Murchison Capital Partners, L.P. v. Nuance Communs., Inc., 760 F.3d 418 (5th Cir. July 25, 2014) [click for opinion]

Plaintiffs were stockholders of a Texas-based startup software company called Vocada.  Plaintiffs sold Defendant Nuance 100% of the stock in Vocada in exchange for an upfront payment of $24 million and an additional $21 million in Earnout Consideration, payable when revenues from the sale of software reached a certain level. 

After three years, Plaintiffs still had not received any Earnout Consideration, and filed a demand for arbitration.  They had two alternative theories of damages: the benefit-of-the-bargain damages, representing the $21 million in Earnout Consideration; and out-of-pocket damages, measured by the difference between the $24 million upfront purchase price for the stock and the actual value of the company at the time of the merger.  The arbitration panel found that Nuance had committed fraud in the inducement, but determined that Plaintiffs were not entitled to any portion of the $21 Million Earnout Consideration. 

Plaintiffs subsequently filed an application in the district court to vacate and remand the arbitration award.  They argued that the arbitration panel exceeded its authority by failing to issue findings of fact and conclusions of law on their request for out-of-pocket damages.  The district court agreed and remanded the case to the arbitration panel to consider the issue of out-of-pocket damages, but did not vacate the award.

Nuance appealed, invoking Section 16 of the Federal Arbitration Act (“FAA”).  Section 16 permits appeals from orders confirming or denying confirmation of an award or partial award, orders modifying, correcting, or vacating an award, and a final decision with respect to an arbitration that is subject to the FAA.  The Fifth Circuit held that the case did not fall within the scope of Section 16, and that the court did not have appellate jurisdiction.

The Fifth Circuit explained that a district court decision vacating an arbitral award and remanding to a different arbitration panel for an entirely new hearing would be appealable.  Here, however, the district court neither confirmed nor vacated the award, but instead remanded it to the arbitral panel to consider the issue of out-of-pocket damages.  Pointing to a hypothetical from its 1990 decision in Forsythe International, S.A. v. Gibbs Oil Co. of Texas, the court found that a remand to the same arbitration panel for clarification of its award precluded “appellate intrusion,” based on policies disfavoring partial resolution by arbitration.

The Fifth Circuit also distinguished the Supreme Court’s 2000 decision inGreen Tree Fin. Corp.-Alabama v. Randolph.  While in Green Tree, the Supreme Court considered an order compelling arbitration to be a final judgment (because it ended the litigation on the merits as far as the district court was concerned), in that case, the district court had dismissed the party’s claims with prejudice.  Here, the district court did not dismiss the parties’ case, or vacate or confirm the award, but simply remanded the award for further clarification. 

Finally, the Fifth Circuit pointed to two policy reasons for its decision.  First, allowing an appeal in these circumstances could result in piecemeal appeals; the parties could return to the district court with any complaints they wished to raise regarding the clarified arbitration award, and then also appeal any decision relating to the clarified award.  Second, the deferential standard of review afforded arbitration awards required remand; a court is not permitted to interpret an award to resolve ambiguities and implement the award, but must instead remand the award to the arbitrator with instructions to clarify it.

The Fifth Circuit thus dismissed the appeal for lack of jurisdiction.

Eileen Flynn of the Chicago office contributed to this summary.