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

Filing 33

ORDER granting in part and denying in part 22 Motion to Alter/Amend/Correct Judgment. (Written Opinion) Signed by Judge Joan N. Ericksen on May 5, 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.

This matter is before the Court on the Petitioners’ motion to alter and amend the
judgment pursuant to Federal Rule of Civil Procedure 59(e). ECF No. 22. For the reasons
discussed below, the motion is granted in part and denied in part.

Background
This case arises under the Convention on the Recognition and Enforcement of Foreign
Arbitral Awards, Sept. 1, 1970, 21 U.S.T. 2517, and its implementing legislation at Chapter 2 of
the Federal Arbitration Act, 9 U.S.C. § 201 et seq. The Petitioners, AVR and Sonovation,
commenced this action by filing a petition to confirm a foreign arbitral award they had received
in an arbitration proceeding against the Respondent Interton in Israel. In an order that issued on
January 31, 2014, the Court granted the petition and entered judgment in favor of AVR and
Sonovation and against Interton in accordance with the terms of that arbitral award. ECF No. 20.
Those terms were:

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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.
Id. at 12.
On March 3, 2014, AVR and Sonovation filed the motion under Rule 59(e) that is
currently before the Court. With the motion, AVR and Sonovation requested a quantification
and conversion of the award into a lump sum of American dollars, plus the addition of an award
for the attorney’s fees and related costs they have incurred in this litigation. Altogether, the
Petitioners sought an altered and amended judgment in the amount of $4,031,411. Petitioners’
Memorandum at 2, ECF No. 23.
Interton responded in opposition, challenging the propriety of the Petitioners’
calculations and arguing that a fee award is not appropriate in the circumstances of this case.
ECF No. 28.
In reply, AVR and Sonovation “withdr[e]w the portion of their motion seeking to convert
the portion of the judgment stated in Shekels to dollars” as well as “their request that linkage be
calculated on any portion of the judgment.” ECF No. 29. The Petitioners thus no longer seek a
lump sum judgment in American dollars, but otherwise persist in the arguments presented in
support of their motion.

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Discussion
After briefing on the motion, four issues remain in dispute: (1) whether the interest rate
specified in the Court’s Order is simple or compound, and whether the Court should calculate the
interest that accumulated through the February 3, 2014 date of judgment; (2) whether linkage
should be applied to the damages portion of the judgment that is stated in dollars; (3) whether
Interton is to pay a sum to AVR and Sonovation for any Value Added Tax that may be due; and
(4) whether AVR and Sonovation are entitled to an award of their attorney’s fees and related
costs for this litigation.
These four disputes are addressed in turn below.

I.

Interest.
First, the parties disagree about whether the interest specified in the Court’s Order of

January 31, 2014 should be simple or compound. As this is an action to confirm a foreign
arbitral award, the language of the Order reflects the language of the arbitrator’s award. The
arbitrator specified that interest is to be charged at a rate of 4% per annum, but was silent as to
whether it is to be calculated with a simple or compound formula.
The Petitioners fill this gap with Section 7 of the Adjudication of Interest and Linkage
Law of Israel. Petitioners’ Reply at 3, ECF No. 29. That provision of Israeli law, entitled
“Compound interest,” states that “[i]nterest and linkage differentials and interest awarded in
accordance with this law . . . shall be added to the principal once a year . . . .” Id. Because the
arbitrator was “bound by Israeli substantive law” under the express terms of the arbitration
clause in the parties’ Investment Agreement, ECF No. 2 at 50, the Court is persuaded that it is
implicit in the arbitrator’s award that the interest is to be compound. See Fed. R. Civ. P. 44.1

