United States Court of Appeals
For the First Circuit
No. 05-2741
IN RE: VITAL BASICS INCORPORATED,
Debtor.
VITAL BASICS INCORPORATED,
Appellant,
v.
VERTRUE INCORPORATED, F/K/A MEMBERWORKS, INCORPORATED,
Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MAINE
[Hon. George Z. Singal, U.S. District Judge]
Before
Lipez, Circuit Judge,
Stahl, Senior Circuit Judge,
and Howard, Circuit Judge.
Russell Beck, with whom Jeffery M. Rosin and Foley & Lardner
LLP were on brief, for appellant.
Steven M. Cowley, with whom Christopher P. Silva and Edwards
Angell Palmer & Dodge LLP were on brief, for appellee.
December 29, 2006
STAHL, Senior Circuit Judge. Appellant Vital Basics,
Inc. (VBI) asks this court to vacate an arbitration panel award in
favor of appellee Vertrue Incorporated (Vertrue),1 and instead
order payment by Vertrue to VBI. Our review of an arbitration
award is exceedingly narrow, and VBI has not presented the
compelling evidence necessary to warrant a reversal of the
arbitration panel's decision. Therefore, we affirm the district
court's confirmation of the arbitration panel's award.
I. BACKGROUND
A. The Relevant Facts
VBI markets and sells nutritional and dietary supplements
directly to consumers. Vertrue sells membership programs that
provide consumers with discounts on health care and related
services. The two companies had a long-term marketing agreement
which operated in the following manner. When a customer called VBI
to order its products, the VBI phone operator would also attempt to
enroll the customer in one of Vertrue's membership programs.
Initially, VBI received a flat fee commission for each Vertrue
membership sold, whether or not the customer subsequently cancelled
the membership and received a full or partial refund. Under this
arrangement, Vertrue bore the entire risk of loss for customers who
purchased a membership and then, during the first year, cancelled
the membership and received a refund. On June 1, 2000, the parties
1
Vertrue was formerly known as MemberWorks.
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signed a new contract that continued the per-sale commission
arrangement. Subsequently, on June 25, 2001, the parties signed an
amendment to the contract that changed the commission scheme.
Under the new agreement, instead of receiving commissions on a per-
sale basis, VBI would earn commissions in two ways: (1) for
memberships that were renewed after one year (so-called "Renewal
Commissions"); and (2) for first-year memberships, on a retention-
contingent basis.
A central point of contention between the parties before
the arbitrators was how this second type of commission was to be
earned by VBI. More precisely, the parties disagreed as to whether
VBI was to earn a commission on so-called "Paid Cancels" --
memberships that were cancelled after thirty days but before one
year, meaning the customer received a partial refund, and Vertrue
retained a partial payment. Vertrue contended that the June 25th
amendment provided a commission to VBI only for memberships that
were retained for the full one-year period; in other words, VBI
would not earn a commission if a customer either cancelled and
received a full refund (which occurred if the customer cancelled
within 30 days), or cancelled and received a partial refund (which
occurred if the customer cancelled after 30 days but before one
year). In contrast, VBI contended that the amendment granted a
commission to VBI on Vertrue's net revenue; in other words, if a
customer cancelled after 30 days but before one year, and received
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only a partial refund, VBI would still earn a commission on the
portion of the membership fee retained by Vertrue.
In order to pay VBI a retention-based commission on a
monthly basis, the companies agreed to a complex accounting formula
whereby Vertrue would make monthly payments based on an estimate of
the percentage of subscriptions that would be retained for the
entire one-year subscription period. Every three months, the
actual retention numbers would be calculated and the companies
would "true up" the commission payments to better approximate the
actual retention rate. The contract set the initial projected
retention rate at 40 percent, subject to amendment if retention
proved to deviate from this percentage. Notably, the "true up"
system did not mention Paid Cancels, nor provide a mechanism for
calculating commissions based on Paid Cancels.
In 2003, Vertrue discovered that it had significantly
overpaid advance commissions to VBI by $3.8 million, because
retention rates had plummeted to about 25 percent. Using the "true
up" system, the overpayment amount was whittled down to $2.2
million by the time the dispute went to arbitration.
At the same time that the parties were negotiating a
solution to the overadvance problem, VBI was quietly developing its
own competing membership program, called the Omega Plan. VBI
launched the competing plan in August 2003, in violation of the
contract's exclusivity clause, which barred VBI from marketing or
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selling any competing membership program. Once VBI began selling
its Omega Plan, sales of Vertrue's membership plans slowed
significantly, making it impossible for Vertrue to recover its
multi-million dollar overadvance through the "true up" process.
B. Proceedings Below
To resolve this dispute, Vertrue initiated arbitration,
as provided for in the contract. Before a three-judge arbitration
panel ("the Panel"), Vertrue alleged breach of contract, fraud, and
violation of the Connecticut Unfair Trade Practices Act ("CUTPA").
