Appealing Arbitration Decisions

The Supreme Court of Hawaii ruled recently that if a neutral arbitrator fails to meet disclosure requirements, it constitutes “evident partiality” as a matter of law, and requires the vacatur of the arbitrator’s award.  Furthermore, Hawaii interpreted its disclosure requirements broadly, and in this case found an arbitrator’s failure to disclose the “concrete possibility” of his attorney-client relationship with the claimant’s counsel was enough to create a reasonable impression of partiality and demand vacatur.  Noel Madamba Contracting, LLC v. Romero, __ P.3d __, 2015 WL 7573420 (Haw. Nov. 25, 2015).
The underlying dispute involved homeowners who claimed their contractor had abandoned the construction of their new home.  After the homeowners demanded arbitration and the parties filed their ranked lists of neutrals, a retired judge, Patrick Yim, was appointed as the arbitrator in May of 2011.  The hearing took place in November of 2012, and Yim issued a partial award for the homeowners of about $155,000 on January 26, 2012.  In April of 2012, Yim also awarded the homeowners $42,000 in attorneys’ fees.  The homeowners were represented by lawyers from Cades Schutte LLP.

During that same time period, Yim’s retirement accounts needed some legal attention.  He used a third party (PSC) to manage his retirement accounts, and PSC decided it was time for an attorney to ensure those accounts complied with ERISA (and other laws).  In May of 2011, Yim was told that either Cades or another firm would be chosen to handle that review.  In December of 2011, PSC told Yim the approximate cost for the review and that his file was being sent to an unspecified law firm.  At the end of January, just days before the partial award was issued, PSC told Yim that Cades would likely do the work.  Yim first spoke with a Cades attorney in February of 2012, but Cades had not yet done any work for him and there was no engagement letter.

Within a day or so of the February meeting, which was a month after the partial award for the homeowners, Yim first disclosed his potential client relationship with Cades to the parties in the arbitration.  The contractor objected and requested more information, which resulted in two further supplemental disclosures.  In those disclosures, Yim said he had not yet actually engaged Cades and instead had instructed PSC to send his file to another firm.  The contractor was not satisfied, but the administrator affirmed Yim’s role.  The contractor then moved to vacate the award, arguing evident partiality under the Hawaii Uniform Arbitration Act.  Both the trial court and the intermediate appellate court refused to vacate the award, largely due to their analysis that arbitrators only have to disclose current or past relationships, not potential future relationships.

The Supreme Court of Hawaii remanded the case with instructions to vacate the arbitration award.  It concluded that “Yim’s failure to disclose his relationship with Cades created a reasonable impression of partiality, and as such, resulted in a violation of the disclosure requirements” in the Uniform Arbitration Act, necessitating vacatur of the award.  In its analysis, the court noted that while one subsection of the UAA requires disclosure of an arbitrator’s “past or present relationships,” the more general rule in the UAA is that arbitrators must disclose “any known facts that a reasonable person would consider likely to affect the impartiality of the arbitrator.”  The court cited to Ninth Circuit case law holding that the failure to disclose a “concrete possibility” of a connection between an arbitrator and a party or a party’s law firm can result in a reasonable impression of partiality.  Therefore, Yim’s failure to  disclose his anticipated relationship with Cades constituted evident partiality, even without any showing that Yim was “actually biased.”  The court grounded its decision in policy: “because review of an arbitration award is limited, an arbitrator’s impartiality and appearance of impartiality is paramount.”

This is an interesting opinion for many reasons, but here are a few.

  • Why is this entire case decided under the Hawaii Uniform Arbitration Act?  Was that written into the parties’ contract?  The arbitration agreement is not quoted and there is no analysis in this decision of whether the parties’ transaction involved interstate commerce.  That could have been dispositive, as many federal cases require actual proof of bias.
  • The high court did not reach the issue of whether the trial court should have allowed the contractor’s attorney to depose Yim about his contacts with the Cades firm.  However, it did say that Yim was “not immune” from testifying under the UAA, because the contractor had established prima facie grounds to vacate the award.  I would have liked to see the Hawaii court tackle this issue because there is little good analysis of that issue.
  • Yim’s status as a 24-year member of the Hawaii state courts is likely a critical, but unaddressed, factor in how this decision came out.  Did the lower courts not want to embarrass their former colleague by finding that he failed to disclose?  Conversely, did the high court want to be especially firm with former judges, to avoid any allegation that it was soft on them?  This is not unique to Hawaii — many retired judges become active arbitrators, making it awkward when their former judicial colleagues have to pass on the soundness of their decisions as arbitrators.  Maybe the rule should be that the arbitrator is never named in motions to vacate?  (Ironic…worrying about “evident partiality” by the judges who are considering whether the arbitrator showed “evident partiality.”)


