Incredible Foods Group, LLC v. Unifoods, S.A. de C.V.
Filing
32
For the reasons stated in the attached Memorandum and Order, plaintiffs petition to vacate in part the arbitration award is DENIED. Thearbitration award is hereby CONFIRMED. The court directs the Clerk of the Court to reserve entry of judgment until the objections to Judge Orensteins decision are resolved. Defendant's request for attorney's fees is denied pending additional submissions. Defendants counsel may show cause in writing within 14 days and explain why the court should grant the full award of $10,000 in attorneys fees related to the instant action. Defendants counsel should append contemporaneous time records providing counsels hourly rate as well as a description of the work he performed and his experience and qualifications. Ordered by Judge Kiyo A. Matsumoto on 9/29/2015. (Gong, LiJia)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
-------------------------------------- X
INCREDIBLE FOODS GROUP, LLC,
Plaintiff,
MEMORANDUM AND ORDER
-againstUNIFOODS, S.A. de C.V.,
14-CV-5207 (KAM)(JO)
Defendant.
-------------------------------------X
MATSUMOTO, United States District Judge:
On September 5, 2014, plaintiff Incredible Food
Groups, LLC (“IFG” or “plaintiff”) brought this action against
defendant Unifoods, S.A. de C.V. (“UF” or “defendant”) to
vacate in part the arbitration award in Incredible Foods Group,
LLC v. Unifoods, S.A. de C.V., Case No. 50 467 T 01010 13 (the
“Arbitration”) (the “Award”) pursuant to 9 U.S.C. § 10.
Defendant opposes plaintiff’s request to vacate and seeks
confirmation of the Award, entry of judgment and attorney’s
fees.
For the reasons set forth below, plaintiff’s motion to
vacate in part the Award is denied, and the Award is confirmed.1
1
The court notes that IFG and counter-defendant iSell Unlimited LLC
(“iSell”) have objected to Judge Orenstein’s April 19, 2015 Order (ECF No.
24) granting defendant’s motion to join iSell as a successor-in-interest to
IFG. (Appeal of Mag. Judge Decision, filed 9/2/15, ECF No. 26.) In light
of the fact that the legal and factual issues are distinct, the court
declines to address the appeal in this Memorandum and Order. An Order
addressing the objections is forthcoming.
1
I. Background2
Plaintiff IFG is a Connecticut Limited Liability
Company with its principal place of business in Stamford,
Connecticut.
(Petition to Vacate in Part Arbitration Award
(“Petition”), ECF No. 1-2, Ex. B (“Final Award”) ¶ 1.)
Defendant UF is a Mexican corporation with its principal place
of business in Mexico City, Mexico.
(Id. ¶ 2.)
IFG, as sub-
licensee, and UF, as sub-licensor, are parties to a Sub-License
Agreement (the “Agreement”), dated and effective as of January
1, 2009 and executed in November 2011.
(Id. ¶ 3.)
Pursuant to
the Agreement, IFG is licensed to “manufacture, market,
distribute and sell” a fruit beverage named Bonafina3 in New
York, New Jersey, Connecticut, Delaware, eastern Pennsylvania,
and metropolitan Chicago, IL.
(Id.)
A. The Bonafina Problem
Pursuant to Paragraphs 3.14 and 4.15 of the Agreement,
IFG identified a potential U.S. manufacturer, Diamond Drinks,
2
The court summarizes the relevant facts to the instant action as
represented in plaintiff’s petition and the attached exhibits –
specifically, the Agreement (Exhibit A) and the Final Arbitration Award
(Exhibit B). The parties do not dispute any of the facts relevant to the
issues in this case.
3
UF has the license to manufacture and market Bonafina under trade names
and registered trademarks owned by Productos de Leche, S.A. de C.V. (“PDL”),
a Mexican corporation. (Petition, Ex. B (Final Award) ¶ 3.)
4
As provided under the heading “3. Duties of Sub-Licensee – US
Manufacturing”:
3.1 US Manufacturers. Sub-Licensee will identify potential US
Manufacturers for Sub-Licensor's approval who are capable of
producing the UF Products at a level of quality consistent with
and subject to the quality control and product specifications
2
Inc. of Williamsport, PA (“Diamond”) to manufacture the
Bonafina beverage.
