Kam-Ko Bio-Pharm Trading Co. v. Mayne Pharma

• Decision Date: 11 March 2009
• Docket Number: No. 07-35449.,07-35449.
• Parties: KAM-KO BIO-PHARM TRADING CO., LTD-AUSTRALASIA, a Washington Corporation, Plaintiff-Appellant, v. MAYNE PHARMA (USA) INC., a Delaware corporation; Mayne Pharma Pty, Ltd, an Australia corporation (now known as Mayne Pharma Ltd.); Mayne Group Ltd, an Australian public company; David Bull Laboratories, an Australian proprietary company; and John Does 1-12, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

560 F.3d 935

KAM-KO BIO-PHARM TRADING CO., LTD-AUSTRALASIA, a Washington Corporation, Plaintiff-Appellant, v. MAYNE PHARMA (USA) INC., a Delaware corporation; Mayne Pharma Pty, Ltd, an Australia corporation (now known as Mayne Pharma Ltd.); Mayne Group Ltd, an Australian public company; David Bull Laboratories, an Australian proprietary company; and John Does 1-12, Defendants-Appellees.

No. 07-35449.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted January 22, 2009.

Filed March 11, 2009.

Shaunta Marie Knibb & Jeff A. Smyth, Smyth & Mason, PLLC, Seattle, WA, for the plaintiff-appellant.

Alan S. Middleton, Davis Wright Tremaine LLP, Seattle, WA, for the defendants-appellees.

Appeal from the United States District Court for the Western District of Washington, Thomas S. Zilly, District Judge, Presiding. D.C. No. CV-06-00840-TSZ.

Before: ROBERT R. BEEZER, RICHARD C. TALLMAN, and MILAN D. SMITH, JR., Circuit Judges.

MILAN D. SMITH, JR., Circuit Judge:

Plaintiff-Appellant Kam-Ko Bio-Pharm Trading Co., Ltd-Australasia (Kam-Ko) successfully sued Defendants-Appellees Mayne Pharma (USA) Inc. (Mayne) in district court to compel arbitration before the International Chamber of Commerce (ICC). A short time later, however, Kam-Ko filed a new lawsuit in district court seeking a declaration that the ICC's $220,000 advance arbitration fee was so high as to be substantively unconscionable under the Federal Arbitration Act (FAA), 9 U.S.C. §§ 1-16, and Washington law. The district court rejected Kam-Ko's argument and, when the parties failed to comply with its directive to proceed with arbitration within sixty days, dismissed Kam-Ko's declaratory relief action with prejudice. Given the entirely commercial nature of this dispute, we affirm.

FACTUAL AND PROCEDURAL BACKGROUND

A. Royalty Agreement

Kam-Ko is a Washington company that assisted other companies in securing distribution deals in the Pacific Rim for anti-cancer drugs produced by NaPro BioTherapeutics, Inc. (NaPro). Kam-Ko provided its services to help Mayne's alleged predecessor-in-interest obtain a distribution deal with NaPro in exchange for an agreement (Royalty Agreement) that required an up-front payment of $50,000 and a seventeenyear royalty equal to 5% of the bulk price paid to NaPro. During contract negotiations, Kam-Ko proposed a process for dispute resolution, and its draft language was included, unaltered, as paragraph six of the Royalty Agreement:

Disputes. Any disputes will be settled by binding arbitration under an outside committee of three attorneys acceptable to both parties, under terms of International Chamber of Commerce arbitration guidelines, in Vancouver, B.C., Canada, should such dispute not be resolved within 30 days between the parties. The losing party will pay the cost of such arbitration.

B. Disputed Termination of Royalty Agreement and Kam-Ko's Subsequent Action to Compel Arbitration

In December 2003, Mayne informed Kam-Ko that the Royalty Agreement was terminated because Mayne had purchased NaPro and believed this acquisition relieved Mayne of any obligations to continue making payments. Kam-Ko replied that the purchase did not relieve Mayne of its obligation to pay, and that if the parties were unable to reach an agreement on the matter within thirty days, Kam-Ko would seek to compel arbitration under paragraph six of the Royalty Agreement. Mayne did not reply, and Kam-Ko filed suit in the district court to compel arbitration. Pursuant to a stipulated order, the district court ordered the dispute referred to the ICC for arbitration and dismissed the case without prejudice.

C. Proceedings Before the ICC

Kam-Ko filed a request for arbitration with the ICC in July 2005. Upon submission of the request, the ICC required Kam-Ko to pay a $2500 non-refundable deposit. The ICC then required a provisional advance from Kam-Ko of $45,000 with credit for the previously paid $2500. After some delay, Kam-Ko's principals personally loaned the company the money to pay the balance due. The ICC confirmed the parties' choices of one arbitrator each, appointed a third arbitrator to act as chairman of the tribunal, and set the advance costs at $220,000 to be split by Kam-Ko and Mayne, with credit to Kam-Ko for the amount it had previously paid.

