Baker Industries, Inc. v. Cerberus Ltd.

• Decision Date: 16 July 1985
• Docket Number: No. 84-5197,84-5197
• Citation: 764 F.2d 204
• Parties: BAKER INDUSTRIES, INC., Appellee, v. CERBERUS LIMITED. Appeal of CRAVATH, SWAINE & MOORE.
• Court: U.S. Court of Appeals — Third Circuit

Page 204

764 F.2d 204

81 A.L.R.Fed. 1

BAKER INDUSTRIES, INC., Appellee, v. CERBERUS LIMITED.

Appeal of CRAVATH, SWAINE & MOORE.

No. 84-5197.

United States Court of Appeals, Third Circuit.

Argued Dec. 11, 1984.

Decided June 14, 1985.

Rehearing and Rehearing En Banc Denied July 16, 1985.

Samuel A. Larner, Michael M. Rosenbaum (argued), Budd, Larner, Kent, Gross, Picillo & Rosenbaum, P.C., Newark, N.J., for appellee.

Charles Danzig, Edward A. Zunz, Jr., Riker, Danzig, Scherer & Hyland, Morristown, N.J., Bernard G. Segal, Edward W. Mullinix, James D. Crawford (argued), Schnader, Harrison, Segal & Lewis, Philadelphia, Pa., for appellant.

Before GARTH and HIGGINBOTHAM, Circuit Judges, and McGLYNN, District Judge ^*.

OPINION OF THE COURT

GARTH, Circuit Judge:

Cravath, Swaine, and Moore (Cravath) here appeals an order of the district court taxing a portion of Baker Industries' attorney's fees against them. Concluding that the record amply supports the district court's finding that Cravath's conduct in the course of representing Cerberus, Ltd. in this case constituted bad faith, we affirm the award of attorneys' fees under 28 U.S.C. Sec. 1927.

I.

The district court ordered Cravath, Swaine, and Moore to pay Baker Industries, Inc. the legal fees which Baker incurred by reason of certain aspects of Cravath's conduct in representing Cerberus Limited in a patent licensing suit. The specific conduct of which Baker complained was Cravath's filing of objections to the legal conclusions of a special master ¹ who was appointed at the district court's suggestion, pursuant to a stipulation of the parties. The stipulation into which Baker and Cerberus entered was arrived at after an extended colloquy between both parties and the court. The terms of the parties' stipulation are spread on the transcript record of the hearing held October 14, 1982.

In sum, the Baker-Cerberus stipulation provided as follows: (1) that the issues pending before the district court relating to an injunction against Baker's sale of smoke detectors were to be referred to a referee; (2) that the issues pending in arbitration, relating to breach and termination of the underlying contract, were to be referred to the same referee; and (3) that litigation between the parties then pending in Boston and New York was to be stayed pending the referee's determination. In particular, and because of the nature of the contested issues this stipulation barred review by any court of the referee's conclusions of law as well as of fact. Despite this non-appealable feature of the stipulation, Cravath filed with the district court numerous objections to the referee's decision. The district court found that Cravath's action in seeking such review was taken in bad faith, given its stipulation that it would not appeal from the referee's determination.

Cravath, in disputing the non-reviewability of the referee's findings and conclusions, relied on precedents which Cravath cited as holding that parties cannot effectively stipulate to shield from review the legal conclusions of a Rule 53 master. Baker Industries disputed Cravath's characterization of the reference to the referee as a Rule 53 proceeding, and the district court agreed with Baker Industries, reading the Rule 53 cases on which Cravath relied, to be inapposite.

A.

The underlying action was brought by Baker Industries, the licensee, to enjoin Cerberus' attempt to terminate a long term patent license for the manufacture of smoke detectors. The merits of the termination were to be settled by arbitration, pursuant to a contractual arbitration clause. Baker's suit was originally brought in New Jersey state court, and then removed to federal court by Cerberus.

The injunctive relief sought by Baker was denied by the district court as being covered by the arbitration clause and thus precluded by that clause. The district court's order was affirmed by this court on appeal. Baker Ind., Inc. v. Cerberus, Ltd., 692 F.2d 747 (3d Cir.1982) (table). Cerberus then counterclaimed to enjoin Baker from selling its smoke detectors, claiming that these issues were not subject to the arbitration clause. Meanwhile, related suits were pending in both New York and Massachusetts.

