ARIZONA COURT OF APPEALS DIVISION ONE
BLUE LINE EQUIPMENT, LLC, an Arizona limited liability company; SAPPHIRE SCIENTIFIC, INC., an Arizona corporation; and SKAGIT NORTHWEST HOLDINGS, INC., a Washington corporation, Appellee,
No. 1 CA-CV 11-0559 Maricopa County Superior Court No. CV2010-026991
v. SHAWN LORENZO YORK, Appellant
APPELLANT’S REPLY BRIEF
SHAWN LORENZO YORK Propria Persona 10942 LostWood Sandy, Utah, 84020 Telephone: 801-432-0759 ShawnLorenzoYork@gmail.com
January 17, 2012
TABLE OF CONTENTS Page Introduction And Statement Of The Case.......................................................3 Statement Of Facts..........................................................................................5 Issues Presented For Review..........................................................................7 Standard Of Review.......................................................................................9 Argument......................................................................................................10 Conclusion....................................................................................................13 Certificate Of Compliance............................................................................15 Certificate Of Service...................................................................................16
Introduction And Statement Of The Case In 2005, BlueLine Equipment Company and Vortex Cleaning Systems (competitors in the industry of design, manufacturing and sales of industrial carpet cleaning machines) entered into negotiations for the sale of the Vortex Brand Name, Assets and Intellectual Property. BlueLine could not afford the full purchase price of Vortex, ($1.6M) so instead, the parties negotiated a substantially reduced price ($174k) in consideration for Blue Line’s "Covenant To Manufacture, Market and Promote" two different models (one PTO model and one SI model) of Vortex-branded machines -- and the payment of "Perpetual Royalties" for these two machines. This transaction was documented in an Asset Purchase Agreement ("APA") executed on May 11, 2006 which defines these two machines as; [bold emphasis added] "any configuration of any machine [-] which either incorporates the Intangible Assets [i.e. patents, or designs] or uses the Vortex brand." However, on March 16, 2009, BlueLine and Vortex were acquired by Skagit Northwest Holdings, and on May 9, 2009, or earlier, Skagit issued a determination of “commercial unreasonability” and discontinued the Vortex Brand Name "due to patent obsolescence of U.S. Patent #6,675,437" and, "design impracticability of the artist’s rendering” pursuant to APA ¶2.4.5 which states; [bold emphasis added] "Buyer Covenants and agrees in good faith to use all reasonable efforts to market, promote, distribute and sell the Vortex Machines; provided that it is commercially reasonable for Buyer to continue to manufacture and market
such Vortex machines; further provided that it shall be deemed per se commercially unreasonable to cease manufacturing, marketing or promoting the Vortex Machines solely to manufacture market and promote products similar to, or using technologies that compete with the Vortex Machines." Pursuant to the parties' Alternative Dispute Resolution (APA ¶7.11) Mr. York filed this dispute with The American Arbitration Association in September of 2009, asserting that Skagit's determination to cease promoting the Vortex Brand PTO and SI machines solely to promote PTO and SI machines under the new “Sapphire” Brand name was in breach and resulted in an unjust enrichment - and motioned for an interim ruling on APA ¶2.4 to establish whether the APA requires the use of any patent, technology or “artist’s rendering” for performance. The arbitrator granted this interim ruling during the final evidentiary hearings. However, after the final hearings the arbitrator changed her position [App. 57-58 (CR 13, Ex. C)] and refused to issue this ruling and instead issued an arbitration award which denies Mr. York's damages due to "patent obsolescence" and "design impracticability". In September of 2010, Mr. York filed opposition to this award with The Maricopa County Superior Court asserting that the arbitrator's determination exceeds her powers because it constitutes a knowing refusal to rule on a governing principle establishing breach and requiring a materially different outcome. A.R.S. Statutes and Legion Federal Arbitration Act case law establishes;
(i) An arbitrator is not empowered to refuse to rule on a governing, controlling principle requiring a specific and material outcome, and; (ii) A Superior Court Judge is not empowered to "rubber stamp" the confirmation of an arbitration award produced from such misconduct. Accordingly, Appellant respectfully request that this Court remand the trial court's July 7, 2011 Judgment.
