Free Reply Brief - District Court of Delaware - Delaware

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE REMOTE SOLUTION CO, LTD., Petitioner, v. FGH LIQUIDATING CORP. f/k/a CONTEC CORPORATION, Respondent. ) ) ) ) ) ) ) ) ) )

C.A. No. 06-004 KAJ

REPLY BRIEF OF MOVANT REMOTE SOLUTION CO., LTD. IN SUPPORT OF ITS MOTION TO VACATE OR MODIFY ARBITRATION AWARD [REDACTED}

David L. Finger (DE Bar ID #2556) Finger & Slanina, LLC One Commerce Center 1201 Orange Street, Suite 725 Wilmington, DE 19801-1155 (302) 884-6766 Attorney for Remote Solution Co., Ltd. Dated: March 8, 2006

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TABLE OF CONTENTS
ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 I. THE ARBITRATOR EXCEEDED HIS AUTHORITY BY FAILING TO MAKE FINDINGS OF FACT AND FAILING TO PROVIDE REASONS FOR HIS DECISION ON LIABILITY AS REQUIRED BY THE MPA . . . . . . . . . . . . . . . 1 THE ARBITRATOR VIOLATED PUBLIC POLICY AND MANIFESTLY DISREGARD APPLICABLE NEW YORK LAW IN DETERMINING THAT THE MPA GRANTED INDEMNIFICATION ARISING FROM CONTEC'S OWN ACT IN CAUSING THE INFRINGEMENT BY PROVIDING INFRINGING SPECIFICATIONS TO REMOTE SOLUTION . . . . . . . . . . . . . . . . . . . . . . . . . . 3 THE ARBITRATOR ERRED BY AWARDING CONTEC A SHARE OF CONTEC'S PAYMENT UNDER THE SETTLEMENT AGREEMENT WITH PHILIPS, IN DISREGARD OF UNAMBIGUOUS LANGUAGE . . . . . . . . . . . 11 A. THE INDEMNIFICATION PROVISION OF THE MPA DOES NOT INCLUDE AMOUNTS OBTAINED IN SETTLEMENT . . . . . . . . . . . 11

1. 1

111.

IV.

THE ARBITRATOR MANIFESTLY DISREGARDED THE LAW AND THE TERMS OF THE MPA BY AWARDING ATTORNEYS FEES IN CONNECTION WITH FEDERAL COURT LITIGATION TO STAY THE ARBITRATION . . 14 THE ARBITRATOR DISREGARDED THE EXPRESS LANGUAGE OF THE MPA, AND SO EXCEEDED HIS AUTHORITY, BY AWARDING CONTEC ITS ATTORNEYS' FEES IN EXCESS OF THE FEES INCURRED BY REMOTE SOLUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 THE ARBITRATOR EXCEEDED HIS AUTHORITY BY AWARDING ATTORNEYS' FEES INCURRED IN OBTAINING COURT CONFIRMATION OF THE FIRST INTERIM AWARD AFTER THE DISTRICT COURT DENIED AN AWARD OF THE SAME FEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 CONTEC IS NOT ENTITLED TO ATTORNEYS' FEES AND COSTS INCURRED IN CONNECTION WITH THE MOTION TO VACATE . . . . . . . . . . . . . . . . . 18

V.

VI.

VII.

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VIII.

CONTEC'S REQUEST FOR CONFIRMATION AND INTEREST ARE NOT PROPERLY BEFORE THE COURT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

ii

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TABLE OF CONTENTS Cases American Export Isbrandtsen Lines, Inc. v. U.S., 390 F.Supp. 63 (S.D.N.Y. 1975) . 11 Andrews v. Empire Co-Op. Fire Ins. Co., 103 N.Y.S.2d 177 (N.Y. Sup. 1951) . . . . . 16 Bank of Tokyo-Mutsubishi, Ltd., New York Branch v. Kvaerner a.s., 671 N.Y.S.2d 905 (N.Y.A.D. 1st Dep't 1998) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Baut v. Pethick Construction Co., 262 F.Supp. 350 (M.D. Pa. 1966) . . . . . . . . . . . . . . 4 Boise Cascade Corp. v. Paper, Allied-Industrial, Chemical and Energy Workers (PACE), Local 7-0159, No. 00-2344 RHK/RLE, 2001 WL 1618004, Kyle, J. (D. Minn. Apr. 6, 2001), aff'd, 309 F.3d 1075 (8th Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Carbice Corp. of America v. American Patents Development Corp., 293 U.S. 27 (1931) .......................................................................5 Children's Hospital of Buffalo, Inc. v. Buffalo & Western N.Y. Hospital & Nursing Home Council, AFL-CIO, 582 F.Supp. 1147 (W.D.N.Y. 1984) . . . . . . . . . . . . . . . . . . 18 Clinchfield Coal Co. v. Dist. 28, United Mine Workers, 720 F.2d 1365 (4th Cir. 1983) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13, 15 E.I. du Pont de Nemours & Co. v. Grasselli Employees Indep. Ass'n, 790 F.2d 611 (7th Cir.), cert. denied, 479 U.S. 853 (1986) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Fina, Inc. v. Arco, 200 F.3d 266 (5th Cir. 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 George A. Hormel & Co. v. United Food & Commercial Workers, Local 9, 879 F.2d 347 (8th Cir. 1989) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Houston Lighting & Power Co. v. Atchison, Topeka, & Santa Fe Ry. Co., 890 S.W.2d 455 (Tex. 1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Jurgens v. CBK, Ltd., 80 F.3d 1566 (Fed. Cir. 1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 M/A-Com Security Corp. v. Galesi, 904 F.2d 134 (2nd Cir. 1990) . . . . . . . . . . . . . . . 16 Mark Patterson, Inc. v. Bowie, 654 N.Y.S.2d 769 (N.Y.A.D. 1st Dept. 1997) . . . . . . 16

