Appealing Arbitration Decisions

As regular readers of the blog may recall, Liz wrote a brief note about a decision by the Supreme Court of Missouri holding that arbitration is not available when companies select a defunct institution to administer their arbitrations with consumers.  See A-1 Premium Acceptance, Inc. v. Hunter, 2018 WL 4998256 (Mo. Oct. 16, 2018).  In the case, the commercial party — A-1 — had designated, in a 2006 arbitration agreement contained loan documents, the National Arbitration Forum (“NAF”) as the administering institution.  The NAF, however, entered into a consent decree in 2009 requiring it immediately to stop providing arbitration services for consumer claims nationwide.

Other courts around the country have enforced similar arbitration agreements.  But a Circuit split exists about how best to handle this situation.  The Missouri court took one approach, distinguishing between agreements where the parties agree to arbitrate regardless of the availability of a particular arbitration and agreements where the two sides agree to arbitrate only in a particular forum.  Under the first kind of agreement, the Missouri court conceded that the FAA authorizes courts to name a substitute arbitrator if the forum contemplated in the original agreement is unavailable. But under the second kind of contract, in which the agreement specifies the arbitration forum, the FAA doesn’t grant courts the authority to swap in a new institution. “Nothing in the FAA authorizes (let alone requires) a court to compel a party to arbitrate beyond the limits of the agreement it made,” the Missouri court said.

Although the case presented an opportunity for SCOTUS to provide guidance on this issue, on March 18, it declined to do so.

 

In this week’s installment of Arbitration Nation, we’re going to look at when a “decision with respect to an arbitration” may be appealed.  9 U.S.C. § 16 provides part, but only part, of the answer.  The rule essentially establishes the right of a party losing a motion to compel arbitration in a federal court to appeal that decision immediately. In contrast, a party who has been compelled to arbitration cannot appeal that decision immediately unless she first secures permission from both the district court and the court of appeals under 28 U.S.C. § 1292(b)See 9 U.S.C. § 16(b).

That seems pretty easy, right?  Well, maybe it should be, but some wicked complications come up in at least four situations.

Three of those situations involve a court dismissing a pending lawsuit rather than staying it.  It’s worth noting that Several Circuits reason that dismissal is the wrong procedural complement to an order compelling arbitration.  See, e.g., Aqua-Chem, Inc. v. Bariven, S.A., No. 3:16-CV-553, 2018 WL 4870603, at *2 (E.D. Tenn. Mar. 16, 2018) (discussing the Circuit split in detail).  The Supreme Court has, to date, punted on this issue.  See Green Tree Fin. Corp.-Alabama v. Randolph, 531 U.S. 79, 87 n.2, 121 S. Ct. 513, 520, 148 L. Ed. 2d 373 (2000) (“The question whether the District Court should have [dismissed the underlying lawsuit instead of granting a stay] is not before us, and we do not address it.”).  Basically, courts that find dismissal problematic read FAA § 3 literally: “the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action. . . .”

More courts, however, reason that the FAA’s mandatory stay does not impose an immutable limitation on a court’s discretion to dismiss claims requiring arbitration, and that dismissal may be proper if “all of the issues raised in the [suit] must be submitted to arbitration.” See, e.g., Alford v. Dean Witter Reynolds, Inc., 975 F.2d 1161, 1164 (5th Cir. 1992).

So, back to three of the four complications.

The first isn’t really a complication, I suppose, as there’s a very clear-cut answer: what happens if the district court dismisses an underlying lawsuit with prejudice instead of staying the case pending arbitration?  The answer: dismissal with prejudice constitutes an immediately appealable decision.  Such an “order plainly dispose[s] of the entire case on the merits and [leaves] no part of it pending before the court.”Green Tree, 531 U.S. at 86.

The second complication, however, deserves the label: what happens if the district court dismisses an underlying lawsuit without prejudice instead of staying the case pending arbitration?  The Sixth Circuit recently confirmed that a dismissal without prejudice paired with an order compelling arbitration constitutes an immediately appealable final decision.  See Hilton v. Midland Funding, LLC, 687 F. App’x 515, 518 (6th Cir. 2017).

But, as the case notes, SCOTUS has never addressed this particular issue.  Moreover, I think that there are some decent policy arguments that the Sixth Circuit has gotten it wrong.   Basically, allowing a district court to dismiss a case without prejudice and treating such a dismissal as appealable does an end run around FAA §§ 3 and 16. Combined, these provisions bolster the parties’ recourse to arbitration and push any doubts about the arbitrability of a dispute to arbitration.  But I digress.