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(“In determining foreign law, the court may consider any relevant material or source, including
testimony, whether or not submitted by a party or admissible under the Federal Rules of
Evidence.”).
Interton takes issue with the interest being calculated with a compound interest formula.
Citing § 354 of the Restatement (Second) of Contracts and Minn. Stat. § 549.09, Interton argues
that “accumulating interest is limited to simple, not compound, interest.” Respondent’s
Response at 3, ECF No. 28.
But this case arises under federal, not Minnesota, law. 9 U.S.C. § 203 (“An action or
proceeding falling under the Convention [on the Recognition and Enforcement of Foreign
Arbitral Awards] shall be deemed to arise under the laws and treaties of the United States.”).
Federal law grants the district courts original jurisdiction to hear a petition to confirm a foreign
arbitral award, provides them with the power to grant or deny it, and prescribes a limited inquiry
into a limited set of grounds on which that decision is to be based. See, e.g., Zeiler v. Deitsch,
500 F.3d 157 (2nd Cir. 2007) (“Confirmation under the Convention is a summary proceeding in
nature, which is not intended to involve complex factual determinations, other than a
determination of the limited statutory conditions for confirmation or grounds for refusal to
confirm.”). But the governing federal law does not give the district courts the power to alter or
reform the terms of the arbitral award that were set by the arbitrator.
Furthermore, to the extent that a conflict between the compound interest implicitly
ordered by the arbitrator and general federal law governing the application of interest to a money
judgment would be relevant, there is none. “[T]e United States has no federal statute governing
awards of prejudgment interest on international arbitral awards”; as a result, whether and at what
rate to apply post-award, prejudgment interest where it is not specified in the arbitral award itself

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is left to the discretion of the court. Industrial Risk Insurers v. M.A.N. Gutehoffnungshutte
GmbH, 141 F.3d 1434, 1446 (11th Cir. 1998) (noting also that “the decision whether to grant
prejudgment interest was a matter for the court’s discretion and was not controlled by state
law”). Accord Ministry of Defense and Support for the Armed Forces of the Islamic Republic of
Iran v. Cubic Defense Sys., Inc., 665 F.3d 1091, 1103 (9th Cir. 2011). As for postjudgment
interest, the federal statute that addresses it expressly provides that “interest . . . shall be
compounded annually.” 28 U.S.C. § 1961(b).
The Court’s Order of January 31, 2014 will therefore be amended to clarify that interest
is compound. As for the Petitioners’ invitation to calculate interest through February 3, 2014,
the Court agrees with Interton that in the circumstances of this case “interim interest
determinations are unnecessary,” Respondent’s Response at 3, ECF No. 28, and declines.

II.

Linkage.
Second, while the parties do not disagree that linkage is appropriately applied to the fees

and costs portion of the judgment which is stated in Shekels and that linkage should be
calculated at the time of payment, they do dispute whether linkage is properly applied to the
damages portion of the judgment which is stated in dollars.
Interton argues that, because linkage is designed to address inflationary concerns with
Israeli currency, it should only be applied to the damages portion of the judgment if the interest
on that sum accrues in Shekels. Respondent’s Response at 4, ECF No. 28. Because that
approach is consistent with the arbitrator’s intentions, the Court agrees.
The arbitrator directly addressed this issue in the decision he issued on December 11,
2011 amending the original arbitral award. There, the arbitrator stated:

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In the arbitrator's award, I set forth a sum denominated in shekels for the sum
denominated in dollars, as I specified the current representative dollar rate as the
index for the compensation sum, that is, compensation in shekels and not in
dollars.
. . . My intention was to add upon the compensation, according to the current
value in shekels, interest only from January 1, 2007 until today and linkage
supplement from today onwards. Also, it was my intention to add linkage to the
expenses and legal fees from today onwards, and the aforesaid was omitted from
the arbitrator's award. Therefore, the arbitrator's award ought to be corrected
according to the intended provisions thereof that were omitted. Beyond the
aforesaid, there is no room for correction.
ECF No. 5-1, Ex. 3 at 34. The arbitrator then went on to amend the damages portion of the
award to state that the “Defendant [is] to pay to the Plaintiffs the compensation sum of 2,675,000
. . . dollars (representative dollars as of today). . . . Interest of 4% per year, from 1.1.2007 until
actual payment, will be added to the compensation sum. Also, Linkage from today until the
payment date will be added.” Id. at 35.
The Court thus understands the arbitrator to have added interest and linkage to the
“compensation sum” (in other words, the damages portion of the award) “according to the
current value [of the compensation sum] in shekels.” The Order of January 31, 2014 will
therefore be amended to clarify that interest and linkage are to be added to the damages portion
of the award according to the value of that damages award in Shekels as of December 11, 2011.

