Timegate Studios, Inc. v. Southpeak Interactive, L.L.C.

Case: 12-20256 Document: 00512203350 Page: 1 Date Filed: 04/09/2013
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
April 9, 2013
No. 12-20256 Lyle W. Cayce
Clerk
TIMEGATE STUDIOS, INCORPORATED,
Plaintiff-Appellee
v.
SOUTHPEAK INTERACTIVE, L.L.C.; GONE OFF DEEP, L.L.C., doing
business as Gamecock Media Group; SOUTHPEAK INTERACTIVE
CORPORATION; TERRY M. PHILLIPS,
Defendants-Appellants
v.
MELANIE MROZ,
Appellant
Appeal from the United States District Court
for the Southern District of Texas
Before STEWART, Chief Judge, and DAVIS and CLEMENT, Circuit Judges.
W. EUGENE DAVIS, Circuit Judge:
Defendants-Appellants, who collectively operated as a video game
publisher, entered into a contract with Plaintiff-Appellee, a video game
developer, to produce and market a new video game. When their business
relationship deteriorated, the parties proceeded with arbitration, and the
arbitrator awarded the publisher Defendants-Appellants monetary
compensation and a perpetual license in the video game’s intellectual property.
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However, the district court vacated the arbitrator’s award, determining that the
perpetual license was not consistent with the “essence” of the underlying
contract. Because we find that the perpetual license was a remedy that furthered
the essence of the publishing agreement, we REVERSE and REMAND with
instructions to reinstate the arbitrator’s award.
I.
This dispute arises out of a video game publishing agreement (“the
Agreement”) entered into by Appellee Timegate Studios, Inc. (“Timegate”) and
Appellant Gone Off Deep, L.L.C. d/b/a Gamecock Media Group (“Gamecock”) in
June 2007.1 Under the terms of the Agreement, Timegate was to be the
developer and Gamecock was to be the publisher of a futuristic military-style
video game entitled “Section 8.” As developer, Timegate was obligated to design
and develop a “high quality” video game in accordance with progress and
expenditure milestones outlined in the Agreement. In contrast, Gamecock, as
publisher, was obligated to provide most of the investment funding for the
game’s development. Gamecock was also primarily responsible for
manufacturing, marketing, distributing, and selling the game after its
development. Despite their distinct roles, the contract also contains numerous
provisions requiring the parties to provide each other with specified resources,
information, assistance, and consent.
The Agreement describes in detail the rights and duties of Timegate and
Gamecock, including their rights with regard to Section 8 game sequels, add-ons,
and licensing rights. The Agreement provides, in relevant part, that Gamecock
shall have “the exclusive right and license” to “reproduce, manufacture, package,
1
In October 2008, Gamecock was acquired by Southpeak Interactive, L.L.C. and
organized as a wholly owned subsidiary of Southpeak Interactive Corporation (collectively
“Southpeak”). Under a subsequent sublicense agreement with Gamecock, Southpeak assumed
Gamecock’s rights and responsibilities with regard to the Timegate publishing agreement.
This opinion will refer to the publisher Defendants-Appellants as “Gamecock” throughout.
2
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advertise, publish, market, sell to end-users, wholesalers, and retailers,
distribute, . . . and display” Section 8 and any of its iterations on the game’s
initial platforms. Moreover, the Agreement also grants Gamecock the “limited
exclusive right and license” to manufacture, market, publish, and sell add-ons
and platform translations associated with Section 8. The Agreement, however,
only grants Gamecock a worldwide license for a term of eight years following the
game’s first release or five years following the release of an add-on or sequel,
whichever is later. A special provision concerning sequels guarantees Gamecock
“the right of first refusal and last matching option for the publishing of one
Sequel” to Section 8.
