Petition for Writ of Certiorari — Baxter International, Inc. v. Abbott Laboratories

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Supreme Geurt, U.S.

FILED

03 _BgQWL2 2008

No. 03-

i ______________________________y}

* IN THE

Supreme Court of the Cited States

BAXTER INTERNATIONAL, INCORPORATED,

Petitioner,

ABBOTT LABORATORIES,

Respondent.

Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Seventh Circuit

PETITION FOR A WRIT OF CERTIORARI

CONSTANTINE L. TRELA, JR. CARTER G. PHILLIPS*

ROBERT N. HOCHMAN SIDLEY AUSTIN BROWN &

SIDLEY AUSTIN BROWN & WOOD LLP

WOOD LLP 1501 K Street, N.W.

Bank One Piaza Washington, D.C. 20005

10 South Dearborn Street (202) 736-8000

Chicago, Illinois 60603

(312) 853-7000

THOMAS S. BORECKI

BAXTER INTERNATIONAL,

INCORPORATED

1 Baxter Parkway

Deerfield, Illinois 60015

(847) 948-2000

Counsel for Petitioner

July 2, 2003 * Counsel of Record

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WILSON-EPES PRINTING Co., INC. — (202) 789-0096 -— WASHINGTON, D. C. 20001

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QUESTION PRESENTED

Whether an arbitration panel may shield its award from

court review for compliance with public policy because the

panel itself concluded that the award does no violence to a

specific public policy favoring competition embodied in the

antitrust laws?

(i)

CORPORATE DISCLOSURE STATEMENT

Petitioner Baxter International, Incorporated has no parent

company and no publicly held corporation owns 10% or more

of Petitioner’s stock.

TABLE OF CONTENTS

B. Abbott Introduces Sevoflurane In The United

States And Ohmeda, As Expected, Develops A

Generic Competitor...

C. The Parties Enter Arbitration To Determine

The Scope Of The Sevoflurane Agreements .....

D. Federal Court Review Of The Arbitral Award ..

REASONS FOR GRANTING THE PETITION ...........

RESIS IS TIE CI Rs aa

(iii)

ee ee

TABLE OF AUTHORITIES

CASES Page

In re Cardizem CD Antitrust Litig., No. 00-2483,

2003 WL 21360049 (6th Cir. June 13, 2003)..... 6

Dastar Corp. v. Twentieth Century Fox Film

Corp., 123 S. Ct. 2041 (2003)..........ccccceccceeeceees 4

Delta Air Lines, Inc. v. Air Line Pilots Ass’n, |

Int'l, 861 F.2d 665 (11th Cir. 1988).................. 19

Delta Air Lines, Inc. v. Airline Pilots Ass’n, 686

F. Supp. 1573 (N.D. Ga. 1987), aff'd, 861 F.2d

ee te Piss icacic cas rieeteceniens 19

EEOC v. Waffle House, Inc., 534 U.S. 279

oo, ee een 22

Eastern Associated Coal Corp. v. United Mine

Workers of Am., Dist. 17, 531 US. 57

SOUT ices cinains Raichetectepaes beds) setcas ns Cast ceucamaceies 17, 18, 21

Exxon Corp. v. Esso Workers’ Union, Inc., 118

F.3d 841 (ist Cir. 1997), abrogated on other

grounds by Eastern Associated Coal Corp. v.

United Mine Workers of Am., Dist. 17, 531 U.S.

ON PRA et 2 Stain Disraili Site TN. BOW Se ell Ae J

be oh hn a we

5 RAN eae acd CURRENT Rohe RR LSE OID 17

Exxon Shipping Co. v. Exxon Seamen’s Union,

993 F206 SST GG CH. TGGG) vo... cis eessevectetiienss 17

Gilmer vy. Interstate/Johnson Lane Corp., 500

SR eG Bekescesei bans heccatndsetsnisenascteecsiuteclanins 22

Gulf Coast Indus. Workers Union v. Exxon Co.,

U.S.A., 991 F.2d 244 (Sth Cir. 1993) .0..0.0000.... 17

International Bhd. of Elec. Workers, Local 97 v.

Niagara Mohawk Power Corp., 143 F.3d 704

Ae Rl SO iicckinitasnswaensvensuidinvenane Topo 18

Iowa Elec. Light & Power Co. v. Local Union

204, 834 F.2d 1424 (8th Cir. 1987).........0000....... 17

MidMichigan Reg’l Med. Ctr.-Clare vy.

Professional Employees Div. of Local 79, 183

FB Sr Ce BN vv entevencinccisecaninnstass 17

TABLE OF AUTHORITIES - continued

Page

Mitsubishi Motors Corp. v. Soler Chrysler-

Plymouth, Inc., 473 U.S. 614 (1985)........... 12, 14, 15,

16, 20

Moses H. Cone Mem’! Hosp. v. Mercury Constr.

Corp., 460 U.S. 1 (1983) ooo. 22

PacifiCare Health Sys., Inc. v. Book, 123 S. Ct.

Kt adhe cag TEN ME NS a a eatee 20

Prima Paint Corp. v. Flood & Conklin Mfg. Co.,

SES U.S. 39S (1967) oon cnceccsvecsccesoccoceceessse, 22

Southern Cal. Gas Co. v. Utility Workers Union

of Am., Local 132, 265 F.3d 787 (9th Cir.

iii le ate Na oo) 18, 19

United Paperworkers Int’l Union v. Misco, Inc.,

WOE UD. FO CTIGT) onc oceccccsctsscsscoceesscocesoosses 14, 21

United Steelworkers of Am. v. Enterprise Wheel

& Car Corp., 363 U.S. 593 (1960) oo. 12

Vimar Seguros Y Reaseguros, S.A. v. MV Sky

Reefer, 515 U.S. 528 (1995) 0. 12, 15, 16

W.R. Grace & Co. v. Local Union 759, 461 US.

