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Carl Zeiss Vision Inc. v. REFAC Holdings, Inc.

Court of Chancery of Delaware

August 24, 2017

CARL ZEISS VISION, INC. Plaintiff,
v.
REFAC HOLDINGS, INC. and U.S. VISION, INC., Defendants. REFAC HOLDINGS, INC. and U.S. VISION, INC., Counterclaim Plaintiffs,
v.
CARL ZEISS VISION, INC., Counterclaim Defendant.

          Date Submitted: June 14, 2017

          Gregory E. Stuhlman, Esquire of Greenberg Traurig, LLP, Wilmington, Delaware and Jeff E. Scott, Esquire and Valerie W. Ho, Esquire of Greenberg Traurig, LLP, Los Angeles, California, Attorneys for Plaintiff and Counterclaim Defendant.

          William R. Denney, Esquire, Brian C. Ralston, Esquire, Andrew H. Sauder, Esquire and Jordan A. Braunsberg, Esquire of Potter Anderson & Corroon LLP and Jon M. Talotta, Esquire of Hogan Lovells U.S. LLP, McLean, Virginia, Attorneys for Defendants and Counterclaim Plaintiffs.

          MEMORANDUM OPINION

          SLIGHTS, Vice Chancellor.

         Delaware courts do not take lightly applications to vacate arbitration awards. Indeed, the standard of judicial review with respect to such applications is among "the narrowest . . . in all of American jurisprudence."[1] Acknowledging the nearly vertical mountain it must climb, Defendants/Counterclaim Plaintiffs, REFAC Holdings, Inc. and U.S. Vision, Inc. (collectively "USV"), nevertheless move the Court to vacate an arbitration award that construed a supply agreement between USV and Plaintiff/Counterclaim Defendant, Carl Zeiss Vision, Inc. ("Zeiss"), in a manner that supported Zeiss' claim that USV had wrongfully terminated the agreement. According to USV, the arbitration panel "eviscerate[d] the essential term" of the agreement sua sponte and then "permit[ted] the agreement to remain in effect after gutting that term."[2] This grave error, according to USV, was the product of an arbitration panel that "abdicated its duties" and thereby "acted outside the scope of its authority."[3]

         USV's motion would have the court turn the applicable standard of review on its head. Indeed, although it has not expressly advocated for de novo review, the tone of its motion suggests that the Court should construe the terms of the operative contract anew without any regard for the fact that a carefully selected, experienced arbitration panel has already undertaken that exercise. In two words, USV seeks a "do over." That relief is rarely justified. It is not justified here. The motion to vacate is DENIED.

         I. BACKGROUND

         The parties have submitted rather extensive exhibits from the arbitration proceeding, including sworn testimony. I have drawn the facts from that record to the extent necessary to determine whether the arbitration award "can be rationally derived" from the contract the arbitrators were asked to construe and otherwise from the evidence.[4]

         A. The Parties

         Zeiss manufacturers ophthalmic lenses used in eyeglasses. USV operates as a retailer of ophthalmic products in the United States. Zeiss has supplied ophthalmic lenses to USV for the past 16 years.

         B. The 2011 Supply Agreement

         The contract at the heart of the parties' dispute is the Amended and Restated Supply Agreement dated December 28, 2011 (the "Agreement"). Pursuant to the Agreement, USV committed to purchase 95% of its lenses from Zeiss, subject to certain identified conditions. In exchange, Zeiss committed to supply the lenses ordered by USV and to extend $20 million of unsecured financing to USV at below-market interest. The term of the Agreement is ten years. It is governed by Delaware law and requires the parties to submit disputes relating to the Agreement to binding arbitration.

         The conditions to USV's purchase obligation are set forth in Paragraph 3.2(a) of the Agreement. Specifically, USV need only purchase 95% of its lenses from Zeiss if: (1) Zeiss makes the products required by USV in the quantities USV requires; (2) Zeiss's products comply with industry quality standards; and (3) "CZV [Zeiss] offers USV competitive pricing with respect to the CZV Lenses."[5]Paragraph 3.5 confirms that the purchase prices of Zeiss lenses are set forth on an exhibit attached to the Agreement and that "the purchase price to be charged USV-Refac for the various CZV Lenses. . . shall be no higher than the prices charged by CZV to any other customer making an equivalent volume of purchases of CZV Lenses."[6] The parties have referred to this as a "most favored nation" or "MFN" provision.

         The present dispute arises under the "competitive pricing" provision in Section 3.2(a)(ii). USV maintains that it may avoid the 95% purchase requirement in the Agreement if it is able to obtain more competitive (i.e., better) pricing from another lens supplier. Zeiss interprets the competitive pricing provision as allowing USV to purchase its lenses elsewhere only if Zeiss does not provide pricing to USV that is competitive with what it offers other similarly situated customers, as further addressed in the Agreement's MFN provision.

