Court Opinion

ID: 3064512
Source: CourtListenerOpinion
Date Created: 2015-10-14 22:25:12.403162+00
Date Added: 2024-06-11T11:49:40.618494
License: Public Domain

FOR PUBLICATION
  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

KAM-KO BIO-PHARM TRADING CO.,          
LTD-AUSTRALASIA, a Washington
Corporation,
                Plaintiff-Appellant,
                 v.
MAYNE PHARMA (USA) INC., a                  No. 07-35449
Delaware corporation; MAYNE
PHARMA PTY, LTD, an Australia                 D.C. No.
                                           CV-06-00840-TSZ
corporation (now known as Mayne
                                              OPINION
Pharma Ltd.); MAYNE GROUP LTD,
an Australian public company;
DAVID BULL LABORATORIES, an
Australian proprietary company;
and John Does 1-12,
             Defendants-Appellees.
                                       
        Appeal from the United States District Court
          for the Western District of Washington
         Thomas S. Zilly, District Judge, Presiding

                  Argued and Submitted
          January 22, 2009—Seattle, Washington

                   Filed March 11, 2009

     Before: Robert R. Beezer, Richard C. Tallman, and
             Milan D. Smith, Jr., Circuit Judges.

           Opinion by Judge Milan D. Smith, Jr.

                            3191
           KAM-KO BIO-PHARM v. MAYNE PHARMA        3193

                      COUNSEL

Shaunta Marie Knibb & Jeff A. Smyth, Smyth & Mason,
PLLC, Seattle, Washington for the plaintiff-appellant.

Alan S. Middleton, Davis Wright Tremaine LLP, Seattle,
Washington for the defendants-appellees.

                       OPINION

MILAN D. SMITH, JR., Circuit Judge:

  Plaintiff-Appellant Kam-Ko Bio-Pharm Trading Co., Ltd-
Australasia (Kam-Ko) successfully sued Defendants-
3194         KAM-KO BIO-PHARM v. MAYNE PHARMA
Appellees Mayne Pharma (USA) Inc. (Mayne) in district
court to compel arbitration before the International Chamber
of Commerce (ICC). A short time later, however, Kam-Ko
filed a new lawsuit in district court seeking a declaration that
the ICC’s $220,000 advance arbitration fee was so high as to
be substantively unconscionable under the Federal Arbitration
Act (FAA), 9 U.S.C. §§ 1-16, and Washington law. The dis-
trict court rejected Kam-Ko’s argument and, when the parties
failed to comply with its directive to proceed with arbitration
within sixty days, dismissed Kam-Ko’s declaratory relief
action with prejudice. Given the entirely commercial nature of
this dispute, we affirm.

   FACTUAL AND PROCEDURAL BACKGROUND

  A.    Royalty Agreement

   Kam-Ko is a Washington company that assisted other com-
panies in securing distribution deals in the Pacific Rim for
anti-cancer drugs produced by NaPro BioTherapeutics, Inc.
(NaPro). Kam-Ko provided its services to help Mayne’s
alleged predecessor-in-interest obtain a distribution deal with
NaPro in exchange for an agreement (Royalty Agreement)
that required an up-front payment of $50,000 and a seventeen-
year royalty equal to 5% of the bulk price paid to NaPro. Dur-
ing contract negotiations, Kam-Ko proposed a process for dis-
pute resolution, and its draft language was included,
unaltered, as paragraph six of the Royalty Agreement:

    Disputes. Any disputes will be settled by binding
    arbitration under an outside committee of three attor-
    neys acceptable to both parties, under terms of Inter-
    national Chamber of Commerce arbitration
    guidelines, in Vancouver, B.C., Canada, should such
    dispute not be resolved within 30 days between the
    parties. The losing party will pay the cost of such
    arbitration.
             KAM-KO BIO-PHARM v. MAYNE PHARMA              3195
  B.   Disputed Termination of Royalty Agreement and
       Kam-Ko’s Subsequent Action to Compel Arbitra-
       tion

   In December 2003, Mayne informed Kam-Ko that the Roy-
alty Agreement was terminated because Mayne had purchased
NaPro and believed this acquisition relieved Mayne of any
obligations to continue making payments. Kam-Ko replied
that the purchase did not relieve Mayne of its obligation to
pay, and that if the parties were unable to reach an agreement
on the matter within thirty days, Kam-Ko would seek to com-
pel arbitration under paragraph six of the Royalty Agreement.
Mayne did not reply, and Kam-Ko filed suit in the district
court to compel arbitration. Pursuant to a stipulated order, the
district court ordered the dispute referred to the ICC for arbi-
tration and dismissed the case without prejudice.