[ts i _ | RRP ORER IEC AE PANE SOAEK ah, 2, 12, 13, 14, 21

TREATY

Convention on the Recognition and Enforcement

of Foreign Arbitral Awards, done June 10, 1958

(entered into force for the United States Dec.

29, 1970), reproduced in 9 U.S.C. § 201 note.. 2, 8, 22

IN THE

Supreme Court of the United States

No. 03-

BAXTER INTERNATIONAL, INCORPORATED,

Petitioner,

ABBOTT LABORATORIES,

Respondent.

Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Seventh Circuit

PETITION FOR A WRIT OF CERTIORARI

Petitioner Baxter International, Incorporated respectfully

requests that a writ of certiorari issue to review the judgment

of the United States Court of Appeals for the Seventh Circuit

in this case.

OPINIONS BELOW

The opinion of the United States Court of Appeals for the

Seventh Circuit was entered on January 16, 2003 and is

included in the Appendix (“App.”) at la-18a. It has been

officially reported and can be found at Baxter International,

Inc. v. Abbott Laboratories, 315 F 3d 829 (7th Cir. 2003).

Baxter’s petition for rehearing en banc was denied on April

10, 2003. The order denying the petition and the dissenting

opinion accompanying that order are included in the

Appendix at 92a-94a. They, too, were officially reported and

can be found at Baxter International, Inc. v. Abbott

Laboratories, 325 F.3d 954 (7th Cir. 2003). The-March 27,

2002 opinion of the district court is not reported, but is

reproduced in the Appendix at 19a-42a.

JURISDICTION

The court of appeals entered its opinion and judgment on

January 16, 2003. Petitioner timely filed its petition for

rehearing en banc on January 30, 2003. That petition was

denied on April 10, 2003. The jurisdiction of this Court is

invoked under 28 U.S.C. § 1254(1).

TREATY PROVISION INVOLVED

The arbitral award in this case falls within the scope of the

Convention on the Recognition and Enforcement of Foreign

Arbitral Awards, done June 10, 1958 (entered into force for

the United States Dec. 29, 1970) (“New York Convention”),

which is reproduced in the notes to 9 U.S.C. § 201. Article V,

§ 2(b) of the New York Convention provides:

Recognition and enforcement of an arbitral award

may ... be refused if the competent authority in the

country where recognition and enforcement is sought

finds that ... [t]he recognition or enforcement of the

award would be contrary to the public policy of that

country.

STATEMENT OF THE CASE

This Court has tong recognized that public policy is a

significant constraint on the enforceability of arbitration

awards. See W.R. Grace & Co. v. Local Union 759, 461 US.

757 (1983). Courts asked to approve such awards have

routinely declined to do so when the ultimate effect of the

arbitration decision conflicts with federal law (here, the

antitrust laws) and thus does violence to public policy norms.

To be sure, courts are not free to use public policy as an

eee vie taets-ot ae |

excuse for setting aside awards with which they disagree; that

would invade the province of the arbitral process. By the

same token, until the decision in this case, arbitrators were not

authorized effectively to preempt judicial scrutiny of the

consistency between their awards and public policy as

embodied in federal law by purporting to decide that issue as

part of the arbitration. The Seventh Circuit abdicated its

responsibility to ensure that public policy is not vitiated by

private arbitrators. This fundamental departure from_the

rulings of this Court and the courts of appeals warrants

certiorari.

A. The Sevoflurane Agreements.

This case concerns Petitioner’s effort to market a generic

version of a successful inhalable anesthetic, sevoflurane, in

competition with Abbott Laboratories’ (“Abbott’s”) brand-

name product. Petitioner invented sevoflurane in the mid-

1960s, but no commercially viable process for producing it

existed until the early 1980s when Petitioner obtained patents

on the “one-step process” for making sevoflurane. App. la.

Petitioner then licensed its patents on both the sevoflurane

molecule and the one-step process to a Japanese company,

Maruishi, so that Maruishi could obtain regulatory approval

to market sevoflurane in Japan and other Asian countries. In

the early 1990s, Maruishi, having obtained regulatory

approval, introduced sevoflurane in Japan, where the product

was a commercial success.

Petitioner and Maruishi then turned their attention to the

United States. Maruishi decided not to introduce sevoflurane

in the United States itself, opting instead to sublicense its

rights to Respondent Abbott Laboratories. In 1992, after

lengthy and detailed negotiations, Petitioner entered into a

new licensing agreement with Maruishi, which gave Maruishi

the right to grant sublicenses, and Maruishi entered into a

separate sublicensing agreement with Abbott.

Because Petitioner’s patents on sevoflurane itself and the

method of using it as an anesthetic had expired in 1989, that

product and method were already in the public domain by

1992. Dastar Corp. v. Twentieth Century Fox Film Corp.,

123 S. Ct. 2041, 2048 (2003) (“‘the right to make [an article

whose patent has expired] — including the right to make it in

precisely the shape it carried when patented — passes to the

public”) (alteration in original) (quoting Sears, Roebuck &

Co. v. Stiffel Co., 376 U.S. 225, 230 (1964)). As a result, the

1992 license and sublicense could not and did not convey

rights to sevoflurane itself or to its use as an anesthetic.

Instead, the license and sublicense conveyed rights only to the

one-step process patents and related know-how. The parties

thus were fully aware that Abbott could face competition for

the sale of sevoflurane in the United States, even before the

licensed patents expired in 2005, from generic producers who

developed processes for producing sevoflurane that did not

infringe the one-step process patents. Indeed, Abbott

expressly anticipated and planned for such competition to

arrive by 2000.

