EST LLC v. Smith, 5:08-CV-32

CourtUnited States District Courts. 4th Circuit. Western District of North Carolina
Writing for the CourtRichard L. Voorhees
Decision Date24 May 2011
PartiesEST, LLC, successor-in-interest to ENVIRONMENTAL SCIENCE TECHNOLOGIES, LLC, Plaintiff, v. ROBERT C. SMITH, Individually, and WORKING CHEMICAL SOLUTIONS, INC., Defendants, v. HANK PARKER, ROBERT E. HULSLANDER, JR., and IVAN HAWTHORNE, Third-Party Defendants.
Docket Number5:08-CV-32

EST, LLC, successor-in-interest to ENVIRONMENTAL SCIENCE TECHNOLOGIES, LLC, Plaintiff,
v.
ROBERT C. SMITH, Individually, and WORKING CHEMICAL SOLUTIONS, INC., Defendants,
v.
HANK PARKER, ROBERT E. HULSLANDER, JR., and IVAN HAWTHORNE, Third-Party Defendants.

5:08-CV-32

UNITED STATES DISTRICT COURT WESTERN DISTRICT OF NORTH CAROLINA STATESVILLE DIVISION

Signed: May 24, 2011


ORDER

THIS MATTER is before the Court on Plaintiff's Motion to Vacate, Modify, and Confirm Arbitration Award (Doc. 33) filed March 10, 2011; Defendants' Brief in Opposition (Doc. 36) filed April 6, 2011; and Plaintiff's Reply Brief (Doc. 41) filed April 21, 2011. This matter is now ripe for disposition.

I. BACKGROUND

This matter involves a confidential deer attractant formula (the "Formula") that Defendants sold to Plaintiff EST, LLC for $500,000 under the terms of a Sale and Purchase Agreement and Guaranty Release dated December 29, 2006 (The "Agreement"). The Agreement contains an

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arbitration provision. The Agreement also includes a clause allowing for $500,000 in liquidated damages if Defendants breached the Agreement's non-compete provision, disclosed the Formula to third parties, or used the Formula in an attempt to develop another deer attractant. EST alleged that Defendants breached the Agreement's non-compete provision, disclosed the Formula to third parties, and used the Formula in an attempt to develop another deer attractant. More specifically, EST alleged that Smith worked with one of EST's competitors to formulate another deer attractant.

EST commenced this action and simultaneously moved for an Order compelling arbitration. (Doc. 1.) By Order dated March 31, 2009, this Court granted the relief EST requested, sending the parties to binding arbitration. (Doc. 27.) On July 26, 2010, the arbitrator dismissed EST's claim that Defendants breached the Agreement's non-compete provision because the provision violated North Carolina law as it was not limited in time and territory. The parties proceeded with discovery on the remaining claims; that Defendants disclosed the Formula to third parties, and used the Formula in an attempt to develop another deer attractant.

The arbitration hearing was conducted on these claims on October 11th and 12th, 2010. At the end of the hearing, the arbitrator asked the parties to brief whether, in the absence of any proof of actual damages, the liquidated damages clause was binding and enforeable. Both parties then submitted post-arbitration briefs addressing the enforceability of the liquidated damages provision. EST's post-hearing brief argued that EST is entitled to liquidated damages and attempted to debunk the contention that the liquidated damages clause should be regarded as a penalty. Defendants' post-hearing brief also addressed the enforceability of the Agreement's liquidated damages provision. Defendants' brief clearly acknowledged the enforceability of the provision was before the arbitrator and that liquidated damages are not enforceable if regarded as a penalty. However, Defendants' brief also stated "We have researched the law and do not challenge the enforceability of the liquidated

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damages clause, although we obviously do not believe the issue should be reached because EST has failed to prove its claim." (emphasis added).

The arbitrator issued an Award on December 10, 2010. Based on the evidence and arguments, the arbitrator found that Defendants did not disclose the Formula to any third party. The arbitrator did find, however, that EST "narrowly" proved that Defendants used the Formula in an attempt to develop another deer attractant, although that deer attractant never went to market. Because Defendants neither disclosed the Formula to third parties nor violated the Agreement's non-compete provision, and because EST acknowledged that it suffered no damage, the arbitrator declined to award liquidated damages because doing so would operate as an impermissible penalty under controlling North Carolina law. The Arbitrator then entered an award in favor of EST for nominal damages of $1.00, together with costs and attorneys' fees.

