Three Brothers Trading, LLC v. Generex Biotechnology Corp.

Background

Three Brothers Trading, LLC, doing business as Alternative Execution Group (AEXG), and Generex Biotechnology Corp. entered a February 2017 Memorandum of Understanding. AEXG agreed to secure investors for Generex, and Generex agreed to pay AEXG a percentage of funds received from investors AEXG referred. The contract included a 60-day exclusivity provision barring Generex from entering certain financing transactions with other parties. If Generex breached that provision, it had to compensate AEXG as though AEXG had sourced the financing, including through warrants for Generex stock. The contract required arbitration of disputes.

AEXG alleged that Generex breached the contract in March 2017 by accepting money from an investor AEXG had not referred. In arbitration, AEXG sought $210,000, 84,000 warrants convertible into Generex common stock at $2.50 per share, 9% interest, attorneys’ fees, costs, and expenses. Arbitrator Daniel F. Kolb found that Generex violated the exclusivity provision and awarded AEXG:

- $210,000 in liquidated damages; - the economic value of 84,000 warrants convertible into Generex stock at $2.50 per share, valued as of September 24, 2018; - 9% interest beginning March 28, 2017; - attorneys’ fees and costs; and - $3,312.50 as reimbursement for AEXG’s share of arbitration fees and expenses.

Generex later announced a stock dividend that would issue 20 shares for every one share of common stock and stated that options, warrants, and convertible securities would be adjusted proportionally. Because the announcement came after the arbitration hearing, the parties had not fully presented evidence about how the dividend would affect the warrants’ value. In an earlier round of this case, the court found the warrant award ambiguous and sent it to the arbitrator for clarification.

The arbitrator then stated that he had not determined the warrants’ value, whether the warrants were subject to the dividend, or when they would have been converted into stock. He intended only that AEXG receive the warrants’ economic value, with the value to be determined on a more complete record.

The Parties’ Motions

AEXG amended its petition to ask the court to confirm the portions of the award other than the warrant award and to vacate and remand the warrant award for a final decision. Generex sought to vacate or modify the award and argued that the warrant award should be treated as worth zero. Generex also challenged the interest, attorneys’ fees, and costs.

Legal Standard

The court applied the Federal Arbitration Act, which provides limited judicial review of arbitration awards. An award may be vacated when, among other things, the arbitrator exceeded his powers or failed to issue a mutual, final, and definite award. Courts generally give arbitration awards substantial deference and will uphold an award if the arbitrator provided at least a minimally plausible justification for the result. A court may remand an award to the arbitrator when the award is incomplete, but it may modify an award only when the correction does not affect the merits.

Warrant Award

The court held that the warrant award was not mutual, final, and definite. The warrant issue had been submitted to the arbitrator, but the arbitrator expressly stated that he had not decided the warrants’ economic value. Confirming the award as written would require further litigation to determine the amount owed.

The court rejected Generex’s argument that the warrant award should be treated as a zero-dollar award. The arbitrator had not found that AEXG failed to prove the warrants’ value or that AEXG should receive no damages. The court also declined to decide whether the dividend applied to the warrants or what their proper value should be. Those questions concerned the merits of the award and had not been decided by the arbitrator.

The court further rejected Generex’s arguments that AEXG had waived its challenge or that the arbitrator no longer had authority to act. According to the court, AEXG could not reasonably have known before the clarification that the award was incomplete, and the arbitrator had not finally decided the warrant issue. The court also found that modifying the award to zero would affect the merits, making remand the appropriate remedy.

The court therefore vacated the warrant portion of the award under Section 10(a)(4) of the Federal Arbitration Act and remanded it to the arbitrator for a mutual, final, and definite decision limited to the dollar amount represented by the economic value of the warrants described in the original award.

Confirmed Portions of the Award

The court confirmed the separate and independent portions of the arbitration award.

Liquidated damages. The court confirmed the $210,000 award. The contract entitled AEXG to 7% of the $3 million investment Generex received, which equals $210,000. The court found that the arbitrator properly applied the contract.

Interest. The court confirmed 9% interest on the liquidated-damages award from March 28, 2017, through entry of judgment. After judgment, federal law controls the interest rate. The court did not decide the interest applicable to the warrant award because that portion was vacated and remanded.

Attorneys’ fees and costs. The court confirmed the award of $93,304.06 in attorneys’ fees and $12,392.50 in costs. The arbitrator had found that AEXG made appropriate efforts to keep its fees reasonable, and the court held that this provided a sufficient basis under the deferential standard governing arbitration review. The court also rejected Generex’s argument that AEXG was not the prevailing party, noting that the arbitrator had expressly found that AEXG prevailed.

Arbitration expenses. The court confirmed the provision requiring Generex to reimburse AEXG $3,312.50 for its share of the arbitration’s administrative fees and expenses. Generex did not oppose confirmation of this portion.

Disposition

The court granted AEXG’s motion for summary judgment and denied Generex’s cross-motion for summary judgment. It granted AEXG’s motion to vacate and remand to the extent it sought remand of the warrant award. The court confirmed the remaining portions of the award and stayed the case pending a mutual, final, and definite award on the remanded warrant issue.