With regard to Section 8 intellectual property, the Agreement grants
Gamecock “a non-exclusive right and license . . . to use the Game Trademarks[2]
solely in connection with the packaging, sale, marketing, advertising and
distribution” of the Section 8 game and any add-ons or sequels. However, the
Agreement makes clear that Timegate will remain the “exclusive owner” of the
game intellectual property and that Gamecock’s use of such property is limited
to reasonable game marketing, publishing, and distribution efforts.3 Finally, the
2
The Agreement defines “Game Trademarks” as the “trademarks, trade names,
themes, characters, designs, likenesses and licenses for same used in connection with the
Game, including but not limited to, Developer’s trademark rights in the mark SECTION 8.”
3
The Agreement provides,
[T]he Developer [(Timegate)] is the exclusive owner of the Game Trademarks
and all the goodwill attached thereto and that the Developer shall retain full
rights to the Game Trademarks, all registrations granted thereon and the
goodwill associated therewith. [Gamecock] shall also have the limited right to
use the Game Trademarks in association with its own company marketing,
provided that such use be reasonable and not misstate any affiliation with
Developer or [Gamecock’s] rights in the Game Trademarks. [Gamecock] shall
have no rights, other than rights granted herein, to the Game Trademarks or
any confusingly similar variation thereof.
Moreover,
Developer shall be the owner of all intellectual property rights in the Game,
3
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Agreement specifically prohibits Gamecock from preparing derivative works or
otherwise exploiting any Section 8 subject matter except in accordance with the
contract.
Section 8 was finally released in September 2009, approximately two years
after Timegate and Gamecock entered into the Agreement. By then, Gamecock
had been acquired by Southpeak, which assumed Gamecock’s rights and duties
as publisher under the Agreement. Soon after, the parties’ relationship began to
deteriorate as sales of the game failed to meet expectations. In December 2009,
Timegate filed suit against Gamecock, alleging multiple breaches of the
Agreement: that Gamecock had become insolvent; that Gamecock’s acquisition
by and sublicense agreement with Southpeak was impermissible; and that
Gamecock had misreported sales figures to Timegate. In response, Gamecock
asserted that it was Timegate that breached the Agreement by unilaterally
withdrawing from the contract, by failing to put forth its best efforts in
developing the game, and by unilaterally publishing both a sequel and alternate
platform of the game.
Gamecock also included in its answer a demand that the matter be stayed
in the district court and submitted to binding arbitration in accordance with the
arbitration clause in the Agreement. The district court stayed the suits pending
the arbitration, which took place in April and July 2011. In the arbitration,
Game Trademarks, Derivative Works and all Deliverables (including without
limitation, merchandising items, logos, etc.) related thereto created or developed
by or on behalf of Developer, including without limitation, all copyrights,
trademarks, patents, trade secrets, and other proprietary rights.
....
During the Term, Developer grants to [Gamecock] the non-exclusive right to
publicly Use all of Developer’s intellectual property rights in the Game (and for
Ports, Add-Ons and Sequels) and the Deliverables related thereto, including,
without limitation, all of Developer’s patents, copyrights, and trademarks, in
connection with the publication, distribution, marketing, promotion, and
advertising of the Game and/or the Deliverables related thereto, as provided in
the licenses granted in this Agreement.
4
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Timegate sought recovery for breach of contract, quantum meruit, and copyright
infringement. In turn, Gamecock sought recovery for breach of contract and
fraud. Gamecock asserted that Timegate never intended to fully develop Section
8, and that Timegate had made material misrepresentations in order to induce
Gamecock to enter the Agreement.
Following an eight-day evidentiary hearing, the arbitrator issued his Final
Award, Findings of Fact, and Conclusions of Law (the “Award”), in which he
rejected Timegate’s claims and ruled in favor of Gamecock’s counterclaims for
breach of contract and fraud. The arbitrator found that Timegate had actively
engaged in a litany of fraudulent misrepresentations and contractual breaches.
