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More on Final Awards: Board of Trustees of the University of Illinois v. Organon Teknika Corp. LLC

August 20th, 2010 Appellate Practice, Arbitration Practice and Procedure, Final Awards, Functus Officio, Practice and Procedure, United States Court of Appeals for the Seventh Circuit Comments Off on More on Final Awards: Board of Trustees of the University of Illinois v. Organon Teknika Corp. LLC By Philip J. Loree Jr.

A.   Introduction

Regular readers have heard us preach about the importance of knowing arbitration law cold (here), understanding and identifying when an arbitration award is final (here), and being keenly aware of Federal Arbitration Act deadlines (here).  The United States Court of Appeals for the Seventh Circuit recently decided a case that illustrates these points well.  See Board of Trustees of the University of Illinois v. Organon Teknika Corp. LLC, ___ F.3d ___, slip op. (7th Cir. July 27, 2010) (Easterbrook, C.J.). 

The Court held that, in the circumstances, an arbitration award was final notwithstanding a provision in the award that said the arbitrator reserves his right to change his mind.  But there is more to it than that. 

B.   Background

 Organon Teknika Corp. LLC (“Teknika”) is a subsidiary of Merck & Co, Inc. and licenses from the University of Illinois (“the University”) certain intellectual property rights necessary to manufacture a cancer drug.  The royalty is tied to Teknika’s sale price for the drug and the contract allows Teknika to sell to its affiliates. 

Recognizing that Teknika’s affiliate sales could reduce royalties in the event Teknika offered insider prices, the contract allows the University to reopen its royalty rate if Teknika charges its affiliates prices less than it would charge unrelated buyers in arms’-length transactions.  The contract contains an arbitration agreement that requires an arbitrator to determine, based on comparable transactions, whether Teknika is charging its affiliates arms’-length prices.   Because the issue of arms’-length pricing can repeatedly arise throughout the life of the license, the clause necessarily contemplates the possibility that the same pricing issue may have to be determined on various occasions, all based on contemporaneous and comparable sales to affiliates and non-affiliates.       

The University concluded that Teknika’s sales to its affiliates were not at arms’-length prices and demanded arbitration.  The parties selected an arbitrator who was a member of an intellectual-property-asset-management consulting firm.  He heard evidence concerning 39 allegedly comparable transactions, all of which were supposedly negotiated at arms’-length.  The University argued that they were not comparable transactions. 

The arbitrator selected four of these as benchmarks, found they had been negotiated at arms’-length, and concluded that they showed that the University was not entitled to a royalty-rate adjustment.  He entered an award closing the proceeding without changing the royalty rate.  A cover letter accompanying the award said it was “final,” and the arbitrator’s firm sent a “final” invoice for his services. 

But the award said:

The foregoing opinions and conclusions contained in this report are based on the documents, information and research undertaken as of the date of this report.  I reserve the right to revisit my analysis and amend my conclusions, should additional information become available for review. 

The University waited six months without seeking arbitral reconsideration or judicial review.  It then asked the arbitrator to reconsider, seizing on the proviso quoted above.  It argued that two of the four benchmark transactions had not been negotiated at arms’-length. 

The arbitrator asked his firm’s lawyers whether he could reconsider the award, and the lawyers told him he could, provided both parties agreed.  He sought consent from the parties and Teknika refused. 

The University moved in federal district court to compel arbitration, requesting an order compelling Teknika to resume with the arbitration.  Teknika responded that it had honored its obligation to arbitrate, the arbitration was over, the University lost, and that Federal Arbitration Act Section 12’s 90-day (actually three-month) period to vacate or modify the award had elapsed. 

In a move that took both parties for surprise, the district court said there was no dispute to resolve because the arbitrator had not made a final award.  The matter therefore remained before the arbitrator, leaving the court with nothing to do but dismiss Teknika’s action without prejudice. 

That left things in a state of semi-stasis.  Teknika had prevailed, but was troubled by the terms of the district court’s order, which stated the award was not final.  The University had lost, but might have been able to persuade the arbitrator to render a revised award on terms more favorable to Teknika than the original, perhaps without Teknika’s participation in the proceeding. 

So Teknika, technically the prevailing party, appealed.  The University, technically the losing party, did not. 

In a characteristically terse, well-written and well-reasoned opinion, Chief Judge Frank H. Easterbrook, joined by Circuit Judges William J. Bauer, and David F. Hamilton, reversed the district court and declared that the arbitration was over.      