Although Petitioner and Abbott did not enter into any

license agreements with each other, both Petitioner and

Abbott along with Maruishi (and a fourth party not relevant to

these proceedings) entered into a separate Dispute Resolution

Agreement. That agreement provided that, if a dispute arose

under the sevoflurane agreements, the parties agreed first to

negotiate, then to mediate, and finally, if necessary, to

arbitrate. App. 10Sa-107a. In the event arbitration became

necessary, the agreement expressly set a standard to guide the

conduct of the arbitrators. They should strive to prevent an

“Impairment of the Original Commercial Relationship.” Jd.

at 97a. This “Impairment of the Original Commercial

Relationship” was defined to include “an alleged breach or

termination of one of the Sevoflurane Agreements that results

or could reasonably be expected to result in any change or

potential change in the Original Commercial Relationship that

would ... reduce the amount a party would but for such

change otherwise receive under any Sevoflurane Agreement.”

Id. at 97a-98a. In discharging that duty, the arbitrators were

directed to employ “sound and impartial business judgment,”

which is also what the agreement directed executives of the

parties to employ during pre-arbitration negotiations

concerning any disputes. Jd. at 97a.

B. Abbott Introduces Sevoflurane In The United

States And Ohmeda, As Expected, Develops A

Generic Competitor.

After obtaining the necessary FDA approval, Abbott began

marketing sevoflurane in the United States in 1995. App. 2a.

Abbott has enjoyed market exclusivity in the United States

ever since, even though it anticipated that generic competition

would likely arise by 2000, well before the expiration of the

process patents that were licensed to it.

As Abbott had anticipated, a competitor, Ohmeda, by 1997

had developed a commercially viable process for making

sevoflurane (the “three-step process”) that did not infringe the

licensed one-step process. Ohmeda built a pilot plant and

prepared plans for a full-scale production facility so that it

could, after it obtained FDA approval, compete with Abbott.

In April 1998, after Ohmeda had developed the three-step

process and its plans to compete, Petitioner acquired Ohmeda.

C. The Parties Enter Arbitration To Determine The

Scope Of The Sevoflurane Agreements.

In September 1998, Petitioner informed Maruishi of its

intention to pursue Ohmeda’s plans to develop and market a

non-infringing generic sevoflurane in the United States.

When Abbott learned of Petitioner’s plan, it invoked the

procedures of the Dispute Resolution Agreement. After

efforts to negotiate and mediate a resolution failed, Abbott

submitted its claim for arbitration.

en 6

Abbott asked the arbitrators for an order preventing

Petitioner from selling generic sevoflurane until the

sevoflurane agreements expire in 2005. Abbott thus asked the

arbitrators to impose a covenant not to compete- between

Petitioner and Abbott with respect to a product that is in the

public domain. Such a covenant not to compete would be a

per se violation of Section 1 of the Sherman Acct if it resulted

from a direct agreement between the parties. See, e.g., In re

Cardizem CD Antitrust Litig., No. 00-2483, 2003 WL

21360049, at *2, *7-*8 (6th Cir. June 13, 2003) (holding that

agreement by which brand name manufacturer pays generic

seller to keep its FDA-approved generic product off the

market is a per se violation of the antitrust laws).

During the arbitration, Abbott asserted a variety of bases

for the order it sought which, had they been well founded,

might have rendered it consistent with the Sherman Act.

Abbott claimed that the three-step process would, in fact,

infringe the licensed one-step process patents. The arbitrators

disagreed. App. 59a. Abbott also claimed that the three-step

process was an improvement on the one-step process or that

Petitioner had developed the three-step process using know-

how derived from the one-step process, thus breaching the

exclusive license that Petitioner had granted to Maruishi. The

arbitrators also rejected these claims. Jd.

In sum, the arbitrators expressly concluded that the

licensing agreement did not contain the covenant not to

compete that Abbott sought. App. 63a-64a. Instead, two of

the three arbitrators, over the dissent of the third, determined

that they were authorized to impose a covenant not to

compete based on the broad authority they were given in the

Dispute Resolution Agreement. The majority reasoned, as

Abbott had argued, that if Petitioner sold generic sevoflurane,

then Abbott would receive less money from sales of its own

sevoflurane. Of course, this is only because of the monopoly

rents that Abbott could extract by eliminating Petitioner as a

competitor. The majority reasoned that the Dispute

oth itt rte Sait ae Ns 5 ais roe

Resolution Agreement empowered the arbitrators, even

absent a breach of the Baxter-Maruishi licensing agreement,’

to prevent an “Impairment of the Original Commercial

Relationship” by preventing Petitioner from taking any action

that would “‘reduce the amount [Abbott] would ... otherwise

receive’” from its sales of sevoflurane. Jd. at 61a (emphasis

omitted). They thus barred Petitioner from introducing its

generic drug in competition with Abbott. Jd. at 67a.

As is plain, nothing in the claims Abbott presented to the

arbitrators involved antitrust law. Rather, Petitioner

perceived that the order Abbott sought could be deemed an

agreement between Petitioner and Abbott (the arbitrators

being the mere agents of the parties) to allocate markets in

violation of Section 1 of the Sherman Act. Petitioner argued

that the order Abbott sought would, therefore, violate the

public policy, reflected in the Sherman Acct, prohibiting a

naked horizontal market allocation. Petitioner also pointed

out that the result that Abbott sought would violate the public

policy reflected in a Consent Decree that Abbott had entered

into with the Federal Trade Commission.” As Petitioner

explained, the sevoflurane agreements “cannot be interpreted

' The Seventh Circuit panel majority thus erred when it stated that the

arbitrators ruled that Baxter’s sale of generic sevoflurane would violate

the Baxter-Maruishi license. App. 3a. The arbitrators specifically

concluded to the contrary, id. at 63a-64a, and believed that they were

authorized to impose a covenant not to compete even in the absence of a

breach of the license agreement. Jd. at 61a.

