Paramedics Electromedicina Comercial, Ltda. v. GE Medical Systems Information Technologies, Inc.

Citations: 369 F.3d 645; 2004 WL 1153701Docket: No. 03-7672, 03-7896

Court: Court of Appeals for the Second Circuit; May 25, 2004; Federal Appellate Court

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Tecnimed, a Brazilian distributor for GE Medical Systems Information Technologies, Inc. (GEMS-IT), was involved in a legal dispute after GEMS-IT invoked arbitration in April 2002 due to unpaid invoices. Tecnimed subsequently initiated a lawsuit in Porto Alegre, Brazil, against GEMS-IT and General Electric do Brasil, while also seeking a stay of arbitration in New York State court. GEMS-IT removed the case to federal court, counterclaiming for an order to compel arbitration and seeking an anti-suit injunction against the Porto Alegre action. 

On June 4, 2003, the district court ordered Tecnimed to comply with arbitration and dismiss the Brazilian lawsuit, which Tecnimed attempted to delay by requesting a "suspense" calendar. The court then mandated Tecnimed to file a Joint Petition to Dismiss by a specific date, which Tecnimed failed to do, leading to daily sanctions of $1,000 and a requirement for Tecnimed's president, Paulo Werlang, to appear in court, which he did not. As a result, the court held both Tecnimed and Werlang in civil contempt, imposing escalating fines.

Tecnimed contested the anti-suit injunction and the contempt ruling. However, the court upheld the injunction as a necessary measure to enforce arbitration, found no abuse of discretion in the contempt ruling, and dismissed Werlang's appeal due to insufficient clarity in his notice. The court did, however, remand the contempt sanction for reconsideration of the amount based on its compensatory purpose and GEMS-IT's losses. The background established that Tecnimed and GEMS-IT had entered into two agreements in 1999, both containing arbitration clauses, amid ongoing disputes regarding unpaid invoices and alleged direct sales by GEMS-IT into Brazil.

After unsuccessful negotiations, Tecnimed informed the IACAC that it believed the Commission did not have jurisdiction over GEMS-IT's claims and indicated it would not participate in the arbitration. Despite this, the IACAC appointed a three-member arbitration panel, and on May 23, 2002, Tecnimed filed a complaint in Porto Alegre against GEMS-IT and GE Brasil. Tecnimed's allegations included: (i) the Agreements were unenforceable due to lack of "contractual equilibrium" under Brazilian law; (ii) Tecnimed was not obligated to arbitrate as the Agreements had expired; (iii) GEMS-IT wrongfully terminated the Agreements, resulting in lost profits for Tecnimed; (iv) GEMS-IT illegally imported equipment into Brazil without Tecnimed's consent, causing moral damages; (v) GEMS-IT breached the Agreements by failing to pay sales commissions; (vi) Tecnimed claimed exclusive distributorship of GEMS-IT products in Brazil; and (vii) Tecnimed sought a declaration of no debt owed to GEMS-IT for equipment purchased under the Agreements. 

In response, GEMS-IT answered the Porto Alegre complaint and initiated its own claim with the IACAC. Tecnimed then sought a permanent stay of arbitration in New York, which GEMS-IT removed to the United States District Court for the Southern District of New York, asserting counterclaims for arbitration and an anti-suit injunction against Tecnimed. In April 2003, the IACAC panel ruled against Tecnimed's jurisdictional challenge, affirming the validity of the arbitration clauses and the relevance of both parties' claims. Subsequently, on June 4, 2003, the district court upheld the arbitration clauses, compelled arbitration for all claims, denied Tecnimed's stay request, imposed an anti-suit injunction, and ordered Tecnimed to dismiss the Porto Alegre action. 

Tecnimed had until June 17, 2003, to dismiss the case or explain its failure to do so. On June 17, Tecnimed requested its Porto Alegre case be placed on the "suspense" calendar, which would pause proceedings for up to six months. The Porto Alegre court then required GEMS-IT to file a response, prompting the district court to instruct GEMS-IT to draft a Joint Petition to Dismiss under Brazilian law by July 1, 2003, with a deadline for Tecnimed to either sign or object by July 8, 2003.

