Appealing Arbitration Decisions

A per curiam opinion from the 8th Circuit last week highlights that even if an arbitration goes off the rails, the only remedy is vacating (or confirming) the award.  The parties cannot recover from the administrator of the arbitration.

In Owens v. American Arbitration Association, Inc., 2016 WL 6818858 (8th Cir. Nov. 18, 2016), a terminated CEO filed for arbitration against his former company.  The AAA administrated the arbitration and a three member panel was chosen.  One of the arbitrators disclosed that he had been consulted in a different matter handled by the same firms that were representing the CEO and the company.  No party objected to that arbitrator’s continued involvement or asked follow up questions.

The panel issued an initial award of over $3 million to the former CEO.  At that point, the company moved to remove the arbitrator who had made the disclosure, alleging the disclosure was incomplete.  The AAA did not have a rule or published procedure for addressing the removal of an arbitrator.  It allowed the CEO to respond, but did not inform any of the arbitrators that a motion had been made or allow the arbitrator whose disclosure was at issue to respond.  The AAA eventually removed the arbitrator who made the disclosure, and the remaining two arbitrators issued a final award in favor of the CEO.

The company moved to vacate the award, and a state court trial judge granted the motion.  At that point, the CEO sued the AAA in Minnesota state court for “breach of contract, unjust enrichment, [and] tortious interference with contract.”  The AAA removed the case to federal court, and the federal district court dismissed the claims based on arbitral immunity.

On appeal, the 8th Circuit made quick work of this messy case.  It first recognized that arbitrators, like judges, have immunity.  And, that immunity can extend to “organizations that sponsor arbitrations” and all of the acts within the arbitral process.  Second, it cited a previous case in which the 8th Circuit concluded that “arbitral immunity bars claims against a sponsoring organization based on the appointment of a biased arbitrator.”  (Even if the organization failed to follow its own rules in appointing the arbitrator.)  Third, it extended that rule, concluding that the removal of arbitrators is also protected by arbitral immunity.

p.s. In honor of the all-Minnesota nature of this case, I give you a photo I took of the prize-winning giant pumpkins at the Minnesota State Fair.  Happy Thanksgiving!

In most circumstances, the Federal Arbitration Act requires that the losing party move to vacate an arbitration award within three months.  However, the Ninth Circuit recently ruled that the three-month timeline can be tolled, especially for something as significant as the chair lying about being a licensed attorney.

In Move, Inc. v. Citigroup Global Markets, Inc., 2016 WL 6543522 (9th Cir. Nov. 4, 2016), Move started a FINRA arbitration against Citigroup, alleging the mismanagement of $131 million.  Move expressed its strong desire to have an experienced attorney as chair, given the complexity of the claims.  So, it gave top ranking to “James H. Frank,” who certified to FINRA that he had a law degree and was licensed in three states.  Mr. Frank then served as the chair of the three person panel, signing a unanimous award denying Move’s claims in December of 2009.

However, the person who served as chair had lied about his qualifications and was not even a licensed attorney.  (He was impersonating a retired California attorney.)  Move discovered that fact in 2014.  (By reading The AmLaw Litigation Daily, which should now use this in its subscription sales pitches.)  Move then filed a motion to vacate the arbitration award.

The district court denied the motion, but the Ninth Circuit reversed.  First, it held “that the FAA is subject to equitable tolling.”  It appears to be the first federal appellate court to reach that result, with the Fifth Circuit having held the opposite in an unpublished case in 1993.  Although part of the lure of arbitration is its finality, the court noted “the general pro-arbitration policy relies on the assumption that the forum is fair, and therefore cannot justify special deference to arbitration outcomes in the face of a colorable claim that the forum was unfair in a particular case.” (Citing the 6th Circuit.)