(Petition, Ex. B (Final Award) ¶ 16; Mem.
of Law of Pl. in Support of Mot. to Vacate Arbitration Award in
Part (“Pl.’s Mem.”), ECF No. 15-3 at 3-4.)
UF, “in its sole
discretion” as the sub-licensor, approved Diamond as a U.S.
Manufacturer of Bonafina under Paragraph 4.1 of the Agreement.
(Petition, Ex. B (Final Award) ¶ 36; Pl.’s Mem. at 4.)
Pursuant to Paragraph 4.36 of the Agreement, UF
provided Diamond with the specifications and recipes to produce
the Bonafina product.
(Id.)
Shortly after Diamond began
manufacturing Bonafina in 2011, some, but not all, of the
bottles of Bonafina manufactured by Diamond “bulged and leaked
after remaining unsold on retailers’ shelves for a period of
months,” causing customers to lose interest in stocking the
established by PDL and Sub-Licensor related to the UF Products in
Mexico and as adapted as necessary to satisfy unique US
requirements ("the Quality Controls and Product Specifications")
as described in Exhibit 3. I. Within thirty (30) days of its
identification and after inspection and evaluation, Sub-Licensor
shall, in its sole discretion, approve or deny the Sub-Licensee's
use of any potential US manufacturer so identified. (Petition,
ECF No. 1-1, Ex. A (“Agreement”) ¶¶ 3-3.1.)
5 As provided under the heading “4. Duties of Sub-Licensor – US
Manufacturing”:
4.1 Approval of U.S Manufacturers. Sub-Licensor will review,
including an on-site inspection of any proposed US Manufacturer,
and approve, in its sole discretion, those US Manufacturers
recommended by the Sub-Licensee that are able to meet the Quality
Control standards and Product Specifications and comply with the
Protective Clauses. (Petition, ECF No. 1-1, Ex. A (Agreement) ¶¶
4-4.1.)
6 As provided under the heading “4. Duties of Sub-Licensor – US
Manufacturing”:
4.3 Product Specifications. Sub-Licensor will provide approved US
Manufacturers with specifications and recipes ("Product
Specifications") such that the US Manufacturers can produce UF
Products consistent with UF standards.
3
product.
(Id. ¶¶ 16-17.)
IFG and UF investigated various
approaches to diagnosing and curing the problem.
(Id. ¶ 17.)
Ultimately, an outside consultant determined that the problem
was the result of a chemical reaction between the mixture of
yeast present at the Diamond facility and calcium lactate, an
ingredient in the Bonafina recipe.
(Id.)
After the Bonafina
recipe was changed to eliminate calcium lactate in July 2013,
the problem was resolved.
(Id. ¶¶ 17-18.)
B. The Arbitration
Pursuant to the Paragraph 25 of the Agreement, IFG
commenced arbitration on October 23, 2013, alleging “two sets
of breaches”7 of the Agreement by UF.
Award) ¶¶ 10-11.)
(Petition, Ex. B (Final
IFG alleged that UF’s breaches resulted in
damages totaling $47,582,110 in lost sales.
(Id. ¶ 18.)
UF
denied responsibility for the Bonafina difficulties and
contends that IFG was an inexperienced and undercapitalized
Sub-Licensee that bears the risk of the business it entered.
(Id. ¶ 19.)
UF counterclaimed for recovery of funds that it
loaned to IFG and the unpaid price of goods purchased from UF
by IFG in the amount of $578,599.27 and fees.
(Id. ¶ 20.)
UF
also sought a declaration that it is entitled to terminate the
Agreement due to material breaches by IFG.
(Id. ¶ 21.)
7
At this time, plaintiff seeks to vacate only the portion of Award relating
to the manufacturing of the Bonafina product. (See Petition ¶ 1.)
Consequently, the court declines to summarize the facts relating to the
Chipilo difficulties.
