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Arbitration: CA Appeals Court Won't Budge, Affirming Award vs Software Developers (Web)

In an unpublished opinion, Fujitsu Software Corp. v. Hinman, No. A112781, 2006 WL 2789139 (Sept. 28, 2006)(available at, California's First District Court of Appeals affirmed a trial court's decision confirming a partial final arbitration award, where a losing party made a variety of state and constitutional claims to try to get the award overturned.

In 2003, Howard E. Hinman and his partner started a business named “zBatch,” for developing software. Fujitsu Software Corp. sought to distribute the zBatch software to its customers “in object code form,” according to the appeals court opinion.

In September 2003, Hinman and his partner, Glenn Dent, entered into a Master Distribution and Services agreement with Fujitsu for distributing the zBatch software. The agreement contained a technical support and services clause, a termination clause, and a provision for escrow of the software’s source code, among other things.

During the master agreement’s effective period, Fujitsu sold the zBatch software to several customers. Hinman and Dent received proceeds of more than$100,000 for the zBatch products, and their support and maintenance obligations.

A dispute arose out of the escrow agreement, under which zBatch was required to deposit the source code for the software into escrow with a third-party escrow company, DSI Technology Escrow Services Inc., owned by Iron Mountain Inc.

Hinman and Dent never deposited the source code into escrow. In January 2005, Fujitsu asked about the deposit, and in response Hinman and Dent alleged that they had not signed the escrow agreement.

Fujitsu sent a notice of breach in March 2005, and on March 22, 2005, Dent executed the escrow agreement on behalf of himself and the plaintiff. But they didn’t deposit the source code into escrow, claiming instead that the escrow agreement was invalid because Fujitsu entered into a side agreement with Iron Mountain, agreeing to indemnify Iron Mountain from liability to zBatch, in case the source code was accidentally disclosed.

Fujitsu commenced an American Arbitration Association arbitration proceeding in San Francisco in April 2005. But on May 6, 2005, Hinman and Dent–referred to in their attorneys’ correspondence as, "collectively, ‘zBatch,’”--purported to terminate the master agreement.

The appellate court decision notes that the termination letter didn’t identify the source of the default, “but apparently the primary complaint was [Fujitsu’s]indemnity agreement with Iron Mountain.”

Fujitsu sought to amend its arbitration demand to impose individual liability on Hinman and Dent, since zBatch was not incorporated as a limited liability company, but merely operated as a “dba” of zBatch. On May 27, 2005, Hinman and Dent sought to incorporate zBatch as a Delaware LLC.

Then, on July 18, 2006, the parties argued on the merits of the escrow issue, and the support and maintenance issues. A July 31, “Partial Final Award,” in Fujitsu’s favor, determined that “zBatch LLC” and the principals had continuing support obligations that survived the master agreement’s termination, and that source code needed to be deposited in escrow within 10 business days. The award included attorney fees and costs.

Fujitsu sought to confirm the partial award in the San Francisco Superior Court along with temporary restraining order at the end of August, since the principals weren’t complying with the award.

A state court judge, according to the appeals court opinion, declined “to order Hinman et al. to deposit the source code into escrow, but issued a [temporary restraining order] requiring them to maintain zBatch source code in a form compatible with versions supplied to [Fujitsu] customers and for which zBatch had been paid, and to continue to provide technical services to [Fujitsu’s] using zBatch. . . .”

A month later, Hinman filed a motion to oppose the arbitration award’s confirmation, and cross-motioned to “modify/correct or, alternatively, vacate” the award, recuse the arbitrator, and “obtain a return of fees.”

Dent and zBatch LLC joined Hinman's opposition and cross-motion. An Oct. 26, 2005, trial court decision echoed the award, ordering zBatch LLC, Dent, and Hinman “to comply with the partial final award and deposit the zBatch source code into escrow,” according to the appellate decision. The partial final award was confirmed on Oct. 31, 2005.

Hinman appealed to the California Court of Appeals. And an August federal action by Hinman, pro se, seeking to vacate the award in California’s Norther District, was stayed after the Oct. 31 state court confirmation. The federal court granted a Fujitsu motion to stay the federal proceedings under the abstention doctrine, “indicating that Hinman ‘appear[ed] to be avoiding on an adverse ruling’ by maintaining the federal proceedings,” according to the state appeals court opinion.

