ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Thursday, April 11, 2013

7th Circuit to Johnson Controls: No Second Bite at the Apple for You!

7th CirAccording to Judge Wood, Johnson Conrols, Inc. v. Edman Controls, Inc., was a simple case of a party agreeing to arbitration and then seeking to avoid arbitration once the decision went against it.  The parties had an agreement according to which Edman Controls (Edman) was supposed to have the exclusive right to distribute the products of Johnson Controls (Johnson) in Panama.  The agreement provided for arbitration of all disputes under Wisconsin law and for the losing party to pay the prevailing party's attorneys' fees.  At the time of the agreement, both parties were aware that Edman would rely on its Panamanian subsidiaries (Pinnacle) to carry out the distribution agreement.  

In 2009, Johnson breached the agreement by seeking to sell its products directly in Panama.  The Seventh Circuit noted that there was nothing subtle about the breach.  Johnson approached Edman's clients directly and refused to communicate with Edman about attempts to market its products in Panama,  In 2010, Edman brought its claims, sounding in tortious interference, unjust enrichment and breach of the duties of good faith and fair dealing to an arbitrator.

The arbitrator ruled in Edman's favor and awarded about $750,000 in damages.  However, the arbitrator dismissed Edman's claims relating to tortious interference with Pinnacle, finding that he had no authority over the relations between Johnson and Pinnacle.  "Aha!" said Johnson (we paraphrase).  Challenging the arbitral award, Johnson argued that all of Edman's harm actually derived from Pinnacle's harm, and the arbitrator had no jurisdiction over Pinnacle's harms.  

The District Court was unimpressed.  The parties knew that Edman would be operating through Pinnacle, and given the narrow scope of the court's review on a challenge to an arbitral award, Johnson's claim that the arbitrator had been mistaken in his understanding of Wisconsin law was unavailing.  But thanks for playing, Johnson.  For your troubles, the District Court awarded Edman attorneys' fees of about $250,000, bringing the total in damages to a tidy $1 million.

On appeal, the Seventh Circuit noted that although both parties relied on Chapter 1 of the Federal Arbitration Act (FAA), the case was actually governed by either the FAA's Chapter 2, which incorporates the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, or the FAA's Chapter 3, which incorporates the (Panama) Inter-American Convention on International Commercial Arbitration.  The Seventh Circuit noted that it was not clear whether a court could rely on FAA Chapter 1 to vacate a decision taken by a U.S. arbitrator relating to an agreement that is governed by either the New York or the Panama Convention.

In a close case, the Seventh Circuit opined, a court would have to address that issue, as the grounds for vacatur in FAA Chapters 2 and 3 are different from those in Chapter 1.  But this was not a close case.  Arbitral decisions are not overturned lightly and will be upheld so long as “an arbitrator is even arguably construing or applying the contract and acting within the scope of this authority.”  Johnson claimed that the arbitrator exceeded its power by letting Edman bring claims on behalf of its subsidiary.  But that would only be a mistaken application of Wisconsin law if Johnson were correct.  Such a mistake would not be enough to overturn the award, and Johnson is not correct as to Wisconsin law.  And in any case, it seems, not of that matters anyway, because Edman was directly harmed by Johnson's breach and the arbitrator allowed recovery only for Edman's direct losses.  

The Seventh Circuit also affirmed the award of attorneys' fees, finding that the District Court had not abused its discretion in finding that Johnson had to pay a 33% contingency fee to Edman's attorneys.  The Court denied Edman's request that the Court impose Rule 38 sanctions on Johnson for a frivolous appeal largely, it said, because the attorneys' fee award was already sanction enough.


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