Appealing Arbitration Decisions

Although we usually expect arbitrators to be impartial, the Supreme Court of Texas vacated an arbitration award because the chosen arbitrators were too impartial. Americo Life, Inc. v. Myer, __S.W.3d__, 2014 WL 2789429 (Tex. June 20, 2014). Because the court found the parties’ agreement allowed each side to choose an arbitrator who was partial to it, but the AAA had disqualified the selected advocate-arbitrators, the award was vacated.

The case stemmed from Myer’s sale of a collection of businesses to Americo in 1998. The arbitration agreement in the sale document stated that any disputes should be decided by three arbitrators, with each party appointing one arbitrator and those two selecting the third. The arbitration would be governed by AAA’s commercial rules. Critically, “[e]ach arbitrator shall be a knowledgeable, independent business person or professional.” A dispute about the meaning of that sentence caused the arbitration and its appeals to last nine years.

In 2005, Americo demanded arbitration. At that time, the AAA rules explicitly required arbitrators to be “impartial and independent.” Therefore, when Americo (twice) chose an arbitrator that was partial towards it, the AAA disqualified those arbitrators. After a panel of three impartial arbitrators heard the evidence, they awarded Myer over $26 million in damages.

Americo moved to vacate the award, arguing that the arbitrators were not selected in accordance with the parties’ agreement. The trial court vacated the award, the court of appeals un-vacated it, and a majority of the Texas Supreme Court re-vacated it.

The high court’s analysis emphasized the fact that “arbitrators must be selected pursuant to the method specified in the parties’ agreement.” Because the touchstone is the agreement, the court had to interpret whether the contractual requirement that the arbitrator be “independent” meant that he or she be impartial. The court concluded it did not. The 1998 AAA rules allowed parties to appoint arbitrators that would serve as their advocates. Therefore, the court interpreted “independent” to mean only that the arbitrators would not actually be employed by a party or under its control. (It also found that the modified AAA rules could not trump terms in the agreement itself.)

Once the court concluded that the agreement allowed arbitrators to be biased toward the party that selected them, but the AAA had disqualified arbitrators for being biased, its decision to vacate became unavoidable. “[T]he arbitration panel was formed contrary to the express terms of the arbitration agreement. The panel therefore, exceeded its authority when it resolved the parties’ dispute.” Four justices dissented from the opinion, arguing that the AAA rules in effect in 2005 demanded impartial arbitrators unless the parties specifically agreed otherwise and the language of the parties’ agreement did not specifically allow non-neutral arbitrators.

This case shows why arbitration law is so hard for people to grasp. Essentially, this case says that an award reached by three impartial arbitrators has to be reversed, because two of those arbitrators should have been biased. That is a head-scratcher.  Only when you understand that the FAA emphasizes the parties’ agreement over almost everything else does that result make any sense at all. This case may become Exhibit B for me when I explain that case law under the FAA is not intuitive, even for lawyers (Exhibit A is Buckeye Check Cashing, which never fails to elicit a strong reaction from the uninitiated).

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Just as SCOTUS held its nose and confirmed an arbitration award it thought stunk in Sutter, the Supreme Court of Alabama has confirmed an arbitration award made after only the claimant presented evidence and grounded in a possible misunderstanding of Alabama law.  Tucker v. Ernst & Young, __ So.3d__, 2014 WL 2619860 (Ala. June 13, 2014).

In Tucker, shareholders of HealthSouth Corporation (in the name of the company) asserted claims against HealthSouth’s accountants, Ernst & Young, alleging that E&Y should have discovered accounting fraud at HealthSouth.  The shareholders’ case-in-chief took almost two years.  They presented testimony from 14 live witnesses and 61 video witnesses over the course of 81 days, plus thousands of pages of exhibits.  At least five months before the shareholders rested their case, E&Y sought and received permission to file a dispositive motion based on E&Y’s affirmative defenses at the end of the shareholders’ evidence.  The panel allowed the shareholders to add any relevant evidence and witnesses they wanted to their case-in-chief to address the affirmative defenses.