Kam-Ko objected to the $220,000 amount as "confiscatory and punitive," and as "wholly unforeseeable to the parties." Mayne also objected to the amount, saying it "appears excessive and is unduly burdensome to both parties." Neither party submitted further payment to the ICC. Under the ICC rules, for the arbitration to proceed, Kam-Ko, as the claimant, was required to pay the entire amount due, or some form of security in lieu of cash, if Mayne did not pay. After a number of extensions of payment deadlines, the ICC deemed the arbitration withdrawn. The ICC fixed the costs already incurred in the arbitration at $40,053, deducted that amount from Kam-Ko's payments of $45,000, and refunded $4947 to Kam-Ko.

D. Declaratory Relief Action

Kam-Ko then returned to the district court, seeking (1) "a declaration that the arbitration provision of the Royalty Agreement is illegal and unenforceable"; (2) "an order reforming the Royalty Agreement by severing the arbitration clause"; and (3) damages for Mayne's alleged breach of the Royalty Agreement.

In a subsequent, self-styled "motion for declaratory judgment," Kam-Ko requested a "speedy declaratory judgment hearing pursuant to Rule 57, Fed.R.Civ.P.," and argued that the arbitration clause was substantively unconscionable because of the alleged unreasonable financial burden it placed on Kam-Ko as a precondition to arbitration. To support its position, Kam-Ko offered sworn testimony that it would be unable to pay the arbitration fee and proceed with its claims if the district court enforced the arbitration clause. Mayne responded by asserting that Kam-Ko's motion was actually a motion for summary judgment because the motion sought to skip a hearing and obtain a merits ruling on the issue of unconscionability. Mayne also asked the district court to stay the action pending arbitration in accordance with the Royalty Agreement.

The district court denied Kam-Ko's declaratory judgment motion without reference to the request for a hearing, finding that "the arbitration clause is not void for substantive unconscionability." The district court also granted Mayne's request for a stay and directed the parties to proceed to arbitration within sixty days of the order. When the parties failed to proceed to arbitration as directed, the district court entered a stipulated order dismissing Kam-Ko's declaratory judgment action with prejudice. Kam-Ko timely appealed.

STANDARD OF REVIEW AND JURISDICTION

The validity of an arbitration clause is a question that we review de novo. Nagrampa v. MailCoups, Inc., 469 F.3d 1257, 1267 (9th Cir.2006) (en banc). Although Kam-Ko is correct that we review a district court's denial of declaratory relief under Rule 57 of the Federal Rules of Civil Procedure for abuse of discretion, Principal Life Ins. Co. v. Robinson, 394 F.3d 665, 669 (9th Cir.2005), as discussed below, the district court correctly construed and denied Kam-Ko's motion as a motion for summary judgment. "A grant of summary judgment is reviewed de novo." Blankenhorn v. City of Orange, 485 F.3d 463, 470 (9th Cir.2007). We have jurisdiction over Kam-Ko's appeal pursuant to 28 U.S.C. § 1291.

DISCUSSION

Kam-Ko argues that the district court erred in determining that the arbitration clause in the Royalty Agreement is not substantively unconscionable under the FAA and Washington law. Kam-Ko also asserts that the district court's ruling denied Kam-Ko's right to a jury trial, disregarded Kam-Ko's request for an evidentiary hearing, and "ignored" sworn testimony about Kam-Ko's alleged financial hardship.

A. Substantive Unconscionability

Kam-Ko first argues that the costs required by the ICC render the arbitration clause in the Royalty Agreement substantively unconscionable. The FAA provides that "an agreement in writing to submit to arbitration an existing controversy arising out of ... a contract ... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. Accordingly, while the Supreme Court has emphasized that the FAA clearly enunciates a congressional intention to favor arbitration, Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983), "general contract defenses such as ... unconscionability, grounded in state contract law, may operate to invalidate arbitration agreements," Circuit City Stores, Inc. v. Adams, 279 F.3d 889, 892 (9th Cir.2002).

When a party seeks to have an arbitration agreement declared invalid on the basis of prohibitive expense, that party bears the burden of proving that the contract is unenforceable. Green Tree Fin. Corp.-Ala. v. Randolph, 531 U.S. 79, 92, 121 S.Ct. 513, 148 L.Ed.2d 373 (2000). In determining whether an arbitration clause is unenforceable, a federal court sitting in diversity must apply the relevant state law. Nagrampa, 469 F.3d at 1280. If the court finds that an arbitration clause is valid and enforceable, the court should stay or dismiss the action to allow the arbitration to proceed. Id. at 1276-77.

In this case, because Kam-Ko filed its complaint in Washington and the Royalty Agreement contains no superceding choice-of-law provision, Washington law applies. See Ticknor v. Choice Hotels Int'l, Inc., 265 F.3d 931, 937 (9th Cir.2001). Washington law recognizes two forms of unconscionability: substantive and procedural. Adler v. Fred Lind Manor, 153 Wash.2d 331, 103 P.3d 773, 781 (2004). The only form at issue here, substantive unconscionability, "involves those cases where a clause or term in the contract is alleged to be one-sided or overly harsh. Shocking to the conscience,...