HAYDAY FARMS, INC., ET AL V. FEEDX HOLDINGS, INC., No. 21-55650 (9th Cir. 2022)
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FeeDx and HayDay Farms, Inc. entered into an Exclusive Distribution and Processing Agreement (EDPA). HayDay’s President also entered into a Consulting Agreement with FeeDx through Nippon Agricultural Holgins, Inc. The agreements provided for arbitration. The EDPA also made HayDay and Nippon jointly and severally liable. Neither HayDay nor FeeDx performed its side of the agreement. The parties entered a Settlement Agreement, which modified, but did not replace, the EDPA. After the Settlement Agreement did not see fruition, the parties went to arbitration. An arbitration tribunal made awards against FeeDx, and HayDay and Nippon petitioned to confirm the award. FeeDx sought to vacate the award, arguing that it exceeded the tribunal’s powers under the Federal Arbitration Act (“FAA”). The district court vacated $7 million from the award that reflected HayDay’s unpaid installments under the Settlement Agreement, but confirmed the rest of the award.
The Ninth Circuit affirmed in part, and reversed in part, the district court’s order confirming in part an arbitration award of more than $21 million entered against FeeDx. The panel held that arbitration awards that, as here, involve at least one foreign party are governed by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“Convention”), which Congress incorporated into federal law under the FAA. 9 U.S.C. Section 203 provides federal district courts subject matter jurisdiction over actions or proceedings falling under the Convention. The panel held that the parties’ failure to assert federal question jurisdiction did not deprive the district court of subject matter jurisdiction where HayDay and Nippon’s state court petition established Section 203 jurisdiction.
Court Description: Arbitration The panel affirmed in part, and reversed in part, the district court’s order confirming in part an arbitration award of more than $21 million entered against FeeDx Holdings, Inc. for breach of contract. FeeDx and HayDay Farms, Inc. entered into an Exclusive Distribution and Processing Agreement (EDPA). HayDay’s President also entered into a Consulting Agreement with FeeDx through Nippon Agricultural Holgins, Inc. The agreements provided for arbitration. The EDPA also made HayDay and Nippon jointly and severally liable. Neither HayDay nor FeeDx performed its side of the agreement. The parties entered a Settlement Agreement, which modified, but did not replace, the EDPA. After the Settlement Agreement did not see fruition, the parties went to arbitration. An arbitration tribunal made awards against FeeDx, and HayDay and Nippon petitioned to confirm the *The Honorable Gershwin A. Drain, United States District Judge for the Eastern District of Michigan, sitting by designation. HAYDAY FARMS V. FEEDX HOLDINGS, INC. 3 award. FeeDx sought to vacate the award, arguing that it exceeded the tribunal’s powers under the Federal Arbitration Act (“FAA”). The district court vacated $7 million from the award that reflected HayDay’s unpaid installments under the Settlement Agreement, but confirmed the rest of the award. The panel first considered the issue of jurisdiction. The parties asserted diversity jurisdiction below and on appeal. The panel held that there was no complete diversity of citizenship because there were foreign plaintiffs suing foreign defendants. The panel examined whether another basis for jurisdiction existed. The panel held that arbitration awards that, as here, involve at least one foreign party are governed by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“Convention”), which Congress incorporated into federal law under the FAA. 9 U.S.C. § 203 provides federal district courts subject matter jurisdiction over actions or proceedings falling under the Convention. No party asserted Section 203 as a basis for jurisdiction until the panel requested supplemental briefing on the issue. The panel held that the parties’ failure to assert federal question jurisdiction did not deprive the district court of subject matter jurisdiction where HayDay and Nippon’s state court petition established § 203 jurisdiction. The district court had subject matter jurisdiction, and this court had appellate jurisdiction under 9 U.S.C. § 16 and 28 U.S.C. § 1291. FeeDx asked the panel to vacate the arbitration award pursuant to 9 U.S.C. § 10(a)(4). Whether the FAA grounds for vacatur are available for awards governed by the Convention is an issue of first impression before the court. The panel agreed with the Second, Third, Fifth, Sixth, 4 HAYDAY FARMS V. FEEDX HOLDINGS, INC. Tenth, and D.C. Circuits that FAA grounds for vacatur were available for awards governed by the Convention. The panel held that Section 10(a)(4) was a high standard for vacatur, and was only warranted when an arbitration award exhibited a manifest disregard of law or was completely irrational. FeeDx argued the tribunal’s award of $19.2 million in damages to HayDay and Nippon was completely irrational and manifestly disregarded the law. Specifically, FeeDx claimed that if the tribunal had properly interpreted the Settlement Agreement, FeeDx would have received an award worth $4.4 million, rather than being liable for a much larger amount. FeeDx claimed this outcome manifestly disregarded Cal. Civ. Code § 3358. The panel held that whether an arbitration award deviates from the best interpretation of the parties’ agreement was not the standard for vacatur. The correct standard was whether the award exhibited a manifest disregard of law or reflected a completely irrational interpretation of the parties’ agreements. Under the appropriate standard of review, the panel agreed with the district court that the arbitrators’ award should be confirmed on this issue. First, the award was not irrational because it drew its essence from the parties’ agreement and did not ignore its controlling terms. Second, this portion of the award reflected a plausible interpretation of the parties’ contracts. The tribunal determined the value of FeeDx’s obligations under the Settlement Agreement to be $16.6 million for purchases predating the Agreement and $2.6 million following it. The panel held that because under this interpretation the award of pre-settlement damages did not put HayDay in a better position than it would have been in with full performance, the award also did not exhibit a manifest disregard of § 3358. HAYDAY FARMS V. FEEDX HOLDINGS, INC. 5 The tribunal also held that HayDay’s obligation to pay FeeDx $8 million had been excused by FeeDx’s breach, so it did not subtract that amount (less the $1 million that HayDay had actually paid under the Settlement Agreement) from the award. The district court found that this put HayDay and Nippon in a better position than it would have been in had both agreements been fully performed. The panel held that the tribunal did not manifestly disregard § 3358. In addition, the tribunal’s decision was not completely irrational. Accordingly, the district court erred in vacating $7 million of the award. The panel reversed the district court’s vacatur of this portion of the award. FeeDx argued that under the plain terms of the Settlement Agreement’s fee provision, Nippon cannot recover its expenses in connection with the dispute, only FeeDx or HayDay may recover. The panel held that the tribunal’s interpretation that Nippon was a prevailing party was not completely irrational. The Settlement Agreement did not explicitly say that only HayDay or Nippon could recover fees and costs. Rather, it suggested that fees and costs could be recovered only by the prevailing party when FeeDx or HayDay brought a legal action to enforce its rights under the Settlement Agreement. The panel held that because both FeeDx and HayDay brought legal actions and because Nippon could have been liable for HayDay’s alleged breach, it can plausibly be viewed as a prevailing party who can recover fees and costs. Finally, FeeDx challenged the tribunal’s award of attorneys’ fees and costs incurred litigating claims arising under the EDPA to HayDay and Nippon. Under the tribunal’s interpretation of the parties’ agreement, the EDPA contained an attorneys’ fees provision that was added later by the Settlement Agreement. Presumably, that modification 6 HAYDAY FARMS V. FEEDX HOLDINGS, INC. had retroactive effect. The panel held that this interpretation was not completely irrational, so it was a valid basis for the tribunal’s award of pre-settlement attorneys’ fees. The panel affirmed the part of the district court’s order confirming the award, reversed the part of the district court’s order vacating the award, and remanded with instructions to confirm the whole award. Pursuant to the Settlement Agreement, FeeDx shall be liable for litigation costs associated with this action.
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