After the shareholders rested, and the panel heard arguments on the motion, the panel granted E&Y’s motion, dismissing all claims.  The gist of the motion was this: the fraud at HealthSouth was widespread and knowledge of it must be imputed to the company, therefore the company should not be allowed to blame others for its own misconduct.  The panel cited Alabama common law (the Hinkle rule), as well as the doctrines of in pari delicto and contributory negligence to support the dismissal.

The shareholders moved to vacate the award under Section 10(a)(3) and 10(a)(4) of the Federal Arbitration Act.  They argued the arbitrators committed misconduct in granting a motion for judgment as a matter of law and that the arbitrators exceeded their power by ignoring Alabama precedent.  The Alabama courts disagreed and confirmed the award.

The Tucker court found no misconduct because the panel had authority to allow a dispositive motion and it allowed the shareholders every opportunity to present evidence relating to the affirmative defenses.  The court also found the panel had not exceeded its authority in applying Alabama law.  Citing extensively from Sutter, the court characterized the shareholders’ arguments as indistinguishable from “manifest disregard of the law,” a basis which Alabama has concluded is unavailable under the FAA.  In any case, the court found the panel “arguably and in apparent good faith” applied Alabama law to resolve the dispute and therefore its award must stand.  Finally, with respect to the shareholders’ argument that affirmative defenses were not within the scope of the parties’ arbitration agreement, the court found the shareholders had waived that basis for vacatur by not raising it to the panel (and by asserting the same affirmative defenses against E&Y’s counterclaims).

Although no justices dissented, one wrote a separate concurrence.  After setting forth why the arbitrators mis-interpreted Alabama law about imputing conduct, the concurrence states “further reflection has caused me to question whether arbitrators who willfully ignore applicable state law are not, in fact, ‘exceeding their power’ or acting ‘beyond their authority’ within the contemplation of” Section 10(a)(4).  He concurred, though, because that view is clearly precluded by SCOTUS’s interpretation of the FAA.

Today we take a close look at that rare creature: an opinion finding sufficient basis under the FAA to vacate an arbitration award. In Tenaska Energy Inc. v. Ponderosa Pine Energy, LLC, __S.W.3d __, 2014 WL 2139215 (Tex. May 23, 2014), the Supreme Court of Texas found an arbitrator had shown “evident partiality” due to his misleading “partial” disclosures of his contacts with the law firm representing the claimant.

The underlying dispute was over whether Tenaska had breached representations and warranties to Ponderosa in a power plant purchase agreement. The purchase agreement required that any disputes be arbitrated before a panel of three arbitrators, with each party choosing one neutral arbitrator and the two party-appointed arbitrators selecting the third. Ponderosa, represented by Nixon Peabody, demanded arbitration and chose Samuel Stern as its arbitrator. Stern, along with the third arbitrator, awarded Ponderosa $125 million.

Tenaska moved to vacate the award, arguing that Stern had shown evident partiality. After “extensive discovery” on the issue of Stern’s contacts with Nixon Peabody, the trial court agreed and vacated the award. The intermediate appellate court reversed the trial court, finding that Tenaska had waived its right to argue evident partiality by not objecting to Stern’s appointment after receiving his limited disclosures. The Texas Supreme Court reinstated the district court’s order vacating the arbitration award.

Upon his appointment, Stern  disclosed that Nixon Peabody had designated him as an arbitrator in three other disputes, that he was a director of a litigation services company, LexSite, based in India, and that he had met with Nixon Peabody lawyers about outsourcing some of their discovery tasks to LexSite. However, he said the firm had done no business with LexSite and “it is not clear that Nixon-Peabody would ever have any business to give LexSite.”

The court found it material that Stern did not disclose the following facts: Stern owned shares of LexSite, was being paid $6,000 per month by LexSite to actively solicit business from U.S. law firms, had communicated multiple times with the individual lawyers representing Ponderosa on this very matter about Nixon Peabody using LexSite, and allowed Ponderosa’s counsel to edit his arbitration disclosures. The court held that “[t]aken together, this undisclosed information might cause a reasonable person to view Stern as being partial toward [Nixon Peabody’s] client, Ponderosa, to gain their favor in securing business for LexSite from Nixon Peabody.” Because the court found that the Tenaska did not have to prove “actual bias,” the fact that a reasonable, objective person could conclude Stern was partial was sufficient to vacate the award. [In a nod to Stern, the court “reiterate[d] that [its] holding should not be read as indicating that Stern was actually biased.”]