C.   The Seventh Circuit’s Opinion

The Court initially had to resolve an appellate jurisdiction problem.  A prevailing party can’t appeal from a judgment in its favor on the ground it did not agree with the court’s opinion.  But the Court said Teknika could appeal this one. 

Teknika had a problem with the terms of the judgment, not the language of the opinion.  Teknika wanted a judgment dismissing the University’s claim with prejudice, conclusively resolving the royalty dispute, but what it got was one dismissing the University’s action without prejudice.  Armed with that judgment, the University could resume its suit against Teknika when it saw fit, or perhaps even persuade the arbitrator to modify his award despite Teknika’s continuing refusal to participate in the arbitration.  “No matter[,]” said the Court, for “[i]t was enough to say that Teknika is aggrieved by the terms of the judgment as well as the language of the opinion and is therefore entitled to appellate review.”  Slip op. at 5 (citations omitted). 

Turning to the merits, the Court held that the “district court plainly erred in thinking that [the arbitrator’s] award was not final.”  The award

resolves the parties’ dispute; it was accompanied by a cover letter calling it the final decision; the parties paid their final bills; nothing further happened for six months – and neither side suggested to the other that something should have been happening to get the proceeding wrapped up.  It had been wrapped up already. 

Slip op. at 5-6 (citations omitted; emphasis in original). 

The language in the arbitrator’s opinion contemplating possible revision of the award did not impugn its finality.  The Court said that language was “the arbitral equivalent of Fed. R. Civ. P. 60(b)(2), which allows a judgment to be reopened to consider ‘newly discovered evidence that with reasonable diligence, could not have been discovered in time to move for a new trial under Rule 59(b).’”  Slip op. at 6 (quoting Fed. R. Civ. P. 60(b)(2)).  But just as the ever-present risk of Rule 60(b)(2) relief does not render a judgment non-final, so too the arbitrators’ reference to his right to reconsider the award did not render the award non-final: 

No one thinks that the possibility of reopening a district court’s judgment under Rule 60(b)(2) six months after its entry makes the judgment non-final and hence precludes an appeal.  Likewise no one should think that the equivalent language in the arbitrator’s opinion makes the decision non-final. 

Slip op. at 6 (citations omitted). 

The Court noted that “[t]he parties have regaled us with discussions of the ‘functus officio doctrine’ and other technicalities of arbitration law, but none of them matters[,]” because “[t]he situation is as simple and straightforward as we have described it.”  Slip op. at 6. 

Having drawn an analogy to Rule 60(b)(2), the Court had to deal with a timing issue.  While Rule 60(c)(1) sets a one-year deadline on a Rule 60(b)(2) application, the arbitrator imposed no deadline on a request for reconsideration.  The Court said the default rule was not Rule 60(c)(1)’s one-year deadline, but Federal Arbitration Act Section 12’s  90-day (actually three-month) deadline for a party to move to vacate or modify an award.  The parties, noted the Court, “did not supersede that rule by contract[:]”  “They bargained for a final and conclusive decision, not for perpetual arbitration.”  Slip op. at 6. 

Because the University waited six-months before commencing an action to compel arbitration, its “request came too late.”  So, as Chief Judge Easterbrook succinctly put it, “[t]his arbitration is over.”  Slip op. at 7. 

D.   Analysis

Teknika shows that courts resolve doubts in favor of finality.  And it shows that litigants need to assume that courts will do exactly that. 

We obviously do not know all of the details about this case, let alone what motivated each party’s conduct in connection with it.  We also have the benefit of 20/20 hindsight – something the parties obviously did not.  But the result might have been different had the University treated the award as final, and not waited six months to seek arbitral relief. 

Courts tend to resolve doubts in favor of finality for at least two reasons.  First, finality of awards is necessary to ensure that arbitration works.  One of the avowed purposes of the Federal Arbitration Act is to enable parties to resolve disputes in a speedy and efficient manner.  When awards that otherwise appear to be final and conclusive are deemed non-final for technical reasons, disputes are not resolved, let alone in a timely and efficient manner.        

Second, parties almost always agree that awards should be “final and binding,” and judicial interpretations of the Federal Arbitration Act generally seek to enforce the parties’ arbitration agreement.  Just as the parties in Teknika bargained “for a final and conclusive decision, not for perpetual arbitration [,]” so it is with most other parties that agree to arbitrate.   The Court’s decision enforced that bargain. 

