Soverain Software, LLC v. Day

2017 IL App (1st) 161913-U

SOVERAIN SOFTWARE, LLC, Petitioner-Appellee, v. JONES DAY, Respondent-Appellant.

No. 1-16-1913

APPELLATE COURT OF ILLINOIS FIRST JUDICIAL DISTRICT FOURTH DIVISION

December 21, 2017

NOTICE: This order was filed under Supreme Court Rule 23 and may not be cited as precedent by any party except in the limited circumstances allowed under Rule 23(e)(1).

Appeal from the Circuit Court of Cook County

15-CH-12609

Honorable Kathleen M. Pantle, Judge Presiding

JUSTICE McBRIDE delivered the judgment of the court.

Justices Gordon and Ellis concurred in the judgment.

ORDER

Held: Arbitration panel did not exceed its powers by interpreting ambiguous contract, and trial court erred in vacating award based on its alternative analysis of the facts and law.

¶ 1 Soverain Software, LLC and its former patent enforcement counsel, Jones Day, arbitrated the law firm's breach of contract claim for $10 million in past due fees and the client's counterclaims to be compensated for counsel's improper withdrawal from the litigation and other detrimental, self-serving acts. An arbitration panel ruled in favor of Jones Day, but found the first $8 million in legal fees were contractually conditioned on achieving litigation "success," which had not occurred, and that Jones Day was entitled to only the undisputed remainder from Soverain, which was $1.5 million, not $2 million. Soverain then petitioned the trial court to vacate the $1.5 million award on grounds that the arbitrators exceeded their authority by crafting a compromise not based on any terms in the legal services contract. Jones Day counterpetitioned to confirm the award because Soverain was only disagreeing with the arbitrators' reading of the contract. The trial court was persuaded by Soverain's arguments and vacated the award. Jones Day seeks our further review and contends the arbitrators expressly based the award on what they considered governing provisions of the contract, which was within their authority, and that even an illogical or inconsistent award should be affirmed, so long as the award "draws its essence" from the parties' agreement, so that the arbitration process is the end of the parties' dispute rather than beginning of rounds of judicial intervention.

¶ 2 We address a trial court's decision to vacate or confirm an arbitral award de novo, meaning that we review the arbitrators' decision as if we were the first court to do so. Herricane Graphics, Inc. v. Blinderman Construction Co., Inc., 354 Ill. App. 3d 151, 157, 820 N.E.2d 619, 624 (2004); Cook County Board of Review v. Property Tax Appeal Board, 339 Ill. App. 3d 529, 537, 791 N.E.2d 8, 16 (2003) (when applying the de novo standard of review, the appellate court uses the record compiled in the trial court but reviews the law and facts without deference to the trial court's rulings).

¶ 3 Soverain's petition to vacate the award relied on the Illinois Uniform Arbitration Act (710 ILC 5/1 et seq. (West 2014)), while Jones Day's petition for confirmation relied on the Federal Arbitration Act (9 U.S.C. § 1 et seq. (West 2014)). The parties now disagree on whether the Illinois or Federal statute is controlling. This arbitration action in Illinois addressed a transaction involving interstate commerce, specifically a legal services contract between Soverain, which is a Delaware corporation located in Illinois, and Jones Day, which is an Ohioentity, in which the parties provided for Jones Day attorneys officed in Texas, Ohio, and New York to represent Soverain's interests in Texas federal district court proceedings. The legal services contract specified disputes were subject to binding arbitration, judgment on any arbitration award "may be entered in any court of competent jurisdiction," and all contract terms were to be "governed by the laws of Delaware." We read this to be a preference for State law rather than federal law, but the parties' failure to cite Delaware law at any point in the arbitration action or the confirmation proceedings has resulted in mutual waiver of the laws of that particular jurisdiction. Yates v. Doctor's Associates, Inc., 193 Ill. App. 3d 431, 438, 549 N.E.2d 1010, 1015 (1990) (finding parties' failure to invoke Connecticut statutes or court decisions resulted in mutual waiver of term in franchise agreement calling for application of Connecticut law). Where parties agree to arbitrate in accordance with State law, the Federal Arbitration Act does not apply, even when a transaction involves interstate commerce. Yates, 193 Ill. App. 3d at 438, 549 N.E.2d at 1015 (citing Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior University, 489 U.S. 468 (1989)). Thus, the Illinois arbitration statute controls our review of the validity of the arbitrator's decision. Yates, 193 Ill. App. 3d at 437, 549 N.E.2d at 1015 (finding the Illinois Uniform Arbitration Act governed and the Federal Arbitration Act did not apply, even though the transaction involved interstate commerce); Rauh v. Rockford Products Corp., 143 Ill. 2d 377, 391, 574 N.E.2d 636, 643 (1991) (following Illinois rather than federal principles for vacating an award); Tim Huey Corp. v. Global Boiler & Mechanical, Inc., 272 Ill. App. 3d 100, 104, 649 N.E.2d 1358, 1361-62 (1995) (indicating the Federal Arbitration Act has never been construed to preempt all state law on arbitration and does not preempt State vacatur law); New England Energy, Inc. v. Keystone Shipping Co., 855 F.2d 1, 4-5 (1st Cir. 1988) (indicating the Federal Arbitration Act supersedes State laws that seek to limit the use ofarbitration, but does not supersede all State arbitration laws); Volt Information Services, 489 U.S. at 476 (indicating there is no federal policy favoring arbitration under a certain set of procedural rules; the policy embodied in the Federal Arbitration Act is "simply to ensure the enforceability, according to their terms, of private agreements to arbitrate"). Although we look to the Illinois standards regarding vacatur of arbitration awards, we may incorporate federal law, as well as the opinions of other jurisdictions, as relevant. See 710 ILCS 5/20 (West 2014) ("This Act shall be so construed as to effectuate its general purpose to make uniform the law of those states which enact it."); Garver v. Ferguson, 76 Ill. 2d 1, 8, 389 N.E.2d 1181, 1183 (1979) (in this context, "[o]pinions of the courts of other jurisdictions are *** shown greater than usual deference"). The parties implicitly acknowledge this fact by citing to Illinois and foreign precedent throughout their appellate briefs, with no apparent priority to any jurisdiction. Furthermore, as discussed below, we would reach the same conclusion under either the Illinois or federal standards for vacatur.

