UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
December 13, 2005
TRAPEZE SOFTWARE GROUP, INC., PLAINTIFF,
ONTIRA COMMUNICATIONS, INC.,
The opinion of the court was delivered by: Frank Maas, United States Magistrate Judge.
RECOMMENDATION TO THE HONORABLE P. KEVIN CASTEL
In this lawsuit, defendant Ontira Communications, Inc. ("Ontira") has moved to compel plaintiff Trapeze Software Group, Inc. ("Trapeze") to participate in an arbitration pursuant to the terms of a settlement to which the parties orally agreed at the conclusion of extensive settlement discussions. For the reasons set forth below, that motion should be denied.
I. Factual and Procedural Background
Trapeze commenced this action in an effort to secure, among other forms of relief, a declaration that U.S. Patent No. 5,214,689 (the "Patent"), which has been assigned to defendant Ontira Communications, Inc. ("Ontira"), is not infringed by Trapeze's Interactive Voice Response system ("IVR"), which is used to provide information to consumers regarding such matters as public bus schedules. Because Trapeze provides many public transportation companies with the technological backbone for their information systems, when Ontira is the successful bidder on an IVR project, it often must install its own technology on a customer's system in a manner which coordinates with the customer's simultaneous use of a proprietary "INFOserver" system previously installed by Trapeze.
In its complaint, Trapeze alleges that, during the course of the two competitors' efforts to secure contracts to provide IVR technology to public transportation companies, Ontira has made false statements to Trapeze's customers and prospective customers in an effort to convince them to use Ontira's IVR product rather than Trapeze's allegedly infringing product. (Compl. ¶¶ 36-42).
By order dated March 14, 2005, Your Honor assigned this case to me for settlement purposes only. (Docket No. 17). By then, Ontira had moved to dismiss Trapeze's claims for false advertising under the Lanham Act and deceptive acts and practices under Section 349 of the New York Business Law. (Docket Nos. 9, 23-25). That motion was fully submitted by late March 2005. (See Docket Nos. 20-22).
While the motion was pending, I held two settlement conferences, on June 9 and 22, 2005, which were attended by counsel and representatives of both parties. At the end of the second settlement conference, I put on the record the terms of a settlement pursuant to which the case would be discontinued with prejudice and without costs. The settlement was subject to a "number of conditions," of which the principal ones were as follows:
# The parties would arbitrate their dispute concerning the Patent "as expeditiously and inexpensively as possible."
# The parties would agree on an arbitrator or each would appoint an arbitrator whose sole function would be to confer with the other arbitrator to select an agreed single arbitrator.
# If the arbitrator found that Trapeze was an infringer, Trapeze could revise its IVR technology to circumvent the Patent or, at its option, could license Ontira's technology for a reasonable royalty. Any disputes as to whether a Trapeze work-around infringed the Patent or the reasonableness of the royalty would be presented to the same arbitrator.
# Trapeze would license its INFOserver to Ontira for IVR usage for the duration of the Patent on a most-favored-nation basis.
(See Decl. of David A. Beke, Esq., dated Oct. 17, 2005 ("Beke Decl."), Ex. D (Tr. of 6/22/05 settlement) at 3-6).
Counsel and their clients' principals agreed to these terms in open court and signed a written Order of Discontinuance, which provided that the case could be reinstated by counsel for Trapeze within thirty days by letter request. (See id. at 8-9;Decl. of Steven R. Schoenfeld, Esq., dated Nov. 3, 2005 ("Schoenfeld Decl."), Ex. 2). The Order further provided that "the parties and their counsel . . . consented to the undersigned exercising jurisdiction over this case for the limited purpose of entering this Order of Discontinuance." (See Schoenfeld Decl. Ex. 2). Pursuant to that consent, I signed the Order, which was entered the following day. (Docket No. 26).
After several extensions of the thirty-day period, plaintiff's counsel wrote to Your Honor on August 25, 2005, to request that this case be restored to the calendar.
That application was granted by memorandum endorsement dated August 29, 2005.