The third complication comes up when a district court stays a pending case, compels arbitration and then the party sent to arbitration voluntarily dismissesher federal court case without prejudice.  The Ninth Circuit just addressed this situation and said, “[i]t makes no difference that [the plaintiff] then secured a voluntary dismissal without prejudice. A plaintiff’s ‘voluntary dismissal without prejudice is ordinarily not a final judgment from which the plaintiff may appeal.’”  Gonzalez v. Coverall N. Am., Inc., No. 17-55787, 2019 WL 911884, at *2 (9th Cir. Feb. 22, 2019) (citations omitted).

The fourth complication arises when a district court just isn’t very clear about whether it’s staying the pending lawsuit or dismissing it.  That was at stake in a very recent Second Circuit case, MELINA BERNARDINO, individually & on behalf of other similarly situated persons, Plaintiff-Appellant, v. BARNES & NOBLE BOOKSELLERS, INC., Defendant-Appellee., No. 18-607, 2019 WL 1076834 (2d Cir. Mar. 7, 2019).  There, the plaintiff argued that a district court “entered judgment dismissing, rather than staying, the action,” because the end of the order directed that “[t]he Clerk shall close the case.”  Id. at *1.  The court explained that there is “no jurisdictional significance to [a] docket entry marking [a] case as ‘closed,’ which we will assume was made for administrative or statistical convenience.”  Id. (citations omitted).

First, SCOTUSblog referenced “arbitration nation” last fall, which was flattering.  Then last week the Ninth Circuit declared: “we have become an arbitration nation.”   That was basically the title of my first post on this blog seven years ago!  (“We are becoming an arbitration nation.”) I am going to turn up the  Janet Jackson  (“Rhythm Nation”) and feel smugly validated while I draft the rest of this post.  Because there is more to talk about than just the catchy phrase spreading far and wide.  Three federal circuits have vacated arbitration awards this month, giving new hope to parties who are trying to vacate awards and offering cautionary tales to arbitrators.

Aspic Eng’g & Constr. Co. v. ECC Centcom Constructors2019 WL 333339 (9th Cir. Jan. 28, 2019), dealt with a subcontractor constructing army facilities in Afghanistan.  The subcontractor claimed it was owed significant funds after the project was terminated for convenience by the U.S. government.  It proceeded to arbitration against the prime contractor, and an arbitrator awarded the subcontractor just over $1,000,000.  The prime contractor petitioned to vacate the award.

Both the district court and Ninth Circuit found that the award should be vacated.  The appellate court found the arbitrator exceeded his power within the meaning of Section 10 (a)(4) by issuing a “completely irrational” award.  And what made it completely irrational in the court’s view?  It was the fact that the arbitrator explicitly refused to enforce material provisions of the parties’ subcontract because the Arbitrator concluded  “it was not reasonable to expect that Afghanistan subcontractors would be able to conform to the strict and detailed requirements of general contractors on U.S. Federal projects.”    The court found that the resulting award directly conflicted with the parties’ subcontract.  “By concluding that [subcontractor] need not comply with the FAR requirements, the Arbitrator exceeded his authority and failed to draw the essence of the Award from the Subcontracts…Such an award is ‘irrational.'”

In the opinion’s conclusion, the court reminds us that it is more than just a rubber stamp for arbitral awards:

We have become an arbitration nation.  An increasing number of private disputes are resolved not by courts, but by arbitrators.  Although courts play a limited role in reviewing arbitral awards, our duty remains an important one.  When an arbitrator disergards the plain text of a contract without legal justification simply to reach a result that he believes is just, we must intervene.

The Ninth Circuit was not the only federal circuit court of appeals to vacate an arbitration award this month.  The Fifth Circuit vacated an award in Southwest Airlines Co. v. Local 555, Transport Workers Union of America, 2019 WL 139247 (5th Cir. Jan. 9, 2019) for a similar reason.  The court found “the arbitrator ignored the unambiguous terms of the CBA.”  In particular, the arbitrator treated the final execution date of the Collective Bargaining Agreement (CBA) as the effective date, even though the record established the parties had ratified it weeks earlier. The court found the arbitrator’s analysis “was not an arguable construction of the CBA and instead amounted to the arbitrator’s own brand of industrial justice.”  Indeed, it introduced the case by saying “this case is an example of when an arbitrator goes too far.”  (The allowable bases for vacatur in this case were governed by the Railway Labor Act, and are similar to those in the FAA.)

