HERITAGE RECYCLING, LLC v. ENERGY CREATES ENERGY, LLC et al

Filing 37

ENTRY on Pending motions - Accordingly, ECE's Motion to Set Aside Judgment Confirming Arbitration Award (Filing No. 9 ) is GRANTED and its Motion to Vacate Arbitration Award (Filing No. 30 ) is DENIED. Judgment will issue confirming the arbitration award. Signed by Judge Tanya Walton Pratt on 10/17/2014. (TRG)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF INDIANA
INDIANAPOLIS DIVISION
HERITAGE RECYCLING, LLC,
Plaintiff,
v.
ENERGY CREATES ENERGY, LLC, and
GENESYS INDUSTRIAL CORP.,
Defendants.

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Case No. 1:14-mc-00027-TWP-DKL

ENTRY ON PENDING MOTIONS
This matter was before the Court for oral argument on July 2, 2014. The motions pending
include Defendants’ Energy Creates Energy, LLC (“ECE”), and Genesys Industrial Corp.
(“Genesys”) (collectively, “Defendants”) Motion to Set Aside Judgment Confirming Arbitration
Award (Filing No. 9) and Motion to Vacate Arbitration Award (Filing No. 30). For the following
reasons, the Motion to Set Aside Judgment is GRANTED and the Motion to Vacate is DENIED.
I.

BACKGROUND

ECE and Plaintiff, Heritage Recycling, LLC (“Heritage”) entered into a Purchase, License
& Commercialization Agreement (“the Agreement”) on May 20, 2011.

ECE controlled

technology and intellectual property relating to a machine that shreds material so it may be
recycled (“the Shredder”), and Heritage wanted to commercialize the technology. The Agreement
granted Heritage an exclusive license to two patents for twenty-five (25) years. Heritage paid $3
million for the rights. The Agreement contained an arbitration clause for disputes arising out of
and relating to the Agreement.
Eighteen months later, the working relationship between Heritage and ECE dissolved and
good faith negotiations to resolve their disputes failed. Heritage filed a four count arbitration claim

against ECE alleging breach of contract, fraudulent inducement, tortious interference, and unjust
enrichment. Heritage’s breach of contract claim alleged that ECE had breached the Agreement’s
exclusivity clause, as explained in a demand letter attached to the Complaint. The Complaint itself
does not specify a specific clause of the Agreement, but references seven types of conduct that
Heritage alleged constituted a breach of the Agreement. The conduct generally referred to
developing systems, technology, and intellectual property, and granting licenses and rights that
would compete with Heritage’s exclusive rights and commercialization efforts.

Heritage

specifically requested rescission of the Agreement. See Filing No. 31-6, at ECF pp. 8-9.
The parties underwent discovery. On January 7, 2014, ECE requested the arbitration
hearing be postponed on the basis of discovery abuses. At a telephonic conference on January 10,
2014, the arbitrator denied the request. On January 20, 2014, Heritage filed a pre-hearing brief
that alleged ECE also breached section 4.1(f) and 4.1(k) of the Agreement. ECE did not request a
continuance.
The parties underwent contractually bargained-for arbitration from January 27, 2014 to
February 3, 2014. On February 28, 2014, the arbitrator ruled in favor of ECE on the fraudulent
inducement, tortious interference, and unjust enrichment counts. The arbitrator found in favor of
Heritage on the breach of contract claim. Shortly thereafter, Heritage contacted Defendants’
counsel to arrange for payment of the arbitration award. Heritage notified Defendants it would
seek district court confirmation if the award was not paid by a certain date. After receiving an
unsatisfactory answer, Heritage filed this miscellaneous proceeding with its petition on March 13,
2014. It attached a certificate of service to Defendants. The entire action was also filed under
seal.

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To effectuate service, Heritage emailed a non-file-stamped copy of the petition,
accompanying documents, and motion to seal to Defendants. Heritage also sent copies by U.S.
Mail. However, as emphasized, Heritage did not provide a file-stamped copy of the petition and
the copy provided did not include a cause number. Defendants did not correspond with Heritage
or file anything with the Court. Heritage then emailed Defendants’ counsel to confirm that they
could accept service on behalf of Defendants. Counsel responded that, yes, they could accept
service and would effectuate waiver if the proper forms were provided under Rule 4. Heritage’s
counsel did not reply or send waiver forms and never provided Defendants with a cause number.
Defendants’ counsel state that they searched the online docket for this action, but received no
results due to the action being filed under seal. Additionally, Defendants’ calls to Court staff were
unproductive given the case’s status under seal.
The parties exchanged further correspondence regarding payment of the award and other
matters involving the underlying issue of a lease. One such email from Defendants’ counsel notes
that a legal action had been filed by Heritage, despite that Defendants’ counsel had not appeared
in the action.
On April 4, 2014, the Court entered judgment confirming the arbitration against
Defendants. Then, on April 8, 2014, Heritage’s counsel forwarded to Defendants by email, the
judgment entered by the Court on April 4, 2014. Defendants filed a Motion to Set Aside Judgment
on April 14, 2014. On May 27, 2014, Defendants filed a Motion to Vacate Arbitration Award on
the basis that the arbitrator considered issues beyond that which were presented by the parties.
II.

