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Poponin v. Virtual Pro, Inc.

Issue Discussed: Allocation

Submitted by Natasha C. Lisman, Matthew C. Welnicki

Date Promulgated: September 20, 2006

Issue Decided:

1. Where a written agreement for an assignment of patent rights (“the Agreement”) contains an arbitration clause, does the fact that the assignment instrument itself (“the Assignment”) calls for litigation and not arbitration negate the effectiveness of the arbitration clause in the Agreement?

2. Where the arbitration clause in the Agreement requires arbitration under the rules of the International Chamber of Commerce (“ICC”), is the arbitrability of a dispute to be decided by the court or the arbitrator?

3. Did the circumstances surrounding the formation of the Agreement and its terms render the agreement unconscionable and unenforceable?

4. Can the arbitrator’s rulings on pre-hearing matters justify enjoining the continuation of the arbitration?

Submitted by Natasha C. Lisman and Matthew C. Welnicki*

This case involved judicial review in connection with an ongoing arbitration proceeding. The Agreement and Assignment at issue were between a Russian-American immigrant scientist, Vladimir Poponin, who had applied for a patent on one of his inventions, and a U.S. company, Virtual Pro, Inc., which in return for an assignment of Poponin’s rights, undertook to complete the patent process, commercialize the invention, and pay him 50% of the revenues. The Agreement called for the resolution of all disputes in connection with the Agreement by binding arbitration in accordance with ICC rules. On the other hand, the Assignment executed by Poponin in accordance with the Agreement, provided that all claims and legal actions relating to “this assignment” and related transactions had to be filed in state or federal court in California.

Several years later, Virtual Pro commenced an ICC arbitration against Poponin alleging various breaches of the Agreement (“the Arbitration”). After each party appointed a member of the panel and the ICC appointed the third, Poponin moved to dismiss the arbitration on the ground that he had never agreed to arbitration, and the panel, therefore, lacked jurisdiction. The panel issued an interim award determining it had jurisdiction. Poponin also filed counterclaims, which the ICC dismissed due to Poponin’s failure to pay the requisite filing fee. Finally, the panel barred Poponin from seeking discovery because he propounded his discovery requests after the discovery deadline established by the panel.

It was at this point that Poponin filed a lawsuit in federal court in California, asserting various claims against Virtual Pro, and also seeking to enjoin the Arbitration. He notified the ICC panel of this step and requested a stay of the arbitration. The panel denied his request and proceeded with disposing of various pre-hearing matters and setting the dates of the final hearing. Poponin then moved the court for a preliminary injunction enjoining the arbitration, arguing that (1) the arbitrability of the dispute was for the court, not the panel, to decide, and that there was no valid arbitration agreement between the parties because the Assignment itself did not contain an arbitration clause; (2) the Agreement was unenforceable because it was procedurally and substantively unconscionable due to Poponin’s limited English and Virtual Pro’s financial leverage, and the fact that the arbitration clause lacked mutuality; and (3) in view of the panel’s adverse rulings against him, the completion of the arbitration would subject him to irreparable harm. Virtual Pro countered with a motion to dismiss.

After careful consideration of the parties’ arguments, the court denied Poponin’s motion and granted Virtual Pro’s. The court first ruled that, whether the Agreement and the Assignment were viewed as two contracts or one, the dispute resolution provision of the Assignment in no way negated the arbitration clause of the Agreement. With respect to arbitrability – i.e. whether Virtual Pro’s claims against Poponin fell under the Agreement and its arbitration clause – the court ruled that as a result of the parties’ choice of the ICC rules, which authorize arbitrators to decide arbitrability, it was an issue for the panel, not the court, to decide. The court went on reject Poponin’s unconscionability claims as factually groundless, finding that as the owner of the intellectual property, Poponin had ample bargaining power and could have obtained assistance with his English and taken more time to review the Agreement before signing it. The court also ruled that the arbitration clause in the Agreement was bilateral. Finally, the court rejected Poponin’s invocation of the panel’s adverse rulings as evidence of irreparable harm, noting that Poponin was not precluded from pursuing counterclaims and discovery in the arbitration but, rather, had forfeited them as a consequence of his own acts and choices.

*Natasha C. Lisman is a partner in the Boston litigation firm of Sugarman, Rogers, Barshak & Cohen, P.C., representing parties or serving as an arbitrator in commercial, insurance, and reinsurance litigation and arbitration.

Matthew C. Welnicki is an associate at Sugarman, Rogers, Barshak & Cohen, P.C., concentrating his practice on commercial dispute resolution.