the award should be vacated under 9 U.S.C. § 10. Accordingly, Plaintiff's Motion for Summary Judgment is GRANTED.
2. KDS' Motion to Stay Pending Arbitration
In the second motion pending before the Court, KDS filed a Motion to Stay the confirmation of the arbitration award pending the arbitration of the issue of whether or not Broadscape's software conformed to its patent application. As mentioned above, in KDS' Answer to Broadscape's complaint for confirmation of the arbitration award, KDS reserved its right to arbitrate this issue under Section 2.4 of the Second Agreement. KDS claims that this issue was not litigated in the first arbitration. Broadscape asserts that the issue was in fact litigated in the first arbitration. The basis for KDS' motion that the stay should be granted pending the second arbitration is based on the general proposition that "arbitration is favored in law" and Title 9 U.S.C. § 3.
KDS' Motion to Stay, p. 2, citing Grigson v. Creative Artists Agency, 210 F.3d 524, 527 (5th Cir. 2000).
While the Court is in total agreement with KDS that arbitration is favored, that does not mean that an arbitration award which has already been granted must be stayed pending the outcome of a second arbitration which may or may not be appropriate. KDS provides the Court with no concrete authority as to why confirmation of the first arbitration award must be stayed pending the outcome of the second. KDS does assert that the outcome of the second arbitration, if favorable to KDS, would invalidate the underlying award. However, this possibility does not necessitate staying the confirmation of the first award.
KDS also cites Title 9 U.S.C. § 3 for the proposition that confirmation of the first award should be stayed. KDS' reliance on § 3 is misplaced. Section 3 states that
If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.
While § 3 does require a stay of a suit filed in a court on an issue referable to arbitration, it does not require a court to stay confirmation of an arbitration award. KDS has failed to provide the Court with sufficient authority for staying the confirmation of the first arbitration award. Accordingly, KDS' Motion to Stay the confirmation of the arbitration award is DENIED.
3. Broadscape's Motion to Stay Re-Arbitration
In response to KDS' motion to stay confirmation of the arbitration award pending a second arbitration, Broadscape now seeks to stay the second arbitration on the ground that it seeks to re-arbitrate issues covered and addressed in the first arbitration and subsequent award. Broadscape argues that, upon confirmation of the first award, the Court must stay the second arbitration to protect its judgment. Broadscape cites Miller Brewing Co. v. Fort Worth Distrib. Co., 781 F.2d 494, 499-501 (5th Cir. 1986), in which the Fifth Circuit did reverse a district court's refusal to stay arbitration proceedings, however, the facts are distinguishable from the case at bar. In Miller, Fort Worth Distributing Company filed suit in state court against Miller for terminating a distributorship agreement between the parties. Miller, 781 F.2d at 494. The state court suit was dismissed with prejudice for failure to prosecute, and subsequent to the state court dismissal, Fort Worth invoked an arbitration clause to assert the same claims. Id. The Fifth Circuit stayed the arbitration under the doctrine of res judicata because the state court had already dismissed the same case with prejudice. No such factual situation occurred in the instant case. The procedural history of this case is as follows. There was an arbitration; an award was granted; confirmation of that award was sought in this Court; and then a second arbitration was demanded. The rationale of Miller does not apply.
Broadscape's Motion to Stay Re-Arbitration, p. 2.
Broadscape additionally asserts that the second arbitration should be enjoined by the Court under the All Writs Act, 28 U.S.C. § 1651(a). Broadscape's position is that the All Writs Act gives courts broad powers to protect their judgments. Broadscape cites an Eighth Circuit case in support of its position that courts have the power to defend their judgments and stay or enjoin subsequent arbitrations. In re YA Group Sec. Litig., 38 F.3d 380, 382 (8th Cir, 1994). Again, the facts of that case are distinguishable from the facts of this case. The Eighth Circuit stayed a subsequent arbitration only because the court proceedings were initiated first and a final judgment was entered by the court before arbitration was sought. Id.
While the Court has confirmed the award in the first arbitration, it does not have the authority to stay the second arbitration under the doctrine of res judicata or any other mechanism. Article 9 of both arbitration agreements states that
Except as provided below, any dispute, controversy or claim arising out of or relating to this Agreement shall be finally settled by arbitration in New Orleans, Louisiana, in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect. Judgment upon the award rendered by th arbitrator(s) may be entered in any court having jurisdiction thereof. . . . This Article 9 provides the sole recourse for the setdement of any dispute arising under or in connection with this agreement. . . .
(emphasis added).
While Broadscape may be correct in its assertions that the issues KDS seeks to arbitrate in the second arbitration were raised or should have been raised in the first, that is not for the Court to decide. When parties agree that any disputes they have will be settled by arbitration, the Court must abide by such an agreement to effectuate the general purpose of arbitration. There is no doubt that the arbitration agreement is valid nor that the dispute falls within the scope of the arbitration agreement. These are the only two inquiries to be made by the Court in deciding the arbitrability of an issue. Broadscape's res judicata and collateral estoppel claims should be raised with the arbitration panel when KDS seeks to arbitrate the issue of conformity of Broadscape's software to its patent. Whether or not KDS should be precluded from arbitrating this issue is not for the Court to decide. The parties agreed that any dispute arising out of both the First and the Second Agreements would be resolved by arbitration. Broadscape's Motion to Stay the Re-Arbitration is DENIED.
Accordingly, IT IS ORDERED that
(1) Broadscape's Motion for Summary Judgment to confirm the arbitration award is GRANTED.
(2) KDS' Motion to Stay Pending Arbitration is DENIED.
(3) Broadscape's Motion to Stay Re-Arbitration is DENIED.