Rogers v. Schering Corporation, C-1168-52.

• Citation: 165 F. Supp. 295
• Decision Date: 11 August 1958
• Docket Number: No. C-1168-52.,C-1168-52.
• Parties: William P. ROGERS, Attorney General of the United States, Plaintiff, v. SCHERING CORPORATION, Defendant.
• Court: U.S. District Court — District of New Jersey

165 F. Supp. 295

William P. ROGERS, Attorney General of the United States, Plaintiff, v. SCHERING CORPORATION, Defendant.

No. C-1168-52.

United States District Court D. New Jersey.

August 11, 1958.

Chester A. Weidenburner, U. S. Atty., Newark, N. J., by Barbara A. Morris, Asst. U. S. Atty., Montclair, N. J., for plaintiff.

Allan L. Tumarkin, Newark, N. J., Montrose H. Massler, New York City, of counsel, for Hexagon Laboratories, Inc.

Milton, McNulty & Augelli, Jersey City, N. J., by Anthony T. Augelli, Jersey City, N. J., George B. Finnegan, Jr., New York City, William D. Denson, Washington, D. C., of counsel, for defendant.

FORMAN, Chief Judge.

This matter arises on a motion by the Schering Corporation (Schering) to confirm an arbitration award. A counter-motion by Hexagon Laboratories, Inc. (Hexagon), the other party in the arbitration proceeding, seeks to vacate the award. The pertinent background is as follows:

In April 1942, following the outbreak of hostilities between the United States and Germany, and pursuant to the Trading with the Enemy Act, 50 U.S.C.A. Appendix, § 1 et seq., Schering, owned by German interests, was vested in the Alien Property Custodian who became the sole common stockholder, and who eventually, by 1949, became the sole holder of all stock, preferred as well as common. On March 13, 1952 the Schering stock was sold to the general public, through underwriters, for approximately $29,000,000. Prior thereto, an agreement was entered into between the Attorney General (as successor to the Alien Property Custodian) and Schering, dated January 1, 1952,¹ whereby certain Schering-held patents were transferred to the Attorney General and became part of the public domain free of license or royalty.

Schering was allowed to keep other patents but subject to being licensed on a non-exclusive basis at a "reasonable royalty," the terms of such royalty to be arrived at by negotiation between Schering and the applicants. If the parties were unable to agree on a reasonable royalty by negotiation, the matter was to be determined by arbitration, as provided by Article VI, Par. C(2) of the said agreement with the Attorney General, which reads as follows:

"(2) If the applicant and Schering have been unable to agree, within 60 days from the date such application is received by Schering, upon what constitutes a reasonable royalty, the applicant may forthwith give written notice to Schering that it elects to submit to arbitration, in accordance with the rules then obtaining of the American Arbitration Association, the determination of a reasonable royalty for the requested license, the arbitration tribunal to consist of three arbitrators, all of whom shall be citizens and residents of the United States, selected from the panels of arbitrators of the American Arbitration Association, in accordance with the rules of said Association." (Emphasis supplied.)

On July 6, 1956 Hexagon, as a bulk manufacturer, applied for a license² under Schering's Patent No. 2,567,245 for an anti-histamine, the generic name of which is chlorprophenpyradimine maleate. The parties were unable to agree on the amount of royalty to be paid, and the matter was submitted to the American Arbitration Association pursuant to the Agreement.

A panel of three arbitrators was selected, consisting of Jerome Handler, Chairman, S. H. Bergstrom, and John H. Schwoon. This panel commenced hearing the arbitration proceeding on December 20, 1956, at which time little more than opening statements were made by counsel. After a noon recess, it was announced by Mr. Handler, the chairman, "That in view of Mr. Bergstrom's unavailability after December 25, that the AAA designate a new arbitrator in his place, but such new arbitrator will not be passed upon by any of the parties." Record, p. 30.

The next hearing was held on February 5, 1957 at which time Manfred Fanto, as Bergstrom's replacement, sat as a member of the arbitration board. Following a full day of testimony, the hearing was adjourned to February 14, 1957.

When the meeting convened on that day, counsel for Hexagon brought to the attention of the board the fact that it (Hexagon) had learned that the Van Gelder-Fanto Corporation, importers and distributors of chemicals, of which Mr. Fanto is Vice President, had done business with Schering; that Mr. Fanto had disclosed this fact to the American Arbitration Association in response to its inquiry concerning any circumstances capable of suggesting bias or possible disqualification; and that this disclosure had not been communicated to Hexagon.

