Opposition Brief — Toshiba America Medical Systems, Inc. v. OEC Medical Systems, Inc.

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ay 99 1996

No. 95-1756

In The eee

Supreme Court of the Ufiited States

October Term, 1995

+

TOSHIBA AMERICA MEDICAL SYSTEMS, INC.,

Petitioner,

V.

OEC MEDICAL SYSTEMS, INC.,

Respondent.

+

On Petition For A Writ Of Certiorari

To The Court Of Appeal Of California,

First Appellate District

¢

BRIEF IN OPPOSITION

TO PETITION FOR CERTIORARI

¢

TimotHy T. Scott

Counsel of Record

LLtoyp WINAWER

Joan LAMBERT

Resecca L. Epstein

Witson, SONSINI, GooprIcH & Rosati

650 Page Mill Road

Palo Alto, California 94304

(415) 493-9300

Counsel for Respondent

May 29, 1996

COCKLE LAW BRIEF PRINTING CO., (800) 225-6964

OR CALL COLLECT (402) 342-2831

QUESTION PRESENTED

Did the California Court of Appeal properly confirm an

arbitration award under California law where two Cali-

fornia residents expressly agreed that their arbitration

would be governed by California law and where the

California standards of reviewing an arbitration award

are not in conflict with either federal law or policy?

RULE 29.6 STATEMENT

Respondent OEC Medical Systems, Inc. has no parent

company. Respondent’s only non-wholly owned subsid-

iary is Barwig Medizinische Systeme GmBH.

ill

TABLE OF CONTENTS

Page

QUESTION PRESENTED. .... 2.5.02 cccccvevwecccees i

RULE 29.6 STATEMENT ..... 222.0 c ccc eres scseenes ii

2) 68 @ | SE ea ee ee ee eae 1

INTRODUCTION AND SUMMARY OF

rer ery ae eit eee eee ree eee 1

os ye eS Oy | eee eee 2

A. Factual Background .............-..+++++++:: 2

ee Ee ree ee er ee eee oe 4

C. The State Court Proceedings........--..----- 5

REASONS FOR DENYING THE WRIT.........---. 6

I. The California Court of Appeal’s Decision

Enforcing the Parties’ Arbitration Agreement

is Fully Consistent with the Federal Arbitra-

SNE IC ry eee eT PET Cee eo

A. This Court Has Already Ruled Against

Toshiba on the Very Issue Raised by

Toshiba’s Petition ..........2-+-+--sseeee:

B. Toshiba Has Failed to Demonstrate that

the California Standards for Reviewing an

Arbitration Award Are In Conflict with the

Federal Standards .........--.-.seeeeeee:

C. In Doctor’s Associates, Inc. v. Casarotto, 116

S. Ct. 690 (1996), This Court Did Not Grant

Certiorari On Any Issue Presented in this

“SAGES [epee AM San oO tag eet Pe eee oe

TABLE OF CONTENTS — Continued

Pay

Il. The Court of Appeai’s Decision Enforcing A

California Choice-of-Law Provision in an

Agreement Between Two California Residents

Relating to the Sale of A California Business

Does Not Violate the Full Faith and Credit or

Due Process Clauses. .

CONCLUSION ..

TABLE OF AUTHORITIES

Page(s)

CASES

Advanced Micro Devices, Inc. v. Intel Corp., 9 Cal.

“i 362, 36 Cal. Role. 26 SO) (B998) Sec ti ieeie. 10

Allstate Ins. Co. v. Hague, 449 U.S. 302 (1980)..... 14, 16

Atlantic Aviation, Inc. v. EBM Group, Inc., 11 F.3d

S276: Gs KG BOS frees aa nie kine eceecetrrtr. 9g

Bernhardt v. Polygraphic Co., 350 U.S. 198 (1956) ...... 7

Bradford Electric Light Co. v. Clapper, 286 U.S. 145

01) Pe ere Pre ore erry! Oe. ey ee Pe Tee 14

Brown v. Rauscher Pierce Refsnes, Inc., 994 F.2d 775

‘6h. Swe |) Pr grr Penn epee pene ery 8, 11

Cohen v. Wedbush, Noble, Cooke, Inc., 841 F.2d 282

(Oth Goa. BO kc cab nce cee siete oe 8, 11

Day & Zimmerman, Inc. v. Challoner, 423 U.S. 3

CIOTGD soon ocd pa nace he be ted geenesaeernea eames 16

Delta Air Lines v. Air Line Pilots Ass‘n Int'l, 861 F.2d

665 (11th Cir. 1988), cert. denied, 493 U.S. 871

gg PEE eee Pe OEP EP me oe 12

Doctor’s Associates, Inc. v. Casarotto, 116 S. Ct. 690

(1996), reversed, 1996 WL 262287 (May 20, 1996).... 13

Doctor’s Associates, Inc. v. Casarotto, No. 95-559,

1996 WL 262287 (May 20, 1996)..........-...-- 13, 14

Ekstrom v. Value Health, Inc., 68 F.3d 1391 (D.C. Cir.

Flight Systems v. Paul A. Laurence Co., 715 F. Supp.

BA2S CED | VO a oe a Sic ies len secceress tees 8

vi

TABLE OF AUTHORITIES — Continued

Page(s)

General Signal Corp. v. MCI Telecommunications

Corp., 66 F.3d 1500 (9th Cir. 1995), cert. denied,

196. Si Qk, BRS RED cece oa ee ecg h eee ee eae 14

George Day Construction Co. v. United Brotherhood of

Carpenters and Joiners of America, 722 F.2d 1471

‘ta A | ee errr err hrm ane a8 eT eee 11

Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20

(EOE eek ee ee eee 9

Home Ins. Co. v. Dick, 281 U.S. 397 (1930)........ 15, 16

Hughes v. Fetter, 341 U.S GOD (1981) ccc csi nccter ees 15

In re Air Crash Disaster near Chicago, Illinois on May

25, 1979, 644 F.2d 594 (7th Cir.), cert. denied, 454

C.D. OFM URW ssc hckcead beet hacrenpaeya vanes ee 17

Mastrobuono v. Shearson Lehman Hutton, Inc., 115 S.

CO; U2ER Sinks cs ws a oe pes nee eee 8

Moncharsh v. Heily & Blase, 3 Cal. 4th 1, 10 Cal.

pes, Oa ROS Tae ck kc arms snes se Seen sien iZ, 17

National Equipment Rental, Ltd. v. Szukhent, 375

US. EE CII? ssid p te icie vat eee eee 14

Nedlloyd Lines B.V. v. Superior Court, 3 Cal. 4th 459,

1k Cpt. Spee. SG Doe Cees cs whee ee yaneneae 16, 17

Nevada v. Hall, 440 U.S. 410 (1979)................ & eo

Pack Concrete, Inc. v. Cunningham, 866 F.2d 283 (9th

ee Pee Peete Pee TA Pere he Ory ve 10

Price v. Pierce, 823 F.2d 1114 (7th Cir. 1987), cert.

Geniea, feo Ws. FOS CGB ks occ craw esdidaveiaee 14

Vil

TABLE OF AUTHORITIES — Continued

Page(s)

S.A. Empresa De Viacao Aerea Rio Grandense v. Boe

ing Co., 641 F.2d 746 (9th Cir. 1961).......6.+.-... 14

St. Lukes Hosp. v. SMS Computer Systems, Inc., 785

F. Supp. 1243 (E.D. Mich.1991), aff'd in part,

reversed in part on other grounds mem., 955 F.2d

SOOT COG GE, Wee Ste bed ea sh Pe wt det Keene se 863 7

Sun Oil Co. v. Wortman, 486 U.S. 717 (1988)....... tae

United States Postal Service v. Nat'l Ass'n of Letter

Carriers, 847 F.2d 775 (11th Cir. 1988)...... si 7

United States v. Ets-Hokin Corp., 284 F. Supp. 471

(N.D. Cal. 1966), sds 397 F.2d 935 (9th Cir.

RO cce dec erp i dewlccrevcrPerre rs ..10, 11

Volt Information Sciences, Inc. v. Board of Trustees of

Leland Stanford woreatn University, 489 U.S. 468

tj ee on ae eRe ahs ..... passim

STATUTES

Cal. Civ. Cott © AF Fae a ds2 serine Rew’ 15

Cal. Crm: Gade © 27786 6. 6 ei we rede cive. 17

Cal Cie Cale 6277S. 8 ok a ne evens 4,17

Cal. Code of Civ. Proc. § 1286.2 reaches es lO, TI

BRIEF IN OPPOSITION TO

PETITION FOR WRIT OF CERTIORARI

Respondent, OEC Medical Systems, Inc., formerly

known as Diasonics, Inc. (“Diasonics”), respectfully

opposes the petition of Toshiba America Medical Sys-

tems, Inc. (“Toshiba”) for a writ of certiorari.

¢

OPINIONS BELOW

The arbitration panel that presided over this matter

issued two interim decisions in addition to the final arbi-

tration award reprinted as Appendix D to Toshiba’s peti-

tion. The panel’s First Interim Decision is reprinted as

Appendix A to this opposition brief at page Al.' The

panel's Second Interim Decision is reprinted as Appendix

B, at page A20.

INTRODUCTION AND SUMMARY OF ARGUMENT

Toshiba seeks to overturn an unpublished decision of

the California Court of Appeal confirming an arbitration

award against it and in favor of Diasonics. This case

presents no questions worthy of this Court's attention.

Because the parties’ arbitration agreement contained

an explicit California choice-of-law provision, the Califor-

nia court properly reviewed and confirmed the award

! References to the appendices bound with this opposition

brief are styled (“A__”). References to the appendices bound

with Toshiba’s petition are styled (“Toshiba App. __”).

under California law. The court was correct in concluding

that federal law did not pre-empt state law since the

California law governing the review of arbitration awards

does not conflict with the Federal Arbitration Act

(“FAA”) or any other federal law or policy. Volt Informa-

tion Sciences, Inc. v. Board of Trustees of Leland Stanford

Junior University, 489 U.S. 468 (1989).

The Full Faith and Credit and Due Process Clauses of

the United States Constitution have no application to this

case because Toshiba selected California law to apply to

its dispute with Diasonics. Because the agreement at issue

was negotiated (and consummated) in California between

two California residents and related to the sale of a

California business, California has an extensive connec-

tion to the parties and their agreement and a substantial

interest in applying its law to the parties’ dispute. By

contrast, Toshiba failed to demonstrate that any other

jurisdiction has any governmental interest rivaling that of

California. The California court therefore did not err in

concluding that it was under no obligation to yield to the

laws of other states. Nevada v. Hall, 440 U.S. 410 (1979);

Sun Oil Co. v. Wortman, 486 U.S. 717 (1988).

¢

STATEMENT OF CASE

A. Factual Background

Toshiba acquired Diasonics’ magnetic resonance

imaging (“MRI”) business seven years ago for $167.5

million. Under the parties’ 51-page Asset Purchase

Agreement, dated August 23, 1989 (the “Agreement”),

Toshiba acquired the assets and assumed the liabilities of

the purchased business division. More specifically,

Toshiba assumed the following:

[T]he debts, liabilities, contracts, obligations and

agreements of, and claims against, the Seller

relating to the Division and the Subsidiaries

(whether or not expressly identified on the Clos-

ing Pro Forma Balance Sheet), whether matured

or unmatured, liquidated or unliquidated, fixed

or contingent, or known or unknown, whether

arising out of occurrences prior to the date

hereof, or arising after the date hereof in the

ordinary course of business.

See Interim Decision at A3. Toshiba also agreed to indem-

nify Diasonics for any liability or damages “arising from”

the assumed liabilities. Id.

In addition to agreeing that the contract as a whole

would be governed by California law, Toshiba and

Diasonics expressly agreed that any controversy or dis-

agreement arising out of the Agreement would be settled

by binding arbitration in accordance with the “rules and

regulations of the American Arbitration Association

(“AAA”) and, to the extent not inconsistent there-

with ..., the laws of the State of California.” (quoting

Agreement at § 10.12(b)).

Approximately three years after Toshiba acquirea the

MRI business, a handful of former Diasonics customers

filed state court civil actions against Toshiba and

Diasonics in California, New Jersey, and New York. Each

plaintiff alleged that Diasonics sales personnel made rep-

resentations regarding the future maintenance and sup-

port of the equipment purchased by plaintiffs and that

those representations were not honored after Toshiba’s

acquisition of the MRI division. Plaintiffs asserted causes

of action against both Diasonics and Toshiba for breach of

contract, breach of warranty, and intentional and negli-

gent misrepresentation. Toshiba denied any obligation to

indemnify Diasonics for liability incurred in connection

with the claims for intentional misconduct.

B. The Arbitration

On September 11, 1992, Diasonics filed a petition

with the American Arbitration Association to enforce

Toshiba’s indemnity obligations. After extensive briefing

and a lengthy hearing, a majority of the arbitrators issued

an Interim Decision on April 2, 1993 in Diasonics’ favor.