*In May 2000, Abbott and the FTC entered into a consent decree

arising from an agreement between Abbott and Geneva Pharmaceuticals

in which Abbott had agreed to pay Geneva $4.5 million per month to

delay the introduction of Geneva’s generic version of terazosin

hydrochloride, a drug for which Abbott was the exclusive, brand-name

seller. Pursuant to the terms of the Consent Decree, Abbott must refrain

from “being a party” to agreements with generic drugmakers that would

keep generic products off the market beyond the point in time at which the

FDA would permit them to enter that market. By virtue of the arbitrators’

ruling, Abbott is now a party to such an agreement with Petitioner.

in a way [that] violates public policy.” Arbitration Hr’g Tr. at

1478, Abbott Labs. v. Baxter Int’] (CPR Inst. heard Mar. 8,

2001). In one brief paragraph, the arbitrators summarily

decided that “no illegality results from” the non-compete

covenant they were creating. App. 66a-67a.

D. Federal Court Review Of The Arbitral Award.

Abbott petitioned the United States District Court for the

Northern District of Illinois to enforce the arbitral award

pursuant to the Convention on the Recognition and

Enforcement of Foreign Arbitral Awards (“New York

Convention”). In its response, Petitioner recognized that the

fundamental issue of contract interpretation, i.e., whether the

Dispute Resolution Agreement empowered the arbitrators to

impose a covenant not to compete, could not be reargued.

However, because a federal court was being asked, pursuant

to the New York Convention, to enforce the arbitral award,

the district court necessarily had to decide whether it should

refuse to enforce the award because the award is “contrary to

the public policy of’ the United States. New York

Convention, art. V, § 2(b), reproduced in 9 U.S.C. § 201 note.

Petitioner argued that the award violated the public policy of

the United States as reflected in both Section 1 of the

Sherman Act and the Abbott/FTC Consent Decree.

The district court did not hesitate to review the public

policy question. App. 3la. After conducting its own analysis

of the issues, the court concluded — wrongly — that Petitioner

had failed to establish either an antitrust violation or a

violation of the Abbott/FTC Consent Decree. /d at 31a-39a

(antitrust), 39a-40a (Consent Decree).

The Seventh Circuit, by a two-to-one vote, affirmed.

Unlike the district court, however, the panel majority flatly

refused to consider the merits of Petitioner’s challenge to the

award as a horizontal market allocation that violated Section

1 of the Sherman Act and the Abbott/FTC consent decree.

The panel determined that it had no authority even to reach

Petitioner’s public policy argument because the arbitrators

had considered and reached their own conclusion on that

issue. As the panel viewed the matter, once the arbitrators

rejected Petitioner’s argument that Abbott’s interpretation of

the contract would compel unlawful conduct (both under the

antitrust laws and the consent decree), a federal court had no

choice but to confirm the award. Petitioner could not ask a

federal court to refuse to confirm the award, even if

confirming the award would effectively order the parties to

eliminate competition in a market for an important medical

product. App. 4a.

The panel majority acknowledged Petitioner’s argument

that the arbitrators had created and not merely decided an

antitrust issue. App. 5a. That is, Petitioner’s public policy

challenge focused exclusively on the effect of the arbitrators’

award, and did not challenge the arbitrators’ view that the

Dispute Resolution Agreement authorized them to impose a

covenant not to compete. As the panel majority recognized,

Petitioner invoked the rule that prohibits an arbitrator to

“command the parties to violate rules of positive law.” Jd

But, to the panel majority, “whether the tribunal’s

construction of the ... agreement has [the effect of

commanding the parties to violate the law] was a question put

to, and resolved by, the arbitrators. They answered no, and as

between Baxter and Abbott their answer is conclusive.” Jd. at

5a-6a. On this basis, the panel majority decided that a federal

court could not independently review whether the arbitrators

were commanding the parties to violate the law.

Judge Cudahy dissented. Judge Cudahy reasoned that

Peti:ioner’s decision to urge the arbitrators not to read the

contract to impose an unlawful covenant not to compete did

not divest a federal court of authority independently to review

the award to determine whether it did command the parties to

violate the antitrust laws. Judge Cudahy perceived “an

important distinction” between “a simple [antitrust] claim by

Baxter against Abbott,” on the one hand, and “a request by

Baxter that the arbitrators step back and consider the larger

implications of their underlying decision,” on the other. App.

12a n.3. Judge Cudahy recognized that a court would surely

defer to the arbitrators’ ruling in the former situation. /d. at

1 la-12a.

But this case presented the latter. When the arbitrators

examined Petitioner’s contention that Abbott’s proposed

order would be an unlawful covenant not to compete, they

were “reviewing their own decision” in precisely the way a

court would. App. 13a n.5. Specifically, the arbitrators were

examining their interpretation of the Dispute Resolution

Agreement to determine whether any “‘illegality results”

from the award. /d. (citing App. 66a). Judge Cudahy argued

that to allow an arbitration panel to insulate its decision from

court review through the simple expedient of declaring that its

decision does not command the parties to violate the law

creates an exception that swallows the rule: “[U]nder the

majority’s analysis, the rule that unlawful conduct cannot be

commanded by arbitrators is consumed by the exception that,

if the arbitrators themselves say that what they have

commanded is not unlawful, then ‘their answer is

conclusive.’” Jd. at 13a.

Judge Cudahy then analyzed the merits of Petitioner’s

antitrust challenge. Judge Cudahy recognized that an

agreement among competitors that, in isolation, reduces

competition may be a necessary part of a cooperative venture

(like the agreements that brought sevoflurane to the United

States) that, on the whole, benefits consumers. App. 15a. But

the covenant not to compete imposed by the arbitrators here

was not of that sort. It was in no way a necessary part of the

agreements that brought sevoflurane to the United States.