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Maryville Academy v. Loeb Rhoads & Co., 530 F.Supp. 1061 (N.D. Ill. 1981) . . . . . . 6 New Elliott Corp. v. Man Gotehoffnungshutte, AG, 969 F.Supp. 13 (S.D.N.Y. 1997) 2 Odette v. Shearson, Hammill & Co., 394 F.Supp. 846 (S.D.N.Y. 1975) . . . . . . . . . . . . 6 Roadway Package System, Inc. v. Kayser, 257 F.3d 287 (3rd Cir. 2001) . . . . . . . . . . . 4 Roe v. Cargill, Inc., 333 F.Supp.2d 808 (W.D. Ark. 2004) . . . . . . . . . . . . . . . . . . . . . . 18 Sangirardi v. State, 577 N.Y.S.2d 751 (N.Y. Ct. Cl. 1991) . . . . . . . . . . . . . . . . . . . . . 16 The Major League Umpires Ass'n v. The American League of Professional Baseball Clubs, 357 F.3d 272 (3rd Cir.2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Other authorities Black's Law Dictionary (5th ed. 1979) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 The American Heritage Dictionary of the English Language (1970) . . . . . . . . . . . . . 9 U.C.C. §2-312(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Webster's New Twentieth Century Dictionary Unabridged (2nd ed. 1975) . . . . . . . . 2

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ARGUMENT1 I. THE ARBITRATOR EXCEEDED HIS AUTHORITY BY FAILING TO MAKE FINDINGS OF FACT AND FAILING TO PROVIDE REASONS FOR HIS DECISION ON LIABILITY AS REQUIRED BY THE MPA. In its opening brief, Remote Solution argued that the arbitrator exceeded his authority by issuing an award on liability without providing "findings of fact" or a "statement of reasons for the decision," as required by the MPA. (RSOB 10-13 & App. Ex. D2). The arbitrator was faced with one issue of law (does the language of the MPA permit indemnification for patent infringement when such infringement was the result of Contec's own actions in supplying infringing specifications) and one issue of fact (if indemnification is permitted, do the facts show gross negligence, recklessness or intentional conduct which would preclude indemnification as a matter of New York law).

1

Contec includes in its brief several irrelevant, inaccurate, incomplete and unsupported statements of "fact." For example, Contec states that "at the pre-argument conference before the Second Circuit, the staff counsel for the Second Circuit, who conducted the conference, spent at least fifteen minutes chiding Remote Solution's counsel for wasting everyone's time [in appealing]." (CAB 7). Contec fails to point out that the staff counsel (whose agenda was to clear congested dockets) was unaware that the Second Circuit had previously granted a stay, finding, inter alia, that "there is a substantial possibility of success on appeal...." (Ex. A hereto), and that he modified his position upon learning of same. Due to page limitations, Remote Solution will not address each erroneous statement by Contec, but instead will focus on the facts and law directly relevant to this motion. In so doing, Remote Solution does not accept the accuracy or completeness of any of Contec's comments.
2

Remote Solution's opening brief is cited to herein as "RSOB ___." Remote Solution's Appendix is cited to herein as "App. ___." Contec's answering brief is cited to herein as "CAB ___." 1

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As to the first issue, the arbitrator concluded that the MPA is "clear and unambiguous." As to the second issue, the arbitrator merely stated that "Remote Solution's defenses do not avail it here." (App. Ex. C). Contec argues that the phrase "findings of fact and a statement of reasons for the decision" does not have a standard legal definition, and so all the law requires is that "enough facts are found and enough legal principles stated so that a reviewing tribunal can ascertain the reasons for the ultimate determination." (CAB 12, quoting New Elliott Corp. v. Man Gotehoffnungshutte, AG, 969 F.Supp. 13, 15 (S.D.N.Y. 1997)). Initially, it should be noted that the arbitration agreement in New Elliot Corp. provided for "findings of fact and conclusions of law." Id. at 14. There is arguably a difference between the phrases "conclusions of law" and a "statement of reasons." The term "conclusion of law" is defined as the "statement of court as to law applicable on the basis of facts found by the jury." Black's Law Dictionary 262 (5th ed. 1979). This suggests that conclusions of law may be summary or conclusory in nature. By contrast, the term "reason" is defined (as a noun) as "an explanation or justification of an act, idea, etc." Webster's New Twentieth Century Dictionary Unabridged 1502 (2nd ed. 1975). This definition suggests something more than a conclusory statement, something involving an analytical process. Ultimately, however, the Court need not choose one definition over another. Even accepting (for the sake of argument) the definition propounded by Contec, the arbitrator's opinion on liability fails. There are no findings of any facts whatsoever. Contec implicitly

