QAD, Inc. v. Block & Co.

Decision Date25 April 2022
Docket NumberCivil Action 21-mc-370-MN
CourtU.S. District Court — District of Delaware
PartiesQAD, INC., Petitioner, v. BLOCK & COMPANY, INC., Respondent.
MEMORANDUM OPINION [1]

SHERRY R. FALLON UNITED STATES MAGISTRATE JUDGE.

Presently before the court in this miscellaneous action to confirm an arbitration award are the following motions: (1) respondent Block & Company, Inc.'s (Block) motion to vacate the arbitration award (D.I. 4); (2) petitioner QAD Inc.'s (QAD) cross-motion for attorney's fees (D.I. 9); and (3) QAD's motion for sanctions pursuant to Federal Rule of Civil Procedure 11 (D.I. 15).[2] For the following reasons, the arbitration award is CONFIRMED, Block's motion to vacate the arbitration award is DENIED, QAD's motion for attorney's fees is GRANTED, and QAD's motion for Rule 11 sanctions is DENIED as moot.

I. BACKGROUND

QAD is a software provider offering an end-to-end business process for handling the receipt, shipping, invoicing, and payment of customer orders. (D.I. 5, Ex. 1 at 8) Block is a manufacturer and distributor of cash handling products serving the financial, gaming, hospitality, education, restaurant retail, and vending industries. (Id.)

On October 26, 2018, QAD and Block entered into a contract (the “Cloud Contract”) in which QAD agreed to provide its cloud-based Enterprise Resource Planning (“ERP”) system to Block in exchange for payment. (D.L 5, Ex. 2) Specifically, the terms of the Cloud Contract required QAD to provide a hosted environment with the QAD licensed application and infrastructure to support it, consisting of a development, test, and production server. (Id., Ex. 1 at 9) A December 4, 2018 email confirmed that QAD satisfied these obligations by creating the cloud environment and loading it with the cloud applications. (Id., Ex. 1 at 10) The Cloud Contract also included a provision limiting the parties' liability:

NEITHER PARTY SHALL BE LIABLE FOR ANY INDIRECT, INCIDENTAL, SPECIAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES, OR ANY LOSS OF PROFITS OR REVENUE.
A PARTY'S MAXIMUM LIABILITY FOR ANY DAMAGES ARISING OUT OF OR RELATED TO THE AGREEMENT OR THE SERVICES, WHETHER IN CONTRACT OR TORT OR OTHERWISE, SHALL BE LIMITED TO 1.5X THE AMOUNT OF THE FEES CUSTOMER PAID TO VENDOR OVER THE PREVIOUS TWELVE CALENDAR MONTHS UNDER THE ORDER DOCUMENT GIVING RISE TO THE LIABILITY. THE FOREGOING MAXIMUM LIABILITY LIMIT SHALL NOT APPLY TO (1) DAMAGES ARISING FROM DEATH OR PERSONAL INJURY OR A PARTY'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, OR A BREACH OF OBLIGATIONS UNDER SECTIONS 7 OR 8; OR TO (2) INDEMNITY OBLIGATIONS UNDER SECTIONS 5.2, 10 AND 11 (FOR THE AVOIDANCE OF DOUBT EACH PARTY'S INDEMNITY OBLIGATIONS SHALL COVER ALL CLAIMS MADE BY A THIRD-PARTY, INCLUDING CLAIMS THAT ARE CHARACTERIZED AS CONSEQUENTIAL OR OTHER INDIRECT DAMAGES).

(Id., Ex. 2 at § 12.1)

Soon after entering into the Cloud Contract, Block executed a professional services agreement with Broom Street Software (“Broom Street”), a software consulting and application company, to assist with Cloud implementation. (Id., Ex. 1 at 9) Block's implementation of the Cloud project was subsequently delayed due to the insufficient resources committed to the project. Nonetheless, Block and Broom Street continued to work on the implementation process between January and July 2019, and QAD continued to provide support services during that time. (Id., Ex. 1 at 10-11) Block paid its first invoice from QAD in the amount of $42, 861.86 on March 29, 2019, but it did not pay any of the subsequent nine invoices QAD sent to Block totaling $744, 854.22, despite QAD's efforts to collect on those invoices. (Id., Ex. 1 at 11) Block claimed its refusal to pay the invoices was justified by QAD's alleged failure to provide a “Go-Live” cloud environment as required under the terms of the Cloud Contract. (Id., Ex. 1 at 13)

QAD served a demand for arbitration (“Demand”) on Block on July 9, 2020, pursuant to the arbitration provision in the Cloud Contract:

[A]ny dispute, claim or controversy arising out of or relating to this Agreement or to the breach, termination, enforcement, interpretation or validity thereof, shall be determined by arbitration in Wilmington, Delaware USA before a single arbitrator. The arbitration shall be administered by JAMS pursuant to its Comprehensive Arbitration Rules and Procedures.... The arbitral award may be enforced in any court having jurisdiction thereof.