4
Based upon the record before him, which included
testimony from a three-day hearing and pre- and post-hearing
submissions, the Arbitrator denied IFG’s claims in their
entirety and awarded damages and fees to defendant UF.8
22, 53.)
(Id. ¶¶
The Arbitrator found that IFG failed to establish
that any action or omission by UF with respect to Bonafina
breached the Agreement or caused IFG any damage.
(Id. ¶ 42.)
In stating the reasons for his decision, the
Arbitrator first made the following findings based on the
record: (1) IFG began its relationship with UF “without
material experience in the food manufacturing or distribution
industry and without substantial working capital” (id. ¶ 24);
(2) the Agreement recognized that the process to transplant
recipes for products manufactured and sold in Mexico to the
United States would not be automatic, citing Paragraph 3.1 (id.
¶ 25); (3) the Agreement allocated primary responsibility for
management of the U.S. Manufacturers, such as Diamond, to IFG,
citing Paragraphs 3.39, 3.410, and 3.611 (id. ¶ 26); and UF’s
8
The Arbitrator also awarded UF $379,000 in damages and $154,504.56 in
attorney’s fees (and accrued interest). (Petition, Ex. B (Final Award) ¶
55.) The Arbitrator furthermore terminated the Agreement and found IFG must
bear the administrative fees and expenses of arbitration. (Id. ¶¶ 56-57.)
9 As provided under the heading “3. Duties of Sub-Licensee – US
Manufacturing”:
3.3 US Manufacturers Interface. Sub-Licensee will be responsible
for interfacing with approved US Manufacturers for which it is
responsible and coordinating all operational activities related
to the manufacture, production, distribution and sale of the UF
Products sold to its Customers within the Territory. (Petition,
ECF No. 1-1, Ex. A (Agreement) ¶¶ 3, 3.3.)
5
responsibilities for the manufacturing and quality of products
in the United States were limited, citing Paragraphs 3.3, 3.6,
4.1, 4.3, and 4.512 (id. ¶¶ 27-28).
The Arbitrator also addressed and rejected IFG’s
specific arguments relating to the Bonafina complications.
IFG
argued, as it also does here, that UF breached the Agreement by
(1) providing a defective recipe and (2) by approving the
Diamond bottling plant without recognizing that yeast might be
present in the ambient atmosphere.
(Id. ¶ 36.)
The
Arbitrator found that “UF did not breach the Agreement by
10
As provided under the heading “3. Duties of Sub-Licensee – US
Manufacturing”:
3.4 Monitoring US Manufacturers. Sub-Licensee shall use
commercially reasonable efforts (efforts that are usual and
normal for a company acting in good faith to do in a similar
situation, including periodic visits to the US Manufacturer's
work place and will promptly conduct an investigation should SubLicensee become aware of any facts evidencing the need for such
investigation) in monitoring the activities of US Manufacturers.
Sub-Licensee shall notify Sub-Licensor, immediately, of any
potential issues prior to taking specific action, to assure that
the Sub-Licensor's interests are protected and the Quality
Controls, Product Specifications and Protective Clauses are
enforced. (Petition, ECF No. 1-1, Ex. A (Agreement) ¶¶ 3, 3.4.)
11 As provided under the heading “3. Duties of Sub-Licensee – US
Manufacturing”:
3.6 Preventive Measures. The US Manufacturer's Agreements will
provide that Sub-Licensee and the US Manufacturer will exert
their collective and individual commercially reasonable efforts
to prevent, troubleshoot and resolve any problems arising from
the US Manufacturers' performance under the US Manufacturer's
Agreement. Sub-Licensee will advise Sub-Licensor of any problems
which may have significant economic impact and receive any input
which Sub-Licensor may offer. (Petition, ECF No. 1-1, Ex. A
(Agreement) ¶¶ 3, 3.6.)
12 As provided under the heading “4. Duties of Sub-Licensor – US
Manufacturing”:
4.5 Compliance with Quality Contents. Sub-Licensor may conduct
periodic plant visits, as needed, to review a co-packer's records
to assure that required Quality Controls and Product
Specifications and Protective Clauses are continually met.
6
approving the Diamond plant, nor was there anything inherently
wrong with the Bonafina recipe given to Diamond.”