2

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concedes as much in that it makes no effort whatsoever to identify any findings of fact or any statements of legal principles. Under any definition of the phrase "findings and a statement of reasons for the decision," mere conclusions, such as we have here, are insufficient. Conclusions are not reasons. Indeed, reasons are what lead to a conclusion, and help insure that an award is not arbitrary. In the absence of any findings of fact and reasons for the decision, the arbitrator failed to fulfill his duties and so exceeded his authority. For this reason, the liability award is invalid and must be vacated. As a consequence of that, the damages award (which is dependent upon the liability award) also cannot stand. II. THE ARBITRATOR VIOLATED PUBLIC POLICY AND MANIFESTLY DISREGARD APPLICABLE NEW YORK LAW IN DETERMINING THAT THE MPA GRANTED INDEMNIFICATION ARISING FROM CONTEC'S OWN ACT IN CAUSING THE INFRINGEMENT BY PROVIDING INFRINGING SPECIFICATIONS TO REMOTE SOLUTION. In its opening brief, Remote Solution established the following principles: (i) settled and recognized New York public policy prohibits contracts indemnifying one from his/her/its own negligence or strict liability conduct in the absence of clear and unequivocal language evidencing an intent to include such indemnification; (ii) settled and recognized principles of New York law require that indemnity agreements be construed strictly; (iii) settled and recognized New York law (as shown by precedents provided to the arbitrator and cited to this Court) establish that the language of the MPA may not be interpreted as including indemnification for the indemnitee's own negligent or strict liability conduct; (iv) Contec

3

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never provided any contrary authority to the arbitrator (or to this Court) permitting a plausible basis for rejecting or distinguishing the authority submitted by Remote Solution. As a consequence, Remote Solution argued, the arbitrator (who is a lawyer) manifestly disregarded known and clearly applicable New York law3, and in so doing interpreted the indemnity provision of the MPA in a manner that violates New York public policy. Contec does not deny the existence of this public policy (and could not in light of case law expressly recognizing it), but instead argues that it does not apply in the context of indemnity for patent infringement claims. (CAB 14).4 First, Contec repeatedly and emphatically asserts that "no court" has "ever" applied these principles of contract interpretation to preclude indemnification for an indemnitee's own infringing action. (CAB 2, 14, 15, 18, 22). Contec, however, ignores Baut v. Pethick Construction Co., 262 F.Supp. 350 (M.D. Pa. 1966), previously cited both to the arbitrator (App. Ex. J at 11) and to this Court (RSOB 17-18), in which the Court sua sponte determined

3

Contec suggests that New York law governs the scope of judicial review of the arbitrator's ruling. (CAB 10 & n.4). This is incorrect. Roadway Package System, Inc. v. Kayser, 257 F.3d 287, 294 (3rd Cir. 2001) (generic choice of law provision in contract does not control standards for judicial review of arbitration award).
4

Oddly, Contec also attempts to argue that the public policy is not applicable in this case because it only applies to claims between a third-party and an indemnitee. (CAB 18). In this case, however, Contec is seeking indemnification arising from claims between third parties (UEI and Philips) and itself (the indemnitee), arising from Contec's sales of products that infringed UEI's and Philips' patents. The fact that the products were manufactured by Remote Solution as Contec's sub-contractor does not make any difference to the analysis as it is undisputed that the products were built according to specifications provided by Contec. 4

