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Kim-C1, LLC v. Valent Biosciences Corp.

November 18, 2010

KIM-C1, LLC, PETITIONER,
v.
VALENT BIOSCIENCES CORPORATION, RESPONDENT.



ORDER ON PETITIONER'S MOTION TO CONFIRM ARBITRATION AWARD AND ORDER ON RESPONDENT'S MOTION TO VACATE ARBITRATION AWARD (Doc. Nos. 1, 7, 30, 34)

This case stems from a Licensing Agreement ("the Agreement") between Petitioner KimC1, LLC ("Kim") and Respondent Valent Biosciences Corp. ("Valent").*fn1 In 2010, the parties attended an arbitration. Kim seeks to have the arbitration award confirmed under 9 U.S.C. § 9, that is, the Federal Arbitration Act ("FAA"). Valent seeks to vacate the arbitration award. For the reasons that follow, the Court will deny Valent's motion and confirm the arbitration award.

GENERAL BACKGROUND

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:

WHEREAS, the Parties wish to enter into a licensing, development and supply arrangement, upon terms and conditions to be defined below, respecting the [Kim] technology and Products, whereby [Valent] shall have the exclusive right to use, market, promote, and sell certain products containing the [Kim] technology for use on Grapes, as defined below, in the Territory, defined below, and upon the terms contained therein.

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.

I. MOTION TO VACATE

A. Review Under Federal Law or Illinois Law Petitioner's Position

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.

Respondent's Position

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.

Legal Standard

"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 evidence a 'clear intent' to incorporate state law rules for arbitration." Johnson, 614 F.3d at 1066; Fidelity, 386 F.3d at 1311; Sovak, 280 F.3d at 1269. "A general choice-of-law clause within an arbitration provision does not trump the presumption that the FAA supplies the rules for arbitration." Johnson, 614 F.3d at 1066; Sovak, 280 F.3d at 1270. A general choice of law clause will be interpreted as electing state substantive law and FAA procedural law. See Fidelity, 386 F.3d at 1312; Sovak, 280 F.3d at 1270. "[W]here the FAA's rules control arbitration proceedings, a reviewing court must also apply the FAA standard for vacatur." Johnson, 614 F.3d at 1067; see Fidelity, 386 F.3d at 1312. Where "state arbitration rules control arbitration proceedings, [courts] must apply the state vacatur standard." Johnson, 614 F.3d at 1067.

Contractual Clauses At Issue

There are two provisions of the Agreement at issue, § 21.3 and § 21.4. Section 21.3 reads:

Governing Law

This Agreement shall be construed, interpreted and governed in accordance with the laws of the United States of America and the State of Illinois, except for choice of law rules. Subject to the terms of section 21.4, the Parties consent to the jurisdiction of the competent courts of the State of Illinois which shall have exclusive jurisdiction over all disputes that may arise under or in connection with this Agreement.

Section 21.4b*fn2 reads:

Dispute Resolution

Any dispute or claim arising out of or in connection with this Agreement shall be resolved as follows: (i) for a period of thirty (30) days after a dispute arises the respective appropriate officer of the Parties shall negotiate in good faith in an effort to resolve the dispute, and (ii) if the dispute has not been resolved at the close of such thirty (30) days period the matter shall be submitted by the Parties to arbitration before a single arbitrator in accordance with the rules of the CPR Institute for Dispute Resolution as identified in Exhibit 5.0. Respondent's Ex. 1.23.

Discussion

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, 386 F.3d at 1312; Sovak, 280 F.3d at 1369-70; Chiron, 207 F.3d at 1131.

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 1369-70. 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 1369-70.

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.*fn3 Third, as discussed above, § 21.3 selects the laws of the United States, in addition to Illinois law, as governing the Agreement. Nothing would prevent Illinois courts from applying "United States law," including the FAA. See Baltin v. Alaron Trading Corp., 128 F.3d 1466, 1469 (11th Cir. 1997) ("Federal courts and state courts have concurrent jurisdiction to enforce the FAA."); Virgin Islands Hous. Auth. v. Coastal Gen. Constr. Servs. Corp., 27 F.3d 911, 915 (3d Cir. 1994) (same).

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);*fn4 Chiron, 207 F.3d at 1131.

B. Non-Appealability Clause

Parties' Arguments

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 award itself is not otherwise reviewable or appealable.

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.

Contractual Provision At Issue

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").

Discussion

Valent relies on two Illinois cases, Johnson v. Baumgardt , 576 N.E.2d 515 (Ill. App. Ct. 1991) and First Merit Realty Servs. v. Amberly Square Apts. , 869 N.E.2d 1111 (Ill. App. Ct. 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 nonappealability 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.

To the Court's knowledge, the Ninth Circuit has not fully examined this issue. In Kyocera , an en banc Ninth Circuit panel held that parties could not expand the scope of federal review of an arbitration award beyond what 9 U.S.C. § 10(a) provided. Kyocera Corp. v. Prudential-Bache T Servs., 341 F.3d 987, 1000 (9th Cir. 2003) (en banc). In reaching its decision, however, the Kyocera court noted, "the decision to contract for a narrower standard of review than the courts generally apply in the absence of a statutory command is a decision that may be less troublesome than the attempt to contract for a broader standard of review than that authorized by Congress, although we need not resolve that question here." Id. at 998 n.16 (emphasis in original).

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.").*fn5 The Aerojet court found that a clause that provided that arbitration was to be "final and binding" did not show a clear intent to eliminate court review of the arbitrator's decision.*fn6 See Aeroject, 478 F.2d at 251-52; see also Goodall-Sanford, Inc. v. ...


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