Recent decisions from the 3d and 11th Circuits drive home this point: an arbitration award is final and should not be revisited.

In Robinson v. Littlefield, 2015 WL 5520017 (3d Cir. Sept. 17, 2015), the parties arbitrated their dispute over the quality of a new RV.  The arbitrator ruled for the RV buyers, awarding them about $85,000.  The seller made an untimely motion with the AAA to modify or correct the award, and the arbitrator ignored it.

After the buyers entered their judgment in state court, the seller removed to federal court and moved to strike the judgment as not final (because the motion to modify had not been ruled upon).  The district court asked the arbitrator to indicate whether the case was active, and the arbitrator clarified that he would not amend the previous award and it remained in full effect.   The district court concluded that the arbitration award was not final until the arbitrator responded to the court, and so struck the entry of judgment.  The Third Circuit un-vacated the arbitration award in no time, noting that arbitration awards are final when it is clear the arbitrator intends the award to be a complete determination of all submitted claims (including damages).  In this case, the final award was the award for $85,000, and the motion to modify it “does nothing to change that conclusion.”

In IBEW, Local Union 824 v. Verizon Florida, 2015 WL 5827517 (11th Cir. Oct. 7, 2015), the court found the arbitrator exceeded his power by issuing a substituted award in a labor arbitration.  The arbitrator had issued the original award, interpreting a clause in the parties CBA and applying it to particular employees.  Two days later, the union asked the arbitrator to clarify the award (saying that applying the arbitrator’s rationale, more employees should have benefitted).  In response, the company asked for a reconsideration of the entire award, asserting that a significant topic of the award had not been properly before the arbitrator.  The arbitrator agreed with the company and issued a substituted award, eliminating the topic in question.

The union then sought to confirm the original award and vacated the substituted award.  The district court ruled in favor of the union and the appellate court affirmed.  It analyzed the union’s grievance and found it was broad enough to encompass all the issues addressed in the original award.  “Where — as here–the parties refuse to stipulate to the issues at arbitration, the arbitrator is ’empowered’ to frame and decide all the issues in the grievance as he sees them.”

Furthermore, the 11th Circuit concluded the arbitrator lacked authority to revisit his original award.  Importantly, the court noted that the governing AAA rules preclude an arbitrator from “redetermin[ing] the merits of any claim already decided.”  The hardest issue for the court was the company’s argument that the union had “open[ed] the door” to a full reconsideration by asking for a clarification.  The court agreed that contracting parties can authorize an arbitrator to reconsider his decision by mutual agreement, but said the parties did not mutually consent in this case, because the union sought much narrower relief than that sought by the company.  The arbitrator’s original award stands.

The lesson from these cases?  The parties should not seek reconsideration of the merits of a final award, and arbitrators should not grant a reconsideration of the merits.  Final means final.

Today’s post is a good one for all those defendants/ respondents who are convinced that they have a slam-dunk case and want to recover their attorneys’ fees.  Because while these particular respondents were not successful, they paved a path that may lead others to collect attorneys’ fees after defeating claims in arbitration.

The case involved an owner’s negligence claims against an architect arising out of a condominium project.  WPH Architecture, Inc. v. Vegas VP, __ P.3d __, 2015 WL 6750051 (Nev. Nov. 5, 2015).  “Prior to arbitration”, the architect made offers of judgment under Nevada’s Rule 68 (and a related statute).  That rule allows a defendant to offer to accept judgment against it in a certain amount, and provides that if the plaintiff does not “obtain a more favorable judgment,” the plaintiff “shall pay” the defendant’s costs, interest, “and reasonable attorney’s fees, if any be allowed” from the date of the offer.   (An appropriate betting mechanism for litigation over this Las Vegas condo project…)  The owner rejected the offers and then lost at arbitration.  However, when the architect filed a motion to recover its costs, fees, and interest under Rule 68, the arbitrators denied the motion, noting that there was no express authority finding offers of judgment are available in arbitration.