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whether a contractual provision could serve as an indemnification against a party's own patent infringement. The provision at issue stated that "[a]ll apparatus, appliance or materials must be furnished by the contractor under guarantee against claims for royalties or infringements of patents." The Court stated as follows: Lippi did not offer this clause for the purpose of indemnification by Pethick. Even if it were offered for that purpose, it would not help him. Contracts indemnifying a party against his own torts are valid; however, the intention to include within the scope of an indemnity contract a loss due to the indemnitor's own tort must be expressed in clear and unequivocal language. See Pittsburgh Steel Co. v. Patterson-Emerson-Comstock, Inc., 1961, 404 Pa. 53, 59, 171 A.2d 185, 188: "We think it clear, on reason and authority, that a contract of indemnity against personal injuries, should not be construed to indemnify against the negligence of the indemnitee, unless it is so expressed in unequivocal terms. The liability on such indemnitee is so hazardous, and the character of the indemnity so unusual and extraordinary, that there can be no presumption that the indemnitor intended to assume the responsibility unless the contract puts it beyond doubt by express stipulation. No inference from words of general import can establish it. The manifest purpose, in such cases, to indemnify against the injury which, under the circumstances, could reasonably be apprehended only from the action of the indemnitor or his servant, is a weighty consideration in construing indemnity contracts. ***" See also Dilks v. Flohr Chevrolet, 1963, 411 Pa. 425, 192 A.2d 682. The contract terms do not specifically require indemnity against Lippi's own infringement. If the clause is considered an indemnity clause, it must be construed as indemnifying Lippi against patent infringement by Paddock which might be imputed to Lippi, but not against infringement in which Lippi participated. Id. at 363. Moreover, as previously noted (RSOB 15-16), this rule applies under New York law to strict liability torts. Patent law is a tort, Carbice Corp. of America v. American Patents

5

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Development Corp., 293 U.S. 27, 33 (1931), and is a strict liability offense. Jurgens v. CBK, Ltd., 80 F.3d 1566, 1570 n.2 (Fed. Cir. 1996).5 Contec also suggests that the public policy is not applicable to patent infringement actions because the U.C.C. permits indemnification for the indemnitee's own patent infringement. (CAB 14). Section 2-312(3) of the Uniform Commercial Code states that "[u]nless otherwise agreed a seller who is a merchant regularly dealing in goods of the kind
5

Even if there were no direct case precedent, that would not be dispositive, as the converse would also be true, i.e., that no court had ever held that these principles do not apply in the patent infringement context. The true question would be whether there is any plausible rationale for not applying this law and public policy to claims involving an indemnitee's own patent infringement. Courts have not made any distinction based on the cause of action, and Contec has not offered any plausible non-arbitrary rationale for creating such a distinction. Indeed, case law involving other indemnity claims arising from a federal statute-based cause of action support a stricter, not lesser, standard. See, e.g., Maryville Academy v. Loeb Rhoads & Co., 530 F.Supp. 1061, 1071 (N.D. Ill. 1981) (indemnity not available for one's own negligence in violating federal securities laws); Odette v. Shearson, Hammill & Co., 394 F.Supp. 846, 856 (S.D.N.Y. 1975) (public policy objections to indemnity broad enough to cover negligent violations of securities laws); Fina, Inc. v. Arco, 200 F.3d 266, 270-73 (5th Cir. 2000) (under Delaware and Texas law, indemnity provision deemed inapplicable in CERCLA strict liability action in absence of clear and unequivocal language that parties intended that the indemnitee be indemnified for its own negligence). As the Texas Supreme Court has stated, "[t]here are compelling reasons to treat cases involving strict statutory liability in the same manner as cases involving negligence or strict products liability. First, the requirement that parties expressly state their intent to cover strict liability claims prevents the injustice that may occur when an innocent party incurs tremendous costs because of another's strict statutory liability. Such a result is possible when a party, itself not at fault, lacked fair notice of its potential liability under a less-than-specific indemnity clause. Indemnification against strict liability is an exception to usual business practices in the same manner as indemnifying against someone else's negligence...Contracts indemnifying an indemnitee against the consequences of strict liability involve an extraordinary shifting of the risk and `may have great financial impact on the parties.' ... Thus, fairness dictates against imposing liability on an indemnitor unless the agreement clearly and specifically expresses the intent to encompass strict liability claims." Houston Lighting & Power Co. v. Atchison, Topeka, & Santa Fe Ry. Co., 890 S.W.2d 455, 458 (Tex. 1994). 6

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warrants that the goods shall be delivered free of the rightful claim of any third person by way of infringement or the like but a buyer who furnishes specifications to the seller must hold the seller harmless against any such claim which arises out of compliance with the specifications." This, however, is beside the point. Section 2-312(3) addresses the ability of a buyer who provides specifications to disclaim any warranty of non-infringement. It does not address the ability of such a buyer to shift the economic risks of the buyer's infringement to the seller, and so it not relevant here.6 Contec next argues that the arbitrator merely interpreted the MPA, and the Court may not review the merits of his interpretation. (CAB 15). In so stating, however, Contec conveniently overlooks pertinent facts and legal principles. First, as noted in Remote Solution's opening brief (RSOB 14), as the question of violation of public policy has been raised, the Court reviews the arbitrator's legal conclusions de novo. E.I. du Pont de Nemours & Co. v. Grasselli Employees Indep. Ass'n, 790 F.2d 611, 617 (7th Cir.), cert. denied, 479 U.S. 853 (1986). Additionally, the Third Circuit has held that an arbitration award is in manifest disregard of the law if the decision is not supportable by reference to any principles of contract interpretation. The Major League Umpires Ass'n v. The American League of

