Patrizzi & Co Auctioneers USA Inc. et al v. SDG Corporation et al
MEMORANDUM Opinion and Order, Signed by the Honorable Matthew F. Kennelly on 10/25/2011.(ea, )
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
PATRIZZI & CO AUCTIONEERS SA and
PATRIZZI & CO AUCTIONEERS USA, INC.,
SDG CORPORATION and
MGL AMERICAS INC.,
Case No. 11 C 3589
MEMORANDUM OPINION AND ORDER
MATTHEW F. KENNELLY, District Judge:
SDG Corporation (SDG) demanded arbitration under a software development
contract with Patrizzi & Co Auctioneers SA and Patrizzi & Co Auctioneers USA, Inc.
(Patrizzi). SDG claimed breach of the contract and unjust enrichment, and it requested
an injunction to protect its intellectual property. Patrizzi answered and brought breach
of contract and unjust enrichment counterclaims against SDG and a third-party claim for
breach of contract against MGL Americas Inc. (MGL) in the arbitration proceeding.
An arbitrator ruled against Patrizzi on its counterclaims and cross-claim, awarded
SDG $563,642 in damages, and assessed $287,640.30 in costs and fees against the
Patrizzi companies jointly and severally. Patrizzi now moves to vacate the arbitration
award under 9 U.S.C. § 10. SDG and MGL move to confirm the award under 9 U.S.C.
§ 9. For the reasons stated below, the Court denies Patrizzi’s motion and grants SDG
and MGL’s motion.
In 2008, Patrizzi, an auction company specializing in watches, began to create a
new business model based upon simultaneous live auctions accessible on the internet.
The company needed a software platform to conduct the auctions and entered into
discussions with MGL, a technology company. MGL advised Patrizzi that it designed
systems similar to what Patrizzi needed. During its discussions with MGL, Patrizzi dealt
with representatives of SDG, a technology firm that was in the process of merging with
MGL and that had begun to use the MGL brand name in its business dealings. The
parties dispute the degree to which Patrizzi was aware that SDG and MGL had not yet
merged at the time that discussions of Patrizzi’s software needs were ongoing. An
officer of Patrizzi executed a nondisclosure agreement with SDG in February 2008,
Patrizzi Arb. Ex. 2, but the Master Service Agreement (MSA) that Patrizzi S.A. signed in
May 2008 stated that it was an agreement with MGL. Pet. Ex. A.
SDG developed the software Patrizzi requested, but it was not to Patrizzi’s
satisfaction. Patrizzi contends that the two companies never agreed to many of the
specifications for the software and states that the MSA and the only completed work
order listed few specifications. Pet. Ex. E. An auction testing the software in November
2008 was unsuccessful. The merger of MGL and SDG was never completed. In
January 2009, because SDG was not going to be a part of MGL, it sent Patrizzi for
signature a new MSA under SDG’s name. Patrizzi instead chose to go elsewhere to
obtain auction software.
After a seven day hearing, the arbitrator issued an award finding that the MSA
was a valid contract that was not lacking in material terms. He also found that both
Patrizzi companies were parties to the contract, even though only Patrizzi S.A. had
signed it, and that SDG was a party to the contract even though the contract only listed
MGL. The arbitrator determined that Patrizzi had breached its obligations under the
contract and that it was responsible for any failures in the auction software because it
had frequently changed its requirements and that it was also responsible for any
problems during the November 2008 test. He also found that Patrizzi had abandoned
the contract with SDG not because of dissatisfaction with the software but because of
changing market conditions. The arbitrator granted contractual damages and costs to
SDG but denied its request for an injunction. The arbitrator also denied Patrizzi’s
claims. Pet. Ex. B at 15.
“When parties seek judicial review of an arbitrator’s award, the role of the courts .
. . is extremely limited.” United Food & Commercial Workers, Local 1546 v. IllinoisAmerican Water Co., 569 F.3d 750, 754 (7th Cir. 2009). “Factual or legal error, no
matter how gross, is insufficient to support overturning an arbitration award.” Halim v.