Competition from Petitioner was not a major concern in 1992,

especially after Petitioner had licensed away not only the one-

step process, but also any improvements thereon and all of its

related know-how. ~ Abbott knew that competition from

companies like Ohmeda was on the horizon, and a broad

covenant not to compete from Petitioner would have provided

no protection against that. In short, Judge Cudahy could find

no reason to believe that Abbott considered a broad covenant

not to compete from Petitioner an essential part of the

arrangement, especially in light of the fact that Abbott had

failed to include any language to that effect in the parties’

lengthy and detailed agreements. Thus, Judge Cudahy

concluded that the arbitrators’ award effects an unlawful

horizontal allocation of markets that is not ancillary to any

procompetitive agreement. /d. at 15a-17a.

Petitioner sought en banc review. By a vote of five to

three, the court denied the petition.’ Judge Ripple issued an

opinion dissenting from the denial of rehearing en banc,

joined by Judges Diane P. Wood and Williams. The

dissenters recognized that “the scope of judicial review of

arbitral decisions that, at least arguably, order the parties to

violate the law is an important issue.” App. 93a. Further, the

dissent indicated that the panel majority’s holding is “difficult

to square with existing Supreme Court precedent and, indeed,

with the precedent of this circuit and our sister circuits.” Jd

REASONS FOR GRANTING THE PETITION

The Seventh Circuit’s ruling has broken new and unsettling

ground regarding the important and recurring issue of court

review of arbitral awards. The panel majority’s view, that

arbitrators have the power to shield their own orders from

court review for compliance with the dictates of federal law in

general and the Sherman Act in particular, cannot be squared

with this Court’s precedent, with the precedent of the other

federal courts of appeals, with the New York Convention, or

with sound arbitration policy. The panel’s decision threatens

* Three judges recused themselves from considering the petition. The

order denying rehearing en banc lists nine judges, but Judge Cudahy, who

served on the panel, is a senior judge and therefore did not participate in

the “vote of the active members of the court.” App. 92a.

both to discourage arbitration as a means of resolving

disputes, thus increasing the burdens on the federal courts,

and to undermine the uniform rules defining the boundaries

between courts and arbitrators. The Court should grant this

petition to preserve the effect of its own prior decisions, to

promote the federal policy favoring arbitration, and to ensure

a uniform national approach to court review of arbitral awards

for compliance wiih public policy.

1. The Decision Below Is Contrary To. This Court's

Decisions. Arbitrators have broad discretion to interpret the

parties’ contract. Parties generally may not ask courts to

correct arbitrators’ errors of contract interpretation. United

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

U.S. 593, 596-99 (1960). Accordingly; if the arbitrators

interpret a contract in a way that requires a party to violate the

law or is otherwise inconsistent with public policy, that party

may not ask a court to read the contract differently; issues of

contract interpretation are exclusively the province of the

arbitrators.

But that proposition does not remotely suggest that a party

may not ask a court to refuse to enforce the award becausé it

violates public policy. In a series of cases beginning with

W.R. Grace & Co. v. Local Union 759, 461 U.S. 757 (1983),

and continuing through Mitsubishi Motors Corp. v. Soler

Chrysler-Plymouth, Inc., 473 U.S. 614 (1985), and Vimar

Seguros Y Reaseguros, ¥.A. v. M/V Sky Reefer, 515 U.S. 528

(1995), this Court has «dressed that question and recognized

that protecting the dictates of public policy is solely the

province of the judiciary. In this series of cases, the Court has

indicated that arbitrators have the authority to consider, in the

first instance, whether one party’s interpretation of a contract

would violate public policy. But even as these cases permit

arbitrators to consider the public policy implications of

proposed contractual interpretations, they make clear that,

regardless of whether the arbitrator considers the public

policy issue, the ultimate authority to ensure that an arbitral

order does no injury to the commands of specific public

policies rests with the courts.

W.R. Grace involved a dispute between certain union

members and their employer. The employer, Grace, had laid

off the union members pursuant to an agreement Grace had

with the EEOC regarding past discrimination and its seniority

system’s effect of perpetuating that discrimination. The

agreement with the EEOC was inconsistent with Grace’s

collective bargaining agreement with its union. 461 US. at

760. Grace obtained a district court judgment stating that the

terms of the EEOC agreement were binding on all parties,

including Grace and the union, regardless of any

inconsistency with the collective bargaining agreement. /d. at

761. Later the Fifth Circuit reversed and Grace reinstated the

laid-off workers.

Pursuant to the collective bargaining agreement, the

employees initiated arbitration to collect back pay for the time

they were out of work. /d at 762. Grace argued that the

district court’s order enforcing the agreement with the EEOC

precluded an award of back pay, because Grace was

complying with that court order during the period for which

the employees were seeking back pay. The arbitrator

concluded that the collective bargaining agreement did not

preclude an award of back pay even if the employees were

laid off in compliance with a then-valid court order. Jd at

763-64.

This Court refused to reconsider the arbitrator’s

interpretation of the collective bargaining agreement. /d at

765-66. Thus, this Court accepted that the arbitrator had

properly interpreted the contract to require Grace to

compensate the employees with back pay, even though Grace

was complying with a court order during the relevant period.