See Al-19. The arbitration panel found that under the

“broad sweeping language” and “plain words” of the

Agreement, Toshiba assumed liability for intentional tort

claims relating to the MRI division. Id. at A4. The panel

also rejected Toshiba’s argument that Toshiba’s indemnity

agreement contravened California public policy, finding

that the California Civil Code expressly sanctions retro-

spective indemnification for intentional acts that occurred

prior to the grant of indemnity.? Id. at A7. Because

Diasonics’ alleged conduct in the underlying actions

occurred before the Agreement, the panel concluded that

2 Section 2774 of the California Civil Code provides as

follows:

INDEMNITY FOR A PAST WRONGFUL ACT VALID.

An agreement to indemnify a person against an act

already done, is valid, even though the act was

known to be wrongful, unless it was a felony.

Toshiba’s indemnification obligations under the Agree-

ment should be fully enforced. In a subsequent decision,

the panel also concluded that California law does not

preclude a successor corporation, such as Toshiba, from

indemnifying its predecessor for punitive damages. See

A35-36.

Notwithstanding having argued throughout the arbi-

tration that California law was the only law relevant to its

indemnity obligations, Toshiba sought reconsideration of

the panel’s initial decision on the ground that the arbitra-

tors incorrectly applied California law to the parties’

dispute, rather than the laws of other states in which the

underlying actions were pending. The panel rejected

Toshiba’s argument and enforced the parties’ choice of

law agreement. The panel’s decision was based upon

California’s strong public policy in favor of enforcing

contractual choice of law provisions, particularly where,

as in this case, the parties to the underlying contract are

California residents who negotiated their agreement in

California. See A36-46. The panel also concluded that

Toshiba failed to demonstrate that the result in the arbi-

tration would have been different under the law of New

Jersey or New York - the jurisdictions in which two of the

underlying actions were pending. On March 3, 1994, a

majority of the arbitrators issued a final award in

Diasonics’ favor. See Toshiba App. D.

C. The State Court Proceedings

On October 7, 1994, the Superior Court of California,

County of San Francisco, denied Toshiba's petition to

vacate the arbitration award and entered an Order con-

firming the award. That Order was affirmed on October

25, 1995 by the California Court of Appeal, First Appel-

late District, in an unpublished decision. On January 30,

1996, the Supreme Court of California denied Toshiba's

petition for review of the Court of Appeal’s decision.

¢

REASONS FOR DENYING THE WRIT

I. The California Court of Appeal’s Decision Enforcing

the Parties’ Arbitration Agreement is Fully Consis-

tent with the Federal Arbitration Act.

A. This Court Has Already Ruled Against Toshiba

on the Very Issue Raised by Toshiba’s Petition.

This Court's decision in Volt Information Sciences, Inc.

v. Board of Trustees of Leland Stanford Junior University, 489

U.S. 468 (1989), is dispositive of Toshiba’s argument that

the FAA pre-empts state law any time an arbitration

agreement involves interstate commerce.* In Volt, this

Court held that the FAA does not pre-empt a parties’

choice-of-law provision selecting state law, provided that

the state law does not “undermine the goals and policies

of the FAA.” Id. at 478. Here, as in Volt, the parties’

arbitration agreement contained a California choice-of-

law provision. Here, as in Volt, the petitioner argues that

because the parties’ contract involved interstate com-

merce, the FAA pre-empted the California arbitration

* As noted above, Toshiba did not seek to apply the law of

any jurisdiction other than California until after it had suffered

an adverse result in the arbitration.

statute. This Court held that “the California [arbitration]

statute is not pre-empted by the Federal Arbitration

Act... ina case where the parties have agreed that their

arbitration agreement will be governed by the law of

California.” Id. at 470.

Toshiba’s argument that Volt’s holding is restricted to

state procedural rather than substantive law is unavail-

ing. Although Volt involved a state procedural rule, this

Court's ruling was not premised upon - and did not even

discuss — the procedural/substantive distinction upon

which Toshiba’s petition is based. To the contrary, this

Court emphasized without distinction that arbitration “is

a matter of consent, not coercion, and parties are gener-

ally free to structure their arbitration agreements as they

see fit.” Id. at 479 (emphasis added). This Court also

explained that a party’s state choice-of-law provision

should be respected because “[t]he FAA contains no

express pre-emptive provision, nor does it reflect a con-

gressional intent to occupy the entire field of arbitration.”

Id. at 477 (citing Bernharct v. Polygraphic Co., 350 U.S. 198

{1956)).

Toshiba has cited no authority in support of its nar-

row interpretation of Volt. To the contrary, several courts

have applied Volt’s holding to state choice-of-law provi-

sions that involve substantive as well as procedural law.

E.g., Ekstrom v. Value Health, Inc., 68 F.3d 1391 (D.C. Cir.

1995) (the FAA does not pre-empt Connecticut’s substan-

tive law regarding confirmation of an arbitration award);

St. Luke’s Hosp. v. SMS Computer Systems, Inc., 785 F. Supp.

1243, 1246-47 (E.D. Mich.1991) (the FAA does not pre-

empt the application of state law to court’s review of

arbitration award), aff'd in part, reversed in part on other

grounds mem., 955 F.2d 1067 (6th Cir. 1993); Flight Systems

v. Paul A. Laurence Co., 715 F. Supp. 1125, 1127-28 (D.D.C.

1989) (in light of the “recent Volt decision, the Court finds

that it should apply Virginia law . . . and not the FAA in

analyzing [a] motion to vacate”).

Toshiba’s argument that “federal substantive law

must control the review of the arbitration award” when-

ever the underlying contract involves interstate com-

merce is not supported by the cases upon which Toshiba

relies. Neither Brown v. Rauscher Pierce Refsnes, Inc., 994

F.2d 775, 778 (11th Cir. 1993), nor Cohen v. Wedbush, Noble,

Cooke, Inc., 841 F.2d 282, 285 (9th Cir. 1988), involved a

contractual choice-of-law provision which selected state

law; in the absence of such a contractual provision, the

FAA therefore supplied the rule of decision.

Toshiba also misplaces reliance on Mastrobuono v.

Shearson Lehman Hutton, Inc., 115 S. Ct. 1212 (1995). In

Mastrobuono, this Court again emphasized that the FAA

favors the enforcement of arbitration clauses according to

their terms. Id. at 1216. The issue in Mastrobuono was one

of reconciling the parties’ choice of New York law, which

bars arbitrators from awarding punitive damages, with a

conflicting contractual provision mandating the us~ of an

NASD rule that permits such an award. This Court ruled

that, as a matter of contract interpretation, the express.

reference to NASD rules manifested an intent not to

incorporate New York’s limitation on the arbitrators’

authority to award punitive damages. Id. at 1219. By

contrast, there is no ambiguity in the instant case regard-

ing the parties’ intention to apply California law to any

dispute arising under the Agreement.4

In sum, this Court has consistently resolved arbitra-

tion disputes “to ensure the enforceability, according to

their terms, of private agreements to arbitrate.” Volt, 489

U.S. at 476 (emphasis added). Indeed, it was precisely to

encourage arbitration that the FAA was enacted. Id.;

Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24-25

(1991). The California Court of Appeal properly enforced

the parties’ agreement to arbitrate under California law.

The Federal Arbitration Act does not pre-empt that

result.

B. Toshiba Has Failed to Demonstrate that the Cal-

ifornia Standards for Reviewing an Arbitration

Award Are In Conflict with the Federal Stan-

dards.

Toshiba has failed to demonstrate that the California

standard of review of arbitral awards conflicts with the

federal standard or that application of the federal stan-

dard would lead to a different result in this case.

4 Toshiba’s reliance on Atlantic Aviation, Inc. v. EBM Group,

Inc., 11 F.3d 1276 (5th Cir. 1994), is also misplaced. There, the

court found that a state law denying appellate jurisdiction over

court orders directing an arbitral rehearing conflicted with FAA

provisions allowing appeal of such orders. Here, by contrast,

Toshiba has not shown any conflict with federal law or policy.

See § I.B., infra. Moreover, Atlantic Aviation is highly

questionable in light of its failure to consider this Court's

decision in Volt and its reliance instead on decisions pre-dating

Volt.

10

Under both California and federal law, judicial

review of arbitration awards is extremely deferential and

limited. E.g., Pack Concrete, Inc. v. Cunningham, 866 F.2d

283, 285-86 (9th Cir. 1989); Advanced Micro Devices, Inc. v.

Intel Corp., 9 Cal. 4th 362, 373, 36 Cal. Rptr. 2d 581 (1994).

Indeed, the statutory bases for vacating an arbitration

award under the FAA and the California Code of Civil

Procedure are virtually identical.° See United States v.

5 The FAA (9 U.S.C. § 10) permits an award to be vacated in

these instances:

(1)

(2)

(3)

(4)

Where the award was produced by corruption, fraud,

or undue means.

Where there was evident partiality or corruption in the

arbitrators, or either of them.

Where the arbitrators were guilty of misconduct in

refusing to postpone the hearing . . . or refusing to hear

evidence pertinent and material to the controversy; or

any other misbehavior by which the rights of any party

have been prejudiced.

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....

California Code of Civil Procedure § 1286.2 permits an

award to be vacated in these instances:

(a)

(b)

(c)

(d)

The award was procured by corruption, fraud or other

undue means.

There was corruption in any of the arbitrators.

The rights of the party were substantially prejudiced

by misconduct of a neutral arbitrator.

The arbitrators exceeded their powers and the award

cannot be corrected without affecting the merits of the

decision upon the controversy submitted.

11

Ets-Hokin Corp., 284 F. Supp. 471, 476 (N.D. Cal. 1966)

(“California law is the same as federal law insofar as

grounds for vacating or correcting the award are con-

cerned.”), aff'd, 397 F.2d 935 (9th Cir. 1968).

Rather than argue a conflict between the California

and federal statutory grounds for vacating an arbitration

award, Toshiba argues that federal decisional law pro-

vides a non-statutory basis for vacating an award - 1.e.,

that the award is contrary to public policy. The cases cited

by Toshiba do not support application of a public policy

exception to the enforcement of the arbitration award in

this case. See Brown v. Rauscher Pierce Refsnes, Inc., 994

F.2d 775, 782 (11th Cir. 1993) (declining to vacate award

as against public policy where plaintiff’s argument was

“no more than a complaint that the [arbitrators] failed to

interpret the law correctly”); Cohen v. Wedbush, Noble,

Cooke, Inc., 841 F.2d 282 (9th Cir. 1988) (compelling arbi-

tration under the FAA without discussing public policy

exception to enforcement of awards); George Day Con-

struction Co. v. United Brotherhood of Carpenters and Joiners

of America, 722 F.2d 1471, 1477-79 (9th Cir. 1984) (award

(e) The rights of the party were substantially prejudiced

by the refusal of the arbitrators to postpone the hearing

upon sufficient cause being shown therefor or by the

refusal of the arbitrators to hear evidence material to

the controversy or by other conduct of the arbitrators

contrary to the provisions of this title.

(f) An arbitrator making the award was subject to

disqualification upon grounds specified in subdivision

(e) of Section 1282, but failed upon receipt of timely

demand to disqualify himself or herself as required by

those provisions. ...

12

that certain contract provisions survived the expiration of

a collective bargaining agreement did not manifestly dis-

regard the law or violate any federal labor policy); United

States Postal Service v. Nat'l Ass'n of Letter Carriers, 847

F.2d 775 (11th Cir. 1988) (affirming vacation of award on

ground that award was arbitrary and capricious where

award required reinstatement of postal employee con-

victed of stealing mail).®

Moreover, even accepting the existence of a public

policy exception to the enforcement of arbitration awards

under the FAA, California law is consistent with federal

law in this regard. See Moncharsh v. Heily & Blase, 3 Cal.

4th 1, 32 , 10 Cal. Rptr. 2d 183 (1992) (courts should

enforce arbitration awards “[a]bsent a clear expression of

illegality or public policy undermining [the] strong pre-

sumption in favor of private arbitration”). The California

public policy exception is not limited to cases where an

award violates California statutory rights, but more

broadly applies whenever “granting finality to an arbitra-

tor’s decision would be inconsistent with the protection

of a party’s statutory rights.” Id. at 32. Thus, rather than

6 Toshiba cites only one case, Delta Air Lines v. Air Line

Pilots Ass'n Int'l, 861 F.2d 665 (11th Cir. 1988), cert. denied, 493

U.S. 871 (1989), in which an arbitration award was set aside as

contrary to public policy. In that case, the court affirmed the

vacation of the portion of an arbitration award finding that an

airline did not have just cause for firing a pilot who flew while

intoxicated. The court observed that the facts presented a “rare

example of an award the enforcement of which would violate

clearly established public policy which condemns the operation of

passenger airliners by pilots who are under the influence of

alcohol.” Id. at 671 (emphasis added).

13

“undermine the goals and policies of the FAA,” Califor-

nia law is perfectly consistent with those policies.

Both the arbitrators and the California Court of

Appeal fully considered and rejected Toshiba’s argument

that public policy prevented enforcement of the award in

this case. The result would be no different under the

federal standard of review, which is the same as the

California standard. There is therefore no basis to review

the Court of Appeal’s decision.