Having concluded that it could address the substance of the vacatur motion, the court then found that the false information about the chairperson’s professional qualifications  constituted “misbehavior by which the rights of any party have been prejudiced” and therefore the award should be vacated under Section 10(a)(3).  Because Move made clear in the selection process that having an attorney as chair was critical, and the chair was “an impostor,” the parties’ contractual rights to arbitrate before a panel of three qualified FINRA arbitrators was prejudiced and Move “was deprived of a fundamentally fair hearing.”  The court was not swayed by arguments that the other two members of the panel had voted for the award as well, noting that “there is simply no way to determine” whether the chair influenced the other panelists.

Although I trust that it is a very unusual case for arbitrators to lie about their qualifications, it may be that their disclosure forms list lesser inaccuracies.  What if it was simply that the chair had let his licensure lapse in one of the states?  What lessons does this case offer for lesser types of inaccuracies?  For advocates, it suggests it is useful to make a clear record of what arbitrator qualifications are important during the selection process, so that if there is a problem you can show prejudice.  For arbitrators, it suggests you must be exceedingly careful in the accuracy of the bio you provide.  And for arbitration administrators, like JAMS, AAA and FINRA, it shows that having a system for double-checking arbitrator qualifications is very important.  It is part of the service you are providing the parties.

In an atmosphere in which a federal judge has blocked the CMS rule precluding arbitration in nursing home agreements, and we have a president-elect who seems likely to roll back the other agency regulations of arbitration, we may see courts policing the fundamental fairness of arbitration proceedings more often.  It will be one way to address the public sentiment that arbitration is unfair and stacked in favor of large companies (see this recent editorial by Gretchen Carlson).

While I was busy blogging out listicles and “think pieces” last month, my stack of unread arbitration cases grew exponentially.  August was apparently a very busy month for publishing arbitration opinions.  Maybe most surprisingly, the federal appellate courts vacated three arbitration awards in recent weeks.  So I will start there, and end with two headline-worthy awards that got confirmed.

First, in Bankers Life & Cas. Ins. Co. v. CBRE, Inc., __ F3d __, 2016 WL 4056400 (7th Cir. July 29, 2016), the Seventh Circuit vacated an arbitration award after finding the panel of arbitrators “exceeded its authority.”  The panel had concluded that a real estate broker did not violate its listing agreement with a client when the broker provided an inaccurate cost-benefit analysis to the client.  The panel said that because the cost-benefit analysis had a disclaimer on it, the broker was not responsible.  The district court had confirmed the award.  Writing for the Seventh Circuit, Judge Posner found that because the panel was only authorized to interpret the contract, not the cost-benefit analysis, “[t]he panel’s reliance on the disclaimer in the CBAs was … unjustified.”  One bit of helpful context here is that the court found the Illinois Uniform Arbitration Act applied.  I don’t think this result would fly under the FAA or Sutter .

Second, in Star Ins. Co. v. Nat’l Union Fire Ins. Co. of Pittsburgh, 2016 WL 4394563 (6th Cir. Aug. 18, 2016), the Sixth Circuit vacated an arbitration award pursuant to the arbitration act in Michigan.  Although the district court had confirmed the award, the appellate court reversed due to one arbitrator’s ex parte communications with the party who selected that arbitrator.  That communication violated the parties’ agreement to arbitrate as set forth in the scheduling orders.

Third, although not exactly a vacatur, in Linde Health Care Staffing, Inc. v. Claiborne County Hospital, __ So.3d __, 2016 WL 4245435 (Miss. Aug. 11, 2016), the Mississippi Supreme Court refused to recognize a Missouri judgment based on an arbitration award.  It found the losing party was not a party to the arbitration agreement.  Intriguingly, the winning party claimed that the three months for vacating the award had already passed, so the judgment could not be set aside.  The court refused to apply the FAA, however, asking “How can the Hospital be bound by the FAA’s procedural rules if it never entered a contract with an arbitration clause?  The simple answer is it cannot.”

On the other hand, two very interesting arbitration cases were confirmed.