(Id. ¶ 38.)
The Arbitrator noted that no expert evidence was submitted
concerning the “actual cause” of the Bonfina bulges and leaks,
“but it appears that the contamination may have been particular
to some of the bottling equipment used or bottles manufactured
by Diamond.”
(Id.)
The Arbitrator also found that UF did not
violate the Agreement by “by proving unable to diagnose the
problem for what became a rather lengthy period” because the
contamination in the manufacturing operations was a problem for
IFG to troubleshoot.
(Id. ¶ 39.)
The Arbitrator reasoned that
just because the bulging and leaking bottle issue appears to
have been resolved by a recipe change “does not mean that there
was anything defective in the original recipe.”
(Id.)
Additionally, the Arbitrator found that IFG’s damage claims
were based on speculation and did not “provide a proper, stable
basis” for an award of damages.
(Id. ¶ 41.)
II. Discussion
A. Vacatur of the Award
Plaintiff moves to vacate the Award pursuant to the
Section 10 of the Federal Arbitration Act (codified at 9 U.S.C.
§ 10) (“FAA”).
(Petition at 1.)
Specifically, plaintiff seeks
to vacate the Award insofar as it fails to find that defendant
violated Paragraph 4.3 of the Agreement.
7
(Id.)
Plaintiff
contends that because UF approved Diamond as the U.S.
manufacturer of Bonafina and also provided the recipe that was
used to manufacture Bonafina, the Arbitrator’s determination
fails “to draw its essence from the agreement.”
(Pl. Mem. at
5) (quoting United Steelworkers of Am. v. Enter. Wheel & Car
Corp., 363 U.S. 593, 597 (1960).)
Defendant, in its opposition, requests confirmation
of the Arbitration awarding damages and fees and terminating
the Agreement, and entry of judgment pursuant to 9 U.S.C. § 9.
(Resp.’s Brief in Opp. to Petitioner’s Mot. to Vacate in Part
Arbitration Award (“Def. Opp”), ECF No. 15-4, at 1.)
1. Legal Standard
In reviewing an arbitration award, a court “can
confirm and/or vacate the award, either in whole or in part.”
D.H. Blair & Co., Inc. v. Gottdiener, 462 F.3d 95, 104 (2d Cir.
2006).
“Normally, confirmation of an arbitration award is a
summary proceeding that merely makes what is already a final
arbitration award a judgment of the court.”
(internal quotation marks omitted).
Id. at 110
The reviewing court “must
grant” a petition to confirm an arbitration award unless the
award is vacated, modified, or corrected as prescribed in 9
U.S.C. §§ 10 and 11.
Id.; 9 U.S.C. § 9.
Pursuant to 9 U.S.C. § 10(a), a court may vacate an
arbitration award on one of four grounds:
8
(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.
In addition to the section 10(a) grounds for vacatur, the
Second Circuit has “recognized a judicially-created ground,
namely that an arbitral decision may be vacated when an
arbitrator has exhibited a manifest disregard of law.”
Jock v.
Sterling Jewelers, 646 F.3d 113, 121-22 (2d Cir. 2011)(internal
quotation marks omitted).
Vacatur is appropriate under 9 U.S.C. § 10(a)(4) when
an arbitrator’s decision exceeds his powers.
Am. Postal
Workers Union, AFL-CIO v. U.S. Postal Serv., 754 F.3d 109, 11213 (2d Cir. 2014); 9 U.S.C. § 10(a)(4).
The Second Circuit has
instructed that the “crux of the excess-of-powers standard is
whether the arbitrator’s award draws its essence” from the
agreement.
Id. (internal quotation marks omitted).
The
court’s focus is “whether the arbitrators had the power, based
on the parties’ submissions or the arbitration agreement, to
9
reach a certain issue, not whether the arbitrators correctly
decided that issue.”
Jock, 646 F.3d at 122-23 (emphasis in
original)(quoting DiRussa v. Dean Witter Reynolds Inc., 121
F.3d 818, 824 (2d Cir. 1997)).