Still, this Court reviewed the arbitrator’s award for

compliance with public policy. It did so because “a court may

not enforce a collective-bargaining agreement that is contrary

to public policy.” /d. at 766 (emphasis added). Even though

the Court accepted that the arbitrator's reading of the

collective bargaining agreement was correct, the Court still

independently reviewed the agreement, as interpreted by the

arbitrator, to ensure compliance with public policy before

enforcing the arbitrator’s ruling. Although the arbitrator in

Grace had not himself considered the public policy question,

this Court specifically indicated that it would not have

mattered if he had. The arbitrator's “view of his own

jurisdiction precluded his consideration of th[e public policy]

question, and, in any event, the question of public policy is

ultimately one for resolution by the courts.” Jd (emphasis

added); see United Paperworkers Int’l Unien v. Misco, Inc.,

484 U.S. 29, 43 (1987) (stating that a decision regarding

whether an award violates public policy “turn[s] on our

examination of whether the award created any explicit

conflict with other ‘laws and legal precedents’”) (emphasis

added). Ultimately, this Court found that the arbitrator’s

ruling was not contrary to public policy and enforced it. But

it did so only after reviewing de novo the public policy

question on its merits. W.R. Grace, 461 U.S. at 766-72.

Mitsubishi confirms the approach outlined in W.R. Grace.

The principal issue in Mitsubishi was whether antitrust claims

could be submitted to a foreign arbitration panel, and this

Court answered that they could. But the United States, as

amicus, expressed concern that the arbitrators might read the

choice-of-law clause (Swiss law) in combination with the

forum-selection clause (Japanese arbitration) “wholly to

displace American law.” 473 U.S. at 637.19. The effect of

such an interpretation would be that the clauses “operated in

tandem as a prospective waiver of a party’s right to pursue

statutory remedies for antitrust violations.” Jd. Because the

arbitration panel had not yet interpreted the contract that way,

this Court had no “occasion to speculate on this matter at this

stage in the proceedings.” Jd. Nevertheless, this Court made

clear that at a later stage in the proceedings, if the arbitrators

in fact read the contract as the United States feared, “we

would have little hesitation in condemning the agreement as

against public policy.” Jd. The Court cited a variety of cases

that stand for the settled rule prohibiting parties by private

agreement from releasing each other from antitrust liability

arising out of their own agreements. /d Put simply, if the

arbitrators, over one party’s public policy objection, decided

to read the contract as an unlawful prospective waiver of

remedies under the Sherman Act, that ruling would not be

enforceable by a court.

In Vimar, the Court, for a third time, took the same

approach to federal review of arbitral awards for violations of

public policy. Vimar involved a dispute between the owner

of a shipload of fruit that had been damaged in transit and the

owner of the vessel transporting the fruit. The agreement

between the parties required arbitration in Japan. The

transaction between the parties was subject to the federal

Carriage of Goods by Siea Act (“COGSA”). The fruit owner

argued that the Court should not send the case to arbitration

because certain Japanese rules, potentially applicable because

of the agreement’s choice-of-law provision, were inconsistent

with COGSA regarding whether the shipowner could defend

against the claim based on acts or omissions by the stevedores

hired by the shipowner. 515 U.S. at 539.

This Court, acknowledging that the concern was

substantial, refused to decide how such a conflict between

COGSA and the Japanese rules, if any conflict existed, should

be resolved. Instead, this Court held that the arbitrators

should consider the question in the first instance. This

disposition was justified because court review remained

available if the arbitrators ruled both that the Japanese rules

applied under the contract and interpreted those rules-in a

manner inconsistent with COGSA. /d. at 540. Relying on

Mitsubishi, this Court said that the district court would, at the

award enforcement stage, have a duty to ensure that that the

construction of the contract and the award are not inconsistent

with the public policy reflected in COGSA: /d.

In sum, this Court has rejected the outdated suspicion that

courts once held for arbitrators. “[W]e are well past the time

when judicial suspicion of the desirability of arbitration and

of the competence of arbitral tribunals inhibited the

development of arbitration as an alternative means of dispute

resolution.” Mitsubishi, 473 U.S. at 626-27. But the federal

policy in favor of arbitration has not led this Court as far as

the decision below takes the law: courts abdicating to

arbitrators the authority to review awards to ensure that they

do not command the parties to violate the law and hence

violate public policy. The issue whether the arbitral award so

departs from public policy as to be unenforceable remains,

under this Court’s opinions, the province ultimately of the

courts.

All of this produces a simple and sensible approach for

dealing with a contract that could potentially be interpreted to

violate public policy. The arbitrator should, in the first

instance, consider the public policy challenge to a party’s

proposed contractual interpretation. And, if the arbitrator

rejects that challenge and attempts to enforce a reading of the

contract that compels a party to violate the law, the courts

-retain their obligation to consider the public policy challenge

on its merits. The Seventh Circuit, in the decision below,

refused to hear Petitioner’s challenge on antitrust grounds on

its merits, choosing instead to give the arbitrators the final

word on the lawfulness of their own ruling. At a minimum,

the Court should clarify whether its statements in W.R. Grace,

Mitsubishi, and Vimar reflect the proper role of the judiciary

in enforcing arbitral awards that may violate fundamental

public policy norms.

2. The Other Circuits Have Faithfully Applied This Court’s

Approach To Judicial Review Of Arbitral Awards For

Compliance With Public Policy. All the other circuits to have

confronted the issue agree that, even if an arbitrator considers

and rejects a public policy challenge to his interpretation of a

contract, the losing party has a right to federal court review of

the public policy issue at the award enforcement stage.

“Once the public policy question is raised, [a court] must

answer it by taking the facts as found by the arbitrator, but

reviewing his conclusions de novo.” Jowa Elec. Light &

Power Co. v. Local Union 204, 834 F.2d 1424, 1427 (8th Cir.

1987); MidMichigan Reg’! Med. Ctr.-Clare v. Professional

Employees Div. of Local 97, 183 F.3d 497, 504 (6th Cir.

1999) (“courts will not enforce a contract that they

independently determine [has been interpreted by an

arbitrator] to be contrary to public policy”); Exxon Corp. v.

