United States 1st Circuit Court of Appeals Reports

VITAL BASICS INC. v. VERTRUE INC., 05-2741 (1st Cir.
12-29-2006) VITAL BASICS INCORPORATED, Appellant, v.
Appellee. No. 05-2741. United States Court of Appeals,
First Circuit. December 29, 2006.

DISTRICT OF MAINE, [Hon. George Z. Singal, U.S. District

Russell Beck, with whom Jeffery M. Rosin and Foley &
Lardner LLP were on brief, for appellant.

Steven M. Cowley, with whom Christopher P. Silva and
Edwards Angell Palmer & Dodge LLP were on brief, for

LIPEZ, Circuit Judge, STAHL, Senior Circuit Judge, and
HOWARD, Circuit Judge.

STAHL Senior Circuit Judge.

Appellant Vital Basics, Inc. (VBI) asks this court to
vacate an arbitration panel award in favor of appellee
Vertrue Incorporated (Vertrue),[fn1] and instead order
payment by Vertrue to VBI. Our review of an arbitration
award is exceedingly narrow, and VBI has not presented the
compelling evidence necessary to warrant a reversal of the
arbitration panel’s decision. Therefore, we affirm the
district court’s confirmation of the arbitration panel’s


A. The Relevant Facts

VBI markets and sells nutritional and dietary supplements
directly to consumers. Vertrue sells membership programs
that provide consumers with discounts on health care and
related services. The two companies had a long-term
marketing agreement which operated in the following manner.
When a customer called VBI to order its products, the VBI
phone operator would also attempt to enroll the customer in
one of Vertrue’s membership programs. Initially, VBI
received a flat fee commission for each Vertrue membership
sold, whether or not the customer subsequently cancelled
the membership and received a full or partial refund. Under
this arrangement, Vertrue bore the entire risk of loss for
customers who purchased a membership and then, during the
first year, cancelled the membership and received a refund.
On June 1, 2000, the parties signed a new contract that
continued the per-sale commission arrangement.
Subsequently, on June 25, 2001, the parties signed an
amendment to the contract that changed the commission
scheme. Under the new agreement, instead of receiving
commissions on a per-sale basis, VBI would earn commissions
in two ways: (1) for memberships that were renewed after
one year (so-called “Renewal Commissions”); and (2) for
first-year memberships, on a retention-contingent basis.

A central point of contention between the parties before
the arbitrators was how this second type of commission was
to be earned by VBI. More precisely, the parties disagreed
as to whether VBI was to earn a commission on so-called
“Paid Cancels” memberships that were cancelled
after thirty days but before one year, meaning the customer
received a partial refund, and Vertrue retained a partial
payment. Vertrue contended that the June 25th amendment
provided a commission to VBI only for memberships that were
retained for the full one-year period; in other words, VBI
would not earn a commission if a customer either cancelled
and received a full refund (which occurred if the customer
cancelled within 30 days), or cancelled and received a
partial refund (which occurred if the customer cancelled
after 30 days but before one year). In contrast, VBI
contended that the amendment granted a commission to VBI on
Vertrue’s net revenue; in other words, if a customer
cancelled after 30 days but before one year, and received
only a partial refund, VBI would still earn a commission on
the portion of the membership fee retained by Vertrue.

In order to pay VBI a retention-based commission on a
monthly basis, the companies agreed to a complex accounting
formula whereby Vertrue would make monthly payments based
on an estimate of the percentage of subscriptions that
would be retained for the entire one-year subscription
period. Every three months, the actual retention numbers
would be calculated and the companies would “true up” the
commission payments to better approximate the actual
retention rate. The contract set the initial projected
retention rate at 40 percent, subject to amendment if
retention proved to deviate from this percentage. Notably,
the “true up” system did not mention Paid Cancels, nor
provide a mechanism for calculating commissions based on
Paid Cancels.

In 2003, Vertrue discovered that it had significantly
overpaid advance commissions to VBI by $3.8 million,
because retention rates had plummeted to about 25 percent.
Using the “true up” system, the overpayment amount was
whittled down to $2.2 million by the time the dispute went
to arbitration.

At the same time that the parties were negotiating a
solution to the over-advance problem, VBI was quietly
developing its own competing membership program, called the
Omega Plan. VBI launched the competing plan in August 2003,
in violation of the contract’s exclusivity clause, which
barred VBI from marketing or selling any competing
membership program. Once VBI began selling its Omega Plan,
sales of Vertrue’s membership plans slowed significantly,
making it impossible for Vertrue to recover its
multi-million dollar over-advance through the “true up”

B. Proceedings Below

To resolve this dispute, Vertrue initiated arbitration, as
provided for in the contract. Before a three-judge
arbitration panel (“the Panel”), Vertrue alleged breach of
contract, fraud, and violation of the Connecticut Unfair
Trade Practices Act (“CUTPA”). VBI asserted counterclaims
for breach of contract. The Panel heard numerous days of
complex testimony and issued an award in favor of Vertrue.