Specifically, the arbitrator found that of the $7.5 million Gamecock supplied to
Timegate and which Timegate was obligated to spend on Section 8’s
development, Timegate had spent only $6.76 million while pocketing the
balance. Moreover, Timegate failed to spend any of the $2.5 million of its own
money that it was obligated to spend on Section 8’s development. According to
the arbitrator’s findings of fact, “TimeGate never intended to invest $2.5 million
of its own money” and “failed to use its best efforts to develop a high quality
Game” in accordance with the Agreement. As a result, the arbitrator found that
“Timegate induced Gamecock to enter into the Publishing Agreement by fraud,
and induced [Southpeak] to continue to honor the Publishing Agreement by
fraud, as it promised to invest $2.5 million . . . without intending to do so, and
Gamecock and [Southpeak] relied upon such promise to their detriment.”
Concluding that Timegate materially breached the Agreement, the arbitrator
awarded Gamecock $7,349,733.57, which he determined was the cash loss
suffered by Gamecock to date.4
4
The arbitrator also awarded Gamecock $831,479.55 in attorney’s fees for legal costs
incurred through the arbitration.
5
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The arbitrator also found, however, that the monetary award for losses to
date failed to fully compensate Gamecock for all of Timegate’s fraud and
contractual breaches. For example, the arbitrator concluded that Timegate
breached the Agreement by (1) self-publishing the Playstation 3 platform
translation, or “port”, of Section 8 and (2) unilaterally developing a game sequel
in direct violation of its licensing agreement with Gamecock. Timegate further
breached the agreement by (3) failing to provide Gamecock with fully functioning
versions of Section 8 downloadable content, (4) failing to provide a Russian
translation of the game, and (5) failing to provide Gamecock with the necessary
access codes corresponding to Gamecock’s exclusive right to distribute the game
electronically via certain third-party websites.5 Each of these breaches deprived
Gamecock of the opportunity to exploit the potential opportunities offered by
other iterations, distribution channels, and sequels of Section 8. Thus, the
arbitrator determined that in addition to the $7.35 million award,
The Publishing Agreement is hereby amended as a matter of law
that Gamecock and [Southpeak] have a perpetual license for
TimeGate’s intellectual property in the Game, and Gamecock and
[Southpeak] have no obligation to report to TimeGate about sales of
the Game that use any of TimeGate’s intellectual property, nor do
Gamecock and [Southpeak] have any legal obligation to pay any
royalties to TimeGate under the Publishing Agreement, and
Gamecock and [Southpeak] may create Sequels, Ports, Add-Ons
related to the Game.
The Publishing Agreement is hereby amended as a matter of law
that TimeGate may create sequels, Ports, Add-Ons related to the
Game, or other competing products, and . . . TimeGate has no legal
duty to pay any royalties to Gamecock or [Southpeak] related to the
Game.
5
We emphasize that as Timegate’s counsel conceded at oral argument, this Court is
bound by the arbitrator’s unchallenged factual determinations.
6
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The Publishing Agreement is hereby amended as a matter of law
that Gamecock or [Southpeak] may create sequels, Ports, Add-Ons
related to the Game, or other competing products, and . . . neither
Gamecock nor [Southpeak] has no [sic] legal duty to pay any
royalties to TimeGate related to the Game.
The effect of the license-modifying portion of the Award was to realign
major elements of the parties’ future relationship as established by their original
agreement. The parties’ initially-distinct roles as developer and publisher were
effectively dissolved with each party being given the right to unilaterally create
derivative Section 8 merchandise and property. Timegate and Gamecock’s
previous obligations to report, share, and distribute revenues from Section 8
were likewise dissolved, permitting each party to pursue Section 8 commercial
activities independently.
Gamecock moved the district court to confirm the arbitration Award.