The architect then asked the courts to modify the arbitration award to include its attorneys’ fees, costs and interest, arguing that the arbitrators had “manifestly disregarded the law” in refusing to follow Rule 68 and Nev. Statute 17.115.  The court went through the following analysis:

  • The parties’ contract called for the AAA’s Construction Arbitration Rules to govern the arbitration, but Nevada law to govern the contract.  Applying Mastrobuono, the court held “that the arbitration was substantively governed by Nevada law and procedurally governed by the AAA rules.”
  • The court held that Rule 68 and the similar Nevada statutes “are substantive laws that apply to the arbitration proceedings in the current case.”
  • However, because those rules and statutes do not reference arbitration or arbitrators, they “do not require an arbitrator to award attorney fees or costs.”  (The court noted that California’s offer of judgment statutes explicitly applies to court and arbitration proceedings.)  “Furthermore, no Nevada caselaw exists holding that those statutes apply to arbitration proceedings.”
  • Therefore, because the rules and statutes did not explicitly apply to arbitration, and no case law had reached that issue, the architect “failed to demonstrate that the arbitrator manifestly disregarded Nevada law.”

Going forward, of course, the analysis will be different.  Thanks to this case, there now is binding case law in Nevada that Rule 68 is a substantive law that applies in arbitration.  This gives anyone whose contract is governed by Nevada law new potential leverage in defending against arbitrable claims.  If you make an early offer of judgment on a winning claim, you have the ability to later tax your costs and interest against your opponent (and a statutory basis to seek fees).  Because many states have a similar offer of judgment statute, and the analysis that the rule is substantive is based on federal cases, this same analysis should be available in many jurisdictions.

Again this year, a famous athlete put the spotlight on the process of arbitration.  Earlier this month, Tom Brady succeeded in convincing a federal judge to vacate the arbitration award against Brady.  (The four-game “deflategate” suspension — a pdf of the decision is available through the link.)

The decision vacating the award is 40 pages (and a good read), but here’s the summary:

 The Court is fully aware of the deference afforded to arbitral decisions, but, nevertheless, concludes that the Award should be vacated. The Award is premised upon several significant legal deficiencies, including (A) inadequate notice to Brady of both his potential discipline (four-game suspension) and his alleged misconduct; (B) denial of the opportunity for Brady to examine one of two lead investigators, namely NFL Executive Vice President and General Counsel Jeff Pash; and (C) denial of equal access to investigative files, including witness interview notes.

In its analysis, the court relied on labor law arbitration doctrines, including that the arbitrator has to adhere to the “law of the shop” and the award must “draw its essence” from the collective bargaining agreement, as well as Section 10(a)(3) of the Federal Arbitration Act (refusal to hear evidence).  However, the court curiously “did not reach” one of Brady’s key arguments: that the arbitrator, NFL Commissioner Goodell, displayed evident partiality within the meaning of Section 10(a)(2) of the Federal Arbitration Act.

Yet the court’s decision reads like an 40-page indictment of Goodell’s ability to serve as an impartial decision-maker.  The judge found: Brady had no notice that his conduct (general awareness of others’ misconduct) could be subject to that type of punishment; Goodell’s choice to equate Brady’s behavior to using steroids was basically irrational; and “Commissioner Goodell’s denial of Brady’s motion to compel the testimony of Mr. Pash [the co-lead investigator] was fundamentally unfair” as was Goodell’s refusal to force the NFL to turn over notes from the investigation.  The decision also notes that before Goodell served as arbitrator, he had publicly praised the investigative report at issue.

So – why not just say NFL Commissioner Goodell was evidently partial in his handling of Brady’s arbitration?  (This is the same question I had about the Adrian Peterson ruling in February, which refused to call the arbitrator biased.)  Could it be that judges are overly concerned with setting a precedent that would essentially forbid the NFL from ever using its own Commissioner as an arbitrator again?  Could it be that judges view the NFL Commissioner as a demi-god who cannot be criticized?  Are the judges worried about being banned from games?  Are we all so polite that we just cannot stomach calling another human being biased?  (Though, the Missouri courts had the guts to do so this year in a similar situation.)  Or is there not enough good case law on the issue of partiality to provide judges the cover they need to issue such a ruling?

I’d love to hear your thoughts.  Email me or send them to @Kramerliz.


The Eleventh Circuit has a lesson for future litigants: the presence of a repeat player is not enough to show the evident partiality needed to vacate an arbitration award under the Federal Arbitration Act.

