Opposition Brief — Orthokinetics, Inc. v. Penox Technologies, Inc.

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Supreme Court, U.S.

; FILED

No.89-1214 > FEB 28 1989

JOSEPH F. SPANIOL, JR.

CLERK

In the Supreme Court of the

Gnited States

October Term, 1989

ORTHOKINETICS, INC. and EDWARD J. GAFFNEY,

Petitioners

vs.

PENOX TECHNOLOGIES, iNC. and LARRY HOHOL,

Respondents

ON WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE THIRD CIRCUIT

BRIEF FOR RESPONDENTS

ROSENN, JENKINS & GREENWALD

RICHARD A. RUSSO*

FRED A. PIERANTONIL, {II

Attorneys for Respondents

*Counsel of Record

15 South Franklin Street

Wilkes-Barre, PA 18711

(717) 826-5600

Murrelle Printing Co., Bax 100, Sayre, Pa 18840—{717) 888-2244

Counterstatement of Questions Presented for Review

COUNTERSTATEMENT OF QUESTIONS

PRESENTED FOR REVIEW

1. Whether Question No. 1 raised in the Petition for Writ

of Certiorari was preserved by the Petitioners below?

2. Whether there exists no actual conflict between the

Circuit Courts of Appeal regarding Question No. 1 raised in

the Petition for Writ of Certiorari or no important question of

federal law which has not been, but should be, settled by this

Court?

3. Whether the factual nature of the dispute, the absence

of a stenographic record of the arbitration hearing, and the

lack of an Arbitrator’s Opinion makes it inappropriate for the

Supreme Court to grant a Writ of Certiorari?

4. Whether there exists no actual conflict between the

Circuit Courts of Appeal regarding Question No. 2 raised in

the Petition for Writ of Certiorari?

5. Whether the unclear record regarding the essential

elements of Fed. R.A.P. 4(a)(5) makes it inappropriate for the

Supreme Court to grant a Writ of Certiorari?

TABLE OF CONTENTS

PAGE

Counterstatement of Questions Presented for Review ._ i

Tobia ci Combemte 0 wc ccc ese veness ii

Table of Authorities ... 2.2020 ecccccrvoens iii

Counterstatement ofthe Case ........-...-.-. 1

Summary of Argument ...........---++05- 6

QUESTION NO. 1

1. The position taken by Petitioners in requesting the

Supreme Court to grant a Writ of Certiorari is in-

consistent with the position taken by them in the

ee Mere ree eee 7

2. There exists no actual conflict or inconsistency be-

tween the Circuit Courts nor is there an important

question of federal law which has not been, but

should be, settled by this Court ..........

3. The Petition for Writ of Certiorari should be denied

because the Arbitrator’s determination was based

upon the facts presented to him, and there is no

adequate or clear record of the arbitration hearing

QUESTION NO. 2

4. The Petition for Writ of Certiorari should be denied

because there exists no actual conflict between the

Circuit Courtsof Appeal ........--.---

5. The Petition for Writ of Certiorari should be denied

because the record regarding “Excusable Neglect

or Good Cause” under Fed. R.A.P. 4(a)(5) is un-

MIEN, hot Ghee OL os este w bie «

a rr ee

Appendix:

Brief of Appellants [Petitioners] in the United States

Court of Appeals for the Third Circuit, Appeal

jo GE Ks) 5 Acai 60 9 9 tf § oA oe ano

TABLE OF AUTHORITIES

CASES:

Cement Division, National Gypsum Co. v. United

Stee! Workers of America, AFL-CIO-CLC, Local

135, 793 F.2d 759 (6th Cir.1986) .........

Cohens v. Virginia, 6 Wheat. 264, 19 U.S. 264, 5 L.Ed.

I Bl Gd aS ca wit ol She o

EEOC v. Federal Labor Relations Authority, 476 U.S.

19, 90 L.Ed. 2d 19, 106 S.Ct. 1678 (1986) .....

I/S Stavborg v. National Metal Converters, Inc., 500

F.2d 424 (2d Cir. 1974) ...............

Inter-City Gas Corp. v. Boise Cascade Corp., 845 F.2d

Marcy Lee Manufacturing Co. v. Cortley Fabrics Co.,

354 F.2d 42 (2d Cir. 1965) .............

McDaniel v. Sanchez, 452 U.S. 130, 68 L.Ed. 2d 724,

2G) Se, SEI a sash ewenie we ewes 20

Melton v. Frank, 891 F.2d 1054 (2d Cir. 1989) .. . . 18, 20

Pack Concrete, Inc. v. Cunningham and Teamsters

Local No. 2, 866 F.2d 283 (9th Cir. 1989) ..... 14

Rudolph v. United States, 370 U.S. 269, 82 S.Ct. 1277,

8 L.Ed. 2d 484 (1962), reh. den. 371 U.S. 854, 83

S.Ct. 15, 9 L.Ed. 2493 (1962) ........... 17

Shearson/American Express, Inc. v. McMahon, 482

U.S. 220, 107 S.Ct. 2332, 96 L.Ed. 2d 185 (1987),

reh. den. 483 U.S. 1056, 108 S.Ct. 31, 97 L.Ed. 2d

acta beta er a all as” a a Ea 6

Taggert v. Weinacker’s, Inc., 397 U.S. 223, 90 S.Ct.

876, 25 L.Ed. 2d 240(1970) ........... 16, 22

Timken Co. v. United Steel Workers of America, 482

pf Pt Bee re 13

Tootsie Roll Industries, Inc. v. Local Union No. 1, Bak-

ery, Confectionery and Tobacco Workers’ Interna-

tional Union, 832 F.2d 81 (7th Cir. 1987) ..... 13

U.S. v. Vignola, 464 F. Supp. 1091 (E.D. Pa. 1979),

aff d without Op. 605 F.2d 1199 (3rd Cir. 1979),

cert. den. 444 U.S. 1072, 100 S.Ct. 1015, 62 L.Ed.

SC os Lae ake tn 20

United Food and Commercial Workers Local Union

No. 7R v. Safeway Stores, Inc. and Cortez, 889

F.2d 940 (10th Cir. 1989) ............-. 14

United Paperworkers International Union, AFL-CIO

v. Misco, Inc., 484 U.S. 29, 108 S.Ct. 364, 98

ie EEE. 6 6 5 «eee ks os 10, 11, 12

United States v. Crawley, 837 F.2d 291 (7th Cir.

_. , ME oe re ee ae 19, 20

United Steelworkers of America v. Enterprise Wheel &

Car Corp., 363 U.S. 593, 80 S.Ct. 1358, 4 L.Ed.

2d 1424(1960) ..........., 8, 9, 10, 11, 12, 15

RULES:

| Ns er nn" 19, 21

rein i ai... a ae 18, 19, 21

oS een atonae i, 18, 19, 20, 21, 22

supeemietiemt Raph 2... se RS 7

Counterstatement of the Case

COUNTERSTATEMENT OF THE CASE

On May 21, 1986, PENOX TECHNOLOGIES, INC., a

Pennsylvania corporation (“OLD PENOX”), ORTHO-

KINETICS, INC, (“ORTHO”), and EDWARD J. GAFFNEY

(“GAFFNEY”), entered into a patent license Agreement

(“Penox Original License”). Subsequently, ORTHO,

GAFFNEY, and Super Sagless Corporation (“SS”) entered

into a License Agreement (“SS License”).

Paragraph 12 of the Penox original License provided as

follows:

In the event ORTHOKINETICS or GAFF-

NEY...grants a license under Letters Patent in No. 4, 007,

960 to any other party on terms more favorable than those

provided herein,... PENOX shall have the option, at any

time within two (2) months after receiving a copy of said

license, to avail itself of such more favorable terms upon

notice in writing to ORTHOKINETICS, provided that

PENOX also accepts ail other licensee obligations set

forth in such license....

OLD PENOX timely notified ORTHO and GAFFNEY,

in writing, that OLD PENOX exercised its option to avail itself

of the terms of the SS License.

Paragraph 4 of the PENOX Original License provided as

follows:

...PENOX shall pay ORTHOKINETICS a royalty

on each and every reclining lift chair within the scope of...

said... Patent... actually sold by PENOX... for which pay-

ment has been received by PENOX..., which royalty shall

be equal to five percent (5%) of PENOX’s net selling

Counterstatement of the Case

price for such chair or $15.00 per chair, whichever is

greater...

Paragraph 4 of the SS License provided as follows:

...SS [SUPER SAGLESS] shall pay OKI [ORTHO]

an earned royalty on each and every reclining lift chair

and/or mechanisms therefor within the scope of... said...

Patent... actually sold by SS... commencing the Ist day of

November, 1986 and for which the net sales price has

been received by SS..., which royalty shall be equal to five

percent (5%) of SS’s net selling price for such chair or

$15.00 per chair, whichever is greater.... [Emphasis sup-

plied. ]

Pursuant to Paragraph 4 of the SS License, SS was re-

quired to pay ORTHO an earned royalty on “each and every

reclining lift chair and/or mechanisms therefor” sold by SS,

and the amount of the royalty “shall be equal to five percent

(5%) of SS’s net selling price for such chair or $15.00 per chair,

whichever is greater... (Emphasis supplied.)

Notwithstanding the clear language of Paragraph 4 of the

SS License, ORTHO and GAFFNEY were not charging SS a

royalty equal to five percent (5%) of the net selling price for

such chair or $15.00 per chair, whichever was greater. In fact,

SS was charged only a royalty of five percent (5%) of the net

selling price for the mechanism for the lift chair or $15.00 per

mechanism, whichever was greater. In reality, the $15.00 per

mechanism was greater than five percent (5%) of the net

selling price for the mechanism. Moreover, when SS sold the

mechanism to another company which added the chair to the

mechanism and sold the finished product, the purchaser of the

mechanism from SS was not charged any additional royalty

because it was deemed to be an “implied licensee”.

Counterstatement of the Case

OLD PENOX argued that once it assumed the SS Li-

cense, it was entitled to pay the same royalty, and to receive

the same construction of the royalty terms, as ORTHO and

GAFFNEY were providing to SS, ORTHO’ largest and most

profitable customer. OLD PENOX argued this by virtue of the

“most favored licensee” clause which was contained in Para-

graph 12 of the PENOX Original License and Paragraph 12 of

the SS License.

When ORTHO and GAFFNEY claimed that OLD

PENOX was required to pay a royalty of five percent (5%) of

the net selling price of the chair or $15.00, whichever was

greater, notwithstanding the fact that SS was charged a royalty

of only five percent (5%) of the net selling price for the

mechanism: or $15.00, whichever was greater, OLD PENOX

filed a Demand for Arbitration.

Paragraph 21 of the PENOX Original License and Para-

graph 19 of the SS License both provided as follows:

The parties hereto agree that if any dispute should

arise as to the terms and conditions of this Agreement

which cannot be resolved by the parties, that said dispute

shall be resolved by submitting said dispute to the Amer-

ican Arbitration Association pursuant to its rules and

regulations....

