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Flexible Manufacturing Systems v. Super Products Corp.

June 7, 1996




Appeal from the United States District Court for the Eastern District of Wisconsin. No. 89 C 1032 Robert W. Warren, Judge.

Before POSNER, Chief Judge, and BAUER and DIANE P. WOOD, Circuit Judges.

DIANE P. WOOD, Circuit Judge.



In this appeal, Super Products Corp. seeks to persuade this Court that an arbitration award in a commercial arbitration should be vacated because the arbitrators failed to enforce the agreement reached by the parties and manifestly disregarded the applicable law. We find that there was a valid arbitration agreement, and that Super Products has not carried its burden of showing the invalidity of the award by clear and convincing evidence. See Wis. Stat. sec. 788.10(1)(d), DeBaker v. Shahg, 533 N.W.2d 464, 468 (Wis. 1995). We therefore affirm.

The underlying facts are straightforward. On March 5, 1988, Super Products (a Wisconsin corporation) entered into a licensing agreement to provide Flexible Manufacturing Systems (an Australian company) with drawings and technical information for manufacturing industrial vacuum loading equipment. Shortly after the execution of the agreement, Flexible began to complain that Super Products was not providing the technology required by the agreement. The relationship degenerated on all sides, and on August 24, 1989 Flexible filed the underlying suit in this case in federal court, asserting diversity jurisdiction and claiming breach of contract and fraud in the inducement. On October 17, 1989, Super Products retaliated by sending Flexible notice of its intent to terminate the agreement.

Section 11 of the License Agreement contained a standard commercial arbitration clause. It provided as follows:

In the event of there arising any difference of opinion between the parties or other dispute as to any of the matters provided for herein, the parties shall endeavor to settle the differences or dispute in an amicable manner through mutual consultation.

In the event of such difference or dispute being incapable of resolution by such consultation, such dispute or difference shall be referred to and determined by the Commercial Arbitration Association in the United States and the governing law should be of the state of Wisconsin, or elsewhere as the parties may agree under the Commercial Arbitration Association of the U.S.A.

On February 11, 1991, the district court entered an order granting Super Products' motion to compel arbitration pursuant to Section 11. The order bifurcated the dispute into two parts: the breach of contract claims, which were to be submitted to arbitration, and the fraud in the inducement claims, which the court held in abeyance pending the outcome of the arbitration. (Because there is no entity known as the Commercial Arbitration Association in the United States, the court ordered the parties to arbitrate before the American Arbitration Association (AAA).)

On November 9, 1992, Flexible commenced arbitration before the AAA by filing a demand that set forth the breach of contract claims. Super Products responded with a counterclaim. The arbitration went forward before a three-person panel, which held a seventeen day evidentiary hearing. The panel heard testimony from sixteen witnesses, received over 400 exhibits, and heard full argument from both parties. On March 7, 1994, the panel issued an award of $2,000,000 to Flexible on its claim, $20,395 to Super Products, and costs to Flexible of $28,000. The panel was split two-to-one, but no written opinions were issued.

Following the entry of the arbitrator's award, Super Products returned to the district court with a motion to vacate the award. The district court, in a careful opinion, concluded that the award was valid and enforceable, denied Super Products' motion, and entered an order confirming the award and entering judgment for Flexible. *fn1 The court began by considering the applicable arbitration law for the dispute (as opposed to the law governing the underlying dispute). After evaluating both the Federal Arbitration Act (FAA), 9 U.S.C. sec. 1 et seq., and the Wisconsin Arbitration Act, Wis. Stats. sec. 788.01 et seq., the court concluded that both laws provided for essentially the same type of review of arbitral awards. Both listed very limited and specific grounds upon which a court can vacate an award. The court concluded that the Wisconsin Arbitration Act was not preempted by the FAA, that FAA precedents were persuasive authority for the Wisconsin statute, and that Wisconsin law applied to the case.

On the merits, the court stressed the extremely narrow grounds recognized by the Wisconsin Supreme Court for overturning an arbitration award. In City of Madison v. Madison Professional Police Officers Association, 425 N.W.2d 8 (Wis. 1988), the Wisconsin Supreme Court said that it would "not overturn the arbitrator's decision for mere errors of law or fact, but only when 'perverse misconstruction or positive misconduct [is] plainly established, or if there is a manifest disregard of the law or if the award itself is illegal or violates strong public policy.' " 425 N.W.2d at 11 (quoting Milwaukee Board of School Directors v. Milwaukee Teachers' Education Association, 287 N.W.2d 131 (1980)). The district court might have added that the Supreme Court of the United States takes an identical approach to the scope of judicial review under the FAA. Paperworkers v. Misco, Inc., 484 U.S. 29, 36-38 (1987); Wilko v. Swan, 346 U.S. 427, 436-37 (1953), overruled on other grounds, Rodriguez de Quijas v. Shearson/ American Express, Inc., 490 U.S. 477 (1989).

Just last Term, the Supreme Court wrote on the general subject of arbitration four times, in Allied-Bruce Terminix Companies, Inc. v. Dobson, 115 S.Ct. 834 (1995); Mastrobuono v. Shearson Lehman Hutton, Inc., 115 S.Ct. 1212 (1995); First Options of Chicago, Inc. v. Kaplan, 115 S.Ct. 1920 (1995); and Vimar Seguros y Reaseburos, S.A. v. M/V Sky Reefer, 115 S.Ct. 2322 (1995). In each of these opinions, the clear message is that bona fide agreements to arbitrate must be respected. Thus, in Allied-Bruce the Court held that Congress had exercised its full Commerce Clause power in Section 2 of the FAA, 9 U.S.C. sec. 2, and it concluded that the FAA therefore prevailed over an Alabama law that was less friendly to arbitration. In Mastrobuono, the Court rejected a challenge to an arbitral award that included punitive damages, finding that the parties' choice of New York law extended only to the substance of New York law, not to the procedural rule in New York that forbade arbitrators from making such awards. In First Options, the Court concluded that the question "who should have the primary power to decide" whether a dispute is arbitrable or not depends upon what the parties agreed to arbitrate. In the case before it, nothing indicated that the parties had clearly agreed to have the arbitrators decide the arbitrability issue, and thus the Court concluded that the question was for the district court. In passing, the Court distinguished its case from one in which the parties have a contract that provides for arbitration of some issues, and the issue is the scope of the agreement. In the latter circumstance, the rule requiring any doubts concerning the scope of arbitration to be resolved in favor of arbitration comes into play. See, e.g., Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626 (1985) (quoting Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24-25 (1983)). Finally, in Vimar the Court turned back a claim that a contract containing a clause requiring arbitration in Tokyo before the Tokyo Maritime Arbitration Commission was ...

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