The opinion of the court was delivered by: INGRAM
This court now orders that the Application for Confirmation be granted and that an appropriate judgment in favor of Plaintiff and against Defendant, approved as to form by Defendant, be entered herein. This court further orders that the Application to Vacate, Modify and/or Correct the Awards is denied.
In the later-filed action numbered C-91-20159, Kyocera sues for a declaration that the Phase I award was not a final award and therefore not ripe for enforcement proceedings in the federal court or, in the alternative, for vacatur of the Phase I award. Claimants counterclaim for a declaration that the Phase I award was a final award and for confirmation of that award. The court finds the declaratory relief claim and counterclaim to be moot at this point and therefore dismisses them. The second counts of the claim and counterclaim, seeking vacatur and confirmation, are merged into the motions for the same relief made in Case No. C-87-20316 and are denied and granted respectively.
The foregoing disposition of the pending motions is necessitated because the court's options are limited by the provisions of the Federal Arbitration Act, 9 U.S.C. §§ 1, et seq. and may not be extended by agreement of the parties.
In addition to LaPine and Kyocera, Prudential-Bache Trade Corporation ("Prudential Trade"), Prudential Capital and Investment Services, Inc. ("Prudential Capital"), and LaPine Holding Company ("LaPine Holding") are parties to the arbitration proceeding before the court, and are parties to the counterclaim in the instant action. Only LaPine and Kyocera are initial parties to the instant action.
LaPine is a corporation formed in 1984 to design, market and sell 3.5 inch Winchester disk drive devices with a ten megabyte capacity. LaPine did not have the resources and plant necessary to manufacture and market the product. At the time of its incorporation, LaPine was financed by a limited partnership, the general partner of which was an affiliate of Prudential Trade, an entity in the business of financing international business ventures. LaPine and Prudential Trade approached Kyocera suggesting that Prudential Trade would arrange the financing necessary for the manufacture of Lapine's disk drive products if Kyocera, acting as a licensee of LaPine, would manufacture the product. In November 1984 LaPine, Prudential Trade and Kyocera entered into an Agreement of Principles under the terms of which LaPine was to design and market the disk drive product, Prudential Trade was to finance the manufactured output of Kyocera which was in compliance with the schedule of product agreed upon by the parties. Prudential Trade was also obligated to provide necessary working capital related to product and to accounts receivable financing. Subsequently, in 1985, the same parties and a subsidiary of Prudential Trade executed the Trading Agreement, which covered sales of the LaPine product after its manufacture by Kyocera, and the Technology Transfer and Manufacturing Agreement, covering the licensing of LaPine technology to Kyocera.
The parties agreed that LaPine would order the disk drive product from Kyocera pursuant to a quantity and delivery schedule. A subsidiary of Prudential Trade would purchase the product from Kyocera, then resell the product at a markup to Prudential Trade which would then resell the product to LaPine on credit.
LaPine licensed to Kyocera a recently developed 3.5 inch Winchester disk drive with twenty megabyte capacity, and production commenced in late 1985. On January 18, 1986, LaPine, Kyocera and Prudential Trade, acting through its subsidiary K.K. PB Trade Corporation ("KK Trade"), entered into an agreement which provided certain actions to be taken by the parties in 1986, including an obligation on the part of KK Trade to maintain the then current level of funding of LaPine until the latter achieved "break even" status and to facilitate communication between the parties. In 1986 Kyocera experienced production problems which necessitated a shutdown of two months duration. Management problems at LaPine were encountered in 1986, which resulted in Kyocera's request for assurances that it would be paid for goods manufactured and shipped by it, pursuant to the terms of the agreements between the parties. The root of the problem was the failure of LaPine to make payments to Prudential Trade enabling the latter to pay Kyocera for goods manufactured and shipped by it. By summer of 1986 LaPine had failed to pay Prudential Trade for product delivered by Kyocera, and was insisting that Prudential Trade continue to pay Kyocera for product ordered by LaPine.