The third case comes from the Federal Circuit, in Koester v. U.S. Park Police, 2019 WL 81105 (Fed. Cir. Jan. 3, 2019).   In that labor case, an arbitrator had upheld the park police’s decision to remove an officer from service.  But the court found the arbitrator abused his discretion by refusing to consider evidence, then vacated the award and remanded back to the arbitrator.  (Vacatur in Koester is not governed by the narrow standards of the Federal Arbitration Act, but instead by by the less deferential standards in a federal statute specific to labor relations with government employees.)

In the Midwest, however, arbitration awards fared just fine under the FAA. In fact, the Eighth Circuit un-vacated an award in Great American Ins. Co. v. Russell, 2019 WL 387032 (8th Cir. Jan. 31, 2019).   That case involved a farmer’s claim that his crop insurer wrongfully denied his claim for damage to his corn crop.  A panel of three arbitrators awarded the farmer $1,433,008.  The insurer moved to vacate the award under the Federal Arbitration Act, claiming the arbitrators violated applicable federal regulations that require the arbitrators to make factual findings, including the basis for any award and breakdown any award by claim.  The insurer argued that because the panel did not break the award down by county or otherwise explain the damage calculation, the award must be vacated.  The district court agreed and vacated the award, but the Eighth Circuit reversed, finding “nothing in the regulations required the panel to segregate this claim into multiple separate claims.”

Courtesy of the Ninth Circuit, we kick off 2019 with some fundamentals.  The Federal Arbitration Act gives parties three months to petition to vacate an arbitration award.  We know that “Three is the Magic Number,” but how exactly is a disappointed party supposed to calculate the three months?

Section 12 of the FAA requires that a petition to vacate be served upon the adverse party “within three months after the award is filed or delivered.”  In Stevens v. Jiffy Lube Int’l, 2018 WL 6802644 (9th Cir. Dec. 27, 2018), the Ninth Circuit concluded that the three months should be calculated according to Federal Rule of Civil Procedure 6(a).  That requires three steps.  First, exclude the day the award was delivered.  Second, calculate three months like this: “The first month began September 15 and concluded October 14; the second month began October 15 and concluded November 14; and the third month began November 15 and concluded December 14.”  In other words, it does not matter whether it is a 28-day month or a 31-day month.  It matters what day of the month the award was delivered.  For the third and final step, if the end of that three month period is a weekend or holiday, the period gets extended to the next business day.

In Stevens, the party seeking vacatur made the mistake of believing that “three months from September 15, 2016, was December 15, 2016.”  But, the court used multiple examples to point out why that is illogical.  And therefore, it concluded the petition to vacate was filed one day late and was properly rejected as untimely.

Ouch.

Today’s post covers three new developments from this past week. The Fifth Circuit found a defendant waived its right to arbitrate a class action; the Second Circuit found arbitrators retain power to clarify ambiguous awards; and Jay-Z found his list of potential arbitrators sorely lacking in diversity.

In Forby v. One Technologies, 2018 WL 6191349 (5th Cir. Nov. 28, 2018), a class of plaintiffs filed an action for consumer fraud. The defendant waited two years before compelling arbitration. In the meantime, it removed the case to federal court, transferred venue, and filed a Rule 12 motion to dismiss, which was only partially successful.

In response to the motion to compel, the plaintiffs argued the defendant had waived its right to arbitrate. The district court disagreed, finding that “delay alone is insufficient” to establish the prejudice required to prove waiver. On appeal, however, the Fifth Circuit found prejudice because the plaintiff would “have to re-litigate in the arbitration forum an issue already decided by the district court in its favor”, i.e. the Rule 12 issue. Even if defendant did not make another motion to dismiss in arbitration, the court disapproved of the tactic of “check[ing] the district court’s temperature” on the dispositive issue, before moving the case to another forum.

In General Re Life Corp. v. Lincoln Nat’l Life Ins Co., 2018 WL 6186078 (Nov. 28, 2018), the Second Circuit examined whether a panel of arbitrators can clarify their own award. In the underlying reinsurance arbitration, the arbitrators had ordered the parties to unwind their agreement, and work together to figure out how much money had to be repaid. In the award, the arbitrators retained jurisdiction to resolve any dispute over the payments. The parties did not agree on the amount of repayment, or even how to calculate it. So, more than three months after the final award, one party wrote the arbitrators, seeking resolution of the payment dispute. The other side objected, characterizing the request as one to reconsider the final award. The panel clarified its award, after finding the award had ambiguities.