Great Gatsby’s Auction Gallery, Inc., 516 F.3d 557, 563 (7th Cir. 2008). Courts should
“not set aside an arbitral award so long as the arbitrator interpreted the parties’
agreement at all.” Prostyakov v. Masco Corp., 513 F.3d 716, 723 (7th Cir. 2008).
The sole bases for vacating an arbitration award are contained in 9 U.S.C. §
10(a). Affymax, Inc. v. Ortho-McNeil-Janssen Pharmaceuticals, Inc., _ F.3d _, 2011 WL
4634222, at *2 (7th Cir. 2011). That subsection states:
In any of the following cases the United States court in and for the district
wherein the award was made may make an order vacating the award
upon the application of any party to the arbitration—
1) where the award was procured by corruption, fraud, or undue
2) where there was evident partiality or corruption in the arbitrators,
or either of them;
3) where the arbitrators were guilty of misconduct in refusing to
postpone the hearing, upon sufficient cause shown, or in refusing to hear
evidence pertinent and material to the controversy; or of any other
misbehavior by which the rights of any party have been prejudiced; or
4) where the arbitrators exceeded their powers, or so imperfectly
executed them that a mutual, final, and definite award upon the subject
matter submitted was not made.
Patrizzi presents five arguments for overturning the arbitrator’s award: (1) the arbitrator
refused to hear pertinent and material evidence; (2) the arbitrator exceeded his powers
by manifestly disregarding the law of contracts, unjust enrichment, and piercing the
corporate veil; (3) the arbitrator exceeded his powers by awarding SDG damages on a
quantum meruit theory that neither party had requested or discussed; (4) the arbitrator
exceeded his powers by allowing SDG to show an exhibit that was not one of those the
parties had agreed to; and (5) the arbitrator displayed evident partiality against Patrizzi
during the hearing.
Refusal to hear evidence
During the arbitration hearing, Patrizzi attempted to offer as an exhibit a financial
report from MGL’s website. The report that stated that SDG was a recently acquired
subsidiary of MGL. It included testimonials from employees of SDG describing how
their work had changed since MGL’s acquisition of SDG. Pet. Ex. Q at 14, 61, 79–80.
Patrizzi states that it wanted to use the report to show that it had researched MGL’s
business and performance; that it wanted to contract with Mgl, not SDG; and that SDG
was not a party to the contract or had fraudulently induced Patrizzi to enter into a
contract with it.
The arbitrator did not allow Patrizzi to introduce the financial report. The parties
agree that the report was not admitted because it was not on a list of exhibits that the
parties had prepared prior to the arbitration. The incomplete transcript of the hearing
presented by Patrizzi also indicates that the arbitrator was concerned that the proffered
exhibit was not immediately available. Pet. Ex. P. at 1665.
“‘Every failure of an arbitrator to receive relevant evidence does not constitute
misconduct requiring vacatur of an arbitrator’s award.’” Flender Corp. v. Techna-Quip
Co., 953 F.2d 273, 280 (7th Cir. 1992) (quoting Hoteles Condado Beach v. Union de
Tronquistas Local 901, 763 F.2d 34, 40 (1st Cir. 1984)). “It is when the exclusion of
relevant evidence actually deprived a party of a fair hearing that it is appropriate to
vacate an arbitral award.” Slaney v. Int’l Amateur Ath. Fed’n, 244 F.3d 580, 592 (7th
Cir. 2001) (analyzing New York Convention rule that denies enforcement of arbitration
award if a party “was otherwise unable to present his case” and citing cases under 9
U.S.C. § 10, including Hoteles Condado (emphasis omitted)).
