AVR Communications, Ltd. et al v. American Hearing Systems, Inc.

Filing 20

ORDER - Petitioner's Petition to Confirm Foreign Arbitral Award 1 is GRANTED. (See Order for details.) (Written Opinion) Signed by Judge Joan N. Ericksen on January 31, 2014. (CBC)

UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA

AVR Communications, Ltd., an Israeli
corporation, and Sonovation, Inc., a
Minnesota corporation,
Petitioners,
Civil No. 13-3027 (JNE/TNL)
ORDER

v.
American Hearing Systems, Inc., d/b/a
Interton, Inc., a Minnesota corporation,
Respondent.

Jonathan M. Bye, Esq., Lindquist & Venum PLLP, appeared for the Petitioners.
Terrence P. Canade, Esq., Locke Lord LLP, and Jeffrey S. Storms, Gaskins Bennett Birrell
Schupp LLP, appeared for the Respondent.

This is a petition to confirm a foreign arbitral award under the Convention on the
Recognition and Enforcement of Foreign Arbitral Awards (hereinafter, “the Convention”), Sept.
1, 1970, 21 U.S.T. 2517, and its implementing legislation at 9 U.S.C. Chapter 2. The Petitioners
are AVR Communications, Inc., an Israeli corporation that develops, produces, and sells hearing
aid technology, and Sonovation, Inc., its wholly-owned subsidiary that is incorporated in the
United States. The Respondent is American Hearing Systems, Inc., a Minnesota corporation that
does business as Interton, Inc. Like the Petitioners, Interton also produces and sells hearing aids.
AVR and Sonovation have brought the petition requesting that this Court recognize and
enforce an award that they received in an arbitration proceeding against Interton in Israel.
Interton opposes the petition.
For the reasons stated below, the Court will grant the petition.

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Background
In 2004, Interton and AVR entered into a written Investment Agreement, according to
which Interton acquired a 20% interest in AVR, obtained a seat on AVR’s Board of Directors,
and provided a sum of money “to be dedicated for R&D projects to be carried out by [AVR] in
the area of wireless FM communications and digital signal processing.” ECF No. 2 at 5-6. The
Investment Agreement also includes a statement of “[t]he parties’ intention . . . that Interton will
acquire from [AVR] products deriving from such R&D projects.” Id. at 5.
The Investment Agreement contains an arbitration clause, which is incorporated by
reference from a separate Stock Purchase Agreement that AVR had signed with several other
investors in 1997. ECF No. 2 at 5, 50. This provision is the only agreement to arbitrate that
exists between the parties. It reads as follows:
Arbitration. This Agreement shall be construed and enforced in accordance with
the laws of the State of Israel. Any dispute between the parties related to (or
arising out of) the provisions of this Agreement or any of its Exhibits will be
referred exclusively to the decision of a single arbitrator appointed by mutual
consent, and failing such consent within 10 days from the date on which an
affected party first requested arbitration - the Arbitrator will be appointed by the
President of the Israel Bar Association. The Arbitrator will be bound by Israeli
substantive law but will not be bound by the rules of evidence or the rules of civil
procedure. The Arbitrator will be required to provide the grounds for his ruling in
writing.
The competent court will have such supplementary jurisdiction for all issues
arising and/or relating to the Arbitration as is provided by the Arbitration Law of
1968, and/or may be necessary to resolve such dispute.
Id. at 50.
Disputes arose between the parties in the years after the Investment Agreement was
signed. One dispute centered on Interton’s obligation to acquire two products that AVR had
developed – referred to as the “DFC technology” and the “W.C. components” – and integrate
them into its hearing aids. AVR took the position that Interton had undertaken those obligations

