Global Bldg. Prods. Ltd. v. Chemco, Inc., CASE NO. C12-1017 RSM

• Decision Date: 18 October 2012
• Docket Number: CASE NO. C12-1017 RSM
• Court: U.S. District Court — Western District of Washington
• Parties: GLOBAL BUILDING PRODUCTS LTD.; GLOBAL BUILDING PRODUCTS (12) LTD.; GLOBAL BUILDING PRODUCTS (17) LTD.; and FSR TREATMENT, INC., all Canadian corporations, Plaintiffs, v. CHEMCO, INC.; CHEMCO ACQUISITION CORPORATION; and VERDANT WOOD TECHNOLOGIES, INC., all Washington corporations, Defendants.

GLOBAL BUILDING PRODUCTS LTD.;

GLOBAL BUILDING PRODUCTS (12) LTD.;

GLOBAL BUILDING PRODUCTS (17) LTD.;

and FSR TREATMENT, INC., all Canadian corporations, Plaintiffs,

v.CHEMCO, INC.; CHEMCO ACQUISITION CORPORATION;and VERDANT WOOD TECHNOLOGIES, INC.,all Washington corporations, Defendants.

CASE NO. C12-1017 RSM

UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON AT SEATTLE

Dated: October 18, 2012

ORDER GRANTING PLAINTIFFS'

PETITION FOR ORDER TO

CONFIRM ARBITRATION AWARD

AND DENYING DEFENDANTS'

MOTION TO VACATE

I. INTRODUCTION

This matter is now before the Court on Plaintiffs' Petition for Order to Confirm Arbitration Award, (Dkt. # 1), and Defendants' Motion to Vacate Arbitration Award, (Dkt. # 18). These motions are considered together as they concern similar questions of law and fact. For thereasons set forth below the Court grants Plaintiffs' petition, denies Defendants' motion, and directs the clerk to enter judgment confirming the arbitrator's award.

II. BACKGROUND

Plaintiffs Global Building Products, Ltd., Global Building Products (12) Ltd., Global Building Products (17) Ltd., and FSR Treatment, Inc. (collectively "Global") are all Canadian corporations with their principal place of business in British Columbia, Canada. Global provides pressure treatment services that treat Western Red Cedar shakes and shingles with fire retardant chemicals. Global then sells these treated products to various customers in multiple markets.

Defendants Chemco, Inc., Chemco Acquisition Corporation, and Verdant Wood Technologies, Inc. (collectively "Chemco") are all Washington corporations with their principal place of business in Ferndale, Washington. Chemco is a specialty manufacturer of fire retardant chemicals used to fire retard a variety of wood products, including plywood, lumber, and wood shakes and shingles. Chemco developed, marketed, and sold these proprietary chemicals under various brand names including Thermex FR and FTX (collectively "Thermex FR"). In order to sell wood shakes and shingles in the State of California the shakes and shingles must be treated with an approved fire retardant. In 2007, Thermex FR was the only product available that had obtained a report of approval from the International Code Council Evaluation Service ("ICC") and a listing by the State of California Fire Marshal. The California Fire Marshal's listing is particularly difficult because it requires ten years of weather testing before the chemical is approved.

White Mountain Building Products, LLC, a/k/a Galchem Chemical, Inc., ("White Mountain") also manufactured a fire retardant chemical used on wood products, including shakes and shingles (the chemical herein referred to as "Galchem"). In 2001, White Mountain obtained a favorable ICC report for the use of its chemical on wood shakes and shingles but, as of 2007,had not received approval from the California Fire Marshal. In 2007, Global entered into a purchase agreement with White Mountain to acquire the rights to Galchem.

Meanwhile, in 2007, Chemco began soliciting offers to purchase its business or rights associated with its business including the fire retardant pressure treatment services using Thermex FR. Global expressed an interest and, in December 2007 after months of negotiation, Chemco and Global entered three separate Exclusive Licensing Agreements and a Toll Manufacturing Services Agreement (collectively the "Contract") for Thermex FR . The Contract provided that Global was to pay Chemco $2 million up front and a royalty of $6 per square for five years thereafter with a minimum total payment of $5 million, which Global paid.

During the negotiation, Global's Mr. Ed Watkins asked Chemco's CEO Mr. Fred Amundson why the contract was structured as a license instead of an outright purchase and sale. Mr. Amundson explained,

The answer as to why this is a an [sic] exclusive license agreement as opposed to a purchase of the rights to the chemical is simply that we own the the [sic] right to use the chemical for our other business uses. The best way to keep these issues separate is through an exclusive license agreement.

The bottom line is that you do own the chemical for your purposes. You can use it when and where you want. You can have it made anywhere you choose. We cannot use it anywhere in the word [sic] for the use that you have been granted. (This sounds a lot like you own it!) You are simply responsible for preserving the confidentiality of the chemical so that we can both use it for our purposes. This certainly would be different if we were not using the chemical for other business purposes, although it would still present us with some tax issues. All you are talking about is the name that is applied to the agreement.