In order to bring about a refinancing and reorganization of LaPine the parties entered into negotiations to reach an agreement which would ensure both the development of LaPine and a workable commercial relationship between all the parties. In August 1986 a document entitled "Agreement in Principle" between Kyocera and Prudential Trade was forwarded by Prudential Trade to Kyocera for its consideration. This proposed agreement provided for an advance to LaPine by Prudential Trade of up to ten million dollars, secured by unfactored accounts receivable of LaPine, and that Prudential Trade would continue to buy and pay for disk drive product purchased from Kyocera for resale to LaPine. The proposed agreement contained the agreement of Kyocera to sell all LaPine products manufactured by it to Prudential Trade in accordance with a schedule of payment. The proposed Agreement in Principle also provided that all losses associated with uncollected LaPine receivables would be shared evenly by Prudential Trade and Kyocera.
On October 9, 1986, LaPine, Prudential Trade, KK Trade, the limited partnership which initially organized LaPine and Kyocera executed and delivered an Agreement in Principle which purported to restructure LaPine and to obligate the parties to negotiate the terms of a proposed Definitive Agreement ("DA"). This proposed Definitive Agreement was to be submitted to the respective boards of the corporate parties for final approval and, by its terms, was required to be signed by November 12, 1986. The proposed DA provided additionally that nothing contained in other agreements would be binding upon the parties until the execution, delivery and board approval of the Definitive Agreement.
The Agreement in Principle provided for the reorganization of LaPine by means of a "merger" by which LaPine would become the wholly owned subsidiary of LaPine Holding Company of which two-thirds of the voting stock would be owned by Prudential Trade and one-third by Kyocera. Prudential Trade and Kyocera were to be obligated to make additional capital contributions and other adjustments. While these provisions were stated to be non-binding, the Agreement in Principle contained binding provisions for the liquidation of LaPine if its operations were unsuccessful, for access to information and confidentiality, and for the selection of arbitration as the appropriate means of settling disputes arising under either the Agreement in Principle or the Definitive Agreement.
Commencing in early November 1986, revised drafts of a proposed Definitive Agreement, a proposed Financing Agreement and proposed revisions of the Trading Agreement and of the Technology Transfer and Manufacturing Agreement were prepared and circulated to counsel. On November 13, 1986, the parties completed the collection of the various signature pages to the proposed Definitive Agreement, including one purportedly signed by the chairman of Kyocera, and the DA was then filed with the California Corporations Commissioner in order to comply with California law concerning corporate reorganization.
On November 14, 1986, certain revised pages of the Definitive Agreement, the Amended Trading Agreement, the Financing Agreement and the Amended Technology Transfer and Manufacturing Agreement were circulated to all parties and their counsel. Also on that date, eight signature pages for the Definitive Agreement, not including the one previously signed by Kyocera's chairman, were forwarded to Kyocera in Japan for signature and return. Those signature pages were never returned by Kyocera.
On December 17 and 18, 1986, Kyocera's attorney met with attorneys for the other parties in a "pre-closing" meeting. Kyocera's attorney at that time advised that Kyocera declined to sign the Amended Trading Agreement and the Financing Agreement prepared by Prudential Trade because those agreements provided for direct sale of manufactured product to LaPine without the intervening sales to KK Trade and Prudential Trade.
On December 18, 1986, also at the pre-closing meeting, a representative of Kyocera executed the eight copies of the signature page to the Definitive Agreement, and also executed all exhibits to the Definitive Agreement except the Amended Trading Agreement in the form proposed by Prudential Trade. On December 22, 1986, Kyocera's counsel advised the parties that although Kyocera would participate in the final closing meeting set for December 29, 1986, it would not execute and deliver the proposed Amended Trading Agreement and the Financing Agreement. On December 26, 1986, Kyocera's counsel advised the parties that Kyocera would sign a version of the Amended Trading Agreement providing that Prudential Trade remained the party responsible to pay Kyocera for disk drive product supplied by Kyocera to LaPine.
On December 29, 1986, the closing took place and all documents which constituted exhibits to the Definitive Agreement were executed and delivered between the parties except the Amended Trading Agreement. LaPine and Prudential Trade declined to sign the form of Amended Trading Agreement previously circulated by Kyocera.
By an Interim Agreement dated December 29, 1986, the parties agreed to proceed with the closing of the LaPine reorganization even though the Amended Trading Agreement had not been executed. All rights were reserved with respect to that agreement, and the parties agreed to future meetings to attempt to resolve their differences.