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as a result of negotiations that took place between the parties in the months surrounding the
signing of the Investment Agreement. In 2007, AVR and Sonovation initiated arbitration
proceedings against Interton in Israel over this and other disputes pursuant to the arbitration
clause in the Investment Agreement. AVR and Sonovation’s Statement of Claim asserted a
number of breach of contract and tort claims and demanded tens of millions of dollars in
damages.
Interton immediately contested the arbitrability of the claims, arguing to the Israeli courts
that they were not encompassed by the agreement to arbitrate in the Investment Agreement.
However, Interton’s narrow reading of the arbitration agreement was rejected by both the Tel
Aviv District Court and the Supreme Court of Israel. Applying, as the Investment Agreement
specified, Israeli law, the Israeli Supreme Court on appeal did a close reading of the arbitration
provision and determined that Interton had agreed to arbitrate
the arguments of the parties raised on the grounds of torts and deriving from the
Investment Agreement, as well as arguments concerning conducting of
negotiations prior to the engagement in the Investment Agreement and as regards
the undertakings of [Interton] that were indeed made (to the extent that made) a
few months after the Investment Agreement, however they are related to the
Investment Agreement and/or arising out of it. Note well – this does not mean
that any dispute and disagreement between [Interton] and [AVR and Sonovation]
will be heard as part of an arbitration proceeding, however only disputes and
disagreements pertaining to or arising out of the Investment Agreement.
ECF No. 5-1 at 8 (English translation of Hebrew original). With the scope of the arbitration
agreement thus defined, the Israeli Supreme Court decided that “the causes of action that are
specified in the Statement of Claim submitted by [AVR and Sonovation] against [Interton]” –
which included the claim regarding the DFC technology and the W.C. components – “should all
be heard as part of an arbitration between the parties.” Id. at 7.

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Several years of arbitration proceedings then ensued in Israel. Interton participated in
those proceedings and vigorously defended itself against AVR and Sonovation’s claims. After
numerous motions and evidentiary hearings, the arbitrator issued a written decision on
November 29, 2011, ECF No. 5-1, Ex. 2 at 17-32, which he amended shortly thereafter on
December 11, 2011, ECF No. 5-1, Ex. 3 at 34-37. Interton challenged the arbitrator’s decision in
the Israeli courts on substantive grounds, in response to which the arbitrator supplemented the
decision with additional reasoning on October 24, 2012. ECF No. 5-4, Ex. 7 at 20-30.
The arbitrator rejected all of AVR and Sonovation’s claims except those regarding the
DFC technology and W.C. components. On those claims, the arbitrator found that Interton had
entered into and breached two binding oral contracts, ancillary to the Investment Agreement, to
purchase and market particular quantities of those devices. To remedy those breaches, the
arbitrator awarded AVR and Sonovation $2.675 million in damages and one million Israeli New
Shekels in fees and expenses. ECF No. 5-1 at 34-37.
Interton moved to revoke that award in the Haifa District Court, challenging the
arbitrator’s reasoning and his handling of certain evidentiary issues. However, after Interton
failed to deposit a $1 million guarantee that the courts had ordered, the Haifa District Court
summarily rejected the motion and entered judgment on the award on July 22, 2013. ECF No. 55, Ex. 10 at 50-53. Interton appealed that ruling to the Supreme Court of Israel, which affirmed
it on October 28, 2013. ECF No. 4 at 2-8.
One week after the arbitrator’s award thus became final in Israel, AVR and Sonovation
brought this petition requesting that this Court recognize and enforce it in the United States
under the Convention. Interton opposes the petition.

