TiVo Inc. v. Goldwasser

13-2180-cv
TiVo Inc. v. Goldwasser
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SUMMARY ORDER
RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A
SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY
FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT=S LOCAL RULE 32.1.1. WHEN
CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE
EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION
ASUMMARY ORDER@). A PARTY CITING A SUMMARY ORDER MUST SERVE A COPY OF IT ON
ANY PARTY NOT REPRESENTED BY COUNSEL.
At a stated term of the United States Court of Appeals for the Second Circuit, held at
the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New
York, on the 17th day of March, two thousand fourteen.
PRESENT: REENA RAGGI,
DENNY CHIN,
SUSAN L. CARNEY,
Circuit Judges.
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TIVO INC.,
Plaintiff-Appellant,
v. No. 13-2180-cv
DOROTHY GOLDWASSER, ROMI JONES (NEE
GOLDWASSER), GOOD INVENTIONS, L.L.C.,
Defendants-Appellees.*
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APPEARING FOR APPELLANT: LARRY L. SHATZER, III (Shaun R. Snader,
Wilson Sonsini Goodrich & Rosati, P.C.,
Washington, D.C.; Michael B. Levin, Wilson,
Sonsini, Goodrich & Rosati, P.C., Palo Alto,
California, on the brief), Wilson, Sonsini,
Goodrich & Rosati, P.C., Washington, D.C.
*
The Clerk of Court is directed to amend the official caption as shown above.
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APPEARING FOR APPELLEES: TOBEY B. MARZOUK (Thomas M. Parry,
Marzouk & Parry, PLLC, Washington, D.C.;
Gary Hoppe, Kantor, Davidoff, Wolfe,
Mandelker, Twomey & Gallantry, P.C., New
York, New York, on the brief), Marzouk &
Parry, PLLC, Washington, D.C.
Appeal from a judgment of the United States District Court for the Southern District
of New York (Louis L. Stanton, Judge).
UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED,
AND DECREED that the judgment entered on May 3, 2013, is AFFIRMED.
On August 22, 2012, an arbitration panel awarded royalties to defendants Dorothy
Goldwasser, Romi Jones (née Goldwasser), and Good Inventions, LLC (the
“Goldwassers”) pursuant to a patent license agreement (“PLA”) they had with plaintiff
TiVo Inc. (“TiVo”). TiVo now appeals from a judgment denying its motion to vacate the
award, granting the Goldwassers’ motion to confirm the award, and entering judgment in
the Goldwassers’ favor. In reviewing a decision to confirm or vacate an arbitration award,
we examine the district court’s legal rulings de novo and its findings of fact for clear error.
See Kolel Beth Yechiel Mechil of Tartikov, Inc. v. YLL Irrevocable Trust, 729 F.3d 99,
103 (2d Cir. 2013). We assume the parties’ familiarity with the facts and record of the
underlying proceedings, which we reference only as necessary to explain our decision to
affirm.
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1. Standard of Review for Arbitration Decisions
Under the Federal Arbitration Act (“FAA”), 9 U.S.C. § 1 et seq., “[a] party moving
to vacate an arbitration award has the burden of proof, and the showing required to avoid
confirmation is very high.” D.H. Blair & Co. v. Gottdiener, 462 F.3d 95, 110 (2d Cir.
2006). The district court may vacate an arbitration award only:
(1) where the award was procured by corruption, fraud, or undue means;
(2) where there was evident partiality or corruption in the arbitrators, or
either of them;
(3) where the arbitrators were guilty of misconduct in refusing to postpone
the hearing, upon sufficient cause shown, or in refusing to hear evidence
pertinent and material to the controversy; or of any other misbehavior by
which the rights of any party have been prejudiced; or
(4) where the arbitrators exceeded their powers, or so imperfectly executed
them that a mutual, final, and definite award upon the subject matter
submitted was not made.
9 U.S.C. § 10(a). “In addition, as judicial gloss on these specific grounds for vacatur of
arbitration awards, we have held that the court may set aside an arbitration award if it was
rendered in manifest disregard of the law.” Schwartz v. Merrill Lynch & Co., Inc., 665
F.3d 444, 451 (2d Cir. 2011) (internal quotation marks, citation, and alteration omitted).
Vacating an award for manifest disregard of the law requires a showing that “the
governing law alleged to have been ignored by the arbitrators was well defined, explicit,
and clearly applicable,” and that “the arbitrator knew about the existence of a clearly
governing legal principle but decided to ignore it or pay no attention to it.” Jock v.
