Jacada Ltd. v. Intern. Marketing Strategies

• Decision Date: 18 March 2005
• Docket Number: No. 03-2521.,03-2521.
• Citation: 401 F.3d 701
• Parties: JACADA (EUROPE), LTD. f/k/a CLIENT/SERVER TECHNOLOGY (EUROPE), LTD., Plaintiff-Appellant, v. INTERNATIONAL MARKETING STRATEGIES, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 701

401 F.3d 701

JACADA (EUROPE), LTD. f/k/a CLIENT/SERVER TECHNOLOGY (EUROPE), LTD., Plaintiff-Appellant, v. INTERNATIONAL MARKETING STRATEGIES, INC., Defendant-Appellee.

No. 03-2521.

United States Court of Appeals, Sixth Circuit.

Argued: November 30, 2004.

Decided and Filed: March 18, 2005.

ARGUED: Daniel D. Quick, Dickinson, Wright, Bloomfield Hills, Michigan, for Appellant. Douglas L. Callander, Kreis, Enderle, Callander & Hudgins, Kalamazoo, Michigan, for Appellee. ON BRIEF: Daniel D. Quick, Dickinson, Wright, Bloomfield Hills, Michigan, for Appellant. Douglas L. Callander, Stacy M. Stine, Kreis, Enderle, Callander & Hudgins, Kalamazoo, Michigan, for Appellee.

Before: BOGGS, Chief Judge; CLAY, Circuit Judge; and WALTER, District Judge.^*

BOGGS, C.J., delivered the opinion of the court, in which WALTER, D.J., joined. CLAY, J. (pp. 715-18), delivered a separate opinion concurring in part and dissenting in part.

BOGGS, Chief Judge.

This case concerns an arbitration award arising from an agreement between a Michigan corporation and a foreign corporation to distribute software overseas. Plaintiff appeals the district court's decision to uphold an arbitration award entered in favor of the Defendant. To resolve Plaintiff's appeal, however, we must first resolve two preliminary questions that present complicated and, within our court at least, novel questions of law. We must first determine the scope of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Because we conclude that this arbitration award falls under the Convention, Plaintiff's case was properly removed to the district court. Our second inquiry is whether the federal or state standard for vacating an arbitration award should apply when the parties' agreement contains both an arbitration clause and a general choice-of-law provision requiring the application of a particular state's law. After deciding that the federal standard applies, we analyze the arbitrators' award under that deferential standard. We ultimately conclude that the arbitrators' decision in favor of Defendant drew its essence from the agreement and did not manifestly disregard the law. In reaching all these conclusions, we agree with the district court and we therefore affirm.

I

Jacada (Europe), Ltd. ("Jacada") is a software development company incorporated in the United Kingdom that created a software package referred to as Jacada/400. International Marketing Strategies ("IMS") is a marketing firm incorporated in Michigan that offered expertise in attracting possible customers for software such as Jacada's. The two companies signed a Distribution Agreement, under which IMS received the right to market and distribute Jacada/400 throughout Europe, the Middle East, and Africa. Three provisions of this contract are crucial to this appeal. The parties agreed to a general choice-of-law provision stating, in its entirety, "[t]his Agreement will be governed by the laws of the State of Michigan." J.A. 103. The Distribution Agreement also contained an arbitration clause specifying that all disputes under the agreement would be resolved "in Kalamazoo, Michigan, and exclusively by arbitration by the American Arbitration Association in accordance with its commercial arbitration rules." Ibid. Finally, the parties agreed to a limited liability provision, which included the following:

Notwithstanding anything herein to the contrary, the maximum aggregate amount of money damages for which [Jacada] may be liable to IMS under this Agreement, resulting from any cause whatsoever other than for a breach by [Jacada] of any of its representations and warranties under paragraph 5(a), shall be limited to the amounts actually paid by IMS to [Jacada] under this agreement.

During the term of the agreement, both Jacada and IMS attempted to sell the Jacada/400 software package to another British company, JBA. When that company eventually purchased the product, Jacada failed to compensate IMS for its efforts in securing the sale. The parties were unable to resolve the dispute between themselves, and IMS subsequently sought arbitration.

An American Arbitration Association panel conducted a five-day hearing concerning the sale to JBA. Following the hearing, the arbitrators issued an award for IMS consisting of one lump sum of $401,299 to be paid within thirty days and then 50% of JBA's nine remaining quarterly payments to Jacada, each of which was for >208,333.¹ In reaching this decision, the arbitrators expressly disregarded the limited liability provision excerpted above. They did so because they found that the provision "is unreasonable and unconscionable and ... that it fails of its essential purpose."

