other party remedies the breach or default specified in the notice before the end of such ninety (90) days."
From 1988 to 1990, Western Glove manufactured its licensed Canadian jeanswear out of the original Blue Bell Canadian plant in Renfrew, Ontario, which it subleased from Blue Bell. In 1990, Western Glove terminated its sublease on the Renfrew plant and transferred operations to a plant in Winnipeg, where Western Glove was headquartered and where it had always produced Western Glove jeanswear under its own "private label". Blue Bell alleges that the motive for moving production of the Wrangler jeans to Winnipeg was solely to facilitate Western Glove's planned "knock-off" of the Prorodeo model. Western Glove alleges that the operation of the Renfrew plant was too expensive to continue, and that these expenses were responsible for the losses suffered by Blue Bell Canada.
Once operations were consolidated in Winnipeg, Blue Bell alleges that Western Glove took actions which amounted to a breach of the license agreement. The first breach occurred when Western Glove continued to order American-made merchandise from Blue Bell with purchase orders listing the price at the 33% discount for nearly a year after the end of October, 1990. Blue Bell did not catch the error and billed Western Glove at a 33% discount, pursuant to the prices listed on Western Glove's purchase orders, until October, 1991. Western Glove knew it was taking an excessive discount, and passed the discount on to its customers by not levying price increases scheduled to go into effect in 1991.
Western Glove's second infraction was more serious and involved an alleged copying of the patterns, trademarks and trade dress of the Wrangler Prorodeo jeans. By March, 1991, G.A. Boulet, Inc. ("Boulet"), a Canadian boot company based in Quebec, was ordering jeans manufactured by Western Glove to sell under its own "Boulet" label as a promotional item to spur sales of its Western-style boots. Blue Bell alleges that Boulet specifically asked Western Glove to develop for them a "Wrangler-style" Jean, and that in producing the Boulet Jean, Western Glove copied two of the patterns originally supplied by Blue Bell for the production of its Prorodeo model. Blue Bell also alleges that Western Glove supplied Boulet with & "pocket flasher" trade dress directly copied from and confusingly similar to the Wrangler Cowboy Mark.
In November, 1991, John Neal ("Neal"), Blue Bell's then-Director of Western Retail Marketing and Licensing saw an advertisement for "Boulet Rodeo Jeans" which appeared in the program of the Canadian Finals Rodeo next to an ad for Wrangler Prorodeo jeans. Noting the similarity between the trade dress labels, Neal ordered a pair of the Boulet Rodeo Jeans. Upon receipt, he checked "CA" number, a manufacturer's unique identification required by the Canadian government, which proved that the Boulet Rodeo jeans were manufactured by Western Glove. Neal wrote a letter dated January 22, 1992, requesting that Western Glove "stop attaching the Wrangler look-alike back pocket tag on the Boulet jean and remove any and all tags already attached," and stated that Western Glove was violating the License Agreement.
By this time (in October, 1991), Blue Bell had caught Western Glove's continuing, now unauthorized use of the 33% discount. In December, 1991, Blue Bell's credit department invoiced Western Glove for $ 232,000, the amount which Blue Bell calculated it was owed for the difference between the 33% rate and the 20% rate (the "December 1991 invoice"), and had informed Western Glove that as of January 1, 1992, Blue Bell intended to bill Western Glove for merchandise at wholesale list prices, not the 20% provided for by the License Agreement. The companies now scheduled a meeting to discuss the issues of the discount and the Boulet jeans. On February 6, 1992, after two Blue Bell officers met with Western Glove officers in Canada, Blue Bell was left with the impression that all Boulet Rodeo jeans were being taken off the market, and that Western Glove would pay the December, 1991 invoice.
However, negotiations continued about both matters until March, 1992, when Blue Bell discovered that Boulet was showing its Boulet Rodeo jeans at the Canadian American Western Apparel Trade Show (held in Calgary, Alberta, from February 29-March 2) and accepting orders for "at once" and fall 1992 delivery. On March 20, 1992, Blue Bell put Western Glove on "credit hold," refusing to ship any merchandise until Western Glove at least paid the December, 1991 invoice. Western Glove paid the invoice under protest three days later, on March 23. However, at this point it did not offer to buy back all Boulet Rodeo jeans from G.A. Boulet.