The Panel decision ordered VBI to pay Vertrue $3.5 million
in compensatory damages, composed of: (a) about $2.2
million, plus interest, to cover the over-advances VBI had
received; and (b) almost $1.2 million for damages caused by
VBI’s breach of the exclusivity clause. In addition, the
Panel rejected VBI’s counterclaims, and held that Vertrue’s
obligation to pay VBI for Renewal Commissions terminated on
August 6, 2003, the date that VBI breached the exclusivity
clause of the contract. Finally, the Panel concluded that
VBI “engaged in unfair and deceptive acts and practices” in
violation of CUTPA, and ordered payment to Vertrue of $1.3
million in punitive damages and attorney fees.

On May 10, 2004, after the arbitration process had
commenced, VBI became a bankrupt, thus subjecting itself to
the jurisdiction of the United States Bankruptcy Court,
District of Maine. After the arbitration panel issued its
award, VBI sought vacation of the award before the
bankruptcy court, where the parties thoroughly briefed the
issues and presented oral argument. The bankruptcy court,
finding no grounds to vacate, issued an order confirming
the award. VBI appealed the bankruptcy court’s confirmation
order to the United States District Court, District of
Maine, alleging several grounds for relief, including that
the Panel disregarded the law, exceeded its authority, was
biased, and failed to hear relevant evidence. The district
court, having received extensive briefs from both sides,
affirmed the bankruptcy court in all respects, holding that
“the arbitration award represents a final and definite
award based upon a `plausible’ reading of the contract
between VBI and [Vertrue].” Vital Basics, Inc. v. Vertrue
Inc., 332 B.R. 491, 494 (D. Me. 2005). This appeal


VBI makes three arguments on appeal. First, that the
Panel’s conclusion regarding Renewal Commissions violates
the express language of the contract. Second, that the
Panel’s holding regarding Paid Cancels violates the express
language of the contract. And third, because Vertrue
allegedly owes VBI commission payments for Paid Cancels but
did not make those payments, that Vertrue was the first
party to breach the contract, thus nullifying VBI’s later
breach of the exclusivity clause. We consider each argument
in turn below.

A. Standard of Review

It is well-settled that our review of arbitral panel awards
is exceedingly narrow. Wonderland Greyhound Park, Inc. v.
Autotote Sys., Inc., 274 F.3d 34, 35 (1st Cir. 2001).
Indeed, as we have noted before, “disputes that are
committed by contract to the arbitral process almost always
are won or lost before the arbitrator.” Gupta v. Cisco
Sys., Inc., 274 F.3d 1, 3 (1st Cir. 2001) (quoting
Teamsters Local Union No. 42 v. Supervalu, Inc., 212 F.3d
59, 61 (1st Cir. 2000)).

When considering a district court’s confirmation of an
arbitration award, we review questions of law de novo and
questions of fact for clear error. First Options Of
Chicago, Inc. v. Kaplan, 514 U.S. 938, 947-48 (1995). In
addition, our de novo review is highly circumscribed. See
United Paperworkers Int’l Union v. Misco, Inc., 484 U.S. 29,
38 (1987) (confirmation of award required where arbitrator
was “even arguably construing or applying the contract”);
Gupta, 274 F.3d at 3 (confirmation required if the
interpretation is “in any way plausible, even if we think
[the arbitrator] committed serious error.”). We will only
disturb an arbitration award in limited circumstances, two
of which are relevant here. Based on the federal courts’
“inherent power,” Cytec Corp. v. DEKA Prods. Ltd. P’ship,
439 F.3d 27, 33 (1st Cir. 2006), we can vacate an award
where it is contrary to the plain language of the relevant
contract, or where the arbitrator has construed the
contract “in a way that cannot possibly be described as
plausible or rational.” Labor Relations Div. of Constr.
Indus. v. Int’l Bhd. of Teamsters, 29 F.3d 742, 745 (1st
Cir. 1994).

In this case, the appellant argues that the Panel’s award
directly violates the plain terms of the contract. Because
this is a legal claim involving contract construction, our
review is de novo.[fn2]

B. Renewal Commission

VBI first argues that the Panel’s finding regarding Renewal
Commissions that Vertrue’s obligation to pay VBI
Renewal Commissions terminated on the date VBI breached the
exclusivity clause violates the plain language of the
contract. We disagree.