C. In Doctor’s Associates, Inc. v. Casarotto, 116 S.

Ct. 690 (1996), This Court Did Not Grant Cer-

tiorari On Any Issue Presented in this Case.

Contrary to Toshiba’s argument, this Court has not

recently granted certiorari on any issue relevant to this

case. In Doctor’s Associates, Inc. v. Casarotto, 116 S. Ct. 690

(1996), reversed, 1996 WL 262287 (May 20, 1996), this

Court considered a Montana statute voiding all arbitra-

tion agreements that fail to include the notice of arbitra-

tion in underlined, capital letters on the first page of any

contract in which an arbitration agreement appears. This

statute, enforced by the Montana Supreme Court, con-

flicted with the FAA’s policy favoring the enforcement of

arbitration agreements. On May 20, 1996, this Court

reversed the Supreme Court of Montana, holding that the

FAA pre-empts the Montana statute because “Montana’s

law places arbitration agreements in a class apart from

any contract, and singularly limits their validity.” Doctor's

Associates, Inc. v. Casarotto, No. 95-559, 1996 WL 262287, at

*5 (May 20, 1996).

14

In contrast to the Montana statute at issue in Doctor's

Associates, the California rules governing the vacatur of

arbitral awards strongly favor the enforcement of arbitra-

tion agreements and are nearly identical to the federal

rules. Doctor's Associates provides no reason for this Court

to grant Toshiba’s petition for a writ of certiorari.

Il. The Court of Appeal’s Decision Enforcing A Cali-

fornia Choice-of-Law Provision in an Agreement

Between Two California Residents Relating to the

Sale of A California Business Does Not Violate the

Full Faith and Credit or Due Process Clauses.

The Full Faith and Credit clause has no application to

this case. Applied primarily in the conflict of laws con-

. text, it places constitutional limits on a forum’s selection

of its own law to govern disputes potentially governed by

the laws of different sovereigns. See, e.g., Allstate Ins. Co.

v. Hague, 449 U.S. 302 (1980); Bradford Electric Light Co. v.

Clapper, 286 U.S. 145 (1932).

The Full Faith and Credit clause has no application

where the parties have contractually chosen to be gov-

erned by the laws of a particular state. This Court and the

lower federal courts have consistently enforced such

choice-of-law clauses. See, e.g., National Equipment Rental,

Ltd. v. Szukhent, 375 U.S. 311 (1964); General Signal Corp. v.

MCI Telecommunications Corp., 66 F.3d 1500 (9th Cir. 1995),

cert. denied, 116 S. Ct. 1017 (1996); Price v. Pierce, 823 F.2d

1114 (7th Cir. 1987), cert. denied, 485 U.S. 960 (1988); S.A.

Empresa De Viacao Aerea Rio Grandense v. Boeing Co., 641

F.2d 746 (9th Cir. 1981).

15

Moreover, this Court has long held that the Full Faith

and Credit clause “does not require a State to apply

another State’s law in violation of its own legitimate

public policy,” Nevada v. Hall, 440 U.S. 410 (1979), and

“does not compel ‘a state to substitute the statutes of

other states for its own statutes dealing with a subject

matter concerning which it is competent to legislate.’ ”

Sun Oil Co. v. Wortman, 486 U.S. 717, 722 (1988) (quoting,

Pacific Employers Ins. Co. v. Industrial Accident Comm'n, 306

U.S. 493, 501 (1939)). California has already enacted laws

governing the enforceability of indemnity agreements, a

matter on which “it is competent to legislate.” See Cal.

Civ. Code § 2772 et seq. Having established its public

policy regarding indemnity, California need not defer to

other states’ policies in this dispute between California

residents regarding a contract for the sale of California

assets.”

Nor does application of California law in the present

case violate Toshiba’s due process rights. Toshiba selected

California law to apply to this dispute, a choice enforced

by the arbitrators and the California Court of Appeal.

Toshiba utterly fails to explain how due process is impli-

cated by enforcement of its own selection of California

law.®

7 Hughes v. Fetter, 341 U.S 609 (1951), does not support

Toshiba's argument. In Hughes, this Court held unconstitutional

a statute that denied the parties, many of whom were Wisconsin

residents, access to Wisconsin’s courts merely because the

injury occurred in another state.

8 Home Ins. Co. v. Dick, 281 U.S. 397 (1930), the only case

cited by Toshiba decided under the due process clause, does not

support Toshiba’s argument. In Home, the Court held

i

16

Toshiba nonetheless advances a governmental inter-

est approach in an attempt to void its own selection of

California law. Toshiba Petition at 10-11. While a govern-

mental interest analysis might be appropriate where the

parties did not contractually agree on the governing law,

it has no place where California residents have chosen

California law to govern their dispute. California, the

forum state, applies its own law to determine the out-

come of any potential conflict of law. Day & Zimmerman,

Inc. v. Challoner, 423 U.S. 3 (1975). In that context, Califor-

nia requires enforcement of the parties’ choice of law

without ever reaching the governmental interest

approach suggested by Toshiba. Nedlloyd Lines B.V. v.

Superior Court, 3 Cal. 4th 459, 471, 11 Cal. Rptr. 2d 330

(1992).

Indeed, even if there were no choice of law provision

in the Agreement, the governmental interest analysis

advocated by Toshiba would still result in a constitu-

tionally appropriate application of California law. Allstate

Ins. Co. v. Hague, 449 U.S. 302, 312-13 (1981) (“[F]or a

State’s substantive law to be selected in a constitutionally

permissible manner, that State must have a significant

contact or significant aggregation of contacts, creating

state interests, such that choice of its law is neither arbi-

trary nor fundamentally unfair.”).

unconstitutional the application of Texas law to a dispute

regarding an insurance clause that lacked a choice-of-law

provision because “nothing in any way relating to the policy

sued on, or to the contract of reinsurance, was ever done or

required to be done in Texas.” 281 U.S. at 408.

17

Toshiba is incorporated and headquartered in Cali-

fornia. Diasonics was also headquartered in California.

The MRI division and virtually all of the assets acquired

by Toshiba were located in California. A substantial por-

tion of the contract negotiations (including the contract

closing) occurred in California. The only issue in this case

- indemnity between California residents — is expressly

addressed by California legislation (Cal. Civ. Code

§§ 2773-74 ). Likewise, California has a strong interest in

enforcing its citizens’ choice of law and the finality of

arbitrations to which its citizens agreed. Moncharsh, 3 Cal.

4th at 9-10; Nedlloyd Lines B.V. v. Superior Court, 3 Cal. 4th

459, 471, 11 Cal. Rptr. 2d 330 (1992).

Toshiba suggests that these interests should yield to

the interests of New York and New Jersey. Neither New

York nor New Jersey have an interest in the indemnity

obligations between California residents. These states’

paramount interest is in ensuring that their citizens’ right

to compensation, if it is established, is not impaired by

the application of California law. In re Air Crash Diaster

Near Chicago, Illinois on May 25, 1979, 644 F.2d 594, 613

(7th Cir.), cert. denied, 454 U.S. 878 (1981). Because the

indemnity provision enforced by California addresses

only the rights of Diasonics and Toshiba inter se, without

diminishment of their obligations to third parties, New

York or New Jersey’s interests in this regard are

unaffected. Moreover, to the extent New York and New

Jersey have any interest in deterrence, that interest has

already been addressed by the California legislature.

Compare Cal. Civ. Code § 2774 (allowing indemnity for

past wrongful conduct) with Cal. Civ. Code § 2773 (pro-

hibiting indemnity for future wrongful conduct). Thus,

ee

18

neither New York nor New Jersey have any unaddressed

governmental interest sufficient to displace California

law. Thus, the Court of Appeal properly applied Califor-

nia law to the parties’ agreement.

4

CONCLUS!ON

For the foregoing reasons, the petition for a writ of

certiorari should be denied.

Respectfully submitted,

TimotHy T. Scott

Counsel of Record

Ltoyp WINAWER

JOAN LAMBERT

Repecca L. Epstein

WILSON, SONSINI, GOODRICH

& Rosati

Professional Corporation

650 Page Mill Road

Palo Alto, California 94304

(415) 493-9300

Counsel for Respondent

May 29, 1996

A-1

APPENDIX A

AMERICAN ARBITRATION ASSOCIATION

74 E 199 01113 02

Diasonics, Inc.

-and-

Toshiba America Medical Systems, Inc.

INTERIM DECISION

I. INTRODUCTION

At the prehearing conference herein on January 21,

1993, the Panel ruled that the issues raised by Claimant

DIASONICS, INC. (“Diasonics”) would be tried in an

initial round of hearings in early March and the issues

raised by the counterclaim of Respondent TOSHIBA

AMERICA MEDICAL SYSTEMS (“Toshiba”) would be

tried in a second round of hearings in the latter part of

May. The parties thereafter stipulated that the Panel

should render its decision with respect to the Diasonics

claim on the basis of the documentary evidence and the

written and oral argument of counsel.

The issues were fully briefed by the parties. A hear-

ing was held on March 9, 1993, the documents were

received in evidence, and the Panel heard the argument

of counsel. Permission was granted to submit additional

authority on an issue that arose at the hearing and to

provide written counterparts of certain handwritten

exhibits. The parties advised the Panel that they had no

A-2

further evidence to submit respecting the claim of

Diasonics.

The parties advised the Panel that the “written deci-

sion” provision in Section 10.12(b) of the Asset Purchase

Agreement would be satisfied by a brief decision by the

Panel that ruled on the issues tendered by the parties.

This interim decision has therefore been prepared.

It is important to note that this interim decision does

not constitute an award as that term is used in Rule 41

and in Code of Civil Procedure Section 1283.4. Rather,

this interim decision is issued to guide the parties pend-

ing the final award that will issue following the second

round of hearings and the closing of the proceedings

pursuant to Rule 35. However, the rulings set forth in this

interim decision will be incorporated in the declaratory

relief provisions in the final award herein.

All arguments presented by the parties in their thor-

ough presentations herein have been considered, whether

or not specifically discussed.

Il. DETERMINATION OF THE ISSUES

The conclusions of a majority of the Panel with

respect to the principal issues herein are discussed in turn

below. The first subject to be discussed will be whether

claims against Diasonics that include allegations of fraud-

ulent misrepresentations in connection with sales of

products of the Division constitute liabilities that were

assumed by Toshiba pursuant to the Asset Purchase

Agreement.

:

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i

'

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A-3

A. Section 1.3 of the Asset Purchase Agreement

Section 1.3 of the Asset Purchase Agreement is the

principal basis of Diasonic’s claim. It provided in material

part that Toshiba would:

“Assume on the Closing Date, pursuant to an

Assumption Agreement substantially in the

form of Exhibit 1.3 hereto (the “Assumption

Agreement”), and agree to pay and discharge in

due course, the debts, liabilities, contracts, obli-

gations and agreements of, and claims against,

the Seller relating to the Division and the Sub-

sidiaries (whether or not expressly identified on

the Closing Pro Forma Balance Sheet), whether

matured or unmatured, liquidated or unliqui-

dated, fixed or contingent, or known or

unknown, whether arising out of occurrences

prior to the date hereof, or arising at or after the

date hereof in,the ordinary course of business

(such assumed debts, liabilities, contracts, obli-

gations, agreements and claims, the “Lia-

bilities”), including (i) any liabilities associated

with the British Technology Group patent port-

folio (the “BTC Patent Liabilities”), and (ii) lia-

bilities and obligations arising from any claims

under warranty obligations related to, or

imposed by law in respect of, any products sold,

or arising from the performance or non-perfor-

mance of any contract or agreement assumed by

the Purchaser pursuant to this Section 1.3(c) or

any other transaction occurring in connection

with the business of the Division, whether exist-

ing on the Closing Date or arising thereafter.

Notwithstanding the foregoing, Liabilities shall

not include those liabilities relating to the Divi-

sion and the Subsidiaries that are expressly set

forth on Schedule 1.3 hereto, liabilities with

a

A-4

respect to indebtedness for borrowed money

(except as set forth on the Closing Pro Forma

Balance Sheet or in Schedules 3.3.1 or 3.9) and

liabilities for Taxes that are obligations of the

Seller under Section 5.4 (collectively, the “Non-

Assumed Liabilities”). Except for the Liabilities,

the Purchaser shall not be responsible for, and

shall not assume or in way become liable with

respect to, any debts, liabilities or obligations of

the Seller”.

Section 1.3 did not expressly provide that Toshiba

would pay claims based on fraud committed by Diasonics

prior to the Closing Date. Nor did it expressly provide

that any liabilities based on fraud committed by

Diasonics were excluded from Toshiba’s assumption

obligation. There was no reference to fraud claims in

Schedule 1.3.

The parties submitted a number of arguments

respecting the correct interpretation of Section 1.3 under

these circumstances. The conclusions of a majority of the

Panel will be set forth in turn.

Plain meaning of the words: The plain words of

Section 1.3 support Diasonics. In. broad sweeping lan-

guage, Toshiba assumed all liabilities that were not

expressly excluded. Fraud claims were encompassed by

the broad language. They were not excluded either by

Schedule 1.3 or by the exceptions set forth in Section 1.3.