On March 26, 1992, Blue Bell served a demand for arbitration on Western Glove. Five of the eight "claim and controversies" to be arbitrated concerned the Boulet Rodeo Jean, one concerned Western Glove's "willful and repeated taking of 33% discounts after October 22, 1990," one concerned Western Glove's applications for registration in Canada of other American Blue Bell trademarks, and one was whether the License Agreement "is or should be terminated." On April 1, 1992, Blue Bell secured a temporary restraining order (the TRO) from this Court against the manufacture, distribution, or sale of jeanswear with counterfeit imitations of Blue Bell's trademarks and trade dress by Western Glove. The next day Western Glove complied with the TRO by ordering a recall of the Boulet Rodeo jeans. On April 17, 1992, the TRO was vacated and a preliminary injunction was entered on consent on the same terms as the TRO.
Pursuant to the arbitration clause in Article 22 of the License Agreement, the parties arbitrated their dispute in New York from June 29 to July 2, 1992. All papers were considered fully submitted on July 24, 1992, and the Arbitrator rendered his award on September 30, 1992. Blue Bell does not contest the correctness of any of the procedures followed in the course of the arbitration.
The Arbitrator issued a two-page opinion which permanently enjoined Western Glove from manufacturing jeans upon the same terms as those contained in the TRO and the preliminary injunction, and directed Western Glove to pay $ 270,170 in damages to Blue Bell. But the Arbitrator let Western Glove take measures to keep its underlying license in paragraph 3 of the Award, in what Blue Bell refers to as the "cure" ruling:
3. In the event Respondent [Western Glove] fails to make timely payment of the amount directed to be paid pursuant to [this award] then the License Agreement is to be declared terminated by Claimant [Blue Bell] effective October 31, 1992. . . . In the event Respondent makes timely payment of the amount due pursuant to paragraph 2 [of $ 270,170] hereof, Respondent will have cured any material breach of its obligations under the License Agreement.
On October 19, 1992, Western Glove sent Blue Bell a check in the amount of $ 270,170 in United States dollars certified by the Royal Bank of Canada. On November 10, 1992, Blue Bell filed this motion to vacate the Award.
It is certain that, in comparison with the sales of Blue Bell licensed jeans, sales of the Boulet Rodeo Jeans were small: although the parties cannot agree on the number, apparently fewer than 1,000 pairs were sold, and Blue Bell itself indicates in its brief that only $ 20,170 of the Award represents disgorgement of all profits earned by Western Glove on shipments of the Boulet Rodeo jean. (Pl. Mem. of Law at 16). As Blue Bell points out, however, the damage to its trademarks and goodwill may be materially greater, since it is unknown how many customers may have judged Wrangler jeans and decided not to buy on the basis of the Boulet jean's allegedly inferior quality.
Blue Bell alleges that Western Glove has consistently acted in bad faith, and that it is entitled to terminate the license since (despite Western Glove's new, written License Compliance Program) the Canadian company is only waiting for an opportunity to cheat again. Western Glove, in turn, alleges that Blue Bell has been trying to find an excuse to cancel their license ever since the elimination of tariffs under the Canada-United States Free Trade Agreement, effective in 1990, made shipping American-made products into Canada more profitable than earning royalties under the terms of the License Agreement.
Blue Bell alleges two grounds for vacating paragraph 3 of the Award: that the Arbitrator's "cure" ruling is plainly a rewriting of the License Agreement in excess of his authority under 9 U.S.C. § 10(d), and that the "cure" ruling was made in manifest disregard of applicable New York and federal law. Blue Bell argues that since trademark infringement causes irreparable injury as a matter of law, and since a licensee's fraud, dishonesty and untrustworthiness are not amenable to cure, the Award is in plain contradiction to existing law.
