I have saved up six opinions that considered whether to vacate an arbitration award over the summer.* Only one of those opinions vacated the award; the other five confirmed. To get a flavor of what types of arguments are winning and losing motions to vacate, here is a summary of those six.
The lone vacatur came in Hebbronville Lone Star Rentals, LLC v. Sunbelt Rentals Industrial Services, LLC, 2018 WL 3719682 (5th Cir. Aug. 6, 2018). The issue in that case was whether the arbitrator exceeded his power by reforming the parties’ contract. Sunbelt had purchased the assets of Lone Star, and agreed to later pay earnouts based on the post-sale revenue from Lone Star’s customers. The asset purchase agreement provided that disputes over the amount of earnouts would be decided by the parties “jointly [selecting] the Accounting Firm to resolve any remaining dispute over Seller’s proposed adjustments…which resolution will be final.” (If that doesn’t sound like an arbitration clause to you, be sure to read this post.) A dispute arose over whether the revenues from certain Lone Star customers exceeded a target number established in the agreement. The parties submitted that dispute to an accounting firm.
The arbitrator found that Sunbelt should have included the revenue of two additional customers, which would have resulted in a payment to Lone Star of $6.4M. However, the arbitrator also concluded that the parties made a mutual mistake in calculating the target number in the agreement, and if the corrected target number was used, Lone Star was actually entitled to nothing. Lone Star moved to vacate the portion of the arbitrator’s award that reformed the target amount based on mutual mistake. The district court granted the vacatur, and the Fifth Circuit affirmed. Oddly, the opinion is not framed in terms of vacatur at all; it does not reference Section 10(a) of the FAA. Instead, the opinion framed the question as “who decides” the question of mutual mistake. The court interpreted the language of the parties’ arbitration clause and found it too narrow to encompass the mutual mistake issue. Therefore, that issue was remanded to the district court for determination. (Also odd is the absence of any discussion of waiver in this opinion. My sense is if the arbitrator had been a lawyer instead of a CPA, the analysis may have been quite different.)
The courts found the arguments for vacatur insufficient in five other cases:
- In another case regarding earnout payments after an asset purchase, an accountant/arbitrator was appointed to hear the seller’s claim that the buyer was manipulating sales to ensure no earnout was owed. DFM Investments, LLC v. Brandspring Solutions, LLC, 2018 WL 3569353 (8th Cir. July 25, 2018). After reviewing documents and hearing arguments, the arbitrator found the seller not entitled to any revisions. The seller moved to vacate, arguing the arbitrator had refused to consider material evidence. The district court and Eighth Circuit disagreed, noting that the arbitrator concluded the additional evidence was not material. “An arbitrator’s reasoned decision to forgo analyzing additional evidence does not, without more, provide grounds for vacating the decision.”
- In a case that reminds all advocates to carefully preserve objections, the Ninth Circuit confirmed an award because the complaining party did not properly preserve its objection. Asarco LLC v. United Steel, 2018 WL 3028692 (9th Cir. June 19, 2018). Like in Sunbelt, the issue was whether the arbitrator had the power to reform the parties’s labor agreement based on mutual mistake, despite a provision in the contract depriving the arbitrator of “authority to add to, detract from or alter in any way the provisions of” the contract. The district court concluded the arbitrator had authority to reform the labor agreement. The Ninth Circuit found Asarco had conceded the issue by arguing the arbitrator lacked authority, instead of preserving that issue for the courts by refusing to address jurisdiction with the arbitrator (0r seeking injunctive relief at the outset). (Wow – what a harsh rule.) Even so, the court analyzed the merits and found the arbitrator had authority to reform the agreement. However, one dissenting judge wrote that he would vacate the award based on the arbitrator exceeding the scope of his powers.
- In another case from the Eighth Circuit, the court refused to vacate an arbitration award, even though the arbitration award was nearly three times the contractual liability limit. Beumer Corp. v. Proenergy Services, 2018 WL 3767135 (8th Cir. Aug. 9, 2018). The arbitrator found the provision limiting damages to the “Contract Sum” was enforceable, but that attorneys fees and interest did not count as “damages” for the purpose of that provision. The court found that, even if the arbitrator had overlooked Missouri decisions finding attorneys fees count as damages, it did not matter because manifest disregard of the law is not a valid basis to vacate an award.
- Speaking of “manifest disregard,” Maryland’s high court took the opportunity to clarify that it lives on as a basis for vacating awards under Maryland’s Uniform Arbitration Act. WSC/2005 LLC v. Trio Ventures Assoc., 2018 WL 3629441 (Md. July 30, 2018). However, the arbitrator in Trio did not manifestly disregard the law, because he did not make “a palpable mistake of law or fact appearing on the face of the award.” In fact, the arbitrator identified relevant principles of Maryland law, analyzed the parties’ contract, and issued damages that were “reasonably consistent” with principles of Maryland law.
- Finally, the Supreme Court of Rhode Island confirmed an arbitration award, despite allegations that the arbitrator manifestly disregarded the law, in Prospect Chartercare LLC v. Conklin, 2018 WL 2945664 (R.I. June 13, 2018). The arbitrator awarded 18 months of severance to an executive employee, and the employer moved to vacate the award based on the arbitrator’s alleged manifest disregard of the law by relying on “erroneous facts” and disregarding the contract language. On appeal, the high court noted that even if the arbitrator had based his decision on a factual error, “such a mistake would not be a proper basis upon which to vacate the arbitration award.” Furthermore, the arbitrator’s award was based upon a “passably plausible interpretation” of the parties’ agreement.
* There were more than six judicial opinions on whether to confirm an arbitration award over the summer, of course. I focus on federal appellate courts (circuits and SCOTUS) as well as the highest court of each state.