Landmark Ventures, Inc. v. InSightec, Ltd., No. 14 Civ. 0233 (S.D.N.Y. Nov. 26, 2014) [click for opinion]
Petitioner Landmark Ventures, Inc. ("Landmark") is a New York corporation that provides financial advice and banking services. Cross-Petitioner InSightec ("InSightec") is an Israeli corporation that develops medical devices. The companies executed a letter of engagement (the "Agreement") providing that InSightec retained Landmark for six months to be its exclusive financial advisor related to, among other things, a possible sale or other disposition of a majority of the Company's assets or stock. Landmark was to pursue prospective investors or partners, but such prospective investors did not include InSightec's existing shareholders or their affiliates. The Agreement provided that any disputes were governed by New York law and would be settled under the Rules of Arbitration of the International Chamber of Commerce ("ICC").
During the term of the Agreement, GE Healthcare invested $27.5 million in InSightec. Landmark asserted that InSightec owed it a "minimum strategic partnership fee" in the amount of $450,000. InSightec refused to pay because GE Healthcare was an affiliate of GE, an existing InSightec shareholder. Landmark submitted the dispute to ICC arbitration. The parties were unable to jointly nominate an arbitrator, so one was appointed by the ICC. InSightec's attorney is a member of the arbitration committee of the ICC and on the ICC roster of arbitrators. She is also a member of the ICC's Commission on Arbitration. She did not disclose any potential conflict of interest after the ICC appointed an arbitrator.
At the onset of the arbitration, the parties and the arbitrator signed the "terms of reference" which stated that the arbitration would be governed by New York law, that ICC Rules were the applicable procedural rules, and that one of the issues to be determined in the arbitration was how costs should be fixed under Article 37 of the ICC Rules. A subsequent order by the arbitrator provided that discovery would be governed by the IBA Rules on the Taking of Evidence in International Arbitration.
Prior to the arbitration hearing, numerous disputes arose. Landmark submitted ten document requests to InSightec, but the arbitrator denied six of the requests outright and an additional two for failing to satisfy the IBA Rules regarding scope and specificity of requests. Landmark also failed to submit witness statements by the deadline set forth in the arbitrator's order. While noting that there was no reasonable basis for Landmark's failure to comply, the arbitrator extended the deadline and explained that evidence submitted after the second deadline would be subject to an adverse inference or deemed inadmissible unless good cause was shown. On the new deadline, Landmark did not submit any expert witness statements, but instead submitted a request for a one-week extension to "engage" an expert witness. The arbitrator denied the request.
After the evidentiary hearing was held, pursuant to the arbitrator's order, Landmark submitted a post-hearing statement, InSightec submitted an opposition, and Landmark submitted a reply. After Landmark submitted its reply, InSightec submitted a letter by email discussing the adequacy of Landmark's response and raising other arguments. That same day, Landmark sent an email arguing that InSightec's letter was an unauthorized surreply and requesting that it be withdrawn or rejected. The following day, the arbitrator issued an order finding that InSightec's letter was improper and stating that it would be disregarded. The arbitrator then closed the proceedings.
The arbitrator issued a 34-page written award finding that the Agreement was unambiguous and denying Landmark's claims in their entirety. Following the award, both parties sought an award deciding who should bear the cost of the arbitration. InSightec asserted it was entitled to attorney's fees and costs and submitted an affirmation of its counsel detailing its expenses and legal fees. The arbitrator found that Landmark should bear its own legal fees and pay InSightec's attorney's fees and costs due to Landmark's complication of the proceedings by failing to comply with procedural orders. The arbitrator reduced InSightec's attorney's fees by an additional 20% to avoid fees for work performed before the arbitration commenced.
Landmark petitioned to vacate the award. Because the Agreement is commercial and involves a foreign party, the action was governed by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the "New York Convention"). Under the New York Convention, a party seeking to vacate an arbitration award faces a heavy burden of proof, and an award should be confirmed unless the court finds one of the seven ground set forth in Article V. In addition, the New York Convention provides that the state in which the award was made, or under the law of which the award was made, may set aside or modify the award in accordance with its domestic arbitral law. Thus, Chapter 1 of the Federal Arbitration Act ("FAA") also applied to Landmark's motion to vacate. Under the FAA, there are four express grounds for vacating arbitration awards. In addition, an implied ground for vacating an arbitration award in the United States is manifest disregard of the law.
Landmark argued that the award should be vacated because the arbitrator (1) engaged in misconduct, (2) demonstrated evident partiality, and (3) exceeded her powers by manifestly disregarding the law and awarding InSightec attorney's fees and costs. The district court rejected each of Landmark's arguments.
First, the court held that the arbitrator was not guilty of misconduct. Landmark argued that the arbitrator's procedural rulings related to its document requests and second request for extension of a deadline constituted misconduct. In rejecting this argument, the court noted that procedural rulings can only lead to vacating an award if the ruling denied the petitioner fundamental fairness, which the arbitrator's rulings did not. Rather, the arbitrator's decisions were within her broad discretion to control discovery and enforce deadlines. The court further noted that because the arbitrator found that the Agreement was unambiguous, extrinsic evidence would have been irrelevant. Additionally, the court disregarded Landmark's allegations of misconduct related to the arbitrator's consideration of InSightec's unauthorized surreply as being contrary to fact because the arbitrator had expressly disregarded InSightec's letter and closed briefing.
Second, the court rejected Landmark's arguments regarding evident partiality. Landmark argued that the arbitrator's substantive orders on its discovery requests, denial of its request for extension, and consideration of InSightec's surreply show that the arbitrator was biased against Landmark. The court held that Landmark's subjective disagreement with the rulings cannot give rise to a finding of partiality. The court also addressed and rejected Landmark's argument, raised for the first time in reply, that the arbitrator was partial towards InSightec's counsel because they were both affiliated with the ICC. The court found no merit in this argument, because there was no evidence that the InSightec's attorney and the arbitrator served on an arbitrator panel together, attended similar ICC events or meetings, or even knew each other at all.
Third, the court denied Landmark's motion to vacate on the grounds of manifest disregard of the law. A party seeking to vacate an award under this very limited implied ground "must establish that the law allegedly ignored was clear, improperly applied, and led to an erroneous outcome, and that the arbitrator not only knew the law but intentionally disregarded it." Because Landmark failed to identify a principle of law the arbitrator allegedly understood and ignored or misapplied, its argument failed. The court held that disputes over contractual interpretation do not rise to the level of manifest disregard of the law.
Finally, the court rejected Landmark's argument that the arbitrator had exceeded her powers by awarding InSightec attorney's fees. The Agreement provided that disputes would be settled under ICC Rules, and Article 37 of the ICC Rules gives the arbitrator the power to award costs, including attorney's fees. Accordingly, the arbitrator had clear authority to award attorney's fees to InSightec. The court rejected Landmark's contention that the award of attorney's fees was an award of punitive damages, which are contrary to New York public policy, and that the amount of fees was unsubstantiated. The court, therefore, granted InSightec's cross-petition to enforce the arbitrator's award of fees.
Meghan Hausler of the Dallas office contributed to this summary.