Sterling Jewelers Inc., 646 F.3d 113, 121 n.1 (2d Cir. 2011) (internal quotation marks
omitted); see Westerbeke Corp. v. Daihatsu Motor Co., 304 F.3d 200, 208 (2d Cir. 2002)
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(stating that vacatur requires “something beyond and different from mere error in the law
or failure on the part of the arbitrators to understand or apply the law” (internal quotation
marks omitted)). An arbitrator’s award may also be vacated if it is “in manifest disregard
of the terms of the parties’ relevant agreement.” Schwartz v. Merrill Lynch & Co., Inc.,
665 F.3d at 452 (internal quotation marks and alteration omitted). In such cases,
“interpretation of the contract terms is within the province of the arbitrator and will not be
overruled simply because we disagree with that interpretation”; rather, “[i]f the arbitrator
has provided even a barely colorable justification for his or her interpretation of the
contract, the award must stand.” Id. (internal quotation marks and alterations omitted).
2. Manifest Disregard of the Law
a. Functional Equivalence
TiVo argues that the arbitration panel manifestly disregarded the law by conflating
patent licenses and patent infringement actions—mutually exclusive concepts—in
interpreting the PLA. The Goldwassers respond that the concepts are not as unrelated as
TiVo asserts; infringement damages are frequently calculated based on an estimated
reasonable royalty that the infringer would have paid under a licensing agreement. See
Vermont Microsystems, Inc. v. Autodesk, Inc., 138 F.3d 449, 450 (2d Cir. 1998). In fact,
the question before us is not whether these are separate legal concepts—the arbitration
panel does not say otherwise—but whether the arbitration panel provided at least a “barely
colorable” justification for concluding that the Goldwassers’ right to royalties, as that term
is used in the PLA, includes a right to a portion of a settlement for past infringement.
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In urging error, TiVo cites Wang Laboratories, Inc. v. Oki Electric Industries Co.,
15 F. Supp. 2d 166 (D. Mass. 1998), in which the district court held that a lump sum
payment to the licensor to cover past infringement did not amount to a royalty payment
triggering the most favored licensee clause in the parties’ agreement. See id. at 171
(stating that “[m]onies received as a settlement for past tortious use of patents are not the
equivalent of royalties”). This conclusion, however, was premised in part on “the
language of the contract,” which is, of course, unique to every case, and the fact that “[t]he
word royalty commonly imports payment for permissive or lawful use and not damages for
pirated or illegal appropriation.” Id. (internal quotations marks and ellipsis omitted).
But, in a contract, the word “royalty” need not always be read so strictly, especially where,
as here, the agreement expressly recognizes that royalties may sometimes result from
litigation. See PLA Attachment One, J.A. 83 (stating parties’ “intention” for royalties
provision to be “interpreted in a manner that causes TiVo . . . to pay Royalties at [a
specified rate] once, whether from license revenue or litigation recovery” (emphasis
added)). Furthermore, even to the extent they provide persuasive language, none of the
cases TiVo cites are “well defined, explicit, and clearly applicable.” Jock v. Sterling
Jewelers Inc., 646 F.3d at 121 n.1; see, e.g., Information Res., Inc. v. Test Mktg. Grp., Inc.,
22 F.3d 1102 (Fed. Cir. 1993) (“Although couched in terms of a ‘reasonable royalty,’
damages awarded . . . are designed to compensate a patentee for infringement of his patent
rights, and are not royalty payments at all.”) (unpublished table decision). Rather, they
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address different contracts in different circumstances and reach conclusions that are not
precedential.
Thus, the arbitration panel’s interpretation of the royalties provision in the PLA as
including certain litigation damages did not manifestly disregard patent law and is at least a
“barely colorable” interpretation of the PLA. Schwartz v. Merrill Lynch & Co., Inc., 665
F.3d at 452.
b. Consistency with Express Provisions of PLA
We similarly reject TiVo’s argument that the arbitration panel manifestly
disregarded New York law by implying obligations through the duty of good faith and fair
dealing that are inconsistent with the PLA’s litigation settlement and survival provisions.1
See Havell Capital Enhanced Mun. Income Fund, L.P. v. Citibank, N.A., 84 A.D.2d 588,
589, 923 N.Y.S.2d 479, 481 (1st Dep’t 2011) (stating that “duty of good faith cannot imply
obligations inconsistent with the express terms” of agreement).
The litigation settlement provision states that, during the term of the PLA, “TiVo
will pay the Goldwassers an amount equal to forty percent (40%) of any Net Litigation
Recovery . . . directly attributable to the enforcement of the [Goldwasser patent].” PLA
Attachment One, J.A. 84. TiVo urges that this payment is the exclusive means by which
the Goldwassers may recover proceeds from litigation settlements, and that no such
payment is due here because the litigation did not involve the Goldwasser patent. But
1
TiVo contends that the arbitration panel also erred by engaging in “gap filling” analysis
contrary to New York law. Because we do not read the arbitration panel to have applied
such analysis, this argument warrants no discussion.