¶ 4 A party who wishes to vacate an arbitration award faces a difficult burden. Judicial review of an arbitration award is extremely limited—more limited than appellate review of a trial court's decision. Garver, 76 Ill. 2d at 8, 389 N.E.2d at 183; Doral Financial Corp. v. Garcia-Velez, 725 F. 3d 27, 31 (1st Cir. 2013) (review is so narrow and deferential that arbitral awards are nearly impervious to judicial scrutiny); City of Chicago v. Chicago Loop Parking LLC, 2014 IL App (1st) 133020, ¶ 1, 23 N.E.3d 453 (parties who choose arbitration as their method of resolving disputes restrict the reach of the courts). This deferential approach honors the parties' decision to avoid the expense and delay of litigation and instead have their disputes addressed through arbitration. Amicizia Societa Navegazione v. Chilean Nitrate & Iodine Sales Corp., 274 F.2d 805, 808 (2d Cir. 1960) (the court's function in confirming or vacating an arbitration awardis severely limited, otherwise, the advantage of arbitration, avoiding litigation, would be frustrated). Arbitration is not intended to be equivalent to litigation. For instance, arbitration differs from litigation in that it does not rely on legal precedent, and instead provides for all questions of law and fact to be determined by the arbitrator. Colmar, Ltd. v. Fremantlemedia North America, Inc., 344 Ill. App. 3d 977, 985, 801 N.E.2d 1017, 1023 (2003). In addition, the usual rules of evidence are not controlling and the rights and procedures common to civil trials, such as discovery, cross-examination, and testimony under oath "are often severely limited or unavailable." Colmar, 344 Ill. App. 3d at 985, 801 N.E.2d at 1023. Although Illinois arbitrators may choose to use the familiar rules and procedures, they are required only to conduct the arbitration in a manner that is not inconsistent with the Illinois arbitration statute. Colmar, 344 Ill. App. 3d at 985, 801 N.E.2d at 1023. Thus, arbitration has been described as "a private system of justice offering benefits of reduced delay and expense." Eljer Manufacturing, Inc. v. Kowin Development Corp., 14 F.3d 1250, 1253 (7th Cir. 1994); Johnson v. Baumgardt, 216 Ill. App. 3d 550, 555, 576 N.E.2d 515, 518 (1991) (arbitration avoids the formalities, delay, and expenses of litigation).

¶ 5 Intrusive judicial scrutiny of an arbitral award for legal or factual error would moot the parties' agreement to opt out of the judicial system. Prostyakov v. Masco Corp., 513 F.3d 716, 723 (7th Cir. 2008); Baravati v. Josephthal, Lyon & Ross, Inc., 28 F.3d 704, 706 (7th Cir. 1994) ("[W]e do not allow the disappointed party to bring his dispute into court by the back door, arguing that he is entitled to appellate review of the arbitrators' decision."). In fact, it is well established that the judiciary will not overturn an arbitration decision even when it is apparent that the award was based on errors of judgment as to law or fact. Garver, 76 Ill. 2d at 10-11, 389 N.E.2d at 1184; Johnson, 216 Ill. App. 3d at 556, 576 N.E.2d 515 at 518; Rauh, 143 Ill. 2d at391, 574 N.E.2d at 643. Instead, the scope of judicial review of an arbitration award under the federal and Illinois arbitration statutes is ...