6

The arbitrator's statement that the indemnity provision "overrides and is not subject to the `buyer's specifications' provision of UCC Section 2-312(3)" is an odd non sequitur, as Remote Solution did not argue to the contrary in its briefs on liability (see App. Exs. J and M). In any event, as described above, Section 2-312(3) is irrelevant as it does not address the true issue. 7

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Professional Baseball Clubs, 357 F.3d 272, 280 (3rd Cir.2004). As such, the Court is obligated to review the arbitrator's contract interpretation to see if it is plausible in light of relevant principles of contract law. In this case, the parties contracted that New York law would govern the MPA. (App. Ex. E ¶25). Thus, the arbitrator had a duty to interpret the MPA in a manner consistent with existing New York law. If the rule were otherwise, arbitrators would be free to interpret contracts as they see fit with impunity, untethered by any rules, principles or duty of reason. This could result in unreviewable arbitrary and capricious decisions. As such, for the arbitrator's decision on liability to stand and not be deemed to be arbitrary, this Court will have to: (1) decide after de novo review that the arbitrator's conclusion (that the

indemnity provision includes indemnity arising from patent infringement caused by Contec's own infringing specifications) is somehow consistent with the principles of New York contract construction which were provided to the arbitrator by Remote Solution (and which were uncontradicted by Contec), even though application of those principles leads to a directly contrary result; (2) conclude that the arbitrator did not disregard the clearly relevant,

uncontradicted and governing law provided to him by Remote Solution, even though such precedent uniformly mandate a conclusion that the language of the indemnity provision of the MPA cannot reasonably be interpreted as indemnifying Contec for its own acts causing patent infringement; and

8

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(3)

conclude that, notwithstanding consistent and uncontradicted law to

the contrary, the arbitrator's interpretation of the indemnity agreement as permitting indemnification arising from Contec's own act of infringement, in the absence of clear and unequivocal language, is not inconsistent with New York public policy. Remote Solution respectfully submits that the Court cannot adopt any of these conclusions without doing severe violence to reason, precedent and justice. Contec's complaint that Remote Solution's arguments "are, and always have been, nothing more than a bald attempt by Remote Solution to rewrite an agreement that it no longer wished to abide by" (CAB 16) rings hollow in light of the fact that Contec failed to submit to the arbitrator or this Court any precedent supporting its interpretation of the MPA. Contec's argument boils down to "never mind the case law, the MPA means what we say it means because we say so." Indeed, Contec did not make any effort either before the arbitrator or before this Court to explain how its interpretation of the MPA is in any way consistent with New York law. By contrast, Remote Solution does not rely on ipse dixit. Rather, Remote Solution has merely sought to have the MPA interpreted in accordance with controlling New York law.7
7

Contec asks this Court to accept, without evidence in the record, that Remote Solution knew it would be assuming the risk of Contec's infringement because Remote Solution knew that Contec would be providing the specifications. (CAB 16). Contec fails to point out that Contec also represented in the MPA that the specifications were Contec's "proprietary" information. (App. Ex. E ¶3(a)). The term "proprietary" includes among its definitions "[o]wned by a private individual or corporation under a trademark or patent." The American Heritage Dictionary of the English Language 1050 (1970). Thus, contrary to Contec's self-serving speculation, it is more reasonable to interpret the indemnity provision as expressing the parties' understanding that indemnity for patent infringement arises only (continued...) 9

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If Contec had wanted Remote Solution to indemnify Contec for Contec's own infringement, Contec, as the drafter, could have drafted the MPA to make that point clearly. It did not do so and it is the one, not Remote Solution, that is seeking benefits that were not granted under the terms of the MPA. Finally, Contec spends several pages attempting to establish that it was not negligent (or worse) in providing infringing specifications to Remote Solution, notwithstanding that Contec (i) had already been notified of infringement claims by Universal Electronics, Inc., (ii) had constructive knowledge of the existent of Philips' patents, and (iii) does not appear to have undertaken any investigation (notwithstanding its knowledge of risks and claims) to determine if there was a risk of infringement before asking Remote Solution to manufacture universal remote controls for Contec.8

(...continued) from infringement directly caused by Remote Solution, since Remote Solution was (mis)led to believe that Contec had "proprietary" rights to the specifications.
8

7

Contec also states that Remote Solution "did not identify [to the arbitrator] any specific acts by Contec that would constitute" intentional, reckless or grossly negligent conduct. (CAB 16). Contec once again ignores the record. The parties initially submitted briefs to determine whether the arbitrator could decide the liability issue in a summary judgment-style proceeding without the need for an evidentiary hearing. (App. Ex. J at 1 n.1). After briefing was completed (App. Exs. I-L), in consultation with the arbitrator, the parties attempted to stipulate as to facts to facilitate a decision without an evidentiary hearing. The parties submitted a Joint Statement Regarding Contec's Claim to Indemnification from Remote Solution, containing statements of stipulated and disputed facts, and additional arguments from the parties. (App. Ex. M). In that process, Contac refused to provide information about any internal discussions regarding investigating patent infringement risks (the arbitrator did not explain how summary judgment was appropriate when Contec refused to disclose material information). (Id. at 10). In that document, Remote Solution set forth what actions of Contec constituted gross negligence, recklessness and/or intentional conduct, based on the evidence that Contec did disclose. (Id. at 34-38). Remote Solution also cited (continued...) 10