In  Johnson v. Directory Assistants, Inc., __ F.3d __, 2015 WL 4939578 (11th Cir. Aug. 20, 2015), an advertising company demanded arbitration against its client for breach of contract.  The arbitrator disclosed that he had arbitrated a dispute involving the advertising company five years earlier.  The client challenged the arbitrator and the arbitral forum (the Alternative Dispute Resolution Center, “ADRC”) denied the challenge.  Days before the hearing, the client requested and received a continuance.  A week before the rescheduled hearing, the client declared that because of “the current state of affairs” in its industry, it was “not able to continue with the arbitration.”  Therefore, the arbitrator proceeded with the hearing and allowed the advertising company to put on its case, despite the absence of the client.  The arbitrator awarded the advertising company roughly $100,000 in liquidated damages, late fees, and arbitration costs.

The client sought to vacate the award.  The federal district court granted the motion to vacate, finding that the arbitrator was biased.  The appellate court disagreed.  With respect to the client’s primary argument, that there was “evident partiality” because the arbitral forum refused to disclose how often the advertising company had used ADRC, the court noted that there was no record the client even asked how many times the advertising company had used the arbitral forum.  Furthermore, the court was “unconvinced that the failure to disclose that information would justify vacatur” because that fact alone would not “lead a reasonable person to suspect partiality.”

With respect to the client’s argument that vacatur was appropriate under Section 10(a)(3) because the arbitrator did not postpone the hearing a second time, the court had little sympathy.  “Under these circumstances, where a party participated in an arbitration proceeding only to withdraw a week before the hearing with little explanation and no request for extension, vacatur is inappropriate.”

While the client’s arguments for vacatur in this case were not strong, the Eleventh Circuit did more than it needed to dispose of them.  Its comment that evidence of repeat arbitrations before a single arbitrator or forum is not enough to show vacatur is important because many opponents of consumer arbitration point to the existence of repeat players as a critical flaw in the system.

Three years ago, this blog catalogued where all the federal circuits stood on the issue of whether an arbitration award that “manifestly disregarded the law” could be vacated under the Federal Arbitration Act, as that is not one of the four bases for vacatur listed in Section 10.  There was a circuit split then, and that circuit split has not gone away.  An analysis this summer shows that, while some circuits have shifted their position slightly, there is still no clear majority on whether the basis is valid.

Three federal appellate courts have maintained a strict reading of SCOTUS’s 2008 Hall Street decision.  The Fifth, Eighth, and Eleventh circuits continue to hold that manifest disregard is no longer an applicable basis for vacating an arbitration award. See McVay v. Halliburton Energy Servs., Inc., 2015 WL 1810950, at *2 (5th Cir. Apr. 22, 2015); Medicine Shoppe Intern., Inc. v. Turner Invs., Inc., 614 F.3d 485, 489 (8th Cir. 2010); Campbell’s Foliage, Inc. v. Federal Crop Ins. Corp., 562 Fed. Appx. 828, 831 (11th Cir. 2014).

The Second, Fourth, Seventh, Ninth, and Tenth circuits take the opposite view and have allowed arguments to vacate an arbitration award based on manifest disregard of the law. See A & G Coal Corp. v. Integrity Coal Sales, Inc., 565 Fed. Appx. 41, 42-3 (2nd Cir. 2014); Dewan v. Walia, 544 Fed. Appx. 240, 248 (4th Cir. 2013); Renard v. Ameriprise Fin. Servs., Inc., 778 F.3d 563, 567- 69 (7th Cir. 2015); Wetzel’s Pretzels, LLC v. Johnson, 567 Fed. Appx. 493, 494 (9th Cir. 2014); Adviser Dealer Servs., Inc. v. Icon Advisers, Inc., 557 Fed. Appx. 714, 717 (10th Cir. 2014).

Interestingly, more circuit courts have opted for a middle ground in the last few years, declaring that the issue is undecided. The First Circuit recently reversed a district court’s decision to vacate an arbitration award for manifestly disregarding the law. Raymond James Fin. Servs., Inc., v. Fenyk, 780 F.3d 59, 63-4 (1st Cir. 2015). The court stated that whether the manifest disregard doctrine remains good law is “uncertain,” but that the alleged error in the arbitrator’s award did not meet that high standard in any case.