Timegate objected, and asked the court to vacate the Award because the
arbitrator exceeded his authority. The district court found that although a
finding of fraud permits an arbitrator to fashion an award which conflicts with
contractual provisions, any such award must still be “rationally inferable from
the parties’ central purpose in drafting the agreement.” The court then
concluded that the arbitrator’s creation of the perpetual license was not a
remedy rationally rooted in the contract. Because “[t]he provision takes what
was a temporary licensing agreement, which required collaboration and
coordination between the parties, and expands it into a permanent contract
under which the parties are able to develop competing products,” the court found
that the grant of a perpetual license exceeded the arbitrator’s authority. In the
district court’s view, the perpetual license was “inconsistent with the
fundamental purpose of the contract.”6 Because the district court concluded that
6
Timegate also argued to the district court that the arbitrator exceeded his authority
by awarding cash damages based on milestone payments which the Agreement described as
7
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it could “not modify the award while still preserving its intent, and acting
consistently with the essence of the parties’ contract,” the court vacated the
entire Award. Gamecock now appeals.
II.
Our review of the district court’s confirmation or vacatur of an arbitrator’s
award is de novo. Executone Info. Sys., Inc. v. Davis, 26 F.3d 1314, 1320 (5th Cir.
1994). “Our review of the arbitrator’s award itself, however, is very deferential.
We must sustain an arbitration award even if we disagree with the arbitrator’s
interpretation of the underlying contract as long as the arbitrator’s decision
‘draws its essence’ from the contract.” Id. (citation omitted) (quoting
Anderman/Smith Operating Co. v. Tenn. Gas Pipeline Co., 918 F.2d 1215, 1218
(5th Cir. 1990)). “In other words, we must affirm the arbitrator’s decision if it is
rationally inferable from the letter or the purpose of the underlying agreement.”
Id. “In deciding whether the arbitrator exceeded its authority, we resolve all
doubts in favor of arbitration.” Id.III.
Gamecock first argues that the district court erred by vacating the
arbitration Award. Contrary to the district court’s conclusion, Gamecock
contends that the perpetual license remedy selected by the arbitrator was
permissible and rationally explainable as a logical means of furthering the aims
of the underlying publishing agreement.
The Federal Arbitration Act provides, in relevant part, that a district court
may vacate an arbitration award “where the arbitrators exceeded their powers.”7
non-refundable. Unlike the perpetual license, the district court found that the cash award
voided any conflicting contractual provisions related to the damages award in light of
Timegate’s fraudulent inducement. Timegate has not disputed this finding on appeal.
7
The Federal Arbitration Act actually provides four bases upon which a district court
may vacate an arbitrator’s award: (1) “where the award was procured by corruption, fraud, or
undue means;” (2) “where there was evident partiality or corruption in the arbitrators;” (3)
8
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9 U.S.C. § 10(a)(4). Whether an arbitrator has exceeded his powers is tied closely
to the applicable standard of review. We will sustain an arbitration award as
long as the arbitrator’s decision “draws its essence” from the contract—even if
we disagree with the arbitrator’s interpretation of the contract. Executone, 26
F.3d at 1320.8 The question is whether the arbitrator’s award “was so unfounded
in reason and fact, so unconnected with the wording and purpose of the
[contract] as to ‘manifest an infidelity to the obligation of an arbitrator.’”9 Thus,
the substantive question of whether an arbitrator has exceeded his arbitration
powers is a function of our highly deferential standard of review in such cases:
an arbitrator has not exceeded his powers unless he has utterly contorted the
evident purpose and intent of the parties—the “essence” of the contract.
In this case, the arbitration clause is quite broad and contains no limits
relevant to the instant dispute: “any dispute . . . shall be submitted to binding
arbitration.” (emphasis added). Moreover, “the arbitrator’s selection of a
particular remedy is given even more deference than his reading of the
underlying contract.” Executone, 26 F.3d at 1325. “The remedy lies beyond the
arbitrator’s jurisdiction only if ‘there is no rational way to explain the remedy
“where the arbitrators were guilty of misconduct . . . or of any other misbehavior by which the
rights of any party have been prejudiced;” and (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). The only grounds asserted for
vacatur in the instant case is that the arbitrator exceeded his powers
8
See also Misco, 484 U.S. at 38 (“[A]s long as the arbitrator is even arguably construing
or applying the contract and acting within the scope of his authority, that a court is convinced
he committed serious error does not suffice to overturn his decision.”).