On September 13, 1988, a hearing was held before the

arbitrator selected by the American Arbitration Association, at

which time all parties appeared and participated. All parties

were furnished with a full and fair opportunity to present

testimony and documentary evidence. On November 7, 1988,

the Arbitrator entered an award in favor of OLD PENOX,

which is set forth at Petitioners’ Appendix, Pg. A-32.

Counterstatement of the Case

ORTHO and GAFFNEY filed a Petition to Vacate the

Award of Arbitrator with the United States District Court for

the Middle District of Pennsylvania on the basis that the

Arbitrator exceeded his authority and/or committed a manifest

disregard of law. OLD PENOX filed a Cross-Motion to Con-

firm the Award of Arbitrator.

On December 27, 1988, OLD PENOX sold substantially

all of its assets, including its entire reclining chair business, to

Big Ben Group, Ltd., a Missouri corporation, assignee of Essex

Industries, Inc., which sale included the License Agreement,

and the rights held in connection therewith, which OLD

PENOX had with ORTHO and GAFFNEY, and the terms and

provisions were accepted by the assignee in writing. Pursuant

to the Asset Purchase Agreement, all post-closing benefits

from the arbitration award in question belong to Big Ben

Group, Ltd., and all pre-closing benefits were retained by

OLD PENOX. The closing regarding this asset sale took place

on December 27, 1988. On or about December 30, 1988,

OLD PENOX changed its corporate name to LeaseCor Cap-

ital, Inc., and on December 31, 1988, LeaseCor Capital, Inc.

was liquidated, and all of its assets, subject to its liabilities, were

distributed to LARRY HOHOL as sole shareholder on that

date.

On or about January 17, 1989, Big Ben Group, Ltd.

changed its corporate name to PENOX TECHNOLOGIES,

INC., a Missouri corporation (“NEW PENOX”).’ As a result,

NEW PENOX and LARRY HOHOL (“HOHOL,”) each has

an interest in the November 7, 1988 award of Arbitrator. A

Motion for Substitution of Parties was filed, and the District

' PENOX TECHNOLOGIES, INC. is not « publicly held corporation, and

has no parent company, subsidiary or affiliate corporation.

Counterstatement of the Case

Court entered an Order substituting NEW PENOX and

HOHOL as Respondents in connection with the Motion to

Vacate the Arbitrator’s Award, and as Petitioners in connection

with the Cross-Motion to Confirm the Arbitrator’s Award.

On April 18, 1989, the District Court entered a Memo-

randum and Order denying the Petition to Vacate the

Arbitrators Award filed by ORTHO and GAFFNEY. This

same Order granted the Respondents’ Cross-Motion to Con-

firm the Arbitrator’s Award. Same is set forth at Petitioners’

Appendix., Pg. A-13.

On May 16, 1989, ORTHO filed a Notice of Appeal with

the United States Court of for the Third Circuit. On

June 29, 1989, ORTHO GAFFNEY filed a Motion for

Enlargement of Time with the District Court within which to

file a Notice of Appeal and to Conform the Caption to include

GAFFNEY as an Appellant. The District Court, without opin-

ion, granted the aforementioned Motion on July 5, 1989. On

July 14, 1989, NEW PENOX and HOHOL filed a Motion for

Reconsideration of the Court's Order granting GAFFNEY’s

Motion for Enlargement of Time, which was denied.

On November 3, 1989, the Court of Appeals for the Third

Circuit affirmed the decision of the District Court because: (a)

on the merits, the arbitrator did not exceed his authority or

commit a manifest disregard of law, and (b) in any event,

GAFFNEY had failed to timely appeal the District Court's

ruling. Same is set forth at Petitioners’ Appendix, Pg. A-1.

Summary of Argument

SUMMARY OF ARGUMENT

Just as in the labor field, there exists a strong federal

policy favoring commercial arbitrations. Shearson/American

Express, Inc. v. McMahon, 482 U.S. 220, 107 S.Ct. 2332, 96

L.Ed. 2d 185 (1987) reh. den. 483 U.S. 1056, 108 S.Ct, 31, 97

L.Ed. 2d 819 (1987). This federal policy is a ve one

which ought not to be lightly overri The policy of

the Federal Arbitration Act is to promote the speedy disposi-

tion of disputes without the expense and delay of protracted

court proceedings.

The decision of the Court of Appeals in the instant matter

was in accord with the decisions of the Supreme Court of the

United States regarding the standard of review in labor arbi-

tration cases. The Petitioners submitted these labor cases to

the Court below and should not be heard to complain when

the Court of Appeals relied on them. Moreover, the

Arbitrator’s determination turned on the facts developed be-

fore him, and there does not exist any transcript of the hearing

as neither party requested one. There exists no special and

important reason for this Court to hear this matter,

because the necessity of an intense factual analysis makes this

a case of little significance to anyone except the litigants.

In addition, regarding the second issue raised by Petition-

ers, the alleged conflict in the Circuits arises from the Peti-

tioners’ inability or unwillingness to distinguish between hold-

ing and dicta. Upon careful analysis, the holdings of the cases

cited by Petitioners are entirely consistent.

In summary, while this case is obviously important to the

parties, there is lacking any element of national significance or

importance which should detract from or interfere with this

Summary of Argument

Court's ability to consider and resolve the more important

issues confronting our nation.

QUESTION NO. 1

1. The Position Taken By Petitioners In Requesting

The Supreme Court To Grant A Writ Of Certiorari Is

Inconsistent With The Position Taken By Them In The

Court Below

There exists no reason, much less a special and important

reason, for this Honorable Court to grant a Writ of Certiorari

in this matter. Supreme Court Rule 17 provides that:

A review on writ of certiorari is not a matter of right,

but of judicial discretion, and will be granted only when

there are special and important reasons therefor [empha-

sis added].

It further provides that the following factors, while neither

controlling nor fully measuring the Court's discretion, indicate

the character of the reasons that will be considered:

(a) When a federal court of appeals has rendered a

decision in conflict with the decision of another federal

court of appeals on the same matter; or has decided a

federal question in a way in conflict with a state court of

last resort; or lias so far departed from the accepted and

usual course of judicial proceedings, or so far sanctioned

such a departure by a lower court, as to call for an exercise

of this Court's power of supervision.

(b) When a state court of last resort has decided a

federal question in a way in conflict with the decision of

Summary of Argument

another state court of last resort or of a federal court of

appeals.

has decided an important question of federal law which

has not been, but should be, settled by this Court, or has

decided a federal question in a way in conflict with

applicable decisions of this Court.

Regarding the first question raised for review by the

Petitioners, while the Petition is vague, the only basis submit-

ted by Petitioners in support of an appeal appears to be that

the standard of review of commercial arbitration proceedings

under the Federal Arbitration Act must be clarified. (Page 8

of Petition for Writ of Certiorari.) Petitioners contend that it

is not clear whether this Court’s precedents in labor arbitration

cases define the standard of review for proceedings to vacate

commercial arbitration awards under the Federal Arbitration

Act. Petitioners did not raise this issue in the Court below. To

the contrary, the Petitioners cited labor arbitration cases to the

Court below as the standard of review. (See the attached

Appendix.) Both the District Court and the Court of Appeals

followed labor arbitration cases in denying the Motion to

Vacate and in granting the Motion to Confirm the Arbitrator’s

Award. Significantly, the Petitioners on page 9 of their Brief

with the Court of Appeals stated, “although the District Court

examined the appropriate authorities it did not follow the

applicable law set forth therein.” In addition, the Petitioners

referred the Court of Appeals to this Court's opinion in United

Steelworkers of America v. Enterprise Wheel & Car Corp., 363

U.S. 593, 80 S.Ct. 1358, 4 L.Ed. 2d 1424 (1960), and stated in

their Brief that:

The [arbitrator's] award is legitimate only so long as

it draws its essence from the agreement. When the award

Summary of Argument

is not based on the agreement, the Courts have no choice

but to refuse to enforce the award, United Steelworkers

of America v. Enterprise Wheel & Car Corp., 363 U.S.

593, 80 S.Ct. 1358 (1960).

It is clear that this Court will refrain from addressing

issues not raised or presented in the Court of Appeals. EEOC

v. Federal Labor Relations Authority, 476 U.S. 19, 90 L.Ed.

2d 19, 106 S.Ct. 1678 (1986). Before the Court of Appeals, the

Petitioners referred the Court to labor cases as setting the

standard for review, and as noted above, stated that the District

Court had examined “the appropriate authorities.” Given such

statements and actions by Petitioners below, it is submitted

that there are no special and important reasons for this Hon-

orable Court to grant review on a Writ of Certiorari. The issue

was neither properly preserved by the Petitioners nor fully

developed before the Court of Appeals. Accordingly, the Pe-

tition for Writ of Certiorari should be denied.

2. There Exists No Actual Conflict Or Inconsistency

Between The Circuit Courts Nor Is There An Impor-

tant Question Of Federal Law Which Has Not Been,

But Should Be, Settled By This Court

Assuming arguendo that the Petitioners properly pre-

served for review the issue they raise regarding the applicabil-

ity of the labor standard of review to a commercial arbitration

case, there exists no actual conflict among the Circuit Courts

nor an important question of federal law which has not been,

but should be, settled by this Court.

Before the Court of Appeals, Petitioners relied upon

United Steelworkers of America v. Enterprise Wheel & Car

Summary of Argument

Corporation, supra, and its progeny, as the standard of review

for the instant matter. An analysis of the opinion of the Court

of Appeals for the Third Circuit shows that that court followed

well-established principles of the United States Supreme

Court which have been widely recognized in the other Circuit

Courts of Appeal.

The Court of Appeals determined that the district court

confirmed the Arbitrator’s award because:

... [Petitioners] had failed to show that the award was

fundamentally irrational or failed to drawits essence from

the parties’ agreement. [Petitioners’ Appendix at A-12.]

The Court of Appeals further determined:

We also do not find that the arbitrator’s award was

irrational or failed to draw its essence from the royalty

agreement at issue. [ Petitioners’ Appendix at A-12.]

Additionally, the Court of Appeals ruled that:

The arbitrator could have determined from the tes-

timony of the parties that the most favored licensee

agreement would have little meaning if the term is [sic]

used to calculate the product was different. ...Thus, the

arbitrator was giving meaning to the intent behind the

clause, rather than an illusory written interpretation.

[Petitioners’ Appendix at A-12.]

In United Paperworkers International Union, AFL-CIO

v. Misco, Inc., 484 U.S. 29, 108 S.Ct. 364, 98 L.Ed. 2d 286

(1987), a case involving several aspects of when a federal court

may refuse to enforce arbitration awards under a collective

bargaining agreement on the basis of public policy, the Court

reaffirmed the Enterprise Wheel standard, stating:

As the Court has said, the arbitrator's award settling

a dispute with respect to the interpretation or application

Summary of Argument

of a labor agreement must draw its essence from the

contract and cannot simply reflect the arbitrator's own

notions of industrial justice. But as long as the arbitrator

is even arguably construing or applying the contract and

acting within the scope of his authority, that a court is

convinced he committed serious error does not suffice to

overturn his decision.

