Contract Interpretation

The Southern District of New York recently modified an arbitrator’s award regarding post-judgment interest and declined to award fees and costs related to the prevailing party’s motion to confirm the arbitration award.

Negocios y Telefonia Nedetel S.A. entered into a contract with Kenmar Securities LLC for Kenmar to provide advisory and investment banking services to Nedetel related to a potential sale of Nedetel. The contract included a “success fee” provision that required Nedetel to pay Kenmar a fee if a “transaction” for the sale of Nedetel closed. Nedetel terminated the contract and subsequently entered into a stock purchase agreement to sell 70% of Nedetel and a shareholders’ agreement to sell the remaining 30%. Kenmar claimed those agreements triggered the “success fee” provision and initiated arbitration. An arbitrator ruled in favor of Kenmar and awarded, among other things, post-award interest at the rate of 9%.

Kenmar moved to confirm the award. Nedetel did not dispute the merits of the arbitration award but claimed that post-judgment interest was limited to a rate lower than 9%. The court agreed. The court explained that 28 U.S.C. § 1961 sets a post-judgment interest rate tied to the weekly average one-year constant maturity Treasury yield. The court noted that the parties may contract for a different post-judgment interest rate. Nedetel claimed that the parties had not done that. Kenmar responded that the parties had agreed to a different rate by agreeing to submit the question of post-judgment interest to the arbitrator. The court rejected that argument, explaining that “the parties did not explicitly submit the issue of post-judgment interest to the arbitrator” and that, even if they had, “parties’ agreement to submit the interest rate issue to the arbitrator is insufficient to deviate from Section 1961” because “parties must expressly agree (1) on the interest rate and (2) that this rate applies specifically to post-judgment interest.” The court therefore ordered that post-judgment interest would accrue at the lower rate (approximately 3.28%) sought by Nedetel.

Kenmar also sought the fees and costs that it incurred to confirm the arbitration award. The court declined to award those fees and costs, explaining that “the parties did not agree to award the prevailing party fees and costs stemming from proceedings to confirm the arbitration award” and that it was unaware of any authority that allowed it to otherwise award those fees and costs.

Kenmar Securities LLC v. Negocios Y Telefonia Nedetel S.A. , No. 1:24-cv-06737 (S.D.N.Y. Dec. 19, 2024).

The Seventh Circuit Court of Appeals recently refused to invalidate an arbitration award in a breach of contract case involving patent royalties based on purported violations of public policy.

Dr. John Insall patented various knee replacement devices and licensed them to medical device company Zimmer Biomet Holdings Inc. Zimmer paid Dr. Insall, and later his estate, royalties in return. Dr. Insall’s last patent expired in 2018, and Zimmer informed his estate it would be ceasing royalty payments because it believed further payments ran “counter to the policy and purpose of patent laws.” The estate claimed that was improper and the parties arbitrated the matter. An arbitration panel concluded that the payments could continue and thus ruled for the estate. Zimmer moved to vacate the award on public policy grounds. The district court confirmed the award.

The Seventh Circuit affirmed. It noted that even if Zimmer’s arguments that there is a “well-defined public policy that a party may not be compensated for patent rights after the patent’s expiration,” the arbitration award still needed to be confirmed because “the panel determined that the royalty payments in question were not grounded in any patent rights” but were instead “untied” to Dr. Insall’s “patents, products, or technology.” Put differently, the panel interpreted the contract as providing for payments for “non-patent rights” that were “closely related” to patents. The court noted that the Federal Arbitration Act does not allow it to question whether the arbitrators erred or even clearly erred in interpreting a contract, but to only determine whether it interpreted the contract.

Zimmer Biomet Holdings, Inc. v. Insall, No. 23-1888 (7th Cir. July 12, 2024).

The U.S. District Court for the Northern District of Illinois has rejected an argument that opting out of arbitration clauses precluded arbitration under prior arbitration agreements in a dispute between Uber drivers and Uber.

A group of Illinois Uber drivers sued Uber under the Fair Labor Standards Act and Illinois law claiming that Uber misclassified them as independent contractors. Uber moved to compel arbitration, arguing that the drivers had signed multiple platform access agreements that included broad arbitration clauses. The platform access agreements allowed drivers to opt out of the arbitration clauses if they so chose, however. The drivers had not opted out of one or more of the agreements but, when subsequent platform access agreements were presented to them, had opted out of those. They argued that the subsequent opt-outs precluded Uber from enforcing the earlier agreements to arbitrate. The district court disagreed, citing the plain language of the opt-out provision, which provided: “If you opt out of this Arbitration Provision and at the time of your receipt of this Agreement you were bound by an existing agreement to arbitrate disputes arising out of or related to your use of our Platform and Driver App, that existing arbitration agreement will remain in full force and effect.” The court also concluded that the arbitration clauses were not unconscionable under Illinois law. One of the plaintiffs had previously filed suit and obtained a ruling that he was not required to arbitrate any claims, however. The district court gave effect to that decision under issue preclusion principles.

Agha v. Uber Technologies, Inc., No. 1:23-cv-17182 (N.D. Ill. Apr. 22, 2024).

The Ninth Circuit Court of Appeals recently reversed a district court’s decision to deny a motion to compel arbitration in a case involving a request to refund the cost of airline tickets after a cancellation.

Winifredo and Macaria Herrera purchased airline tickets on Cathay Pacific flights through a third-party booking website, ASAP Tickets. ASAP’s terms and conditions included an arbitration clause requiring binding arbitration through the American Arbitration Association. During their trip, Cathay Pacific canceled the Herreras’ return flight and told them to talk to ASAP about a refund. ASAP apparently denied the Herreras’ request for a refund. The Herreras filed suit against Cathay Pacific, which moved to compel arbitration pursuant to ASAP’s terms and conditions. The district court denied Cathay Pacific’s motion, reasoning that the Herreras’ gripe was with Cathay Pacific, not ASAP.

Cathay Pacific appealed, and the Ninth Circuit reversed and remanded. It first rejected the argument that federal regulations precluding arbitration provisions in “contracts of carriage” precluded arbitration in this case, explaining that the regulation in question did not prohibit “airline carriers from enforcing arbitration agreements between passengers and third parties if the applicable law permits them to do so.” The court then held that California contract law allowed Cathay Pacific to invoke ASAP’s arbitration clause because the Herreras’ breach of contract claim was “intimately founded in and intertwined with” ASAP’s terms and conditions. ASAP had effectively acted as a “middleman” for “refund-processing purposes.” The Ninth Circuit then rejected the Herreras’ arguments that it would be unfair to allow Cathay Pacific to invoke the arbitration clause because “the refund process was not clear.”

Herrera v. Cathay Pacific Airways Ltd., No. 21-16083 (9th Cir. Mar. 11, 2024).