Furthermore, the court found that Tenaska did not waive its right to vacate the award by accepting Stern’s appointment after he disclosed his relationship to LexSite and his meeting with Nixon Peabody. The court concluded that because material information was withheld from Tenaska, it did not waive its partiality challenge. “To hold otherwise ‘would put a premium on concealment’ in a context where the Supreme Court has long required full disclosure.”

This case has important practical implications for arbitrators and counsel alike: if you choose an arbitrator who you believe will be a strong voice in your client’s corner, do not put that appointment at risk by making partial disclosures.

Legally, I find it interesting that even though the Texas Supreme Court acknowledged that the FAA governed, it rested its analysis largely on its own precedent decided under its state arbitration act. The court did not discuss, for example, the Fifth Circuit decision from just two years ago, finding a party had waived its claim of partiality under the FAA when it received partial disclosures from an arbitrator and took no further action. The Fifth Circuit found the disclosures at issue in that case “ were sufficient to put [the party] on notice of a potential conflict” and the party had a duty to reasonably investigate. That holding appears at odds with the Texas Supreme Court’s Tenaska decision, even though both courts are applying the FAA.

This week the Eighth Circuit confronted an interesting question: if a union member believed he failed a drug test, and therefore agreed his employer could terminate him if he tested positive again, can the arbitrator invalidate that agreement if the union member never actually failed the drug test? The appellate court answered yes, reversing the district court, in Assoc. Elec. Coop., Inc. v. IBEW, Local No. 53, 2014 WL 1910604 (8th Cir. May 14, 2014).

The employee’s story proves that sometimes being proactive is not wise. The employer conducted random drug testing. Its employee of 28 years informed management that he would test positive because he had recently smoked marijuana. In response, the employer and employee signed a last chance agreement (LCA), providing that if the employee was found under the influence or in possession of drugs again, he would be terminated. The employee was suspended without pay and had to immediately begin chemical dependency treatment. A week later, the employee found out that the random drug test did not reveal the presence of marijuana. Despite that, both parties treated the LCA as remaining in force. When a follow-up urine sample revealed the presence of a prescription drug that the employee had not been prescribed, the employer terminated him pursuant to the LCA.

The union submitted the dispute to arbitration under the parties’ Collective Bargaining Agreement (CBA). The arbitrator found the LCA was unconscionable because the initial drug test was negative. Therefore the termination lacked “just cause” under the CBA. The arbitrator awarded the employee back pay from the date of the random drug test.

The district court vacated the arbitrator’s award. It concluded that the arbitrator lacked authority to ignore the LCA.

The Eighth Circuit reversed. It held that LCAs are binding in arbitration only when they: 1) involve the union; and 2) resolve pending disciplinary proceedings governed by the CBA grievance process. In this case, the LCA did not involve the union and did not resolve any pending disciplinary proceeding. Therefore, the LCA did not supersede the CBA and its requirement of just cause for termination. The court noted that “it is customary and appropriate for arbitrators to pass upon claims for reformation for mutual mistake, often applying principles more liberal than judicial equity…” The Eighth Circuit found that the arbitrator was only authorized to award back pay from the date of termination, not the date of suspension, however, because only the termination was timely raised in arbitration. (That issue drew a dissenting opinion.)

Three decisions came out recently that offer guidance on appealing from arbitration awards.  Here are three pearls of arbitration appeal wisdom, one from each case:

1.  If you want to appeal from an arbitration, you must have a record.  Sounds basic, right?  But many parties, either due to confidence they will win in arbitration or due to penny-pinching, choose not to hire a court reporter to provide a transcript of the arbitration.  Similarly (though less frequently in my experience), parties sometimes opt for an arbitration award that does not include the arbitrator’s reasoning.  (I always advise clients to choose the highest level of award possible. If there were a Super Monster Supreme Award With Chocolate Sprinkles, I would recommend that.)  Those decisions can be the death knell of an arbitration appeal.  As the Sixth Circuit found recently, a party who fails to preserve a “complete record of the arbitration proceedings [] cannot meet its high burden of showing that the arbitration award must be vacated.”  Physicians Ins. Capital v. Praesidium Alliance Group, 2014 WL 1388835 (6th Cir. April 10, 2014).

