Rocket Jewelry Box v. Noble Gift Packaging

• Decision Date: 20 November 1997
• Docket Number: No. 95 CIV. 7900(MBM).,95 CIV. 7900(MBM).
• Citation: 986 F.Supp. 231
• Parties: ROCKET JEWELRY BOX, INC., Plaintiff, v. NOBLE GIFT PACKAGING, INC. and Ralph Herzog, Defendants.
• Court: U.S. District Court — Southern District of New York

986 F.Supp. 231

ROCKET JEWELRY BOX, INC., Plaintiff, v. NOBLE GIFT PACKAGING, INC. and Ralph Herzog, Defendants.

No. 95 CIV. 7900(MBM).

United States District Court, S.D. New York.

November 20, 1997.

COPYRIGHT MATERIAL OMITTED

Lewis H. Eslinger, Garden City, NY, for Plaintiff.

Michael D. Lesh, New York, NY, for Defendants.

OPINION & ORDER

MUKASEY, District Judge.

Rocket Jewelry Box, Inc. ("Rocket") petitions to confirm an arbitration award against Noble Gift Packaging, Inc. ("Noble"). Noble opposes confirmation and cross-petitions to vacate the award on the grounds that the arbitrators: (1) rendered a decision that was not final; (2) exceeded the scope of their powers; and (3) manifestly disregarded the law. For the reasons stated below, Rocket's petition to confirm is granted, and Noble's cross-petition to vacate is denied.

I.

This arbitration is the product of intermittent litigation between Rocket and Noble over the sale of jewelry boxes. In 1992, Rocket filed the first of three patent infringement actions against Noble and its owner, Ralph Herzog, alleging that Noble had made unauthorized sales of two types of jewelry boxes for which Rocket held patents. (Lesh Aff. ¶ 7) Judge Haight dismissed that action for improper venue, concluding that the record did not show that Noble had sold any patented boxes in the Southern District of New York. Rocket Jewelry Box, Inc. v. Noble Gift Packaging, Inc., 869 F.Supp. 152, 156 (S.D.N.Y.1994). The dismissal was without prejudice. Id. at 157.

A. The License Agreement and Its Termination

A second patent infringement action, filed by Rocket two years later, ended on a more conciliatory note. Prior to judicial intervention, the parties entered into a "License Agreement" dated March 24, 1995. Pursuant to this agreement, Rocket granted Noble a non-exclusive license to sell its patented jewelry boxes to low volume retail stores. (Def. Mem. Ex. 5, Art. II) In exchange, Noble agreed to: (1) pay Rocket $22,500 in satisfaction of any unauthorized sales it had made prior to December 31, 1993; (2) pay Rocket a 5% royalty on any patented jewelry boxes sold after January 1, 1994; (3) furnish quarterly royalty reports to Rocket, beginning with a report covering the period from January 1, 1994, through the end of the quarter in which the License Agreement was entered into; and (4) permit Rocket to audit its books upon written notice. (Id. Arts. IV-V) The License Agreement provided that Rocket could terminate the agreement if, among other things, Noble failed to submit a quarterly royalty report and failed to correct this error within 30 days after receiving a default notice. (Id. Art. VI) Finally, the License Agreement contained an arbitration clause providing that "[a]ny disputes arising under this Agreement shall be submitted to arbitration by three (3) Arbitrators under and according to the rules and regulations of the American Arbitration Association." (Id. Art. VIII, § 7) The arbitration clause stated further that "ROCKET and NOBLE shall each pay for their own costs of the arbitration." (Id.)

Because the License Agreement served to settle Rocket's claims against Noble, the parties stipulated to a May 17, 1995, order dismissing the second patent infringement action with prejudice. (Def. Mem. Ex. 6) However, even as the parties were agreeing to this dismissal, they were taking steps that eventually would lead to more litigation. Thus, on May 12, 1995, Rocket sent Noble a default notice indicating that Rocket had not yet received the first royalty report, which was to have covered the period from January 1, 1994, through March 30, 1995. (Def. Mem. Ex. 7) Noble's attorney, Michael Lesh, then telephoned Rocket's attorney, Lewis Eslinger, to discuss the default notice. (Tr. at 102)¹ During this conversation, Lesh claims that Eslinger told him "not to worry" about the default notice. (Id. at 104) Nevertheless, three days after this conversation, Eslinger sent a memorandum to Lesh repeating the request for a royalty report. (Def. Mem. Ex. 18)

Noble did not send a royalty report until June 28, 1995, more than 30 days after Rocket's May 12, 1995, default notice. (Id. Ex. 8) Accordingly, on September 15, 1995, Rocket sent Noble a letter ("termination letter") purporting to terminate the License Agreement effective retroactively to June 13, 1995. (Id. Ex. 19) In that letter, Rocket also demanded an opportunity to audit Noble's books. (Id.)