Shortly thereafter, Jacada filed an action to vacate the arbitration award in Oakland County Circuit Court in Michigan. On the same day, IMS filed an action to enforce the award in the United States District Court for the Western District of Michigan. Because the state court action was filed first, albeit by only a few hours, the district court stayed the federal action. The state court suit was eventually transferred to Kalamazoo County Circuit Court, where IMS sought removal of the case on the sole ground that the case fell under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 21 U.S.T. 2517, 330 U.N.T.S. 38 ("Convention").

With both cases then before it, the federal district court consolidated the two actions, naming the first-filed suit, to vacate the arbitration award, as the lead case. The district court subsequently issued two opinions. In the first, it determined that the arbitration fell under the Convention and that the Federal Arbitration Act ("FAA") therefore provided the correct standard of review. In the second decision, the court applied the FAA's standard of review and upheld the arbitrators' award. Jacada has timely appealed both decisions.

II

This case arrived before the district court in an unusual procedural posture that required the court to examine whether the dispute was properly before it. Because IMS is a Michigan corporation and Jacada is a British corporation, IMS could have removed the case on the basis of diversity jurisdiction. See 28 U.S.C. § 1332. In its notice of removal, however, IMS did not invoke the diversity of the parties; it only asserted the ground that the arbitration award fell under the Convention. Because it is the stated policy of this court that "[a]ll doubts as to the propriety of removal are resolved in favor of remand," Coyne v. Am. Tobacco Co., 183 F.3d 488, 493 (6th Cir.1999), we first resolve whether the Convention applies to the arbitration award before us.² Because we have no doubt that the Convention does indeed apply, we need not, and therefore do not, consider the jurisdictional question of whether removal on the basis of diversity jurisdiction would be proper in this case.

To explain the Convention's applicability to the present dispute, we find it helpful to begin with some history from the Convention's drafting. The purpose of both this country's adoption of the Convention and the Convention itself was to encourage the recognition and enforcement of international arbitration awards and agreements.³ See Scherk v. Alberto-Culver Co., 417 U.S. 506, 520 n. 15, 94 S.Ct. 2449, 41 L.Ed.2d 270 (1974) (stating purposes of the Convention in light of academic commentary). This left an obvious question: what makes an arbitration award or agreement international or foreign? This question provoked considerable debate during the drafting of the Convention because different countries had different concepts of what made an award foreign. See Bergesen v. Joseph Muller Corp., 710 F.2d 928, 931 (2d Cir.1983) (summarizing the dispute); Albert Jan van den Berg, When is an Arbitral Award Nondomestic Under the New York Convention of 1958? 6 Pace L.Rev. 25, 32-38 (1985) (same). Generally, the divergence of opinion was between common law and civil law countries. See Bergesen, 710 F.2d at 931; van den Berg, 6 Pace L.Rev. at 32-35. Civil law countries, such as France, favored an approach where "the nationality of an award was determined by the law governing the procedure." Bergesen, 710 F.2d at 931; see also van den Berg, 6 Pace L.Rev. at 33-35 (quoting excerpts from delegates' remarks at the Convention). Under this approach, an arbitration award between two parties that took place in the United States, but applied Dutch law, would be considered domestic only in the Netherlands and foreign, or non-domestic, everywhere else, including the United States. See Bergesen, 710 F.2d at 931. Another group of countries, including the United States and United Kingdom, argued that common law countries would have difficulty applying such a distinction and favored a simple rule under which an award was domestic in the country it was entered and foreign elsewhere. See ibid. Applying that rule to the previous example, an arbitration award entered in the United States would be domestic in this country regardless of what substantive laws, Dutch or otherwise, were applied to it.

The language relevant to this appeal was drafted with this disagreement in mind. Article I(1) of the Convention states:

This Convention shall apply to the recognition and enforcement of arbitral awards made in the territory of a State other than the State where the recognition and enforcement of such awards are sought, and arising out of differences between persons, whether physical or legal. It shall also apply to arbitral awards not considered as domestic awards in the State where their recognition and enforcement are sought.

Convention, art. I(1), 21 U.S.T. at 2519 (emphasis added). As written, the provision allows both approaches. Countries that preferred the territorial approach, such as the United States and the United Kingdom, are accommodated in the first sentence of Article I(1). The second sentence appeases the civil...