Statement Of Facts Appellees’ ANSWERING BRIEF does not refute or provide any argument to dispute the following TEN material, indisputable FACTS; FACT ONE: APA ¶2.4 is a governing, controlling principle of the APA establishing that; (i) there exists no requirement for the use of any patent, design, technology or “artist’s rendering” for performance and, (ii) APA performance may be reached solely in the use of the Vortex brand name to prevent an unjust enrichment. FACT TWO: If any requirement existed for the use of any patent or design, the word “and” would appear in place of the word “or” in ¶2.4 -- but it does not. The word “or” is not subject to multiple legal interpretations. FACT THREE: Had the arbitrator issued the interim ruling on APA ¶2.4, the arbitration would have resulted in a substantial and materially different outcome because it would have established that Appellees decision to discontinue Vortex in 2009 due to patent obsolescence of the ‘437 patent and design impracticability of the artist’s rendering was in breach and resulted in an unjust enrichment and damages to Mr. York in the form of past and future lost royalty payments. Mr. York sold the Vortex company for a significantly reduced purchase price in consideration for Blue Line’s covenant to manufacture “any configuration of any” (SI and PTO) cleaning machines and the payment of perpetual royalties for these two machines. FACT FOUR: Pursuant to APA ¶7.11 any dispute over whether performance of the parties’ APA mandates the use of any technology, patent or “artist’s rendering” is a substantial and material controversy requiring a ruling and a final determination by a single arbitrator qualified to hear the dispute. Any attempt to 5
adjudicate any similar controversy without first ruling on the definition of the very product the parties agreed would be manufactured would also be absurd. FACT FIVE: The arbitrator knowingly refused to issue this ruling which deprived Mr. York of his legal victory. FACT SIX: The Superior Court’s decision to confirm this award is a simultaneous legal endorsement for the payment of perpetual royalties on U.S. issued patents - which is unlawful - (and would also simultaneously make APA ¶2.4 unenforceable). The confirmation of this award also assumes an implausible interpretation of the parties’ APA. The basic legal premise of this arbitration award (that the parties entered into a “perpetual royalty agreement” for the use of a United States issued patent) is unlawful. FACT SEVEN: The words “artist’s rendering” do not exist in the parties’ APA. The APA does not grant Mr. York the right to control any design or engineering of the products nor does the APA contain any requirement that Blue Line utilize any concept, design, patent or technology received from Mr. York in the APA transaction. FACT EIGHT: The arbitrator denied Mr. York’s damage claims due to patent obsolescence and design impracticability of an “artist’s rendering”. FACT NINE: Appellees have resumed into the business of manufacturing PTO and SI carpet cleaning machines under the new brand name “Sapphire Scientific” - effectively burying and usurping the Vortex Company and Brand Name. FACT TEN: The unjust enrichment of Skagit and the damages to Mr. York are obvious, simple, substantial and ongoing - and certainly deserving of urgency by the Appeals Court.
Issues Presented For Review The entire basis to Appellees Answering Brief can be summed up accordingly: Appellees assert that Mr. York’s arbitration submission for a ruling
on APA ¶2.4.1 was merely “...an issue of contract interpretation that was not material to the outcome” [-] “...because the arbitrator's rulings on other issues made the interpretation of that provision immaterial.” (P. 4-5) However, this is factually and legally impossible. Mr. York cannot establish any breach or damages without first receiving a ruling on the provision (¶2.4.1) which establishes whether there even exists any requirement for the use of any patent or design. It is for this ruling that Mr. York initiated the arbitration. Either a ruling on the interpretation of APA ¶2.4.1 establishes a materially different outcome or it does not. In order for this court to determine whether The Superior Court Judge abused his discretion it must first establish whether APA ¶2.4. is a governing, controlling principle requiring a materially and substantially different outcome than that of the issued arbitration award. If it cannot establish a materially different outcome -- the trial court’s judgement should be affirmed. If indeed it does - the arbitrator has exceeded her powers and the award must be vacated. While an arbitrator is empowered to dispose of claims as she sees fit she is obviously not empowered to ignore or disregard governing, controlling principles requiring a materially different outcome. Otherwise the purpose of entering into written agreements would be defeated. Additionally, this Court must consider; Is APA ¶2.4.1 a governing, controlling principle requiring a specific, material outcome - and is that outcome substantially or materially different than the arbitration award?