In one, a famous football player had the arbitration award against him un-vacated.  The district court around the corner from my office had found Adrian Peterson was not fairly on notice of the potential penalty against him.  The Eighth Circuit reversed, concluding:

As applied to Peterson’s case, therefore, the arbitrator thought the terms of the Agreement, the law of the shop, and the Personal Conduct Policy gave the Commissioner discretion to impose a six-game suspension and fine if he concluded that shorter suspensions in prior cases had been inadequate.  The arbitrator’s decision on this point was grounded in a construction and application of the terms of the Agreement and a specific arbitral precedent.  It is therefore not subject to second-guessing by the courts.

Nat’l Football League Players Assoc. v. Nat’l Football League, __ F.3d__, 2016 WL 4136958 (8th Cir. Aug 4, 2016).

Another fun case confirming an arbitration award involved a significant award for a Mexican subsidiary of KBR and quite the international legal dispute.  Corporacion Mexicana de Mantenimiento Integral v. Pemex-Exploracion y Produccion, __F.3d__, 2016 WL 4087215 (2d Cir. Aug. 2, 2016).  The losing party in that arbitration happened to be an oil and gas company “acting on behalf of the Mexican government.”  Three years into the arbitration proceeding, the Mexican Congress vested exclusive jurisdiction for disputes over public contracts in its Tax & Administrative Court.  And nearly five years into the arbitration proceeding, the Mexican Congress “ended arbitration” for the claims.  After KBR’s subsidiary won big, it confirmed the award in SDNY.  But a court in Mexico ordered that the award be annulled.  The Second Circuit was having none of that.  It found the district court was right to confirm the award “notwithstanding invalidation of the award in the Mexican courts,” due to four “powerful considerations” including waiver of sovereign immunity, the “repugnancy of retroactive legislation that disrupts contractual expectation,” the need for legal claims to have a forum, and the “prohibition against government expropriation without compensation.”

What can we take away from these decisions?  Maybe that losing parties in arbitration have a better chance of vacating an award under state arbitration acts, that the 8th Circuit is not sympathetic to wealthy football players, and the Second Circuit will not allow a foreign government to legislate its way out of an arbitration award.

While regular people count down the days to summer blockbusters that come in the form of high-paid actors fighting aliens or robots, I prefer my summer blockbusters in the form of arbitration opinions that have been months in the making (maybe finally released because the clerks are about to turn over?). Today, I report on three of these arbitration blockbusters, all from state high courts.

Blockbuster 1: New Hampshire Rejects Application of FAA.

In the most ambitious of the three decisions, the New Hampshire Supreme Court found that the FAA’s sections regarding confirming and vacating awards do not apply in state courts.  Finn v. Ballentine Partners, LLC, __ A.3d __, 2016 WL 3268852 (NH June 14, 2016) (an opinion that took five months to produce).  In that case, a company ousted one of its founders, and she instituted an arbitration challenging her termination.  She was awarded about $6.5 million.  After the company engaged in some major restructuring, which resulted in lots of cash, the ousted founder started a new arbitration.  Although the company argued her claims were barred by res judicata, the second arbitration went all the way through hearing and she was awarded another $600,000.

The New Hampshire Supreme Court refused to confirm the award.   Because the FAA allowed no avenue for vacating the award, the court based its decision on a state statute allowing courts to vacate an award for “plain mistake.”  The founder had argued that the state statute was preempted by the FAA.  The court responded that “we conclude that §§ 9-11 of the FAA apply only to arbitration review proceedings commenced in federal court.”  WAIT, WHAT?? (Truly, this stuff is what keeps me blogging.  There is never a dull moment with state courts and arbitration law.)*  The court essentially found that since most of the state court cases that have ended up at SCOTUS were about enforcing arbitration agreements in the first place, enforcing arbitration agreements is the limit of the FAA’s application in state courts.  (“Preemption… is at its apex when parties cannot get to arbitration…  In contrast, state rules . . . without the potential consequence of invalidating an arbitration agreement are not preempted.”)  Having gotten that pesky FAA out of the way, the court easily found that the failure to apply res judicata as the court interprets it was a “plain mistake” and reversible error.

