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Nexteer Automotive Corp. v. Korea Delphi Automotive Systems Corp.

United States District Court, E.D. Michigan, Southern Division

March 13, 2018




         I. Overview

         Now before the court are two motions. First, Defendant Korea Delphi Automotive Systems Corporation's (“KDAC”), now known as erae Automotive Systems Co. Ltd. (“erae”) (lowercase in title), filed a motion to withdraw $3, 000, 000 previously deposited with the Clerk of the Court as security for a stay order. (Doc. 79). For the reasons set forth below, erae's motion for the withdrawal of funds shall be GRANTED. The second motion now pending is Plaintiff Nexteer's motion for attorney's fees expended to obtain confirmation and enforcement of the Arbitral Award here. For the reasons set forth below, Nexteer's motion for attorney's fees (Doc. 77) shall be DENIED.

         II. Background

         This breach of contract and misappropriation of trade secret case arises out of Defendant erae's alleged piracy of a halfshaft joint, known as a TriGlide joint, owned by Plaintiff. The halfshaft joint is used in automotive steering systems. Per the parties' contracts, the matter was arbitrated in Singapore. On December 28, 2016, the sole Arbitrator, Dr. Wolfgang Peter of Switzerland, issued his final Award. The Arbitrator found that erae's competing premium joint, the KPJ, was manufactured using Nexteer's proprietary information in violation of the parties' 2006 and 2011 agreements. As a result of this finding, the Arbitrator awarded plaintiff Nexteer Automotive Corp. (“Nexteer”) $5, 876, 666 consisting of (1) $3, 328, 760 as disgorgement for past sales of defendant's KPJ halfshaft, with an additional $218, 861 in pre-judgment interest, (2) $2, 103, 572 for Nexteer's legal fees, (3) $220, 492 for Nexteer's arbitration costs, and (4) $4, 981 in Nexteer's fees for administrative secretary's services. The Arbitrator also awarded Nexteer a royalty of 4.5% on all sales of the KPJ halfshafts and future sales of any premium joint product derivative of KPJ after November 30, 2015. Early last year, Nexteer filed a motion to confirm the Arbitration Award, and erae filed a motion to stay confirmation pending review proceedings in Singapore.

         On May 16, 2017, this court confirmed the monetary award in the amount of $5, 876, 666 for disgorgement of past sales of the KPJ halfshaft, legal fees, arbitration costs, and costs of the administrative secretary's services, and the 4.5% royalty for all future sales of the KPJ halfshafts, but the court did not confirm the award as it related to the 4.5% royalty award for the sales of any premium joint product derivative of KPJ from November 30, 2015. Instead, the court held the Arbitral Award of the 4.5% royalty on future sales of any premium joint product derivative of KPJ from November 30, 2015, in abeyance pending the ongoing Singapore proceedings. The issue pending before the Singapore High Court was whether the derivative royalty award should be set aside. As a condition of the stay, erae was required to post a $3, 000, 000 bond. The stay and bond order were permitted pursuant to Article VI of the New York Convention, codified at 9 U.S.C. §§ 201-08, which provides:

If an application for the setting aside or suspension of the award has been made to a competent authority referred to in article V(1)(e) [of the country in which, or under the law of which, that award was made], the authority before which the award is sought to be relied upon may, if it considers it proper, adjourn the decision on the enforcement of the award and may also, on the application of the party claiming enforcement of the award, order the other party to give suitable security.

(Doc. 48-2 at PageID 2360). The reason for the bond was a concern over erae's ownership and solvency and thus, concern over whether erae would be able to pay the derivative royalties awarded by the Arbitrator in the event that his award for derivative royalties was confirmed in the Singapore proceedings. (Doc. 67 at 32). The amount was determined to be $3, 000, 000 because of the court's best estimate of the potential value of a derivative royalty owing for the estimated 18-months that the Singapore review period was expected to last. Based on estimates that erae may be selling $65.5 million in premium joint products in 2018, which would amount to a derivative royalty of $2.9 million (based on 4.5% royalty fee) if the products were derivative, it appears that the amount deposited may be a fair estimate of derivate royalties owing for 2018. Of course, erae disputes that the product it is now selling is derivative of the KPJ.

         On June 2, 2017, the court entered a stipulated order permitting erae to deposit $3, 000, 000 with the Clerk of the Court in lieu of posting a bond and the deposit was made on June 7, 2017. This court ordered that the deposited funds could “only be withdrawn upon further order of the court.” (Doc. 72). During the Singapore set aside proceedings, erae emphasized the prejudice it would suffer if the derivative royalty award were upheld because it was developing a new premium joint for sale beginning in 2018. erae estimated that sales for the new joint in 2018 alone could exceed $65.5 million and total as much as $304 million for the four years between 2018 and 2021.

         On September 4, 2017, the Singapore High Court entered an order dismissing erae's application to set aside the derivative royalty provision. erae informed Nexteer that it would not be appealing the Singapore ruling, and that it was willing to stipulate to the entry of an order confirming the derivative royalty provision of the Award. erae requested Nexteer stipulate to the return of the deposited funds. Nexteer responded that it would not consent to the release of the funds unless erae provided information about its premium joint products from November 30, 2015 to present, including an affidavit listing, among other things, all halfshaft and premium joint products manufactured or sold by erae from November 30, 2015 through the second quarter of 2017, and seeking an affidavit if erae contended it had no derivative products.

         On October 12, 2017, the parties stipulated to lift the stay and to confirm the derivative royalty provision in the Arbitration Award and stipulated to the entry of a Second Amended Judgment. (Doc. 80). The Second Amended Judgment provides, among other things, that erae shall pay Nexteer “a royalty of 4.5% on all sales of the KPJ halfshafts as well as any premium joint product derivative of the KPJ from November 30, 2015.” (Doc. 81 at PgID 5269). In addition, the Second Amended Judgment requires erae to “furnish adequate proof of its halfshaft and premium joint product sales 30 days prior to the due date for each quarterly royalty payment.” (Doc. 81, PgID 5270). Nexteer alleges that erae has not complied with this requirement. The Second Amended Judgment also provides for an audit procedure to confirm compliance with the royalty provision and derivative royalty provisions of the Arbitral Award.

         Specifically, that Judgment provides:

It is further ORDERED AND ADJUDGED that Nexteer shall have the right to audit the sales and other financial records of erae Automotive and companies under erae Automotive's control to confirm compliance with the obligation to pay royalties pursuant to the Award. Any such audit is to be conducted by a mutually acceptable independent auditor, with the costs of the audit to be evenly split by the parties. Erae Automotive shall maintain the records of its sales of the KPJ halfshafts or any premium joint product derivative of KPJ for a period of at least five years, and make them available to the auditor during normal business hours subject to a three-day written notice.

(Doc. 81 at PgID 5270). Since the Second Amended Judgment was entered, erae has paid a total of over $6, 500, 000 to Nexteer.

         Specifically, on August 7, 2017, pursuant to a payment arrangement to which the parties agreed, erae wired $6, 321, 483.72 to Nexteer. This payment covered (1) the lump-sum portion of the judgment (including interest), and (2) erae's KPJ royalties and interest through March 31, 2017. In addition, erae withheld and paid to the Korean government $816, 435.42 in income taxes on Nexteer's behalf. On September 29, ...

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