Gateway Technologies, Inc. v. MCI Telecommunications Corp.

MCI Telecommunications Corp. (MCI) (defendant) successfully bid on a project for the Virginia Department of Corrections (VADOC) to create an automated collect-call telephone system for prison inmates. MCI subcontracted with Gateway Technologies, Inc. (Gateway) (plaintiff) to provide equipment and technology for the system. The subcontract provided that MCI and Gateway were independent contractors and not agents, joint venturers, or partners. It required the parties to negotiate any disputes in good faith and, failing resolution, to arbitrate. Arbitration would be binding, although errors of law would be appealable. A dispute arose, and MCI decided to integrate its own system and bypass Gateway’s installation. MCI ultimately notified Gateway that it was in default, effectively prevented Gateway from curing the default by refusing to sign a confidentiality agreement for updated software, and terminated the contract. The arbitrator, applying Virginia law, found that MCI’s decision to integrate its own system was motivated by profit and that MCI had breached its duty to negotiate in good faith. He awarded Gateway actual damages of attorneys’ fees and $2,000,000 in punitive damages. MCI sought to vacate the award in the United States District Court for the Northern District of Texas, and Gateway sought to confirm it. The district court decided to review the arbitration award under a harmless-error standard but with deference to the federal policy favoring arbitration, and it confirmed the award in its entirety. MCI appealed, claiming that the contract provided for de novo review of errors of law in the arbitration award.