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Vital Basics, Inc. v. Vertrue, Inc.

Issue Discussed: Judicial Review/Manifest Disregard

Submitted by John R. Cashin

Date Promulgated: December 29, 2006

Issue Decided: When may an arbitration award be vacated on grounds that it violated the plain language of the parties’ contract.

In a non-insurance case, the Court of Appeals for the First Circuit affirmed the lower court’s confirmation of an arbitration award that it found to be based upon a plausible reading of the contract between the parties. Vital Basics Inc (VBI) markets and sells nutritional and dietary supplements directly to consumers. Vertrue Incorporated (Vertrue) sells membership programs that provide consumers with discounts on health care and related services. The two companies had a long term marketing agreement whereby VBI would attempt to sell Vertrue memberships to consumers who called to order products from VBI. Vertrue would pay a commission to VBI for memberships that were sold and remained in force for a full year. A dispute arose over the payment of commissions for memberships that were paid but subsequently cancelled with the customer receiving a partial refund and Vertrue retaining a portion of the membership fee. VBI contended it was entitled to a commission on the portion of the membership fees retained by Vertrue. While the dispute was being debated between the parties, VBI was quietly developing its own competing membership program. VBI launched the program in violation of the contract’s exclusivity clause which banned VBI from marketing or selling any competing membership program. Vertrue initiated arbitration before a three-judge arbitration panel as provided in the contract. Vertrue alleged breach of contract, fraud and violation of the Connecticut Unfair Trade Practices Act. VBI asserted counterclaims for breach of contract.

After numerous days of complex testimony, the panel ordered VBI to pay Vertrue $3.5 million in compensatory damages and $1.3 million in punitive damages and attorney fees. After the arbitration process commenced VBI became insolvent and sought protection 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. The bankruptcy court found no grounds to vacate and confirmed the award. VBI appealed to the United States District Court, District of Maine alleging that the panel disregarded the law, exceeded its authority, was biased and failed to hear relevant evidence. The district court received extensive briefs from both sides and 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 at 494 (D. ME. 2005). VBI appealed alleging that the Panel’s award violated the express language of the contract and that Vertrue was the first party to breach the contract thereby nullifying VBI’s subsequent breach of the exclusivity clause.

In affirming the District Court’s confirmation of the award the Court of Appeals acknowledged that any review of an arbitral panel’s award is ‘‘exceedingly narrow’’ Wonderland Greyhound Park, Inc. v. Autotote Sys., Inc., 274 F. 3d 34 at 35 (1st Cir. 2001) and that confirmation of an award is required where the arbitrator was ‘‘even arguably construing or applying the contract.’’ Gupta v. Cisco Sys., Inc., 274 F. 3d 1 at 3 (1st Cir. 2001). The court held that the panel’s conclusion was not contrary to the plain language of the contract and therefore left no basis to vacate the award. The Court concluded ‘‘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 contract.’’ Bull HN Info. Sys., Inc. v. Hutson, 229 F. 3d 321 at 330 (1st Cir. 2000). ‘‘It is the arbitrator’s view of the facts and of the meaning of the contract that (the parties) have agreed to accept.’’ United Paperworks Int’l Union v. Misco, Inc., 484 U.S. 29, 38 (1987).

* John R. Cashin is General Counsel – Group Reinsurance at Zurich Financial Services, Zurich, Switzerland. He is an ARIAS-U.S. Certified Arbitrator. At Zurich his responsibilities include insurance regulation, reinsurance claims, reinsurance litigation, arbitration and contract wording. He joined Zurich in 2004 from the law firm of Stroock & Stroock & Lavan LLP in New York City. Prior to his law firm practice he served as Deputy Superintendent of the New York State Insurance Department and spent twenty years in the reinsurance brokerage business.