Did the arbitrator refuse to rule on APA ¶2.4? What reason did the arbitrator issue for refusing to rule on APA ¶2.4? Is an arbitrator empowered to deny damages due to patent and design obsolescence while simultaneously refusing to rule on a governing principle establishing whether there exists any requirement for the use of any patent or design? Is it a plausible interpretation of the APA that the parties entered into a “perpetual royalty” agreement and the sale of the Vortex Company and Assets for a fraction of it’s asking price - while simultaneously granting Blue Line the power to cease manufacturing just three years later based on patent or design impracticability of technology received in 2006? Is it plausible that the parties entered into an agreement wherein Blue Line was obligated to continue using the exact design and technology received in 2006 forever - regardless of any new or superior technology that came to light and the simultaneous payment of perpetual (forever) royalties? Under what conditions (if any) is an arbitrator empowered to refuse to rule on a governing principle requiring a material outcome - and is such a scenario applicable in this instant case? Why would the arbitrator knowingly refuse to rule on ¶2.41 given it’s obvious ability to produce a materially different outcome? Why would the Superior Court Judge confirm this award? Why would it be “commercially reasonable” to manufacture “any configuration of any” SI and PTO machines under the “Sapphire Scientific” brand name but not under the “Vortex” brand name?
Standard Of Review The arbitrator's remedy cannot possibly be "rationally derived" from the "general framework or intent" of the Agreement as set forth in Arizona case law. The arbitrator's remedy was not based on a plausible interpretation of the 8
Agreement, was not within the contemplation of the parties, and is an extreme, obvious and vile display of injustice. In Westerbeke Corp. v. Daihatsu Motor Co., 304 F.3d at 217 (2d Cir. 2002) the court concluded; “We must therefore continue to bear the responsibility to vacate arbitration awards in the rare instances in which “the arbitrator knew of the relevant [legal] principle, appreciated that this principle controlled the outcome of the disputed issue, and nonetheless willfully flouted the governing law by refusing to apply it.” From Ganton Techs., Inc. v. Int'l Union, United Auto., Aerospace and Agric. Implement Workers of Am., U.A.W., Local 627, 358 F.3d 459, 462 (7th Cir.2004); “[T]he issue for the court [here] is not whether the contract interpretation is incorrect or even wacky but whether the arbitrator has failed to interpret the contract at all.” Further, “A contract will not be interpreted literally if doing so would produce absurd results, in the sense of results that the parties, presumed to be rational persons pursuing rational ends, are very unlikely to have agreed to seek.” See Beanstalk Group, Inc. v. AM General Corp., 283 F.3d 856, 860 (7th Cir. 2002); see also Nelson v. Schellpfeffer, 656 N.W.2d 740, 743 (S. Dak. 2003); Bohler-Uddeholm America, Inc. v. Ellwood Group, Inc., 247 F.3d 79, 96 (3d Cir. 2001)
Argument Had the arbitrator issued the interim ruling on APA ¶2.4, the arbitration would have resulted in a substantially and materially different outcome because it would have established that Appellees decision to discontinue Vortex due to patent obsolescence of the ‘437 patent and design impracticability of the artist’s rendering was in breach and resulted in an unjust enrichment and damages to Mr. York. Mr. York sold the Vortex Brand name and assets to Appellees for a significantly reduced purchase price in consideration for their covenant to manufacture two different models of cleaning machines defined as; “any configuration of any machine [PTO or SI] which either uses the Vortex intangible assets or uses the Vortex Brand Name”. (See APA ¶2.4.1) and the payment of perpetual royalties for these two machines. The word “or” is not subject to multiple legal interpretations. Appellees determination to discontinue Vortex branded machines due to patent obsolescence and design impracticability was in breach. Such a breach cannot be established without first ruling on the interpretation of APA ¶2.4.1 which both the arbitrator and the Superior Court Judge have refused to do. This Appeals Court must make this indispensable determination in order to determine whether the Superior Court Judge abused his discretion. Mr. York has filed this appeal for a determination on whether or not the arbitrator exceeded her powers by refusing to rule on what Mr. York asserts