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Discussion
The Convention on the Recognition and Enforcement of Foreign Arbitral Awards entered
into force in the United States in 1970. It contains two complimentary directives for U.S. district
courts. First, where parties have entered into a valid, written, international, commercial
arbitration agreement, Article II of the Convention requires district courts to give effect to that
agreement by declining to hear their dispute and referring them instead to the arbitration
proceedings they agreed to utilize. Second, where the parties have already concluded foreign
arbitration proceedings, district courts are to recognize the arbitral award “as binding and enforce
[it] in accordance with the rules of procedure of the [United States], under the conditions laid
down in” Articles III-V of the Convention.
Accordingly, under the implementing legislation, a party who has received an award in a
foreign commercial arbitration may file a petition for an order confirming that award in any
district court “in which save for the arbitration agreement an action or proceeding with respect to
the controversy between the parties could be brought . . .” 9 U.S.C. §§ 203, 204, 207. The
petition must be accompanied by both the arbitrator’s award and the parties’ written agreement
to arbitrate. Convention Art. IV(1). Upon a properly filed petition, the district court “shall
confirm the award unless it finds one of the grounds for refusal or deferral of recognition or
enforcement of the award specified in the . . . Convention.” 9 U.S.C. § 207.
The grounds on which a district court may refuse to recognize and enforce a foreign
arbitral award are listed in Article V of the Convention. The burden is on the respondent who
opposes the petition to establish that:
(a) The parties to the agreement [to arbitrate] were, under the law applicable to
them, under some incapacity, or the said agreement is not valid under the law
to which the parties have subjected it or, failing any indication thereon, under
the law of the country where the award was made; or
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(b) The party against whom the award is invoked was not given proper notice of
the appointment of the arbitrator or of the arbitration proceedings or was
otherwise unable to present his case; or
(c) The award deals with a difference not contemplated by or not falling within
the terms of the submission to arbitration, or it contains decisions on matters
beyond the scope of the submission to arbitration, provided that, if the
decisions on matters submitted to arbitration can be separated from those not
so submitted, that part of the award which contains decisions on matters
submitted to arbitration may be recognized and enforced; or
(d) The composition of the arbitral authority or the arbitral procedure was not in
accordance with the agreement of the parties, or, failing such agreement, was
not in accordance with the law of the country where the arbitration took place;
or
(e) The award has not yet become binding on the parties, or has been set aside or
suspended by a competent authority of the country in which, or under the law
of which, that award was made.
Convention Art. V(1). In addition, a court may refuse to recognize and enforce a foreign arbitral
award if it determines that doing so would be contrary to domestic public policy or if the parties’
dispute is not capable of settlement by arbitration under domestic law. Convention Art. V(2).
In accordance with the Convention’s “general pro-enforcement bias,” Parsons &
Whittemore Overseas Co. v. Societe General de l’Industrie du Papier (RAKTA), 508 F.2d 969,
973 (2nd Cir. 1974), these seven grounds for refusing to confirm an award have been held to be
exclusive. See, e.g., Ministry of Defense and Support for the Armed Forces of the Islamic
Republic of Iran v. Cubic Defense Systems, Inc., 665 F.3d 1091, 1097 (9th Cir. 2011); Yusuf
Ahmed Alghanim & Sons, W.L.L. v. Toys “R” Us, Inc., 126 F.3d 15, 23 (2d Cir. 1997). As a
result, an opposed petition to recognize and enforce a foreign arbitral award in a U.S. district
court involves a more limited and circumscribed inquiry than an action to set aside or vacate the
same award brought in the foreign country in which, or under the law of which, it was rendered.

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Here, without citing any Article V ground at all, Interton argues that the Court should
deny AVR’s petition because of “one core issue: [t]he award does not arise from a written
arbitration agreement.” ECF No. 17 at 7. Put another way, Interton urges the Court to “refuse to
confirm the Israeli abitral award . . . because the award arose from two oral agreements
[regarding the DFC technology and W.C. components] that do not contain valid agreements to
arbitrate.” Id. at 9.
As an initial matter, the parties do of course have a written agreement to arbitrate – the
arbitration provision in the Investment Agreement. It is true that the arbitrator’s decision makes
clear that the arbitral award arose from Interton’s breach of oral contracts to purchase and market
AVR’s DFC technology and W.C. components, and that those oral contracts did not contain their
own arbitration provisions. But, it is equally clear that the parties entered into a broadly-worded
arbitration agreement when they memorialized their ties in the Investment Agreement, and that
the Israeli courts – to which Interton itself turned to challenge the arbitrability of the claims –
found that it encompassed the dispute over the DFC technology and W.C. components.
AVR and Sonovation have properly submitted this written agreement to arbitrate here
with their petition. Interton does not challenge the authenticity of the Investment Agreement or
the arbitration provision it incorporates, nor does it make any argument that they are invalid or
unenforceable for any reason. Thus, despite the way Interton frames its opposition to the
petition, the heart of this matter is whether the valid written agreement to arbitrate that does exist
and bind the parties encompasses the particular dispute that gave rise to the arbitral award – in
other words, it is a question of scope. Article V(1)(c) of the Convention is therefore implicated.
As previously noted, that ground calls for the Court to refuse to confirm a foreign arbitral award
if the respondent establishes that “[t]he award deals with a difference not contemplated by or not

