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.” Continue reading ›