Hence, while liabilities of Diasonics for fraud were not

expressly identified in Schedule 1.3, such liabilities were

assumed (SCM Corp. v. Berkeley, Inc., 73 Cal. App. 3d 49,

A-5

57-58 (1977)), unless some other language in the docu-

mentation of the transaction or some principle of contract

interpretation requires a different conclusion.

Ordinary course of business qualification: After the

broad terminology, Section 1.3 continued with these

words: “whether arising out of occurrences prior to the

date hereof, or arising at or after the date hereof in the

ordinary course of business”.

A majority of the Panel concluded that the plain

meaning of these words is that the qualification “in the

ordinary course of business” is applicable only to occur-

rences “arising at or after the date hereof”. Even a comma

may have profound legal significance. State Farm Mut.

Auto. Ins. Co. v. Flynt, 17 Cal. App. 3d 538, 547 (1971)

(“Semantically and grammatically the limiting clause did

not modify the entire insuring agreement, but only the

clause which immediately preceded it”).

Hence, it is unnecessary to decide whether or not

fraud claims arising out of earlier occurrences would or

would not be “in the ordinary course of business”.

Drafting history: The Panel received in evidence

documents pertaining to the negotiations between the

parties prior to the execution of the Asset Purchase

Agreement. As might be expected, it was apparent that

throughout the negotiations the goal of Diasonics was to

induce Toshiba to assume the maximum amount of the

liabilities of the Division, while the goal of Toshiba was to

avoid an open-ended assumption of liabilities. The evi-

dence after being considered in its totality did not per-

suade a majority of the Panel that there should be any

departure from the plain meaning of Section 1.3.

A-6

Toshiba vigorously contended that since the critical

words of Section 1.3 were drafted by counsel for

Diasonics, they should be construed against Diasonics.

This principle of contract interpretation is applicable

when the parties do not have equal bargaining power and

the words of the contract are ambiguous. Neal v. State

Farm Ins. Co., 188 Cal. App. 2d 690, 695 (1961); 1 Witkin,

Summary of California Law [9th Ed.], Contracts, Section

698, and cases cited. However, the principle is inapplica-

ble when, as here, the agreement is not ambiguous. Neal

at 690. Moreover, here the parties had equivalent bargain-

ing power and both parties were advised by astute and

experienced counsel during the negotiations.

Failure to discuss fraud during negotiations: There

was no indication in the evidence that the parties gave

any consideration during the negotiations to the possi-

bility that after the closing lawsuits could be brought

against Diasonics alleging that it had committed fraud in

the course of dealing with customers of the Division prior

to the closing. With the advantage of 20-20 hindsight, one

can see that it would have been desirable to have

addressed the subject. But in the context of what was

known to the participants at the time, any criticism of

skilled counsel or the principals would be most inap-

propriate.

Toshiba argued that if anyone had thought of the

possibility of fraud during the negotiations, fraud would

have been excluded from the definition of Liabilities in

Section 1.3. Obviously, Toshiba would have taken that

negotiating stance. However, it may only be conjectured

whether Diasonics would have yielded on this issue or

A-7

whether Diasonics in the give and take of the negotia-

tions would have obtained other changes to the Asset

Purchase Agreement in favor of Diasonics. The Panel

must interpret and apply the agreement in the form that

it was executed by the parties.

Public policy considerations: Section 1.3 would not

be enforceable if Toshiba had agreed to indemnify

Diasonics for fraudulent acts committed after the effec-

tive date of the agreement. Civil Code Section 2773; Cor-

bin on Contracts, Section 1471, and cases cited.

However, Section 2774 of the Civil Code provides:

“An agreement to indemnify a person against an

act already done, is valid, even thought [sic] the

act was known to be wrongful, unless it was a

felony”.

There was no showing by Toshiba that any of the

underlying actions involved conduct by Diasonics that

constituted a felony. Hence, Section 2774 permits applica-

tion here of the plain words of Section 1.3.

A further issue remains. It is possible that in one or

more of the underlying actions a trier of fact will ulti-

mately award punitive damages in favor of the plaintiff.

Insofar as an award were to be for compensatory

damages pursuant to Civil Code Sections 3333 and 3343,

Section 2774 would not bar application of Section 1.3.

However, if punitive damages were to be assessed against

Diasonics, a trier of fact would necessarily have deter-

mined that an award should be made “for the sake of

example and by way of punishing defendant”. Civil Code

Section 3294(b).

A-8

The parties did not sufficiently address in their briefs

the issue whether Section 2774 would or would not vali-

date an agreement to indemnify another party against an

award of punitive damages. As noted below, the Panel

requests further briefs on this issue.

Lack of any specific reference to “fraud”: There

remains for consideration the question whether the broad

sweeping language of Section 1.3 may be deemed to

cover fraud claims in the absence of a specific reference

to fraud therein.

The parties cited a number of cases on this subject to

the Panel. A majority of the Panel concluded that deci-

sions that did not involve the acquisition of a line of

business or that involved indemnification for future con-

duct were not particularly helpful. Additionally, one of

the cases most heavily relied upon by Toshiba, Smoketree-

Lake Murray, Ltd. v. Mills Concrete Construction Co., 234

Cal. App. 3d 1724 (1991), involved a construction contract

subject to the special rules set forth in Section 2782 of the

Civil Code. 234 Cal. App. 3d at 1742. The general obser-

vations in the Smoketree opinion on page 1741 were made

in that context.

Two decisions discussed by the parties involved

acquisitions of a line of business, parties with substan-

tially equivalent bargaining power, and indemnification

for past conduct: SCM Corp. v. Berkel, Inc., 73 Cal. App. 3d

49 (1977) and Schwartz v. Pillsbury, Inc., 969 F. 2d 840 (9th

Cir. 1992).

In SCM, an indemnification agreement with language

similar to Section 1.3 of the Asset Purchase Agreement

was held sufficient to require the purchasing corporation

A-9

to indemnify the seller for a negligence claim relating to a

product that had been sold long before the date of the

acquisition. The Court held that in the context of an

agreement to acquire an entire business, it was not “nec-

essary to look for unusually clear, express language in

order to find a provision transferring tort liability”. 33

Cal. App. 3d at 58. The Court's rationale for this conclu-

sion is persuasive. 33 Cal. App. 3d at 58-59. However, the

underlying action in SCM did not involve a fraud claim.

Schwartz also involved the sale of a line of business.

The buyer agreed to assume “agreements and contracts

entered into in the ordinary course of business”. 969 F.2d

at 845. The Ninth Circuit held that the buyer did not

thereby assume liability for fraudulent misrepresenta-

tions made by the seller to a franchisee. Id. The SCM case

was not discussed in the opinion. Schwartz is distinguish-

able from the present dispute because the agreement

contained an “in the ordinary course of business” limita-

tion. That limitation is not present here under the plain

wording of Section 1.3 of the Asset Purchase Agreement.

Moreover, while any decision of the Ninth Circuit is

entitled to respectful consideration, Federal decisions are

not controlling on issues of state law. 9 Witkin, California

Procedure [3rd Ed.], Appeal, Section 781, and cases cited.

Here, the fraud claims in the underlying actions are

based on allegations that Diasonics made misrepresenta-

tions respecting the quality of its products and personnel,

and that Diasonics concealed an intention not to maintain

or upgrade the products. The plaintiffs in the underlying

actions asserted in other claims that Diasonics breached

contractual commitments respecting its products. The

A-10

common thread in all the underlying actions is that the

plaintiffs had entered into business relationships with

Diasonics respecting its product line and were sorely

aggrieved by the subsequent failure of Diasonics and

Toshiba to conform to the plaintiffs’ expectations.

A majority of the Panel concluded that under these

circumstances the SCM rationale is applicable and

Toshiba assumed liability under Section 1.3, notwith-

standing the lack of an express reference to fraud.

Toshiba, represented by competent counsel, agreed in

sweeping language to assume the liabilities of the Divi-

sion. It agreed to take the sour with the sweet. There is no

basis to allow it to escape from its undertaking.

Conclusion respecting Section 1.3: A majority of the

Panel concluded that the liabilities assumed by Toshiba

pursuant to Section 1.3 of the Asset Purchase Agreement

included liabilities of Diasonics arising from tort claims

by purchasers of products of the Division alleging that

Diasonics made fraudulent misrepresentations in connec-

tion with the sale of the products.

B. Conflict with Assumption Agreement

Section 1.3 of the Asset Purchase Agreement, quoted

in full above, provided that it would be implemented by

the execution of an Assumption Agreement substantiat-

ing the form of Exhibit 1.3 thereto. The date was left

blank in Exhibit 1.3.

The Asset Purchase Agreement was dated August 23,

1989. The Assumption Agreement was dated November

21, 1989. Critical wording in both documents read,

A-11

“whether arising out of occurrences prior to the date

hereof, or arising at or after the date hereof in the ordi-

nary course of business”. The question thus arises

whether “the date hereof” in the Assumption Agreement

refers to August 23, 1989 or November 21, 1989.

A strange result would be reached if the November

21, 1989 date were deemed applicable. From the closing

date forward, Diasonics was out of the picture and

Toshiba assumed control of and was fully responsible for

the operation of the Division. Hence, the qualifying

words, “or arising at or after the date hereof in the

ordinary course of business” would be wholly redundant.

If, on the other hand, the August 23, 1989 date were

deemed applicable, the qualifying words would be appli-

cable to matters occurring between August 23, 1989 and

November 21, 1989. It does make sense for the parties to

make a distinction between liabilities arising before the

date of the Asset Purchase Agreement, and liabilities

arising after that date and before the closing date. Other-

wise, the parties may have concluded, Diasonics, once it

had a signed agreement in hand for the purchase of the

assets of the Division, might change its manner of opera-

tion of the Division to the detriment of the buyer.

A majority of the Panel concluded that “the date

hereof” refers to August 23, 1989. The Asset Purchase

Agreement is an elaborately crafted document. It is not

probable that the parties intended to make such a sub-

stantive change thereto when they executed the Assump-

tion Agreement in order to implement their undertakings

in the Asset Purchase Agreement.

ee

A-12

C. Section 9.2(b)(3)

Section 9.2(b)(3) of the Asset Purchase Agreement

provided:

“The Purchaser shall indemnify and hold harm-

less the Seller and its Affiliates from and against

all Damages arising from:

| “(3) the Liabilities as of the Closing and the

conduct of the business associated with the

Assets after the closing”.

A majority of the Panel concluded that the underly-

ing tort actions constituted “Liabilities” as that term is

defined in the agreement. It is therefore unnecessary to

rule upon Diasonics’ further contention that Toshiba

became obligated to indemnify Diasonics because the

underlying tort claims arose from “the conduct of the

business” by Toshiba after the closing.

D. The Lenox Hill Action

The underlying action in the Lenox Hill case, Exhibit

1036, raises an issue that is not present in the other

underlying actions.

The FDIC as receiver for a failed financial institution,

Citytrust, alleged that Diasonics guaranteed payment of a

loan made by Citytrust and that the loan was in default.

The FDIC asserted that Diasonics was liable as the origi-

nal guarantor of the loan and that Toshiba was liable by

virtue of the Asset Purchase Agreement and also by

reason of two assignment agreements that were executed

by Diasonics and Toshiba.

A-13

It is undisputed that the guaranty related to the

Division that was purchased by Toshiba. The obligation is

clearly a liability under the broad language of Section 1.3

of the Asset Purchase Agreement.

That is not the end of the matter. Toshiba contends

that it did not assume the liability in view of paragraph 3

of the Assumption Agreement. It provided:

“Notwithstanding any provision herein to the

contrary, this Assumption Agreement shall not

constitute an agreement or an attempted agree-

ment to transfer or assign any agreement, con-

tract, lease, license, permit or other instrument

or any claim or right or any benefit arising

thereunder or resulting therefrom if an

attempted transfer or assignment thereof, with-

out the consent of any other party thereto,

would constitute a breach thereof or in any

other way adversely affect the rights of Pur-

chaser thereunder. Seller shall use its best efforts

to assist Purchaser to obtain consents to the

assignment of the foregoing to Purchaser in

accordance with the conditions more fully set

forth in Section 2.4 of the Purchase Agreement”.

Toshiba argued that by virtue of Section 3 it did not

assume any liabilities wherein the consent of the other

party to an agreement was required and not obtained.

However, Section 3 does not provide that any failure to

obtain a consent to an assignment will relieve Toshiba

from its obligation to Diasonics under the Asset Purchase

Agreement. Further, the guaranty agreement is in evi-

dence as Exhibit 97. It does not contain any prohibition

A-14

against an unconsented assignment. The FDIC in its law-

suit maintains, for obvious reasons, that the assignment

was valid. Exhibit 1036, paragraphs 71-74.

Toshiba further contended that the sale of the assets

of the Division pursuant to the Asset Purchase Agree-

ment was an act of default under Section 8(b) of the

guaranty. The FDIC did not take this position in its com-

plaint and a majority of the Panel does not accept

Toshiba’s interpretation of Section 8(b). In any event, the

obligation of Toshiba under Section 1.3 of the Asset Pur-

chase Agreement would be unaffected.