Esso Workers’ Union, Inc., 118 F.3d 841, 845 (1st Cir. 1997)

(“the question of what public policy demands is within the

judicial, not the arbitral, domain”), abrogated on other

grounds by Eastern Assaciated Coal Corp. v. United Mine

Workers of Am., Dist. 17, 531 U.S. 57 (2000); Gulf Coast

Indus. Workers Union v. Exxon Co., U.S.A., 991 F.2d 244,

248 n.5 (Sth Cir. 1993) (“courts are the ultimate arbiters of

public policy, not arbitrators”); Exxon Shipping Co. v. Exxon

Seamen's Union, 993 F.2d 357, 360 (3d Cir. 1993) (“Once we

identify a public policy, we must determine whether the

arbitrator’s award, as reflected in his interpretation of the

"agreement, violated that policy.”).

The issue commonly arises in the labor arbitration context,

in which a collective bargaining agreement permits an

employer to fire an employee only for “just cause.” Each

time an arbitrator applies the “just cause” standard to a

particular dismissal, he is effectively interpreting the “just

cause” language of the contract either to cover or not to cover

the circumstances presented. Eastern Associated Coal Corp.

v. United Mine Workers of Am., Dist. 17, 531 U.S. 57, 61-62

(2000). Employers have claimed that reinstating the

employee, as the union requests, would interpret the “just

cause” language of the contract to require the employer to

violate federal safety regulations. And, as the decisions

discussed below from the Second, Ninth, and Eleventh

Circuits illustrate, the federal courts consider that public

policy issue on its merits, cven when the arbitrator has

already considered the governing regulations and determined

that they did not (or did) require the employer to dismiss the

employee.“

In International Brotherhood of Electrical Workers, Local

97 v. Niagara Mohawk Power Corp., 143 F.3d 704 (2d Cir.

1998), an employee of a nuclear power plant had been

dismissed by his employer after testing positive for cocaine.

An arbitrator “examined at length” the federal regulations the

power plant had cited concerning the public policy

considerations at issue in the dispute. Jd at 709. The

arbitrator ultimately ruled against. the power plant and

reinstated the employee. The power plant challenged the

award on public policy grounds, and the Second Circuit

independently reviewed the regulations at issue to determine

whether they stated a public policy inconsistent with the

arbitral award. /d. at 715-19.

Southern California Gas Co. v. Utility Workers Union of

America, Local 132, 265 F.3d 787 (9th Cir. 2001), also

involved a utility’s dismissal of workers who had tested

positive for drugs. The tests were administered pursuant to a

federally mandated random testing program. Jd. at 790. The

parties disputed whether the tests had been administered in

accordance with the program, and an arbitrator decided that

they had not. Jd at 792. The arbitrator ordered the

employees reinstated. The utility company challenged the

award on public policy grounds, referring to a regulation that

specifically required the company not to employ individuals

“ Indeed, this Court, in Eastern Associated Coal, 531 U.S. at 63-67,

independently examined the employer’s public policy defense to

reinstatement even though the arbitrator had considered that issue in the

first instance. Brief for Respondents at 3, Eastern Associated Coal Corp.

v. United Mine Workers of Am., Dist. 17, 531 U.S. 57 (2000) (No. 99-

1038).

who failed a federally mandated drug test. /d. at 795. Given

that the arbitrator had already determined that the tests

federal regulations, the opinion cf the panel majority in this

case would require a federal court to reject the utility

company’s public policy challenge without reaching its

merits. But the Ninth Circuit, though affirming the arbitral

award, specifically conducted its own review of the

regulations to determine whether the drug tests had complied

with federal requirements. Jd. at 795-96.

Delta Air Lines, Inc. v. Air Line Pilots Ass'n, International,

861 F.2d 665 (11th Cir. 1988), involved the dismissal of a

pilot for flying while intoxicated. The pilot was dismissed for

violating both airline policy and federal regulations. /d. at

668. An arbitration panel reinstated the pilot. As the

Eleventh Circuit viewed the arbitral ruling, the panel “ha{d]

construed the collective bargaining agreement in such a

manner that it appears that Delta has agreed to submit to

arbitration the question as to whether it should authorize

operation of aircraft by pilots while they are drunk.” /d. at

671. Despite the fact that the arbitrators had been presented

with the various legal bases that the airline asserted reflected

a public policy against employment of pilots who have flown

while intoxicated, see Delta Air Lines, Inc. v. Airline Pilots

Ass'n, 686 F. Supp. 1573, 1575 (N.D. Ga. 1987), the Eleventh

Circuit reviewed those materials de novo and found the

arbitral award incompatible with public policy. 861 F.2d at

672-74.

The Seventh Circuit, in an opinion by a respected jurist, has

stated a position that stands alone and conflicts with a

standard of review adopted by the other circuits. This is

precisely the situation in which review by this Court is

warranted.

3. The Decision Below Threatens Effectively To Nullify The

Public Policy Exception To Enforcement Of Arbitral Awards

And Reflects Poor Arbitration Policy. The approach set forth

in Grace, Mitsubishi, and Vimar, and followed by the other

circuits, should have led the Seventh Circuit to consider on its

merits Petitioner’s argument that the arbitral award was

grossly anticompetitive and therefore that the interests of

consumers required that it not be enforced. In accord with the

approach outlined in these cases, Petitioner first tried to

persuade the arbitrators that Abbott’s proposed interpretation

of the Dispute Resolution Agreement would cause the parties

to violate the antitrust laws and Abbott to violate its consent

decree with the FTC.* When the arbitration panel accepted

Abbott’s interpretation over Petitioner’s opposition, based in

part on public policy, Petitioner, again following the approach

outlined above, asked the district court to “condemn[] the

agreement as against public policy.” Mitsubishi, 473 U.S. at

637 n.19.