VBI’s argument here relies on the following clause
regarding Renewal Commissions:

[Vertrue] shall continue to pay VBI Commissions to which
VBI may be entitled with respect to Renewal Net Membership
Revenue after the termination or expiration of this

Reading this clause alone, VBI’s plain language argument
appears to have some merit. However, the Panel was tasked
with evaluating the agreement as a whole, not just one
isolated clause. See Blackie v. State of Me., 75 F.3d 716,
722 (1st Cir. 1996) (rejecting contract interpretation that
“harps on isolated provisions, heedless of context.”).
Consideration of Section 12A of the contract shows that the
Panel’s conclusion on Renewal Commissions was an eminently
plausible reading of the agreement:

During the term of this Agreement and for so long as
[VBI] is receiving revenue as a result of the Sales of the
Programs neither [VBI] nor any of its affiliates or
subsidiaries shall purchase, market, administer, or enter
into an agreement [that violates the exclusivity clause].

The Panel was justified in concluding that the parties
agreed to condition VBI’s receipt of revenue, including
Renewal Commissions, on compliance with the contract’s
exclusivity clause. Thus, the Panel’s conclusion regarding
Renewal Commissions is not contrary to the plain language
of the contract, leaving no basis for us to vacate the
Panel’s award in this respect.

C. Paid Cancels

VBI also argues that the plain language of the contract
contradicts the Panel’s conclusion that VBI was not
entitled to commissions on Paid Cancels. To support this
claim, VBI points out that the contract required Vertrue to
pay VBI advance commission payments “with respect to First
Year Net Membership Revenue,” which the contract defines as:

[A]ll revenue received by [Vertrue] . . . from Eligible
Program Members with respect to Initial Membership Years,
less refunds for Member cancellations with respect to such
Initial Membership Years.

This clause too, read in isolation, appears to support VBI’s
assertion that commissions are owed to VBI on Paid Cancels,
because if a customer cancelled his membership and only
received a partial refund, Vertrue retained a partial
payment, thus increasing Vertrue’s net revenue.

However, again, the Panel was interpreting the contract as
a whole, not just one clause. As Vertrue points out, the
contract’s “Commissions” and “Advance” sections clearly
create an advance commission and “true up” scheme whereby
commission payments on first-time sales are based on the
number of memberships that are purchased and fully paid for,
meaning they were not cancelled during the one-year
subscription period. Admittedly, the contract’s definition
of First Year Net Membership Revenue appears to conflict
with the contract’s advance commission and “true up”
system. Given this apparent contradiction, it was perfectly
reasonable for the Panel to conclude, based on the language
and structure of the contract, that the parties did not
contract to pay commissions on Paid Cancels, but only on
fully-paid memberships that were retained for one year. The
fact that the contract’s complex “true up” mechanism
provides no formula at all for measuring or calculating
commissions based on Paid Cancels is sufficient to justify
the Panel’s conclusion in this regard.

Having so determined, we can easily dispatch VBI’s third
claim, that Vertrue breached the contract first by failing
to make commission payments on Paid Cancels. Because the
Panel reasonably concluded that the contract did not
require payments based on Paid Cancels, it cannot be
successfully argued that Vertrue breached the contract by
failing to make those payments. Thus, we uphold the Panel’s
conclusion that VBI breached the contract first by
marketing a competing product in violation of the
agreement, and leave untouched the Panel’s award of damages
for such breach, both punitive and compensatory.

III. Conclusion

The Panel’s award did not violate the plain language of the
parties’ contract. We therefore affirm the district court’s
confirmation of the arbitration panel’s award. Having
presented its arguments to the arbitration panel, the
bankruptcy court, the district court, and this court, VBI
must now abide by the reasonable conclusions reached by the
arbitration panel, a body that they themselves selected to
resolve disputes under the contract. Bull HN Info. Sys.,
Inc. v. Hutson, 229 F.3d 321, 330 (1st Cir. 2000) (“[I]t is
the arbitrator’s view of the facts and of the meaning of
the contract that [the parties] have agreed to accept.”)
(quoting United Paperworkers, 484 U.S. at 37-38 (1987)).
Costs to appellee.

[fn1] Vertrue was formerly known as MemberWorks.

[fn2] Appellee Vertrue argues that de novo review is not
warranted because, in its view, the bankruptcy court made a
factual finding that the Panel viewed the contract as
ambiguous. Therefore, argues Vertrue, this court must use
the clearly erroneous standard to review this supposed
factual finding before reaching the merits of VBI’s claim
about the plain meaning of the contract. This argument
misses the mark. Even if the bankruptcy court made such a
factual finding a dubious assertion on its own
VBI’s claim that the award violates the plain
language of the contract would still raise a question of
law, and thus would be subject to de novo review by this
court. Labor Relations Div., 29 F.3d at 745 (“We reject
plaintiffs’ contention that our review of the district
court’s vacation of an arbitration award, based on an
alleged impermissible interpretation of a contract, is made
under the clearly erroneous standard. In this case, all
deference is due to the arbitrator’s interpretation of the
contract, not to the interpretation of the district