The exclusion of the report did not deprive Patrizzi of a fair hearing. There was
other evidence showing that Patrizzi thought that SDG was a subsidiary of MGL,
including the testimony of one of Patrizzi’s executives who had read MGL reports
stating that the two companies had merged and had been informed of the same by a
SDG employee. Pet. Ex. H at 1656–59. Patrizzi’s lawyer argued only that the financial
report would have shown why Patrizzi executives thought that SDG and MGL had
merged. Pet. Ex. P. at 1664. Even without the financial report, however, the arbitrator’s
award acknowledged that SDG and MGL had begun to represent that they had merged
before the merger was actually completed. Pet. Ex. B at 3 ¶¶ 6–7.
Patrizzi now argues that the financial report would have shown that SDG and
MGL had merged before Patrizzi entered into the contract and that Patrizzi wanted to
contract with MGL because of its “global reach and reputation.” Pet. Br. at 6. But it is
unclear, and Patrizzi does not explain, how either of these facts would undermine the
arbitrator’s findings. Patrizzi’s argument is unpersuasive.
Manifest disregard of the law
Patrizzi argues that the arbitrator manifestly disregarded three different areas of
Illinois law, which he was obliged to follow because of the MSA’s choice-of-law clause.
It claims that he ignored the rule that a contract is not enforceable when it lacks material
terms, law requiring that unjust-enrichment damages be based on the defendant’s gain,
and law on piercing the corporate veil that requires a showing that Patrizzi S.A. was a
dummy or sham corporation controlled by Patrizzi USA.
Manifest disregard of the law, however, is grounds for vacating an arbitration
award only if the arbitrator “directs the parties to violate the legal rights of third persons
who did not consent to the arbitration.” Affymax, 2011 WL 4634222, at *2. Legal errors
by the arbitrator, even egregious errors, are not grounds for vacating the award. Halim,
516 F.3d at 563; George Watts & Son, Inc. v. Tiffany & Co., 248 F.3d 577, 579 (7th Cir.
The arbitrator was obliged by the contract to apply Illinois law to the dispute. If
he had not done so, the award could be vacated. George Watts & Son, 248 F.3d at
579. But there is no indication in the award that the arbitrator ignored Illinois law. In
addition, the arbitrator was not required to state affirmatively that he was applying
Illinois law. See Affymax, 2011 WL 4634222, at *3.
Patrizzi argues that the arbitrator exceeded his power because he determined
that SDG would be entitled to recover under a quantum meruit theory. Patrizzi
contends that neither party had discussed quantum meruit and that it was given no
opportunity to address that point.
In his award, the arbitrator stated:
Since the evidence presented establishes the MSA as an enforceable
agreement, SDG’s damages must flow from [Patrizzi]’s breach of that
agreement and not from SDG’s unjust enrichment claim. If there was no
enforceable contract, then under the evidence presented SDG would be
entitled to damages for unjust enrichment and/or quantum meruit.
Pet. Ex. B at 14 ¶ 16(b). It is clear that the arbitrator awarded damages based on
breach of contract. He offered unjust enrichment or quantum meruit only as an
alternative basis for damages if there had been no enforceable contract. For this
reason, even if the arbitrator exceeded his authority by discussing quantum meruit, any
error was harmless.
Patrizzi argues that the arbitrator exceeded his power by allowing SDG’s lawyer
to introduce an exhibit that the parties had not agreed would be presented. Before trial,
the parties agreed with the arbitrator on a schedule for exchanging exhibits and
resolving objections to them; they also prepared exhibit lists. Pet. Ex. F at 3 ¶ 9. SDG
did not include Patrizzi’s website as an exhibit during this process. Despite this, SDG’s
attorney referred to it during his opening statement and displayed it to the arbitrator. In
particular, SDG’s attorney referred to a demonstration form of the auction software that
SDG had developed that was on Patrizzi’s website, attempting to show the arbitrator
that SDG’s program worked and that Patrizzi was still making some use of it. Pet. Ex.
G. Patrizzi states that it had no advance notice that SDG would use the website at the
Patrizzi claims that the arbitrator lacked the authority to admit the exhibit contrary
to the parties’ agreement regarding the admission of exhibits. SDG argues, however,
that the website was not formally admitted as an exhibit but was only briefly mentioned
and displayed during its counsel’s opening statement. The Court agrees. For this
reason, any error was harmless.
