Willemijn Houdstermaatschappij, BV v. Standard Microsystems Corp.

• Decision Date: 02 January 1997
• Docket Number: D,No. 476,476
• Parties: WILLEMIJN HOUDSTERMAATSCHAPPIJ, BV, Petitioner-Appellant, v. STANDARD MICROSYSTEMS CORPORATION, Respondent-Appellee. ocket 96-7623.
• Court: U.S. Court of Appeals — Second Circuit

Page 9

103 F.3d 9

41 U.S.P.Q.2d 1464

WILLEMIJN HOUDSTERMAATSCHAPPIJ, BV, Petitioner-Appellant, v. STANDARD MICROSYSTEMS CORPORATION, Respondent-Appellee.

No. 476, Docket 96-7623.

United States Court of Appeals, Second Circuit.

Argued Aug. 28, 1996.

Decided Jan. 2, 1997.

Paul E. Crawford, Wilmington, DE (Jeffrey B. Bove, James D. Heisman, Connolly, Bove, Lodge & Hutz, Wilmington, DE, of counsel), for Petitioner-Appellant.

Paul J. Hayes, Boston, MA (Victor B. Lebovici, Dean G. Bostock, Weingarten, Schurgin, Gagnebin & Hayes, Boston, MA, of counsel), for Respondent-Appellee.

Before: MESKILL and KEARSE, Circuit Judges. ^*

MESKILL, Circuit Judge:

The issue presented on appeal is whether the district court properly vacated an arbitration award. Plaintiff Willemijn Houdstermaatschappij, BV (Willemijn) appeals from an order of the United States District Court for the Southern District of New York,

Owen, J., vacating Willemijn's arbitration award and denying Willemijn's petition to confirm the award. The district court found that the arbitrators manifestly disregarded the law. We disagree and accordingly vacate the order of the district court and remand the case with directions to confirm the award.

BACKGROUND

A. The SMC Agreement

Willemijn, a holding company incorporated in the Netherlands, is the owner of United States Reissue Patent No. 31,852 (the " '852 patent"). The '852 patent describes a data communication system for transmitting information between a central master computer and several subordinated terminal units. In October 1992, Standard Microsystems Corporation (SMC), a company incorporated in Delaware, entered into a patent license agreement with Willemijn (the "SMC Agreement"). The SMC Agreement granted SMC a non-exclusive license to manufacture and distribute data communication systems within the scope of the '852 license. The SMC Agreement also contained a most-favored-licensee (MFL) provision, pursuant to which SMC was entitled to receive the benefit of any more-favorable royalty terms subsequently granted by Willemijn to another licensee. The provision provides, in pertinent part:

If WILLEMIJN, after execution of this agreement by both parties, grants a license under the ['852 patent] containing provisions that require payments at rates of royalty less than provided for in [the royalty provisions of this agreement], WILLEMIJN shall promptly notify [SMC] of those royalty provisions. [SMC] shall then be entitled, upon written request ..., to substitute for [the royalty provisions of this agreement] the corresponding provisions of such other license but only if [SMC] also agrees to accept any other terms and conditions of such other license, identified by WILLEMIJN to [SMC].

The agreement also provided for arbitration of any disputes arising under the agreement.

B. The Proteon Agreement

Well before the SMC Agreement was executed, Willemijn granted an '852 patent license to Proteon, Inc. (Proteon). In August of 1992, Proteon instituted an arbitration action against Willemijn pursuant to an arbitration provision in its license agreement with Willemijn. Proteon claimed that the '852 patent did not apply to products manufactured and sold by Proteon. An arbitration panel agreed, holding that Proteon's products were not within the scope of any of the '852 patent claims at issue. The panel ruled, therefore, that Proteon need not pay further royalties to Willemijn under the patent license agreement (the "Proteon Award").

In April 1994, Willemijn petitioned the arbitrators to reconsider and/or modify the award. Proteon responded with a Petition to Confirm the Proteon Award in the United States District Court for the Southern District of New York pursuant to 9 U.S.C. § 9. However, before the arbitrators or the court ruled on these petitions, Proteon and Willemijn reached a settlement and agreed to end any further litigation of this matter.

In an agreement dated May 11, 1994, well after the execution of the SMC Agreement, Proteon promised never to attempt at any future time in any forum to confirm the Proteon Award (the "Proteon Agreement"). In return, Willemijn promised Proteon that it would never seek modification, reconsideration, vacation and/or reversal of the Proteon Award. More importantly for the present case, Willemijn also granted Proteon immunity from suit under the '852 patent. Section 4.0 of the Proteon Agreement provides, in pertinent part, that "Willemijn and all successors in interest of Willemijn and/or of US patent Re. 31,852 hereby grant to Proteon immunity from suit under US Patent Re. 31,852, the reexamination certificate relating thereto, and all foreign counterparts thereof."