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TiVo fails to cite—and we independently do not find—any indication in PLA language
that, under any colorable interpretation, this method of recovery is the exclusive means by
which the Goldwassers may share in the proceeds of TiVo’s litigation. Indeed, the
provision cited by the arbitration panel stating that royalties must be paid, “whether from
license revenue or litigation recovery,” arguably contradicts TiVo’s position and, thereby,
provides sufficient support for the panel’s interpretation.
The arbitration panel likewise did not manifestly disregard New York law in
concluding that expiration and survival provisions of the PLA did not preclude recovery.
The survival provision states that payment obligations survive only to the extent they
“ar[ose] prior to termination,” PLA § 9.3, J.A. 79, and it is undisputed that the EchoStar
settlement occurred after the PLA terminated. The arbitration panel, however, concluded
that the payment obligation at issue here arose not with execution of the settlement, “but
when [EchoStar] manufactured TV DVRs using DVR Functionality during the term of the
PLA.” J.A. 418. TiVo labels this a logical absurdity because it obligated TiVo to pay
royalties before TiVo obtained a judgment against, or settled with, EchoStar. The
arbitration panel’s decision, however, is consistent with its construction of the settlement
as the functional equivalent of an implied license, necessitating a royalty payment because
the revenue payment provision imposes a payment obligation at the time that third party
DVRs with DVR functionality licensed from TiVo are manufactured. Moreover, insofar
as the panel found that the parties contracted for the Goldwassers to receive benefits from
litigation whose functional purpose was to obtain compensation for units produced using
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TiVo’s technology without a license, this intent would be undermined by an alternative
interpretation. Thus, the construction of EchoStar’s settlement payment as the functional
equivalent of revenue subject to a royalty payment obligation is consistent with a
determination that the payment obligation arose at the time of manufacture. We therefore
conclude that, although the panel’s interpretation allows for a temporal oddity, it is a
colorable interpretation of the PLA and not contrary to law.
c. Commercially Absurd Result
Separately, TiVo maintains that the arbitration panel’s decision is contrary to law
because it arrives at a commercially absurd result. See In re Lipper Holdings, LLC,
1 A.D.3d 170, 171, 766 N.Y.S.2d 561, 561 (1st Dep’t 2003) (“A contract should not be
interpreted to produce a result that is absurd.”). According to TiVo, the EchoStar
litigation involved EchoStar’s infringement on TiVo’s patent, not the Goldwassers’ patent,
and, because the PLA expired by the time of settlement, the Goldwassers may now sue
EchoStar for infringement on their patent. It would be commercially absurd, therefore, to
require TiVo to pay part of its litigation settlement to the Goldwassers. We disagree.
The arbitration panel found that TiVo attempted to license its technology to
EchoStar, and the parties do not contest that, if such a licensing agreement had been
reached, the Goldwassers would have been entitled to royalties for each unit EchoStar
manufactured. Further, the Goldwassers’ ability to recover royalties from a suit that did
not explicitly involve their patent but, as the arbitration panel found, in function substituted
for the failure to obtain a license, must be considered in light of the parties’ intent to forge
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a “win-win” partnership and the Goldwassers’ choice to rely on TiVo’s good faith rather
than to protect themselves through guaranteed minimum payments, guaranteed conduct, or
other contractual devices. Without the ability to recover the equivalent of a royalty from
TiVo’s litigation that arose because TiVo failed to obtain a license agreement, the
Goldwassers’ “entitlement to royalties would be subject to forces completely beyond their
control.” J.A. 418. Accordingly, we cannot conclude that the arbitrators, who are “often
selected for expertise in the commercial aspect of the dispute,” Goldman v. Architectural
Iron Co., 306 F.3d 1214, 1216 (2d Cir. 2002), came to a commercially absurd result.
3. Fundamental Fairness
TiVo argues that vacatur was warranted because the arbitration panel deprived it of
a fundamentally fair hearing pursuant to 9 U.S.C. § 10(a)(3) by relying on the implied
covenant of good faith and fair dealing, despite the Goldwassers not advancing that theory.
Specifically, TiVo contends that, without notice that the decision could be based on this
theory of recovery, it was unable to place relevant evidence into the record and to argue
against this resolution. See Tempo Shain Corp. v. Bertek, Inc., 120 F.3d 16, 20 (2d Cir.
1997) (stating that evidence exclusion under § 10(a) not erroneous unless violative of
“fundamental fairness”). We are not persuaded.