In addition to the First Circuit, the Sixth and Third Circuits leave unanswered the question whether manifest disregard is a legitimate basis to vacate an arbitration award. In 2008, the Sixth Circuit decided to continue accepting manifest disregard and overturned an arbitration award on that basis, yet in 2014 it held that the legitimacy of using manifest disregard has not been settled and evaded applying it. See Coffee Beanery, Ltd. v. WW, LLC, 300 Fed. Appx. 415, 419 (6th Cir. 2008); Schafer v. Multiband Corp., 551 Fed. Appx. 814, 818-19 (6th Cir. 2014). Although the Third Circuit has allowed manifest disregard arguments in the past, it recently held that “this court has not yet ruled” on whether manifest disregard is an allowable basis to vacate an award. Bellantuono v. ICAP Secs. USA, LLC, 557 Fed. Appx. 168, 173-74 (3d Cir. 2014).

Litigants hoping to overturn arbitration awards should not take great comfort in the fact that five circuit courts allow manifest disregard arguments.  Even those five circuits are reluctant to vacate arbitration awards on that basis.  In fact, we were able to find only two federal appellate courts, the Fourth and Ninth, that have overturned an arbitration award on that basis since 2009. See Dewan, 544 Fed. Appx. at 248; Comedy Club, Inc. v. Improv West Assocs., 553 F. 3d 1277, 1289-90 ( 9th Cir. 2009)

Here’s the scorecard:

Manifest Disregard Lives Manifest Disregard Dead Status Uncertain
2015 2d, 4th, 7th, 9th, 10th 5th, 8th, 11th 1st, 3d, 6th
2012 2d, 4th, 6th, 9th, 10th 1st, 5th, 7th, 8th, 11th. 3d

ArbitrationNation thanks Bri’An Davis, a law student at the University of Iowa College of Law, for researching and drafting this post.

Today I present a collection of recent state and federal appellate court decisions that vacate or un-vacate arbitration awards. The seven opinions below emphasize how difficult it is to prove that an arbitrator exceeded his or her power and suggest that the surest way to vacate an arbitration award is still by presenting evidence that an arbitrator had significant ties to the opposing party.


The Supreme Court of Alabama vacated an award for evident partiality. Municipal Workers Compensation Fund, Inc. v. Morgan Keegan & Co., Inc., __ So. 3d __, 2015 WL 1524911 (Ala. Apr. 3, 2015). Alabama has determined, under the FAA, that arbitration awards may be vacated if the evidence shows a “reasonable impression of partiality” by the arbitrators. In this case, the court found that one of the three FINRA arbitrators did not disclose the significant relationship between his financial firm and the respondent’s firm (including co-underwriting equity and debt issuances and being co-defendants in lawsuits). Even though there was no evidence that the arbitrator was aware of those business relationships, the court found the FINRA arbitration rules obligated the arbitrator to discover those relationships and he did not satisfy that duty. Therefore, the arbitration award was vacated for evident partiality.

The Federal Circuit vacated an arbitration award because the arbitrator had improperly dismissed an employee’s labor dispute. In Garcia v. Dept. of Homeland Security, __ F.3d __, 2015 WL 1087880 (Fed. Cir. Mar. 13, 2015), the arbitrator construed the limitation period within the collective bargaining agreement and found the employee’s claims were too late. Noting that courts may interpret CBA provisions de novo, the court found the employee’s request was timely. (That should be seen as a labor-specific result. It does not comply with the standard in Oxford Health Plans.)


At least three appellate courts have recently un-vacated arbitration awards that lower courts had vacated.

My favorite of these is Raymond James Fin. Servs., Inc. v. Fenyk, __ F.3d__, 2015 WL 1055385 (1st Cir. Mar. 11, 2015), in which the court found the arbitration award “perplex[ing]” and possibly erroneous, but not “unsustainable.” In that case, a discharged employee initially asserted claims that the employer violated Vermont state law. At the hearing, however, the employee asked to add a claim under the federal Americans with Disabilities Act. And, in his post-hearing brief, he asked to add claims under New York and Florida law. The arbitration panel applied Florida law and awarded the employee damages over $600,000. The employer moved to vacate the award, arguing that the panel exceeded its power by ruling on a claim that the employee only submitted after the hearing and ignored Florida’s statute of limitations for that claim. The district court agreed and vacated the award. The First Circuit reversed, noting that the arbitrators were empowered to resolve claims under Florida law, and that Florida’s law on the statute of limitation was ‘evolving” at the time of the arbitration, so “any error by the panel in refusing to dismiss” the claims cannot justify vacatur.