At the urging of the district court, the parties agreed to refer all the issues before the district court, as well as the portion of [Question by Mr. Rosenbaum, counsel for Baker Industries: T]he Master's decision is not reviewable by you[?]

                the dispute pending before the arbitrators, to a hearing before a neutral party--a referee--to be selected by the court.  The advantage to be gained by such a reference was the possibility of judicial control over all of the issues, 2 thus concluding all disputes between the parties in one proceeding.  The referee was to have power to order discovery.  As a condition to acceding to the appointment of a referee, the district court required an express agreement of the parties that the referee's decision would be final and not reviewable.  Both parties thereupon stipulated "that the findings of fact will be final" and that "the conclusions of law will be final."    According to the court
                

THE COURT: That is right. And if (sic) not reviewable by the United States Court of Appeals for the Third Circuit and not reviewabling (sic) by the Supreme Court of United States, and not reviewable by the World Court--

It is evident from a reading of the transcript that absent full and complete agreement by the parties to the terms of the stipulation the district court would not have appointed a referee and would not have endorsed the reference procedure agreed to by the parties.

The precise nature of the court's reference is both disputed and the subject of some confusion. Nevertheless, despite the confusion in terminology by both the parties and the court, it is evident that what emerged was a hybrid form of reference--not a classic Rule 53 master, nor a conventional arbitrator. Rather, the court appointed an impartial referee granting him the powers agreed to by the parties.

To illustrate the confusion that led up to the appointment, we note that the district court repeatedly referred to the referee as a "Master" during the conference, which led to the parties' stipulation. It was in this connection that the district court discussed the Fed.R.Civ.P. 53 provisions relating to Masters. ³

From the outset, the parties realized, however, that a true Rule 53 reference was inappropriate, as the district court lacked subject matter jurisdiction over the portion of the dispute covered by the arbitration clause. Indeed, at a hearing on the appointment of the referee, the district court, although referring to the appointee as an arbitrator-master, denied that the reference was to arbitration. "He's not an Arbitrator. The proceeding you are about to go through is not an arbitration." At the same hearing, the court referred to the referee as the "Arbitrator-Master" and to the reference as an "Arbitration-Mastership."

The hybrid character of the reference was recognized by the parties as well. When Baker moved to enforce the referee's favorable report, it moved alternatively to enter judgment on a Master's report and to confirm an arbitration award. The court reacted: "I don't know what you are talking about. There was no arbitration. There was no award." Despite this disclaimer, at the October 14, 1982 stipulation conference, the district court did at one time refer to the reference in terms of arbitration: "The arbitration will, in effect, be shifted to a different forum, one which we can control in terms of the timetable and speed, et cetera and so forth."

B.

After receiving the referee's report, which was unfavorable to Cerberus, despite its earlier stipulation that findings of fact and conclusions of law were to be final and were not to be appealed. Cravath nevertheless filed thirty pages of objections to the report. Cerberus claimed that the objections which it filed with the district court and which appear to be objections raised to findings of fact were not barred by provisions of the stipulation prohibiting appeal because, according to Cerberus Cravath then filed a 101 page brief in support of its various objections, insisting that the district court was obliged to exercise review of the referee's findings and conclusions despite its stipulation to forego appeal. Baker filed a 36 page response to Cerberus' objections, and a 43 page response to Cerberus' legal memorandum.

they were based on the referee having exceeded the scope of his reference. Cerberus also contended that "manifest errors of law" are always reviewable. On April 15, 1983, the district court judge held a hearing, at which he indicated that he would not consider objections other than those based on a claim that the scope of the reference had been exceeded.

On April 11, 1983, Baker moved to enforce the referee's report and on April 25, 1983, Baker moved for an award of counsel fees pursuant to 28 U.S.C. Sec. 1927. The district court granted both motions. In the district court's opinion, which denied Cerberus any review of the legal issues decided by the referee, the district court implicitly held that the referee was not a Special Master under Rule 53. Rather, according to the district court's opinion, "This court at no time could have delegated to the master the power to decide the controversy between the parties since this court has never had any such power to delegate," Baker Industries, Inc. v. Cerberus, Limited, 570 F.Supp. 1237, 1250 (D.N.J.1983), and "the only statute which arguably governs judicial review of Mr. Moser's [the referee's] decision is the United States Arbitration Act." Id. at 1251.

The district court judge thus found to be frivolous, Cravath's contentions on Cerberus' behalf that the referee's legal conclusions were reviewable, and found that Cravath's conduct in asserting this position was sufficiently vexatious to justify the award of...