Blockbuster 2: Michigan Allows Law Firm To Compel Arbitration Of Suit Against Its Principals

Michigan’s decision has more interesting facts but less of a jaw-dropping result.   In Altobell v. Hartmann, __ N.W.2d__, 2015 WL 3247615 (Mich. June 13, 2016), a principal in a law firm had gotten the chance to be an assistant football coach at the University of Alabama.  (What attorney has a second act as a football coach?  I imagine him giving his clients half-time type pep talks during trial: “Clear eyes.  Full hearts.  Can’t lose!”)   He got the impression that his firm would allow him to keep his ownership interest for a year, but the firm audibled and declared the coach had withdrawn from the partnership.  No law firm money was coming his way.

The coach then sued seven principals of the law firm in court, and the firm moved to compel arbitration.  Although the lower courts had found that naming individual defendants was sufficient to avoid his arbitration agreement with the firm, the Michigan Supreme Court sided with common sense. The arbitration agreement called for binding arbitration of any dispute “between the Firm…and any current or former Principal.”  The court found it “must consider the concept of agency” in interpreting whether the firm was meant to include the individuals who makes its decisions.  Therefore, the court found claims against the individual defendants were arbitrable, and the coach’s claims were also within the scope of the arbitration agreement.

Blockbuster 3: Kentucky Finds CPA Determination Is Not “Arbitration”

Kentucky waded into the muddy issue of defining arbitration in The Kentucky Shakespeare Festival, Inc. v. Dunaway, __ S.W.3d__, 2016 WL 3371085 (Ky. June 16, 2016).  In that case, a theater fired its director but agreed to pay his bonus for 2013.  The agreement noted that “the parties agree to abide by the determination of the … certified public accountants…in case of a dispute as to the true amount of the net profits, and each party agrees to accept such determination as final.”  After the CPAs concluded the director was entitled to no bonus, the director filed suit.  A year later, the theater filed for summary judgment, arguing the CPA determination was a binding arbitration award.  The district court denied the motion and the intermediate appellate court agreed.

The Kentucky Supreme Court affirmed for two reasons. First, it found even if the language was binding, it related only to “net profits” not to the director’s bonus.  But more interestingly, it rejected the concept that this was an arbitration clause, as it “makes no express reference to arbitration”, did not allow for “fundamental components of due process” like presenting evidence and cross-examining witnesses, and the agreement had a general venue provision selecting Kentucky state court.

Speaking of defining arbitration, watch for an upcoming post about how courts around the country are trying to put some parameters on what is and is not an arbitration. 


*Would love to hear from any academic types who have looked into this argument. What about these statements from SCOTUS, not limited to Sections 2-4 of the FAA??

  • “State and federal courts must enforce the Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq., with respect to all arbitration agreements covered by that statute.” Marmet Health Care Ctr., Inc. v. Brown, 132 S. Ct. 1201, 1202, 182 L. Ed. 2d 42 (2012).
  • “It is well settled that ‘the substantive law the Act created [is] applicable in state and federal courts.’” Nitro-Lift Technologies, LLC v. Howard, 133 S.Ct. 500, 503 (2012).

Finding that some of its previous pronouncements were leading district court judges astray, the Ninth Circuit clarified its precedent regarding the scope of review of labor arbitration awards. “We conclude that it is time for us to retire the use of ‘plausibility’ as a term to describe the courts’ role in reviewing labor arbitration awards.” Southwest Regional Council of Carpenters v. Drywall Dynamics, Inc., 2016 WL 2909241 (9th Cir. May 19, 2016).

In Drywall Dynamics, the district court had vacated the arbitration award for two reasons.  It found the arbitration panel’s interpretation of the labor contracts was not “plausible”, and it found the award violated a clear public policy.  The Ninth Circuit un-vacated the arbitration award, and took the occasion to clarify the limited bases for vacating labor arbitration awards.