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Of course, if the Court recognizes New York law and public policy to preclude Remote Solution from assuming liability for strict liability damages caused by an indemnitee's own actions and that the language of the MPA does not cover same, then the issue of whether Contec was negligent is moot. On the other hand, if the Court concludes that the sole issue is negligence, and that for some reason the MPA permits indemnification arising from Contec's own negligence, Remote Solution recognizes that, apart from the arbitrator's failing to provide findings of fact and a statement of reasons, Remote Solution may not challenge any factual conclusion (if one there be) by the arbitrator that Contec was not negligent. However, the Court need not reach that issue since the case law is clear, controlling and one-sided: under established New York law and public policy, the language of the MPA cannot be interpreted to permit indemnification of Contec for a claim of patent infringement arising from Contec's own (undisputed) action in supplying infringing specifications to Remote Solution. III. THE ARBITRATOR ERRED BY AWARDING CONTEC A SHARE OF CONTEC'S PAYMENT UNDER THE SETTLEMENT AGREEMENT WITH PHILIPS, IN DISREGARD OF UNAMBIGUOUS LANGUAGE. A. THE INDEMNIFICATION PROVISION OF THE MPA DOES NOT INCLUDE AMOUNTS OBTAINED IN SETTLEMENT.

In its opening brief, Remote Solution argued that under Section 3(c) of the MPA, any indemnity was expressly restricted to amounts "awarded" in a "final judgment," and there (...continued) legal authority for the proposition that an indemnitee owes a duty of care to the indemnitor to protect against the indemnitee's liability for indemnity. American Export Isbrandtsen Lines, Inc. v. U.S., 390 F.Supp. 63, 68 (S.D.N.Y. 1975). 11
8

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was no award in a final judgment in this case because Contec settled with Philips. (RSOB 20-21). Contec argues that the arbitrator could award settlement payments under Section 13(a) of the MPA. (CAB 19). It should be noted initially that the arbitrator did not rely on Section 13(a) in granting this award, but focused exclusively on Section 3(c) (and at the same time ignoring the references to "settlement" and "award"). (App. Ex. D at 15). Even assuming that Section 13(a) was the justification, Contec's argument suggests that the arbitrator was free to ignore the express, unambiguous terms of Section 3(c), which restricted the more general provisions of Section 13(a). The arbitrator was faced with two inconsistent contractual provisions.9 In such circumstance, the arbitrator is not free to disregard one express provision arbitrarily in favor of another. The arbitrator was duty-bound to rationally reconcile the two provisions and, if he concluded that Section 13(a) overruled Section 3(c), to set forth in his "statement of reasons" a plausible reason consistent with New York contract law. The arbitrator did not do this. The arbitrator's ignoring and failing to address or reconcile probative contract terms means that he wrongfully and arbitrarily disregarded express language of the MPA and so the award cannot be deemed to draw its essence from the contract. George A. Hormel & Co. v. United Food & Commercial Workers, Local

9

Under New York law, "if there is an inconsistency between a general provision and a specific provision of a contract, the specific provision controls." Bank of TokyoMutsubishi, Ltd., New York Branch v. Kvaerner a.s., 671 N.Y.S.2d 905, 910 (N.Y.A.D. 1st Dep't 1998). 12

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9, 879 F.2d 347, 351 (8th Cir. 1989); Clinchfield Coal Co. v. Dist. 28, United Mine
Workers, 720 F.2d 1365, 1369 (4th Cir. 1983).

Contec instead argues that arbitrator rejected Remote Solution's arguments, and so the Court must blindly accept that. (CAB 20). However, the Court is not bound by the arbitrator's decisionwhere it is evident that the arbitrator disregarded clear and unambiguous language, which is the case here. Contec also attacks Remote Solution for making contradictory arguments simultaneously before the arbitrator and this Court. (CAB 20). Contec is confused. The argument Remote Solution is making in this Court is the exact same one made before the arbitrator. (App. Ex. 0 at 1-3). Remote Solution, as a precaution, made an alternative argument in the pre-trial order filed in the Philips v. Contec case on December 21, 2005. Although Contec states in a

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conclusory fashion that doing so was improper, Contec offers neither precedent nor a reasoned explication why. Iiideed, it would have been negligent of counsel for Remote Solution not to do so, since an adverse decision in one action would have resulted in a beneficial position in the other action. Finally, Contec argues that making the two arguments simultaneously is evidence that the arbitrator's decision was arguably correct. That conclusion, however, does not automatically result. The fact that Remote Solution was placed in the position of having to make contradictory arguments in two separate lawsuits to preserve its rights should not result in the Court abdicating its responsibility to determine whether the language is clear, unambiguous and capable of only one interpretation. The Court can (and should) rule that the language at issue here is clear, unambiguous and the arbitrator did not have authority to

IV.