         C. The Arbitration

         USV filed a Demand for Arbitration with the American Arbitration Association on August 28, 2015 (the "Demand").[7] The Demand sought a declaration that the Agreement (specifically Paragraph 3.2(a)(ii)) authorized USV to engage in price checks of the market to determine if Zeiss was offering competitive prices and, if not, to purchase some or all of its lenses from the suppliers offering the best price. USV identified in its Demand that one of Zeiss's biggest competitors, Essilor Laboratories of America ("Essilor"), was, in fact, able to offer more competitive pricing than Zeiss and it alleged that it was therefore entitled to purchase lenses from Essilor under the Agreement.[8]

         A panel of three arbitrators (the "Panel") was selected as called for in the Agreement. As the parties moved closer to the arbitration hearing, the Panel asked USV to state definitively the relief it would be seeking at the hearing. USV responded by expanding, or refining, the relief it was seeking to include declarations that: (1) when it compared Zeiss's pricing with that of other manufacturers it could do so on a "portfolio" or "product line" basis; (2) if USV buys lenses from another supplier offering lower prices, USV would have ten days to notify Zeiss when that supplier's prices increase; (3) if Zeiss offers to lower its pricing after USV moves to another supplier in order to return to "competitive pricing, " then USV will have three months to transition its purchasing back to Zeiss; (4) the pricing for Essilor's product portfolio is more competitive than the pricing for Zeiss's product portfolio; (5) the pricing of certain Essilor products is more competitive than the pricing of certain Zeiss products; and (6) USV could purchase any amount of lenses from Essilor until Zeiss matches Essilor's pricing. Importantly, USV did not seek rescission of the Agreement or damages for breach of contract.

         The hearing lasted seven days. As one would expect after a seven-day hearing, the evidentiary record was extensive. The parties offered closing arguments at the conclusion of the hearing and, in doing so, addressed the specific questions posed to them by the Panel. By agreement, the parties then submitted post-hearing briefs. It was in this submission that USV argued for the first time that the Agreement should be rescinded if the Panel concluded that the competitive pricing provision was ambiguous.[9] Zeiss objected. Among other grounds, it stressed that the Agreement could not be rescinded because USV had already taken and spent most the $20 million that it had loaned to USV as consideration for the Agreement. USV responded to Zeiss's objection and the issue was joined for decision by the Panel along with USV's other claims for relief.

         The Panel issued its unanimous decision denying all of USV's requested relief on July 14, 2016. With respect to USV's request for a declaration relating to its interpretation of the competitive pricing provision, the Panel found that while "USV intended that the provisions set forth market check language, " "the evidence is undisputed that Labeeuw [a USV negotiator of the Agreement] never intended, or understood, that the new language was market check language, and there is no evidence (other than by implication from the execution of the [Agreement] by Zeiss) that anyone employed by Zeiss, or representing Zeiss, intended or understood before the [Agreement] was executed that the [competitive pricing] provisions set forth market check language."[10] The Panel also determined that "even if one were to conclude Zeiss accepted USV's proposed language, that does not indicate any agreement by Zeiss or, for that matter, USV, to any mechanism for implementation of any market check right. This is only illustrative of the absence of terms supporting the forms of relief requested by USV."[11]

         After completing its construction of the relevant language in the Agreement, the Panel concluded that USV was not authorized by the Agreement to engage in a market check to determine if Zeiss was offering competitive pricing. It further concluded, under the Uniform Commercial Code ("UCC") and Delaware case law, that it had no reasonably certain basis to fashion an appropriate remedy if it were to agree that USV's construction was reasonable since the Agreement was silent as to how a market check would work under the MFN clause.[12] It expressly declined to "rewrite" the parties' Agreement.[13]

         The Panel then addressed USV's belated request for rescission. After acknowledging USV's argument that it "would not have entered into the [Agreement] 'unless it could exclude lenses that were not competitively priced, " the Panel determined that USV had failed to cite any evidence in support of this statement and noted that the Panel's own assessment of the evidence found no support for this position either.[14]

         D. Procedural Posture

         This matter first came to the Court on Zeiss's Verified Complaint for Specific Performance, filed on September 16, 2015, in which Zeiss sought an order declaring that the Agreement precluded USV from purchasing lenses from Zeiss competitors, including Essilor. Zeiss sought a temporary restraining order to that same effect. On October 26, 2016, the parties stipulated that this action should be stayed in favor of arbitration that would address the "merits of their dispute relating to the [] Agreement."[15] The arbitration hearing was held May 18-26, 2016. The Panel issued its award on July 14, 2016. USV filed its Motion to Vacate Arbitral Award on October 12, 2016.

         USV argues that the Panel "abdicated its duties and ignored basic tenets of UCC law by declaring the Competitive Pricing Exceptions [in the Agreement] unenforceable and then compounded the problems it created by refusing to terminate the contract as the UCC requires."[16] According to USV, the Panel "refused to interpret" the Agreement as requested by the parties and, instead, resolved issues that it raised sua sponte at the conclusion of the arbitration hearing.[17] By proceeding in this manner, the Panel "acted outside the scope of its authority, [] issued an award that did not resolve the disputes submitted to arbitration, [] manifestly disregarded governing law, [] gutted USV's bargained-for contractual protections, and [] ultimately decided the parties' disputes based on the Panel members' own idiosyncratic views of justice."[18]

         Zeiss, of course, emphasizes the extraordinarily narrow standard of review within which the Court must operate--a standard that USV has not come close to meeting here. It also challenges USV's characterization of the Panel's award. According to Zeiss, USV asked the Panel to declare that the Agreement allowed USV to seek out competitively priced lenses in the marketplace and to acquire such lenses if Zeiss did not match the pricing. The Panel considered USV's proffered construction of the Agreement in this regard and rejected it. Accordingly, dissatisfied with the Panel's award, USV cannot now be heard to argue that the Panel somehow acted outside of the scope of its authority when it decided precisely what USV asked it to decide.

         II. ...


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