DISCUSSION

Defendants ask the Court to set aside the default judgment because service was not
effectuated properly. Defendants also ask the Court to vacate the arbitrator’s finding for Heritage.

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A.

Default Judgment
The procedure of this action is governed by the Federal Arbitration Act (“FAA”). Under

9 U.S.C. § 6, “[a]ny application to the court hereunder shall be made and heard in the manner
provided by law for the making and hearing of motions, except as otherwise herein provided.”
Under 9 U.S.C. § 9, a party may make an application to the Court for confirmation or vacation of
an arbitration award. “Notice of the application shall be served upon the adverse party, and
thereupon the court shall have jurisdiction of such party as though he had appeared generally in
the proceeding.” 9 U.S.C. § 9. “If the adverse party shall be a nonresident, then the notice of the
application shall be served by the marshal of any district within which the adverse party may be
found in like manner as other process of the court.” Id. Notice is further discussed in 9 U.S.C. §
12:
Notice of a motion to vacate, modify, or correct an award must be served upon the
adverse party or his attorney within three months after the award is filed or
delivered. If the adverse party is a resident of the district within which the award
was made, such service shall be made upon the adverse party or his attorney as
prescribed by law for service of notice of motion in an action in the same court. If
the adverse party shall be a nonresident then the notice of the application shall be
served by the marshal of any district within which the adverse party may be found
in like manner as other process of the court.
“Section 12 thus creates separate service requirements for parties who reside in the district and
those who reside elsewhere.” Technologists, Inc. v. MIR’s Ltd., 725 F. Supp. 2d 120, 126 (D.D.C.
2010). The Defendants in this case are nonresidents of this District, and under the FAA, such
service is to be effectuated by a U.S. Marshal. However, in Technologists, Inc., the court reasoned
that a foreign party (not a resident of any judicial district) should be served under Rule 4. It
explained:
The language of § 12, although outdated because of the federal courts’
abandonment of marshals as process servers, suggests that nonresidents should be
served “in like manner as other process of the court,” which points to the
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requirements of Rule 4. Although Technologists argues that Rule 5 should apply
because petitions filed under the FAA are treated as motions rather than civil
complaints, see 9 U.S.C. § 6, the Court is not persuaded by this argument. Section
6 merely ensures that motions to vacate or confirm arbitral awards are not subject
to the pleading requirements of the Federal Rules of Civil Procedure and enables
judges to decide arbitration issues on an expedited basis.
Id. at 127.
The Seventh Circuit has not weighed in on this precise issue, but this extended discussion
from Webster v. A.T. Kearney, Inc., 507 F.3d 568, 570-71 (7th Cir. 2007) is helpful:
Under the FAA, “[a]ny application to the court hereunder shall be made and heard
in the manner provided by law for the making and hearing of motions.” 9 U.S.C.
§ 6. This provision of the FAA, we have held, removes actions to confirm or vacate
arbitration awards from the realm of civil cases governed by the Federal Rules of
Civil Procedure. See Fed R. Civ. P. 1, 81(a)(3); Health Servs. Mgmt. Corp. v.
Hughes, 975 F.2d 1253, 1257-58 (7th Cir.1992). In Hughes, the filer of a motion
to vacate protested the district court's denial of the motion and the entry of judgment
in favor of the opposing party on the ground that the district court had not afforded
the movant the process required by Federal Rule of Civil Procedure 16, including
scheduling conferences and briefing. We held that § 6 of the FAA “preempts the
applicability of the Federal Rules” in favor of the rules governing motions practice.
Similarly, other courts have concluded that actions under the FAA to challenge or
confirm awards proceed outside the Federal Rules, except insofar as the FAA is
silent. See Productos Mercantiles E Industriales, S.A. v. Faberge USA, Inc., 23
F.3d 41, 46 (2d Cir.1994); O.R. Sec., Inc. v. Prof'l Planning Assocs., Inc., 857 F.2d
742, 748 (11th Cir.1988).
Thus, while the Seventh Circuit noted that the FAA preempts the Federal Rules for motions
practice, it has not decided whether service should be effectuated by a marshal or under Rule 4.
The precise issue, though, the Court declines to decide because the Court finds that under the facts,
Defendants were not effectively served or provided notice of this action.
The operative facts are that Heritage sent Defendants a non-file-stamped copy of the
Complaint, failed to ever provide Defendants with a cause number, and filed the action under seal,
effectively preventing Defendants from finding and participating in this action. These actions fail
under the FAA notice provision, but also failed to provide effective service under Rule 4. Heritage