A majority of the Panel therefore concluded that

paragraph 3 of the Assumption Agreement does not

allow Toshiba to avoid its obligation with respect to the

Lenox Hill case.

E. Issues Relating to Implementation of the Deci-

sion

A number of issues were raised by the parties

respecting implementation of the Panel’s decision inter-

preting the Asset Purchase Agreement.

Timeliness of Any Decision Respecting Indem-

nity: Toshiba contends that a decision whether it should

indemnify Diasonics in a particular underlying action

would be premature, inasmuch as litigants may amend

their claims and a litigant’s ultimate claims and the out-

come thereof will not be known until the litigation ends.

The Panel agrees. CNA Casualty of California v. Seaboard

Surety Co., 176 Cal. App. 3d 598, 605 (1986).

A-15

Declaratory relief is an appropriate remedy to deter-

mine the extent of an indemnity obligation. The Panel has

the authority to grant declaratory relief in the award

under Section 10.12(b) of the Asset Purchase Agreement,

Rule 43, and Section 1283.4 uf the Code of Civil Pro-

cedure.

With the assistance of able counsel, the award herein

will be in a form that should eliminate most if not all

future disputes respecting indemnity issues, notwith-

standing the wide range of possible outcomes in the

underlying cases.

Duty to Defend: Unless “a contrary intention

appears”, an indemnitor may be required by the indemni-

tee “to defend actions or proceedings brought against the

latter [the indemnitee] in respect of the matters embraced

by the indemnity”. Civil Code Section 2778(4).

Here, as Toshiba correctly pointed out, a “contrary

intention” appears from Section 9.3 of the Asset Purchase

Agreement. Detailed provisions are set forth therein

respecting the mechanics of defending an underlying

action in an indemnity situation. Toshiba has the option

to, but is not required to, take over the defense of an

action. Accordingly, Toshiba may, if it wishes to do so,

elect to require Diasonics to defend itself in a pending

action, subject, of course, to the obligation to reimburse

Diasonics for litigation costs discussed immediately

below.

Apportionment of Cost of Defense: During the pen-

dency of the dispute, Toshiba advised Diasonics that it

would defend both itself and Diasonics with respect to

A-16

breach of contract and warranty claims relating to cus-

tomer product performance and service. Toshiba further

advised Diasonics that it would defend the fraud claims,

non-indemnifiable in the view of Toshiba, only if

Diasonics would pay a prorated share of the defense

costs. Diasonics rejected this proposal. Consequently, in

at least some of the underlying actions, Toshiba and

Diasonics are defended by separate counsel.

Toshiba took this posture at the risk that it would

have to reimburse Diasonics for its litigation costs if the

Panel were not to agree with Toshiba’s interpretation of

Section 1.3. That eventuality has now occurred. In light of

the Panel’s ruling, Diasonics’ litigation costs are “dam-

ages” as defined in the Asset Purchase Agreement and

they are reimbursable by Toshiba pursuant to Section

9.2(b)(3).

The 1% Threshold Issue: The Asset Purchase Agree-

ment provided in Section 9.2(c)(1):

“Notwithstanding anything to the contrary in

this Agreement, (1) neither Seller nor Purchaser

shall be required to indemnify and hold harm-

less the other or the other’s Affiliates until and

to the extent that aggregate Damages owed to

the other and its Affiliates with respect to all

claims asserted under this Section 9.2 equal or

exceed 1% of the Purchase Price; provided, how-

ever, that no dollar threshold shall apply with

respect to claims that (x) relate to the represen-

tations and warranties contained in Sections

3.20 and 4.4, or (y) arise pursuant to Sections

9.2(a)(3), 9.2(a)(4), 9.2(b)(3) or 9.2(b)(4). . . . ”

eee

A-17

The term “Damages” is defined in Section 1.1 as:

“ any loss, liability to third parties, however

defined or characterized, damages, cost or

expense (including reasonable costs of investi-

gation, defense and prosecution of litigation and

attorney’s fees) incurred by such person.”

It is understood from the parties’ briefs that 1% of the

purchase price is approximately $1.9 million and that

Diasonics to date has not paid this amount.

Toshiba argued that the reference to Section 9.2(b)(3)

in the last sentence of Section 9.2(c) means that the 1%

threshold does not apply to “Liabilities” as defined in

Section 1.3, but it does apply to legal costs associated

with such “Liabilities”.

Diasonics contended that the 1% threshold is inappli-

cable to legal costs associated with Section 1.3 “Lia-

bilities” because the exception in the last sentence of

Section 9.2(c)(1) applies to such costs as well as to the

“Liabilities”.

Toshiba’s characterization of Section 9.2 as one “of

Byzantine complexity” is well-taken. A majority of the

Panel concluded that Diasonic’s interpretation is the cor-

rect one. The reference in the exception in the last sen-

tence of Section 9.2(c)(1) is not solely to subparagraph (3)

of paragraph 9.2(b) but rather to Section 9.2(b)(3). The

reference as a whole is thus to “Damages arising

from... the Liabilities as of the Closing. ... ” Hence, the

1% threshold does not apply to “Damages” that have as a

component legal expenses associated with the defense of

“Liabilities” that were assumed by Toshiba pursuant to

Section 1.3.

A-18

III. FURTHER SUBMISSIONS BY THE PARTIES

Declaratory relief provisions of the award: The par-

ties previously submitted their respective proposals for

the wording of the portion of the final award setting forth

declaratory relief relating to the claim of Diasonics. See

the letter on behalf of the Panel dated January 28, 1993,

paragraph 10.

Neither draft is fully responsive to the rulings made

hereinabove. Counsel for Diasonics is therefore requested

to draft a form of Award and submit it to counsel for

Toshiba for approval as to form only. The draft shall

contain alternative provisions respecting Diasonics’

rights in the event that punitive damages should be

awarded against Diasonics in any of the underlying cases.

If counsel are unable to agree on the form of the

Award, each party shall submit to the Panel not later than

April 19, 1993 its proposed form of award with an accom-

panying brief argument respecting the reasons to prefer

one version over the other. Reargument of issues here-

tofore submitted to and decided by the Panel will be

inappropriate.

Punitive Damages Issue: The plain words of Section

1.3 are sufficiently broad to include within the definition

of assumed liabilities any award of punitive damages

against Diasonics in one of the underlying tort actions.

However, the question would remain Toshiba’s agree-

ment to indemnify Diasonics against such damages

would be validated by Section 2274. The Panel desires

further briefing by the parties on this issues [sic]. Such

briefs shall be submitted to the Panel not later than April

19, 1993.

Dated: April 2, 1993.

/s/ Peter Anderson

Peter Anderson

Neutral Arbitrator

for a Majority

of the Panel

A-20

APPENDIX B

AMERICAN ARBITRATION ASSOCIATION

74 E 199 01113 02

Diasonics, Inc.

-and-

Toshiba America Medical Systems, Inc.

SECOND INTERIM DECISION

I. INTRODUCTION

The interim decision by a majority of the Panel dated

April 2, 1993 (“initial interim decision”) ruled upon most

of the issues raised herein by the claim of DIASONICS,

INC. (“Diasonics”). Respondent TOSHIBA AMERICA

MEDICAL SYSTEMS (“Toshiba”) thereafter advised the

Panel that it was withdrawing its counterclaim.

This second interim decision will first address a pro-

cedural issue that was raised in the dissent to the initial

interim decision by co-arbitrator Stallings dated April 2,

1993. The decision will then discuss the various issues

that have been raised by the parties and remain to be

decided. Finally, the Panel will make the determination

required by Rule 43.

An Award consistent with the initial interim decision

~ and the second interim decision will be made by a major-

ity of the Panel.

All arguments presented by the parties have been

considered by the Panel, whether or not discussed in this

decision.

A-21

Il. PREPARATION OF THE INITIAL INTERIM DECI-

SION

Ordinarily, the internal procedures followed by an

arbitration panel in the course of making its award are

not revealed to the parties. However, co-arbitrator Stall-

ings discussed in his dissent to the initial interim decision

the procedure that was followed in rendering the deci-

sion. He argued that this procedure rendered this arbitra-

tion null and void. Dissent at 1-3.

This issue was not discussed in the initial interim

decision. It appears from various communications from

the parties that the issue may well be the subject of

contentions in connection with any post-award confirma-

tion proceeding. In order that there may be a meaningful

record in such event, it is therefore appropriate to discuss

the procedure that was followed.

The applicable statutes provide only that an award is

to be made by the arbitrator or arbitrators and do not

prescribe any specific procedures to be followed by the

members of a panel in the course of their decision-

making process. 9 U.S. Code Section 9; Code of Civil

Procedure, Section 1283.4. Similarly, the Commercial

Arbitration Rules only require that an award be made by

a majority of the members of the arbitration panel. Rules

28 and 42. The procedures to be followed in a particular

arbitration are thus left to the common sense and good

judgment of the members of a panel, in accordance with

the general rule that arbitration proceedings may be con-

ducted informally so long as the hearing as a whole is

fair. Sapp v. Barenfeld, 34 Cal. 2d 515, 520 (1949).

A-22

When all members of an arbitration panel are neutral

arbitrators, it is the general practice, at least in the experi-

ence of the Neutral Arbitrator herein, for the members of

an arbitration panel to schedule a meeting after the evi-

dence has been taken and any post-hearing briefs have

been received. A decision respecting the award in the

arbitration is reached at this meeting. The collective eval-

uation of the controversy by two other neutral arbitrators

is usually very helpful. Indeed, the practice of the Ameri-

can Arbitration Association is to appoint three neutral

arbitrators in complex cases in order that different points

of view and different real-life experiences may be

brought to bear on the issues. Anderson, Arbitrating Your

First Case 73 (The Practical Litigator, July 1990).

Hence, it may fairly be assumed that if three neutral

arbitrators had been appointed in this arbitration, the

Panel chair would have endeavored to schedule a meet-

ing among the members of the Panel to discuss the issues

prior to undertaking to draft the initial interim decision.

However, the parties to this arbitration did not elect

to have the arbitration decided by three neutral arbitra-

tors. Instead, the Asset Purchase Agreement provides

that the arbitration panel shall consist of one neutral

arbitrator and two party-appointed arbitrators.

California decisions recognize that party-appointed

arbitrators are in reality another set of advocates for the

positions of the appointing parties. Tipton v. Systron Don-

ner Corp., 99 Cal. App. 3d 501, 506 (1979); Dinong v.

Superior Court, 120 Cal. App. 3d 300, 303 (1981); Painters

Dist. Council No. 23 v. Moen, 128 Cal. App. 3d 1032, 1040

(1982). Thus, a recent case held that one who has acted as

RCE ee EEE

Py

N

i

‘

4

:

A-23

a party-appointed arbitrator in an arbitration is deemed

to have a substantial business relationship with the

appointing party that must be disclosed if the arbitrator

undertakes to act as a neutral arbitrator in a subsequent

arbitration involving the appointing party. Neaman v. Kai-

ser Foundation Hospitals, 9 Cal. App. 4th 1170, 1176-1177

(1992).

Accordingly, the partiality of any party-appointed

arbitrator is assumed in any California arbitration.

Anderson, supra at 72.

In this arbitration, the parties appointed arbitrators

who are distinguished and able attorneys. They have

skillfully presented the positions of their appointing par-

ties. On any issue of any significance, each co-arbitrator

has consistently and faithfully presented arguments in

favor of, and voted in favor of, his appointing party.

Resolution of the conflicting arguments, and the casting

of the deciding vote, has been made on each and every

major issue by the Neutral Arbitrator.

The parties to the arbitration also retained very capa-

ble trial counsel. Their written and oral advocacy has

been thorough and professional. Prior to the rendition of

the initial interim decision, the issues were fully briefed.

In addition, the Panel heard extensive oral argument. The

argument was reported and the transcript was submitted

to the Panel.

At the conclusion of oral argument, the Neutral Arbi-

trator considered several courses of action.

One course was to convene the members of the Panel

and discuss the presentations that had been made by trial

A-24

counsel. In such event, it was obvious that each party-

appointed arbitrator would advocate the position of his

appointing party, reiterate the arguments of counsel for

his appointing party, and vote in favor of his appointing

party on all material issues.

The other course was for the Neutral Arbitrator to

draft a proposed opinion and distribute it to the two

party-appointed arbitrators for their comments. In such

event it was obvious that one party-appointed arbitrator

would concur and the other would dissent.

The Neutral Arbitrator believed that he had made it

clear to both party-appointed arbitrators that he was

considering these two alternatives. Co-arbitrator Dil-

lingham apparently so understood. Co-arbitrator Stall-

ings has strongly stated that he did not have this

understanding. There can be no doubt respecting his

sincerity. For whatever reason, there was a failure of

communication for which the Neutral Arbitrator must

accept at least partial responsibility.

