On July 20, 2017, the Sixth Circuit affirmed the U.S. District Court for the Eastern District of Tennessee’s decision to vacate an arbitration award. How the case got to the Sixth Circuit is a cautionary tale in litigation gambling that ultimately paid off.
The facts of the dispute are relatively ordinary. Marlin Controls, Inc. and Gridsmart Technologies, Inc. entered into a distribution agreement granting Marlin the exclusive right to distribute Gridsmart’s products within a defined territory. Gridsmart terminated the contract. A dispute ensued over how to handle outstanding orders and returns for previously ordered equipment.
Gridsmart initiated arbitration with the American Arbitration Association. Marlin refused to participate. As a result, less than four months after initiating arbitration, the arbitrator granted Gridsmart’s motion for summary judgment and issued a $293,000 award in Gridmart’s favor.
Refusing to participate in the arbitration was a fairly risky decision. As most legal practitioners know (as well as fans of the New England Patriots), there are very limited grounds to challenge an arbitration award. As a result, an arbitrator’s award is generally upheld in the court system. Marlin’s gamble, however, is an exception to that general rule.
When Gridsmart subsequently petitioned to enforce the award in the Knox County Chancery Court, Marlin appeared, removed the case, and filed a motion to vacate the award contending that the arbitration provision did not survive the termination of the contract. District Judge Pamela Reeves agreed and the Sixth Circuit affirmed.
Takeaway
Marlin’s decision to ignore the arbitration was extremely risky. Had Marlin’s bet not paid off, Gridsmart would have had a nice payday without facing much resistance on the merits of the dispute, if any at all. A far less risky choice of action (but perhaps more expensive in the short run) would have been for Marlin to offensively institute legal action seeking to declare the arbitration agreement unenforceable with respect to the outstanding orders and the returned equipment. While the parties may have ended up with the same result, Marlin would have had more control over the process.
Bundren on Competitive Practices 