2.  You cannot appeal in the middle of arbitration.  There are only two times to come to court about your arbitration: before it happens, when you want to figure out whether arbitration is required under your contract; and after it is complete, when you want to either vacate or confirm the final award.  The corollary is: you cannot appeal in between.  That rule was reiterated in Savers Property & Cas. Ins. Co. v. Nat’l Union Fire Ins. Co. of Pittsburg, 2014 WL 1378134 (6th Cir. April 9, 2014).  (Other circuits take note — Savers was argued on March 21 and the decision came out less than three weeks later.  Such efficiency!)  In Savers, the panel of arbitrators had issued an interim award on liability and were accepting submissions on damages when the liable party convinced the federal court to enjoin any further orders from the panel (based largely on allegations of evident partiality).  The Sixth Circuit reversed the district court’s injunction saying that the liable party “is entitled to its day in court to challenge the fairness of the proceedings and the partiality of the arbitrators — just not until the panel has concluded its work and issued a final award.”

3.  If your arbitration itself includes an appellate review, the court may review both levels of arbitral awards.  As you likely are aware, the AAA started offering optional appellate rules a few months ago. (CPR and JAMS already had optional appellate rules.)  If parties incorporate those appellate rules into their arbitration agreement, then they are entitled to have a first arbitrator/panel decide the issues in the case, and then a second panel of arbitrators decide if the first arbitrator(s) made any material errors of law or “clearly erroneous” factual determinations.  (I didn’t blog about it because *everyone* was blogging about it.  The same reason I am not blogging about the new General Mills policy today…)  One of the practical questions I had about that process was how the courts would review those two levels of arbitral awards on motions to confirm or vacate.  Would a court review only the “final” award of the appellate panel?  Or would it conduct an independent review of the initial arbitrators’ decision?  The Alaska Supreme Court had occasion to address that situation and decided to give both levels of arbitration award the same level of scrutiny.  In Dunham v. Lithia Motors Supports Servs., Inc., 2014 WL 1421780 (Alaska April 9, 2014), the employment agreement allowed a second arbitrator to review the award made by the first arbitrator.  Both arbitrators concluded the employees’ claims lacked merit.  In considering the employees’ allegations that the award should be vacated, the court applied the Section 10 standards to both levels of arbitration: “neither arbitrator manifestly disregarded the law nor issued a completely irrational award;”  “the arbitrators’ awards do not violate public policy.”  While that is a good belt-and-suspenders approach, it strikes me as inefficient and unworkable in cases where the appellate arbitrators actually reversed an aspect of the trial arbitrator’s award.


You may have already heard that SCOTUS affirmed arbitrators’ authority to interpret contractual prerequisites to arbitration last week in BG Group, PLC v. Republic of Argentina.  But that is just one of a number of recent decisions from high courts on the deference due arbitrators.

In the BG Group case, the D.C. Circuit had vacated an arbitration award, finding the arbitration panel overstepped its authority by hearing the case before certain conditions precedent had been met.  (My preview of the case is here.)  In a 7-2 decision written by Justice Breyer, the Court gave this helpful roadmap to its analysis:

we shall initially treat the document before us as if it were an ordinary contract between private parties. Were that so, we conclude, the matter would be for the arbitrators. We then ask whether the fact that the document in question is a treaty makes a critical difference. We conclude that it does not.

Why is the conditions precedent issue for the arbitrators in an ordinary contract?  SCOTUS repeatedly cites its 2002 decision in Howsam and explains that “courts presume that the parties intend arbitrators, not courts, to decide disputes about the meaning and application of particular procedural preconditions for the use of arbitration…includ[ing] the satisfaction of ‘prerequisites such as time limits, notice, laches, estoppel, and other conditions precedent to an obligation to arbitrate.'”  Because the section of the treaty at issue dealt with a condition precedent to arbitration, the Court found it was properly a question for the arbitrators, and the fact of the treaty did not change that analysis one bit.