9
Brotherhood of R.R. Trainmen v. Cent. of Ga. Ry., 415 F.2d 403, 412 (5th Cir.1969)
(quoting United Steelworkers v. Enterprise Wheel & Car Corp., 363 U.S. 593, 597 (1960)), cert.
denied, 396 U.S. 1008 (1970).
9
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handed down by the arbitrator as a logical means of furthering the aims of the
contract.’” Id.10
Because the question of an arbitrator’s remedial power hinges upon the
“aims,” “wording and purpose,” and “essence” of the underlying agreement, we
must first determine the essence of the publishing agreement in the instant case.
According to the Agreement, the parties’ contract was motivated by Gamecock’s
“desire[] to engage [Timegate] to develop an interactive video game with a
working title of Section 8.” The numerous contractual provisions that follow
describe in detail how funding is to be allocated to the game’s development,
which party is to provide what funding, how developmental benchmarks are to
be determined, and the respective roles of the parties in the design and creation
of the game. Other provisions describe the respective roles of the parties in the
marketing of the game, with each party being subject to record-keeping and
reporting requirements. The Agreement further outlines various financial
provisions detailing how revenue, expenses, and profits are to be calculated and
allocated. In fact, virtually every foreseeable aspect of the parties’ business
relationship is contemplated and addressed by the Agreement, representing a
sensitive, interdependent balance in which each party was assured of a specific
set of rights and benefits in exchange for their promise to accept a specific set of
duties and responsibilities. The entire Agreement can accurately be summed up
as the creation of a mutually beneficial business relationship between two
parties with distinct expertise: a video game developer and a video game
publisher. The parties were to work jointly to create, market, and popularize a
video game whose success would yield financial benefits to be distributed
10
(quoting Brotherhood of R.R. Trainmen, 415 F.2d at 412). See also Anderman/Smith
Operating Co. v. Tenn. Gas Pipeline Co., 918 F.2d 1215, 1219 n.3 (5th Cir. 1990) (“The single
question is whether the award, however arrived at, is rationally inferable from the contract.”).
10
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between the two parties in accordance with their respective contributions to the
joint effort as required by the contract.
The perpetual license furthers these general aims of the Agreement. As
Timegate’s counsel conceded at oral argument, we are bound by the arbitrator’s
factual findings regarding Timegate’s conduct—findings which identify
Timegate’s pattern of deliberate fraud, deception, and willingness to violate its
promises. Timegate had breached the Agreement in so many ways and its
relationship with Gamecock had become so contentious that the collaborative
relationship presupposed by the Agreement was no longer possible. The
perpetual license granted to Gamecock represents an attempt by the arbitrator
to restore to Timegate and Gamecock the fundamental goal of the Agreement:
mutual access to financial benefits derived from their joint creation and
distribution of Section 8.
As the arbitrator recognized, the parties were unable to work together in
a cooperative effort to profit from this venture because of Timegate’s numerous
breaches. An adequate remedy in the form of a monetary award was available
for Timegate’s breaches to date; however, whether sequels or other iterations of
Section 8 would or could be developed successfully and marketed profitably
(particularly estimates of the amount of such profit) was so speculative that the
arbitrator rationally could have concluded that a monetary award was not an
appropriate remedy for those breaches. Under these circumstances, where the
relationship of the parties could not be expected to be healed primarily because
of the fraud of Timegate, the parties could no longer partner together to market
their product jointly. The only way to give Gamecock the opportunity to benefit
from the future development of variations of Section 8 was to cut Gamecock loose
from Timegate and allow it to independently pursue game marketing efforts. To
do this, the arbitrator granted the perpetual license to Gamecock, a remedy that
also left Timegate free to develop and promote Section 8 variations on its own.