Statutory Vacatur Of an Arbitration Award
Under Section 10 of the Federal Arbitration Act (FAA), 9 U.S.C. § 10, there are four possible grounds for vacating an arbitration award. Briefly, these are: fraud or corruption in the proceeding, bias on the part of the arbitrator, refusal by the arbitrator to consider relevant evidence or other misbehavior on his part, and failure to exercise his power properly. 9 U.S.C. § 10(a)-(d); Cook Chocolate Co. v. Salomon Inc., 748 F. Supp. 122, 126 (S.D.N.Y. 1990) (Sweet, D.J.). Blue Bell has alleged only the last, and states that under Section 10(d) the award must be vacated because the arbitrator exceeded his power to interpret the party's agreement bestowed upon him by their contract.
A party seeking to overturn an arbitration award is under a heavy burden to prove that the standards for such relief have been met, (id.) especially since the it is the Second Circuit's policy to read very narrowly the courts' authority to vacate arbitration awards pursuant to Section 10(d) of the FAA. Blue Tee Corp. v. Koehring Co., 808 F. Supp. 343 (S.D.N.Y. 1992) (Sweet, D.J.); John T. Brady & Co. v. Form-Eze Systems, Inc., 623 F.2d 261, 264 (2d Cir. 1980), cert. denied, 449 U.S. 1062, 66 L. Ed. 2d 605, 101 S. Ct. 786 (1980); Andros Compania Maritima, S.A. v. Marc Rich & Co., A.G., 579 F.2d 691, 703 (2d Cir. 1978). Any "colorable justification" will support an arbitral award. Fahnestock & Co., Inc. v. Waltman, 935 F.2d 512, 516 (2d Cir. 1991); In re Marine Pollution Serv., Inc., 857 F.2d 91, 94 (2d Cir. 1988).
But an arbitral award may be overturned on the grounds that the arbitrator exceeded his powers, or exces de pouvoir. This limit does not exist so that a party dissatisfied with the result may attempt to destroy it, but so that the arbitrator may decide only the dispute that the parties submitted to him. This is necessary to any functioning system of arbitration since:
Arbitral jurisdiction is entirely consensual. . . . The arbitrator's powers are derived from the parties' contract. Hence, in the classic sense, an arbitrator is not entitled to do anything unauthorized by the parties: arbiter nihil extra compromissum facere potest. An arbitral award rendered within the framework of the common agreement of the parties is itself part of the contract and hence binding on them. Conversely, a purported award which is accomplished in ways inconsistent with the shared contractual expectations of the parties is something to which they had not agreed. The arbitrator has exceeded his power . . . . Without [exces de pouvoir], arbitration would lose its character of restrictive delegation and the arbitrator would become a decision maker with virtually absolute discretion; whatever limits may have been prescribed by the parties would become meaningless because the arbitrator would be answerable effectively to no one. Exces de pouvoir thus is the conceptual foundation of control for arbitration.
W. Michael Reisman, The Breakdown of the Control Mechanism in ICSID Arbitration, 1989 Duke L.J. 739, 745 (1989) (citations omitted). See generally W. Michael Reisman, Nullity and Revision: the Review and Enforcement of International Judgments and Awards (1971).
Awards which cannot be based upon the parties contract will be vacated under Section 10(d), but the proper response is to remand the case to the arbitrator. In Collins & Aikman Floor Coverings Corp., 736 F. Supp. 480 (S.D.N.Y. 1990) (Sweet, D.J.), an award was remanded to the arbitrator for clarification on the grounds that no provision of the parties' agreement allowed for commissions for sales made by petitioner after termination, and the award am rendered could only be explained by including post-termination commissions. In Harry Hoffman Printing v. Local 261, 950 F.2d 95, 99 (2d Cir. 1991), the court found it
unmistakable that, in reaching its decision, the Panel did not merely misapply principles of contractual interpretation or misinterpret the CBA [collective bargaining agreement], but drew upon a concept upon which it was not entitled to rely. The Panel based its conclusion on the concept of "elementary due process." . . . . The CBA, taken as a whole, does not evince any intention on the part of the parties to endow an arbitration panel with expansive, equitable discretion.