VBI asserted counterclaims for breach of contract. The Panel heard
numerous days of complex testimony and issued an award in favor of
Vertrue.
The Panel decision ordered VBI to pay Vertrue $3.5
million in compensatory damages, composed of: (a) about $2.2
million, plus interest, to cover the overadvances VBI had received;
and (b) almost $1.2 million for damages caused by VBI's breach of
the exclusivity clause. In addition, the Panel rejected VBI's
counterclaims, and held that Vertrue's obligation to pay VBI for
Renewal Commissions terminated on August 6, 2003, the date that VBI
breached the exclusivity clause of the contract. Finally, the
Panel concluded that VBI "engaged in unfair and deceptive acts and
practices" in violation of CUTPA, and ordered payment to Vertrue of
$1.3 million in punitive damages and attorney fees.
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On May 10, 2004, after the arbitration process had
commenced, VBI became a bankrupt, thus subjecting itself to the
jurisdiction of the United States Bankruptcy Court, District of
Maine. After the arbitration panel issued its award, VBI sought
vacation of the award before the bankruptcy court, where the
parties thoroughly briefed the issues and presented oral argument.
The bankruptcy court, finding no grounds to vacate, issued an order
confirming the award. VBI appealed the bankruptcy court's
confirmation order to the United States District Court, District of
Maine, alleging several grounds for relief, including that the
Panel disregarded the law, exceeded its authority, was biased, and
failed to hear relevant evidence. The district court, having
received extensive briefs from both sides, affirmed the bankruptcy
court in all respects, holding that "the arbitration award
represents a final and definite award based upon a 'plausible'
reading of the contract between VBI and [Vertrue]." Vital Basics,
Inc. v. Vertrue Inc., 332 B.R. 491, 494 (D. Me. 2005). This appeal
followed.
II. DISCUSSION
VBI makes three arguments on appeal. First, that the
Panel's conclusion regarding Renewal Commissions violates the
express language of the contract. Second, that the Panel's holding
regarding Paid Cancels violates the express language of the
contract. And third, because Vertrue allegedly owes VBI commission
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payments for Paid Cancels but did not make those payments, that
Vertrue was the first party to breach the contract, thus nullifying
VBI's later breach of the exclusivity clause. We consider each
argument in turn below.
A. Standard of Review
It is well-settled that our review of arbitral panel
awards is exceedingly narrow. Wonderland Greyhound Park, Inc. v.
Autotote Sys., Inc., 274 F.3d 34, 35 (1st Cir. 2001). Indeed, as
we have noted before, "disputes that are committed by contract to
the arbitral process almost always are won or lost before the
arbitrator." Gupta v. Cisco Sys., Inc., 274 F.3d 1, 3 (1st Cir.
2001) (quoting Teamsters Local Union No. 42 v. Supervalu, Inc., 212
F.3d 59, 61 (1st Cir. 2000)).
When considering a district court's confirmation of an
arbitration award, we review questions of law de novo and questions
of fact for clear error. First Options Of Chicago, Inc. v. Kaplan,
514 U.S. 938, 947-48 (1995). In addition, our de novo review is
highly circumscribed. See United Paperworkers Int'l Union v.
Misco, Inc., 484 U.S. 29, 38 (1987) (confirmation of award required
where arbitrator was "even arguably construing or applying the
contract"); Gupta, 274 F.3d at 3 (confirmation required if the
interpretation is "in any way plausible, even if we think [the
arbitrator] committed serious error."). We will only disturb an
arbitration award in limited circumstances, two of which are
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relevant here. Based on the federal courts' "inherent power,"
Cytec Corp. v. DEKA Prods. Ltd. P'ship, 439 F.3d 27, 33 (1st Cir.
2006), we can vacate an award where it is contrary to the plain
language of the relevant contract, or where the arbitrator has
construed the contract "in a way that cannot possibly be described
as plausible or rational." Labor Relations Div. of Constr. Indus.
v. Int'l Bhd. of Teamsters, 29 F.3d 742, 745 (1st Cir. 1994).