  C.   Proceedings Before the ICC

   Kam-Ko filed a request for arbitration with the ICC in July
2005. Upon submission of the request, the ICC required Kam-
Ko to pay a $2500 non-refundable deposit. The ICC then
required a provisional advance from Kam-Ko of $45,000 with
credit for the previously paid $2500. After some delay, Kam-
Ko’s principals personally loaned the company the money to
pay the balance due. The ICC confirmed the parties’ choices
of one arbitrator each, appointed a third arbitrator to act as
chairman of the tribunal, and set the advance costs at
$220,000 to be split by Kam-Ko and Mayne, with credit to
Kam-Ko for the amount it had previously paid.

   Kam-Ko objected to the $220,000 amount as “confiscatory
and punitive,” and as “wholly unforeseeable to the parties.”
Mayne also objected to the amount, saying it “appears exces-
sive and is unduly burdensome to both parties.” Neither party
submitted further payment to the ICC. Under the ICC rules,
for the arbitration to proceed, Kam-Ko, as the claimant, was
required to pay the entire amount due, or some form of secur-
3196         KAM-KO BIO-PHARM v. MAYNE PHARMA
ity in lieu of cash, if Mayne did not pay. After a number of
extensions of payment deadlines, the ICC deemed the arbitra-
tion withdrawn. The ICC fixed the costs already incurred in
the arbitration at $40,053, deducted that amount from Kam-
Ko’s payments of $45,000, and refunded $4947 to Kam-Ko.

  D.   Declaratory Relief Action

   Kam-Ko then returned to the district court, seeking (1) “a
declaration that the arbitration provision of the Royalty
Agreement is illegal and unenforceable”; (2) “an order
reforming the Royalty Agreement by severing the arbitration
clause”; and (3) damages for Mayne’s alleged breach of the
Royalty Agreement.

   In a subsequent, self-styled “motion for declaratory judg-
ment,” Kam-Ko requested a “speedy declaratory judgment
hearing pursuant to Rule 57, Fed. R. Civ. P.,” and argued that
the arbitration clause was substantively unconscionable
because of the alleged unreasonable financial burden it placed
on Kam-Ko as a precondition to arbitration. To support its
position, Kam-Ko offered sworn testimony that it would be
unable to pay the arbitration fee and proceed with its claims
if the district court enforced the arbitration clause. Mayne
responded by asserting that Kam-Ko’s motion was actually a
motion for summary judgment because the motion sought to
skip a hearing and obtain a merits ruling on the issue of
unconscionability. Mayne also asked the district court to stay
the action pending arbitration in accordance with the Royalty
Agreement.

   The district court denied Kam-Ko’s declaratory judgment
motion without reference to the request for a hearing, finding
that “the arbitration clause is not void for substantive uncons-
cionability.” The district court also granted Mayne’s request
for a stay and directed the parties to proceed to arbitration
within sixty days of the order. When the parties failed to pro-
ceed to arbitration as directed, the district court entered a stip-
             KAM-KO BIO-PHARM v. MAYNE PHARMA               3197
ulated order dismissing Kam-Ko’s declaratory judgment
action with prejudice. Kam-Ko timely appealed.

   STANDARD OF REVIEW AND JURISDICTION

   The validity of an arbitration clause is a question that we
review de novo. Nagrampa v. MailCoups, Inc., 469 F.3d
1257, 1267 (9th Cir. 2006) (en banc). Although Kam-Ko is
correct that we review a district court’s denial of declaratory
relief under Rule 57 of the Federal Rules of Civil Procedure
for abuse of discretion, Principal Life Ins. Co. v. Robinson,
394 F.3d 665, 669 (9th Cir. 2005), as discussed below, the
district court correctly construed and denied Kam-Ko’s
motion as a motion for summary judgment. “A grant of sum-
mary judgment is reviewed de novo.” Blankenhorn v. City of
Orange, 485 F.3d 463, 470 (9th Cir. 2007). We have jurisdic-
tion over Kam-Ko’s appeal pursuant to 28 U.S.C. § 1291.