(D.I. 5, Ex. 2 at § 14.1; see Ex. 1 at 4) Block responded with counterclaims for breach of contract and promissory estoppel against QAD. (Id., Ex. 1 at 5) In April 2021, Block indicated it had no intention of paying the outstanding invoices. (Id., Ex. 1 at 12) The JAMS arbitrator conducted a virtual arbitration hearing in June 2021 and subsequently entered a final award in favor of QAD on August 10, 2021. (Id., Ex. 1) The arbitrator concluded that § 12.1 of the Cloud Contract did not limit QAD's damages and awarded QAD $744, 854.22, plus costs and accrued interest at a rate of 11/2 % per month as of April 4, 2019. (Id., Ex. 1 at 17-18)

On September 10, 2021, QAD filed a petition to confirm the final arbitration award in this court.[3] (D.I. 1) The following week, Block moved to vacate the arbitration award. (D.I. 5)

QAD subsequently moved for attorney's fees and Rule 11 sanctions related to Block's motion to vacate the arbitration award. (D.I. 9; D.I. 15) The motions are now ripe for resolution.

II. DISCUSSION
A. Arbitration Award

There is a strong presumption in favor of enforcing arbitration awards under the Federal Arbitration Act (“FAA”), and the party seeking to overturn the award bears the burden of showing that the award does not merit deference. Brentwood Med. Assocs. v. United Mine Workers of Am., 396 F.3d 237, 241 (3d Cir. 2005); see also Dunkley v. Mellon Inv'r Servs., 378 Fed.Appx. 169, 171 (3d Cir. 2010). Nonetheless, the court may vacate an arbitration award under the FAA if the arbitrator exceeds his or her authority in reaching a decision. See 9 U.S.C. § 10(a)(4). The question for the court in applying § 10(a)(4) is whether the arbitrator's award is “irrational, ” meaning that the award fails to draw its essence from the agreement and cannot be rationally derived from the agreement, or that the record contains no support for the arbitrator's determination. Verizon Pa., LLC v. Commc'ns Workers of Am., AFL-CIO, Local 13000, 13 F.4th 300, 306 (3d Cir. 2021) (quoting Ario v. Underwriting Members of Syndicate 53 at Lloyds for 1998 Year of Account, 618 F.3d 277, 295 (3d Cir. 2010); Exxon Shipping Co. v. Exxon Seamen's Union, 73 F.3d 1287, 1295 (3d Cir. 1996)).

Block contends that the arbitrator improperly disregarded the Cloud Contract's limited liability provision as unconscionable, despite conceding that the language of the provision is unambiguous. (D.I. 5 at 6-7) According to Block, the limited liability provision was drafted by QAD, and there is no evidence of a gross imbalance between sophisticated parties that fully negotiated the term. (Id. at 8-10)

In response, QAD argues that the applicable case law prohibits a review of the merits of an arbitration award, even if the award allegedly rests on erroneous contract interpretations. (D.I. 8 at 8-9) Moreover, QAD submits that the arbitrator correctly applied Delaware law in finding the limitation of liability provision unconscionable because Block would otherwise be able to avoid all liability for its breach despite QAD's full performance of its contractual obligations. (Id. at 10-12)

The court finds that Block has not satisfied its heavy burden to show that the arbitrator's award is not rationally derived from the agreement or supported by the record. See Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 569 (2013); Verizon Pa., 13 F.4th at 306. [T]he sole question for [the court] is whether the arbitrator (even arguably) interpreted the parties' contract, not whether he got its meaning right or wrong.” Oxford Health Plans, 569 U.S. at 569. Here, the arbitrator thoroughly considered and construed the Cloud Contract before reaching his determination. (D.I. 5, Ex. 1) Block does not substantively challenge the arbitrator's conclusions that QAD fulfilled its obligations under the terms of the Cloud Contract, [4] or that the limited liability provision at § 12.1 of the Cloud Contract was unambiguous. (D.I. 5 at 6-11; Ex. 1 at 13-16)

The heart of the dispute is whether the arbitrator exceeded his authority under § 10(a)(4) in failing to enforce an unambiguous limited liability provision in the Cloud Contract and declaring it unconscionable. Block cites cases finding that an unambiguous limited liability provision should be enforced. See, e.g., Galantino v. Baffine, 46 A.3d 1076, 1081 n.9 (Del. 2012) (stating that unambiguous contract language should be enforced as written); eCommerce Indus., Inc. v. MW A Intel., Inc., 2013 WL 5621678, at *45 (Del. Ch. Sept. 30, 2013) (noting that limited liability clauses are typically enforceable). Block argues unconscionability is difficult to establish when the contracting parties are sophisticated commercial entities. See, e.g., Ketler v. PFPA, LLC, 132 A.3d 746, 748 (Del. 2016) (“Unconscionability is a concept that is used sparingly.”); Pig Improvement Co., Inc. v Middle States Holding Co., 943 F.Supp. 392, 402 (D. Del. 1996) (declining to find unambiguous contract provision unconscionable in the commercial setting). But the court “may not review the merits of [an arbitration] award, ” even in the case of serious legal error. Verizon Pa., 13 F.4th at 306; see Oxford Health Plans, 569 U.S. at 569 (“It is not enough ... to show that the [arbitrator] committed an error-or even a serious error.”). Even if the arbitrator erred in his interpretation of the case law on...

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