The principal reason that litigants should assume that courts will resolve doubts in favor of finality is that finality determines whether time limits for judicial review have begun to run.  Federal Arbitration Act Sections 9, 10, and 11 all have been held applicable only to final awards (or awards intended to be final, but for some technical reason are not).  The reason is that these judicial-review provisions contemplate the possibility that a court will enter a final judgment confirming the award, and a judgment confirming a non-final award would not conclusively resolve the rights and obligations that are the subject of the award any more than the non-final award did.  Such a judgment would therefore not be final.  

Parties – like the University – who assume that an award is not final, and forgo seeking judicial review, risk being time-barred if they let the applicable limitation period expire before seeking review.   If there are doubts about whether an award is final, then the safer course is to treat it like it is, and act accordingly.  

We conclude with a couple of other observations and a caveat.  We wonder why Teknika did not cross-move to confirm the award in response to the University’s motion to compel arbitration.  While that would likely not have changed the outcome in the district court, a denial of a motion to confirm without prejudice would have provided a firmer basis for appellate jurisdiction, and the end result of the appeal would have been a judgment confirming the award, which probably would also have stated that it was too late to seek reconsideration.  Perhaps that’s just a picayune point of Federal Arbitration Act practice and procedure; in all likelihood Teknika’s rights will be as fully protected as they would have been had it cross-moved to confirm.  Things would probably have proceeded a little more smoothly had the cross-motion been made, but we say that solely with the benefit of 20/20 hindsight, and not knowing what (if anything) motivated Teknika not to cross move.    

We were also somewhat surprised that the Court deemed Section 12’s three-month time limit for certain types of judicial review to be the applicable limitation period for arbitral review, particularly when that period has nothing to do with reconsideration of an award  — something a court has no power to grant.  We suspect it was because the Court chose not to address the functus officio question of whether reconsideration by the arbitrator would have been proper in the circumstances — despite what the award said – and so needed an (elapsed) time limit to rely upon, so that functus officio would not – as the Court put it — “matter.” Section 12 supplied a limitation period by analogy that allowed the Court to dispose of the case while avoiding nettlesome functus officio questions. 

But even though Section 12 was, as we read it, intended solely to set a time limit on seeking certain types of judicial relief, it provided an acceptable analogue for filling a gap in the Federal Arbitration Act.  If a party is time-barred from seeking judicial relief that might result in a modified award or a remand to the arbitrator, then it at least arguably follows that a party should likewise be precluded from seeking arbitral relief from a final award.  In any event, as discussed in more detail below, there may be cases where state law would provide an even better analogue. 

As the previous sentence implies, our caveat is “beware of state law.”  The Court in Teknika suggested that the University could have made a timely request to the arbitrator for reconsideration, provided it was made within the three-month period provided by Federal Arbitration Act Section 12.  Apparently there was no potentially applicable state law better suited to fill the gap. 

Even where an arbitration is governed by the Federal Arbitration Act, and the parties have not agreed that state arbitration law applies, a court might look to state law for a more specific gap filler than Federal Arbitration Act Section 12.  New York State’s arbitration law provides, for example, that an application to the arbitrators to modify an award must be made “within twenty days after delivery of the award to the applicant. .  .  .”  See New York Civ. Prac. L & R § 7509.  Although this rule permits modification only to the extent a court could grant it pursuant to an application for modification made under New York Civ. Prac. L & R. § 7511(c) – Section 7511(c) authorizes modification on limited grounds similar to those set forth in Federal Arbitration Act Section 11 and, like Section 11, does not authorize an application for reconsideration – it would still be a better analogue for a default rule than Section 12.  For Section 12 sets the time limit for applying to a court to vacate or modify an award, whereas CPLR 7509 expressly sets a time limit for making an application for modification to an arbitrator.  Section 12 would therefore arguably not preempt Section 7509, and a New-York-based court faced with a situation like that in Teknika might find that it supplied a better default rule. 

Since state law may (like CPLR 7509) impose a time limit shorter than three months on applications to arbitrators to modify or reconsider awards, to make reasoned strategy decisions, counsel faced with an issue like that presented in Teknika must have a grasp on what state arbitration law has to say (if anything) about this subject.

Lecture over and class dismissed (with prejudice, of course…). 

[Editor’s Note:  For a different analysis of Teknika, and one more critical of the Court’s than ours, see our friend Marc Goldstein’s excellent post here.] 

         

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