The Second Circuit confirmed the clarified award. Although usually an arbitration panel loses authority after issuing the final award, five circuits have recognized an exception to that “functus officio” doctrine where the final award is “susceptible to more than one interpretation”. The Second Circuit adopted the same exception, but limited it to when three conditions are present: the award is ambiguous; the clarification only clarifies the award, and does not substantively modify the award; and the clarification comports with the parties’ arbitration agreement.

Finally, making headlines across the country, Jay-Z has asked a New York state court to stay his arbitration, due to a lack of available African-American arbitrators. I will let you know when I hear of a decision. But, the underlying premise is one I have wondered about – are large arbitration providers a place of “public accommodation”? In the meantime, maybe Jay-Z will write a rap about arbitration… then it could be my theme song!

The Seventh Circuit issued an opinion last week that sounded like it would be a big deal.  The case, Herrington v. Waterstone Mortgage Corp., 2018 WL 5116905 (7th Cir. Oct. 22, 2018), dealt with the fallout from SCOTUS’s Epic Systems, and addressed a class arbitrability issue of first impression, which meant it could have been epic indeed.  But instead, the decision is a fizzle that punts all the truly exciting issues back to the district court.

Herrington began in court as a collective action for minimum wages and overtime pay under the Fair Labor Standards Act.  The named plaintiff had an arbitration clause which included this statement “Such arbitration may not be joined with or join or include any claims by any persons not party to this Agreement.”  So, the defendant moved to compel individual arbitration.  But, based on the 7th Circuit’s precedent finding that class waivers in employment agreements violated federal labor laws (the NRLA), the court sent the parties to arbitration with an order instructing the arbitrator to allow the plaintiff “to join other employees to her case.”

In arbitration, the parties continued to fight over what type of suit could proceed.  The arbitrator concluded that the arbitration agreement evinced the parties’ intent to allow class arbitration, because it incorporated AAA employment rules, which the arbitrator interpreted to also include the supplementary rules for class arbitration.   In the end, however, the group proceeded as a collective arbitration with 175 members, and the arbitrator awarded them $10 million.

While the issue was on appeal, SCOTUS overruled the 7th Circuit’s precedent (in Epic Systems), which upended this entire proceeding.  On its face, it seemed as if the initial decision not to enforce the arbitration clause precluding joinder should be un-done, which would vacate the entire award.  However, the plaintiffs argued that despite the language precluding joinder, the arbitration clause still contained other language that authorized the collective arbitration.  At that, the 7th Circuit pivoted and framed the question as: who decides whether the arbitration clause allows collective arbitration?  The court or the arbitrator?

Noting it was “an open question in our circuit,” the 7th Circuit agreed with “every federal court of appeals to reach the question” that the “availability of class arbitration is a question of arbitrability” and therefore presumptively for courts to decide.  But, the 7th Circuit did not address the next logical question that must be answered to resolve the case: does or does not the parties’ choice of AAA rules delegate even the availability of class arbitration to an arbitrator?  Because that is not only an open question in the 7th Circuit, but one on which the other federal circuits are split.

That issue is important because if the parties validly delegated that question to the arbitrator, then the arbitrator’s decision finding the parties’ arbitration clause allowed collective action is entitled to deference.  At that point, isn’t it just like Sutter?  The arbitrator allowed the class action, and the courts have to live with that construction, “good, bad or ugly”?

Well, all those issues will have to be worked out by the district court.  The 7th Circuit found “the district court should conduct the threshold inquiry regarding class or collective arbitrability to determine whether [plaintiff’s] agreement with [defendant] authorized the kind of arbitration that took place.”

Happy Halloween!  (Or, by the time most of you read this, Day of the Dead.  Can you believe my husband carved this cool pumpkin?)

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.

Vacated

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.)

Confirmed

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.

Okay, folks, we are still combating the summer slide here.  Today’s refresher rule is this: If an arbitrator fails to disclose a substantial relationship, the resulting award can be vacated under 9 U.S. C. 10 (a)(2).  But, not all relationships are substantial, as the cases today make clear.