In this case, the appellant argues that the Panel's award
directly violates the plain terms of the contract. Because this is
a legal claim involving contract construction, our review is de
novo.2
B. Renewal Commission
VBI first argues that the Panel's finding regarding
Renewal Commissions -- that Vertrue's obligation to pay VBI Renewal
Commissions terminated on the date VBI breached the exclusivity
2
Appellee Vertrue argues that de novo review is not warranted
because, in its view, the bankruptcy court made a factual finding
that the Panel viewed the contract as ambiguous. Therefore, argues
Vertrue, this court must use the clearly erroneous standard to
review this supposed factual finding before reaching the merits of
VBI's claim about the plain meaning of the contract. This argument
misses the mark. Even if the bankruptcy court made such a factual
finding -- a dubious assertion on its own -- VBI's claim that the
award violates the plain language of the contract would still raise
a question of law, and thus would be subject to de novo review by
this court. Labor Relations Div., 29 F.3d at 745 ("We reject
plaintiffs' contention that our review of the district court's
vacation of an arbitration award, based on an alleged impermissible
interpretation of a contract, is made under the clearly erroneous
standard. In this case, all deference is due to the arbitrator's
interpretation of the contract, not to the interpretation of the
district court.").
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clause -- violates the plain language of the contract. We
disagree.
VBI's argument here relies on the following clause
regarding Renewal Commissions:
[Vertrue] shall continue to pay VBI Commissions to which
VBI may be entitled with respect to Renewal Net
Membership Revenue after the termination or expiration of
this Agreement.
Reading this clause alone, VBI's plain language argument appears to
have some merit. However, the Panel was tasked with evaluating the
agreement as a whole, not just one isolated clause. See Blackie v.
State of Me., 75 F.3d 716, 722 (1st Cir. 1996) (rejecting contract
interpretation that "harps on isolated provisions, heedless of
context."). Consideration of Section 12A of the contract shows
that the Panel's conclusion on Renewal Commissions was an eminently
plausible reading of the agreement:
During the term of this Agreement and for so long as
[VBI] is receiving revenue as a result of the Sales of
the Programs neither [VBI] nor any of its affiliates or
subsidiaries shall purchase, market, administer, or enter
into an agreement [that violates the exclusivity clause].
The Panel was justified in concluding that the parties agreed to
condition VBI's receipt of revenue, including Renewal Commissions,
on compliance with the contract's exclusivity clause. Thus, the
Panel's conclusion regarding Renewal Commissions is not contrary to
the plain language of the contract, leaving no basis for us to
vacate the Panel's award in this respect.
C. Paid Cancels
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VBI also argues that the plain language of the contract
contradicts the Panel's conclusion that VBI was not entitled to
commissions on Paid Cancels. To support this claim, VBI points out
that the contract required Vertrue to pay VBI advance commission
payments "with respect to First Year Net Membership Revenue," which
the contract defines as:
[A]ll revenue received by [Vertrue] . . . from Eligible
Program Members with respect to Initial Membership Years,
less refunds for Member cancellations with respect to
such Initial Membership Years.
This clause too, read in isolation, appears to support VBI's
assertion that commissions are owed to VBI on Paid Cancels, because
if a customer cancelled his membership and only received a partial
refund, Vertrue retained a partial payment, thus increasing
Vertrue's net revenue.
However, again, the Panel was interpreting the contract
as a whole, not just one clause. As Vertrue points out, the
contract's "Commissions" and "Advance" sections clearly create an
advance commission and "true up" scheme whereby commission payments
on first-time sales are based on the number of memberships that are
purchased and fully paid for, meaning they were not cancelled
during the one-year subscription period. Admittedly, the
contract's definition of First Year Net Membership Revenue appears
to conflict with the contract's advance commission and "true up"
system. Given this apparent contradiction, it was perfectly
reasonable for the Panel to conclude, based on the language and
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structure of the contract, that the parties did not contract to pay
commissions on Paid Cancels, but only on fully-paid memberships
that were retained for one year. The fact that the contract's
complex "true up" mechanism provides no formula at all for
measuring or calculating commissions based on Paid Cancels is
sufficient to justify the Panel's conclusion in this regard.
Having so determined, we can easily dispatch VBI's third
claim, that Vertrue breached the contract first by failing to make
commission payments on Paid Cancels. Because the Panel reasonably
concluded that the contract did not require payments based on Paid
Cancels, it cannot be successfully argued that Vertrue breached the
contract by failing to make those payments. Thus, we uphold the
Panel's conclusion that VBI breached the contract first by
marketing a competing product in violation of the agreement, and
leave untouched the Panel's award of damages for such breach, both
punitive and compensatory.
III. Conclusion
The Panel's award did not violate the plain language of
the parties' contract. We therefore affirm the district court's
confirmation of the arbitration panel's award. Having presented
its arguments to the arbitration panel, the bankruptcy court, the
district court, and this court, VBI must now abide by the
reasonable conclusions reached by the arbitration panel, a body
that they themselves selected to resolve disputes under the
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contract. Bull HN Info. Sys., Inc. v. Hutson, 229 F.3d 321, 330
(1st Cir. 2000) ("[I]t is the arbitrator's view of the facts and of
the meaning of the contract that [the parties] have agreed to
accept.") (quoting United Paperworkers, 484 U.S. at 37-38 (1987)).
Costs to appellee.
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