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overstates the import of the March 19, 2014 email. Rather than explicitly acknowledge service of
this action, Defendants’ counsel confirmed he could accept service and would be open to waiver.
In short, the Court concludes that justice and fairness require that the default judgment be set aside.
Defendants’ motion is GRANTED.
B.

Arbitration Award
It is extremely rare that a district court would overturn an arbitrator’s ruling. Heritage has

represented to the Court that it could only find one such instance, and that was a ruling in part
because the arbitrators failed to rule on all the claims. See Filing No. 32, at ECF p. 1 n.2; W&J
Harlan Farms, Inc. v. Cargill, Inc., No. 1:09-cv-113-WTL-TAB, 2011 WL 1560988 (S.D. Ind.
Apr. 21, 2011). Courts only vacate arbitration awards in narrowly defined cases. Am. Postal
Workers Union, AFL-CIO, Milwaukee Local v. Runyon, 185 F.3d 832, 835 (7th Cir. 1999). Section
10 of the FAA permits a court to vacate an arbitration award:
(1) where the award was procured by corruption, fraud, or undue means; (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.
9 U.S.C. § 10(a). Defendants assert the fourth ground in this case, specifically that the arbitrator
ruled on Heritage’s breach of contract claim involving section 4.1(k) of the Agreement.
At this stage, the Court need not consider the merits of the arbitrator’s decision, only
whether it was within the proper scope of the proceeding. The Seventh Circuit has stated, “[i]t is
tempting to think that courts are engaged in judicial review of arbitration awards under the Federal
Arbitration Act, but they are not.” Wise v. Wachovia Secs., LLC, 450 F.3d 265, 269 (7th Cir.
2006). The Court’s task is limited “to determining whether the arbitrator abided by the contractual
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limits placed on him to decide the dispute.” Am. Postal Workers Union, 185 F.3d at 835. The
Court looks both to the contract and the issues submitted to the arbitrator. Id. When determining
whether an award is outside of the contract, “[i]t is only when the arbitrator must have based his
award on some body of thought, or feeling, or policy, or law that is outside the contract that the
award can be said not to draw its essence from” the contract. Id. (quotation omitted). The Court
resolves any doubt in favor of the arbitration award. When determining whether an award is
outside the issues submitted by the parties, deference is given to the arbitrator’s interpretation of
the scope of an issue “so long as it is rationally derived from the parties’ submission.” Id. Again,
any doubts regarding scope are resolved in favor of the arbitration award.
Defendants contend that the breach of contract count pleaded by Heritage was only for a
breach of the exclusivity obligations under the Agreement, and did not include breach of section
4.1(k). Section 4.1(k) of the Agreement stated:
Ownership of Rights. ECE represents and warrants that it is the owner of the full
right, title and interest to, and has the right to grant the rights hereinafter granted
under, the ECE Technology and ECE Patent Rights, and that no license or other
rights are necessary to be granted to ECE from Third Parties under the ECE
Technology and ECE Patent Rights for the purpose of conducting the activities set
forth herein.
Filing No. 31-1, at ECF p. 9. Defendants argue that the first mention of section 4.1(k) as a basis
for breach came seven days before the arbitration hearing and was contained in Heritage’s prehearing brief, that it had no pre-hearing opportunity to respond to the 4.1(k) claim, and that the
arbitrator heard only “three lines of uncorroborated, third-party deposition testimony in support of
Heritage’s newly alleged breach,” Filing No. 31, at ECF p. 3. Defendants argue that in order to
determine whether a breach of 4.1(k) occurred, the arbitrator considered, applied, and ruled on
federal patent law, which he had no authority to do. Additionally, Defendants argue the arbitrator