Dkt. # 1, Ex. 1 at 11-12. Ultimately, the Contract provided Global the exclusive right to use Thermex FR and the associated technology, information, and product certifications for wood roofing purposes. For beneficial tax purposes, the initial license agreement was replaced by three agreements that covered three different time periods and applied to three different entities ofGlobal. The first agreement, between Chemco and Global Building Products, Ltd., provided an exclusive license for the period from December 1, 2007, through November 30, 2012. The second agreement, between Chemco and Global Building Products (12) Ltd., provided an exclusive license for the period from December 1, 2012, through November 30, 2017. Finally, the third agreement, between Chemco and Global Building Products (17) Ltd., provided an exclusive license for the period starting December 1, 2017, and continued in perpetuity.

In May 2010, Chemco entered a lease agreement with Global's competitor, the American Treating Company, LLC ("ATC") which is an entity of The Clarke Group (collectively the "Clark Group"), to lease Chemco's wood treatment facilities in Ferndale, Washington. Chemco also entered a Chemical Supply and License Agreement ("ATC License") with ATC relating to the sale of Thermex FR. Then in March 2011, ATC obtained an ICC report covering wood roofing shakes and shingles and in September 2011, received a listing by the California State Fire Marshall covering wood roofing shakes and shingles.

In April 2011, Plaintiffs brought a demand for arbitration claiming that Chemco breached the Contract by supplying a fire retardant chemical to the Clarke Group for wood shakes and shingles. The international arbitration was administered by the American Arbitration Association's International Centre for Dispute Resolution and a Final Award (the "Award") was issued in Plaintiffs' favor, and against Defendants, on June 8, 2012.

Plaintiffs petitioned this Court to confirm the Award, Dkt. # 1, and Defendants moved to vacate, claiming that the Award violates public policy and manifestly disregards the law, Dkt. # 18.

III. DISCUSSION

A. Jurisdiction, Venue, and Applicable Standards

The parties agree that Plaintiffs' confirmation request is made pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the "Convention"), 21 U.S.T. 2517, T.I.A.S. No. 6997, 330 U.N.T.S. 38, as incorporated in the Federal Arbitration Act (the "FAA"), 9 U.S.C. §§ 201-208.¹ Dkt. # 1, 1; Dkt. # 15, 3. The Court has original jurisdiction of any action or proceeding that falls under the Convention. 9 U.S.C. § 203; Gould, 887 F.2d at 1362. Specifically, in order for an arbitral award to "fall[] under the Convention," 9 U.S.C. § 202, the award "(1) must arise out of a legal relationship (2) which is commercial in nature and (3) which is not entirely domestic in scope," Gould, 887 F.2d at 1362. Here, the award is nondomestic in nature because the three conditions are satisfied when there is a commercial contractual dispute involving foreign and domestic parties. Venue is proper when the action is brought in the district of the place of the arbitration. 9 U.S.C. § 204. Here, venue is proper because the arbitration took place in Bellingham, Washington.

Under the Convention, a district court "shall confirm the award unless it finds one of the grounds for refusal . . . of the award specified in the said Convention." 9 U.S.C. § 207; Polimaster Ltd. v. RAE Sys., Inc., 623 F.3d 832, 835-36 (9th Cir. 2010). The party seeking to avoid enforcement of an arbitral award has the burden of proving the defense asserted. Polimaster Ltd., 623 F.3d at 836. This is a substantial burden because of the strong public policy in favor of arbitration and the Court's narrow interpretation of the Convention's defenses. Id.The Court conducts its review of the arbitrator's decision in "both [a] limited and highly deferential" manner and does not have the authority to "re-weigh the evidence." Coutee v. Barington Capital Grp., L.P., 336 F.3d 1128, 1132, 1134 (9th Cir. 2003) (internal quotations and citations omitted).

Article V of the Convention provides seven grounds for refusing an arbitral award but only two apply in this case. Convention art. V. First, an award may be vacated if a "competent authority in the country where recognition and enforcement is sought finds that . . . [t]he recognition or enforcement of the award would be contrary to the public policy of that country." Convention art. V(2)(b).

Second, recognition and enforcement of an award may be refused if the challenging party provides proof that the award is set aside "by a competent authority of the country in which, or under the law of which, that award was made." Convention art. V(1)(e). Defendants argue that this provision allows Defendants to assert the full breadth of the defenses provided under Chapter I of the FAA. Dkt. # 15, 4. The Ninth Circuit has yet to address the availability of the FAA defenses in addition to those provided under Article V of the Convention. ESCO Corp. v. Bradken Res. PTY LTD., Civ. No. 10-788-AC, 2011 WL 1625815, at *8 (D. Or. Jan. 31, 2011); Kaliroy Produce Co., Inc. v. Pac. Tomato Growers, Inc., 730 F. Supp. 2d 1036, 1040...