III.

Value Added Tax.
Third, the parties disagree about the import of the arbitrator’s decision, reflected in the

Court’s order, that Interton is to pay Value Added Tax (“VAT”) in accordance with Israeli law.
See Arbitrator’s Award of November 29, 2011, ECF No. 5-1, Ex. 2 at 26 (initial arbitral award
stating that “[t]he Defendant shall also incur payment of VAT by law”); Arbitrator’s Decision of

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December 11, 2011, ECF No. 5-1, Ex. 3 at 35 (amended arbitral award stating that “[t]he
Defendant will also bear payment of VAT according to law”).
Supported by a letter from an Israeli Certified Public Accounting firm, the Petitioners
explain that they will be responsible for payment of VAT to the Israeli government when
Interton satisfies the judgment, and argue that the language of the arbitral award thus requires
Interton to pay that amount to them in addition to the other components of the award.
Petitioners’ Reply at 5, ECF No. 29. Therefore, the Petitioners request that “the Court clarify
that Interton is to pay Petitioners the VAT Petitioners will be required to pay upon Interton’s
payment of any portion of the judgment.” Id.
Interton counters that “[n]either the Motion nor the Petition suggests that Interton owes
Value Added Tax to AVR or to Sonovation, as opposed to the Israeli government. Israel is not a
party to this action and has no rights to enforce the Court’s judgment in Minnesota.”
Respondent’s Response at 7, ECF No. 28.
This is not persuasive. Interton’s suggestion that it would be improper for this Court to
order Interton to pay VAT to the Israeli government here, in an action to confirm a foreign
arbitral award that resulted from its arbitration with the Petitioners, is certainly correct. 1 But that
is not what the arbitral award that is reflected in the Court’s Order does. As with the other two
components of the arbitral award – for the Petitioners’ damages and for their arbitration fees and

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It bears repeating that the Court’s Order reflects the terms of the arbitral award as set by
the arbitrator. If Interton believed that the arbitrator had in fact improperly ordered it to pay
VAT to the Israeli government, it could have argued in its opposition to the petition that the VAT
component of the arbitral award should have been severed. See Convention, Article V(1)(c)
(providing that where a foreign arbitral award “contains decisions on matters beyond the scope
of arbitration, . . . 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”). Interton made no such argument.
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costs – the VAT component of the award sets a payment obligation that Interton owes to the
Petitioners, not to the Israeli government.
The Order of January 31, 2014 will therefore be amended to clarify that Interton is to pay
to the Petitioners any VAT that the Petitioners may be required to pay in accordance with Israeli
law upon payment by Interton of any portion of the judgment.

IV.

Attorney’s fees.
Finally, the parties disagree about whether AVR and Sonovation are entitled to an award

of the attorney’s fees they have incurred in this litigation.
As an initial matter, the Petitioners’ request for fees is collateral to the merits of their
petition to confirm their foreign arbitral award and is therefore not appropriately brought on a
motion under Rule 59(e). See White v. New Hampshire Dept. of Employment Sec., 455 U.S. 445,
451 (1982) (noting that Rule 59(e) motion is “only [for] reconsideration of matters properly
encompassed in a decision on the merits,” while “a request for attorney’s fees under § 1988
raises legal issues collateral to the main cause of action – issues to which Rule 59(e) was never
intended to apply”); Fed. R. Civ. P. 54(d)(2)(B) (requiring a motion for “attorney’s fees and
related nontaxable expenses” to be made by motion within 14 days after entry of judgment);
D.Minn. L.R. 54.3(b).
But regardless of the procedural defect in the Petitioners’ fee request, there is no basis for
such an award in this case. The Petitioners have “move[d] for an award of attorneys fees and
costs based on Israeli law,” and emphasize that they exclusively “base their request for fees on
the parties’ contract and its incorporation of Israeli law.” Petitioners’ Memorandum at 3, ECF
No. 23; Petitioners’ Reply at 6, ECF No. 29. Essentially, AVR and Sonovation argue that they