                        DISCUSSION

   Kam-Ko argues that the district court erred in determining
that the arbitration clause in the Royalty Agreement is not
substantively unconscionable under the FAA and Washington
law. Kam-Ko also asserts that the district court’s ruling
denied Kam-Ko’s right to a jury trial, disregarded Kam-Ko’s
request for an evidentiary hearing, and “ignored” sworn testi-
mony about Kam-Ko’s alleged financial hardship.

  A.   Substantive Unconscionability

   [1] Kam-Ko first argues that the costs required by the ICC
render the arbitration clause in the Royalty Agreement sub-
stantively unconscionable. The FAA provides that “an agree-
ment in writing to submit to arbitration an existing
controversy arising out of . . . a contract . . . shall be valid,
irrevocable, and enforceable, save upon such grounds as exist
at law or in equity for the revocation of any contract.” 9
U.S.C. § 2. Accordingly, while the Supreme Court has
3198         KAM-KO BIO-PHARM v. MAYNE PHARMA
emphasized that the FAA clearly enunciates a congressional
intention to favor arbitration, Moses H. Cone Mem’l Hosp. v.
Mercury Constr. Corp., 460 U.S. 1, 24 (1983), “general con-
tract defenses such as . . . unconscionability, grounded in state
contract law, may operate to invalidate arbitration agree-
ments,” Circuit City Stores, Inc. v. Adams, 279 F.3d 889, 892
(9th Cir. 2002).

   [2] When a party seeks to have an arbitration agreement
declared invalid on the basis of prohibitive expense, that party
bears the burden of proving that the contract is unenforceable.
Green Tree Fin. Corp.-Ala. v. Randolph, 531 U.S. 79, 92
(2000). In determining whether an arbitration clause is unen-
forceable, a federal court sitting in diversity must apply the
relevant state law. Nagrampa, 469 F.3d at 1280. If the court
finds that an arbitration clause is valid and enforceable, the
court should stay or dismiss the action to allow the arbitration
to proceed. Id. at 1276-77.

   [3] In this case, because Kam-Ko filed its complaint in
Washington and the Royalty Agreement contains no super-
ceding choice-of-law provision, Washington law applies. See
Ticknor v. Choice Hotels Int’l, Inc., 265 F.3d 931, 937 (9th
Cir. 2001). Washington law recognizes two forms of uncons-
cionability: substantive and procedural. Adler v. Fred Lind
Manor, 103 P.3d 773, 781 (Wash. 2005). The only form at
issue here, substantive unconscionability, “involves those
cases where a clause or term in the contract is alleged to be
one-sided or overly harsh. Shocking to the conscience, mon-
strously harsh, and exceedingly calloused are terms some-
times used to define substantive unconscionability.” Id.
(citations and internal quotation marks omitted). “When the
courts use the expression ‘unconscionable’ in classifying a
fee, we think they mean an amount under the circumstances
which neither [party] can sensibly argue to be otherwise.” In
re Disciplinary Proceeding Against Greer, 380 P.2d 482, 487
(Wash. 1963), overruled on other grounds by In re Disciplin-
                KAM-KO BIO-PHARM v. MAYNE PHARMA                        3199
ary Proceeding Against Boelter, 985 P.2d 328, 337 (Wash.
1999).

   [4] Under Washington law, “substantive unconscionability
alone can support a finding of unconscionability.” Adler, 103
P.3d at 782. Additionally, in a commercial context, the rele-
vant clause must be substantively unconscionable at the time
of contracting.1 M.A. Mortenson Co. v. Timberline Software
Corp., 998 P.2d 305, 315 (Wash. 2000) (“In a purely com-
mercial transaction . . . , the fact an unfortunate result occurs
after the contracting process does not render an otherwise
standard limitation of remedies clause substantively uncon-
scionable.”); Adler, 103 P.3d at 788 (quoting RESTATEMENT
(SECOND) OF CONTRACTS § 208 for the proposition that a court
may refuse to enforce, reform, or limit the application of “ ‘a
contract or term thereof [that] is unconscionable at the time
the contract is made’ ” (emphasis added)).

