Diapulse Corp. of America v. Carba, Ltd.

• Decision Date: 10 July 1980
• Docket Number: D,No. 695,695
• Citation: 626 F.2d 1108
• Parties: DIAPULSE CORPORATION OF AMERICA, Petitioner-Appellant, v. CARBA, LTD., Respondent-Appellee. ocket 79-7535.
• Court: U.S. Court of Appeals — Second Circuit

Page 1108

626 F.2d 1108

DIAPULSE CORPORATION OF AMERICA, Petitioner-Appellant, v. CARBA, LTD., Respondent-Appellee.

No. 695, Docket 79-7535.

United States Court of Appeals, Second Circuit.

Argued Jan. 24, 1980.

Decided July 10, 1980.

Solomon H. Friend, New York City (Friend, Perles, Dorfman & Kleefeld, New York City, Frank D. Decolvenaere, on brief), for petitioner-appellant.

Stephen P. H. Rachlis, New York City (Hans Harnik, Stephen M. Harnik, New York City, of counsel, Wachtell, Manheim & Grouf, New York City, on brief), for respondent-appellee.

Before MULLIGAN, VAN GRAAFEILAND and KEARSE, Circuit Judges.

VAN GRAAFEILAND, Circuit Judge:

This is an appeal by Diapulse Corporation of America from that part of a judgment entered in the United States District Court for the Southern District of New York which modified the injunctive provisions of an arbitration award in its favor. Appellee, Carba, Ltd. originally cross-appealed but then withdrew its appeal, content to let the award stand as modified. We hold that the district court had no authority to modify the substantive provisions of the award but remand to the district court so that application may be made for remand to the arbitration panel for clarification of ambiguities in the award.

Diapulse, a Delaware corporation, manufactures an electronic device for use by the medical and veterinary professions. The device, known as the "Diapulse machine," is designed to expedite bone and tissue healing through the emission of electromagnetic energy and impulse waves. Because of FDA objections, the machine, which is manufactured in New York, is not distributed in the United States. It is marketed in Europe and other parts of the world through a system of exclusive territorial distributorships.

In 1973, Carba, a Swiss corporation, contracted to become the exclusive distributor of Diapulse machines in Switzerland. In 1974, Diapulse granted Carba a second exclusive distributorship covering Germany. These agreements contained a clause providing for resolution of all contractual disputes by arbitration in New York City in accordance with the rules of the American Arbitration Association.

Pursuant to this clause, Diapulse filed a demand for arbitration in 1976, alleging that Carba had violated a provision in the distributorship agreements prohibiting it from competing with Diapulse in the production or sale of Diapulse machines or any similar device during the term of the agreements and for two years thereafter. The arbitration proceedings took place in June 1976. Diapulse presented evidence that Carba had funded the development of a competitive device which it marketed in Europe and elsewhere under the name "Ionar". Diapulse introduced into evidence a copy of a letter from Carba to an Arabian sales agency dated October 27, 1975, in which Carba announced the development of the Ionar machine, described it in some detail, and noted that sales efforts were concentrated in Switzerland, France, and Algeria, where hundreds of Ionar machines were currently in service and hundreds more were expected to be sold. The letter was accompanied by literature purporting to be descriptive of the Ionar machine and Ionar therapy. A representative of Carba admitted at the arbitration proceedings that the literature accompanying the letter to the Arabian sales agency was for the most part a direct translation of literature discussing the Diapulse machine which had been provided by Diapulse to Carba and other Diapulse distributors for use in the promotion of the Diapulse machine. This witness also testified that Carba had financed the development of the Ionar machine, had appointed agents or distributors of Ionar in France, Belgium, and Austria, and regularly responded to requests for information about Ionar from other parts of the world.

By way of defense, Carba argued that the Ionar machine was not really similar to the Diapulse machine and that, in any event, the non-competition clause should be construed as barring competition only in Germany and Switzerland, the areas in which Carba served as exclusive distributor. Carba urged that the reference in the letter to the Arabian sales agency concerning sales efforts in Switzerland was a "sales bluff" and that in reality it never sold Ionar machines in Switzerland in violation of the non-competition clause.

In an award dated December 19, 1977, the arbitrators enjoined Carba "from engaging in competition with (appellant) in the production or sale of its device described as Diapulse or any similar devices", awarded appellant $35,000 in damages, and required Carba to pay the costs of the arbitration proceeding. Appellant petitioned for confirmation of the award in the United States District Court for the Southern District of New York in July 1978. Carba cross-moved to modify the award by deleting the provision that enjoined it from competition, arguing that the two-year period provided for in the contracts had expired. The district court concluded that because the injunction was permanent in time and unlimited in geographic scope, it violated the public policy of the United States against unreasonable restraints of trade. Purporting to act under the authority of 9 U.S.C. § 11(c), the court modified the award by adding a clause limiting the injunction geographically to the area of Switzerland and Germany and temporally to a period of two years from the date of the judgment. The award, as modified, was confirmed, and judgment thereon was entered July 6, 1979. We turn first to the district court's construction of the authority given him by section 11(c).

The purpose of arbitration is to permit a relatively quick and inexpensive resolution of contractual disputes by avoiding the expense and delay of extended court proceedings. Wilko v. Swan, 346 U.S. 427, 431-32, 74 S.Ct. 182, 184-85, 98 L.Ed. 168 (1953); Office of Supply v. New York Navigation Co., 469 F.2d 377, 379 (2d. Cir. 1972). Accordingly, it is a well-settled proposition that judicial review of an arbitration award should be, and is, very narrowly limited. I/S Stavborg v. National Metal Converters, Inc., 500 F.2d 424, 429-32 (2d Cir. 1974); Office of Supply v. New York Navigation Co., supra, 469 F.2d at 379-80. A federal court may vacate or modify an arbitration award only if one of the grounds specified in 9 U.S.C. §§ 10 & 11 is found to exist. I/S Stavborg v. National Metal Converters, Inc., supra, 500 F.2d at 429-30. Office of Supply v. New York Navigation Co., supra, 469 F.2d at 379. Section 11(c) authorizes a district court to modify or correct an arbitration award "(w)here the award is imperfect in matter of form not affecting the merits of the controversy."

The district court, after concluding that the arbitrators' injunction violated public policy, reasoned that this rendered the award "imperfect in form" and empowered the court to modify it so as to eliminate the violation. This was error. Section 11(c), which is limited to matters of form not affecting the merits of the controversy, does not license the district court to substitute its judgment for that of the arbitrators. It cannot be argued seriously that the district court's revision of the arbitration award, which...