Opinion
3:20-cv-00094-MO
08-05-2020
BIOTRONIK, INC., Petitioner, v. RONALD FRY; and DENOVO MEDICAL, INC., Respondents.
OPINION AND ORDER
MICHAEL W. MOSMAN, United States District Judge
This case comes before me on Petitioner Biotronik, Inc.'s Amended Petition to Confirm Arbitration Award [ECF 9] and Respondents Ronald Fry and Denovo Medical, Inc.'s Cross-Petition to Vacate Arbitration Award [ECF 12]. The parties' respective petitions concern the legality of attorney fees and costs awarded by an arbitration panel as a result of an underlying arbitration proceeding. For the reasons explained below, I GRANT Biotronik's Petition [9], I DENY Respondents' Cross-Petition [12], and I CONFIRM the arbitral award.
BACKGROUND
This case arises out of a business dispute between Biotronik and Respondents. Hanchett Decl. Ex. B [ECF 11-2] ("Arbitration Decision") at 1. In July 2017, Respondents filed a complaint in the United States District Court for the Northern District of California asserting numerous claims against Biotronik and individuals associated with Biotronik. Id. at 2. Pursuant to a contract between Biotronik and Respondents (the Asset Purchase Agreement ("APA")), Biotronik responded by filing an arbitration claim with the Arbitration Service of Portland requesting a declaration by the arbitrators that all of the claims asserted by Respondents in their district court complaint lacked merit. Id. After an arbitration panel was selected, Respondents asserted counterclaims against Biotronik, including (1) breach of contract (on numerous grounds) and (2) tortious interference with Respondents' business and contractual relationships. Id.
On October 28, 2019, the arbitration panel issued its decision. Id. at 22. The panel rejected Respondents' tortious interference claim in its entirety, but it ruled in Respondents' favor on its breach of contract claim (albeit on narrow grounds). Id. at 7, 17-21.
On December 29, 2019, the panel issued its order regarding attorney fees and costs. Hanchett Decl. Ex. C [ECF 11-3] ("First Fee Order") at 5. The panel awarded Respondents attorney fees of $266,000 and costs of $110,000 and awarded Biotronik attorney fees of $495,000 and costs of $90,000. Id. at 4-5.
Respondents filed a motion with the panel challenging the award of attorney fees to Biotronik. Hanchett Decl. Ex. B [ECF 16-2] ("Motion to Correct Award"). Specifically, they argued that the APA did not permit the panel to award fees or costs for the tortious interference claim because the claim was not brought to enforce the APA itself. Id. at 1-2. Respondents' argument turned on the language of Section 22 of the APA, which governs dispute resolution under the contract. Section 22 states in full:
Any and all disputes arising out of or relating in any way to this Agreement, shall be finally resolved by binding arbitration under the then current Commercial Arbitration Rules of the Arbitration Service of Portland (the "ASP"), which rules are incorporated herein by reference. The place of arbitration shall be Portland, Oregon. In the event an action of any type is brought to enforce this Agreement in a court of competent jurisdiction, in arbitration or otherwise, including any action brought in connection with any bankruptcy proceeding, or on appeal, the prevailing party shall be entitled to recover its reasonable attorney fees and costs from the non-prevailing party, including any expert witness fees.Hanchett Decl. Ex. A [ECF 11-1] ("APA") 122 (emphasis added).
The panel denied Respondents' motion, writing that "[t]he [APA] provides that the prevailing party is entitled to fees and costs in 'an action of any type' brought to enforce the Agreement. This broad language does not limit such actions to contract claims." Hanchett Decl. Ex. E [ECF 11-5] ("Second Fee Order") at 2 (emphasis in original). After denying Respondents' motion, the panel issued a "Final Award" calculating the total costs to be awarded in the action, including the disputed attorney fees and costs. Hanchett Decl. Ex. F [ECF 11-6] ("Final Award") at 3.
Separately, after submitting their motion challenging the fees and costs but while it was still pending before the panel, Respondents emailed the panel and requested disclosures from the arbitrators related to whether one of the arbitrators, Judge Mary Deits, had been "a paid arbitrator or mediator in one or more matters also being handled by [counsel for Biotronik] . . . ." Richard Decl. Ex. A [ECF 14-1] at 1. Respondents suspect that Judge Deits "had [involvement in] at least one other undisclosed contemporaneous matter with [Biotronik's counsel] .. . because [Respondents' counsel] heard [Judge Deits] comment to [Biotronik's counsel] at one point as to their other matter." Richard Decl. [ECF 14] ¶5. Neither the panel nor counsel for Biotronik responded to the request. Second Richard Decl. [ECF 18] ¶ 6.