98 L.Ed. 2d at 299.

Petitioners, in their brief, correctly recognize that Enter-

prise Wheel and Misco both promote use of the “essence” test.

Both the District Court and Court of Appeals for the Third

Circuit determined that the Arbitrator had construed and

applied the contract terms, and as such, did not exceed his

authority. As such, the opinion of the Court below is entirely

consistent with this Court’s opinion in Misco.” It is clear that

Misco reaffirmed the “essence” test, as was pronounced in

Enterprise Wheel, and the Court below utilized precisely that

test. Both of the lower courts believed that the Arbitrator’s

decision was not irrational, in other words, that his award was

an arguable construction and application of the contract. This

was especially so where the applicable contract contained a

most favored licensee clause, as was the case here.

The decision of the Court of Appeals for the Third Circuit

is in accord with the decisions of the Supreme Court of the

United States and rulings throughout the various Circuit

Courts regarding the standard of review for proceedings to

® It is also interesting to note that while the Petitioners contend in their

Petition that “(T]he Third Circuit i Misco, although it was cited ... by

Petitioners” [See Pg. 21 of Petition for Writ of Certiorari], the Petitioners’ only

reference to Misco in their Brief below was one isolated reference within a quote

from an 8th Circuit Inter-City Gas Corp. v. Boise Cascade Corp., 845 F.2d

184 (8th Cir. 1988). [See Petitioners’ Brief below at Pg. 15.]

Summary of Argument

vacate arbitration awards. Enterprise Wheel established a

broad test as to whether the Arbitrator’s award “draws its

essence” from the agreement of the parties. The various Cir-

cuit Courts have interpreted the ruling of Enterprise Wheel

and consistently list uniform criteria to determine whether an

arbitration award is subject to vacation.

In Enterprise Wheel, the Court held that:

Nevertheless, an arbitrator is confined to interpre-

tation and application of the ... agreement; he does not sit

to dispense his own brand of industrial justice. He may

of course look for guidance from many sources, yet his

award is legitimate only so long as it draws its essence

from the ... agreement.

4 L.Ed. 2d at 1428.

In Misco, the Court held:

...the arbitrator’s award settling a dispute with respect to

the interpretation or application of a labor agreement

must draw its essence from the contract and cannot

simply reflect the arbitrator's own notions of industrial

justice. But as long as the arbitrator is even arguably

construing or applying the contract and acting within the

scope of his authority, that a court is convinced he com-

mitted serious error does not suffice to overturn his

decision [emphasis supplied].

98 L.Ed. 2d at 299.

The Third Circuit, in accord with Misco and Enterprise

Wheel, recognized the duty of the arbitrator to interpret and

apply the terms contained in the agreement itself.

The various Circuit Courts are consistent in reviewing

arbitration awards to determine if grounds for vacating an

Summary of Argument

award are present. Some Circuits have adopted the “rational”

test, that:

‘An arbitrator’s award does “draw its essence from the ...

agreement” so long as the interpretation can in some

rational manner be derived from the agreement, “viewed

. in the light of its language, its context and any other

indicia of the parties’ intention ....”’ |

Tootste Roll Industries, Inc. v. Local Union, No. 1, Bakery,

Confectionery and Tobacco Workers’ International Union, 832

F.2d 81, 83 (7th Cir. 1987).

An award fails to derive its essence from the agree-

ment when (1) an award conflicts with express terms of

the collective bargaining agreement [citation omitted];

(2) an award imposes additional requirements that are not

expressly provided in the agreement [citation omitted];

(3) an award is without rational support or cannot be

rationally derived from the terms of the agreement [cita-

tion omitted]; and (4) an award is based on general

considerations of fairness and equity instead of the pre-

cise terms of the agreement [citation omitted].

Cement Division, National Gypsum Co. v. United Steel Work-

ers of America, AFL-CIO-CLC, Local 135, 793 F.2d 759, 766

(6th Cir. 1986), citing Timken Co. v. United Steel Workers of

America, 482 F.2d 1012 (6th Cir. 1973).

...[A]s long as arbitrators remain within their juris-

diction and do not reach an irrational result, they may

“fashion the law to fit the facts before them” and their

award will not be set aside because they erred in the

determination or application of the law ... .’

Summary of Argument

I/S Stavborg v. National Metal Converters, Inc., 500 F.2d 424,

431 (2d Cir. 1974) citing Marcy Lee Manufacturing Co. v.

Cortley Fabrics Co., 354 F.2d 42 (2d Cir. 1965).

Still other Circuit Courts have attempted to delineate

factors useful in determining whether an award “draws its

essence” from the agreement of the parties. As stated in Pack

Concrete, Inc. v. Cunningham and Teamsters Local No. 2, 866

F.2d 283, 285 (9th Cir. 1989):

The scope of review of an arbitrator's decision is

extremely narrow. [Citations omitted]. “As long as the

arbitrator's award “draws its essence from the ... agree-

ment” and is not merely “his own brand of industrial

justice,” the award is legitimate.’ [Citations omitted]. “[I]f

on its face, the award represents a plausible interpretation

of the contract, judicial inquiry ceases and the award must

be enforced.” [Citations omitted].

In United Food and Commercial Workers Local Union

No. 7R v. Safeway Stores, Inc. and Cortez, 889 F.2d 940,

946-947 (10th Cir. 1989), the Court stated:

‘[W]here the question of the submission to the arbi-

trator is vague, the award of the arbitrator will not be set

aside in a subsequent court proceeding, unless it can be

shown that the essence of the resulting award was not

drawn from the collective bargaining agreement.’ [Cita-

tions omitted. ] The parties may limit the discretion of the

arbitrator, such as through submitting a precise statement

of the issues to the arbitrator or through providing express

limitations in the collective bargaining agreement. [Cita-

tion omitted.] When the parties fail to limit the scope of

the submission, however, we will affirm the arbitrator's

award if it draws its essence from the ... agreement and

Summary of Argument

is not contrary to the express language of that agreement.

[Citations omitted. ]

We will not interfere with an arbitrator's decision

‘unless it can be said with positive assurance that the

contract is not susceptible to the arbitrator’s interpreta-

tion.’ [Citations omitted.] ‘[A]s long as the arbitrator is

. even arguably construing or applying the contract and

acting within the scope of his authority, that a court is

convinced he committed serious error does not suffice to

overturn his decision.’ [Citation omitted. ]

Regardless of the specific criteria considered by the Cir-

cuit Courts, the tests as pronounced by the Circuit Courts

require the reviewing court to make a careful analysis of the

agreement between the parties and a determination as to

whether the Arbitrator arguably construed or applied the

contract in arriving at his or her determination. As aptly stated

in Enterprise Wheel:

There the need is for flexibility in meeting a wide

variety of situations. The draftsmen may never have

thought of what specific remedy should be awarded to

meet a particular contingency.

4 L.Ed. 2d at 1428.

The District Court and the Court of Appeals for the Third

Circuit determined that the award herein was not fundamen-

tally irrational nor did it fail to draw its essence from the

parties’ agreement. The decision of the Third Circuit was in

accordance with the decisions of the Supreme Court of the

United States, its own precedents, and rulings throughout the

Circuit Courts of Appeal regarding the standards to be ap-

plied. As such, there exists neither a conflict between the

Circuit Courts, nor an important question of federal law which

Summary of Argument

has not been, but should be, settled by this Court. Due to the

uniformity of the decisions among the various Circuit Courts

and this Court, as well as the inconsistency in the position

taken first by the Petitioners below and now here, the Petition

for Writ of Certiorari should be denied.

3. The Petition For Writ Of Certiorari Should Be De-

nied Because The Arbitrator’s Determination Was

Based Upon The Facts Presented To Him, And There

Is No Adequate Or Clear Record Of The Arbitration

Hearing

The Court of Appeals for the Third Circuit noted in the

instant matter, “although our review is made more difficult

since the arbitrator did not write an opinion to explain his

interpretation, it is obviously not for us to rewrite the contract,

but rather, to determine whether the contract will support the

arbitrator's interpretation.” Petitioners’ Appendix at A-11. The

Court may dismiss a Petition for Writ of Certiorari where the

record is unclear or obscure. Taggert v. Weinacker's, Inc., 397

U.S. 223, 90 S.Ct. 876, 25 L.Ed. 2d 240 (1970). Neither the

District Court nor the Court of Appeals could say that the

Arbitrator was not arguably construing or applying the license

agreement in arriving at his determination. The arbitration

hearing turned upon the facts presented there, construed in

light of and in conjunction with the most favored licensee

clause of the contract. While either party had the right to

request a stenographic record pursuant to the rules of the

American Arbitration Association, no party made such a re-

quest. Without any stenographic record or opinion, the Re-

spondents submit that the Court should deny the Petition for

Writ of Certiorari.

Summary of Argument

Additionally, even it the Court could recreate the factual

record by affidavits, the Court should nonetheless deny the

Petition for Writ of Certiorari as the Arbitrator’s determination

turned upon factual questions. Where an issue for which the

Court granted certiorari turned upon certain factual ques-

tions, the Writ was dismissed as improvidently granted since a

review of the findings of fact would be of no importance except

to the litigants themselves. Rudolph v. United States, 370 U.S.

269, 82 S.Ct. 1277, 8 L.Ed. 2d 484 (1962), reh. den. 371 U.S.

854, 83 S.Ct. 15, 9 L.Ed. 2d 93 (1962).

For the foregoing reasons, the Petition for Writ of Cer-

tiorari should be denied.

QUESTION NO. 2

4. The Petition For Writ Of Certiorari Should Be De-

nied Because There Exists No Actual Conflict Be-

tween The Circuit Courts Of Appeal

The Petitioners’ only basis for this Court's exercising its

discretion to grant review on a writ of certiorari regarding

Question No. 2 is the contention that a conflict exists between

one decision from the Court of Appeals for the Second Circuit

and one decision from the Court of Appeals for the Third

Circuit. The Petitioners do not refer the Court to any decision

from any other circuit which even addresses this issue. A

careful analysis of the two decisions cited by Petitioners dis-

closes that no actual conflict exists between the holdings of

these decisions, and the alleged conflict is nothing more than

Petitioners’ failure to distinguish between holding and dicta.