   [5] Here, the parties agreed to settle all disputes under the
ICC’s rules pursuant to an arbitration clause Kam-Ko itself
originally proposed. Moreover, the record reveals that Kam-
  1
    Kam-Ko cites Zuver v. Airtouch Communications, Inc., 103 P.3d 753,
762-63 (Wash. 2004), for the proposition that the Washington Supreme
Court has rejected the long-standing rule that courts must consider the
substantive unconscionability of an agreement at the time the parties
entered into the contract. Instead, Kam-Ko asserts, courts must now deter-
mine whether a contract clause is unconscionable on a case-by-case basis
by analyzing “the context of the particular circumstances of the parties to
the arbitration agreement.” Zuver, however, was a case that dealt with the
issue of whether high fees undermined the public policy favoring enforce-
ment of employment discrimination claims, a policy that has no applica-
tion in this purely commercial dispute. In addition, the Zuver court’s
unwillingness to judge the substantive unconscionability of the fee-
splitting provision at the time the parties entered into the contract requires
an understanding of the context: the employer had volunteered to pay the
arbitration fee, and the court “refused to ignore [the] offer” in holding the
unconscionability argument moot. Id. at 763 & n.7. Here, by contrast,
Mayne refused to pay even its half of the arbitration fee, let alone the full
amount.
3200         KAM-KO BIO-PHARM v. MAYNE PHARMA
Ko had in its possession a copy of the ICC’s rules at the time
it sought to compel arbitration. Appendix III, Article 4 of
those rules includes tables of administrative expenses and of
arbitrator fees. “For illustrative purposes only,” these tables
indicate “the resulting administrative expenses” and “the
resulting range of fees” based on the sum in dispute. Kam-
Ko’s arbitration request sets the sum in dispute at $2,527,000
or more. This sum establishes administrative expenses of
$23,800 plus 0.30% of the amount over $2,000,000, for a total
here of $25,381. It similarly sets the maximum value for a
single arbitrator at $81,000 plus 1.12% of the amount over
$2,000,000, for a total of $86,902.40. Thus, for three arbitra-
tors, expenses and fees amount to a maximum cost of
$286,088.20. The ICC’s advance fee for the arbitration in this
case was $220,000, less than the maximum cost calculated
using the tables.

   [6] The record thus establishes that (1) Kam-Ko itself pro-
posed paragraph six of the Royalty Agreement; (2) Kam-Ko
effectively controlled the amount of arbitration expenses and
fees by the sum it chose to claim in dispute and by the number
of arbitrators it requested; and (3) the ICC rules Kam-Ko had
in its possession before it sought to compel arbitration clearly
indicated that arbitration expenses and fees might be as high
as $286,088.20. Moreover, (4) Kam-Ko has failed to provide
any evidence regarding what other arbitration fora would
charge to conduct the arbitration it sought or the administra-
tive expenses that the ICC would actually incur in arbitrating
the matter; and (5) it is well known that “[i]n international
commercial arbitrations, the fees of the arbitral tribunal can be
considerable.” John Y. Gotanda, Setting Arbitration Fees: An
International Survey, 33 VAND. J. TRANSNAT’L L. 779, 781
(2000) (noting, for example, that “a dispute involving $100
million and a panel of three arbitrators appointed under the
Rules of the [ICC] could result in arbitrators’ fees totaling
$780,000”). In light of these facts, we fail to see how the
requested $220,000 arbitration fee can fairly be characterized
             KAM-KO BIO-PHARM v. MAYNE PHARMA              3201
as “one-sided,” “[s]hocking to the conscience,” or “mon-
strously harsh.” Adler, 103 P.3d at 781.