The Neutral Arbitrator elected to take the second

course of action. He did so for several reasons. The writ-

ten and oral advocacy of both trial counsel was outstand-

ing. To the extent that memory of the oral argument

faded, a transcript was available and it was read. Another

round of oral argument by another pair of advocates was

deemed unnecessary.

The Neutral Arbitrator also had in mind his personal

experience some decades ago as a law clerk to a justice on

the California Supreme Court. The practice of the Court

at that time was to assign cases to individual justices

et

A-25

prrinr to nn7l uapuument .Theuassigned, iustice, with. what-

ever useful assistance might be forthcoming from his law

clerks prepared a calendar memorandum that was dis-

tributed to the other members of the Court prior to argu-

ment. Such memoranda were frequently in the form of a

draft opinion that set forth a recommended disposition of

the case.

The actual voting of the justices, of course, took place

after oral argument. Frequently, the calendar memoran-

dum became the opinion of the Court with relatively

minor changes. No one involved ever felt that there was

anything in the least improper in drafting an opinion

prior to oral argument and prior to any consultation with

the other justices. By contrast, here the decision-making

process did not commence until after oral argument.

Additionally, the other Panel members were not impar-

tial. Hence, it appeared proper to emulate the practice of

the Neutral Arbitrator’s early mentors.

The Neutral Arbitrator carefully considered the

briefs and the oral argument, as heard and transcribed. A

draft of the initial interim decision was prepared. It was

essentially in favor of Diasonics. The draft was then

submitted to the party-appointed arbitrators. Submission

of the draft served two purposes. One was to obtain the

concurrence required by Rules 28 and 42. The other pur-

pose was to be sure that no argument had inadvertently

been overlooked or misunderstood. Thus, it seemed to

the Neutral Arbitrator, both party-appointed arbitrators

would have an opportunity to participate in the decision-

making process consistent with their partiality.

A-26

Predictably, the co-arbitrator appointed by Diasonics

concurred in the conclusions set forth in the draft and the

co-arbitrator appointed by Toshiba dissented. Unexpec-

tedly to the Neutral Arbitrator, co-arbitrator Stallings

vigorously argued that the procedure followed herein

rendered the arbitration null and void.

With the benefit of hindsight, the Neutral Arbitrator

sincerely regrets that he did not notify the co-arbitrators

in writing that he had elected to follow the second course

of action. This would have avoided any element of sur-

prise and any embarrassment to co-arbitrator Stallings in

his relationship with Toshiba.

Nevertheless, no prejudice to Toshiba occurred. Its

position on every issue was thoroughly and ably pre-

sented by Toshiba’s trial counsel. Distribution of the draft

to the party-appointed arbitrators provided assurance

that Toshiba’s contentions had been understood. Co-arbi-

trator Stallings’ dissent is skillful and comprehensive.

However, all the arguments therein had previously been

presented by Toshiba’s trial counsel, albeit in another

format, and had been carefully considered by the Neutral

Arbitrator. Toshiba was entitled to have its arguments

presented once by its advocates. It was not denied a fair

hearing because they were not presented to the Neutral

Arbitrator a second time by another of its advocates prior

to preparation of the draft.

A subsequent development merits discussion.

In deference to the concerns so strongly raised by co-

arbitrator Stallings, a different procedure was followed

by the Panel with respect to the issues that are the sub-

jects of Parts III and IV hereof. Counsel for the parties

A-27

submitted briefs fully setting forth the contentions of the

parties. The Panel then met to discuss the issues. Counsel

waived oral argument, thereby eliminating the possibility

of duplicative oral presentations on behalf of a party.

The presentations by the party-appointed arbitrators

at the meeting of the Panel were all that would be

expected of attorneys with their skill, experience and

professional success. Further, at the meeting of the Panel

co-arbitrator Stallings on behalf of his appointing party

presented a thoughtful analysis of the choice of law issue

that is discussed below in Part IV hereof. At the request

of the Neutral Arbitrator, this issue was further devel-

oped in written submissions by each co-arbitrator on

behalf of his appointing party.

However, following this procedure in the latter

instance does not prove that failing to follow it in a

former instance was an error. Each party-appointed arbi-

trator played the role of an advocate for his appointing

party. Had counsel elected to present oral argument, such

arguments presumably would have been made with the

same skill and thoroughness as the earlier oral advocacy.

The meeting of the Panel was a viable alternative to oral

argument. However, there was no indication that duplica-

tive oral presentations were necessary in order ade-

quately to present the position of a party.

The dissent to the initial interim decision also criti-

cizes certain communications by the Neutral Arbitrator.

Dissent at 1-2. The circumstances of those communica-

tions have been fully disclosed by everyone involved.

The American Arbitration Association considered those

A-28

disclosures and declined to disqualify the Neutral Arbi-

trator. No more need be said here other than respectfully

to record the total disagreement of the Neutral Arbitrator

with the dissent’s characterization of these innocuous

communications. |

—

III. PUNITIVE DAMAGES ISSUE

A request was made in the initial interim decision for

further briefing respecting the punitive damages issue.

7-8, 18. The parties have done so and the issue is ripe for

decision.

A majority of the Panel ruled that, in view of Section

2774 of the Civil Code and the sweeping language of

Section 1.3 of the Asset Assumption Agreement, Toshiba

is required to indemnify Diasonics against any award for

compensatory damages, including awards of such dam-

ages based on fraud claims pursuant to Civil Code Sec-

tions 3333 and 3343 and the equivalents thereof in other

states. Initial interim decision at 7.

A more difficult issue is presented with respect to

indemnification for punitive damages. Under California

law, an award of punitive damages is made “for the sake

of example and by way of deterring defendant”. Civil

Code Section 3294(b). Thus, the Supreme Court recently

held that evidence of the financial condition of the defen-

dant is required as a basis for punitive damages because

“the quintessence of punitive damages is to deter future

misconduct by the defendant”. Adams v. Murakami, 54

Cal. 3d 105, 110 (1991).

———

A-29

It is clear that California will not permit indemnifica-

tion against an award of punitive damages based on post-

agreement misconduct of the indemnitee. Stonewall Sur-

plus Lines Ins. Co. v. Johnson Controls, Inc., 14 Cal. App. 4th

637, 642-643 (1993), and cases cited therein. That would

not occur here. Any misconduct of Diasonics that could

give rise to an award of punitive damages took place

prior to the acquisition by Toshiba and the effective date

of the Asset Assumption Agreement.

Diasonics and Toshiba are substantial business enti-

ties. They were represented by competent counsel in the

negotiations preceding execution of the Asset Assump-

tion Agreement. In the course of those arms length nego-

tiations, Toshiba obligated itself to indemnify Diasonics

for liabilities. The sweeping language of the indemnity

encompasses any award of punitive damages for pre-

agreement misconduct. Contractually shifting the burden

of paying punitive damages based on pre-agreement mis-

conduct of the indemnitee is permissible under Section

2774. Initial interim decision at 7.

The narrow issue before the Panel is whether, not

withstanding the broad language of Section 2774, Califor-

nia law would permit Toshiba to escape its contractual

obligation to Diasonics because such indemnification

would serve to defeat the deterrent purpose of Section

3294(b) in that the pain of payment would not be borne

by the wrongdoer.

Toshiba relies principally upon Peterson v. Superior

Court, 31 Cal. 3d 147 (1982). An earlier decision of the

Supreme Court had held that punitive damages could be

recovered by a person injured by an intoxicated driver.

li i

A-30

Peterson held that this rule would be applied retroac-

tively. 31 Cal. 3d at 147. In response to an argument that

to do so would negate insurance coverage, the Court

stated, 31 Cal. 3d at 158:

“There are two distinct reasons why indemni-

fication of punitive damages is prohibited in

California. First is the public policy rationale

against diluting the deterrent effect of punitive

damages by allowing the impact of the penalty

to be shifted to the insurer. This justification

applies whatever the basis for the punitive dam-

ages award. The second reason is applicable

only when the basis for the punitive damages is

a willful act of the defendant. When the defen-

dant commits an intentional tort, the prohibition

of [Insurance Code] section 533 presents an

additional reason for disallowing indemnifica-

tion of the punitive damages, as well as indem- |

nification of the remainder of the plaintiff's

recovery. However, because the situations in

which punitive damages are allowed include

more than just those resulting from intentional

torts, indemnification of the entire damage

award is not always precluded.”

In Peterson the Court was discussing insurance cover-

age for future wrongful acts. In a non-insurance context,

such indemnification would be invalidated by Section

2773. Peterson did not address the issue whether indemni-

fication for punitive damages would be permitted pur-

suant to an agreement that came into effect after the

commission of the wrongful act. However, the Court’s

broad admonition “against diluting the deterrent effect of

punitive damages to be shifted to the insurer” could be

i

ee

ee ore ee een

644 wh eth te

A-31

interpreted as applicable both to prospective and to retro-

active indemnification agreements.

Diasonics cited two California cases imposing on suc-

cessor corporations the obligation to pay punitive dam-

ages assessed by reason of the misconduct of a

predecessor corporation. As Toshiba points out, in each

instance the obligation was imposed by reason of princi-

ples of corporate law. Moe v. Transamerica Title Ins. Co., 21

Cal. App. 3d 289, 303-304 (1971) (corporation formed by

consolidation or merger is answerable for the debts and

liabilities of the constituent corporations, including lia-

bility for punitive damages); Marks v. Minnesota Mining &

Manufacturing Co., 187 Cal. App. 3d 1429, 1434-1437

(1986) (acquisition by parent of assets of subsidiary had

the consequences of a statutory merger including the

assumption of liability for punitive damages).

Judge Rea of the Central District recently analyzed

the California cases evaluating the circumstances under

which a successor corporation may properly be held lia-

ble for a punitive damage award arising from the inten-

tional acts of the predecessor corporation. Certain

Underwriters of Lloyd’s v. P.S.W. Airlines, 786 F. Supp. 867

(C.D. Cal. 1992).

In the P.S.W. Airlines case, US Air had purchased PSA

through a large-scale purchase of PSA stock. Lloyd’s had

insured an insurance policy in favor of PSA. A former

employee of PSA sued PSA and US Air in State court and

recovered a verdict assessing substantial punitive dam-

ages. Lloyd’s sought declaratory relief in Federal court

respecting its obligations under the policy. The subject

opinion dealt with Lloyd’s motion for partial summary

A-32

judgment on the issue of its coverage for the punitive

damages award against PSA. ;

To defeat the Lloyd’s motion, US Air invoked the line

of California cases holding that an insured can be indem-

nified when its liability for punitive damages is vicarious

and it is only required to pay punitive damages because

of the employee’s wrongdoing. 786 F.Supp. at 869. It

therefore became necessary for the Court to decide

whether US Air had successor or vicarious liability.

FR nO AE OE OE Om Ne i RE ah SR, aL RE tom tm

Judge Rea stated (page 870)

“The courts have failed to establish a uniform

test to evaluate when a successor corporation

can properly be held liable for a punitive dam-

age award arising from the intentional acts of

the predecessor corporation. The courts have

developed two tests, namely, the mere continua-

tion test and the form of the merger test.

saci

Ms ;

. 4

“Although the ‘mere continuation’ test has

merit, the test fails to give adequate weight to

the punishment purpose of punitive damages.

This Court believes that the mere continuation

test should be modified. Instead of focusing on

whether the successor entity is the mere contin-

uation of the predecessor, the focus will be on

whether the predecessor entity makes up a ‘sig-

nificant and identifiable part’ of the successor

entity. If the predecessor does make up a signifi-

cant and identifiable part of the successor entity,

the successor can fairly be punished for the acts

of the predecessor. The reason is twofold. First,

so long as the predecessor retains an identifiable

existence in the successor entity, that portion of

the successor entity remains a wrongdoer and

A-33

should be punished. In addition, the successor

would have paid a lower price when the suc-

cessor purchased the predecessor. This lower

price reflects the potentiality of any and all law-

suits. Therefore, the successor is not being

unduly punished or harmed.”

After analyzing the Marks and Moe decisions, Judge

Rea further stated (pages 873-874):

“The Court is of the opinion that both the ‘sig-

nificant and identifiable part’ and ‘form of the

merger’ tests should be considered because

either of these tests may be applicable. For

instance, if the successor consists in significant

part of the predecessor, such that the prede-

cessor’s unique existence has not been eradi-

cated, a court can properly punish the

predecessor by punishing the successor regard-

less of the form of the merger.

“In addition, if the successor corporation sub-

sumed the predecessor in a form which recog-

nized that the successor was assuming all the

liabilities of the predecessor, the successor can-

not claim that it was unfairly punished by the

acts of the predecessor because the successor

was aware of that possibility when the successor

subsumed the predecessor. This awareness dis-

allows indemnification regardless of whether

the predecessor makes up a ‘significant and

identifiable part’ of the successor.”

The Court applied the test and determined that US

Air had successor liability because it acquired PSA sub-

ject to PSA’s debts and liabilities. It ruled that under these

circumstances, the successor liability of US Air was not

the functional equivalent of vicarious liability and US Air

A-34

had not brought itself within the exception. 786 F. Supp.

at 871.

