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The 1st U.S. Circuit Court of Appeals ruled that where parties to arbitration agree to bifurcate proceedings, with one phase devoted to liability and the other to damages, the party that loses at the end of the first phase may immediately appeal the arbitrator’s decision to federal district court, even though the damages phase is still pending. Addressing a case of first impression, the April 5 ruling written by 1st Circuit Court Chief Judge Juan R. Torruella is Hart Surgical, Inc. v. UltraCision, Inc., No. 00-1596. The ruling stems from a 1993 contract in which Hart Surgical agreed to be the exclusive Canadian distributor for Rhode Island-based UltraCision, according to court documents. In 1996, UltraCision terminated the contract, claiming that Hart Surgical failed to purchase the quantity of its endoscopic surgery devices required under the contract. Hart contended that the contract had been terminated without cause. UltraCision terminated the contract shortly after being acquired by Johnson & Johnson subsidiary Ethicon Endo-Surgery, Inc., leading Hart Surgical to believe that the purpose of the move was to cut out the middle man and use Johnson & Johnson’s channels of distribution, according to an Oct. 11, 1996 article in The Wall Street Journal. On April 25, 2000, U.S. District Court Judge Ernest C. Torres ruled that Hart Surgical exercised its contractual option to seek arbitration. Both parties agreed to have the arbitration panel consider first whether UltraCision was liable under the contract and move on to damages only if liability was found in the first phase. On Aug. 19, 1997, the arbitration panel found that UltraCision was liable. Torruella noted in his ruling that UltraCision asked Torres to vacate the arbitration ruling a few months after it was handed down, but then agreed to postpone a ruling on that point with the expectation that the damages phase would be over quickly, allowing it to take a consolidated appeal. When it became clear that the damages phase was dragging on, UltraCision asked Torres to rule immediately on the liability phase. Torres denied UltraCision’s request on the grounds that the liability determination was not a “final” ruling under the Federal Arbitration Act and to permit the equivalent of an interlocutory appeal would defeat the purposes of arbitration and waste judicial resources. In an unusual step, both Hart Surgical and UltraCision asked the 1st Circuit to overturn Judge Torres’ ruling. The 1st Circuit noted that UltraCision was in danger of being boxed in by the statute of limitations under the Federal Arbitration Act. A party to arbitration has one year after an award becomes final to ask that it be vacated. If it were later determined that the 1997 liability determination was final, waiting for completion of the damages phase might deprive UltraCision of the opportunity to challenge the earlier finding. According to Michael J. Tuteur, a Boston attorney with the firm Epstein, Becker & Green and counsel to Hart Surgery, the company — or rather its former owners, since the company is now out of business — saw no reason to oppose an immediate appeal of the liability determination since the company was confident that it would prevail on the merits. Tuteur said that the damages phase was still in progress, more than three years after liability had been found. He agreed that that is an unusually lengthy period for arbitration, but was not at liberty to speculate about the cause. Nor would he say whether UltraCision’s termination of its distribution contract with Hart Surgery had anything to do with the latter company’s demise. Although the 1st Circuit has never addressed the precise issue presented here, an earlier decision did presage its ruling. In Bull H/N Information Systems, Inc. v. Hutson, 229 F.3d 321 (1st Cir. 2000), the court ruled that it had appellate jurisdiction under the Federal Arbitration Act to review a District Court order vacating a partial arbitration award. That case did not, however, call for a ruling on whether a district court had authority to review a partial award. According to the court, the 2nd Circuit has examined this issue in a few cases, but with results that are “seemingly at odds.” The 1st Circuit suggests in its opinion that in one case the 2nd Circuit may have been inclined to deny that a partial award was final because a contrary holding would have put one of the parties in the statute-of-limitations bind that faced UltraCision. On the other hand, the 2nd Circuit has also found that partial awards may be deemed final if the parties agreed beforehand to bifurcation. That was the approach adopted by the 1st Circuit here: “We think it best to limit our holding to the situation in which there is a formal, agreed-to bifurcation at the arbitration stage.” The court reserved judgment on what might happen if an arbitrator issued a partial determination on its own initiative.

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