THE ARBITRATOR MANIFESTLY DISREGARDED THE LAW AND THE TERMS OF THE MPA BY AWARDING ATTORNEYS FEES IN CONNECTION WITH FEDERAL COURT LITIGATION TO STAY THE ARBITRATION. In its opening brief, Remote Solution argued that the arbitrator exceeded his authority

by awarding attorneys' fees incurred by Contec ill bringing its action to compel arbitration notwithstanding that the MPA expressly states that "IN NO EVENT SHALL EITHER PARTY HEREUNDER BE LIABLE TO THE OTHER...FOR ANY INDIRECT, INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR BASED UPON ANY BREACH OF

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CONTRACT...." (App. Ex. E ¶13(b), capitalization in original). The arbitrator arbitrarily disregarded express language of the MPA in granting his award.. As noted before, when an arbitrator fails to address probative terms of a contract which might require a contrary result, the award cannot be considered to draw its essence from the contract. George A. Hormel & Co., 879 F.2d at 351; Clinchfield Coal Co., 720 F.2d at 1369. Again, this is not a circumstance where the arbitrator simply misinterpreted a contractual term. This involves disregard of express qualifying language (capitalized by the parties for emphasis). Remote Solution had the right to the benefit of that provision, and the arbitrator's disregard of it impermissibly taints the award. "[B]ecause the arbitrator ignored the operative language of the [MPA], and did not provide any reason for his failure to mention the language, the award must be vacated `because such shortcomings are an indication that the arbitrator has not interpreted the specific contract at issue.'" Boise Cascade Corp. v. Paper, Allied-Industrial, Chemical and Energy Workers (PACE), Local 7-0159, No. 00-2344 RHK/RLE, 2001 WL 1618004, WL Op. at *5, Kyle, J. (D. Minn. Apr. 6, 2001), aff'd, 309 F.3d 1075 (8th Cir. 2002). V. THE ARBITRATOR DISREGARDED THE EXPRESS LANGUAGE OF THE MPA, AND SO EXCEEDED HIS AUTHORITY, BY AWARDING CONTEC ITS ATTORNEYS' FEES IN EXCESS OF THE FEES INCURRED BY REMOTE SOLUTION. In its opening brief, Remote Solution demonstrated that (i) the arbitrator ignored clear language of the MPA that stated that "in no event will the recovery of [the winner's] attorney's fees be in excess of the actual cost of the other party's attorney's fees," and (ii) the

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arbitrator manifestly disregarded New York law by relying on an implied covenant of good faith to get around this limitation on fees, even though black-letter New York law (which had been provided, and not merely cited, to the arbitrator) stated that the implied covenant of good faith may not be used to contradict express language of a contract. (RSOB 28-31). Contec argues that the cases did not establish that the legal principle governed because the cases cited were insurance cases.10 Even though the arbitrator did not rely on this distinction (or even discuss the law) in his award, for the arbitrator to distinguish the law, any such distinction must be plausible, rational and non-arbitrary. Contec's proposed distinction is not. First, the relevant language of the case law spoke in terms of contracts generally, not insurance policies specifically. Mark Patterson, Inc. v. Bowie, 654 N.Y.S.2d 769, 771 (N.Y.A.D. 1st Dept. 1997). Second, the distinction is arbitrary and artificial because insurance is considered a type of indemnity contract. Sangirardi v. State, 577 N.Y.S.2d 751, 755 (N.Y. Ct. Cl. 1991). See also Andrews v. Empire Co-Op. Fire Ins. Co., 103 N.Y.S.2d 177, 180 (N.Y. Sup. 1951) ("[w]ell established is the rule that the object of insurance...is indemnity..."). Thus, Contec's purported justification for deviation from wellsettled New York law is without reason or precedent, and is arbitrary and capricious. Indeed, even the award to Contec is arbitrary and capricious, as there was no basis for the arbitrator to conclude that, even applying the implied covenant of good faith (albeit
10

Contec also appears to suggest that the rule does not apply where one party frustrates the intent of a contract provision. (CAB 24). Even assuming that Contec's interpretation of the contract's intent, this argument fails since "the implied covenant does not extend so far as to undermine a party's `general right to act on its own interests in a way that may incidentally lessen' the other party's anticipated fruits from the contract." M/A-Com Security Corp. v. Galesi, 904 F.2d 134, 136 (2nd Cir. 1990). 16