The court of appeals rejected the course detailed by existing

caselaw. Instead, the panel majority relied on the general, but

here inapplicable, rule that when arbitrators decide antitrust

claims, a court’s review is limited. App. 4a-S5a. That is

certainly true when the parties have agreed to arbitrate an

antitrust claim, seeking affirmative relief, brought by one

party against another. Mitsubishi, 476 U.S. at 628-40. But

that rule is not implicated when the antitrust issue is presented

* Just this past April, this Court, in PacifiCare Health Systems, Inc. v.

Book, 123 S. Ct. 1531 (2003), indicated that an arbitrator should be

permitted, in the first instance, to consider whether an arbitration clause in

a contract that prohibits the award of punitive damages in arbitration

would prohibit the arbitrator from awarding treble damages under RICO.

Nothing in PacifiCare suggests that submitting the issue to the arbitrator

in the first instance would prevent a court, at the enforcement stage, from

determining whether an arbitral decision to refuse to award treble damages

based on the contract’s prohibition on punitive damages violates public

policy by frustrating the remedial purposes of RICO. If the Seventh

Circuit’s ruling stands, then PacifiCare’s rule requiring an arbitral ruling

in those circumstances ensures that no court will be permitted to reach the

underlying RICO issue.

as a public policy-based defense against the opposing party’s

proposed construction of a contract.

When raised as a defense, as Petitioner has done here, the

antitrust issue presents a question within the well-settled

meaning of the public policy exception to enforcement of

arbitral awards: a court should not enforce an arbitral award

that commands a party to violate the law. Eastern Associated

Coal, 531 U.S. at 63; Misco, 484 U.S. at 42; W.R. Grace, 461

U.S. at 766. If Petitioner is correct, then the Dispute

Resolution Agreement as interpreted by Abbott and the

arbitrators violates the Sherman Act and an FTC consent

decree. In turn, the arbitral award enforcing that agreement

commands Petitioner to violate the Sherman Act. There is no

similar possibility of a command to violate the law when the

parties arbitrate an antitrust claim. Even an erroneous ruling

that permits anticompetitive conduct to continue does not

compel any violation of the law; it merely permits it.

The panel majority read Mitsubishi expansively to require

courts to defer not only to an arbitrator’s ruling on an antitrust

claim, but also to an arbitrator’s ruling that his own order

does no violence to the antitrust laws. The panel found

support for this expansive reading in the general rule that

courts have only limited authority to review an arbitrator’s

ruling for legal errors. App. 4a. If allowed to stand, this line

of analysis will vitiate the public policy exception in its

entirety. As this Court has made clear, a party may seek to

prevent enforcement of an arbitral award for violating public

policy only when the policy is “well defined and dominant,

and ... ascertain{able] ‘by reference to the laws and legal

precedents and not from general considerations of supposed

public interests.” W.R. Grace, 461 U.S. at 766. That is,

public policy is revealed entirely through traditional materials

of positive law — statutes, regulations, and court precedents.

Eastern Associated Coai, 531 U.S. at 63. If courts must

always defer slavishly to arbitrators’ analyses of positive law,

even in the context of public policy challenges to arbitral

awards themselves, then there is nothing left of the public

policy exception, which is supposed to restrict an arbitrator’s

power. The panel majority’s analysis thus has the effect of

reading the public policy exception to enforcement of arbitral

awards out of the New York Convention. New York

Convention, art. V, § 2(b) (stating enforcement should be

refused where “recognition or enforcement of the award

would be contrary to the public policy of [the court’s]

country”), reproduced in 9 U.S.C. § 201 note.

Thwarting the public policy exception to enforcement of

arbitral awards is not only contrary to the New York

Convention and the precedents discussed above, but is also

unsound arbitration policy. As an initial matter, because

arbitration agreements are contracts, they should be

interpreted and applied consistent with the parties’ intent.

EEOC v. Waffle House, Inc., 534 U.S. 279, 294 (2002). It is

hardly reasonable to assume that parties intend to insulate

from judicial review not only the arbitrator’s interpretation of

the contract, but also an order that compels a violation of

positive law.

Further, this Court repeatedly has emphasized the federal

policy favoring arbitration of disputes. Gilmer vv.

Interstate/Johnson Lane Corp., 500 U.S. 20, 25 (1991);

Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460

U.S. 1, 24 (1983). Arbitration provides a speedy and efficient

means of resolving disputes, and helps relieve the burden on

the court system. Prima Paint Corp. v. Flood & Conklin

Mfg. Co., 388 U.S. 395, 404 (1967). Depriving a party of the

opportunity to obtain court relief if an arbitrator’s erroneous

legal analysis leads the arbitrator to order that party to violate

the law places an added cost, a potentially large cost, on every

_ arbitration clause: the potential for an unreviewable order to

violate the law. As the panel majority itself recognized, while

Petitioner and Abbott are bound to respect the arbitrators’

conclusion that the arrangement is lawful, others are not.

App. Sa-6a. Either or both of Petitioner and Abbott are, as a

result of the arbitral ruling which the Seventh Circuit has

deemed unreviewable, exposed to potentially costly antitrust

suits. This additional cost can serve only to discourage use of

the arbitration process by contracting parties, contrary to the

federal policy favoring arbitration.

* * * &

A badly divided Seventh Circuit has staked out a

provocative position concerning the relationship between

arbitrators and courts with respect to the protection of public

policy. Notwithstanding prior statements of this Court

indicating that such issues are ultimately for the courts to

decide, the court below concluded that judicial deference to

arbitration decisions extends even to determining the validity

of those decisions measured against the demands of public

policy. Other circuits would not have refused to consider

Petitioner’s antitrust arguments on their merits. Indeed, the

ruling below renders impotent the command of the New York

Convention not to enforce awards that conflict with public

policy, and the ruling will undercut the willingness of

contracting parties to opt for arbitration. The court of appeals

has cried out for this Court to review its decision; the Court

should accept that invitation.

CONCLUSION

The petition for writ of certiorari should be granted.

Respectfully submitted,