Fifth Circuit Affirms $63 Million Arbitration Award in Wind Energy Equipment Dispute

The United States Court of Appeals for the Fifth Circuit has upheld a nearly $63 million arbitration award that was issued against a California company owned by a foreign corporation.  In Soaring Wind Energy, L.L.C., et al. v. Catic USA Inc., et al., No. 18-11192 (5th Cir., January 7, 2020), a Dallas-based company, Tang Energy Group (“Tang Energy”) and California-based Catic USA entered into a partnership agreement that created Soaring Wind Energy designed to provide worldwide marketing for wind energy equipment.  The partnership agreement contained an arbitration clause, which was signed by Catic USA but not signed by the Chinese entity that owns Cactic USA, Aviation Industry Corporation of China (“AVIC”).  As part of the contract, Catic USA agreed to contribute $50 million to Soaring Wind Energy’s marketing efforts.  Instead of doing so, however, the company’s parent corporation invested in a competitor to Soaring Wind Energy.

Later, Tang Energy accused Catic USA of breach of contract.  Following arbitration proceedings that AVIC chose not to participate in, Catic USA and AVIC were jointly and severally ordered to pay $62.9 million to Soaring Wind Energy.  After that, Soaring Wind Energy sought to confirm the arbitration award in the Northern District of Texas.  The federal district court bifurcated the proceedings against Catic USA and AVIC before confirming the award against Catic USA.

On appeal, the nation’s Fifth Circuit first dismissed Catic USA’s claim that the district court lacked jurisdiction to confirm the arbitration award.  After that, the court disagreed with Catic USA’s arguments that: 1) The district court erred by confirming the award without first reviewing the arbitrators’ power over AVIC, 2) the arbitration panel was improperly constituted, and 3) the award included speculative or punitive damages that rendered it unenforceable because it divested Catic USA and Thompson – who was not only a shareholder of Soaring Wind Energy, but also President and CEO of AVIC – of their respective interests in Soaring Wind Energy.

The Court of Appeals summarily dismissed the first claim by stating:

Catic USA made its proverbial bed; therein it must lie. The company signed an agreement specifying that the actions of its affiliates could constitute its own breach. Whether Catic USA’s non-signatory affiliates themselves be subject to the arbitration is irrelevant: Catic USA “assum[ed] the obligation of its affiliates’ performance.” The arbitration panel reasonably found that a breach had occurred; given the deference owed to the panel, we decline to disturb that finding.

Next, the court found Catic USA and AVIC were bound by the arbitrator’s decision despite that the Chinese affiliates refused to participate in the arbitral proceedings:

Catic USA’s Chinese affiliates claim that the arbitration proceedings violated due process, reasoning that because the two sides appointed an unequal number of arbitrators, the panel’s decision could not have been impartial. That contention, when taken to its logical conclusion, would require this court to invalidate any arbitral award not issued by an evenly appointed panel. We reject that notion. The Agreement was not a contract of adhesion but a bespoke deal made between extremely sophisticated parties. The Agreement did not inherently favor one party or another; it just so happened that Catic USA was outnumbered. The agreed-upon selection process was followed to the letter: Catic USA and Thompson selected the arbitrators and received the process they were due.

The Fifth Circuit also stated the arbitrator did not award punitive damages in violation of the parties’ agreement when it divested Catic USA of its equity interest.  The court found:

Although the panel did not have the authority to issue punitive damages, it did possess powers to grant court-enforceable injunctive relief. The question thus is whether the divestment constitutes permissible injunctive (or equitable) relief or improper punitive damages.

It is the former. The panel divested Catic USA and Thompson of their interest in Soaring Wind to prevent them from receiving incidental benefit for breaching their duties, duties owed not only to the other members of the LLC but also to the LLC itself. Unlike punitive damages, which are based on a perceived reprehensibility of the breaching party’s actions or flow from a desire to make examples of them, see E.I. DuPont, 679 A.2d at 445–46, the divestment operates to achieve what the panel considered a fair result. Such concern— that relief not only compensate parties financially but also achieve a just outcome, ex aequo et bono—is precisely a matter of equity. Catic USA’s theory that the divestment effectively doubles the damages—and is therefore substantively indistinguishable from punitive damages—is well taken, but, given the broad scope of “equitable” relief, combined with the deference we must grant the arbitration panel, we decline to set aside the divestment as punitive and not equitable.

Finally, the United States Court of Appeals for the Fifth Circuit affirmed the Northern District of Texas’ order confirming the nearly $63 million arbitral award.

Photo by: Karsten Würth on Unsplash