Tecnimed's counsel declined to sign a Petition, citing concerns over the statute of limitations and a substantial "honorarium" fee (10-20% of the claim value) required under Brazilian law if the case was dismissed. On July 14, 2003, GEMS-IT filed a motion for civil contempt against Tecnimed and its president, Paulo Werlang, for not dismissing the Porto Alegre action. GEMS-IT argued that Tecnimed’s suspension notice was inadequate due to the lack of a Portuguese translation and that the honorarium fee would be nominal, asserting that Brazilian law would automatically toll the statute of limitations during arbitration. On July 21, 2003, the district court mandated amendments to the Petition to clarify the tolling of the statute of limitations and ordered Tecnimed to sign by July 24, 2003, warning of sanctions for noncompliance. Tecnimed did not sign and sought a stay of the injunction and postponement of the July 31 hearing, which the court denied. The court found Tecnimed in violation of its order, imposing a daily fine of $1,000 for continued noncompliance and requiring Werlang's appearance at the hearing. Werlang failed to appear, leading the district court to declare both Tecnimed and Werlang in civil contempt without criminal contempt findings. They were ordered to pay $1,000 per day until September 3, 2003, and $5,000 per day thereafter until compliance was achieved. The Court consolidated Tecnimed's appeals regarding the anti-suit injunction and contempt ruling. The standard of review for permanent injunctions is abuse of discretion. A federal court may restrict a party from pursuing foreign litigation, but such injunctions should be applied cautiously, only when both parties are identical in both cases and the outcome in the enjoining court is dispositive of the foreign action. Tecnimed argues that these requirements are unmet and that comity considerations render the injunction unwarranted.

Tecnimed argues that GE Brasil and GEMS-IT are not identical parties in two legal actions, as GE Brasil is named as a defendant in the Porto Alegre action but not in the New York action. However, the district court found substantial similarity between the two entities, noting that Tecnimed's claims against GE Brasil are based on its affiliation with GEMS-IT, which holds over 70% of GE Brasil's shares. Tecnimed claims that GE Brasil is an appropriate party due to this ownership structure, despite a GE Brasil official stating it is not an affiliate of GEMS-IT. A Tecnimed director's testimony suggests otherwise, indicating some ambiguity in the definition of "affiliate" under both Brazilian and American law.

Tecnimed served process on GEMS-IT at GE Brasil's address, asserting that this was valid due to GEMS-IT's ownership stake in GE Brasil. The district court did not abuse its discretion in ruling that the parties in both actions are sufficiently similar to meet the China Trade threshold. Under China Trade, an anti-suit injunction may be justified if the outcome in the enjoining court would determine the enjoined action. The current case involves the arbitrability of the claims, and the district court's judgment effectively disposes of the Porto Alegre litigation by reserving relevant issues for arbitration. Tecnimed contends that its claim for "moral damages" related to Brazilian law is unique and not arbitrable; however, the court's ruling is still dispositive even if the claim may involve unique legal considerations.

Tecnimed contends that its claim against GEMS-IT falls outside the arbitration clauses specified in their agreements, arguing it is not related to the sale of GEMS-IT's products. The court reviews the arbitrability of claims de novo, with a strong federal policy favoring the enforcement of arbitration agreements. This policy establishes a presumption of arbitrability, which can only be rebutted by clear evidence that the arbitration clause does not encompass the dispute. Any doubts are resolved in favor of arbitration. The arbitration agreement in question is broad, covering "any controversy, claim or dispute" arising from the agreements, and if the claims "touch matters" covered by these agreements, they are subject to arbitration.

Tecnimed's claim for moral damages, alleging that GEMS-IT bypassed its role as the distribution agent for products in Brazil, relates directly to the agreements governing their business relationship. Therefore, the court found the claim arbitrable, confirming the district court's ruling was correct and dispositive. 

Further considerations regarding anti-suit injunctions involve the potential threat to public policy or jurisdiction in domestic forums. An anti-suit injunction may only be issued when strong equitable factors justify it, particularly when there is an evasion of significant public policies. The federal policy favoring arbitration is especially pertinent in international disputes. The Porto Alegre action, filed shortly after GEMS-IT initiated arbitration, was deemed a tactic to evade arbitration, as stated by Tecnimed's president, who indicated the action aimed to prevent involvement in the arbitration process that GE was attempting to impose.

An attempt to avoid arbitration does not solely justify a foreign anti-suit injunction; however, if a court has already rendered a judgment on the same issues, the need for an injunction is heightened to protect the court's jurisdiction. The application of res judicata can prevent re-litigation in another forum, but foreign courts may not recognize U.S. judgments. The principle of comity plays a significant role in deciding to impose a foreign anti-suit injunction, which effectively limits the jurisdiction of the foreign court. Nevertheless, when a judgment has been made on the same issues and parties, the influence of comity is reduced.