EST now contends that by striking the liquidated damages provision under North Carolina law, the arbitrator exceeded his powers and that portion of the Arbitration Award should be vacated pursuant to 9 U.S.C. § 10(a)(4). EST similarly contends that the Arbitration Award should be modified pursuant to 9 U.S.C. § 11(b) to award EST liquidated damages in the amount of $500,000 against the Defendants, jointly and severally. Finally, EST moves pursuant to 9 U.S.C. § 9 and 9 U.S.C. § 13 that the Arbitration Award be confirmed in all other respects and be enforced as if it had been rendered by this Court.

II. STANDARD OF REVIEW

"Arbitration awards are subject to very limited review in order to avoid undermining the twin goals of arbitration, namely, settling disputes efficiently and avoiding long and expensive litigation." Dirussa v. Dean Whitter Reynolds, Inc., 122 F.3d 818, 821 (2d Cir. 1997) (internal quotations omitted). Arbitration awards are subject to vacatur only on the narrow grounds set forth in 9 U.S.C.

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§ 10 of the Federal Arbitration Act. One such ground exists when the arbitrator has "exceeded [his] powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made." 9 U.S.C. § 10(a)(4). Courts may modify or correct an arbitration award in similarly limited circumstances. 9 U.S.C. § 11(b) grants federal courts the power to modify arbitration awards "where the arbitrators have awarded upon a matter not submitted to them, unless it is a matter not affecting the merits of the decision upon the matter submitted."

"Judicial review of arbitration awards is . . . 'among the narrowest known to the law.' " PPG Indus. v. Int'l Chem. Workers Union Counsel, 587 F.3d 648, 652 (4th Cir. 2009), quoting Union Pac. R.R. Co. v. Sheehan, 439 U.S. 89, 91 (1978). District courts "do not sit to hear claims of factual or legal error by an arbitrator as an appellate court does in reviewing decisions of lower courts." United Paperworkers Int'l Union v. Misco, Inc., 484 U.S. 29, 38 (1987). A court, therefore, "may not disturb the arbitrators' judgment, even if convinced that 'serious error' infected the panel's award." Id. Vacatur of an arbitration award is only proper when an arbitrator "strays from interpretation and application of the agreement and effectively, 'dispense[s] his own brand of industrial justice' . . ." Major League Baseball Players Assn. v. Garvey, 532 U.S. 504, 509 (2001), quoting Steelworkers v. Enterprise Wheel & Car Corp., 363 U.S. 593, 597 (1960).

III. DISCUSSION

An arbitrator's powers and authority are derived from the scope of the arbitration agreement. Marine Tug & Barge, Inc. v. North Am. Towing, Inc., 607 F.2d 649, 651 (5th Cir. 1979) (citing United Steelworkers of Am. v. Enterprise Wheel & Car Corp., 363 US. 593, 597, 80 S. Ct. 1358, 4 L.Ed.2d 1424 (1960)). In reviewing an arbitration award to determine whether an arbitrator exceeded his authority, courts look to the submission to arbitration and certain provisions of the underlying contract. Textile Workers of Union America v. American Thread Co., 291 F.3d 894, 897

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(4th Cir. 1961). It is also appropriate for a court to consider the parties' definitions of the issues. See Schoenduve Corp. v. Lucent Technologies, Inc., 442 F.3d 727, 732 (9th Cir. 2006). An arbitrator may address issues raised both explicitly and implicitly by the contract and the arbitration demand submissions. Id. Further, any issue that is "inextricably tied up with the merits of the underlying dispute" may properly be decided by the arbitrator. Dighello v. Busconi, 673 F. Supp. 85, 87 (D. Conn. 1987) (citations omitted), aff'd, 849 F.2d 1467 (2d Cir. 1988). In pertinent part, the parties' agreement provided:

2.05. Agreement not to Compete or Disclose Formula or Confidential Information. Upon execution of this Agreement, WCS and SMITH agree not to compete by developing, marketing, selling or distributing any Wild Game Attractant as defined hereinabove anywhere in the World. WCS and SMITH agree to maintain the Formula and Confidential Information in confidence and not to disclose the Formula or Confidential Information to any person. In the event that WCS and/or SMITH breaches this provision, EST shall be entitled to liquidated damages in the amount of $500,000.00.
6.10 Arbitration. Except as provided by Article 6.01 regarding injunctive relief, any and all disputes, controversies and differences
...

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