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are entitled to a fee award in this action because the parties agreed in their contract that their
rights and obligations would be governed by Israeli law, and Israeli law dictates that the losing
party pay the prevailing party’s fees.
But this action is governed by federal law, not Israeli law. The District Court for the
District of Columbia has said it well:
[T]his is not an action in which a plaintiff has come to a United States court to
adjudicate rights arising under foreign law. Rather, this action arises under
[Chapter 2 of] the Federal Arbitration Act . . . . The FAA implements the New
York Convention by allowing international arbitral awards to be enforced in
United States courts, 9 U.S.C. § 201, and it provides that “[a]n action or
proceeding falling under the Convention shall be deemed to arise under the laws
and treaties of the United States.” 9 U.S.C. § 203.
While the original dispute between [the parties] may have involved questions of
[foreign] law—which their contract specified would govern any disputes that
were referred to arbitration . . . —[the petitioner's] right of action here derives
entirely from U.S. law, namely the right to have an arbitral award that meets
certain criteria be confirmed by a United States district court. Under the FAA and
the New York Convention, the confirming court does not adjudicate the
underlying legal disputes between the parties or even review the arbitrator's
conclusions. Instead, the court must confirm the award “unless it finds one of the
grounds for refusal or deferral of recognition or enforcement of the award
specified in the said Convention.” 9 U.S.C.A. § 207; [additional citations
omitted]. Therefore, regardless of the circumstances that led [the parties] to
submit to arbitration initially, [the petitioner’s] cause of action in this Court arises
exclusively under United States law . . . .
Continental Transfert Technique Ltd. V. Federal Government of Nigeria, 932 F.Supp.2d 153,
160-61 (D.D.C. March 26, 2013).
The American law that governs this action requires the parties to a lawsuit to bear their
own expenses unless their contract or a statute specifically provides otherwise. See Alyeska
Pipeline Service Co. v. Wilderness Society, 421 U.S. 240, 247 (1975). Nothing in the
Convention or its implementing legislation authorizes the fee award AVR and Sonovation seek
here, and the parties’ contract does not contain a fee-shifting provision. The Court recognizes

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that it also has the inherent authority to “assess attorneys’ fees . . . when the losing party has
acted in bad faith, vexatiously, wantonly, or for oppressive reasons,” id. at 258-59, but, as the
Petitioners acknowledge, Interton has not acted in bad faith or otherwise inappropriately in
opposing the petition.
There is therefore no basis to order Interton to pay the Petitioners’ fees or related
nontaxable expenses from this litigation.

Based on the files, records, and proceedings herein, and for the reasons discussed above,
IT IS ORDERED THAT:
1. Petitioners’ Motion to Alter and Amend the Judgment Pursuant to Fed. R. Civ. P. 59(e)
[ECF No. 22] is GRANTED IN PART and DENIED IN PART consistent with the
memorandum above.
2. The Court’s Order of January 31, 2014 [ECF No. 20 at 11-12] is AMENDED to state as
follows:
1. Petitioners’ 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.
3. Judgment is ENTERED, in accordance with the confirmed arbitral award, in favor
of Petitioners AVR and Sonovation and against Respondent Interton as follows:

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a. Respondent will pay Petitioners $2,675,000 in damages, plus 4% compound
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 according to the value of the damages award in Israeli New Shekels
on December 11, 2011;
b. Respondent will pay Petitioners 1,000,000 Israeli New Shekels in fees and
costs, plus 4% compound annual interest and linkage to the Israeli
Consumer Price Index from December 11, 2011 until payment is made;
c. Respondent will pay Petitioners any Value Added Tax that Petitioners may

be required to pay in accordance with Israeli law upon Respondent’s
payment of the judgment or any portion thereof.

LET JUDGMENT BE ENTERED ACCORDINGLY.

Dated: May 5, 2014

s/Joan N. Ericksen
JOAN N. ERICKSEN
United States District Judge

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