Judge Rea concluded (786 F. Supp. at 871):

“This holding is consistent with the policy

behind punitive damages. Punitive damages are

designed to punish the wrongdoer and deter

future harm. US Air argues that it was not the

wrongdoer, just as an employer is not the

wrongdoer when the employer is held vicari-

ously liable for the actions of its employee. The

distinguishing factor in this case is that US Air

was on notice that it was purchasing PSA sub-

ject to the liabilities of PSA and is unable to

claim innocence of PSA’s actions. Thus, as the

successor entity, US Air is responsible as the

wrongdoer, in the sense that the predecessor

may have committed some wrongdoing and

thereby agreed to assume any liability therefore.

Using this analysis, the proper party is being

punished.”

The P.S.W. Airlines case was not an action by PSA

against US Air to enforce a contractual obligation of US

Air to indemnify PSA. It is thus not directly in point.

However, the Court was clearly of the view that the

burden of punitive damages could properly be imposed

on a successor corporation, for the reasons set forth in the

extensive quotations from the opinion above. Judge Rea’s

ultimate conclusion that “the proper party is being pun-

ished” demonstrates that the Court would have ruled

that US Air was required to indemnify PSA.

It was previously observed that decisions in the Fed-

eral judicial system are not California precedents. Initial

interim decision at 9. Further, the P.S.W. Airlines case is

ial aiatalall

A-35

not an appellate opinion. However, Judge Rea’s scholarly

decision is entitled to the same weight that would be

given to a law review article or other secondary authority

reviewing the decisions and predicting the future course

of California jurisprudence.

The Asset Purchase Agreement requires the Award to

be made in accordance with California law. In the absence

of any California case directly in point, the Panel must

perforce make its own determination respecting Califor-

nia law. A majority of the Panel concluded that Judge

Rea’s analysis in P.S.W. Airlines is predictive of California

law.

Toshiba acquired a significant and identifiable divi-

sion of Diasonics that conducted the segment of the busi-

ness that is the source of the underlying tort actions

wherein there is a possibility of an award of punitive

damages. Toshiba assumed the tort liabilities in the Asset

Purchase Agreement, including any liability to pay puni-

tive damages. Hence, application of the P.S.W. Airlines

rationale to the facts of this arbitration leads to the con-

clusion that requiring Toshiba to comply with its contrac-

tual obligation will not violate California public policy. It

is therefore not necessary to determine whether Toshiba

would have been required under California law to indem-

nify Diasonics if it had contracted to do so, but were not a

successor corporation.

It bears noting that the Fourth Circuit has recently

held that a successor corporation that has assumed tort

liabilities of a predecessor may be required to bear the

burden of punitive damages. City of Richmond, Va. v.

Madison Management Group, 918 F. 2d 438, 455-456 (4th

A-36

Cir. 1990) and cases cited therein. City of Richmond did

not, of course, involve a determination of California law,

but it is reassuring that there is respectable authority for

the proposition that indemnification against an award of

punitive damages for pre-agreement misconduct is not

against public policy.

Toshiba is required to indemnify Diasonics against

any award of punitive damages in the underlying tort

actions.

IV. THE CHOICE OF LAW ISSUE

A majority of the Panel ruled in the interim initial

decision that, in view of Section 2774 of the Civil Code,

Section 1.3 of the Asset Purchase Agreement was enforce-

able under California law with respect to underlying tort

actions involving fraud claims. Page 7.

By its memorandum dated June 25, 1993, Toshiba

requested reconsideration of this ruling on the ground

that indemnification would contravene the laws of the

jurisdictions in which fraud issues had been raised in the

underlying tort actions. The Panel ruled that the issue

would be reconsidered. The parties submitted additional

briefs directed to the issue.

In the initial interim decision a majority of the Panel

deemed California law to be controlling because Section

10.12(a) of the Asset Purchase Agreement provided:

“The terms of this Agreement shall be governed

by the laws of the State of California.”

Choice of law provisions in contracts are enforced in

California when the chosen state law has a substantial

A-37

relationship to the parties or their transaction, or there is

any other reasonable basis for the parties’ choice of law.

Nedlloyd Lines B.V. v. Superior Court, 3 Cal. 4th 459, 466

(1992). It is clear that both of the Nedlloyd tests are satis-

fied here.

Toshiba contends that Nedlloyd is not dispositive.

Toshiba’s argument, as more fully developed by co-

arbitrator Stallings, is that under the circumstances here

there is an exception to the usual California rule that the

parties’ choice of law provision in an agreement is

enforced.

Diasonics contends that Toshiba’s argument should

be disregarded because it is inconsistent with Toshiba’s

position during this arbitration that California law gov-

erns the scope of its indemnity to Diasonics.

However, the Neutral Arbitrator does not so view

Toshiba’s position.

The initial interim decision determined at a minimum

that if a tort action were pending in California, Toshiba

must indemnify Diasonics whether or not the plaintiff in

the underlying action sought recovery under fraud theo-

ries. The decision did not specifically address the ques-

tion whether Toshiba had a similar obligation if the

underlying tort action were pending in another state

(“Forum X”), the plaintiff therein sought recovery under

a fraud theory, and the substantive law of Forum X would

not have permitted indemnification under such circum-

stances. The parties did not raise the issue, and it was not

detected by the Neutral Arbitrator or the co-arbitrators.

However, it was probably implicit in the language of the

decision that indemnification would be required under

A-38

such circumstances and the Award would have so pro-

vided if the issue had never been raised.

The Panel is required by the Asset Purchase Agree-

ment to apply California law. However, “California law”

includes California conflict of law principles as well as

California substantive law. Once identified, the issue

raised by Toshiba is not determinable merely by deciding

what a California court would do if the underlying tort

action were in California.

Diasonics points out that California requires that con-

flict of law issues be raised in a timely fashion. Hurtado v.

Superior Court, 11 Cal. 3d 574, 581 (1974). But what is

“timely”? Obviously, it wouid have most desirable for

Toshiba to have raised the choice of law issue much

earlier in this proceeding. If Toshiba had done so, the

issue could have been briefed and resolved in the initial

interim decision. With hindsight, even Toshiba probably

would have to concede this much.

However, during the earlier part of this proceeding

the focus of everyone concerned was on the proper inter-

pretation of the Asset Purchase Agreement. If Toshiba

had prevailed on that issue, the conflict issue would not

have been reached. An arbitration proceeding certainly

should be resolved in a timely fashion. However, an

arbitration proceeding should also give the parties a full

opportunity to present their arguments on a critical issue

which may affect the ultimate outcome of the arbitration.

In view of the amounts at stake and all of the circum-

stances, the Neutral Arbitrator in the exercise of his dis-

cretion does not feel required by Hurtado to decline to

consider Toshiba’s contentions.

A-39

The Toshiba argument has two major premises.

The first premise is that in some if not all of the states

where the underlying tort actions are pending, an agree-

ment to indemnify a tortfeasor for past fraudulent acts

would be unenforceable as against public policy.

The second Toshiba premise is that California would

under such circumstances yield to the policy of the state

where the tort action is pending and would not permit

Diasonics to obtain contractual indemnification.

Each premise will be examined in turn.

Toshiba’s first premise is not supported by the cases

that it has cited to the Panel. The cases involved common

law principles of indemnification and contribution, agree-

ments that purported to indemnify a party against the

consequences of future wrongful conduct, or the special

policy considerations applicable to violations of the Fed-

eral securities laws. No case was cited by Toshiba holding

that the state where a tort action is pending would forbid

one of the parties to the tort action to obtain indemnifica-

tion for past conduct pursuant to a contract that is valid

and enforceable under the law of the state that was

selected by the parties and that has a substantial relation-

ship to the subject matter of the contract.

Toshiba’s second premise will be independently

examined. It will be assumed arguendo for purposes of

this part of the analysis that the law of a state where an

action is pending (“Forum X”) would have prevented

Diasonics from enforcing the indemnification provisions

of the Asset Purchase Agreement if the agreement were

governed by the law of Forum X.

A-40

The Supreme Court stated in Nedlloyd that it would

apply the principles set forth in Section 187 of the

Restatement Second Conflict of Laws. 3 Cal. 4th at

464-465.

Section 187 provides:

“(1) The law of the state chosen by the parties

to govern their contractual rights and duties

will be applied if the particular issue is one

which the parties could have resolved by an

explicit provision in their agreement directed to

that issue.

“(2) The law of the state chosen by the parties

to govern their contractual rights and duties

will be applied, even if the particular issue is

one which the parties could not have resolved

by an explicit provision in their agreement

directed to that issue, unless either

“(a) the chosen state has no substantial

relationship to the parties or the transaction and

there is no other reasonable basis for the parties’

choice, or

“(b) application of the law of the chosen

state would be contrary to a fundamental policy

of a state which has a materially greater interest

than the chosen state in the determination of the

particular issue and which, under the rule of

Section 188, would be the state of the applicable

law in the absence of an effective choice of law

by the parties.

“(3) In the absence of a contrary indication of

intention, the reference is to the local law of the

state of the chosen state.”

Git ES TR iA “i ect at

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A-41

Toshiba argues that under California law the excep-

tion set forth in Section 187(2)(b) is applicable here.

Two conditions must be met. First, the hypothetical

Forum X must have “a materially greater interest than the

chosen state in the determination of the particular issue”.

Second, Forum X is required “under the rule of Section

188 [to] be the state of the applicable law in the absence

of an effective choice of law by the parties”.

The first condition requires a balancing of the inter-

ests of Forum X and the interests of California.

The Asset Purchase Agreement shows the close con-

nection of the underlying transaction to California.

Toshiba is a California corporation. Preamble. Toshiba

acquired the shares of California corporations that were

subsidiaries of Diasonics. Third “Whereas”. The agree-

ment was performed by a closing which took place in

California. Section 2.1. All notices and communications

were sent to California addresses. Section 10.11. Califor-

nia law governed the relationship of the parties and any

arbitration was to take place in San Francisco, California.

Section 10.12.

Similar circumstances were present in McMullan &

Son, Inc. v. United States Fid. & Guar. Co., 103 Cal. App. 3d

198 (1980). In McMullan, a California corporation pur-

chased an insurance contract in California from a Califor-

nia insurance broker. A claim against the insured arose in

connection with a construction project in Florida and

Florida litigation ensued. There was subsequent litigation

in California respecting the rights and obligations of the

insured and the insurer under the insurance contract. The

Court had to determine whether to apply the law of

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A-42

Florida, the state where the underlying action was

brought, or the law of California, the state where the

parties entered into the insurance contract. The Court

held that California law applied, stating (103 Cal. App. 3d

at 205):

“California, not Florida or Maryland, was the

place of contracting, the place of negotiation of

the contracts. The place of performance was not

specified, yet McMullan was a resident of Cali-

fornia and Fidelity a resident of Maryland, and

Fidelity did business in California. The Fidelity

contacts with Maryland were not significant

with respect to these contracts since Fidelity did

business on a national scale. Fidelity knowingly

dealt with residents of the various states and

voluntarily subjected itself to the contract laws

of those states.

“Moreover, California has many interests in

having its law applied in this case. California is

the forum state. Since the contract was made

between a California resident and a corporation

doing business in California, California has an

interest in seeing that such contract is enforced

according to the law where it was made.”

(Emphasis added).

Here, the indemnification agreement is enforceable

under California law. Civil Code, Section 2774; interim

initial decision at 7. Toshiba has not demonstrated that

the interest of Forum X is “fundamentally greater” than

the interest of California in enforcing the agreement

according to its terms.

The second condition in Section 187(b)(2) requires

reference to Section 188 of the Restatement. It provides:

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“(1) The rights and duties of the parties with

respect to an issue in contract are determined by

the local law of the state which, with respect to

that issue, has the most significant relationship

to the transaction and the parties under the

principles stated in §6.

“(2) In the absence of an effective choice of law

by the parties (see §187), the contacts to be taken

into account in applying the principles of §6 to

determine the law applicable to an issue

include:

(a) the place of contracting,

(b) the place of negotiation of the contract,

(c) the place of performance,

(d) the location of the subject matter of the

contract, and

(e) the domicile, residence, nationality,

place of incorporation and place of

business of the parties.

“These contacts are to be evaluated according to

their relative importance with respect to the par-

ticular issue.

“(3) If the place of negotiating the contract and

the place of performance are in the same state,

the local law of this state will usually be

applied, except as otherwise provided in

§§189-199 and 203.”

Each of the five Restatement conditions favors the

application of California law here. California has the

“most significant relationship” to the subject matter of

the agreement and this arbitration.

A-44

Accordingly, Toshiba has not been able to satisfy

either condition of the exception set forth in Section

187(2)(b).

Toshiba relies upon Ashland Chemical Co. v. Provence,

129 Cal. App. 3d 790 (1982). However, Ashland is consis-

tent with the foregoing analysis.

In Ashland, a California corporation and two Califor-

nia residents executed a promissory note payable to a

Kentucky corporation. The note provided that it was to

be governed by and construed in accordance with Ken-

tucky law. The payee sued on the note in California. If the

California statute of limitation were applied to the action,

it was barred; if the Kentucky statute of limitation con-

trolled, the action was timely. The trial court applied the

California statute.