First, the court tackled its precedent.  Although there are “a long line of” cases that required an arbitrator’s decision to be based on a “plausible interpretation of the contract,” the court found that was “in sharp contrast to the judicial ‘hands off’ approach long required in labor arbitration cases.” Therefore, the court took the opportunity to make clear that the only relevant inquiry on the merits of the award is whether “the arbitrator is even arguably construing or applying the contract and acting within the scope of his authority.”

With respect to the public policy exception, the court noted that is also narrow. When there are “countervailing policy considerations,” it is not appropriate to vacate an arbitrator’s decision on public policy grounds.

In this case, the court found the panel did construe and apply the contract, and that there were competing policy considerations, so the award must be affirmed.


The Ninth Circuit is not the only appellate court affirming arbitration awards (and clarifying bases for vacatur). The Supreme Court of Oregon affirmed an arbitration award last month, over an objection that the arbitrator did not have authority to grant the awarded remedies. Couch Investments, LLC v. Peverieri, 2016 WL 1593701 (Or. Apr. 21, 2016).  And last week the Supreme Court of Texas affirmed an arbitration award in a trust dispute.  In its opinion, Texas’s highest court held that the bases for vacatur set forth in the Texas  General Arbitration Act are exclusive.  “[A] party may avoid confirmation only by demonstrating a ground expressly listed in” that statute. Hoskins v. Colonel Clifton Hoskins, 2016 WL 2993929 (Tex. May 20, 2016).  (Read more at Disputing.)

The Second Circuit reminded us yesterday that judicial review of arbitration awards is “among the most deferential in the law.”  And when district courts are not sufficiently deferential, their decisions are likely to be overturned.  That happened recently in Tom Brady’s “deflate-gate” arbitration, and in an arbitration over how much a pedestrian was owed after a car accident.

In the pedestrian’s dispute, the arbitrator was assigned to determine the extent of the pedestrian’s injury and what compensation should flow from that injury.  Lemerise v. The Commerce Ins. Co., 2016 WL 1458213 (R.I. April 13, 2016).  The arbitrator determined the pedestrian was entitled to $150,000 in damages plus interest of $47,550.  The insurance company moved to modify the arbitration award down to $100,000 – the limits of the policy.  The trial court granted that motion, and the pedestrian appealed.  The Supreme Court of Rhode Island reinstated the full arbitration award.  It found that the trial court had erred by considering the limits of the policy, when the insurance company had not introduced that policy as an exhibit in the arbitration.  Furthermore, the court found the limited statutory grounds for modifying the arbitrator’s award were not present.

In a case that garnered much more news coverage, the four-game suspension against Tom Brady was also reinstated yesterday by the Second Circuit Court of Appeals.  Although the district court had found the arbitration hearing lacked fundamental fairness, in a 2-1 decision the Second Circuit found the arbitrator met the low bar required by the LMRA: he acted within his authority and he was at least arguably construing the parties’ contract.

Perhaps not surprisingly, the appellate court’s description of the Brady arbitration sounds like an entire different proceeding than the one described by the district court.  This opinion describes the evidence against Brady to support the conclusion that he participated in the scheme to deflate game balls (not just was “generally aware”).  It makes ten hours of testimony and 300 exhibits sound exorbitant.  And it places significant emphasis on the cell phone destruction.

The opinion also went out of its way to emphasize that this process was what the players association bargained for, even if it “may appear somewhat unorthodox” to have the Commissioner first impose discipline and then preside over a challenge to his discipline in arbitration.  As a result, the players’ remedy “is not judicial intervention, but” to negotiate a different deal next time.  In an example of the snarky tone used for many of the arguments made on behalf of Brady, the majority wrote (about the comparison to substance abuse) that even if Brady “may have been entitled to notice of his range of punishment, it does not follow that he was entitled to advance notice of the analogies the arbitrator might find persuasive in selecting a punishment within that range.”

Today’s lesson is that famous athletes are not entitled to a less deferential standard of review for arbitration awards than the rest of us.  And, if an arbitration award in your favor is vacated by a trial court, it may be worth your while to appeal.