After concluding the arbitrators properly had authority to determine whether the conditions precedent were satisfied, the Supreme Court easily determined that the arbitrators’ substantive determination about those conditions precedent did not “exceed their powers” under the highly deferential standard of Stolt-Nielsen.  While this case is about international arbitration, its analysis begins as a normal contract analysis and in that way is a helpful reminder even in FAA cases about which decisions belong squarely with the arbitrator(s).

The U.S. Supreme Court is not the only one that has been busy confirming arbitration awards, however.

  • West Virginia recently confirmed an arbitration award after hearing arguments that the arbitrators lacked authority to interpret a lease.  In CDS Family Trust, LLC v. ICG, Inc., 2014 WL 184441 (W. Va. Jan. 15, 2014), the high court of West Virginia disposed of the arguments in support of vacatur easily by noting that the losing party had not raised those arguments to the arbitration panel and that the arbitrators were at least arguably construing the lease, citing Sutter.
  • In McAlpine v. Priddle, 2014 WL 685854 (Alaska Feb. 21, 2014), the Supreme Court of Alaska affirmed an arbitration award in favor of an attorney in a dispute with a client.  In response to most of the client’s arguments for vacatur, the court found that “[u]nder our precedent, neither the panel’s factual findings nor its legal conclusions are reviewable.”  Even the arbitrators’ finding that the fee agreement was not falsified or a fraudulent copy was not reviewable.
  • In Hawaii State Teachers Assoc. v. Univ. Laboratory School, 2014 WL 783135 (Hawaii Feb. 27, 2014), the Supreme Court of Hawaii enforced the parties’ agreement that “the arbitrator shall first determine the question of arbitrability” and found that the union was therefore entitled to arbitrate its claim that its grievance is arbitrable.

Just how hard is it to vacate an arbitration award?  The Sixth Circuit recently held that even if the arbitrator reached a result directly contrary to federal precedent, the arbitration award would be upheld.  And the Tenth Circuit found that even if the arbitrator based his award on an agreement that does not support the award, it will be upheld if there is any other basis to confirm.

In Schafer v. Multiband Corp., 2014 WL 30713 (6th Cir. 2014), two directors of a holding company sold that company to Multiband.  Everyone involved knew that the federal government was investigating whether the holding company had purchased stock for its ESOP at inflated prices.  (ESOP = Employee Stock Ownership Plan.)  As part of the deal, Multiband agreed to indemnify the directors if they were found to have wrongly purchased stock.  Later, however, when the federal government actually sued the directors, Multiband refused to indemnify them.  So, the directors settled the suit with their own funds and started an arbitration against Multiband.

In arbitration, Multiband argued that the indemnification agreement was void against public policy (under ERISA) and therefore unenforceable.  The arbitrator agreed.  The directors moved to vacate the award, and the district court granted the motion.  The district court concluded the arbitration award was in “manifest disregard of the law” because the arbitrator was aware of controlling Sixth Circuit precedent and chose to ignore it.  The Sixth Circuit was able to look past the arbitrator’s error and rely on the extraordinary deference to arbitration awards to confirm the award:

Even assuming that manifest disregard of the law is a basis for vacatur of an arbitral decision, the scope of the basis has to be very narrow. Manifest disregard of the law is not just manifest error of law. If the arbitrator expressed disagreement with the law, rather than interpretation of the law, that might suggest “disregard.” But there is little evidence of that in the arbitrator’s decision. Instead, the arbitrator relied on a very broad “plain” reading of the ERISA provision invalidating contractual provisions that relieve a fiduciary of liability, and relied on a narrow and formal meaning of the insurance exception to that provision.

But here’s the opinion’s real kicker:

Moreover, the very idea that an arbitral decision is not appealable for legal error leads to the conclusion that the arbitrator is not necessarily bound by legal holdings of this court. If an arbitrator relies on a colorable meaning of the words of the statute—as the arbitrator did here—the fact that there is Sixth Circuit precedent to the contrary is not necessarily determinative. Sixth Circuit holdings are binding in courts and on agencies whose decisions are appealable to the Sixth Circuit, ultimately because of that appealability. An arbitrator cannot reject the law, but can disagree with nonbinding precedent without disregarding the law.

