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11/28/86 Nanex Corp., Et Al. v. Prism Corp

November 28, 1986





Rules of the District of Columbia Circuit Court of Appeals may limit citation of unpublished opinions. Please refer to the Rules of the United States Court of Appeals for this Circuit.



Appellants, Nanex Corporation and Dr. Anna Freed, entered into a contract with the appellee, Prism Corporation, in February 1985. The contract established a joint venture to produce and market certain instructional materials and seminars on Medicare and Medicaid. Pursuant to this agreement, Dr. Freed prepared written materials which Prism had printed. Demand for the joint venture's products, however, apparently did not live up to expectations. Accordingly, Dr. Freed was left with a substantial inventory of books from the joint venture in her possession. She proceeded independently to market some of these books. This unilateral initiative led Prism to the view that appellants were employing joint venture assets for their personal gain. Invoking diversity jurisdiction, Prism initiated suit in United States District Court on August 15, 1985.

Prompted by the fact that the contract at issue contained an arguably applicable arbitration clause, the District Court, with the parties' consent, submitted the case to binding arbitration. The court's order, dated October 25, 1985 provided as follows:

"ORDERED, that the parties promptly submit the instant dispute to arbitration . . . the decision therein to be binding upon the parties; and it is

FURTHER ORDERED, that plaintiff shall advance to the American Arbitration Association the administrative expenses due in connection with the arbitration aforesaid, provided, however, that the non-prevailing party shall ultimately bear all costs of the arbitration (not, however, including attorneys' fees) . . . ."

The case proceeded through arbitration with considerable dispatch. On December 18, 1985, the Arbitrator issued his decision, holding, inter alia, that "[t]he administrative fees and expenses of the American Arbitration Association shall be borne by Claimant [Prism]." This arbitration award was thereafter submitted to the District Court, which, in an order dated January 3, 1986, entered judgment, with one exception, "in accordance with the arbitration award." Not surprisingly, the one exception is the subject of this appeal. Specifically, the District Court ordered that the approximately $1200.00 of administrative costs of the arbitration be borne by the appellants. The parties have devoted considerable effort, and presumably expense, to the disposition of this modest sum. In addition, four federal judges have been summoned to bring their judgment to bear on the issue.

Appellants advance two arguments in support of their contention that the District Court's imposition of the costs on them was error. First, they contend that the issue of administrative costs was submitted to the arbitrator, and that the District Court did not possess the requisite grounds to vacate or modify the arbitrator's award. See Appellants' Brief at 12-14. Second, appellants claim that even if the issue was not properly before the arbitrator, they were the "prevailing party" and thus, by virtue of the District Court's October 25, 1985, order, not liable for these costs. On the sparse record before us, we reject both of these arguments. We find no error in the District Court's decision.

First, it is sufficiently clear from the District Court's October 25 order that the court was treating the issue of administrative costs as distinct from the underlying substantive dispute. The court dealt with the issue of costs in a separate paragraph of its order and established a specific standard by which those costs would be assessed. This indicates, and the court's subsequent Memorandum Order makes clear, that the costs issue was not intended to be submitted to the arbitrator. When the arbitrator's award came before the District Court, the court thus properly dismissed the arbitrator's determination on this issue and considered the matter de novo. The court was not obliged to have the grounds necessary to vacate or modify an arbitrator's award, inasmuch as the issue was never intended to be before the arbitrator in the first instance.

Second, appellants' fallback position is that they should be considered the "prevailing party" and should thus not bear the arbitration costs. We disagree. The District Judge concluded, correctly in our view, that "[o]n balance . . . the plaintiff [has] prevailed." Prism's complaint sought several avenues of relief, some of which the arbitrator granted, some of which he denied. The thrust of Prism's position, however, was that the contractual relationship should continue, while appellants were declaring the contract was at an end. Specifically, Prism sought to prohibit appellants from making sales of the joint venture materials for their own account, to recover damages incurred as a result of such sales, to remove the materials from appellants' possession, and to have the proceeds of the joint venture distributed pursuant to a formula that would first compensate each partner for its costs and then split the proceeds evenly.

The arbitrator's award substantially vindicates Prism's position. The arbitrator ruled that the contract remained in force and directed that all future sales of the materials at issue be on behalf of the joint venture. Moreover, while he denied Prism's claim for compensatory damages, the arbitrator did order the appellants to provide an accounting of any sales that may have taken place and to deliver all proceeds of any such sales to the joint venture account. The arbitrator also ruled that Prism should take possession of all the materials, save for a small amount that would remain in appellants' possession on consignment. Finally, the arbitrator accepted Prism's formula for distribution of the joint venture's proceeds. Significantly, the arbitrator held Prism's allowed costs to be in excess of $50,000, the full amount it claimed, but limited appellants' costs to $8,500, less than half their claimed amount. This costs award has the obvious effect of giving Prism the bulk of the joint venture revenues.

In short, while the record before us is extremely sparse, due in no small part to appellants' conduct of this odd litigation, it is clear that the District Court committed no error. The issue of costs was retained for the court's determination, not submitted to the arbitrator. The court thus properly considered the issue, and we find its assessing of the administrative costs on ...

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