The Supreme Court of Connecticut also un-vacated an award under its state arbitration act in Burr Road Operating Co. II, LLC v. New England Health Care Employees Union, Dist. 1199, __ A.3d__, 2015 WL 1894398 (Conn. May 5, 2015). In a dispute over the proper punishment for an employee who delayed reporting her suspicion that a nursing home resident had been abused, the arbitrator reduced the punishment from termination to a one month unpaid suspension. The employer moved to vacate the award and the trial court denied it. The intermediate appellate court, however, found the arbitration award violated well-defined public policy against delayed reporting of abuse and vacated the award. The Supreme Court of Connecticut then un-vacated the award. After clarifying the factors a reviewing court should consider on claims that an arbitration award violated public policy, it concluded that the award in this case did not violate public policy.

The Fifth Circuit un-vacated an award (using the Texas state arbitration act) in Campbell Harrison & Dagley, LLP v. Hill, __ F.3d __, 2015 WL 1501059 (5th Cir. April 2, 2015). Two law firms were awarded $28 million in an arbitration with their former clients, but the district court vacated the portion of the award that was based on the contingency fee agreement, finding it unconscionable. The Fifth Circuit found the district court “misapplied” the highly deferential standard of review due to arbitration awards under Texas law and substituted its judgment for that of the arbitrators. The Fifth Circuit affirmed the entire award for the law firms.


Two other decisions address, and shoot down, interesting arguments for vacatur.

The Fourth Circuit found that the death of one member of a three-member arbitration panel is not sufficient to vacate the award for “exceeding its authority”, without absolute proof that the third arbitrator failed to participate in deliberation in the case. Although billing records for the arbitrator’s time ceased before issuance of the award, the district court found he participated in and signed the award prior to his death.  PNGI Charles Town Gaming, LLC v. Mawing, 2015 WL 898559 (4th Cir. Mar. 4, 2015).

In the area of reinsurance, the First Circuit agreed that vacatur was not appropriate in First State Ins. Co. v. National Casualty Co., __ F.3d __, 2015 WL 1263147 (1st Cir. Mar. 20, 2015). After the arbitration award declared the parties obligations under the reinsurance contracts, the insured party asked the federal court to vacate the award because the arbitrator’s exceeded their authority. The district court and appellate court both refused to vacate the award. The First Circuit noted that the text of the award shows the arbitrators based their award on the terms of the agreements so that there was “no doubt that the arbitrators were arguably construing those agreements.” Plus, the agreements had “an honorable engagement provision,” which relieved arbitrators of “strict rules of law” and directed them to consider the agreements as “an honorable engagement rather than merely a legal obligation.” The court found that provision empowered the arbitrators to grant equitable remedies that depart from strict readings of the agreements.

If you made it all the way to the bottom of this post you deserve a prize. Today, that prize is this collection of awesome words from the First Circuit opinion in First State Insurance Co.: defenestrate, ultracrepidarian, and adumbrated. Plus, the court quoted Shakespeare!

The Fifth Circuit un-vacated an arbitration award last week, holding the district court had wrongly concluded that the court was the proper decision-maker on contract formation.  Although courts are presumptively authorized to decide whether an arbitration agreement exists, the Fifth Circuit found the parties altered that presumption by “submitting, briefing, and generally disputing that issue throughout the arbitration proceedings.”  OMG, L.P. v. Heritage Auctions, Inc.,  2015 WL 2151779 (5th Cir. May 8, 2015).  [Or, as I like to think of the case: “OMG!  I gave arb TMI and lost my appeal.  WTF”]

The dispute related to OMG’s claim that it was owed more commissions than the auction house had paid it for firearm sales.  The parties disputed how to interpret the term “merchandise” in the contract. Heritage demanded arbitration.  The two relevant agreements between OMG and Heritage provided for binding arbitration of “any dispute” “in any way related” to the agreements.  In arbitration, the auction house argued there was no meeting of the minds regarding the meaning of “merchandise,” so the contract was unenforceable.  The arbitrator agreed and rescinded the contract.

OMG asked the federal district court to vacate the arbitration award, arguing that the arbitrator exceeded his authority by ruling on the issue of contract formation.  The district court agreed, finding “a court was the proper decision-maker as to contract formation issues in this case, not the arbitrator.”