Beginning in my backyard,  the appellant in Ploetz v. Morgan Stanley Smith Barney LLC, 2018 WL 3213877 (8th Cir. June 12, 2018), sought to vacate a FINRA arbitration award due to an alleged failure to disclose.  The chairperson disclosed that he was currently serving as an arbitrator in two other cases where Morgan Stanley was a party and had served in 8 previous cases involving Morgan Stanley or an affiliated company.  However, he did not disclose he had once served as a mediator in a case involving Morgan Stanley, and the FINRA rules require disclosure of past service as a mediator.  After the three-person panel dismissed appellant’s claims, she moved to vacate the award.  The district court denied the motion, and the 8th Circuit affirmed that result.  After noting the test for evident partiality is unclear in this circuit and refusing to clarify it (srsly??), the court found no evidence that the lack of disclosure “creates even an impression of possible bias.” Instead, the court found it “represented at most a trivial and inconsequential addition to that relationship.”  It also faulted appellant for failing to seek discovery into the earlier mediation.

The D.C. Circuit reached a similar result in Republic of Argentina v. AWG Group Ltd., 2018 WL 3233070 (D.C. Cir. July 3, 2018).  There, the losing party in arbitration (Argentina) argued the award should be vacated because one of the three arbitrators failed to disclose her service on a board of directors.  Three years into a twelve-year arbitration, this arbitrator was named to UBS’s board of directors, and UBS managed investments in two of the other parties in the arbitration (the “opposing parties”).  The arbitrator did not know of UBS’s investments, and they did not turn up in a conflict check run by UBS when she joined the board.  Argentina asked her to recuse due to her service on the UBS board, but the other arbitrators rejected the challenge.   After the award, both the district court and D.C. Circuit found this did not rise to the level of evident partiality.  Critically, while the arbitrator had “some degree” of interest in Argentina’s opposing parties, it failed to show she had a “substantial interest.”  In addition, there was no proof that the opposing parties had “more than trivial” import to UBS, a passive investor (though it had invested more than $2 billion).  The court raised public policy concerns about how many disqualifications and vacaturs could result if this type of financial relationship was sufficient to establish evident partiality.

In Certain Underwriting Members of Lloyds of London v.  Florida, 2018 WL 2727492 (2d Cir. June 7, 2018), the issue was what disclosure standards apply to party-appointed arbitrators.  In the reinsurance arbitration at issue, one party (ICA) had appointed Campos as its arbitrator.  Campos failed to disclose that he was president of a human resources firm that officed out of the same suite as ICA, and used a former director of ICA as a vendor, and had just hired a former director of ICA as its CFO.  The district court vacated the award based on evident partiality, citing the number and depth of relationships.  The Second Circuit remanded, finding that a different test should apply to party-appointed arbitrators.  It noted that reinsurers seek arbitrators with industry expertise, who are often “repeat players with deep industry connections”, and courts should be “even more indulgent” of undisclosed relationships for party-appointed arbitrators who are expected to serve as advocates.  Therefore, the Second Circuit followed the lead of four other circuits, and set a different standard for evident partiality by a party-appointed arbitrator.  It clarified that nondisclosure by a party-appointed arbitrator is only fatal if it violates the “contractual requirement” (here, “disinterested”) or “prejudicially affects the award.”  On remand, the district court must determine whether Campos was disinterested (had a personal or financial stake in the outcome) and whether his failure to disclose had a prejudicial impact on the award.

The Supreme Court of Mississippi issued a new opinion that sheds light on a topic that doesn’t come up often: when can an arbitration award be modified due to miscalculation?  D.W. Caldwell, Inc. v. W.G. Yates & Sons Construction Co., 2018 WL 2146355 (Miss. May 10, 2018).

The context for the case was a construction dispute between a general contractor and a roofing subcontractor.  The arbitrator awarded damages to the subcontractor, and the general contractor filed a motion to the arbitrator to have the award modified.  The arbitrator denied the motion.

The contractor them made a motion in court to modify the award.  After taking testimony and exhibits in an evidentiary hearing, the court granted the motion to modify the award, reducing the subcontractor’s damages by over $100,000.  The contractor argued that the arbitrator “miscalculated” in two ways: first, by declaring that the amount of retainage was not ripe for decision; and second by double-counting some labor costs.