The Fifth Circuit recently addressed a hard question: what should the court consider when determining the amount in controversy for purposes of federal jurisdiction over an arbitration award?  The court decided to rely on the amount originally sought by the claimant in the demand for arbitration.  Pershing, LLC v. Kiebach, __ F.3d __, 2016 WL 1375874 (5th Cir. April 6, 2016).

In Pershing, the claimants demanded $80 million in damages from their broker.  The arbitration panel rejected their claims, but awarded them $10,000 for expenses.  The broker moved to confirm the award in federal court, and the customers sought to have the confirmation suit dismissed for lack of federal jurisdiction.  (Why?  So they could move to vacate in Louisiana state court, which they must have thought would be more friendly.)

The court then had to decide whether the amount in controversy should be determined by: 1) the amount of the final award or 2) the amount sought in the arbitration demand.  The Fifth Circuit sided with the courts that have used the damages sought in the demand.  It reasoned that the initial damage amount “recognizes the true scope of the controversy between the parties…the amount at stake is the $80 million that Appellants initially sought in arbitration, not the minimal award.”  It also sought to mirror the test for jurisdiction over a motion to compel arbitration, which relies on the amount demanded in the petition.

Showing it will soldier on without Justice Scalia, the Supreme Court granted cert, vacated, and remanded an arbitration decision from West Virginia yesterday.  Because this is the exact same treatment the Court gave a case from Hawaii’s highest court in January (and the same treatment I predicted, ahem), it suggests SCOTUS is trying to go on with business as usual.

So, what was the West Virginia case? It is the Schumacher Homes case I wrote about last July, in which that state’s highest court refused to enforce the parties’ delegation clause, even after acknowledging the rule in Rent-A-Center, because it found the word “arbitrability” was ambiguous.

This GVR (grant, vacate, and remand), although not a summary reversal because it ostensibly leaves it up to the West Virginia courts to decide what to do next, falls in line with recent arbitration summary reversals from SCOTUS.  Prof. Drahozal, in an interesting article called “Error Correction and the Supreme Court’s Arbitration Docket,” helps put it in context (Ohio State Journal on Dispute Resolution, Vol. 29, No. 1, 2014).  

He writes:

Indeed, since O.T. 2000, the proportion of summary reversals that addressed arbitration issues (4 of 83, or 4.8%) is more than double the proportion of argued cases (18 of 948, or 1.9%) that addressed arbitration issues.

What are the common characteristics of cases that receive a summary reversal?  First, they misapply the FAA.  But also, Prof. Drahozal points out:

The summary reversals were all in cases that originated in state rather than federal courts, and often included some suggestion that the state court disagreed with Supreme Court decisions interpreting the FAA.

Bingo!  That last factor is definitely present in Schumacher Homes.  In addition to calling the rule in Rent-A-Center “absurd” and an “ivory-tower interpretation of the FAA,” the opinion criticized all federal arbitration jurisprudence, explaining that the SCOTUS decisions construing the FAA “create an eye-glazing conceptual framework” that is “a tad oversubtle for sensible application” and that “the rules derived from these decisions are difficult for lawyers and judges—and nearly impossible for people of ordinary knowledge—to comprehend.”

So, here’s a tip for all state courts that want to buck the FAA, but not risk summary reversal or GVR: don’t insult SCOTUS.

Lots of interesting arbitration law has been made already in 2016, so here is a roundup from the first four weeks of the year. As a teaser, courts have breathed life into the effective vindication doctrine, found arbitrators cannot determine the availability of class actions, and found state laws not preempted.  More surprisingly, state courts are following SCOTUS’s interpretations of the FAA.

Effective Vindication Lives On

Although I thought Italian Colors was an “effective elimination” of the effective vindication doctrine, the Tenth Circuit affirmed its use as a defense to a motion to compel arbitration this month in Nesbitt v. FCNH, Inc., 2016 WL 53816 (10th Cir. Jan. 5, 2016).  [Side note to WestLaw: can there really have been 53,816 cases by January 5th of the year??  Or do I misunderstand the numbering system?]  In that case, class action plaintiffs in a Fair Labor Standards Act case defeated a motion to compel individual arbitrations by asserting that under the AAA Commercial Rules, each plaintiff would have to pay between $2,300 and $12,500 in arbitrator fees and could not recover attorneys’ fees.  The appellate court affirmed.