LEGAL STANDARD
The Federal Arbitration Act ("FAA") sets out a very limited role for federal courts in reviewing arbitration awards. 9 U.S.C. § 10(a). Under the act, "[n]either erroneous legal conclusions nor unsubstantiated factual findings justify federal court review of an arbitral award" Bosack v. Soward, 586 F.3d 1096, 1102 (9th Cir. 2009) (citations omitted). The FAA explicitly describes only four scenarios in which a federal court may step in to vacate an arbitral award:
(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.9U.S.C.§10(a)(1)-(4).
"The burden of establishing grounds for vacating an arbitration award is on the party seeking it." U.S. Life Ins. Co. v. Superior Nat'l Ins. Co., 591 F.3d 1167, 1173 (9th Cir. 2010) (citation omitted).
DISCUSSION
In their cross-petition, Respondents argue that the panel's Final Award assessing attorney fees and costs should be vacated for two independent reasons. First, they argue that the panel "exceeded their powers" by incorrectly inteipreting Section 22 of the APA and thus vacatur is appropriate under § 10(a)(4). Resp't Mem. [ECF 13] at 6-7. Second, they argue that vacatur is appropriate under § 10(a)(2) because the possibility that Judge Deits had involvement in a separate, undisclosed matter with Biotronik's counsel reveals "evident partiality" on behalf of the arbitration panel. Id. at 12-13. I take each argument in turn.
I. Whether the panel "exceeded its powers" under § 10(a)(4) of the FAA.
Arbitrators exceed their powers only "when they express a 'manifest disregard of law,' or when they issue an award that is 'completely irrational.'" Bosack v. Soward, 586 F.3d 1096, 1104 (9th Cir. 2009) (citations omitted). "[F]or an arbitrator's award to be in manifest disregard of the law, 'it must be clear from the record that the arbitrator [] recognized the applicable law and then ignored it.'" Id. (citations omitted). When determining if an award is "completely irrational," the "standard is extremely narrow and is satisfied only 'where [the arbitration decision] fails to draw its essence from the agreement.'" Id. at 1106 (citations omitted). "An 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.'" Id. (citations omitted). Under this standard of review, a court does not "decide the Tightness or wrongness of the arbitrators' contract interpretation, only whether the panel's decision 'draws its essence' from the contract." Id. (citations omitted).
Respondents' argument here is a repeat of the argument they made to the arbitration panel. They argue that their tortious interference counterclaim was not a claim that sought to enforce the APA and thus, per the language of Section 22, it was not a claim upon which attorney fees and costs could be awarded. See Mem. [13] at 9-10. By awarding fees and costs anyway, Respondents' argue that the panel exceeded their authority. Id.
As described above, the arbitration panel rejected the argument that Section 22 precluded an award of fees and costs based on the tortious interference claim. And the panel's decision on that front was neither a "manifest disregard of law" nor was it "completely irrational." The panel engaged with the applicable contractual language in Section 22 and issued a rational decision that drew its essence from the parties' agreement. In its original decision on the fees and costs, the panel described that in its view the tortious interference claim was, per the language of Section 22, "a dispute arising out of or relating in any way" to the APA. First Fee Order [11-3] at 4. In its later decision denying Respondents' motion to correct the award, the panel further explained that "[t]he [APA] provides that the prevailing party is entitled to fees and costs in 'an action of any type' brought to enforce the Agreement. This broad language does not limit such actions to contract claims." Second Fee Order [11-5] at 2. There is no dispute that Biotronik brought an arbitration action to enforce the APA. In that same action, Respondents chose to assert their tortious interference counterclaim (as well as their breach of contract counterclaim, which also indisputably sought to enforce the APA). The panel's conclusion that the fee provision of Section 22 encompassed a claim that was related to the parties' APA and that was asserted in an action brought to enforce the APA is, at the very least, a rational interpretation of the language of the parties' agreement. And that is enough to survive this court's review.