   Although Kam-Ko cites cases which hold that high arbitra-
tion costs can effectively deny a plaintiff access to a forum to
obtain justice and thereby render an arbitration clause uncon-
scionable, those cases are easily distinguishable, as they gen-
erally involve contracts of adhesion in either a consumer or
employment context. See, e.g., Green Tree, 531 U.S. 79 (con-
sumer class action arising out of mobile home loan); Luna v.
Household Fin. Corp. III, 236 F. Supp. 2d 1166 (W.D. Wash.
2002) (consumer action arising out of home loan); Adler, 103
P.3d 773 (discrimination action arising out of employment
contract); Zuver, 103 P.3d 753 (same); Nelson v. McGoldrick,
896 P.2d 1258 (Wash. 1995) (consumer action arising out of
unclaimed inheritance agreement); Mendez v. Palm Harbor
Homes, Inc., 45 P.3d 594 (Wash. Ct. App. 2002) (consumer
action arising out of mobile home agreement). In this purely
commercial case, no such consumer- or employment-based
statutory rights or policies are at issue. Moreover, excluding
the employment cases (where some courts have applied a cat-
egorical prohibition against requiring an employee to pay the
arbitration fee), virtually all of the cases cited by Kam-Ko
involve circumstances in which the potential arbitration
expense dwarfs the amount claimed by an individual. By
comparison, Kam-Ko’s claim exceeds $2.5 million, thereby
dwarfing its $110,000 share of the advance fee sought by the
ICC.

   Kam-Ko cites only one commercial case, In re Arbitration
Between Teleserve Sys., Inc. & MCI Telecommc’ns Corp.,
230 A.D.2d 585 (N.Y. App. Div. 1997), in support of its sub-
stantive unconscionability argument. Teleserve has no prece-
dential authority in our court and, even if it did, is readily
distinguishable from the facts in this case. In Teleserve, the
New York Supreme Court, Appellate Division, held that an
arbitration fee of $204,000 was substantively unconscionable
under both federal and state law. Id. at 593-94. The arbitration
3202         KAM-KO BIO-PHARM v. MAYNE PHARMA
agreement provided that all disputes arising out of a commer-
cial contract involving telecommunications required arbitra-
tion pursuant to the rules of the Arbitration Association of
America (AAA). Id. at 587. The court concluded that the “fil-
ing fee is patently excessive and bears no reasonable relation
to the arbitration forum’s administrative expenses in process-
ing the claim. A filing fee of $204,000 far exceeds fees typi-
cally charged by neutral arbitration forums.” Id. at 594.

   Importantly, however, the parties in Teleserve had origi-
nally reached an agreement in which the arbitration fee was
merely the flat fee of $4000 required by the AAA. Id. at 589.
MCI then “unilaterally” drafted a new, superceding set of
agreements—which incorporated an independent “MCI
Tariff”—setting “a filing fee of $4,000 plus .5% of the
amount claimed. Petitioner [was] thus . . . required to pay a
filing fee of $204,000 based on its . . . claim [of] $40,000,000
in compensatory damages.” Id. at 588-89.

   Here, by contrast, the filing fee was not increased many
times over that required by the arbitral forum by a separate
“tariff” that grossly favored the party that proposed the arbi-
tration clause. Rather, the ICC based its fees only upon the
table of costs in the ICC rules to which Kam-Ko expressly
agreed when it submitted its request for arbitration and set the
sum in dispute at $2,527,000 or more.

   [7] Accordingly, we hold that Kam-Ko has failed to meet
its burden of showing that the arbitration clause in the Royalty
Agreement is substantively unconscionable.

  B.   Right to Jury Trial

   [8] Kam-Ko next argues that the district court’s ruling
denied Kam-Ko’s right to a jury trial. However, in a declara-
tory relief action, as in other civil actions, a party has “an
absolute right to a jury trial unless a jury has been waived.”
Pac. Indem. Co. v. McDonald, 107 F.2d 446, 448 (9th Cir.
            KAM-KO BIO-PHARM v. MAYNE PHARMA                3203
1939) (emphasis added). Here, the record shows that Kam-Ko
waived its right to a jury trial in the parties’ Joint Status
Report and Discovery Plan, which states, “[n]o party has
requested, or intends to request a jury as to any issue.”