What can one learn from this opinion?  First, in drafting arbitration provisions, parties need to think carefully about whether they want to forego even this type of legal challenge to an arbitrator’s award.  If not, consider either staying in court or opting to build in an arbitral appeal.  Second, the Sixth Circuit appears to believe “manifest disregard of the law” may be a valid challenge to an arbitration award.  But they consider manifest disregard to be so narrow (the arbitrator disagreeing with a controlling statute and refusing to apply it) that it might as well have died with Hall Street.  And finally, the Sixth Circuit is willing to say in a published opinion what I have only heard others whisper in select company: that if the grounds for appeal of an arbitration award are this constrained, maybe arbitrators really do not have to follow the law after all…

In a less dramatic opinion, the Tenth Circuit also recently affirmed a portion of an arbitration award that the district court had vacated.  In Adviser Dealer Services, Inc. v. Icon Advisers, Inc., 2014 WL 541914 (10th Cir. Feb. 12, 2014), it upheld the arbitration panel’s award forcing Party X to pay attorneys’ fees, even though the award had indicated the fees were “pursuant to the terms of” an agreement, and Party X was not a signatory to that agreement.  However, the appellate court found all parties had requested attorneys’ fees and the rules allowed the panel to award attorneys fees in that situation.  “Because the arbitration panel had general authority  . . . to award attorneys’ fees, an erroneous reference to the [agreement] as a basis for its award was merely an error of fact, which does not justify overturning the panel’s award of attorneys’ fees.”

Arbitration is in the news.  Not just a buried paragraph in the business section, but the front page.   (A three-arbitrator panel issued a 34-page arbitration award finding Major League Baseball was justified in suspending baseball player Alex Rodriguez for 162 games, which A-Rod is now trying to vacate.)  My own hope is that this high-profile arbitration becomes a tool for teaching the public about arbitration.  Indeed, A-Rod’s experience to date offers pointers for everyone from the arbitration novices to nerds. For example:

  • Labor disputes — i.e. those between employees who are members of unions and the employer or other employees — are frequently arbitrated.
  • In a case where the arbitration will be decided by three arbitrators, the agreement often provides that each party to the arbitration will choose one of the three, and only the third arbitrator will be neutral.  (In this case, one of A-Rod’s complaints is that his union, the MLB Players Association, chose his arbitrator and did not allow his personal legal team to make the selection.)  A-Rod’s panel was made up of the General Counsel of the Players Association, the COO of Major League Baseball, and then the impartial chair, Fredric Horowitz.  (The Players Association appointee did not agree to the award.)
  • Arbitration hearings do not generally proceed under either the Federal Rules of Civil Procedure or any state’s rules of civil procedure, nor do they necessarily abide by the federal or state rules of evidence.  Instead, the parties’ contract dictates what rules will govern the arbitration proceeding (contracts often choose rules of the arbitration provider, like the AAA).  In this case, the parties’ collective bargaining agreement set out its own rules of procedure that would govern.
  • Arbitration proceedings are not necessarily confidential.  A-Rod was unsuccessful in asking a federal judge to “seal” his arbitration award, i.e. keep it out of the public record.  And in general, once any party goes to court to confirm or vacate an arbitration award, the award is likely to become public, even if the parties’ agreement or the arbitral rules provide for confidentiality.
  • Arbitrators only have power over the parties who signed the arbitration agreement at issue, but not over third parties like media outlets.  In this case, both parties complained about violations of the confidentiality clause in the parties’ agreement during the arbitration, but the arbitration award noted that “the Panel does not have authority to enjoin third parties or the media from breaching the confidentiality provisions” of the agreement.
  • Arbitration awards are extremely difficult to overturn.  There are only four valid bases to overturn an arbitration award under the Federal Arbitration Act.  Rodriguez is arguing two of those bases (that the arbitrators refused to hear pertinent evidence and were partial to MLB).  He is also arguing a basis that is not found in the FAA, but was created by judges: the arbitrator manifestly disregarded the law.  Many federal courts have declared that “manifest disregard of the law” cannot be used to overturn arbitration awards (because it is not in the statute), but the federal courts in New York have continued to allow arguments that arbitrators effectively disregarded legal precedent.