On December 29, 1986, counsel for LaPine and Prudential Trade gave notice by letter to Kyocera of Kyocera's breach of the Definitive Agreement by reason of Kyocera's failure to execute the Amended Trading Agreement proposed by counsel for LaPine and Prudential Trade.
On January 9, 1987, the Board of Directors of Kyocera approved its investment in LaPine under the Plan for Reorganization but did not approve the form of Amended Trading Agreement proposed by Prudential Trade.
On May 8, 1987, LaPine filed this action seeking to compel Kyocera to continue to supply drives under the terms of the Definitive Agreement. On September 2, 1987, this court granted Kyocera's motion to compel arbitration. Now before the court are LaPine's motion to confirm the arbitration award and Kyocera's motion to vacate that award.
As it turns out, after extensive arguments and briefing of multiple issues, the threshold issue of the scope of review is wholly determinative of these motions.
Kyocera places primary reliance for its position that a United States District Court, in deciding whether to confirm or to vacate an arbitration award, is bound to exercise the breadth of review provided for by the agreement between the parties upon which the arbitration is grounded upon two cases: Fils et Cables D'Acier de Lens v. Midland Metals Corp., 584 F. Supp. 240 (S.D.N.Y. 1984) and Gateway Technologies, Inc. v. MCI Telecommunications Corp., 64 F.3d 993 (5th Cir. 1995). I will take up the Fils case first. That case is apt and strongly supports Kyocera's contention. In that case the court recognizes:
The provision embodied in the FICAL/Midland contracts differs from a standard arbitration clause, however, insofar as it specifically sets forth the standard of judicial review to be applied in the event that either party seeks confirmation of an arbitration award.
Fils, supra, 584 F. Supp. at 242.
There, the contract provided in paragraph 13(c):
The arbitrator shall make findings of fact and shall render an award based thereon . . . . Upon an application to the court for an order confirming such award, the court shall have the power to review (1) whether the findings of fact rendered by the arbitrator are, on the entire record of the said arbitration proceedings, supported by substantial evidence, and (2) whether as a matter of law based on said findings of fact the award should be affirmed, modified or vacated . . .
In the instant case the document providing for arbitration is the Definitive Agreement. Exhibit H to Phase 1 Findings of Fact. Section 8.10(b) of that agreement provides:
The arbitration shall be conducted in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce ("ICC") and the Federal Arbitration Act, 9 U.S.C. sections 1 et seq.
Section 8.10(d) provides in part as follows:
The arbitrators shall issue a written award which shall state the bases of the award and include detailed findings of fact and conclusions of law. The United States District Court for the Northern District of California may enter judgment upon any award, either by confirming the award or by vacating, modifying or correcting the award. The Court shall vacate, modify or correct any award: (i) based upon any of the grounds referred to in the Federal Arbitration Act, (ii) where the arbitrators' findings of fact are not supported by substantial evidence, or (iii) where the arbitrators' conclusions of law are erroneous.
In Fils, supra, 584 F. Supp. at 243, the court confronts the question of scope of review as follows:
The threshold question before the court is whether the parties can, by agreement, alter the nature of a federal court's role in the arbitration process. It is well settled that, in the normal case, judicial review of an arbitration award under the Federal Arbitration Act is quite limited, being confined to determining whether one of the specific grounds in 9 U.S.C. §§ 10 or 11 for vacating or modifying an award is present. [Citations omitted.] Otherwise, if the petition is properly before the Court, the Court must confirm the award.
The court, at 244, then states:
Here the arbitration clause contained at § 13 of the parties' contracts alters the role of the arbitrators and the courts from those normally obtaining where the parties bargain for resort to arbitration; Paragraph 13(c) affords less weight to the decision of the arbitrator and provides for more extensive court involvement than is ordinarily the case. However, since resort to arbitration is by itself a product of contract, there appears to be no reason, absent a jurisdictional or public policy barrier, why the parties cannot agree to alter the standard roles. [Emphasis added.]
The court in Fils went on to find that the provisions of § 13 did not confer a broader species of jurisdiction upon the reviewing court, because that court had "constitutional and statutory jurisdiction" because of the diversity of the parties' citizenship, and that no public policy tenets are violated by the provisions of § 13 because, in the Fils case, the court's review of Findings of Fact and ...