On the same day that it sent the termination letter, Rocket filed the present patent infringement action against Noble — its third such suit. In the complaint, Rocket alleges that Noble has continued to make and sell the patented jewelry boxes without authorization since June 13, 1995, the effective date of termination of the License Agreement. (Def. Mem. Ex. 1, ¶¶ 14-29) Rocket seeks, inter alia, a declaration that its patents are valid and infringed, an injunction, and an accounting of Noble's profits since June 13, 1995. (Id. Relief Section, ¶¶ 1-5) In its answer, Noble raises several affirmative defenses, including a claim that Rocket's design patents are invalid. (Def. Mem. Ex. 2, ¶¶ 18-26)

B. The Arbitration

During the pendency of this third patent infringement suit, Rocket exercised its right under the License Agreement to demand arbitration before the American Arbitration Association (AAA). (Def. Mem. Ex. 9) In its demand, Rocket stated that it sought to recover any royalties to which it was entitled while the License Agreement was in effect. (Id.) In an order dated November 29, 1995, I removed the patent infringement suit from the active docket pending resolution of the arbitration.² (11/29/95 Order)

The arbitration panel assigned to this case invited the parties to submit memoranda of law regarding the scope of the arbitration. (Lesh Aff. ¶ 28) In its memorandum, Rocket argued that the arbitration should be limited to Noble's violation of the reporting and audit requirements of the License Agreement. (Id. ¶ 29) Noble, on the other hand, sought to litigate affirmative defenses, in particular, the alleged invalidity of Rocket's design patents. (Id. ¶ 31) The panel determined that the scope of the arbitration would encompass those affirmative defenses asserted by Noble which, if proved, would defeat Rocket's claim to an audit and royalties.³ (Def. Mem. Ex. 11) The arbitration panel then asked the parties to brief the issue of whether patent invalidity was a defense to Rocket's claims under the License Agreement. (Lesh Aff. ¶ 38; Id. Ex. 14)

In response to this request, the parties entered into a stipulation of issues for arbitration (hereinafter "stipulation"). The stipulation listed six such issues:

"(i) Whether there was a license agreement in effect between Rocket and Noble.

"(ii) What were the parties' rights and obligations under the License Agreement?

"(iii) Did Noble breach the License Agreement by failing to comply with the audit and reporting requirements thereunder and is Rocket entitled to the relief requested in the demand[?]

"(iv) If Noble breached the License Agreement, was such breach waived by Rocket?

Did Rocket breach the License Agreement?

"(vi) Did Rocket wrongfully terminate the License Agreement?" (Id.)

The stipulation "expressly preserved" the issue of the "validity of Rocket's design patent and the effect of the invalidity of such patent on the parties' rights and obligations under the License Agreement...." (Id.)

The arbitration hearing went forward on the stipulated issues in February 1997. At the hearing, the sole witness for Noble was its attorney, Lesh. He testified, among other things, that Rocket's attorney, Eslinger, had waived Noble's reporting failure during their telephone conversation they had following receipt of the default notice. (Tr. at 104) At the close of his testimony, Lesh attempted to call Eslinger to the stand to question him on this issue but the panel refused this request after some deliberation. (Id. at 123)

The panel issued their award on March 13, 1997. (Id. Ex. 16) They determined that there was a valid license agreement between Rocket and Noble; that Noble had breached that agreement; and that, as a result, Rocket was "entitled to an audit of the books and records of [Noble] in order to determine the recovery of royalties, if any, due under the agreement." (Id.) The panel determined also that Noble alone was responsible for paying their salaries as well as AAA's administrative fees and expenses. (Id.)

As noted, Rocket now petitions to confirm the arbitration award;⁴ Noble cross-petitions to vacate the award under § 10 of the Federal Arbitration Act (FAA), 9 U.S.C. § 10 (1994).

II.

Although the parties do not question the Court's authority to decide their petitions, I have an obligation to consider the issue of subject matter jurisdiction mea sponte. See Andrus v. Charlestone Stone Prods. Co., 436 U.S. 604, 608 n. 6, 98 S.Ct. 2002, 2005 n. 6, 56 L.Ed.2d 570 (1978). It is well-settled that the FAA, upon which the parties' petitions are based, does not by itself create federal jurisdiction. SeeMoses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 25 n. 32, 103 S.Ct. 927, 942 n. 32, 74 L.Ed.2d 765 (1983); Westmoreland Capital Corp. v. Findlay, 100 F.3d 263, 267 (2d Cir.1996). A district court may not consider a petition either to confirm an arbitration award under § 9 of the FAA, or to vacate an award under § 10, unless there is an "independent basis for jurisdiction." Drexel Burnham Lambert, Inc. v. Valenzuela Bock, 696 F.Supp. 957, 960-61 (S.D.N.Y. 1988) (Leval, J.); see also Kallen v. Dist. 1199, Nat'l Union of Hosp. & Health Care Employees, 574 F.2d 723, 724-25 (2d Cir. 1978) (analyzing § 9 of FAA); Harry Hoffman Printing, Inc. v. Graphic Communications, Int'l Union, Local 261, 912 F.2d 608, 611 (2d Cir.1990) (analyzing § 10); cf. Findlay, 100 F.3d at 267 (analyzing § 4). Moreover, the existence of a federal question in the arbitration does not create...