The Fifth Circuit reversed.  Critically, it found that “by their actions, the parties may agree to arbitrate disputes that they were not otherwise contractually bound to arbitrate.”  It cited Fifth Circuit precedent from 1980 (Piggly Wiggly, I am not kidding with the names here) and from 1994 (Executone Info. Sys.) to support that proposition.  Because the auction house had disputed whether there had been a meeting of the minds throughout the arbitration, and OMG “never contested the arbitrator’s authority to resolve” that issue, “the parties agreed to arbitrate contract formation.”  The court found that OMG could have refused to arbitrate the formation issue.  But it could not “simply [] wait until it receives a decision with which it disagrees before challenging the arbitrator’s authority.”

I find the analysis here very interesting.  The Fifth Circuit chose not to base the arbitrator’s authority to rescind the contract in the parties’ agreement to arbitrate any dispute, or any other language in the (now rescinded) agreement.  Instead, it looked to the parties’ conduct to authorize the award.  And in describing that conduct, it did not use a concept like waiver (OMG could have waived its right to argue the arbitrator exceeded his power by not raising that in the arbitration), but instead described the conduct as forming a separate agreement to arbitrate.  In any case, the public policy behind the decision is very clear and reminds me of the “invited error” doctrine: parties cannot ask the arbitrator to exercise power, or accede to that exercise of power, and later complain that the arbitrator exercised that power.

This is an important issue for advocates in arbitration.  Every issue that is presented to the arbitrator — by either party– should be carefully analyzed to determine whether it is validly within the scope of the parties’ arbitration agreement.  If an issue is outside the scope, and the party wants to preserve an objection to its submission to the arbitrator, it must “forcefully” object (see First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995)).  Otherwise, the party will be deemed to have agreed to arbitrate the issue, and the arbitrator’s decision will be subject to the highly deferential review of the Federal Arbitration Act.

If you won your arbitration, it is vexing to have to spend many thousands more in attorneys’ fees opposing a motion to vacate the arbitration award.  (That is especially true if you signed up for arbitration thinking it was faster and avoided appeals.)  But, can you ask the court to award you the attorneys’ fees you incurred in confirming the arbitration award?  That is a much more complicated question than it should be, and the Sixth Circuit took it on recently in Crossville Medical Oncology, P.C. v. Glenwood Systems, LLC, 2015 WL 1948329 (6th Cir. May 1, 2015).

In Crossville, two businesses had claims against each other in arbitration.  Glenwood won.  The arbitrator awarded Glenwood over $200,000 in damages, plus about $16,000 in attorneys’ fees.  The losing party then challenged the award by arguing the arbitration agreement was invalid.  The federal district court disagreed and confirmed the award.  Glenwood then asked the district court to award it the attorneys’ fees it incurred in confirming the arbitration award.  The district court denied the motion.

The Sixth Circuit affirmed the denial of fees.  It analyzed the possibility of recovering fees to confirm an arbitration award by using the following rules/guidelines:

  • “The FAA neither contemplates nor precludes an award of attorneys’ fees.”  So, just like in any other situation, fees are only available if authorized by statute or contract.  In this case, Glenwood only made arguments under its contract.
  • The court may not award fees, even if an arbitration agreement authorizes fees to a prevailing party, if the arbitration agreement has broad language sending all disputes to arbitration.  (Because then, even the dispute over the winner’s fees in confirming the arbitration award must go to an arbitrator.)
  • Similarly, the court may not award fees if the arbitration agreement shows the parties’ intended to grant the power to award fees only to the arbitrator (not a court) .
  • [Another guidepost from the 8th Circuit last year: if the arbitrator didn’t grant the winner its attorneys’ fees during the arbitration, the court is not likely to grant the winner fees incurred in post-arbitration proceedings.]

This is a very useful analysis that should help other courts confronting the issue.  In short, to ask a court for fees on confirmation of the award, a party must be able to show that a statute or contract authorizes the fee recovery, and that that dispute does not fall within the scope of the arbitration clause.

It also offers an important tip for drafters of arbitration clauses.  If you really want to emphasize the binding and final nature of the arbitration by making it onerous for a party to challenge the award, then you may want to consider having a statement along these lines in the arbitration agreement: “In order to discourage any dispute over the confirmation of the resulting arbitration award, the parties agree that the court hearing any challenge to the award may award fees incurred in post-arbitration proceedings to the party who prevailed in the arbitration if and when the award is confirmed.”