The Court of Appeal affirmed, on the ground that

application of Kentucky law would violate the protective

policy of the forum, California. The Court said (129 Cal.

App. 3d at 795):

“We hold the parties to a contract may not select

the law of a disinterested state to govern their

agreement when applying that law would be

contrary to the public policy of the state whose

law would ordinarily be applied under choice of

law principles — in this case California.”

Here, the parties selected the law of an interested

state, California. As stated in McMullan, California has an

interest in applying its law to the contract between

Toshiba and Diasonics. After application of the Section

188 factors, California is “the state whose law would

A-45

ordinarily be applied under choice of law principles”.

Hence, Ashland does not support Toshiba’s position.

Toshiba further contends that the Full Faith and

Credit Clause and the Due Process Clause require Califor-

nia yield to the (assumed) policy of Forum X that forbids

indemnity.

Of course, a California court would be bound by

decisions of the United States Supreme Court interpreting

the Constitution of the United States. 7 Witkin, Summary

of California Law [9th Ed.], Constitutional Law, Section

92, and cases cited. This principle is part of the “Califor-

nia law” that the Panel is required to apply under the

Asset Purchase Agreement.

The most recent United States Supreme Court deci-

sion cited by the parties is Allstate Ins. Co. v. Hague, 449

U.S. 302 (1981). It held that a state may choose to apply

its own laws if there are significant contacts with the

forum state and application of its laws is neither arbitrary

or substantially unfair. 449 U.S. at 320, 326. Those condi-

tions are met here.

Toshiba relies upon Home Ins. Co. v. Dick, 281 U.S. 397

(1930), a case of somewhat ancient vintage. Hague stated

that Dick stands “for the Proposition that if a State has

only insignificant contact with the parties and the occur-

rence or transaction, application of its law is unconstitu-

tional”. 449 U.S. at 310-311; see Dick, 281 US. at 408, note

5. Here, California has significant contacts with the par-

ties and the transaction that is the subject of the Asset

Purchase Agreement.

A-46

The other case cited by Toshiba, Hughes v. Fetter, 341

U.S. 609 (1951), involved a refusal by a forum state to

enforce a right created by the law of another state. 341

U.S. at 612. That is not the situation here, where the issue

is whether California would decline to enforce a right

created by a contract that is valid under California law.

See by analogy Hughes, 341 U.S. at note 10.

Toshiba has not cited any case holding that the

United States Constitution requires a forum state with

significant contacts with the parties to decline to enforce

a contract, valid under the laws of the forum, by reason

of common law principles of another state that also has

contacts with the parties. A majority of the Panel does not

believe that there is such a constitutional requirement.

Toshiba argues that the choice of law provision in the

Asset Purchase Agreement is not applicable to tort

claims.

It is true that a choice of law provision in a contract

governs ex contract disputes between the contracting par-

ties and does not govern ex delicto disputes between

them. Consol. Data Term. v. Applied Digital Data Systems,

708 F. 2d 385, 390, n.3 (9th Cir. 1983) (discussing Califor-

nia choice of law decisions). However, that rule does not

assist Toshiba. Diasonics’ claim against Toshiba is based

on the indemnity provisions of the Asset Purchase Agree-

ment. Diasonics has not made a tort claim against

Toshiba.

In summary, no basis has been shown by Toshiba for

a departure from the Nedlloyd rule. The parties chose in

their agreement to make California law applicable. The

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A-47

indemnification provisions on the Asset Purchase Agree-

ment are valid under California law. They are applicable

whether the underlying tort actions are pending in Cali-

fornia or in other states.

V. THE FORM OF THE AWARD

The parties were requested to endeavor to agree

upon a form of an Award embodying the rulings in the

initial interim decision. Decision at 18. The parties were

unable to do so. Each party submitted a draft of the

Award and each party submitted comments on the draft

submitted by the opposing party. Of course, it is under-

stood that such participation by Toshiba in the determina-

tion of the wording of the final Award was at the specific

request of the Panel and that such Participation may not

be deemed to be a waiver of Toshiba’s objections to the

rulings that are embodied in the Award.

The draft submitted by Diasonics will be considered

first. Toshiba’s objections to the draft will be discussed in

turn.

Toshiba’s first objection is that the Diasonics draft

“consists largely of a revision of the ‘analysis’ portion of

the opinion set forth in the interim ruling”. No prejudice

to Toshiba appears therefrom and the objection is over-

ruled.

Toshiba’s second objection is that the Diasonics draft

“fails to declare that respondent has the right to take over

the defense of claimant on a case by case basis”.

| a aia a

A-48

Toshiba did not provide a citation. Apparently the

reference is to Section 9.3 of the Asset Purchase Agree-

ment and the detailed procedures respecting indemnifica-

tion set forth therein.

The Award will not and cannot rewrite the terms of

the Asset Purchase Agreement. Rather, the Award will

interpret the provisions of the Agreement that were the

subject of this arbitration. Accordingly, there is no need

for the Award to restate all of the various complex provi-

sions of the Asset Assumption Agreement. The provi-

sions of Section 9.3 remain in force and there is no need

to make the change requested by Toshiba.

Toshiba’s third objection is that Diasonics draft “fails

to declare that respondent has the right to direct how

claimant conducts its defense on a case by case basis,

whenever respondent does not take over the defense”.

Again, Toshiba did not provide a citation. Appar-

ently, the objection reflects Toshiba’s interpretation of

Section 9.3 of the Asset Purchase Agreement. The issue

whether that interpretation is or is not correct has not

been briefed by the parties and submitted to the Panel for

decision. It is inappropriate under these circumstances to

include the language requested by Toshiba.

Toshiba’s fourth objection is that the draft:

“purports to rule on all guarantees irrespective

of their terms and conditions, including restric-

tions on assignability, etc., which may be appli-

cable to them and the facts and circumstances

concerning which were not presented to the

A-49

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panel. The panel does not have such hypotheti-

cal guarantees before it and has no basis on

which to rule concerning such hypotheticals.”

Toshiba’s objection is meritorious. Paragraph 7 of the

Diasonics draft provides:

“In addition to the Diasonics Guaranty and

Diasonics Shortfall Agreement, Toshiba

assumed liability and owes indemnity with

respect to Diasonics’ other guarantees relating

to the MRI Division. Toshiba’s assumption of

such liabilities is valid regardless of whether

consent or any other approval to Diasonics’

assignment to Toshiba and/or Toshiba’s

assumption of such guarantees was obtained

from the party to whom such guarantee(s) is

owed or any other person or entity”.

As illustrated by the facts of the underlying action in

the Lenox Hill case, guarantees relating to the MRI Divi-

sion may have been made in various factual contexts that

could affect Toshiba’s liability. The Panel ruled against

Toshiba with respect to the Lenox Hill case. Initial interim

decision at 12-14. Other guarantee situations with differ-

ent facts could lead to a different conclusion. It may well

be that Toshiba has an indemnity obligation with respect

to all of Diasonics’ other guarantees relating to the MRI

Division. However, on the record of this arbitration, an

unqualified declaration to such effect would be unfair to

Toshiba.

Toshiba’s next objection is that the Diasonics draft

“fails to state that the counterclaim was withdrawn with-

out prejudice for the reasons set forth in [counsel’s] letter

of April 13, 1993.

A~5D-

The Diasonics draft states, “Toshiba has withdrawn

its counterclaim”. It does not specify whether such with-

drawal is with or without prejudice. From other commu-

nications by the parties, it appears that if the

counterclaim were to be reasserted in a subsequent arbi-

tration, Toshiba would contend that it could do so and

Diasonics would contend that Toshiba is barred from

doing so. This issue is not before this Panel. The draft

language accurately states what occurred and does not

purport to rule upon the legal effect of the withdrawal.

The objection is overruled.

Toshiba also submitted a draft and Diasonics objected

thereto.

Diasonics’ first objection is that the Toshiba draft is

limited to a declaration of the parties’ rights and obliga-

tions with respect to the pending underlying actions but

does not provide any guidance with respect to future

actions that may be filed.

The objection is sustained to the extent that the final

Award will set forth the conclusions in the initial interim

decision and thereby provide guidance whenever similar

issues should arise in future underlying actions. How-

ever, as noted above in discussing Toshiba’s objections

with respect to the guarantee issue, there may well be

future underlying actions that raise issues that were not

involved in this arbitration.

Diasonics’ next objection is that the Toshiba draft

does not clearly state that Toshiba must indemnify

Diasonics for its costs and expenses in the underlying

actions that may be incurred prior to the time that

Toshiba should assume the defense of these actions with

counsel acceptable to Diasonics. Diasonics included lan-

guage to such general effect in its draft (page 5, lines

11-15) and Toshiba did not object thereto. This wording

will be included in the final Award.

Diasonics’ third objection is that Toshiba’s draft

makes Diasonics’ right to indemnity conditional on

Diasonics’ duty to “cooperate” with Toshiba. Diasonics

argues that this issue was not before the Panel. Diasonics

is technically correct and the Award will be silent on this

subject. However, the parties are reminded that while the

Award resolves disputes between the parties respecting

the interpretation of the Asset Purchase Agreement, all

Provisions of that Agreement remain in full force and

effect. Hence, a failure to refer in the Award to any

particular provision of the Agreement does not imply

“at such provision may be disregarded by a party.

Diasonics’ final objection is that the Toshiba draft

“does not reflect the Panel’s ruling that Toshiba assumed

liability for, and agreed to indemnify Diasonics against,

all of the causes of action alleged in the underlying

actions, not merely those grounded in tort law”.

Emphasis in original. Toshiba responded by arguing that

“the issue of non-tort claims is not part of this arbitra-

tion”.

The Diasonics draft provides that Toshiba Shall

indemnify Diasonics with respect to six identified pend-

ing actions. Toshiba did not object to this language. At

least some of these actions involve breach of contract

claims. See Exhibits F, G and H in the Appendix to the

Opening Submission of Diasonics.

A-52

The parties discussed the underlying actions in their

submissions to the Panel. See, for example, Diasonics

Opening Submission dated January 11, 1993 at 8-13 and

Toshiba’s Preliminary Conference Memorandum dated

January 19, 1993 at 4-10. It was clear that Diasonics

sought indemnification with respect to all claims asserted

in those actions. Toshiba had a full opportunity to contest

Diasonics’ showing. It is too late now to endeavor to

draw a distinction between the tort and contract claims in

the underlying actions.

Diasonics’ objection is therefore sustained. The final

Award will incorporate Diasonics’ wording with respect

to the identified pending actions.

A further observation is appropriate. It is possible

that in future actions contract claims may be asserted that

involve factual situations substantially dissimilar to those

in the underlying actions that were the subject of the

arbitration. In such event, as discussed above in connec-

tion with Toshiba’s fourth objection to the Diasonics

draft, the final Award will not imply that Toshiba must

indemnify Diasonics for all contract claims irrespective of

the circumstances.

The final Award will take into consideration the lan-

guage submitted by both parties and will reflect the

foregoing rulings. In addition, of course, the final Award

will take into account the rulings of a majority of the

Panel in this second interim decision.

The Panel and the parties have invested a great deal

of time and effort in the resolution of the issues raised in

this arbitration. New issues may arise that were not

A-53

involved in this proceeding. Hence, it may not be possi-

ble to solve every problem that may arise in the future

respecting the critical provisions of the Asset Purchase

Agreement. However, it is the earnest hope of the Panel

that the final Award will be in a form that will at least

minimize any need to resort to future arbitration proceed-

ings on this subject.

To that end, the Panel will submit its revised draft of

the Award to the parties and give them a final oppor-

tunity to comment thereon prior to the formal rendition

of the Award pursuant to Rule 42.

VI. DISCLOSURE OF THE INITIAL INTERIM DECI-

SION

Counsel submitted several letters in May and June

1993 respecting an alleged improper disclosure by

Diasonics of the initial interim decision. Diasonics dis-

puted the allegations of Toshiba and an evidentiary hear-

ing has not been held.

The Panel met with counsel on June 11, 1993 to

discuss the disposition of the remaining issues to be

decided in this arbitration. See the Panel's letter of May

26, 1993, forwarded by the Association to the parties on

May 28, 1993. Counsel did not indicate any desire at the

June 11th meeting further to pursue the disclosure issue,

and the matter is considered by the Panel to be moot.

A-54

VII. RULE 43 DETERMINATION

Rule 43 requires the Panel to provide in the Award

for the assessment of the arbitration fees, expenses and

compensation.

Diasonics ultimately prevailed on the major issues in

this arbitration. However, the arbitration presented com-

plex issues of law. Toshiba was substantially justified in

asserting its position. The arbitration was certainly hard

fought, but there was no misconduct by either party.

The Award will provide that each party will bear its

own expenses, and that the administrative fees and

expenses of the American Arbitration Association, and

the compensation and expenses of the Neutral Arbitrator,

shall be divided equally between Diasonics and Toshiba.

Dated: December 6, 1993. /s/ Peter Anderson

Peter Anderson

Neutral Arbitrator

for a Majority

of the Panel