The court reviews contempt findings for abuse of discretion, but this review is stricter due to the limited nature of the district court's contempt powers. Tecnimed challenges the district court's contempt ruling, arguing it was improperly found in civil contempt, along with its president, and contests the threats of criminal contempt sanctions and the contempt award calculation. Civil contempt requires that the court order be clear, the proof of noncompliance substantial, and that the contemnor made reasonable efforts to comply. The injunction specifically required Tecnimed to take steps to dismiss a related action in Porto Alegre, including signing a Joint Petition to Dismiss. Tecnimed contended there was no clear evidence of noncompliance; however, the district court found that Tecnimed had failed to comply as it did not effectively cause the Porto Alegre action to be suspended and instead sought a stay pending appeal, disregarding the directive to sign the dismissal petition.

Tecnimed failed to comply with court orders, arguing that the court should accept lesser efforts that were ineffective. Compliance with an injunctive order is mandatory until modified or reversed, regardless of objections. Tecnimed's lack of diligent attempts to comply was evident, as its claims regarding procedural costs in Brazil and risks under the statute of limitations were found unconvincing. Specifically, Tecnimed claimed that voluntary dismissal would incur high costs based on a $3.64 million damage claim, despite the case being valued at only $122. Furthermore, an expert testified that filing with the arbitration panel would toll the statute of limitations. The Joint Petition to Dismiss assured that dismissal would not preclude future claims, contrary to Tecnimed's assertions. Judge Eaton indicated that if the Brazilian judge did not toll the limitations period, Tecnimed could argue compliance. Brazilian law permits suspension of cases for only six months, potentially rendering any suspension ineffective before an arbitration ruling, thus providing inadequate relief for GEMS-IT. The court's contempt finding was justified due to Tecnimed's failure to comply reasonably.

Regarding the imposition of sanctions on Tecnimed's president, Paulo Werlang, the appeal notice did not clearly name him as a party. While the notice mentioned him in relation to the contempt order, it failed to specify his intent to appeal, which is required under Federal Rule of Appellate Procedure. The lack of clarity regarding Werlang’s intent could lead to dismissal of the appeal against him.

Werlang's individual challenge to the contempt order is dismissed. The district court's warning of potential criminal sanctions during the July 31 hearing was asserted by Tecnimed to have influenced Werlang's absence, leading to a finding of civil contempt. Tecnimed claims this warning was an abuse of discretion, but the court has the authority to impose both civil and criminal contempt for violations of its injunctions. Criminal contempt serves to punish violations and uphold the court's authority. Given that both Tecnimed and Werlang repeatedly disobeyed court orders, the court acted within its discretion by indicating a willingness to enforce compliance.

Tecnimed also contends that the fine imposed was excessively high and did not adequately consider its financial situation. Civil contempt sanctions serve dual purposes: ensuring future compliance and compensating the wronged party, and they cannot be solely punitive. The fine included both coercive and compensatory elements, with the judge asserting that the sanctions were fair and aimed at ensuring compliance. However, the court recognized that Tecnimed and Werlang were causing GEMS-IT to incur significant expenses and directed the fine to be paid to GEMS-IT, not the court.

The court must evaluate multiple factors when determining fines for contempt, including the seriousness of the harm from continued noncompliance and the contemnor's ability to pay. If a fine is compensatory, it should reflect the actual damages suffered by the other party. In this case, while the fine could serve both purposes, the compensatory aspect must be substantiated by proof of loss. The court failed to provide specific details about the expenses incurred by GEMS-IT, which limits the justification for the compensatory nature of the sanction. Consequently, the emphasis on coercion is insufficient without clear evidence of loss caused by Tecnimed’s noncompliance.

The sanction imposed must be compensatory and correlated with GEMS-IT's actual losses, necessitating a remand to the district court for reassessment of the sanction amount based on its intended purpose and GEMS-IT's demonstrated loss. The district court properly considered Tecnimed's financial capacity to pay the fine, noting that a contemnor can be excused from a civil contempt sanction if it proves financial incapacity, but bears the burden of providing evidence for such a defense. Tecnimed presented minimal information regarding its financial struggles, including a 15-20% drop in sales and layoffs, but did not submit sufficient documentation like balance sheets or income statements to substantiate its claim of financial incapacity. The court found no abuse of discretion in expecting a business to provide basic financial records. The judgment is affirmed, Paulo Werlang's individual appeal is dismissed, and the matter is remanded for possible adjustment of the contempt award. Tecnimed claimed damages of $3.64 million but previously valued the claim at approximately $122. Furthermore, the resolution of a domestic trademark action does not necessarily affect a pending foreign trademark claim under different laws, as highlighted by precedent cases. Tecnimed's appeals focus on the anti-suit injunction and contempt finding, with an implied challenge to the arbitrability of claims. There are procedural concerns regarding Tecnimed's suspension filing in the Porto Alegre court, particularly regarding the lack of a required Portuguese translation of the injunction order.