Johnson Controls, Inc. v. Edman Controls, Inc.

• Court: U.S. Court of Appeals — Seventh Circuit
• Writing for the Court: WOOD
• Citation: Johnson Controls, Inc. v. Edman Controls, Inc., 712 F.3d 1021 (7th Cir. 2013)
• Decision Date: 18 March 2013
• Docket Number: 12–2623.,Nos. 12–2308,s. 12–2308
• Parties: JOHNSON CONTROLS, INC., Plaintiff–Appellant, v. EDMAN CONTROLS, INC., Defendant–Appellee.

712 F.3d 1021

JOHNSON CONTROLS, INC., Plaintiff–Appellant,

v.EDMAN CONTROLS, INC., Defendant–Appellee.

Nos. 12–2308, 12–2623.

United States Court of Appeals, Seventh Circuit.

Argued Oct. 24, 2012.

Decided March 18, 2013.

Theresa A. Andre, Attorney, Foley & Lardner, LLP, Madison, WI, for Plaintiff–Appellant.

Alexander Angueira, Attorney, Miami, FL, for Defendant–Appellee.

Before POSNER, WOOD, and TINDER, Circuit Judges.

WOOD, Circuit Judge.

Although arbitration is supposed to be a procedure through which a dispute can be resolved privately, with the narrowest of exceptions for court intervention, losers sometimes cannot resist the urge to try for a second bite at the apple. That is what has happened here. Johnson Controls, Inc. (Johnson) and Edman Controls, Inc. (Edman) entered into an agreement giving Edman the exclusive rights to distribute Johnson's products in Panama. When it appeared that Johnson was not living up to its promise, Edman invoked the agreement's arbitration clause. The arbitrator ultimately concluded that Johnson had breached the agreement and that Edman was entitled to damages. Rather than accept that result, Johnson filed this suit, in which it seeks to vacate or modify the arbitral award. Edman responded with a motion to confirm. The district court ruled in Edman's favor, and Johnson now appeals.

I

Johnson is a Wisconsin company that manufactures building management systems and HVAC equipment. It distributes its products through direct sales, mechanical contractors, and distributors. Edman, a distribution company, was created by a former employee of Johnson; it is incorporated in the British Virgin Islands. Edman hoped to exploit its familiarity with the Panamanian building market in order to market Johnson's products to developers there.

In March 2007, Johnson and Edman entered into an agreement that awarded Edman the exclusive rights to distribute Johnson products in Panama. The agreement committed Johnson to assist Edman with semi-annual reviews of a market focus plan and to give Edman marketing and sales information, including specific customer leads. The agreement also provided that any dispute arising from the parties' arrangement would be resolved through arbitration using Wisconsin law and that the losing party would be responsible for the prevailing party's attorneys' fees. After the agreement was concluded, Johnson distributed promotional materials recognizing Edman as the “only authorized fire safety, CCTV, and access control agent for [Johnson] in Panama.”

At the time the parties signed the agreement, Johnson was aware that Edman planned to distribute Johnson's products by contracting with its two Panamanian subsidiary corporations, Pinnacle Technologies and Pinnacle Engineering—we refer to them as “Pinnacle” for simplicity. (They were merged into Edman on July 28, 2011, but this is of no importance to the dispute here.) Edman's plan was to delegate to Pinnacle the direct responsibility to deliver Johnson's products to Panamanian customers. Edman itself would operate as an intermediary between Johnson and Pinnacle.

In 2009, Johnson breached the agreement by attempting to sell its products directly to Panamanian developers, circumventing Edman. There was nothing subtle about this: Johnson supervisors instructed managers of Johnson's operations in Latin America to “keep Edman away from Johnson.” The head of Johnson's Latin American operations in Panama confirmed that he understood he was not to deal with Edman's president. As of mid–2009, Edman said, it had lost all support and backing from Johnson. Edman representatives repeatedly emailed Johnson about the issue, but they never received a response. In 2010, Edman learned that Johnson was offering to sell its products directly to Edman's primary client in Panama—a building developer that had purchased Johnson products from Edman for numerous projects on the understanding that Edman was the exclusive Johnson distributor in Panama. This client lost trust in Edman because it felt that Edman had misrepresented its exclusive right to distribute Johnson products. Once Johnson began to present itself as Edman's competitor, customers started questioning whether Edman could still support the Johnson products it sold.