In the Hall Street decision in 2008, SCOTUS held that parties could not contractually enlarge Section 10 of the Federal Arbitration Act by agreeing that a court could vacate the arbitration award for reasons not found in that section.  This week, the Ninth Circuit held that parties also cannot contractually restrict Section 10 by providing for “binding, non-appealable arbitration.”  In
re Wal-Mart Wage and Hour Employment Practices Litig., __ F.3d __, 2013 WL 6605350 (9th Cir. Dec. 17, 2013).

The dispute in In re Wal-Mart was among the successful counsel for plaintiffs in an employment suit.  The attorneys had been awarded $28 million in attorneys’ fees, but could not agree on how to divvy it up among the various firms who had handled the case.  They had an agreement calling for “binding, non-appealable arbitration” and they arbitrated their fee dispute.

After the arbitrator issued an award splitting up fees, one group of attorneys was unhappy and moved to vacate the award.  The district court confirmed the award and the unhappy attorneys appealed.

On appeal, the happy attorneys argued that the Ninth Circuit lacked jurisdiction to hear the dispute, because the parties had contractually agreed that the arbitration would not be appealable.  The Ninth Circuit disagreed for two reasons.  First, using an analysis similar to Hall Street, the court found the statutory language in the FAA “carries no hint of flexibility.”  And second, allowing parties to opt out of Section 10 review “would also frustrate Congress’s attempt to ensure a minimum level of due process for parties to an arbitration.”

This decision is important in that it protects consumers and other parties without negotiating power from arbitration agreements that write out even the minimal appeal bases in Section 10.  However, it also runs counter to SCOTUS’s oft-repeated point that the purpose of the FAA is to enforce arbitration agreements.  If that is true, why not also enforce an agreement that the award is final and not appealable?  Thoughts to ponder over some egg nog…

The Federal Arbitration Act sets forth only four bases for vacating arbitration awards.  See 9 U.S.C. § 10 (a).    After SCOTUS’s 2008 decision in Hall Streetat least half of the circuit courts have concluded that those four bases are exclusive, de-legitimizing the creative bases that judges had developed over the years.  However, a recent Fourth Circuit opinion vacated an arbitration award for “manifest disregard of the law,” a judicially-created basis for vacating arbitration awards that is not contained in Section 10 of the FAA.

In Dewan v. Walia, 2013 WL 5781207 (4th Cir. Oct. 28, 2013), there was an arbitration between a company and its former employee.  Each side made claims against the other.  Critically, however, the employee had executed a Release Agreement in exchange for $7,000 just three months before the arbitration, which allegedly released all his employment claims.  After the hearing, the Arbitrator concluded that the Release Agreement was enforceable, but still awarded damages to the employee.  The district court confirmed the arbitrator’s award.

On appeal, the Fourth Circuit reversed.  It instructed the district court to vacate the arbitration award because it was “the product of a manifest disregard of the law by the Arbitrator.”  The court conducted its own analysis of the release language and concluded that the employee had released all claims against the company, including those he pursued in the arbitration, and therefore the arbitrator should not have awarded the employee any damages on his claims in the arbitration.

One judge dissented.  The dissent, while never citing Sutter, invokes the same standard used in Sutter, noting that the arbitrator did her job and interpreted the contract.  “Because the arbitrator unquestionably construed the release agreement at issue, we are not at liberty to substitute our preferred interpretation for the arbitrator’s.”

It does seem nearly impossible to square Justice Kagan’s language in Sutter, instructing courts to confirm arbitration awards whether “good, bad or ugly” and even if containing “grave error,” with this Dewan opinion from the Fourth Circuit.  While the insurer in Sutter moved to vacate under a legitimate FAA basis (that the arbitrator exceeded his power), and the company in this case moved to vacate claiming “manifest disregard,” the same standard should apply to all claims that arbitrators got the law wrong: as long as the arbitrator even arguably construed the contract, that construction holds.

**Finally, a short update on a previous post.  In April, the Ninth Circuit ducked the question of whether California’s Broughton-Cruz rule was preempted by the FAA.  (That rule exempted claims for public injunctive relief from arbitration under California law.)  Last week, however, the Ninth Circuit determined that Broughton-Cruz is preempted.  Ferguson v. Corinthian Colleges, Inc., __ F.3d __, 2013 WL 5779514.  The court relied on Concepcion as well as Marmet Health Care Center, and Mastrubuono to reach its result.