Where, as here, “the challenge
is to an award deciding a question which all concede to have
been properly submitted to the arbitrator in the first
instance, vacatur under the excess-of-powers standard is
appropriate only in the narrowest of circumstances.”
Am.
Postal Workers Union, 754 F.3d at 112-113 (internal quotation
marks omitted).
The Supreme Court recently restated the limited scope
of relief under § 10(a)(4):
It is not enough to show that the arbitrator
committed an error—or even a serious error.
Because the parties bargained for the
arbitrator’s construction of their agreement, an
arbitral decision even arguably construing or
applying the contract must stand, regardless of a
court’s view of its (de)merits. . . . So the sole
question for [the court] is whether the
arbitrator (even arguably) interpreted the
parties’ contract, not whether he got its meaning
right or wrong.
Oxford Health Plans LLC v. Sutter, --- U.S. ---, 133 S. Ct.
2064, 2068 (2013)(alterations, citations, and internal
quotation marks omitted).
Where, however, the arbitral
decision lacks “any contractual basis” for its determination
such that the decision “could not have been . . . based on a
determination regarding the parties’ intent,” a court may
10
vacate the arbitrator’s decision.
Id. at 2069-70
(differentiating the Supreme Court’s decision in Stolt-Nielson
S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010) where it
found proper vacatur of arbitrator’s decision to permit class
arbitration when parties expressly stipulated that they never
reached an agreement regarding class arbitration).
2. Application
Applying the well-settled law established by the
Supreme Court and the Second Circuit, the court finds that the
Arbitrator did not exceed the bounds of his authority pursuant
to 10 U.S.C. § 10(a)(4).13
The parties do not dispute that the
issue of whether UF violated its duties pursuant to the
Agreement with respect to the Bonafina problem was properly
submitted to the Arbitrator.
Rather, plaintiff’s argument
amounts to a disagreement with the Arbitrator over his
interpretation of the Agreement.
The law prohibits vacatur
where the Arbitrator has interpreted the Agreement, whether
correctly or incorrectly.
See Oxford Health Plans, 133 S. Ct.
at 2068; Jock, 646 F.3d at 122-23.
Here, as the court’s summary of the Award
demonstrates, the Arbitrator interpreted the Agreement, in
light of the evidence in the record, to reach his conclusion as
13
Federal district courts have original jurisdiction over the review of
arbitration awards. 9 U.S.C. § 203. Venue in the Eastern District of New
York is proper pursuant to Paragraph 19 of the Agreement. (Petition, ECF
No. 1-1, Ex. A (Agreement) ¶ 19.)
11
to whether UF committed any breaches.
The Arbitrator
determined, based on the factual record and his textual
analysis of the Agreement, that UF did not breach any of its
duties under the Agreement.
Specifically, the Arbitrator
reasonably14 determined that UF met its duties to provide
“specifications and recipes” for the manufacture of Bonafina
and to approve the U.S. manufacturers.
The Arbitrator based
his determination on the fact that (1) the recipe was not by
its very nature defective and (2) that UF diligently inspected
the Diamond facility and considered whether the facility had
the ability to overcome potential contamination issues.
(See
Petition Ex. B (Final Award) ¶¶ 37, 39.)
That the Arbitrator did not find plaintiff’s
arguments compelling does not mean that the Arbitrator did not
interpret the Agreement.
Not only did the Arbitrator interpret
the Agreement, but he considered and addressed plaintiff’s
specific arguments which plaintiff recycles here.
Ex. B (Final Award) ¶¶ 38-39.)
See Petition
Plaintiff also fails to show
under Stolt-Nielson that the Award is not supported by any
contractual bases and fails to demonstrate that the arbitrator
14
The court is well-aware that whether the Arbitrator’s interpretation of
the Agreement was reasonable is not the standard to be applied here. The
court, however, does not find that plaintiff has even made a sufficient
showing that the Arbitrator’s decision was unreasonable.
12
exhibited a “manifest disregard of the law.”
See Jock, 646
F.3d at 121-22.15
Plaintiff’s remaining arguments are premised upon the
fact that, in plaintiff’s view, it would defy “common sense”
for the plaintiff to have been allocated the duty to ensure
that the recipe “worked” when used by the selected U.S.