Hexagon's counsel raised the issue of failure of notice to Hexagon of the disclosure made by Mr. Fanto to the Association, and that of Mr. Fanto's disqualification thereby, as the first order of business at the meeting of February 14th. No change resulted.

The hearings ended January 23, 1958, after four additional days of hearings and a total in excess of 700 pages of testimony. On February 25, 1958 the arbitrators made known their award, fixing Hexagon's royalty payments at "50% of the net selling price of said substance or drug when sold by it in bulk * * or 10% of the net selling price of said substance or drug when sold by it in final packaged form * * *."

Since the matter before the court arose out of an agreement between the Attorney General of the United States and Schering, it would appear that the Federal Arbitration Act, 9 U.S.C. § 1 et seq. has application here. In any event, the provisions of the federal act with regard to vacation of awards, Section 10, are practically identical with the provisions of the New Jersey Statute, N.J.S.A. 2A:24-8.

Hexagon bases its first objection to the award on the irregularity of the service of Mr. Fanto on the Board of Arbitrators as coming within the provisions of the federal statute, which is as follows, 9 U.S.C. § 10:

"In either of the following cases the United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party to the arbitration—"

* * * * *

"(b) Where there was evident partiality or corruption in the arbitrators, or either of them."

At the outset it should be emphasized that Mr. Fanto, with complete candor, disclosed to the Association that the firm of which he was Vice President, Van Gelder-Fanto Corporation, had in fact transacted business with Schering.

Schering states that Van Gelder-Fanto Corporation's business relationship with it consisted of one transaction, and insists that such a situation hardly constitutes a "business relationship" in the usual intendment of the phrase. It further states that "the matters now complained of by Hexagon were known to it long prior to the making of the award and a party to an arbitration will not be permitted to repudiate an award for causes within his knowledge before it was made"; and that Hexagon had not exhausted remedies available to it—within the Association—for the removal of Mr. Fanto.

The questions are raised—whether Mr. Fanto's appointment was made in conformity with the Commercial Arbitration Rules as published by the American Arbitration Association, and if not, had Hexagon done all that could be expected of it, under the circumstances, to have Mr. Fanto removed.

There is no disputing the fact that Mr. Fanto's disclosure to the Arbitration Association of an earlier business transaction with Schering was not transmitted by the Tribunal Clerk to Hexagon.

Schering submitted an affidavit of John Eastman, Jr., Vice President of the American Arbitration Association, in which he states that Mr. Fanto's appointment was made in accordance with Section 12 of the Rules, which is as follows:

"Section 12. Appointment from Panels—If the parties have not appointed an Arbitrator and have not provided any other method of appointment, the Arbitrator shall be appointed in the following manner: Immediately after the filing of the Submission or copy of a Demand, as required under Rule III, the Tribunal Clerk shall submit simultaneously to each party to the dispute, an identical list of names of persons chosen from the Panels. Each party to the dispute shall have seven days from the date of mailing of such lists in which to examine said list, cross off any names to which he objects and number the remaining names indicating the order of his preference, and return the list to the Tribunal Clerk. When any party or both parties fail to return the list within the time specified all persons named therein shall be deemed acceptable. From among the persons who have been approved on both lists, and in accordance with the designated order of mutual preference if any, the Tribunal Clerk shall invite the acceptance of an Arbitrator to serve. If the parties fail to agree upon any of the persons named or if those named decline or are unable to act, or if for any other reason the appointment cannot be made from the submitted lists, the Administrator shall have power to make the appointment from other members of the Panels without the submission of any additional lists. (Emphasis supplied.)

Mr. Eastman then makes reference to Section 18 of the Rules which is as follows:

"Section 18. Disclosure by Arbitrator of Disqualification—At the time of receiving his notice of appointment, the prospective Arbitrator is requested to disclose any circumstances likely to create a presumption of bias or which he believes might disqualify him as an impartial Arbitrator. Upon receipt of such information the Tribunal Clerk shall immediately disclose it to the parties, who if willing to proceed under the circumstances disclosed, shall, in writing, so advise the Tribunal Clerk. If either party declines to waive the presumptive disqualification, the vacancy thus created shall be filled in accordance with the applicable provisions of this Rule."

He explains in his affidavit that the latter Rule

"is not applicable to appointments made administratively by the

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