Summary of Argument

Petitioners contend that the ruling in Melton v. Frank,

891 F.2d 1054 (2d Cir. 1989), conflicts with the ruling entered

by the Third Circuit in the instant matter which held that the

failure of Petitioner, GAFFNEY, to file a timely Notice of

Appeal or Motion for Enlargement of Time to Appeal consti-

tuted a jurisdictional bar to the appeal. The Court also held

that upon the timely filing of a Notice of Appeal by the

Petitioner, ORTHO, jurisdiction over the case was immedi-

ately transferred from the district court to the Court of Ap-

peals, and an untimely Motion for Enlargement of Time did

not present an instance in which the district court retained

power to act.

be dismissed tor lack of jurisdiction where there was

a 106 day delay between aug iataiammnink te

filing of a pro se Motion to Extend the Time to File a Notice

of Appeal. As such, the holding of the Court of Agpeals for the

Second Circuit in Melton is consistent with the holding of the

Court of Appeals for the Third Circuit in the instant matter.

Petitioners are incorrect when they state that the holding

of the Second Circuit in Melton was that “a Motion for Exten-

sion of Time for a Cross Appeal would be timely if filed within

104 days ... because of the automatic fourteen day extension

following a timely filed first Notice of Appeal Appeal to an ne pty

under Rule 4(a)(3) and the 30 days afforded under

4(a)(5).” Instead, the Court in Melton held that the appeal

should be dismissed due to the absence of

tion because of the failure of the appellant to file a timely

Notice of Appeal or Motion for Extension of Time to Appeal.

Rather than referring this Court to the holding in Melton,

Petitioners are looking to dictum in the Second Circuit's

Summary of Argument

opinion in a futile and transparent attempt to manufacture an

inconsistency between the Circuit Courts of Appeal.

Any reference by the Second Circuit as to whether the

time for filing a Motion for Enlargement of Time under Fed.

R.A.P. 4(a)(5) runs from the time set forth in Fed. R.A.P.

4(a)(1) or from the combined time of Fed. R.A.P. 4(a)(1) and

4(a)(3) was unnecessary to its decision. This is so be-

cause the Circuit concluded that the Motion for En-

of Time was filed more than thirty (30) days after

the expiration of either of such time . Acco , the

reference by the Second Circuit, Petitioners is

inconsistent with the opinion of the Third Circuit, was unnec-

essary and surplusage. Respondents respectfully submit that

this Honorable Court has more important and more pressing

demands upon its limited time and resources than to consider

an alleged inconsistency between the holding of one case and

dicta in another.

Dictum is the part of an opinion that a later court, even

if it is an inferior court, is free to reject. Dictum has been

defined as:

‘a statement in a judicial opinion that could have

been deleted without seriously impairing the analytical

foundations of the holding—that, being peripheral, ma

not have received the full and careful consideration of the

court that uttered it.’ [Citation omitted.] ‘[D]ictum is a

general t or observation unnecessary to the de-

cision.... The basic formula [for distinguishing holding

from dictum] is to take account of facts treated by the

judge as material and determine whether the contested

opinion is based upon them.’ [Citation omitted.] A dic-

tum is ‘any statement made by a court for use in argu-

ment, illustration, analogy or suggestion. It is a remark,

Summary of Argument

an aside, concerning some rule of law or legal proposition

that is not necessarily essential to the decision and lacks

the authority of adjudication.’ [Citation omitted. ] It is ‘a

statement not addressed to the question before the court

or necessary for its decision.’ [Citation omitted.]

United States v. Crawley, 837 F.2d 291, 292 (7th Cir. 1988).

Dictum is unnecessary to the decision in a case and is, there-

fore, not controlling in a subsequent case. McDaniel v. San-

chez, 452 U.S. 130, 68 L.Ed. 2d 724, 734, 101 S.Ct. 2224

(1981).

As stated by Chief Justice Marshall nearly 170 years ago:

‘It is a maxim not to be disregarded, that general

expressions, in every opinion, are to be taken in connec-

tion with the case in which those expressions are used. If

they go beyond the case, they may be respected, but

ought not to control the judgment in a subsequent suit

when the very point is presented for decision. The reason

of this maxim is obvious. The question actually before the

court is investigated with care and considered in its full

extent. Other which may serve to illustrate it,

are in their relation to the case decided, but

their possible bearing on all other cases is seldom com-

pletely investigated.’

Cohens v. Virginia, 6 Wheat. 264, 399-400, 19 U.S. 264, 5

L.Ed. 257, 290 (1821), quoted in U.S. v. Vignola, 464 F. Supp.

1091, 1099 n.25 (E.D. Pa. 1979), aff'd without op. 605 F.2d

1199 (3rd Cir. 1979), cert. den. 444 U.S. 1072, 100 S.Ct. 1015,

62 L.Ed. 2d 753 (1979).

In Melton, as noted above, the Court determined that the

Motion for Extension of Time to Appeal was filed outside the

time limits set forth in Fed. R.A.P. 4(a)(5), regardless of

Summary of Argument

whether or not the 14 day extension of time permitted by Fed.

R.A.P. 4(a)(3) was added to the time permitted to appeal by

Fed. R.A.P. 4(a)(1). The Court’s statement dealing with the

computation of time under Fed. R.A.P. 4(a)(1) and 4(a)(3)

constituted dictum. The holding in Melton is entirely consis-

tent with the Third Circuit’s holding in the instant matter.

- The Respondents respectfully submit that the Court

should exercise its discretion to deny the Petition for Writ of

Certiorari as there is no direct conflict between the holdings

of the two cases cited by Petitioners.

In addition, inasmuch as Petitioners are able to cite the

Court to only a single decision (dicta) in one other Circuit

re this issue, Respondents submit that the Court

should the Courts of Appeals for the other Circuits time

to consider this issue before deciding whether a true conflict

exists in the Circuits which presents this Court with a special

and important reason to exercise its discretion to expend its

valuable time in order to resolve such conflict. Consideration

at this time would be premature.

5. The Petition For Writ Of Certiorari Should Be De-

nied Because The Record Regarding “Excusable Ne-

glect Or Good Cause” Under Fed. R.A.P. 4(a)(5) Is

Unclear

According to Fed. R.A.P. 4(a)(5):

The district court, upon a showing of excusable

neglect or good cause, may extend the time for filing a

notice of appeal upon motion filed not later than 30 days

after the expiration of the time prescribed by this Rule

4(a).

Summary of Argument

In the instant case, the Third Circuit did not address the

question of “excusable neglect or good cause” pursuant to Fed.

R.A.P. 4{a)(5) because of its disposition of the untimeliness

issue. Moreover, a review of the record before the District

Court will disclose that there existed absolutely no factual basis

for a finding of “excusable neglect or good cause.” There were

no depositions or affidavits filed by Petitioners to properly

create such a factual record. Moreover, the District Court did

not write an opinion regarding its disposition of the Motion for

Enlargement of Time to Appeal. Significantly, a review of the

Petition for Writ of Certiorari discloses that the Petitioners

never explain the factual basis for a finding of “excusable

neglect or good cause.” As noted above, this Court may dismiss

a Petition for Writ of Certiorari where the record is unclear or

obscure. Taggert v. Weinacker’s, Inc., supra. There is lacking

any record for this Court to find an essential element

the basis for an extension of the time to appeal, and the Petition

for Writ of Certiorari should be denied.

CONCLUSION

For these reasons, the Petition for Writ of Certiorari filed

by ORTHO and GAFFNEY should he denied.

Respectfully submitted,

ROSENN, JENKINS & GREENWALD

/s/RICHARD A. RUSSO

FRED A. PIERANTONIL, III

Attorneys for Respondents

15 South Franklin Street

Wilkes-Barre, PA 18711

(717) 826-5600

Brief of Appellants

APPENDIX

BRIEF OF APPELLANTS

IN THE

United States Court of Appeals

FOR THE THIRD CIRCUIT

Appeal No. 89-5417

Orthokinetics, Inc. and,

- VS -

Penox Technologies, Inc. and

Larry Hohol,

Appellees,

On Appeal From a Decision of the United States

District Court for the Middle District of Pennsylvania

(Judge William J. Nealon, Jr.)

Henry C. Fuller, Jr.

FULLER, RYAN & HOHENFELDT, S.C.

633 West Wisconsin Aver.ue

Milwaukee, Wisconsin 53203

(414) 271-6555

Attorneys for Appellants.

Of Counsel:

Franklin A. Miles, Jr.

Diane Tokarsky

McNEES, WALLACE & NURICK

P.O. Box 1168

100 Pine Street

Harrisburg, Pennsylvania 17108-1166

Brief of Appellants

TABLE OF CONTENTS

Page

Table ck Antnees 6.60.29 ap 80 PR HO ii

STATEMENT OF JURISDICTION .......... 1

STATEMENT OF ISSUES PRESENTED FOR RE-

VIEW AND STANDARD OF REVIEW ..... 1

STATEMENT OF THE CASE ..........-... 3

STATEMENT OF RELATED CASES AND PRO-

CERN wc tice eet errr ease 4

STATEMENT OP PACTS ...-ccccescecss 4

Summary of Argument ...........0-6-2000:% 7

ARGUMENT 7

I. The arbitrator did not interpret the agreement, he

amended the agreement ...........-.-.. 9

II. The arbitrator disregarded the unambiguous lan-

guage, which constitutes amendment of the agree-

ment and exceeds the arbitrator's authority .... 13

III. Penox is not entitled to pay the same royalty for its

chair as SS, the subcontractor pays foritsbase .. 18

IV. The arbitration award based on the lack of power of

the arbitrator is subject to being vacated under the

Federal Arbitration Act .........--+-++-. 19

CONNEINN ccc cece three eee ce 21

Addendum Pages 1-18

Brief of Appellants

TABLE OF AUTHORITIES

Case Page(s)

Apex Fountain Sales, Inc. v. Kleinfeld, 818 F.2d 1089

ESE. Log hss seb eee e eee 6 2

ARCO-Polymers, Inc. v. Local 8-74, 671 F.2d 752, 755

ds tk Se Sr a a ee 10

Board of Education of North Babylon Union Free

School District v. North Babylon Teachers’ Orga-

nization, 479 N.Y.S. 2d 536 (A.D. 2.Dept. 1984) . 16

Carr v. Kalamazoo Vegetable Parchment Co., 354 Mich

327, 92 NW2d 295 (1958) ............. 17

Civil Serv. Emp. Ass'n v. County of Steuben, 377

Es 2 ee 20

County of Ontario v. Civil Serv. Employees Ass’n., On-

tario County Chapter, 76 Misc.2d 365, 351

N.Y.S.2d 101, Affd. 46 A.D.2d 738, 361 N.Y.S.2d

SP 16, 17

Detroit Coil v. Intern. Ass’n of M. & A. Workers, etc.,

504 F.2d 575 (6th Cir.1979) ............ 14

District No. 72 & Local Lodge 1127, Int'l Assoc. of

Mach. & Aerospace Workers v. Teter Tool & Die,

Inc., 630 F.Supp. 732, 736 (N.D. Ind. 1986) ... 15

First Nat'l Bank v. Lincoln National Life Ins. Co., 824

F.2d 277, 281-82 (3d Cir. 1987) .......... 21

Georgia Pacific Corp. v. U.S. Plywood-Champion Pa-

pers, Inc., 46 F.2d 295 (2nd Cir.), cert. denied,

CS I ae ee 18

Georgia Pacific Corp. v. United States Plywood Corp.,

318 F.Supp. 1116 (S.D.NY.1970) ......... 18

Brief of Appellants

Graphic Arts Intern. Union v. Haddon Craftsmen, 796

eS ee eee 2

H.K. Porter Co., Inc. v. United Saw, File and Steel

Products Workers of America, 333 F.2d 596 (3d

GUT US Go "0 ea vee oh of erie abd #0 14

Inter-City Gas Corp. v. Boise Cascade Corp., 845 F.2d

Ee Eo & 4 0.0 0 0 4G ms 0 dys 8, 15

Kane Gas Light & Heating v. Intern. Broth., etc., 687

eo a ee ee 10

Lentine v. Fundaro, 328 NYS2d 418 (1972) ...... 20

Ludwig Honold Mfg. Co. v. Fletcher, 405 F.2d 1123

oo | er eres ee .2, 10, 14

Matter of National Cash Register Co. [Wilson], 8 NY2d

377, 383, 208 NYS2d 951, 955-956 171 NE2d 302,

ee a Se ree 2 eee 20 21

Mobil Oil Corp. v. Independent Oil Workers Union,

679 F.2d 299 at 302 (3d Cir. 1982) ......... 10

Monongahela Power Co. v. Local No. 2332, Intern.