In the California Court of Appeal, Hinman argued that 1) the judgment was void due to lack of personal jurisdiction, 2) the court erred in affirming the arbitration award because the arbitrator exceeded his powers, 3) the court abused its discretion by confirming an award that indentured Hinman to perform free work in violation of the U.S. Constitution’s 13th Amendment, and 4) the arbitrator was biased against him.

At the outset, the opinion discusses the appealability of the trial court's confirmation of a partial final award. The opinion notes it is a “final appealable judgment.”

The appeals court addresses Hinman's first argument on the trial court's lack of personal jurisdiction with two observations. First, the decision notes that Hinman and Dent, doing business as zBatch, entered into the master agreement with a California corporation. “The state court proceedings to confirm the partial final award,” the appeals court notes, “therefore arose out of Hinman's alleged failure to perform his contract with a California entity.”

Also on the personal jurisdiction issue, the opinion finds that by agreeing to California arbitration, plaintiff Hinman consented to personal jurisdiction in California courts for confirming the arbitration award. Hinman waived “any objection to personal jurisdiction by appearing in the action,” the opinion notes.

The opinion examines the award confirmation itself. The appeals court discusses arbitration awards’s judicial review standards in Moncharsh v. Heily & Blase 3 Cal.4th 1 (1992), and grounds for vacating an arbitration award under the Code of Civil Procedure. It holds that none of Hinman's grounds for vacating the arbitration award fell within Code Section 1286.2 (a) (4), which lists appropriate grounds.

It also holds that the arbitrator did not exceed his powers by precluding discovery before the arbitration hearing. The opinion notes found that the plaintiff didn’t establish that the absence of discovery before the arbitration hearing was prejudicial.

“Moreover,” the opinion states, he “did not ask for discovery, and his counsel asserted that evidence was unnecessary" at the hearing.

Hinman also alleged that Fujitsu waived its claims against zBatch, at least as to the source code deposit, and the arbitrator exceeded his powers by failing to dismiss the arbitration “in its entirety or in part.” The opinion observes that Fujitsu’s arbitration demand occurred less than 18 months after the master agreement’s full execution, and therefore was timely.

Next, the opinion finds that Hinman's “claim that the arbitrator's ruling forced him to either comply or challenge the award within 10 days rings hollow, since he never complied with the order and he never moved any court to vacate the award until 30 days after receiving it.”

Hinman argued that the arbitrator exceeded his power by “remaking” the parties' contract. The appeals court observed that Hinman was simply disputing the arbitrator's legal construction of the contract. It notes that the award cannot be set aside merely because the arbitrator made contract interpretation error.

The appeals court rules that “it was certainly not ‘irrational’ for the arbitrator to conclude that Hinman's escrow obligations did not terminate automatically with the termination of the Master Agreement.”
The appeals panel found that the escrow agreement did not end automatically with the master agreement's termination, and the arbitrator did not exceed his powers in his ruling as to the source code escrow.

The appeals court relies on Pinkerton's Inc. v. Superior Court, 49 Cal.App.4th 1342, 1348 (1997), to hold that zBatch wasn’t a separate legal entity from the principals. It states, “Persons behind a ‘dba’ are personally liable for any claim against it, as use of a fictitious business name does not create a separate legal entity or insulate the individuals from personal liability.”

Plaintiff Hinman argued that the trial court violated the U.S. Constitution’s 13th Amendment in confirming the arbitration award ordering zBatch and the principals to provide technical support services to Fujitsu’s customers for free past the contract termination.

“This argument,” the opinion states, “is frivolous.”

The opinion also dismisses the arbitrator bias claim. “Hinman presents not one shred of evidence of corruption, fraud, misconduct or other bias on the part of the arbitrator, or any motive the arbitrator might have had for favoring [Fujitsu] other than the fact that [Fujitsu’s] legal positions were correct.”

California's First District Court of Appeal affirmed the judgment.

--Ongmu Tshering, CPR Intern