The Fifth Circuit recently refused to vacate an arbitration award, despite the loser’s arguments that: the arbitrators decided claims outside the scope of the arbitration agreement; and the winner’s expert used incorrect damage numbers in his testimony. Morgan Keegan & Co., Inc. v. Garrett, 2012 WL 5209985 (5th Cir. Oct. 23, 2012).
At issue in Garrett were 18 investors’ claims of securities fraud. Each investor’s Client Agreement with Morgan Keenan contained an arbitration clause, and after the dispute arose, the parties executed a FINRA Submission Agreement, agreeing to submit the investors’ claims and any related cross claims or answers, to the FINRA arbitrators. Despite those agreements, Morgan Keenan made a motion late in the arbitration process to dismiss the arbitration because the claims were not within the scope of the FINRA arbitration rules (because they were allegedly derivative and/or some of the investors were not “customers”). The arbitrators denied the motion.
With almost no reasoning, the district court vacated the arbitration award, finding the arbitrators had “exceeded their power” by deciding derivative claims and claims of non-customers. The Fifth Circuit reversed that decision. It relied heavily on the two broad arbitration agreements between the parties, as well as the extraordinary deference granted to arbitrators, repeating the mantra that courts may not vacate arbitration awards “simply because [they] disagree with the arbitrator’s legal reasoning.” (The emphasis on deference is a bit disingenuous, given the Fifth Circuit’s recent refusal to grant deference to an arbitrator’s rationale for allowing class arbitration.)
With respect to the expert, he had testified regarding the investors’ losses attributable to the fraud. One week later, in an arbitration brought by a different group of investors relating to the same fraud by the same defendant, the expert used different figures. He explained that one of his staff had made an error, and he did not realize it until after the Garrett arbitration. (The opinion does not indicate the magnitude of the error, nor whether it increased or lowered the investors’ damages. It does say, however, that there is no evidence suggesting the error was intentional.)
Morgan Keegan also moved to vacate the arbitration award on this second basis, characterising the award as being “procured by fraud” within the meaning of Section 10 of the FAA. The district court granted the motion to vacate the award, but the Fifth Circuit reversed. It found that Morgan Keegan had not proven that the “fraud was not discoverable by due diligence before or during the arbitration hearing.” Because Morgan Keegan knew about the error before the award was issued, and because Morgan Keegan could have discovered the error on its own before or during the hearing, the Fifth Circuit found it had not proven its own due diligence. The Fifth Circuit reversed the district court’s vacatur, and remanded with instructions to confirm the arbitration award.
I think this case turns on the fact that Morgan Keegan was not a sympathetic party. The fact that it waited until just before the arbitration hearing (when it may have realized the chips were stacked against it) to argue that the claims should be dismissed, and the fact that it did nothing to raise the expert’s revised calculations before the arbitration award was issued (let alone find those errors on its own), gave the odor of sour grapes to this entire arbitration appeal.