  C.    Request for Evidentiary Hearing

  Kam-Ko also asserts that the district court erred by failing
to hold an evidentiary hearing, as requested in Kam-Ko’s
declaratory judgment motion. Rule 57 of the Federal Rules of
Civil Procedure provides, in relevant part:

    [The Federal Rules of Civil Procedure] govern the
    procedure for obtaining a declaratory judgment
    under 28 U.S.C. § 2201 . . . . The existence of
    another adequate remedy does not preclude a declar-
    atory judgment that is otherwise appropriate. The
    court may order a speedy hearing of a declaratory-
    judgment action.

As a result, “the requirements of pleading and practice in
actions for declaratory relief are exactly the same as in other
civil actions.” 10B WRIGHT, MILLER & KANE, FEDERAL PRACTICE
AND PROCEDURE: CIVIL § 2768 (3d ed. 1998).

  This equivalence, in turn, means that:

    a party may not make a motion for declaratory relief,
    but rather, the party must bring an action for a
    declaratory judgment. Insofar as plaintiffs seek a
    motion for a declaratory judgment, plaintiffs’ motion
    is denied because such a motion is inconsistent with
    the Federal Rules. The only way plaintiffs’ motion
    can be construed as being consistent with the Federal
    Rules is to construe it as a motion for summary judg-
    ment on an action for a declaratory judgment.

Int’l Bhd. of Teamsters v. E. Conference of Teamsters, 160
F.R.D. 452, 456 (S.D.N.Y. 1995) (citation omitted). The dis-
3204         KAM-KO BIO-PHARM v. MAYNE PHARMA
trict court thus properly construed Kam-Ko’s “motion” for
declaratory judgment as a motion for summary judgment on
Kam-Ko’s “action” for declaratory judgment.

  [9] In the absence of a genuine issue of material fact, sum-
mary judgment is appropriate without a trial, let alone an evi-
dentiary hearing:

    [O]rdinarily there is no such thing as an evidentiary
    hearing . . . on a summary judgment motion. Under
    Federal Rule of Civil Procedure 56(c), a summary
    judgment may be granted if there is “no genuine
    issue as to any material fact,” but not if there is a
    genuine issue. Where there is a genuine issue, trial
    rather than summary judgment is the means of deter-
    mining what is true.

Thompson v. Mahre, 110 F.3d 716, 719 (9th Cir. 1997).
Accordingly, because Kam-Ko failed to meet its burden of
showing that the arbitration clause in the Royalty Agreement
is substantively unconscionable under the FAA and Washing-
ton law, there was no genuine issue of material fact that
would have required a trial or any kind of evidentiary hearing.

  D.   Sworn Testimony Regarding Financial Hardship

   Finally, Kam-Ko contends that the district court erred by
disregarding the declaration that Kam-Ko submitted regarding
the company’s alleged lack of assets and inability to pay the
$220,000 arbitration fee. This argument fails for two reasons.

   First, although Kam-Ko argues that the district court “ig-
nored” its declaration regarding its alleged financial hardship,
that assertion is factually incorrect. The district court explic-
itly noted in its order that “Kam-Ko represents to the Court
that if the arbitration clause is enforced, it will be unable to
proceed due to its inability to pay the arbitration fee,” and
then cited the declaration in support of that proposition.
             KAM-KO BIO-PHARM v. MAYNE PHARMA                 3205
   [10] Second, as noted above, “[i]n a purely commercial
transaction . . . , the fact an unfortunate result occurs after the
contracting process does not render an otherwise standard
limitation of remedies clause substantively unconscionable.”
M.A. Mortenson Co., 998 P.2d at 315. Thus, the fact that
Kam-Ko—a mere shell company that distributed many mil-
lions of dollars directly to its stakeholders—claims it is “un-
able to pay” many years after it proposed and agreed to the
arbitration clause, does not create a genuine issue of material
fact.

                        CONCLUSION

   In this purely commercial context, we hold that Kam-Ko
has failed to meet its burden of showing that the costs of the
ICC arbitration are so excessive as to be substantively uncon-
scionable. Nor do we find that Kam-Ko was entitled to a jury
trial or an evidentiary hearing, or that the district court failed
properly to consider sworn testimony regarding Kam-Ko’s
alleged financial hardship.

  AFFIRMED.