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falling within the terms of the submission to arbitration, or it contains decisions on matters
beyond the scope of the submission to arbitration . . . .”
With that said, the Convention does not on its face specify how the scope of the parties’
agreement to submit disputes to arbitration is to be determined. Interton would have it that this
Court is obliged to make a de novo determination of the arbitrability of the dispute that formed
the basis of the arbitral award using domestic law, without reference or deference to the Israeli
courts’ decision; indeed, the whole of its opposition to the petition rests on this premise.
However, the two principle cases Interton cites in support of its premise – China
Minmetals v. Chi Mei Corp., 334 F.3d 274 (3rd Cir. 2003) and Sarhank Group v. Oracle Corp.,
404 F.3d 657 (2nd Cir. 2005), ECF No. 17 at 8-10 – are off point. Those cases concerned a
district court’s obligation to independently determine the existence, not the scope, of a valid
written arbitration agreement as a precondition to hearing a petition under the Convention.
In China Minmetals, the petitioner had initiated arbitration proceedings in China pursuant
to two purported contracts that contained written arbitration clauses. 334 F.3d at 278. The
respondent argued that the contracts had been forged, but the arbitrators found the contracts to be
legitimate and awarded several million dollars to the petitioner. Id. The petitioner then brought
an action to recognize and enforce the award, which the district court granted without conducting
an evidentiary hearing into the validity of the contracts. Id. On appeal, the Third Circuit closely
examined the structure and purpose of the Convention as a whole and concluded that a district
court may properly refuse to enforce a foreign arbitral award where no valid written agreement
to arbitrate exists between the parties. Id. at 286. The case was therefore remanded for the
district court to determine whether the contracts presented by the petitioner were genuine or
forgeries. Id. at 289-90.

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In Sarhank, the Sarhank Group and Oracle Systems had entered into an international
commercial contract that contained an arbitration provision. 404 F.3d at 658. When a dispute
arose, Sarhank initiated arbitration proceedings in Egypt against both Oracle Systems and Oracle
Corp., Systems’ U.S.-based parent company. Id. Oracle Corp. objected to its inclusion in the
arbitration, arguing that it was not a party to the contract between Sarhank and Oracle Systems
and therefore had not consented to arbitration. Id. The arbitrators rejected that argument and
issued an award in Sarhank’s favor, for which it deemed Oracle Systems and Oracle Corp. to be
jointly and severally liable. Id. at 658-59. Sarhank then petitioned a U.S. district court to
recognize and enforce its award against Oracle Corp. Id. at 659. The district court granted the
petition, but the Second Circuit vacated and remanded for a determination as to whether Oracle
Corp., as a non-signatory to the contract containing the arbitration provision, was bound “on any
basis recognized by American contract law or the law of agency” by Oracle System’s agreement
to arbitrate with Sarhank. Id. at 662-63.
These cases, then, do not in fact dictate that the Court must undertake its own analysis of
the arbitrability of the dispute underlying the award in these circumstances. Instead, they
confirm that a district court is obliged to make its own threshold determination that the written
arbitration agreement submitted by the petitioner along with the arbitral award is valid and
binding on the respondent, regardless of the fact that a foreign arbitration has already taken
place. China Minmetals and Sarhank are thus in line with decisions of other courts that have
found the existence of a valid and binding written arbitration agreement – whatever its content –
to be a “prerequisite” to an action to enforce a foreign arbitral award. See, e.g., Czarina, L.L.C.
v. W.F. Poe Syndicate, 358 F.3d 1286, 1292 (11th Cir. 2004) (“Where a party has failed to
satisfy the agreement-in-writing prerequisite, courts have dismissed the action for lack of