11
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We conclude that the arbitrator could have reasonably found that only by
severing the parties’ obligations to work with each other to develop, publish, and
sell Section 8 could each party achieve the object of the Agreement: access to the
financial benefits of their agreed-upon contributions. In fact, one provision in the
contract actually provides that in the event of certain (inapplicable) breaches of
the Agreement by Timegate, Timegate “shall deliver to [Gamecock] all Work
Product and other materials requested or required by [Gamecock] . . . including,
but not limited to, the Intellectual Property.”11 Indeed, when questioned at oral
argument, Timegate’s counsel could offer no alternative remedy to permanently
and fairly compensate Gamecock for Timegate’s contractual breaches, given the
findings of the arbitrator. This supports our conclusion that the Award was a
permissible exercise of the arbitrator’s creative remedial powers.12
In response, Timegate argues that the essence of the Agreement should
not be construed so generally. As Timegate correctly observes, “It is well-
established that courts may set aside awards when the arbitrator exceeds his
contractual mandate by acting contrary to express contractual provisions.”13
11
Indeed, it appears that in the traditional “pay for hire” arrangement in the video
game industry, a publisher incrementally pays a developer for all of the costs of developing a
video game, and in turn the publisher retains the intellectual property rights to “elements
such as the game’s name, characters, storyline, and logos.” See Jennifer Stanley, DEAL POINTS
IN GAMING NEGOTIATION, 11 No. 1 CYBERSPACE LAW. 4 (2006).
12
In a separate attempt to sustain the district court’s vacatur of the Award, Timegate
asserts that the perpetual license cannot be upheld because it would eliminate Timegate’s
ability to control its trademark in Section 8, creating a “naked license” and effectively
destroying the trademark. However, Timegate’s objection is merely one more consideration
which factors into this Court’s essence analysis. Contrary to Timegate’s assertions, the mere
possibility of a watered-down trademark is a natural consequence of shared licensing
rights—rights already contemplated by the Agreement—and in this case does not interfere
with the Agreement’s essence.
13
Beaird Indus., Inc. v. Local 2297, Int’l Union, 404 F.3d 942, 946 (5th Cir. 2005); see
also Delta Queen Steamboat Co. v. Dist. 2 Marine Eng’rs Beneficial Ass’n, 889 F.2d 599, 604
(5th Cir. 1989) (stating that “arbitral action contrary to express contractual provisions will not
be respected”).
12
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Accordingly, Timegate argues that the perpetual license remedy cannot further
the essence of the Agreement when it conflicts with specific provisions in the
Agreement governing the retention and limitation of intellectual property rights.
However, Timegate’s reliance upon these conflicting provisions to
invalidate the Award is misleading for several reasons. First, Timegate ignores
the extremely particularized nature of its Agreement with Gamecock. The 35-
page contract contains hundreds of individual provisions governing every
foreseeable aspect of the parties’ relationship. Any award which attempts to
compensate and restore one contractual party for multiple, irreversible breaches
committed by the other party will inevitably realign some of the original
contract’s provisions. If the “essence” of such a complex contract rested on every
provision in the contract, an arbitrator could not possibly fashion a remedy.14
Second, it is undisputed that under Texas law, a finding of fraudulent
inducement can provide an arbitrator with a basis for voiding provisions of a
contract.15 Nor has Timegate challenged the district court’s conclusion that the
arbitrator can implicitly void contractual provisions in a fraudulently induced
contract merely by ordering an award which partially conflicts with the contract.
See Executone, 26 F.3d at 1325.16 Thus, the arbitrator’s finding of fraudulent
inducement permitted him to fashion an award which conflicted with provisions
in the original Agreement.
14
See Executone, 26 F.3d at 1327–28 (broadly defining “the parties’ central purpose in
drafting the agreement—which was to reach a purchase price based on a fair calculation of
[the distributor’s] adjusted pre-tax profits for the year”).
15
See, e.g., Dunbar Med. Sys., Inc. v. Gammex Inc., 216 F.3d 441, 454 (5th Cir. 2000)
(affirming award of punitive damages under Texas law to party fraudulently induced into
entering contract, despite contractual provision excluding punitive damages).