Manufacturer.
(See, e.g., Pl.’s Mem. at 6; Reply Mem., ECF No.
15-5, at 7-8.)
Plaintiff’s argument is based on a fundamental
misunderstanding of contractual duties – just because this duty
may not have been entirely allocated to the plaintiff does not
mean that it was necessarily the defendant’s.
Here, it
appears, from the court’s understanding of the facts and review
of the Agreement that this type of manufacturing error – an
unforeseen chemical reaction between a contaminant in the plant
itself and a beverage ingredient – was not expressly
contemplated by the Agreement and the court is not aware of any
warranty provided by either party.
What is clear from the
Agreement is that plaintiff, as sub-licensee, had the duty to
interface with all approved U.S. Manufacturers, coordinate all
operational activities relating to the manufacture, production,
15
In light of the Supreme Court’s decision in Oxford Health Plans and the
subsequent Second Circuit decision in American Postal Workers, the court is
unsure of the viability of the “manifest disregard of law” as a ground upon
which the court may vacate an arbitral decision. The court nonetheless
considers the applicability of vacatur on this ground in the absence of any
Second Circuit decision expressly rejecting the doctrine and finds that the
arbitrator’s award does not show a manifest disregard of law.
13
distribution and sale of the products (Petition, ECF No. 1-1,
Ex. A (Agreement) ¶ 3.3) and monitor the activities of U.S.
Manufacturers, to ensure controls, product specifications and
protective clauses are enforced and promptly investigate any
facts evidencing the need for investigation.
(Id. ¶ 3.4.)
Thus, the only relevant question is whether defendant breached
any provisions of the contract, which the Arbitrator
appropriately determined UF did not.
B. Attorney’s Fees
Defendant requests reasonable attorney’s fees in the
sum of $10,000 for opposing plaintiff’s petition pursuant to
Paragraph 32 of the Agreement.
(Def. Opp. at 4.)
The
prevailing American rule is that each party in federal
litigation pays his own attorney’s fees absent statutory
authorization or contractual agreement between the parties.
See, e.g., In re Arbitration Before New York Stock Exchange,
Inc., 04 Civ. 488, 2004 WL 2072460, at *14 (S.D.N.Y. Sept. 8,
2004).
Although the FAA does not expressly authorize fee-
shifting, see id., the Agreement does authorize the losing
party to pay the prevailing party a “reasonable sum” for fees
and costs associated with “enforcing” an arbitration award.
(Petition, Ex. B (Final Award) ¶ 3.)
Although the court finds that defendant is entitled
to attorney’s fees for opposing plaintiff’s petition to vacate
14
in part the Award pursuant to the Agreement, the court finds
that the requested $10,000 is not a reasonable sum.
Defendant
has failed to provide any indication of why the $10,000 sought
is reasonable.
Defendant has provided no contemporaneous time
records in support of its request, as required by the Second
Circuit.
New York State Ass’n for Retarded Children, Inc. v.
Carey, 711 F.2d 1136, 1147 (2d Cir. 1983)(“[A]ny attorney . . .
who applies for court-ordered compensation in this Circuit for
work done after the date of this opinion must document the
application with contemporaneous time records.
These records
should specify, for each attorney, the date, the hours
expended, and the nature of the work done.”)
The court notes
that defendant’s only submission in this matter is its fourpage opposition brief.
Defendant’s counsel may show cause in writing within
14 days and explain why the court should grant the full award
of $10,000 in attorney’s fees related to the instant action.
Defendant’s counsel should append contemporaneous time records
providing counsel’s hourly rate as well as a description of the
work he performed and his experience and qualifications.
Conclusion
For the foregoing reasons, plaintiff’s petition to
vacate in part the arbitration award is denied.
arbitration award is hereby CONFIRMED.
15
The
The court directs the
Clerk of the Court to reserve entry of judgment until the
objections to Judge Orenstein’s decision are resolved.
SO ORDERED.
Dated:
September 29, 2015
Brooklyn, New York
__________/s/________________
Kiyo A. Matsumoto
United States District Judge
16
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