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jurisdiction.”). Because Interton does not contest the validity or enforceability of the written
arbitration agreement that AVR and Sonovation submitted here, these cases are inapposite.
Interton’s position – that it is left to this Court to make a de novo determination of the
arbitrability of the dispute underlying the award in accordance with domestic law – could well be
the default rule for Article V(1)(c). Cf. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938,
943 (1995). However, even if it is, the parties overrode that default here when they
unambiguously agreed to the contrary in the arbitration provision itself, which specifies that
“[t]his Agreement shall be construed and enforced in accordance with the laws of the State of
Israel” and that “all issues arising and/or relating to the Arbitration” are to be resolved by the
Israeli courts having jurisdiction over the proceedings pursuant to the Israeli Arbitration Law of
1968. These terms – clear though they are – do not make even a cameo appearance in Interton’s
submissions.
Whether the dispute over the alleged oral contracts between AVR and Interton fell within
or without their arbitration agreement was a question of its scope. Parties may agree to arbitrate
the scope of arbitration; in the absence of such an agreement, they turn to the courts for a
decision. Here, AVR and Interton contemplated that the courts, rather than the arbitrator, would
determine the scope of their arbitration. In fact, they not only specified which law would apply
to the question (Israeli law), but also which courts would supply the answer – the Israeli courts.
And that is what happened. Interton itself took its scope arguments to the Israeli courts,
and no less a tribunal than the Supreme Court of Israel construed the arbitration provision in
accordance with Israeli law and concluded that the parties’ agreement is worded broadly enough
to encompass their dispute over the DFC technology and W.C. components. Unless the Israeli
Supreme Court made a radical mistake in applying Israeli law – and Interton does not argue that

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it did – this outcome could reasonably have been within the contemplation of the parties when
they selected their law and forum. Indeed, though Interton of course disagrees with the result of
the process it agreed to utilize, it does not assert that it was not fully heard on the issue, or that
the Israeli courts did not have jurisdiction, or that their decisions were biased in any way. 1 In
these circumstances, Interton’s argument has come to a dead end. The parties bargained for the
arbitrability of their disputes to be determined by Israeli courts applying Israeli law, and there is
no avenue for this Court to rescind that agreement here.
In sum, Interton not only agreed to arbitrate all disputes “relating to (or arising from)” the
Investment Agreement in Israel, but also agreed that the scope of that clause would itself be
determined by Israeli courts and in accordance with Israeli law. Those terms are clear,
unambiguous, and consequential. This Court may not, consistent with the Convention, allow the
parties to re-litigate the construction of their arbitration agreement here.

THEREFORE, IT IS ORDERED THAT:
1. Petitioner’s Petition to Confirm Foreign Arbitral Award [ECF No. 1] is GRANTED.
2. The Arbitrator’s Award of November 29, 2011 [ECF No. 5-1, Ex. 2 at 17-32], as
amended by the Decision of December 11, 2011 [ECF No. 5-1, Ex. 3 at 34-37] and the
Reasoning Supplement of October 24, 2012 [ECF No. 5-4, Ex. 7 at 20-30], is
CONFIRMED.

1

Interton does object to the Israeli courts’ requirement that it post a guarantee as a
precondition to hearing its appeal of the arbitrator’s award, and notes its belief that this “pay-toplay” requirement is inconsistent with due process. ECF No. 17 at 6 n.1. However, the Haifa
District Court and the Israeli Supreme Court required Interton to post the guarantee only when it
sought review of the substance of the arbitrator’s award in 2012-13. Interton was not subject to
this requirement and was fully heard on the merits when it contested the arbitrability of AVR and
Sonovation’s claims in the Tel Aviv District Court and the Supreme Court of Israel in 2007-08.
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3. Judgment is ENTERED, in accordance with the confirmed arbitral award, in favor of
Petitioners AVR and Sonovation and against Respondent Interton as follows:
a. Respondent will pay Petitioners $2,675,000 in damages, plus 4% annual interest
from January 1, 2007 until payment is made and linkage to the Israeli Consumer
Price Index from December 11, 2011 until payment is made;
b. Respondent will pay Petitioners 1,000,000 Israeli New Shekels in fees and costs,
plus 4% annual interest and linkage to the Israeli Consumer Price Index from
December 11, 2011 until payment is made;
c. Respondent will pay Value Added Tax in accordance with Israeli law.

LET JUDGMENT BE ENTERED ACCORDINGLY.

Dated: January 31, 2014

s/Joan N. Ericksen
The Honorable Joan N. Ericksen
United States District Judge

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