16
“We are not limited to the arbitrator’s explanations for his award; as we stated in
Anderman/Smith, ‘this Court does not review the language used by, or the reasoning of, the
arbitrators in determining whether their award draws its essence from the contract. This
Court looks only to the result reached.’” Executone, 26 F.3d at 1325 (quoting Anderman/Smith,
918 F.2d at 1219 n.3).
13
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Third, the cases which Timegate cites do not stand for the proposition that
an arbitration award can never alter a provision of the underlying contract.
Rather, “in the cases in which we [have] found an arbitrator had exceeded his
powers, he had intruded on an issue that was reserved for an alternative
decisionmaker or was removed from anyone’s discretion under the contract.”
Apache Bohai Corp. LDC v. Texaco China BV, 480 F.3d 397, 403–04 (5th Cir.
2007).17 The contested intellectual property licensing provisions in the Award do
not concern an issue precluded from arbitration, nor does the Agreement purport
to vest discretion over such matters in some other party or entity.
Although this court has not considered a factually similar application of
the essence test, our caselaw suggests that the perpetual license is within the
broad scope of the arbitrator’s authority. In United Steelworkers v. U.S. Gypsum,
17
For example, Timegate cites Beaird v. Local 2297 for the proposition that “courts may
set aside awards when the arbitrator exceeds his contractual mandate by acting contrary to
express contractual provisions.” 404 F.3d at 946. In Beaird, an arbitrator determined that an
employer had violated its collective bargaining agreement by subcontracting its landscaping
work to a third party. Id. at 945. However, the agreement specifically provided that the
employer would retain the right to “exercise within its sole and exclusive discretion . . . the
decision to subcontract out [landscaping] work.” Id. As a result, this court found that the
unambiguous language of the contract gave the employer an unlimited right to subcontract,
and the arbitrator could not determine that the employer had breached the contract by
subcontracting. Id. at 945–46. Timegate also cites Delta Queen for its similar holding. 889 F.2d
at 604. In Delta Queen, a collective bargaining agreement similarly vested sole responsibility
and discretion for disciplinary action in the company’s management once proper cause for
discipline was found to exist. Id. This court found that because the arbitrator had found the
existence of proper cause for discipline, the agreement prohibited him from questioning
management’s disciplinary actions. Id.Each of these cases involved contractual provisions which limited the arbitrator’s own
authority and which the arbitrator had completely disregarded. In contrast, the instant case
concerns an arbitrator’s discretionary attempt to restore the party’s rights following what was
indisputably a contractual breach and proper invocation of the arbitrator’s remedial powers.
See United Steelworkers of America v. U.S. Gypsum Co., 492 F.2d 713, 730 (5th Cir. 1974)
(“Provided that his choice is not precluded by the arbitration provision under which he was
acting, is adequately grounded in the contract, and is not arbitrary or capricious, we must
uphold his action.” (emphasis added)). Moreover, each of the cases cited by Timegate is
distinguishable on the sole ground that they did not concern situations in which fraud has
made the underlying contract voidable.
14
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this court considered the propriety of an arbitrator’s award in the context of a
dispute between union workers and their employer who had refused to negotiate
wages with them five years before the arbitration. 492 F.2d at 728. To
compensate the employees, the arbitrator ordered the employer to pay “the
amount of a wage increase which he thought the parties would have agreed to
had they negotiated.” Id. Although this remedy is inherently speculative and
called for the arbitrator to unilaterally realign the contractual balance of the
parties, this court upheld the award. Id. We reasoned,
[W]e do not consider the arbitrator’s remedy as making an agreement for
the parties or as adding terms to the contract. In the context present here
his action merely represents an attempt to make the union whole for the
damage suffered as a result of Gypsum’s breach of the collective
bargaining agreement. Having deprived the union of its right to negotiate
over an increase in wages, the company is bound by the arbitrator’s
determination that it must remedy this wrong. Nothing in the agreement
precludes the remedy selected by the arbitrator.