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improperly granted rescission, which they argue was clearly prohibited as a remedy by the
Agreement.
First, the Court finds that the section 4.1(k) breach was not improperly before the arbitrator.
ECE argues that Heritage failed to amend its statement of claims under the American Arbitration
Association’s Commercial Arbitration Rule 6, which sets for the procedure and deadlines for
adding new claims. Heritage acknowledges that it did not amend its statement of claims, but argues
that the discovery and summary judgment processes made clear that a section 4.1(k) claim was
implicated, or at least that the ownership of the patent was at issue. Further, Heritage argues that
the American Arbitration Association’s procedural rules are within the arbitrator’s authority and
there is no authority that a breach of the rules, or failure to amend a statement to conform to the
evidence, dictates vacatur. See generally, John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543,
557 (1964) (“Once it is determined, as we have, that the parties are obligated to submit the subject
matter of a dispute to arbitration, ‘procedural’ questions which grow out of the dispute and bear
on its final disposition should be left to the arbitrator.”); Hicks v. Cadie Co., 355 F. App’x 186,
194 (10th Cir. 2009) (“The arbitrator had discretion to allow Mr. Hicks to amend his statement of
claims to conform to the evidence.”). The discovery process in this case revealed an issue of who
invented the Shredder. The summary judgment briefing discussed this issue in the context of
section 4.1(k). The issue was contained in the pre-hearing brief. At no time before or during the
hearing did ECE object or state that this claim should not be decided by the Court. ECE argues
that the arbitrator had made it clear no continuances or additional discovery would be granted, but
this alone does not cure ECE’s failure to object to an issue that, it argues, invalidates the arbitrator’s
decision. Given this set of circumstances, the Court finds that the arbitrator had jurisdiction over

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this claim that arose from the parties’ contract and was “rationally derived from the parties’
submission.” Am. Postal Workers Union, 185 F.3d at 835.
Second, ECE argues that the arbitrator improperly decided patent law, which was outside
the scope of arbitration. Specifically, the arbitrator found that there was an issue with the
“inventorship” of the Shredder, thus there was a cloud on ownership as transferred by the
Agreement. ECE argues that inventorship is a term of art within patent law, and the arbitrator
necessarily decided patent law issues. Contrary to ECE’s assertion, the Court finds that the
arbitrator did not decide the issue of inventorship, nor did he interpret patent law in his decision.
Rather, the arbitrator made a threshold finding that there was a dispute about who invented the
Shredder. This factual dispute can be pinpointed and discussed without a full application of the
underlying patent law issues. The arbitrator made no findings regarding the patent’s validity and
the ruling went no further than necessary to rule on the issue of breach and the conclusion was
within the arbitrator’s discretion.
Finally, ECE argues that the arbitrator exceeded the Agreement’s remedies when he
granted rescission of the Agreement. The Court first notes that rescission was sought by Heritage
from the outset of the arbitration process, yet ECE did not object to rescission as inappropriate.
The Court finds that this alone is sufficient to deny ECE’s motion on this issue. Additionally, ECE
also sought equitable relief that was not explicitly provided for in the Agreement. It borders on
disingenuous to contend that only monetary damages were available when ECE requested more
than monetary damages. Rescission may not be ECE’s preferred remedy, but it was raised from
the outset of the claims and ECE failed to object until it received an unfavorable result. The Court
will not vacate the arbitration award on this basis. See Graphic Arts Int’l Union v. Haddon

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Craftsmen, Inc., 489 F. Supp. 1088, 1093 (M.D. 1979) (“[A] party may not await an adverse award
before asserting objections on grounds of which he had knowledge prior to the award.”).
III. CONCLUSION
Accordingly, ECE’s Motion to Set Aside Judgment Confirming Arbitration Award (Filing
No. 9) is GRANTED and its Motion to Vacate Arbitration Award (Filing No. 30) is DENIED.
Judgment will issue confirming the arbitration award.

SO ORDERED.
10/17/2014
Date: ______________

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DISTRIBUTION:
Briana Lynn Clark
BINGHAM GREENEBAUM DOLL LLP
[e-mail]
E. Ashley Paynter
BINGHAM GREENEBAUM DOLL LLP
[e-mail]
Phillip J. Fowler
BINGHAM GREENEBAUM DOLL LLP
[e-mail]
Carly Duvall
DENTONS US LLP
[e-mail]
Wade P.K. Carr
DENTONS US LLP
[e-mail]
Jason R. Scheiderer
SONNENSCHEIN, NATH & ROSENTHAL LLP
[e-mail]

Jayna Morse Cacioppo
TAFT STETTINIUS & HOLLISTER LLP
[e-mail]
Tracy Nicole Betz
TAFT STETTINIUS & HOLLISTER LLP
[e-mail]
Trent J. Sandifur
TAFT STETTINIUS & HOLLISTER LLP
[e-mail]

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