Seventh Circuit Short Circuits Attempt to Avoid Enforcement of Arbitration Award

In a recent decision, the Seventh Circuit federal court of appeals reaffirmed the limited role courts have in reviewing arbitration awards. The decision also provides a lesson to litigants about the need for a clearly written and well-reasoned arbitration decision.

The case stems from a fallout between a technology company and an inventor turned equity owner in the company. The defendant Roe invented a nozzle that transforms gases into liquids. Nano Gas expressed interest in acquiring and commercializing the technology. The parties embarked on negotiations resulting in Roe assigning the nozzle to Nano Gas in exchange for a 20% ownership of Nano Gas, a board seat, and a potential salary. Under the terms of the parties’ agreement, Roe’s salary was tied to either Nano Gas successfully raising capital or Roe’s developing his invention into a working machine. Before either milestone could be reached, the parties’ relationship soured.

Roe ultimately left Nano Gas and took with him a prototype machine and a box of Nano Gas’s intellectual property. The parties initially began litigation in a Michigan federal court before the dispute was referred to arbitration. Following a hearing, the arbitrator entered an award generally favoring Nano Gas but awarding compensation to both parties.

The arbitrator found that Nano Gas should compensate Roe for the continued use of his invention. It also found though that Roe should compensate Nano Gas for the financial harms he caused when he continued to use the technology he assigned to Nano Gas and made off with Nano Gas’s intellectual property. The arbitrator considered awarding Roe some sort of royalty on future profits that might flow from Nano Gas’s use of the device Roe invented, but in the end decided against this approach. The arbitrator determined a royalty was not necessary to compensate Roe because he “remains a major shareholder in Nano Gas, and that, as such, he could benefit financially from this in the future should Nano Gas experience profitability and an increase in value.”

Ultimately, the arbitrator ordered Roe to return Nano Gas’s intellectual property or pay Nano Gas $150,000 if he did not return the IP. Then the arbitrator ordered Roe to pay damages to Nano Gas in the amount of $1,500,000, with such payment “to be made by (1) first, subtracting from the amount to be paid to Roe by Nano Gas under this decision ($1,500,000) the amount to be paid to Nano Gas by Roe under this decision ($1,000,000) and (2) thereafter, the remainder ($500,000) in such manner as Roe chooses.”

The parties and the Court agreed that the arbitrator’s award was less than clear but disagreed what effect the lack of clarity had on enforcement of the award. Nano Gas argued that the trial court had the ability to order a sale of Roe’s shares in the company to satisfy the $650,000 amount Roe owed it. Roe argued that the arbitrator’s award granted him the right to remain a shareholder of the company and that a court could not deprive him of that right by forcing him to sell his shares to satisfy the award. Roe also argued that the arbitrator’s ruling that Roe could pay the $500,000 “in such manner as Roe chooses” entitled him to decide the timing and source of the funds to satisfy the award, going as far as to argue that he could wait and satisfy the award from his estate after his death.

First, the Court considered Roe’s argument that the arbitration award entitled him to remain a shareholder. It agreed with the trial court that the award is devoid of any language indicating Roe shall remain a shareholder indefinitely. The award, the Court explained, only states that the arbitrator considered awarding Roe a right to future profits but declined to do so. Far from creating a right to remain a shareholder, the reference to Roe’s shareholder status simply served as a justification for why the arbitrator determined the offset was the appropriate award for Roe. The award only granted Roe the $1,000,000 offset, the Court reasoned, but “his Nano Gas shares are fair game.”

Next, the Court considered Roe’s claim that the award prevented Nano Gas or a court from determining how and when Roe was required to pay the $500,000 awarded to Nano Gas. The Court found Roe’s reading of the “in such manner as Roe chooses” language in the award to be unreasonable. The Court found that an interpretation giving Roe complete discretion to decide if, when, and how Roe pays the award during his lifetime to be absurd. “The ‘manner’ Roe chooses does not mean the ‘time’ Roe chooses,” the Court determined. Rather, the Court interpreted the language as giving Roe the choice of which assets to use to satisfy the award, if he had multiple assets with which to do so. However, the Court rejected the contention that the arbitrator’s award could deprive courts of their normal authority to enforce satisfaction of arbitration awards in post-award proceedings.

The Court’s full opinion is available here.

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