Here is my own tip for those litigating this issue: there is room for parties who succeed in getting arbitration awards confirmed (or vacated) to make arguments for attorneys’ fees under the applicable state uniform arbitration act.  The argument goes like this: 1) Even when the FAA applies, state acts may be applicable as a gap-filler; 2) Section 25 of the revised uniform act states that a “court may add reasonable attorney’s fees and other reasonable expenses of litigation incurred” after hearing motions to confirm or vacate arbitration awards; and 3) that is appropriate in my case because my opponent continually thwarted the goal of arbitration to be efficient and final (etc, etc).  Try it and let me know how it works.

Let’s say your arbitration agreement calls for arbitration administered by JAMS under JAMS rules, but the arbitrator is independent and applies AAA rules, over one party’s objection.  A new decision from the Fifth Circuit says that is enough to vacate the resulting award.

In Poolre Insurance Corp. v. Organizational Strategies, Inc., __ F.3d__, 2015 WL 1566633 (5th Cir. April 7, 2015), there was a dispute between a self-insured company, the consultants that set up its insurance program (Capstone), and its reinsurer.  The arbitration agreement between the company and Capstone called for arbitration under the Commercial Arbitration Rules of the AAA, with venue in Delaware.  The arbitration agreement between the company and the reinsurer, on the other hand, called for arbitration by the International Chamber of Commerce (ICC), in Anguilla, with the arbitrator chosen by “the Anguilla [] Director of Insurance.” (Anguilla is in the British West Indies.  Why don’t I ever get to arbitrate somewhere exotic?  Maybe that’s the reward for being a reinsurance lawyer…)

Capstone started arbitration with the company at “Conflict Resolution Systems, PLLC” (CRS) in Houston, and Dion Ramos was named the arbitrator.  When the reinsurer inquired whether the Anguilla Director of Insurance could select the arbitrator, as required in the reinsurance contract, an Anguillan official explained that “no such official existed.”  (Sounds reminiscent of these cases...)  However, the Anguillan official designated CRS to select an independent arbitrator and administer the proceedings.  The company objected to the arbitrator’s authority, and the reinsurer intervened to request an arbitrator based in Anguilla.  Ramos found he had jurisdiction over all parties, and found the reinsurer waived its right to arbitrate in Anguilla by intervening.  The company continued to object, arguing that the arbitrator did not have the power to apply AAA rules to the reinsurance dispute.

Ramos found the reinsurer was properly joined in the arbitration.  On the merits, Ramos found the company breached its contracts with Capstone and the reinsurer and granted attorneys’ fees and expenses to Capstone and the reinsurer of about a half a million dollars.  Ramos denied all the company’s claims.

The reinsurer and Capstone moved to confirm the award and the company moved to vacate.  The Texas district court found Ramos exceeded his authority by exercising jurisdiction over the reinsurer and applying AAA rules to the reinsurance dispute. Because the inclusion of the reinsurer “tainted the entire process,” the district court vacated the award.

On appeal, the Fifth Circuit affirmed the district court’s decision to vacate the award.  The court noted that arbitration awards may be vacated when arbitrators “exceed[] the express limitations” of the contractual mandate, or act contrary to express contractual provisions.  Here, the Fifth Circuit found two separate bases for vacating the award.  First, the arbitrator-selection mechanism in the reinsurance contracts was not followed.  (In a footnote, the court acknowledged that the selection mechanism provided in the contract was not actually available, since there was no official with that title, but that the parties could have come to the court under Section 5 of the FAA and asked the court to appoint an arbitrator.)  Second, Ramos “acted contrary” to the requirement that the reinsurance disputes be arbitrated by the ICC under ICC rules.  The court found that was a “forum selection clause integral to the agreement” and therefore the arbitrator exceeded his power by applying AAA rules.  (Interestingly, the Fifth Circuit did not analyze the third basis that the district court used to support vacatur: the arbitrator’s decision to join all the parties to a single arbitration, although the company had not consented to consolidation.)

What are the lessons here for parties?  Here are at least two.  First, do not try to consolidate arbitrations that call for different administrators or different rules unless all parties agree.  And second, if you are going to specify an unusual arbitrator-selection process, make sure to put a “Plan B” in the contract.

Two other bits of arbitration news:

First, SCOTUS denied cert in one of the cases that refused to enforce an arbitration clause calling for arbitration before a Native American tribe.

Second, Delaware’s Rapid Arbitration Act officially became a law on April 3 and will go into effect in May.  Will Delaware businesses see the promise of speedy dispute resolution (max resolution time is 180 days by law) as enough of a benefit to give it a try? We may never know, as the process will be confidential…