On August 30, 2005, Ontira wrote to Your Honor seeking permission to file a motion to enforce what it considered a binding settlement. Later that same day, Trapeze's counsel wrote to protest the disclosure of the terms of the settlement, deeming it a violation of Local Rule 83.12(k)*fn1 and an improper attempt to draw Your Honor into settlement discussions. Trapeze's counsel asked that you "not read Ontira's August 30 letter." On September 2, 2005, Your Honor referred the issues raised by both letters to me to "hear and report."*fn2
After some further extensions so that settlement talks could continue, Ontira filed its motion to compel arbitration on October 17, 2005. That motion is now fully submitted, the Court having received the last of the parties' papers on November 10, 2005.
The papers make clear that one of the key areas of disagreement between the parties related to the methods that would be used to ensure that the arbitration proceeded "as expeditiously and inexpensively as possible." In brief, following the second settlement conference, Trapeze prepared a draft agreement which provided that the arbitration would be conducted on the basis of simultaneous written submissions to the arbitrator, with no live testimony or additional materials presented, unless the arbitrator made a written request for information from "material witnesses," in which case it would be submitted by affidavit or telephone conference call, unless the arbitrator found it "strictly necessary" to compel the attendance of the witnesses for questioning by the arbitrator to determine one of two core issues.*fn3 (See Schoenfeld Decl. Ex. 3 at ¶¶ 2(a), 6). Ontira deleted all of these provisions from its counterproposal, stating, instead, that the arbitration would be conducted "in accordance with the Federal Arbitration Act and the Commercial Arbitration Rules of the American Arbitration Association, except as hereinafter provided." (Id. Ex. 4 at 6-7). The next draft, circulated by Trapeze's counsel reinstated the arbitration terms Trapeze originally had proposed, except that the time period for making written submissions was extended. (Id. Ex. 7 at 6-7).
Trapeze maintains that Ontira agreed to Trapeze's terms before the last draft was circulated, but then did a rapid about-face. (See Schoenfeld Decl. ¶¶ 9-14). Ontira contends, to the contrary, that these terms essentially eviscerated the parties' agreement to arbitrate and, therefore, were unacceptable. (See Beke Decl. ¶¶ 11-17).
In this Circuit, four factors must be considered to determine whether a settlement agreement not executed by both sides should be enforced: "(1) whether there has been an express reservation of the right not to be bound in the absence of a signed writing; (2) whether there has been partial performance of the contract; (3) whether all of the terms of the alleged contract have been agreed upon; and (4) whether the agreement at issue is the type of contract that is usually committed to writing." Ciaramella v. Reader's Digest Ass'n, 131 F.3d 320, 323 (2d Cir. 1997) (citing Winston v. Mediafare Entm't Corp., 777 F.2d 78, 80 (2d Cir. 1986)).
Here, while neither side expressly reserved its right not to be bound in the absence of a signed writing when the settlement terms were recited in open court, the very first draft of the Settlement and Arbitration Agreement proposed by Trapeze's counsel on July 14, 2005, contains the legend: "For settlement purposes only; not binding until finalized and executed." (Schoenfeld Decl. Ex. 3 at 1) (emphasis in original). Ontira's counsel deleted that statement from its "revised settlement agreement," dated July 21, 2005, but the exchange of drafts suggests, at a minimum, that Trapeze did not wish to be bound until a formal agreement was signed.
Trapeze's view is not inconsistent with at least some of my statements on the record on June 22, 2005. At that time, I outlined my own suggestion as to how to select the arbitrator, but stated that "the parties, obviously, can agree to another mechanism to arrive at a suitable arbitrator if both sides agree to it." (Id. Ex. 1 at 4).
Additionally, after I outlined all of the other significant settlement terms, I observed (without protest from Ontira) that all of this will be subject to being reduced to writing in a more detailed settlement agreement within the next thirty days, and that if the parties are unable to agree on suitable language for such settlement agreement, Trapeze may apply by letter to reinstate this action, in which event it will be reinstated. (Id. at 6) (emphasis added).
Ontira points to another section of the transcript where I cautioned the parties that the negotiations regarding a detailed settlement agreement had to occur within the "broad brush strokes" I previously had outlined. As I explained:
[T]he parties are not free to go back, going forward, and renegotiate the basic deal terms.
By way of example, if somebody wakes up tomorrow and says if I win [the arbitration], I want a hundred thousand dollars from the other side, and the other side doesn't agree, that will not be a basis for reinstating the . . . lawsuit. (Id. at 11). The parties' representatives present in court expressly agreed to these terms. (Id.).