Bro., 566 F.2d 1196 (4th Cir. 1976) ........ 14

Moseley, Hallgarten, Estabrook & Weeden v. Ellis, 849

F.2d 264 (7th Cir. 1988), at page 267 ....... 1,8

Mutual Fire, Marine & Inland v. Norad Reinsurance,

868 F.2d 52 (3d Cir. 1989), at page56 ....... 1,8

NF&M Corp. v. United Steelworkers of America, 524

es . s feta 2,14

Simpson v. North Collins Central School Dist., 392

PE Se oe eee 20

Stickle v. Heublein, Inc., 716 F.2d 1550, 1561 (Fed.

Gee «6 NN ANG ChB ih wce Hees 18

Brief of Appellants

Sun Petroleum Products Co. v. Oil, Chemical and

Atomic Workers International Union, Local 8-901,

681 F.2d 924 at 928 (3d Cir. 1982) .......... 10

Swift Industries, Inc. v. Botany Industries, Inc., 466

PR, EE sss ee 6 own wre 2, 10, 20

The Roosevelt Hospital v. Dennis M. Silverman, etc.,

Se OREENTED «0.0. seis n-56 0 + 00:0, « 21

TWM Mfg. Co. Inc. v. Dura Corp., 789 F.2d 895, 901

. * FP er pete pty 16

United Paperworkers Int'l Union, 108 S.Ct. at371 ... 15

United Steelworkers of America v. Enterprise Wheel &

Car Corp., 363 U.S. 593, 597, 80 S.Ct. 1358,

1361, 4 L.Ed.2d 1424 (1960) ...... .2, 10, 13, 14

Statutes

I Gs Ce ess ates tee ed ee 1

oo eer rere ree 18

Ge oe 0 ee ae 1-3, 7, 13-15, 21

Treatises

OEHMKE Commercial Arbitration, published 1987 by

Lawyers Co-operative Publishing, Page 312 .... 17

SF eI 65 TROT A WX 17

Brief of Appellants

STATEMENT OF JURISDICTION

The District Court had jurisdiction of the Motion to

Vacate and the Cross Motion to Confirm the arbitration award

under Title 9, Section 9, and Sectiovis 10 and 11. The arbitra-

tion clause in the contract between the parties provides that

the American Arbitration Rules would govern. Rule 40(b) of

the AAA rules (App. 13) provides that judgment can be en-

tered on the award in any Court. This meets the jurisdictional

requirements of 9 USC Section 9. The District Court also had

diversity jurisdiction. This Court has jurisdiction of this case

under 28 USC Section 1291 because the order for judgment

of the Court below was a final order or decision. The District

Court denied appellant's motion to vacate and entered judg-

ment confirming the award.

STATEMENT OF ISSUES PRESENTED

FOR REVIEW AND STANDARD OF REVIEW

1. Did Orthokinetics establish the statutory ground to

vacate the award under 9 U.S.C. §10(d) that the arbitrator

exceeded his power by rewriting the royalty terms and amend-

ing the agreement?

Standard of Review: The Standard of Review is plenary

under 9 U.S.C. §10(d) and this Court:

(a) can independently determine if Orthokinetics estab-

lished grounds to vacate the award under this statute. This

Court is in the same position as the District Court when it

comes to reviewing an arbitration award, Moseley, Hallgarten,

Estabrook & Weeden v. Ellis, 849 F.2d 264 (7th Cir. 1988), at

Brief of Appellants

page 267; Mutual Fire, Marine & Inland v. Norad Reinsur-

ance, 868 F.2d 52 (3d Cir. 1989), at page 56.

(b) In addition, this Court can vacate the award if the

arbitrator “manifest[s] an infidelity” to her obligation to inter-

pret the contract, United Steelworkers of America v. Enter-

prise Wheel & Car Corp., 363 U.S. 593, 597, 80 S.Ct, 1358,

1361, 4 L.Ed.2d 1424 (1960), ignores a plain and unambiguous

provision of the contract, see NF & M Corp. v. United Steel-

workers of America, 524 F.2d 756, 759 (3d Cir. 1975); Apex

Fountain Sales, Inc. v. Kleinfeld, 818 F.2d 1089 (3d Cir. 1987);

if the interpretation of the arbitrator cannot in any rational way

be derived from the agreement, viewed in the light of its

language, its context, and any other indicia of the parties’

intention; where there is a manifest disregard of the agree-

ment by the arbitrator, totally unsupported by principles of

contract construction. Ludwig Honold Mfg. Co. v. Fletcher,

405 F.2d 1123, 1128, (3d Cir. 1969); Graphic Arts Intern.

Union v. Haddon Craftsmen, 796 F.2d 692 (3d Cir. 1986).

ited as labor arbitration review. Swift Industries, Inc. v. Botany

Industries, Inc., 466 F.2d 1125 (3d Cir. 1972).

2. Should the award be vacated because the arbitrator

exceeded his power as limited by 9 USC $10(d) by amending

unambiguous royalty provisions which awarded Penox a dif-

ferent royalty than Super Sagless under the same royalty

provisions?

Standard of Review: Same as Issue 1 above.

3. Should the award be vacated because the result is

irrational where Penox adopts the Super Sagless royalty terms

and the arbitrator changes the terms so that Penox, a manu-

facturer of a complete chair, will always pay the minimum

Brief of —_a

royalty of $15.00 and never pay a 5% royalty on a chair, whereas

subcontractor, Super Sagless, under the same royalty provi-

sion, will be required to pay 5%, a greater amount, if it sells a

chair rather than a base?

Standard of Review: Same as Issue 1 above.

4, Did the District Court err in construing the award as

a permissible interpretation of ambiguous language in the

contract rather than a re-writing of the contract beyond the

power of an arbitrator, and base its decision on cases giving

arbitrators broad powers to interpret rather than basing its

decision on 9 USC §10(d) which limits the power of the

arbitrator to re-write agreements?

Standard of Review: Same as Issue 1 above.

STATEMENT OF THE CASE

This is an Appeal of a decision confirming an arbitration

award and denying a Motion to Vacate the Award in American

Arbitration Association Case No. 14 133 0109 88 B/E LU

Penox Technologies, Inc. and Orthokinetics, Inc. and Edward

]. Gaffney. The arbitration related to a patent license which

was part of a settlement in a patent infringement suit com-

menced by the owners of the Patent Orthokinetics, Inc. and

Edward J. Gaffney against the infringers Penox Technologies,

Inc., Larry Hohol, Edward Stanks and Joel F. Guerrin, CV-85-

1697, in the United States District Court for the Middle

District of Pennsylvania, App. 107). The patent infringement

action was settled with a consent decree of dismissal with

prejudice and a patent license granted by Plaintiff, Orthokinet-

ics and Edward Gaffney to Penox for the patent-in-suit U.S.

Patent 4,007,960 (App. 113). The license granted to Penox the

Brief of Appellants

right to continue to manufacture recliner lift chairs, which

were the subject of the patent infringement suit, and pay a

royalty under the terms and conditions of the patent license.

The patent license contained a most favored nation clause and

pursuant to that clause, Penox adopted the terms of a subse-

quent patent license granted to a Mississippi company, Super

Sagless, App. 139. Penox sought arbitration to change the

license agreement adopted from Super Sagless so that Penox

would only have to pay a $15.00 per chair royalty no matter

what product was sold — a base or a chair not 5% or $15.00

per chair whichever is greater. The arbitrator made an award

changing the adopted Penox license terms to require a royalty

from Penox only on the base and also awarded damages to

Penox of $32,123.13 for royalties based on the prior Penox

agreement which Penox contended it over-paid. Penox’s de-

mand for arbitration sought damages in the amount of

$55,298.53, App. 100. Orthokinetics filed a Petition or Motion

to Vacate the award (App. 21) on the ground among other

matters that Penox does not make and sell chair bases sepa-

rately but incorporates bases made by another company in

complete chairs (Petition, App. 26, 29). The District Court

denied the Motion to Vacate the award and ordered judgment

confirming the award (App. 260). The Appeal is from the

judgment.

STATEMENT OF RELATED CASES AND

PROCEEDINGS

The patent involved in this suit was involved in three

other patent infringement suits in Pennsylvania. All were

settled with the grant of a license. There are no cases pending

involving arbitration of a patent license.

10a

Brief of Appellants

STATEMENT OF FACTS

Edward Gaffney is the President and founder of Or-

thokinetics and inventor of the subject to the Penox

License. Orthokinetics was founded to market to the public an

elevator or lift chair which Gaffney had invented for which he

obtained a patent. He obtained several patents on elevator lift

chairs the Patent 4,007,960 (Exhibit 4, App. 113),

Wve erm repre hy ae

Prior to November 22, 1985, Penox was charged with infringe-

ment of the patent. Penox refused to stop the

7 ee Ra

ber 22, 1985 for patent infringement against Penox and various

officers including Joel F. Guerrin (App. 107). Joel F. Guerrin

was Executive Vice President, who testified as a witness at the

arbitration There was no transcript made of the

hearing or . However, there is no dispute of the

facts which are contained in various exhibits and briefs in the

x peter, complaint, paragraph 16, (App. 110) alleged

by the officers and Penox. Subsequent to

hocsuubaeasm elie akekamawenineat 1986,

the suit was settled by Consent Decree (Exhibit 6, App. 136),

which resulted in a final resolution of the allegations in the

complaint by dismissing the suit with prejudice against Penox.