In addition, the Rules of the American Arbitration Association (AAA), which the
contract required the arbitrator to follow, require the arbitrator “to determine the
admissibility, relevance, and materiality of the evidence offered.” AAA Commercial
Arbitration R. 31(b); see Pet. Ex. A ¶ 10.9. “[A] court can modify an arbitrator’s decision
under section 10(a)(4) only if the arbitrator exceeds the powers delegated to him by the
parties.” Eljer Mfg. v. Kowin Dev. Corp., 14 F.3d 1250, 1255–56 (7th Cir. 1994). The
parties, by deciding to use AAA rules, gave the arbitrator the authority to make
evidentiary decisions. He did not exceed his powers by exercising that authority.
Patrizzi argues that NHL Players’ Ass’n v. NHL, 30 F. Supp. 2d 1025 (N.D. Ill.
1998), reached a different result. In that case, the parties to the arbitration and the
arbitrator agreed not to present or consider evidence of a previous negotiation. The
arbitrator nevertheless considered such evidence. The court vacated the award
because the arbitrator had exceeded his authority. Id. at 1026–29. Here, by contrast,
the parties agreed only to a schedule for exchanging copies of exhibits, and SDG simply
failed to list Patrizzi’s website as a possible exhibit. There was no express agreement
not to discuss or consider Patrizzi’s website, much less an agreement by the arbitrator
not to consider evidence of whether SDG’s software functioned.
Patrizzi’s final argument is that the arbitrator showed evident partiality because
he allowed SDG to display Patrizzi’s website during its opening statement but did not
allow Patrizzi to introduce MGL’s financial report. As discussed above, neither the
website nor the report was on pretrial lists of exhibits the parties had generated.
Patrizzi claims that the differential treatment shows that the arbitrator was biased in
favor of SDG.
“[E]vident partiality exists when an arbitrator’s bias is direct, definite[,] and
capable of demonstration rather than remote, uncertain, or speculative.” Harter v. Iowa
Grain Co., 220 F.3d 544, 553 (7th Cir. 2000) (internal quotation marks omitted). To
display evident partiality, the arbitrator must commit “acts that simultaneously show
support for one side and disregard the rules.” Trustmark Ins. Co. v. John Hancock Life
Ins. Co., 631 F.3d 869, 873 (7th Cir. 2011).
The two situations were not parallel. SDG only briefly showed the website while
making its opening statement. It did not formally ask that the website be admitted as an
exhibit, nor is there any indication the arbitrator considered it as having been admitted in
evidence. By contrast, Patrizzi offered the financial report into evidence as an exhibit.
In addition, the hearing transcript excerpts that Patrizzi has presented reflect that the
arbitrator stated, and Patrizzi’s lawyer agreed, that unlike the website, the financial
report that Patrizzi sought to present was not available in the hearing room at the time
that Patrizzi sought to introduce it. Pet. Ex. P at 1665. Given the differences between
the two pieces of evidence, the arbitrator did not show “evident partiality” via the two
Patrizzi also argues that the arbitrator was partial when he “ignored” evidence
that SDG’s software did not work and did not meet Patrizzi’s specifications. Pet. Br. at
18. But there is nothing to suggest that the arbitrator declined to consider this evidence,
let alone that he did so out of bias against Patrizzi. Rather, the arbitrator considered it
but found other evidence more persuasive. Patrizzi disagrees with the arbitrator’s
factual conclusions, but an alleged factual error does not allow the Court to overturn the
arbitration award. Halim, 516 F.3d at 563.
For the reasons stated above, the Court grants SDG and MCL’s motion to
confirm the arbitration award [docket no. 14] and denies Patrizzi’s petition to vacate the
award [docket no. 1]. The Court directs the clerk to enter judgment confirming the
MATTHEW F. KENNELLY
United States District Judge
Date: October 25, 2011
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