The panel reasoned that implicit in the PLA, viewed as a whole, was the obligation
to pay royalties under the circumstances now presented because, without such an
obligation, the object of the PLA would be hindered. Thus, according to the panel, the
Goldwassers’ right to royalties from the EchoStar settlement is an “implied promise . . . so
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interwoven into the contract as to be necessary for effectuation of the purposes of the
contract.” Thyroff v. Nationwide Mut. Ins. Co., 460 F.3d 400, 407 (2d Cir. 2006)
(internal quotation marks omitted). The panel effectively gave notice of this reasoning
when, after the hearing but before the final award, it requested briefing on “whether the
situation underlying the arbitration was contemplated by the parties at the time they
negotiated and executed the PLA.” Because TiVo did not request—and therefore the
arbitration panel did not refuse—an opportunity to reopen the record to answer this
inquiry, and the evidence needed to answer this inquiry is substantially the same as that
needed to combat the arbitration panel’s ultimate reliance on the covenant of good faith
and fair dealing, the proceeding was not fundamentally unfair. See Tempo Shain Corp. v.
Bertek, Inc., 120 F.3d at 21.
Moreover, no additional notice was necessary to assure fundamental fairness
because the covenant of good faith and fair dealing “is in aid and furtherance of other terms
of the agreement of the parties.” Murphy v. Am. Home Prods. Corp., 58 N.Y.2d 293, 304,
461 N.Y.S.2d 232, 237 (1983). It is therefore implicit in any contract and need not be
raised separately from a breach of contract claim. See ERE LLP v. Spanierman Gallery,
LLC, 94 A.D.3d 492, 493, 942 N.Y.S.2d 472, 473 (1st Dep’t 2012) (“[I]t is unnecessary for
a party to a contract dispute to raise the issue of good faith. The duty of good faith and fair
dealing is implicit in the performance of contractual obligations . . . .” (internal quotation
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marks omitted)). 2 In sum, because the Goldwassers had no obligation to raise the
covenant of good faith and fair dealing separately from their breach of contract claim, it
was not fundamentally unfair for the panel not to notify TiVo specifically that this doctrine
would play a role in its final decision.
4. Arbitration Panel Authority
TiVo argues that the arbitration panel exceeded its powers by basing the award on
the implied covenant of good faith and fair dealing because the covenant was not raised by
the Goldwassers, and arbitrators lack authority to consider “issues beyond those the parties
have submitted for her consideration.” Jock v. Sterling Jewelers Inc., 646 F.3d at 122. It
is beyond cavil, however, that the panel was tasked with deciding whether the PLA entitled
the Goldwassers to royalty payments based on TiVo’s settlement with EchoStar, and that is
precisely the issue it decided. Indeed, had the Goldwassers specifically alleged a breach
of the covenant of good faith and fair dealing, that claim would have been duplicative of
their breach of contract claim. See Netologic, Inc. v. Goldman Sachs Grp., Inc., 110
A.D.3d 433, 433–34, 972 N.Y.S.2d 33, 34–35 (1st Dep’t 2013) (dismissing as duplicative
breach of implied covenant of good faith and fair dealing claim because breach of contract
claim arose from same facts and sought identical damages). TiVo’s argument to the
contrary is merely that the panel’s reasoning did not wholly track the parties’ arguments,
2
To the extent TiVo contends that the award was not fundamentally fair because it relied
on second-hand testimony regarding the PLA negotiations, we are not persuaded. See
Bell Aerospace Co. Div. of Textron v. Local 516, 500 F.2d 921, 923 (2d Cir. 1974) (“In
handling evidence an arbitrator need not follow all the niceties observed by the federal
courts.”); accord Tempo Shain Corp. v. Bertek, Inc., 120 F.3d at 21.
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and is unaccompanied by citation to any case in which alternative reasoning of this sort was
found to exceed the arbitrators’ authority. Rather, TiVo’s supporting citations involve
instances where arbitrators went beyond alternative reasoning and instead awarded relief
not requested by the parties. See, e.g., Totem Marine Tug & Barge, Inc. v. N. Am.
Towing, Inc., 607 F.2d 649, 651–52 (5th Cir. 1979) (vacating award that included damages
for charter hire despite concession that charter hire not at issue); PMA Capital Ins. Co. v.
Platinum Underwriters Bermuda, Ltd., 659 F. Supp. 2d 631, 637–38 (E.D. Pa. 2009)
(vacating award that, inter alia, eliminated provision of agreement where parties disputed
only proper calculation under, and consequences of, that provision). Accordingly, we
conclude that the arbitration panel did not exceed its powers.
We have considered the remainder of TiVo’s claims and consider them to be
without merit. Accordingly, the judgment of the district court is AFFIRMED.
FOR THE COURT:
CATHERINE O=HAGAN WOLFE, Clerk of Court
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