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The Knabb Partnership v. Home Income Equity LLC

United States District Court, E.D. Pennsylvania

April 19, 2017

THE KNABB PARTNERSHIP, Petitioner,
v.
HOME INCOME EQUITY, LLC, Respondent.

          MEMORANDUM

          Gerald Austin McHugh United States District Judge

         This case arises out of a dispute between an architect, The Knabb Partnership (TKP), and a developer, Home Income Equity, LLC (HIE). According to TKP, HIE failed to compensate it for services rendered and made unauthorized use of its copyrighted architectural drawings. The matter was submitted to arbitration and an award was entered in TKP's favor. TKP now petitions to confirm that award, while HIE moves to vacate it on the grounds that the arbitrator demonstrated manifest disregard for the law. For the reasons set forth below, TKP's petition will be granted, and HIE's motion denied.

         I. UNDERLYING FACTS

         On September 26, 2008, HIE and TKP entered into an agreement whereby TKP agreed to design an 80-unit development that HIE planned to build in Brookhaven, Pennsylvania (the Brookhaven Project). TKP prepared architectural drawings in due course, which it copyrighted before submitting to HIE. HIE accepted these drawings without complaint but failed to pay TKP the agreed-upon fee. Moreover, HIE passed along TKP's drawings to a successor architect, Brett Hand, and directed Hand to sign and affix his seal to drawings after removing any attribution to TKP.

         TKP sued HIE for breach of contract, for interest and penalties under Pennsylvania's Contractor and Subcontractor Payment Act, and for copyright infringement under the Federal Copyright Act. Under the terms of TKP's contract with HIE (the Agreement), “any claim, dispute or other matter in question arising out of or related to this Agreement” was subject to arbitration. Dkt. 1 Ex. A at 7. Accordingly, TKP filed a demand for arbitration and the parties eventually chose Richard Lowe, Esq., a highly experienced and respected practitioner in his field, to resolve the dispute. Lowe held evidentiary hearings on December 19 and 20, 2016, during which both parties were represented by counsel and called witnesses. At Lowe's request, both parties submitted post-hearing briefs on January 6; closing arguments were held on January 9; and on January 17, the parties submitted a stipulated list of exhibits to be admitted into evidence. On January 23, Lowe issued a Partial Final Award in TKP's favor, ordering HIE to pay $401, 402.79. This figure included $32, 319.85 attributable to “predevelopment expenses” and $40, 000 for “anticipated profits.” Dkt. 1 Ex. D at 1. Lowe also permanently enjoined HIE from “using, relying upon, copying, preparing derivative works based upon, or otherwise infringing upon, directly or indirectly, ” the architectural drawings at issue. Id. at 2. Finally, Lowe awarded attorneys' fees and litigation costs to TKP as the prevailing party.

         Before me now are TKP's Petition to Confirm Partial Final Arbitration Award and for Entry of Final Judgment, and HIE's Response in Opposition and Counter-Motion to Vacate, Modify, or Correct the Arbitration Award.[1]

         II. STANDARD

         Both TKP's petition and HIE's motion are governed by the Federal Arbitration Act, which provides that I “must, ” 9 U.S.C. § 9, confirm the award unless: (1) it “was procured by corruption, fraud, or undue means”; (2) “there was evident corruption in the arbitrator[]”; (3) the arbitrator was “guilty of . . . any . . . misbehavior by which the rights of any party have been prejudiced”; or (4) the arbitrator “exceeded [his] powers or so imperfectly executed them that a mutual, final, and definite award upon the subject matter was not made, ” § 10. In addition to these four statutory grounds for vacating an arbitration award, some courts will also set aside an award when an arbitrator's actions amount to a “manifest disregard of the law.”[2] It is on this fifth, common-law basis that HIE's motion to vacate rests.

         Unlike an ordinary legal error-which is not grounds for vacatur-manifest disregard of the law occurs only when “it is evident from the record that the arbitrator knew the applicable law, and yet chose to ignore it.” Popkave v. John Hancock Distribs. LLC, 768 F.Supp.2d 785, 790 (E.D. Pa. 2011). “In determining an arbitrator's awareness of the law, [courts] impute only knowledge of governing law identified by the parties during arbitration.” Duferco Int'l Steel Trading v. T. Klaveness Shipping A/S, 333 F.3d 383, 390 (2d Cir. 2003). The party seeking to vacate the award therefore “bears the burden of proving that the arbitrators were fully aware of the existence of a clearly defined governing legal principle, but refused to apply it, in effect, ignoring it.” Id. at 389.[3]

         The Third Circuit first recognized manifest disregard of the law as grounds for vacating an arbitration award over thirty years ago.[4] More recently, however, the doctrine was called into doubt by Hall Street Associates, L.L.C. v. Mattel, Inc., where the Supreme Court held that § 10 of the Federal Arbitration Act provided the “exclusive” grounds for vacating arbitration awards. 552 U.S. 576, 584 (2008). Since Hall Street, circuit courts have split on whether manifest disregard of the law remains a viable standard;[5] our Court of Appeals has noted the disagreement but has not yet taken a position. See, e.g., Whitehead v. Pullman Grp., LLC, 811 F.3d 116, 120 (3d Cir. 2016) (whether the manifest disregard of the law standard survived Hall Street “is an open question”). I will therefore assume without deciding that manifest disregard of the law remains a viable basis for vacatur. Applying the Third Circuit's test pre-Hall Street, I find that HIE has not carried its heavy burden of proving that the arbitrator willfully ignored controlling law.

         III. DISCUSSION

         HIE points to five decisions by Lowe, each of which, it argues, demonstrates manifest disregard for the law and independently justifies vacating the entire award. First, HIE claims that Lowe's award of $32, 319.85 for predevelopment expenses contravenes an unambiguous term of HIE's Operating Agreement. Second, HIE claims that the portion of Lowe's award based on TKP's anticipated profit violates the Agreement's prohibition on consequential damages. Third, HIE claims that Lowe acted arbitrarily in awarding damages for copyright infringement because TKP never produced any evidence that its drawings contained “protectable expression” and therefore never demonstrated that HIE's (apparently conceded) plagiarism amounted to “wrongful copying.” Dkt. 15 at 7-8. Fourth, HIE claims that Lowe erred in awarding copyright damages for two separate infringements of the same work. And fifth, HIE claims that Lowe lacked jurisdiction over TKP's copyright infringement claims because those claims fell outside the scope of the Agreement's arbitration clause.

         HIE's third and fourth claims fail at the outset because HIE points to nothing in the record suggesting that Lowe considered and rejected the legal arguments about copyright infringement that it raises now. Indeed, HIE does not even allege in its supporting brief that it raised these arguments during arbitration. Because HIE bears the burden of demonstrating that Lowe knew of, and ignored, controlling law, this failure of proof is fatal.

         According to TKP, HIE's first, second, and fifth claims should fail for the same reason. TKP's argument is not without force. HIE does not clearly state that it raised its first and second claims during arbitration, and while HIE now claims that it objected “numerous times” to Lowe's jurisdiction over the copyright claims, Dkt. 15 at 12, it offers no record evidence in support of this bald assertion. On the other hand, it appears that the contract documents that underpin HIE's first and second claims were introduced into the record during arbitration, affording Lowe the opportunity to review the ...


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