The Consent Decree was signed on June 9, 1986, App. 138.

The patent license which is in dispute (Exhibit 5, App. 124)

resulted from negotiations which started in January 1986 by a

letter (Exhibit 9, App. 151).

Subsequently, and after settlement of the Penox suit,

Super Sagless (SS) of Tupelo, Mississippi contacted Or-

thokinetics and requested a license so SS could make

—

lla

Brief of Appellants

bases for lift chairs, the bases being generally of the type shown

in Fig. 4 of the Orthokinetics patent, App. 115. SS also wanted

the right in the license to make chairs. The bases constitute

he oporang etl framework which contacts the floor. The

base includes and motor actuators which move an uphol-

stered chair frame between reclining and lift positions as

by Super Sagless on May 6, 1987 but became effective as of

December 24, 1986, t 7 (App. 139). This license con-

tained the same royalty provision of 5% or $15 per chair,

whichever is greater (App. 140), as in the Penox license, App,

126. The Penox license contained a most favored nation or

most favored licensee clause which enabled Penox to adopt the

terms in subsequent licenses which were more favorable.

Orthokinetics informed Penox about the S$ a

agreement. After obtaining a copy of asso

muldhee 17 (hae 100) to chores Blomny a 1988,

Exhibit 17 (App. 186), to attorney H uller, attorney for

Cuteahenaliae tes nec taal aeroudibedd te

SS agreement. The attorney for Penox admitted in the January

27 letter (App. 186) that the literal wording of the royalty

in the SS agreement is the same as the

relating to the royalty in the Penox agreement (App.

186). Penox, however, complained that the practical effect of

the license resulted in different royalty payments between

Penox and Super Sagless because SS primarily sold bases for

under $100 (one hundred dollars) and paid a royalty of $15.00

per base. Penox sold chairs, not bases, which chairs had an

average price of $397.00, and was paying a 5% royalty.

By letter of January 38, 1988, Exhibit 18 (App. 190),

Penox elected u the Most Favored Nations clause, Para-

12a

Brief of Appellants

graph 12 of the Penox license (Exhibit 5, App. 129), the terms

of the Super Sagless license.

Fenox License—Most Favored Nation Clause

The most favored nation clause under which Penox

adopted the Super Sagless provisions provides in part as fol-

lows:

“12. In the event ORTHOKINETICS or GAFFNEY

hereafter grants a license under Letters Patent No.

4,007,960 to any other party on terms more favorable

than those provided herein, ORTHOKINETICS or

GAFFNEY, whichever has granted the license, shall

pro notify PENOX of the granting of such a license

and provide PENOX with a copy thereof, and

PENOX shall have the option, at any time within two (2)

months after receiving a copy of said license, to avail itself

of such more favorable terms ***” (App. 129)

Although Penox adopted the Super Sagless (SS) license

t to the most favored nation clause in the Penox

, Penox did not comply with the royalty specified in the

adopted Super Sagless license:

“which royalty shall be equal to five per cent (5%) of SS’s

net selling price for such chair or $15.00 per chair which-

ever is greater.” App. 140.

Penox does not make and sell bases. Super Sagless (SS)

is a sub contractor which sells bases, not chairs.

Penox is a manufacturer re ecto Ama

incorporate bases made for Penox by a local supplier. Because

the average sales price of the Penox chairs between 1986 and

1988 is $397.05 the royalty provision of 5% of $397.05 has

13a

Brief of Appellants

— to Penox with a resulting average royalty of $19.85 per

. The minimum royalty of $15.00 a chair has not applied

because the royalty of $19.85 is the greater of $15.00 or 5%

when applied to the chair sales price of $397.05.

Under the same royalty provision, Super Sagless was

selling bases for $95.31 and hence the $15.00 royalty was the

greater of 5% or $15.00 as ied to $95.31, App. 204.

However, Penox initially to pay the royalty due under

the 5% or $15.00 of the adopted Super Sagless license provis-

ions, and recomputed the past royalties paid, shown on the

attachment to Exhibit 2, page 0105 to pay only $15 per chair

which incorporated the base, rather than 5%. As a result of

Penox’s failure to pay the full royalties due under the terms of

the Penux or Super Sagless license, Orthokinetics gave notice

of termination of the license by letter of February 19, 1988,

Exhibit 23, App. 198. Prior to expiration of the 60 days notice

of termination, Penox paid the royalty deficiency under protest

with a letter of transmittal, Exhibit 23, and a check for $51,477

attached thereto, App. 198. The amounts paid under protest

consisted of the sums which, in the arbitration, Penox con-

tended should be repaid to Penox, as well as past royalties paid

at the rate of 5% not $15.00. The arbitration was initiated in

March, 1988 by Penox by the filing of the arbitration demand

(App. 100).

Summary of Argument

Orthokinetics has established the grounds to vacate the

award under 9 USC §10(d) in that the arbitrator exceeded his

power and amended and rewrote the agreement. Orthokinet-

ics has also established the judicially created ground for vacat-

l4a

Brief of Appellants

ing the award under 9 USC §10(d) in that the award is not

rationally based on the agreement.

This Court is in the same position as the District Court

to-determine whether Orthokinetics has met the statutory

requirements to vacate the award on these grounds, Moseley,

Hallgarten, Estabrook & Weeden v. Ellis, 849 F.2d 264 (7th

Cir. 1988), at page 267; Mutual Fire Marine & Inland v. Norad

Reinsurance, 868 F.2d 52 (3d Cir. 1989), at page 56.

The arbitrator's award should be vacated because it dis-

regarded the plain unambiguous royalty provisions, which

constitutes a re-writing of the agreement, Inter-City Gas

Corp. v. Boise Cascade Corp., 845 F.2d 184 (8th Cir. 1988).

This is not a case where there is a dispute as to the

interpretation of an ambiguous term in the agreement. The

royalty provision is unambiguous and neither party has urged

a different interpretation of the same contract terms. Penox

admitted that the terms are the same for Penox and SS. They

have to be. Penox adopted the SS terms. Then Penox got the

notion that it wanted the SS terms changed so the word “chair”

would mean “base”. But as far as SS is concerned, “chair”

would still mean chair. The arbitrator's modification of the

terms in accordance with Penox’s request is not an interpreta-

tion of the agreement, but, rather, it is an amendment or

re-writing of the original agreement.

The issue is not whether the arbitrator correctly

interpreted the agreement. The issue is whether he had the

power to rewrite the agreement. The law is clear that neither

a Court nor an arbitrator can rewrite the unambiguous terms

of an agreement.

The District Court erred in its analysis of the issue and

relied on cases which give broad powers to arbitrators to

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Brief of Appellants

interpret agreements (See Add. 10, App. 254) rather than case

law which prohibits the amendment of contracts by arbitra-

tors.

In addition, the award is not rationally based on the

agreement and should be set aside because it results in lower

royalty payments for Penox than Super Sagless, even though

both parties operate under the same royalty provisions. The

most favored licensee clause only affords Penox the same or

equal royalty terms, not different and lower royalties than the

subsequent licensee, SS, from the license terms that were

adopted. The Penox and SS licenses, before being modified

by the arbitrator, are consistent with the philosophy of the

applicable patent statutes and the intent of the parties that

direct infringers of the entire chair (Penox) covered by the

claims pay a higher royalty than a subcontractor (SS) who sells

only part of the patented subject matter. The award, which

amended the contract, effectively removes the 5% royalty

from the contract and Penox will pay $15.00 if it sells a base

and $15.00 if it sells a chair incorporating a base. Thus, the

award is not rationally based on the agreement and should be

set aside because it not only allows Penox to pay a lower royalty

than that which it clearly consented to when it adopted the SS

agreement, but it is also inconsistent with the equal treatment

that Penox has already been granted by receiving equal terms

under the most favored licensee clause. Thus, since Penox has

accepted the 5% or $15.00 (which ever is greater) license,

which is equivalent to the provisions of the SS license, it should

not be allowed to pay lower royalties than SS simply because

the arbitrator dispensed his own form of justice by rewriting

the agreement. As a result of the modification, Penox has an

a results in a 3.8% royalty (i.e. $15.00 for $397.05

chair) and SS pays a royalty of 17.3% (i.e. $15.00 for a base

16a

Brief of Appellants

sold for $86.81). Moreover, when SS sells a chair for $397.00

it will be a 5% royalty or $19.85 per chair. This result cannot

be derived rationally from the agreement.

ARGUMENT

I. The arbitrator did not interpret the agreement, he

amended the agreement.

The District Court ignored the precedents of this Court

requiring that the essence of the award be found in the

agreement itself. Although the District Court examined the

appropriate authorities it did not follow the applicable law set

forth therein. It is clear that the Court below considered the

arbitrator’s award to involve an interpretation of the agreement

rather than a re-writing of the agreement App. 251, 254. In

Kane Gas Light & Heating v. Intern. Broth., etc., 687 F.2d 673

(3d Cir. 1982). This Court stated at page 678:

“To be sure, there are limits to the deference ac-

corded to the arbitrator’s decision; the arbitrator may not

simply “dispense his own brand of industrial justice,”

Honold, supra, 405 F.2d at 1125, quoting United Steel-

workers of America v. Enterprise Wheel and Car Corp.,

363 U.S. 593, 597, 80 S.Ct. 1358, 1360, 4 L.Ed.2d 1424

(1965). Thus, if an arbitrator’s award is made ‘in manifest

disregard of the agreement, totally unsupported by prin-

ciples of contract construction and the law of the shop’,

405 F.2d at 1128, the courts will not enforce the award.

(footnote omitted) Otherwise, though, so long as the

award “draws its essence from the collective bargaining

agreement,” id., the courts will defer to the arbitrator's

Sennett ted BO omen

ans SO ee

17a

Brief of Appellants

decision, a point which has been reaffirmed repeatedly

by this court. See Sun Petroleum Products Co. v. Oil,

Chemical and Atomic Workers International Union,

Local 8-901, 681 F.2d 924 at 928 (3d Cir. 1982); Mobil

Oil Corp. v. Independent Oil Workers Union, 679 F.2d

299 at 302 (3d Cir. 1982); ARCO-Polymers, Inc. v. Local

8-74, 671 F.2d 752, 755 (3d Cir. 1982) (per curiam).

(emphasis supplied)

It is noted that the Third Circuit has held that some of

the principles governing labor and commercial arbitration are

similar but it is more difficult to overturn a labor case than a

commercial arbitration case. Swift Industries, Inc. v. Botany

Industries, Inc., 466 F.2d 1125 (3d Cir. 1972).

It cannot be said that the arbitrator's award is a permissi-

ble interpretation of the agreement, where in complete disre-

gard of the agreement, the arbitrator re-rewrote the royalty

provisions.