Incorporation of AAA Rules Can “Unmistakably” Delegate Some Gateway Issues, But Maybe Not the Availability of Class Actions

The Third Circuit drew what seems to me a questionable distinction between parties’ ability to delegate some substantive issues of arbitrability from others. Despite acknowledging that federal courts of appeals have universally found that when parties agree to be bound by the AAA rules, they delegate substantive arbitrability to arbitrators, the Third Circuit found that does not extend to the availability of class arbitration. Chesapeake Appalachia, LLC v. Scout Petroleum, LLC, 2016 WL 53806 (3d Cir. Jan. 5, 2015).  Recall that in general, courts are presumed to have authority to determine whether an arbitration exists, whether it is valid, and whether it covers the scope of the parties’ dispute.  But, under First Options of Chicago, a SCOTUS opinion, parties can delegate even those issues to arbitrators as long as their intent to do so is “clear and unmistakable.”  In Chesapeake Appalachia, the court repeats its pronouncement from Opalinski that the “availability of classwide arbitration” is one of those substantive questions of arbitrability that courts presumptively decide, unless parties clearly and unmistakably state otherwise.  And then it further protects courts’ ability to make that determination by holding that the parties’ incorporation of AAA rules, which explicitly allow arbitrators to determine their own jurisdiction and contain supplementary rules about class arbitration, is not sufficient to delegate the availability of classwide arbitration to arbitrators.  Drawing on statements from Sutter, the court leaned on the “great” procedural differences between bilateral and class-action arbitration to support its distinction.

Waiver of the Right to Arbitrate is an Issue Presumptively for Courts

Maybe Bryan Garner can come up with a new term for “waiving” the right to arbitrate, so that it is not the same verb as waiving the substantive claim being arbitrated. If so, that would alleviate the problem that the Supreme Court of Nevada addressed in Principal Investments, Inc. v. Harrison, 2016 WL 166011 (Nev. Jan. 14, 2016).  That court wrestled with the issue of whether a court or an arbitrator should decide if a party has waived its right to arbitrate by participating in litigation.  In other words, is that type of waiver a substantive question of arbitrability (like whether there is a valid arbitration agreement) that is presumptively for courts, or a procedural question of arbitrability that is presumptively for arbitrators?  Adding to the confusion is language from Howsam and BG Group characterizing “waiver” as an issue presumptively for arbitrators.  After canvassing other courts and finding the majority have concluded that waiver-by-litigation is presumptively for courts, the Nevada Supreme Court followed the herd.

Missouri Enforces Prima Paint’s Severability Doctrine

As I have picked on Missouri for bucking federal arbitration law, I owe it to the Show-Me State to point out that it recently (but reluctantly) followed federal precedent on severability. In Ellis v. JF Enterprises, LLC, 2016 143281 (Mo. Jan. 12, 2016), the Supreme Court of Missouri recognized that under federal precedent, a plaintiff cannot avoid an arbitration agreement by asserting the contract as a whole is void, it must point to a deficiency with the arbitration clause specifically.  As a result, the court held that “no matter what logic or fairness” undergirded the plaintiff’s argument that her auto sale was invalid, she had to arbitrate that claim.

Kentucky’s Precedent on Wrongful Death Actions is not Preempted by FAA

In Richmond Health Facilities v. Nichols, 2016 WL 192004 (6th Cir. Jan. 15, 2016), the Sixth Circuit analyzed Kentucky’s state law rule, which holds that wrongful-death claims belong only to beneficiaries, and therefore any arbitration agreement signed by a decedent cannot bind a beneficiary bringing a wrongful death claim.  The Sixth Circuit found that state law rule does not stand as an obstacle to the FAA, because it does not categorically prohibit arbitration of wrongful death claims, so was not preempted.