On appeal, the Mississippi Supreme Court reversed the trial court decision and instructed that the original award be confirmed.  In doing so, it established some guidelines for handling these types of motions in the future.  (It applied Mississippi statutes, finding that while the FAA would otherwise govern, the parties contracted for application of the state arbitration statutes.  But, it looked to federal precedent to inform its analysis.)  Importantly, it held that an evident miscalculation “must be apparent from nothing more than the four corners of the award and the contents of the arbitration record.”  Therefore, the district court erred by taking new evidence during the appeal.  In addition, the court found that the face of the award (and the arbitration record) did not show any mathematical error, and therefore there was “insufficient proof of an evident miscalculation.”

This case confirms that not only are the bases for vacatur under Section 10 of the FAA (and its state counterparts) interpreted very narrowly, but the bases for modification in Section 11 are just as hard to prove, if not more so.

p.s. Yikes!  It has been more than two weeks since my last post.  What have I been up to?  Well, preparing to present here  and  here and then updating the Arbitration chapter of this book.  Such a fun time of year!  Let me know if you’ll be at those events so we can connect.

 

The last post focused on three recent state appellate court decisions that refused to compel arbitration or vacated an award, and this follow-up post focuses on seven recent cases that are friendly to arbitration.

My favorite is from Montana.  Although none of its arbitration decisions have been addressed by SCOTUS, Montana decided to preempt any federal preemption issues by adjusting its stance on unconscionability.  (It waited five years after the 9th Circuit put it on notice, though.)  Lenz v. FSC Sec. Corp., 2018 WL 1603927 (Mont. April 3, 2018), involves claims by investors against investment advisors over “substantial losses.”  The defendants moved to compel arbitration and the district court granted the motion.  On appeal, the Montana Supreme Court affirmed.  In its decision, it took the opportunity to clarify that the previous test it had used to determine unconscionability was improper, because it mixed unconscionability analysis with the reasonable expectations doctrine from the insurance context.  (Read this mea culpa: “We have continued to perpetuate confusion by inaccurately referencing [bad tests for unconscionability] …Even more problematic in particular regard to arbitration agreements, we have failed to recognize the manifest incompatibility of the insurance-specific reasonable expectations doctrine as a generally applicable contract principle.”)  I read that as “we do not want to be reversed by the U.S. Supreme Court.”

The others can be reviewed more quickly:

  • Substantive unconscionability cannot be established by showing only that the arbitration agreement is broad in scope.  SCI Alabama Funeral Servs. v. Hinton, 2018 WL 1559795 (Ala. March 30, 2018) [I’m a bit surprised that needed clarifying];
  • The Federal Arbitration Act applies to arbitration agreements within a common interest community’s covenants (and preempts conflicting state law).  In U.S. Home Corp. v. The Michael Ballesteros Trust, 2018 WL 1755536 (Nev. April 12, 2018), 12 homeowners argued that the FAA did not apply to the arbitration agreement in their covenants because land is traditionally a local concern.  The court found that the covenants’ larger purpose was to facilitate the creation of a community of multiple homes, and multiple out-of-state business contributed to construction of the homes.  Therefore, the FAA controlled and preempted Nevada rules requiring the same procedures as in court and requiring arbitration agreements to be more conspicuous than other text in a contract;
  • Non-signatories may compel arbitration if the plaintiff’s claims are based on facts that are “intertwined” with arbitrable claims.  Melendez v. Horning, 2018 WL 1191150 (N.D. March 8, 2018) (reversing district court order denying motion to compel arbitration);
  • Scope of arbitration agreement broad enough to encompass claims against related entity.  Bridgestone Americas Tire Operations v. Adams, 2018 WL 1355966 (Ala. March 16, 2018), concluded that where the employee’s arbitration agreement was with the “Company,” which was defined to include affiliate and related companies, the employee’s suit against a related company was arbitrable;
  • Arbitrator did not manifestly disregard contractual language in construction contract.  In ABC Building Corp. v. Ropolo Family, 2018 WL 1309761 (R.I. Mar. 14, 2018), the owner tried to vacate an arbitration award in favor of the general contractor.  It relied on contract language requiring submission of payroll records with payment applications in order to argue that the contractor could not receive additional compensation for labor without having provided that contemporaneous documentation.  However, the arbitrator considered that provision of the contract in his decision-making (and the owner had never complained), so vacatur was inappropriate (one judge dissented);
  • Delegation clause must be enforced if not specifically challenged.  Family Dollar Stores of W. Va. v. Tolliver, 2018 WL 1074947 (Feb. 27, 2018).  I know, it’s a stretch to call this one a spring decision.  But, it’s snowing in Minnesota on April 14th, so my seasons are totally confused.  That’s why we call it “Minnesnowta.”