The arbitrator's award is in part as follows:

1. ORTHOKINETICS, INC. and EDWARD J.

GAFFNEY, hereinafter referred to as RESPON-

DENTS, shall pay to PENOX TECHNOLOGIES, INC.,

hereinafter referred to as CLAIMANT, the sum of

THIRTY-TWO THOUSAND ONE HUNDRED

TWENTY-THREE DOLLARS AND THIRTEEN

CENTS ($32,123.13), plus interest at the rate of 6%

percent per annum from January 28, 1988 to date of

payment.

2. Under the “Most Favored Licensee” provision of the

Agreement between the perties, CLAIMANT is entitled

to pay 5% royalty on the net selling price of the Mecha-

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Brief of Appellants

nism Base or Fifteen Dollars ($15.00) whichever is

greater from January 28, 1988. (App. 206)

The royalty provision in the original Penox license is as

follows:

*** which royalty shall be equal to five per cent (5%) of

Penox’s net selling price for such chair or $15.00 per

chair, whichever is greater.

The royalty provision in the adopted Super Sagless li-

cense agreement provides as follows:

SUPER SAGLESS LICENSE

*** Which royalty shall be equal to five per cent (5%) of

SS’s net selling price for such chair or $15.00 per chair,

whichever is greater. (App. 140.)

(arbitrator deleted chair and substituted mechanism

base)

In making the award the arbitrator rewrote the Super

Sagless royalty provision and made a new contract between

the parties to require payment of a royalty of 5% or $15.00 only

on the “Mechanism Base” and not 5% or $15.00 (whichever is

greater) on the net selling price on the “entire chair” which

includes a chair shell with a wooden frame and upholstery. The

licensed patent claims under which Penox is operating relate

to an entire chair rather than just a base mechanism. See claims

1, 7, 9, App. 122. All other licensees under this patent have a

royalty provision of at least 5% per chair as well as a minimum

of $15 to $25. (undisputed testimony of Gaffney). Because

Penox sells only chairs at an average of $397.05 net selling

price, as a result of the award, 5% or $15.00 per base mecha-

nism, Penox is only paying a $15.00 royalty on the base mech-

anism part of the chair. The 5% royalty on a chair has been, in,

et eee

19a

Brief of Appellants

effect completely eliminated because bases cost Penox less

than $100.00 and would sell for under $100.00.

Penox never made or sold bases but purchased the bases

from a sub-contractor and assembled the bases with uphol-

stered chair frames, made by Penox. Moreover, there is no “net

selling price for bases” recovered by Penox from a sale of a

chair. It is not separately invoiced to customers.

The 5% royalty in the Super Sagless Agreement, adopted

by Penox, is to be applied to the “net selling price”:

5. The term “net selling price” as used herein shall

mean the selling price actually received by SS after de-

duction of sales taxes but without deduction of any com-

mission, allowance or discount other than a discount

ordinarily given. (App. 141)

As a result of the award, Penox has 2 better deal under

the same royalty provision, than Super Sagless even though

they are both operating under the identical contract clause.

RESULT OF ARBITRATION AWARD

PENOX

_ Sales Price Royalty

After Award Chair $397 $15.00

After Award Chair Base* = Cost-$50.00 $15.00

Prior to Award = Chair $397 $19.83

(5%)

*Penox did not sell bases

at the time of arbitration hearing

SUPER SAGLESS

Sales Price Royalty

Chair $397 $19.85 (5%)

Chair Base 97 15.00

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Brief of Appellants

As is apparent from the above chart, based on the

arbitrator's award under the same contract language, Penox

pays the royalty of $15 per chair which sell for $397 and SS

pays $15 per chair for a base that sells for $97. SS, however,

would have to pay a royalty of 5% of $397 or $19.85 for a chair

it sold at the net selling price of $397.00. The purpose of most

favorable nation or licensee clauses is to grant an earlier

licensee the same or more favorable royalty terms as a later

licensee. The award does not do this and Penox clearly has an

advantage over SS based on a selling price-royalty ratio. The

royalty terms of the Penox and SS licenses are identical. Thus,

the award goes beyond the intent of the parties in the original

license between Penox and Orthokinetics to give equal royalty

terms to all licensees. The arbitrator rewrote the royalty agree-

ment to be 5% or $15 per mechanism base, rather than 5% of

SS net selling price or $15 per chair, whichever is greater, App.

140. The award clearly exceeds the scope of the intent of the

parties and is not rationally based on the Agreement. Conse-

quently, the award should be vacated on this ground.

II. The arbitrator disregarded the unambiguous lan-

guage, which constitutes amendment of the agree-

ment and exceeds the arbitrator’s authority.

The Court below erred because it did not recognize the

limitations on the power of the arbitrator to construe, interpret

or re-write the agreement other than that the result cannot be

“Irrational”. Add. 12, App. 256. The various precedents of this

Court and others under 9 USC $10 have limited the arbitrator's

power to interpret only ambiguous terms with no power to

interpret non-ambiguous terms which constitutes rewriting of

the agreement.

2la

Brief of Appellants

An Arbitrator is confined to interpretation and applica-

| tion of the agreement and does not sit to dispense his own form

- of justice. The award is legitimate only so long as it draws its

; essence from the agreement. When the award is not based on

the agreement, the Courts have no choice but to refuse to

enforce the award, United Steelworkers of America v. Enter-

prise Wheel & Car Corp., 363 U.S. 593, 80 S.Ct. 1358 (1960).

. The Third Circuit interpreted this Supreme Court deci-

sion as follows, at page 1128:

“Accordingly, we hold that a labor arbitrator’s award does

‘draw its essence from the collective bargaining agree-

ment’ if the interpretation can in any rational way be

derived from the agreement, viewed in the light of its

language, its context, and any other indicia of the parties’

intention; only where there is a manifest disregard of the

agreement, totally unsupported by principles of contract

construction and the law of the shop, may a reviewing

court disturb the award.” Ludwig Honold Mfg. Co. v.

Fletcher, 405 F.2d 1123 (3d Cir. 1969). (emphasis sup-

plied)

In NF&M Corp. v. United Steelworkers of America, 524

F.2d 756 (3d Cir. 1975), this Court stated:

“If the arbitrator's award has deviated from the plain

meaning of a labor contract provision, it must find sup-

port in the contract itself or in prior practices demonstrat-

ing relaxation of the literal language. H.K. Porter Co.,

Inc. v. United Saw, File and Steel Products Workers of

America, 333 F.2d 596 (3d Cir. 1964)”, at page 759.

In Detroit Coil v. Intern. Ass’n of M. & A. Workers, etc.,

594 F.2d 575 (6th Cir. 1979) the Court vacated the award

under 9 USC §10(d). The Court said that a “word” in the

22a

Brief of Appellants

agreement which was in dispute had to be given the ordinary

meaning and there was no evidence that the parties intended

to deviate from that meaning. The Court held the arbitrator

had exceeded his authority. The Court stated at page 579:

“The arbitrator is confined to the interpretation and

application of the collective bargaining agreement, and

although he may construe ambiguous contract language,

he is without authority to disregard or modify plain and

unambiguous provisions.”

Other cases which vacated the award where the arbitrator

exceeded his power include Monongahela Power Co. v. Local

No. 2332, Intern. Bro., 566 F.2d 1196 (4th Cir. 1976) where

the Court stated in referring to the arbitrator, at page 1199:

“His function is confined to the interpretation and appli-

cation of the collective bargaining agreement under

which he acts and, while he may give his own construction

to ambiguous language (footnote omitted), he is without

any authority to disregard or modify plain and unambig-

uous provisions (footnote omitted). This is a well-estab-

lished principle of the law; it is, also, specifically so

provided in the agreement in this case (footnote omit-

ted).”

In the case of Inter-City Gas Corp. v. Boise Cascade

Corp., 845 F.2d 184 (8th Cir. 1988), the Court reversed the

District Court and vacated the arbitrator’s award under 9 USC

§10(d) because the arbitrator ignored the plain language of the

contract. The Court held that the arbitrator exceeded his

authority under the contract. The Court stated on page 187:

“As the Supreme Court has stated in the labor context,

[t]he arbitrator may not ignore the plain language of the

contract.’ United Paperworkers Int'l Union, 108 S.Ct. at

23a

Brief of Appellants

371. More specifically, if the arbitrator interprets unam-

biguous language in any way different from its plain

meaning, [the arbitrator] amends or alters the agreement

and acts without authority. District No. 72 & Local Lodge

1127, Int'l Assoc. of Mach. & Aerospace Workers v. Teter

Tool & Die, Inc., 630 F.Supp. 732, 736 (N. D. Ind. 1986)

(labor arbitration). Thus, we will review the arbitration

award to ensure it is grounded on the parties contract.”

The rewriting of non-ambiguous terms of an agreement by an

arbitrator does not constitute a permissible interpretation of

the agreement. The Court below erred in ignoring the limita-

tion on the power of arbitrators in commercial arbitration

cases.

Penox may have acquired the right to make bases as well

as chairs by adopting the SS agreemeni. The Penox agreement,

however, limited Penox to making only chairs. The original

Penox license provides in part

*** This license is limited to reclining elevator chair

mechanism designs which PENOX is currently manufac-

turing or assembling (App. 126).

However, Penox had chosen not to make bases. Penox has

made the choice to make chairs, not bases, and should pay the

same royalty for chairs as SS pays for chairs, 5% or $15.00,

whichever is greater.

The license provisions in both the Penox and Super

Sagless licenses establish a royalty floor assuring the licensor

ORTHOKINETICS receipt of a minimum of $15 for each

licensed sale, regardless of the sales price or nature of article

sold. These provisions are commonplace in patent licensing.

The patent claims (Exhibit 4, pages 122-123) all apply to

an entire chair and Orthokinetics is entitled to a royalty on the

24a

Brief of Appellants

entire chair under the license as if it had obtained a

for damages. The entire market value rule allows for the

recovery of damages based upon the value of the entire chair.

TWM Mfg. Co. Inc. v. Dura Corp., 789 F.2d 895, 901 (Fed.Cir.

1986). If Orthokinetics had pursued the infringement suit to

it would have been entitled to as a minimum, a

reasonable royalty pursuant to 35 USC 284 on the entire chair

rather than merely the base. Penox agreed to pay a 5% royalty

on on cntten dhike So tal Aamestading halted ane te

limit the scope of the patent to only require the licensee Penox

to pay a royalty on only a chair base for immunity from suit

after Orthokinetics went to the of suit to stop an

This is contrary to the intent of the

Penox agreed to 5% on all chairs after the date of t,

App. 169. Orthokinetics did not agree in either the Penox or

SS licenses to receive only royalties on the chair base where

complete chairs are sold by the licensee.