C. The SMC-Willemijn Arbitration Proceeding

Based on Willemijn's grant of immunity to Proteon, SMC brought an arbitration proceeding against Willemijn for, among other The arbitration panel, without explanation, ruled in favor of Willemijn on all claims. On the breach of contract claim, two of the three arbitrators ruled in favor of Willemijn. Willemijn then filed a Petition for Confirmation of this arbitration award in the United States District Court for the Southern District of New York. SMC filed a Motion to Vacate only that part of the arbitrators' decision rejecting the breach of contract claim. The district court vacated the entire award, holding that the arbitration panel manifestly disregarded the law. The district court did not direct any further proceedings.

                claims, breach of the SMC Agreement.  Specifically, SMC claimed that by granting Proteon immunity from suit under the '852 patent, Willemijn had effectively given Proteon a "royalty-free license."   Since this royalty-term was more favorable than the 2-3 percent royalty rate in the SMC Agreement, SMC argued that the MFL clause in the agreement entitled it to a royalty-free term.  Because Willemijn failed to notify SMC of this more-favorable term, SMC contended that Willemijn breached the SMC Agreement
                

DISCUSSION

We have appellate jurisdiction pursuant to 9 U.S.C. § 16(a)(1)(E), and we review de novo a district court's review of arbitration awards under the "manifest disregard of law" standard, see Merrill Lynch, Pierce, Fenner & Smith v. Bobker, 808 F.2d 930 (2d Cir.1986).

A. Manifest Disregard of the Law

The showing required to avoid summary confirmation of an arbitration award is high, Ottley v. Schwartzberg, 819 F.2d 373, 376 (2d Cir.1987), and a party moving to vacate the award has the burden of proof, see generally Matter of Andros Compania Maritima, S.A. of Kissavos (Marc Rich & Co., A.G.), 579 F.2d 691, 700 (2d Cir.1978); Folkways Music Publishers v. Weiss, 989 F.2d 108, 111 (2d Cir.1993). Moreover, "[a]rbitration awards are subject to very limited review in order to avoid undermining the twin goals of arbitration, namely, settling disputes efficiently and avoiding long and expensive litigation." Folkways Music, 989 F.2d at 111. "[T]he court's function in confirming or vacating an arbitration award is severely limited." Amicizia Societa Navegazione v. Chilean Nitrate & Iodine Sales Corp., 274 F.2d 805, 808 (2d Cir.1960). In addition to statutory grounds not present in this appeal, a district court may vacate arbitration awards when the arbitrators acted in manifest disregard of the law. Wilko v. Swan, 346 U.S. 427, 436-37, 74 S.Ct. 182, 187-88, 98 L.Ed. 168 (1953).

The "manifest disregard" test requires "something beyond and different from a mere error in the law or failure on the part of the arbitrators to understand or apply the law." Siegel v. Titan Indus. Corp., 779 F.2d 891, 892 (2d Cir.1985) (per curiam) (internal quotations omitted). "Manifest disregard of the law may be found ... if the arbitrator 'understood and correctly stated the law but proceeded to ignore it.' " Siegel, 779 F.2d at 893 (quoting Bell Aerospace Co. Div. of Textron v. Local 516, 356 F.Supp. 354, 356 (W.D.N.Y.1973), rev'd on other grounds, 500 F.2d 921 (2d Cir.1974)).

It is difficult to apply this standard of review when arbitrators give no explanation for their decision. See O.R. Securities v. Professional Planning Assoc., 857 F.2d 742, 747 (11th Cir.1988)("[W]hen the arbitrators do not give their reasons, it is nearly impossible for the court to determine whether they acted in disregard of the law."). However, since arbitrators are not required to provide an explanation for their decision, United Steelworkers of America v. Enterprise Wheel & Car Corp., 363 U.S. 593, 598, 80 S.Ct. 1358, 1361-62, 4 L.Ed.2d 1424 (1960), a reviewing court must still perform the difficult task of evaluating the conduct and conclusions of the arbitrators.

"The problem is how a court is to be made aware of the erring conduct of the arbitrators." Sobel v. Hertz, Warner & Co., 469 F.2d 1211, 1214 (2d Cir.1972). When arbitrators decline to provide an explanation for their decision, a reviewing court can only infer from the facts of the case whether "the arbitrator[s] appreciate[d] the existence of a clearly governing legal principle but decide[d] In such a case we must confirm the arbitrators' decision "if a ground for the arbitrator[s'] decision can be inferred from the facts of the case." Sobel, 469 F.2d at 1216. This is so even if the ground for their decision is based on an error of fact or an error of law. Siegel, 779 F.2d at 892-93.

to ignore or pay no attention to it." Merrill Lynch, 808 F.2d at 933.

Conversely, a court may infer that the arbitrators manifestly disregarded the law if it...