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unlawfully), that Remote Solution's attorneys' fees would have equaled the full amount of Contec's fees (particularly taking into account the different hourly rates). Contec spends much ink arguing intent of the parties in adopting the fees provision (even though there is no evidence in the record to support Contec's arguments) and chiding Remote Solution's counsel for not billing as much as Contec's lawyers. All of this, however, is irrelevant and self-serving. It does not change the core facts ­ the arbitrator exceeded his authority by ignoring the clear and unequivocal language of the MPA, and Contec had not cited any case (as there is none) holding that an arbitrator may do that, even utilizing an implied covenant. This case is even more egregious as the arbitrator was informed of blackletter New York law prohibiting such act, and he disregarded it. This aspect of the award must be vacated. VI. THE ARBITRATOR EXCEEDED HIS AUTHORITY BY AWARDING ATTORNEYS' FEES INCURRED IN OBTAINING COURT CONFIRMATION OF THE FIRST INTERIM AWARD AFTER THE DISTRICT COURT DENIED AN AWARD OF THE SAME FEES. In its opening brief, Remote Solution demonstrated how principles of res judicata and collateral estoppel precluded the arbitrator from granting fees in connection with the confirmation of the interim award, as the District Court for the Northern District of New York had already denied such a request. (RSOB 32).11 Contec does not dispute the law as presented, but instead engages in semantic gamesmanship, arguing that Remote Solution did not state that the arbitrator "exceeded his

11

If the Court vacates that portion of the arbitrator's award granting Contec's attorney's fees in excess of Remote Solution's attorney's fees, then this issue is moot. 17

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authority." (CAB 26). Remote Solution, however, did state that "the arbitrator had no authority to include such fees in his award." (RSOB 32). Contec argues that the justifications for the award were different, in that the District Court, the fees were awarded (but later denied) "as a sanction against Remote Solution's conduct." (CAB 26). Again, Contec asks this Court (as it asked the arbitrator) to rule based on "facts" without support in the record, as there is nothing showing that District Court's fee award was as a "sanction." Finally, Contec argues that this point should not be considered because the cases cited by Remote Solution were not cited to the arbitrator. (CAB 26). However, whether or not the arbitrator had authority is not dependent on whether the arbitrator knows he does or does not have authority, and failure to cite precedent does not imbue the arbitrator with authority. Remote Solution argued to the arbitrator that "[t]here is no basis in law or equity for granting fees which have been passed on and denied by the District Court." (App. Ex. O at 18). Thus, in any event, the issue was before the arbitrator. VII. CONTEC IS NOT ENTITLED TO ATTORNEYS' FEES AND COSTS INCURRED IN CONNECTION WITH THE MOTION TO VACATE. Remote Solution has acted within its statutory rights in seeking to vacate the arbitration award. Its arguments are not frivolous, vexatious or made in bad faith. As such, Contec is not entitled to an award of its attorney's fees. Children's Hospital of Buffalo, Inc. v. Buffalo & Western N.Y. Hospital & Nursing Home Council, AFL-CIO, 582 F.Supp. 1147, 1154 (W.D.N.Y. 1984); Roe v. Cargill, Inc., 333 F.Supp.2d 808, 816 (W.D. Ark. 2004).

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VIII. CONTEC'S REQUEST FOR CONFIRMATION AND INTEREST ARE NOT PROPERLY BEFORE THE COURT. Contec asks the Court to confirm the arbitrator's award and also to award pre- and post-judgment interest. Contec, however, has not filed a motion for confirmation, as is required by 9 U.S.C. §9. Bonar v. Dean Witter Reynolds, Inc., 835 F.2d 1378, 1382 (11th Cir. 1988). Contec has not cited any authority permitting it to avoid that requirement by raising confirmation in a motion to vacate.

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CONCLUSION An arbitrator may interpret ambiguous law or contract terms or conflicting facts. However, an arbitrator may not disregard uncontradicted law. An arbitrator may not ignore probative unambiguous contract language. An arbitrator may not "cherry pick" contract terms that he believes support his conclusion and ignore others that undercut his conclusion. An arbitrator may not interpret a contract in a manner that violates clear, governing public policy. An arbitrator may not interpret law in an arbitrary manner unsupported by any principles of New York contract law. Yet that is what happened here. WHEREFORE, for the foregoing reasons, as well as the reasons set forth in its opening brief, petitioner Remote Solution Co., Ltd. respectfully requests that the Court vacate or modify the award of the arbitrator.

Respectfully submitted,

David L. Finger (DE Bar ID #2556) Finger & Slanina, LLC One Commerce Center 1201 Orange Street, Suite 725 Wilmington, DE 19801-1155 (302) 884-6766 Attorney for Remote Solution Co., Ltd.

Dated: March 8, 2006

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CERTIFICATE OF SERVICE I, David L. Finger, hereby certify that on this 8th day of March, 2006, I caused two copies of the foregoing document to be served via hand-delivery on the below-listed counsel of record:

Paul E. Crawford, Esq. Connolly Bove Lodge & Hutz LLP 1007 N. Orange St. Wilmington, DE 19801

David L. Finger (DE Bar ID #2556) Finger & Slanina, LLC One Commerce Center 1201 Orange Street, Suite 725 Wilmington, DE 19801-1155 (302) 884-6766