is a governing, controlling provision requiring a materially different outcome. (A determination by this Court on whether ¶2.4.1 is a governing principle is prerequisite to determining if the Superior Court Judge has abused his discretion.) Appellees’ assertion that this Appeal was filed by Mr. York because “he wants someone to reconsider the arbitrator's findings of fact and conclusions of law” is patently false and misleading. Mr. York has filed proper and timely opposition to this award consistent with Arizona Revised Statutes. Appellees’ assertion that “Mr. York never filed a proper opposition to the arbitration award” is patently false and attempts to obfuscate the gravamen of the dispute. Mr. York has submitted indisputable material evidence that the arbitrator has exceeded her powers. (The word “or” is not subject to multiple legal interpretations.) Appellees assertion that “Mr. York fails to identify any legal grounds for concluding that the arbitrator's conduct exceeded her power” is false and misleading. All Alternative Dispute Resolution provisions carry with them inherently, a legal presupposition that the arbitrator will interpret and enforce the parties’ agreement if such an interpretation requires a materially different outcome and cannot be disposed of on other grounds. Appellees’ assertion that “Mr. York fails to identify anything in the parties' arbitration agreement that would limit the arbitrator's discretion in deciding which issues were dispositive; and [-] fails to cite
any legal authority supporting such a limitation” is patently false and misleading. It is obviously impossible to prove that Appellees breached the agreement (by ceasing production of Vortex machines due to patent and design obsolescence) without first ruling on the provision which establishes whether there exists any requirement for any patent or design. Appellees assertion that “[Because] Mr. York failed to prove any basis upon which a damages award could be made, the interpretation of certain APA provisions became immaterial” is legally absurd and impossible. Safety Control, Inc. v. Verwin, Inc., is not wholly applicable. In safety Control, the court rejected the argument "that the arbitration award was invalid (because) the arbitrator did not settle the entire controversy submitted to him." 16 Ariz. App. 540,543,494 P.2d 740, 743 (1972). The Safety Control court affirmed confirmation of the arbitration award because the issues that the arbitrator ruled on were "determinative of the matters submitted for decision." Id. The same is not true here. The arbitrator did not rule upon the determinative issue for which the arbitration was initiated. The arbitrator refused to rule on what Mr. York asserts is a governing controlling provision requiring a material outcome. The only relevant question here is whether APA ¶2.4.1 requires a material and substantially different outcome than the issued AAA arbitration award.
Conclusion This appeals Court faces solely two relevant and determinative questions; (They are the same two questions that both the AAA Arbitrator and the Superior Court Judge have refused to review and also the same two questions that would require review by The Arizona Supreme Court should this Appeals Court also choose not to review them); (i) Is APA 2.4.1 a governing controlling principle requiring a specific and material outcome? and (ii) Would the arbitration have resulted in a substantially and materially different outcome had the arbitrator not refused to issue the ruling on APA ¶2.4.1? An arbitrator is not empowered to refuse to rule on a governing principle requiring a materially different outcome and a Superior Court Judge is not empowered to “rubber stamp” the confirmation of an award produced from such misconduct - otherwise there would be no incentive to enter into written agreements or the need for any legal system to enforce them. There exists no grounds for the confirmation of this arbitration award -- and irrefutable material evidence conversely. The confirmation of this arbitration award is in error and is an obvious abuse of discretion by The Maricopa County Superior Court Judge.
Respectfully Submitted by /s/ Shawn Lorenzo York on January 17, 2012
CERTIFICATE OF COMPLIANCE
Pursuant to Ariz. R. Civ. App. P. 6 ÂŠ, I certify that the attached Motion uses a proportionately spaced type of 14 points or more and is double spaced using a Roman font.
Respectfully Submitted by /s/ Shawn Lorenzo York on January 17, 2012
CERTIFICATE OF SERVICE
I certify that on January 17, 2012 the foregoing was filed with The Clerk Of The Court by electronic filing: AZ TurboCourt Efiling Clerk Of The Court Arizona Court Of Appeals, Division One 1501 West Washington Street, Room 203 Phoenix, Arizona 85007
I further certify that two copies of the foregoing were mailed this same day to Appellees at the following address :
Philip R. Higdon P. Derek Petersen PERKINS COIE LLP 2901 N. Central Avenue, Suite 2000 Phoenix, Arizona 85012-2788 Respectfully Submitted by /s/ Shawn Lorenzo York on January 17, 2012