On this record, the Court cannot say with certainty that Trapeze agreed that my "broad brush strokes" summary of the settlement terms would preclude it from seeking further assurances as to how the arbitration would be conducted to ensure that the process was inexpensive and expeditious. Similarly, the Court cannot say that Trapeze's demands concerning the procedures for the arbitration were not made within the confines of those broad brush strokes. It follows that the first Ciaramella factor --whether there was an express reservation of the right not to be bound -- tips in favor of Trapeze.
Turning to the second factor, there is no indication that there has been any partial performance of the agreement. Thus, this factor also weighs in favor of Trapeze.
The third factor is whether all of the terms of the alleged contract have been agreed to by the parties. In that regard, Trapeze contends that Ontira had acquiesced to its proposed terms and conditions for the arbitration, but then began backing away from that agreement. (See Schoenfeld Decl. ¶¶ 9-14). In its papers, Ontira does not specifically address that contention. Ontira suggests, however, that the procedures outlined by Trapeze constituted a unilateral determination by Trapeze "that it no longer wished to arbitrate the patent infringement dispute, but instead wished to employ a dispute resolution procedure which was neither discussed nor agreed upon on June 22, 2005." (Beke Decl. ¶ 12).
"By definition, arbitration is informal, flexible, expeditious, and relatively inexpensive when compared to administrative or judicial proceedings." Unidad Laboral De Enfermeras(os) v. Hospital De Damas, Inc., 171 F. Supp. 2d 38, 42 (D.P.R. 2001). For that reason, the Court cannot say that the terms proposed by Trapeze would give rise to a proceeding which is not, in fact, an arbitration. Indeed, the key element of most arbitrations -- a binding decision by one or more arbitrators -- obviously remained a part of Trapeze's proposal at every stage of the parties' negotiations. Since Trapeze's proposed procedures therefore arguably gave rise to an arbitration -- albeit, an unusual one -- but were not accepted by Ontira, it is apparent that the parties had not agreed with respect to a material term of their proposed settlement.
That conclusion is consistent with my own recollection of the parties' settlement negotiations. Throughout the ex parte discussions held on June 22, Trapeze was adamant that the range of discretion that the arbitrator was afforded had to be very narrow. On the other hand, Ontira was concerned about its lack of information concerning Trapeze's proprietary systems and therefore wanted to ensure that the arbitrator would allow some discovery. In the interest of agreeing on some essential deal terms even before a final agreement could be negotiated, these competing concerns were not specifically addressed in open court, except to the extent that I indicated that the arbitration was to be conducted "as expeditiously and inexpensively as possible." (Schoenfeld Decl. Ex. 1 at 4). Since the precise contours of what that would entail were left for another day, it is apparent that all of the material terms of the proposed arrangement between the parties were not agreed.
The final factor that a court must consider under Ciaramella is whether the agreement is the type of contract that typically would be reduced to a writing. Here, in addition to the arbitrability of the dispute concerning the Patent, the agreement dealt with a number of other issues, including the terms on which Trapeze would license certain of its technology to Ontira. It is apparent that agreements between competitors with respect to the licensing of sophisticated intellectual property often are reduced to writing.
On balance, therefore, the Ciaramella factors suggest that there was no binding settlement agreement between the parties to this suit.
For the foregoing reasons, Ontira's motion to enforce the parties' settlement agreement and compel arbitration should be denied.
IV. Notice of Procedure for Filing of Objections to this Report and Recommendation
The parties are hereby directed that if they have any objections to this Report and Recommendation, they must, within ten (10) days from today, make them in writing, file them with the Clerk of the Court, and send courtesy copies to the chambers of the Honorable P. Kevin Castel, United States District Judge, and to the chambers of the undersigned, at the United States Courthouse, 500 Pearl Street, New York, NY 10007, and to any opposing parties. See 28 U.S.C. § 636(b)(1); Fed. R. Civ. P. 6(a), 6(e), 72(b). Any requests for an extension of time for filing objections must be directed to Judge Castel. The failure to file timely objections will result in a waiver of those objections for purposes of appeal. See Thomas v. Arn, 474 U.S. 140 (1985); 28 U.S.C. § 636(b)(1); Fed. R. Civ. P. 6(a), 6(e), 72(b).
FRANK MAAS United States Magistrate Judge