Id. at 730–31. We concluded: “Provided that his choice is not precluded by the
arbitration provision under which he was acting, is adequately grounded in the
contract, and is not arbitrary or capricious, we must uphold his action.” Id. at
730 (emphasis added).18
The only case we have found which considers facts similar to the instant
case was decided by the California Supreme Court in Advanced Micro Devices,
18
See also Amalgamated Transit Union Local No. 1498 v. Jefferson Partners, 229 F.3d
1198, 1201 (8th Cir. 2000). The Jefferson case concerned an employer which maintained a
seniority-based wage tier system, which guaranteed senior employees greater pay. Id. at 1199.
The employee’s union sued the employer when it unilaterally enacted wage increases which
elevated all employee pay to what had previously been the highest wage tier. Id. Upholding
the arbitrator’s decision to impose new tiered wage increases, the Eighth Circuit concluded:
“It is true that the remedy . . . is not expressly provided for in the agreement. But contracts
often lack explicit provisions for specific kinds of remedies. The company’s breach (which it
does not now dispute) had already disturbed the contractual wage scale. The arbitrator’s
choice of remedy is one way to restore the balance. Nothing in the contract prohibits this
choice.” Id. at 1201.
15
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No. 12-20256
Inc. v. Intel Corp., 885 P.2d 994 (Cal. 1994). In that case, AMD and Intel, two
computer-chip manufacturers, entered into a joint chip development and
manufacturing agreement, the exact nature of which was disputed. Id. at
996–98. When AMD became aware of Intel’s detrimental unilateral development
and outsourcing activities involving chip efforts which were supposed to be
collaborative, the parties entered arbitration. Id. at 998. Finding a breach of
Intel’s warranty of good faith, and concluding that AMD’s damages were
inherently “immeasurable,” the arbitrator awarded AMD monetary damages and
a “permanent, nonexclusive and royalty-free license to any Intel intellectual
property embodied in the [chip in question].” Id. at 998–99. Applying California’s
identical standard for reviewing arbitration awards, the California Supreme
Court considered whether the arbitrator had “exceeded [his] powers.” Id. at
1006–09. Rejecting Intel’s argument that “arbitrators may not award a party
benefits different from those the party could have acquired through performance
of the contract,” the court concluded that the permanent license remedy was
“rationally drawn from the arbitrator’s conception of the contract’s subject
matter and the effects on AMD of Intel’s breach.” Id. at 1006–08. We find the
reasoning of the AMD court persuasive and agree with its analysis.
Based on the above caselaw and reasoning, we conclude that the Section
8 perpetual license is rationally rooted in the Agreement’s essence. Timegate
committed an extraordinary breach of the Agreement, and an equally
extraordinary realignment of the parties’ original rights is necessary to preserve
the essence of the Agreement. Because the Agreement bestowed broad remedial
powers upon the arbitrator and because it was fraudulently induced and
irreversibly violated by Timegate, the perpetual license is a rational and
16
Case: 12-20256 Document: 00512203350 Page: 17 Date Filed: 04/09/2013
No. 12-20256
permissible attempt to compensate Gamecock and maintain the Agreement’s
essence.19
IV.
For the reasons stated above, the judgment of the district court is
REVERSED and REMANDED with instructions to confirm the arbitration
award.
19
Timegate also briefly argues that the Award’s perpetual license renders other
provisions of the Agreement “nonsensical,” because it is unclear whether they have survived
in light of the Award. (For example, Timegate points to the contract’s requirement that
Gamecock include Timegate’s name and logo on Section 8 packaging and advertising.)
However, Timegate’s argument is meritless because the Award makes clear that the
Agreement “remains in full force and effect as amended by this Award.” Thus, any provisions
of the Agreement which are not impliedly voided because of a conflict with the Award’s
amendments remain active.
17