In The Matter of Board of Education of North Babylon

Union Free School District v. North Babylon Teachers’ Orga-

nization, 479 N.Y.S. 2d 536 (A.D. 2.Dept. 1984). The Court

vacated the arbitrator's award because it went beyond the

contract. The Court stated as follows:

“The arbitration award challenged in the instant

proceeding is to that encountered in County

of Ontario v. Civil Serv. Employees Ass’n., Ontario

Chapter, 76 Misc.2d 365, 351 N.Y.S.2d 101,

Aff'd. 46 A.D.2d 738, 361 N.Y.S.2d 1021, which the court

vacated pursuant to CPLR 7511 (subd.[b], par.1, cl. [iii],

after that the arbitrator exceeded his powers

when he “ the contract by including a provision

to its terms and in effect he made a new contract

for the parties . . . In making the award he did not draw

25a

Brief of Appellants

his conclusion from the agreement itself but went beyond

the contract. This was not a mere error of

either as to fact or law, but the clear case of an arbitrator

rewriting the contract to the prejudice of the

and the court must refuse to enforce the award” (County

of Ontario v. Civ. Serv. Employees Ass'n, Ontario County

Chapter, supra, 76 Misc.2d pp. 367-368, 351 N.Y.S.2d

101).

The legal authorities submitted herein preclude any ac-

tion by the arbitrator in changing the negotiated royalty rates

in the Super Sagless agreement.

eno ea eearrins te aoanin pete

the royalty rate. In OEHMKE Consmercial Arbitration, pub. pub-

lished 1987 by Lawyers Cooperative Publishing, Page 312, the

author states:

“Court of equity. An arbitrator does not sit as a “court

of equity”. An say. Tava alia derived from the

sasly tals Of adel Get Staten aoe tuk

mance, etc.), “. . . the arbitrator is not a chancellor and

EEE Gab dices born Mddaone

” Carr v. Kalamazoo

P a4 $54 Mich 327, 92 NW2d 295

(AUN Was Uioaiier sneak dts by Gio standards ont

forth by the parties.”

In the arbitration clause of the Penox or Super ea

there is no power granted to the arbitrator

ing him to re-write the rates. Just as a court cannot, under the

guise of construction, modify or create a new contract, an

arbitrator cannot, under the guise of construction, create a

26a

Brief of Appellants

new contract. This is well established. In 17 AmJur2d Section

242 Contracts, the following appears:

“It is a fundamental that a court may not make

a new contract for the parties or rewrite their contract

under the guise of construction. In other words, the

or construction of a contract does not

include its modification or the creation of a new or

different one. It must be construed and enforced accord-

ing to the terms employed, and a court has no to

interpret the agreement as meaning something

from what the parties intended as expressed by the lan-

guage they saw fit to employ. A court is not at liberty to

revise, modify, or distort an agreement while

to construe it, and has no right to make a different

contract from that actually entered into by the parties.

Courts cannot make for the parties better or more equi-

table agreements than they themselves have been satis-

fied to make, or rewrite contracts because they operate

evils 9 Senger 050 SNS or alter

them for the benefit of one party and to the detriment of

the other, or, by construction, relieve one of the parties

from terms which he voluntarily consented to, or irmpose

on him those which he did not.”

III. Penox is not entitled to pay the same royalty for its

chair as SS, the subcontractor pays for its base.

A can exact from different levels in the

manufacture of a product. In addition, a patentee can collect

different from and direct

27a

Brief of Appellants —

are consistent with how patent law treats contributory infring-

ers and direct infringers and also the intent of the parties to

those agreements.

The patent infringement statutes Title 35, Section 271

defines various categories of infringers in 271(a); direct in-

fringers; and 271(c) contributory infringers. In the facts in this

case, if Super Sagless did not have a license it would be a

because it makes and sells only the base,

only a part of the elements covered. In an infringement suit

the reasonable royalty it would collect from a sub-contractor

a (eae tone opments a manufacturer

complete chair. The reasonable royalty test for

applied to a subcontractor and to a manufacturer of

an entire chair would provide different reasonable royalties.

a cee <> ® Nypematical

licensing between a willing licensor and a willing

licensee determines, based upon this, what reasonable

royalty would have been agreed to. Stickle v. Heublein, Inc.,

716 F.2d 1550, 1561 (Fed. Cir. 1983).

In Georgia Pacific Corp. v. United States Plywood Corp.,

318 F.Supp. 1116 (S.D.NY. 1970), modified and affirmed sub

nom. Georgia Pacific Corp. v. U.S. Plywood-Champion Pa-

pers, Inc, 446 F.2d 295 (2nd Cir.), cert. denied, 404 U.S. 870

(1971), fifteen evidentiary factors are listed that are relevant

to the determination of a reasonable royalty. The Federal

Circuit has approved the law in this case.

be ca gn situation, a licen-

see will not pay more than one-fourth to one-third of his profit

asa . Thus a base maker who has a smaller profit on the

sale of a at $95.00 than a manufacturer who sells the

entire chair at $400.00 will not be willing to pay as high a

royalty as the chair maker. Yet in this case Penox wants to pay

28a

Brief of Appellants

the same lower royalty as a sub-contractor. The charts, adden-

dum pages 17 and 18, demonstrate the higher profit of Penox

than SS and Mississippi Medical, the purchaser from SS. It is

t that Penox has the better deal than SS, which pays a

royalty of $15.00 on the base it sells for $86.00 equivalent to a

17% royalty (these charts were before the Court below). It is

apparent from the foregoing that the award is not rationally

based on the agreement, or the intent of the parties or com-

mon sense. If Penox warts a $15.00 royalty it can operate as a

sub-contractor and make bases rather than chairs. Percentage

royalties are recognized es the fairest arrangement between

patentees and infringers. In this case the arbitrator has effec-

tively eliminated the percentage royalty for the chair from the

agreement.

IV. The arbitration award based on the lack of power of

the arbitrator is subject to being vacated under the

Federal Arbitration Act.

9 U.S.C. §10(d) provides as follows:

10. Same; vacation; grounds; rehearing

In either of the following cases the United States court in

and for this District wherein the award was made may

make an order vacating the award upon the application

of any party to the arbitration—

(a) Where the award was procured by corruption,

fraud, or undue means.

(b) Where there was evident partiality or corruption

in the arbitrators, or either of them.

in refusing to postpone the hearing, upon sufficient cause

29a

Brief of Appellants

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.

(d) 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.

(e) Where an award is vacated and the time within

which the agreement required the award to be made has

not expired the court may, in its discretion, direct a

rehearing by the arbitrators. (emphasis supplied)

The Federal Statute is based on the New York statute and

New York cases are of interest in applying the New York

Statute. See The Hartbridge Case, 57 F.2d 672 (1932, CA2,

NY). In Swift Industries, Inc. v. Botany Industries, Inc., 466

F.2d 1125 (3d Cir. 1972), the Third Circuit considered New

York arbitration cases as relevant law.

Pertaining to vacating or modifying an arbitration award,

the New York statute states that grounds for vacating an award

include instances when “an arbitrator, or agency or person

the award exceeded his power or so imperfectly exe-

cuted it that a final and definite award upon the subject matter

submitted was not made” (CPLR §7511(b)(iii)).

The current New York case law which interprets “ex-

ceeded his power”, is based on Lentine v. Fundaro, 328 NYS2d

418 (1972), which is applied in the cases that followed

Fundaro. In Civil Serv. Emp. Ass'n v. County of Steuben, 377

NYS2d 849 (1976), the Court stated at page 853, 854, in

holding that the arbitrator exceeded his power by writing a

new contract for the parties:

30a

Brief of Appellants

“There are two basic factors which have been considered

in determining whether an arbitrator acted in excess of

his power. First, was the construction given the contract

document by the arbitrator completely irrational (Lentine

v. Fundaro, supra, p.385, 328 NYS2d pp. 421-422, 278

NE2d p.635; Matter of National Cash Register Co.[Wil-

son], 8 NY2d 377, 383, 208 NYS2d 951, 955-956, 171

NE2d 302, 305) and, second, did the contract agreement

itself expressly limit the power of the arbitrator (Lentine

v. Fundaro, supra, 29 NY2d pp. 385-386, 328 NYS2d pp.

421-423, 278 NE2d pp. 635-636; Matter of Granite Wor-

sted Mills [Cowen], supra, 25 NY2d pp. 456-457, 306

NYS2d pp. 938-939, 255 NE2d pp. 170-171)? In effect,

merely interpret the existing Agreement or did he, in fact

create a new contract (Matter of National Cash Register

Co. [Wilson], supra, 8 NY2d p. 383, 208 NYS2d pp.

955-956, 171 NE2d p. 305)?”

In Simpson v. North Collins Central School Dist., 392

NYS2d 107 (1977), the court, in reversing the award of an

arbitrator, stated at page 110:

“We conclude that the arbitrator's imposition of ex post

facto procedural standards for the evaluation of the griev-

ants was tantamount to the making of a new contract for

the parties, and was therefore in excess of his powers.”

In The Roosevelt Hospital v. Dennis M. Silverman, etc., 392

NYS2d 580 (1977), the Court commented at page 580:

“In these circumstances, an award requiring the em-

ployer to pay the grievant employees under the clause

forbidding sub-contracting of bargaining unit work

means that the Arbitrator ‘gave a completely irrational

construction to the provisions in dispute and, in effect,

3la

Brief of Appellants

made a new contract for the parties.*** The arbitrator

therefor ‘exceeded his power’ withia the meaning of

CPLR §7511(b)1(iii) and Matter of National Cash Regis-

ter Co. [Wilson], supra.” -

CONCLUSION

The arbitrator's award changing the royalty rate from the

net selling price of the chair to the net selling price of the

mechanism base and awarding $32,123.13 to Penox based on

the rewritten royalty provision is without basis in the license,

the intent of the parties or contract law. The royalty provision

is not ambiguous and there is no rule of contract construction

which would permit the change in the contract made by the

arbitrator. As a result of the award, Penox can sell a chair for

$400.00 and pay a royalty of $15.00 on the base for the chair

and pay nothing for the chair shell. SS, an the other hand, will

be required to pay a royalty on the entire chair, i.e., 5% or

$15.00, whichever is greater which would be $20.00 on a

$400.00 chair. This was not the intent of the most favored

nation clause.

This Court can make disposition of the royalty issue

without remand. First Natl Bank v. Lincoln National Life Ins.

Co., 824 F.2d 277, 281-82 (3d Cir. 1987).

For the foregoing reasons this Court should vacate the

award pursuant to 9 USC Section 10 and conclude that the

arbitrator had no authority to change the royalty provisions and

set aside the monetary award.

DATED this day of June, 1989,

Respectfully submitted,

32a

Brief of Appellants

Henry C. Fuller, Jr.

FULLER, RYAN & HOHENFELDT

633 West Wisconsin Avenue

Milwaukee, Wisconsin 53203

(414) 271-6555

Of Counsel:

Franklin A. Miles, Jr.

Diane Tokarsky

McNEES, WALLACE & NURICK

P.O. Box 1166

Harrisburg, Pennsylvania 17108

(717) 232-8000

Attorneys for Appellants.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.