Lots of Action on Attorneys’ Fees

The Supreme Court of Utah held that an arbitrator cannot award attorneys’ fees incurred in confirming the arbitration award, under the Uniform Arbitration Act. Westgate Resorts, Ltd. V. Adel, 2016 WL 67717 (Utah Jan. 5, 2016).

Massachusetts’ highest court also found an arbitrator is not authorized to award attorneys’ fees due to one party’s assertion of frivolous defenses (unless the parties specifically granted the arbitrator that authority). Beacon Towers Condominium Trust v. Alex, 2015 WL 9646024 (Mass. January 7, 2016).

Similarly, the Second Circuit held that a federal district court erred in awarding attorneys’ fees and costs to the party that successfully confirmed its arbitration award. Zurich Am. Ins. Co. v. Team Tankers (2d Cir. Jan. 28, 2016).  As part of its contractual analysis, the court repeated that parties may not contract around Section Ten of the FAA.  In other words, it would not read the parties’ contract as precluding an attempt to vacate the award.

PHEW. I have now alleviated the guilt that has been weighing on me for not blogging about these cases yet.  Hope February brings a more reasonable stream of opinions!

Before I can sum up 2015 in arbitration (next post!), I need to report on some new cases coming out of the federal and state appellate courts in recent weeks.  Two are just good reminders of basic arbitration law, but the third addresses an interesting question of double recovery.

Our first “reminder” case comes from New York’s highest court.  In Cusimano v. Schnurr, 2015 WL 8787554 (N.Y. Dec. 16, 2015), that court held that the Federal Arbitration Act applies, even to intrafamily transactions among New York residents (sing: “it’s a family affaaaair…”), and even when defendants argue their family business is “passive” and has no impact on interstate commerce.  The court basically said family shmamily, look at the type of business you have and what it owns.  “The idea that the intrafamilial nature of the agreements has some bearing on whether the FAA is applicable finds no support in the caselaw.”  Instead, the fact that the family business owned commercial properties inside and outside New York was key.  (But, the plaintiffs waived their right to arbitrate by litigating aggressively for a year.)

The second “reminder” comes from the Eleventh Circuit and relates to appeal timing.  In the Wise Alloys case, 2015 WL 8119326 (11th Cir. Dec. 8, 2015), that court held that the defendant did not appeal the district court order compelling arbitration within the allowed deadline.  (The court had fun with this one, quoting Carole King to say “it’s too late…”)  Critically, the entire complaint related to the union’s effort to compel the defendant company to arbitration.  The district court compelled arbitration in June of 2012, but the company did not appeal until after the arbitration was complete and the award had been confirmed in late 2014 (well beyond the 30-day deadline in the federal rules).  The lesson from this case is that while Section 16 of the FAA commands that “interlocutory” orders compelling arbitration are not immediately appealable, not all orders compelling arbitration are interlocutory: if the only relief a complaint seeks is an order compelling arbitration, then the order granting that relief is final and immediately appealable.

The most interesting outcome in this group comes from the Ninth Circuit (with Judge Shira Scheindlin from SDNY sitting by designation on the opposite coast).  In Uthe Technology Corp. v. Aetrium, Inc., 2015 8538090 (9th Cir. Nov. 19, 2015), the plaintiff had already been awarded millions of dollars against related defendants in an arbitration and then brought a RICO claim for treble damages in U.S. federal court for the same conspiracy.  The question was whether that RICO claim was precluded by the “one satisfaction” rule that avoids double recovery.  (P.s. That arbitration lasted two decades.  Score one for litigation.)   The Ninth Circuit found the RICO claims were not precluded, largely because the arbitration claim was against a different set of defendants, and RICO provides remedies that were not available to Uthe in the arbitration, and the arbitration award specifically noted that it was made without prejudice to Uthe’s right to bring further claims in federal court.  The 9th Circuit did note that any damages in the RICO case must be offset by the sums paid as a result of the arbitral award