In August 2010, Edman initiated arbitration proceedings against Johnson, raising four claims: (1) tortious interference with Edman's contractual relations with its customers; (2) unjust enrichment; (3) breach of duties of good faith and fair dealing arising out of the contract; and (4) tortious interference with Pinnacle's contractual relations. The arbitrator dismissed Edman's fourth claim on the ground that he was not authorized to address matters concerning “relationships enjoyed by either of Edman's subsidiary corporations.” Nevertheless, he concluded that Edman had suffered its own damages, independent of whatever damage Pinnacle suffered. While Johnson has attacked this conclusion vigorously in this court, it does not strike us as contradictory or baseless. Edman entered into the agreement for the purpose of profiting from distributing Johnson products. It chose to accomplish this task by using its Panamanian subsidiaries as its agents, rather than using in-house employees or third-party agents. This was not a charitable operation; Edman naturally expected to profit from its overall efforts. Moreover, as the arbitrator pointed out, Johnson was aware of this operating structure at the time of the agreement and expressed no objection to it.

The arbitrator found that Johnson breached the obligation of good faith and fair dealing that Wisconsin law imposes, as well as the express obligation of good faith and due diligence set forth in the agreement. He also concluded that Johnson was unjustly enriched by the capital investments Edman made to establish Johnson's presence in Panama. As damages, the arbitrator awarded Edman $457,986.39 for lost profits and $244,530.25 for reliance expenditures. In addition, he awarded Edman $30,825 in administrative fees and expenses. The total amount of the award exclusive of attorney's fees was thus $733,341.64.

Johnson did not accept this result. It filed a motion in district court to vacate the arbitral award pursuant to Chapter 1 of the Federal Arbitration Act, 9 U.S.C. § 10(a)(4) (FAA), which provides that a district court may vacate an arbitral award if “the arbitrators exceeded their powers.” This had occurred, in Johnson's view, because the arbitrator (contrary to his representation) had addressed claims that Edman brought on behalf of Pinnacle, and in so doing, the arbitrator had disregarded a Wisconsin rule under which Edman lacked standing to assert Pinnacle's claims. This alleged mistake of law, Johnson argued, could have happened only if the arbitrator flatly disregarded the agreement's choice-of-law clause.

The district court denied Johnson's motion to vacate the arbitral award and instead granted Edman's motion to confirm it. Noting the narrow scope of judicial review of an arbitral award and the fact that neither factual nor legal error is a sufficient ground for vacatur, the court first rejected the argument that the arbitrator exceeded his authority by adjudicating Pinnacle's claims. In fact, the court pointed out, the arbitrator expressly dismissed Edman's effort to recover for Johnson's interference with Pinnacle's contractual relations. By so doing, the arbitrator effectively took account of Johnson's assertion that Edman did not have standing to assert claims on behalf of Pinnacle. The district court also pointed out that the arbitrator cited Wisconsin law throughout his decision and thus there was no sign that the arbitrator had disregarded the parties' contractual choice of law.

Because the agreement contained a “loser pays” provision for attorney's fees, the district court also addressed this subject. Edman's agreement with its lawyer provided for a contingent fee in the amount of 33% of the award. Edman sought $252,127.93 (one-third the sum of the $733,341.64 arbitrator's award and $23,042.16 in prejudgment interest owed to Edman), plus another $57,480.05 in other costs. Relying on two affidavits from experts that Edman submitted and Johnson's silence on the point, the court decided that the contingent fee was commercially reasonable. It decided to lop $17,521.25 off of Edman's requested costs and to award $39,958.80. Johnson's two notices of appeal challenge the district court's decision on the merits to confirm the arbitral award and its award of fees and costs.

II

Before addressing the merits of Johnson's claims, we think it worth highlighting a point about arbitral procedure. Both parties in this case based their arguments on Chapter 1 of the FAA, rather than Chapters 2 or 3 of that statute. Chapter 1 codifies the original Federal Arbitration Act of 1925, 43 Stat. 883; it applies to all domestic awards and to all other awards not otherwise covered by another legal instrument. But the FAA does not stop with Chapter 1. Chapter 2 implements the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of June 10, 1958, commonly called the New York Convention. See 9 U.S.C. § 201. Chapter 3 implements the Inter–American Convention on International Commercial Arbitration of January 30, 1975, known as the Panama Convention. The United States is a party to both of those Conventions.

Chapter 2 of the New York Convention and Chapter 3 of the Panama Convention provide for domestic enforcement of foreign arbitral awards. Any commercial agreement or arbitration that “involves property located abroad, envisages performance or enforcement abroad, or has some other reasonable relation with one or more foreign states” is governed by the New York or Panama Convention, when both or all countries concerned are parties to the relevant Convention. 9 U.S.C. § 202; see also Jain v. de Méré, 51 F.3d 686, 689 (7th Cir.1995) (“[A]ny commercial arbitral...