II. Whether there was "evident partiality" in the panel under § 10(a)(2) of the FAA.
"Evident partiality is distinct from actual bias." New Regency Productions, Inc., v. Nippon Herald Films, Inc., 501 F.3d 1101, 1105 (9th Cir. 2007). An arbitrator has a duty to investigate and disclose potential conflicts, and the "failure to 'disclose to the parties any dealings that might create an impression of possible bias' is sufficient to support vacatur." Id. (citation omitted); see also Monster Energy Co. v. City Beverages, LLC, 940 F.3d 1130, 1135 (9th Cir. 2019). More specifically, for vacatur to be appropriate there must be "facts showing a 'reasonable impression of partiality."' New Regency, 501 F.3d at 1106 (citation omitted).
Here, Respondents' attorney purportedly overheard Judge Diets reference another matter involving counsel for Biotronik, which led him to believe that Judge Diets and Biotronik's counsel have a past or contemporaneous relationship despite there being no disclosure of such a relationship in the record. See Richard Decl. [14] ¶ 5. Based on this information, Respondents argue that Judge Diets has failed to disclose a past relationship which creates a specter of bias sufficient to justify vacatur under § 10(a)(2). Mem. [13] at 12-13.
In their memorandum in support of their cross-petition, Respondents move for vacatur only under the FAA. See Mem. [13] at 12-13. While Respondents mention Oregon's separate statutory disclosure requirements in their reply briefing, see Reply [ECF 17] at 10, it is unclear if they were attempting to separately move for vacatur under Oregon law. To the extent they were, they make that argument too late.
The facts presented here are thin. We have only the overheard comment about the "other matter." There is no information about what this matter might be or the roles that Judge Diets and Biotronik's counsel occupy in relation to it. We know nothing about any possible financial relationship between the two. In short, there is a lot of room to speculate but not a lot to go on. It is Respondents' burden to put forth evidence of a conflict that would establish a reasonable impression of partiality. And it is a burden they fail to meet.
Respondents may feel stymied by the lack of a response to their request for more information: How can they meet their burden when they are being stonewalled? Indeed, Respondents appear to argue that the lack of a response from Judge Diets and Biotronik in and of itself constitutes grounds for vacatur under § 10(a)(2). But while an arbitrator has a duty to investigate and disclose conflicts, Respondents cite no authority for the proposition that an arbitrator must confirm upon request that a conflict does not exist and that a failure to do so justifies vacatur under the FAA.
Finally, let us assume for the moment that the "other matter" is as Respondents speculate it to be-that Judge Diets is presiding as an arbitrator over another matter being litigated by Biotronik's counsel. And let us further assume that that arbitration proceeding is being financed in part by Biotronik's counsel (or his client). Even if all that is true, it is far from clear that that scenario would rise to evident partiality. Cf. Scandinavian Reinsurance Co. v. Saint Paul Fire and Marine Ins. Co., 668 F.3d 60, 74 (2d Cir. 2012) ("The undisclosed matter here was overlapping arbitral service, not a "material relationship with a party." (citation omitted)).Arbitration is often financed by the parties themselves, and it is unsurprising, in a town the size of Portland, that there are repeat players among the local lawyers who serve as counsel and as arbitrators. Declaring that evident partiality exists any time an arbitrator encounters a lawyer (or party) in more than one arbitration proceeding would render arbitration unworkable in many places. Of course, there might be additional circumstances which raise a specter of bias amongst repeat players (say, for example, a single arbitrator is routinely hired by the same company and always delivers them favorable outcomes on questionable grounds). But to infer such circumstances here requires yet another speculative leap that this court will not make.
The Ninth Circuit caselaw on evident partiality cited by the parties involve much more substantial conflicts of interest than the one posed by this hypothetical, including significant financial or business dealings between the arbitrators and the parties. See, e.g., New Regency, 501 F.3d at 1107-08 (vacating an award where the arbitrator failed to disclose a substantial conflict of interest based on non-trivial business dealings with one of the parties); Schmitz v. Zilveti, 20 F.3d 1043, 1044 (9th Cir. 1994) (vacating an award where the arbitrator failed to disclose that his law firm had represented the parent company of a party in over nineteen cases, including one less than two years prior to the arbitration proceeding); Monster Energy, 940 F.3d at 1136 (vacating an award where the arbitrator failed to disclose his ownership interest in the arbitration company and that company's "substantial business relationship" with one of the parties).
CONCLUSION
For the foregoing reasons, I GRANT Biotronik's Petition [9] and I DENY Respondent's Cross-Petition [12]. The arbitral award is CONFIRMED.
IT IS SO ORDERED.