First, SCOTUSblog referenced “arbitration nation” last fall, which was flattering. Then last week the Ninth Circuit declared: “we have become an arbitration nation.” That was basically the title of my first post on this blog seven years ago! (“We are becoming an arbitration nation.”) I am going to turn up the Janet Jackson (“Rhythm Nation”) and feel smugly validated while I draft the rest of this post. Because there is more to talk about than just the catchy phrase spreading far and wide. Three federal circuits have vacated arbitration awards this month, giving new hope to parties who are trying to vacate awards and offering cautionary tales to arbitrators.
Aspic Eng’g & Constr. Co. v. ECC Centcom Constructors, 2019 WL 333339 (9th Cir. Jan. 28, 2019), dealt with a subcontractor constructing army facilities in Afghanistan. The subcontractor claimed it was owed significant funds after the project was terminated for convenience by the U.S. government. It proceeded to arbitration against the prime contractor, and an arbitrator awarded the subcontractor just over $1,000,000. The prime contractor petitioned to vacate the award.
Both the district court and Ninth Circuit found that the award should be vacated. The appellate court found the arbitrator exceeded his power within the meaning of Section 10 (a)(4) by issuing a “completely irrational” award. And what made it completely irrational in the court’s view? It was the fact that the arbitrator explicitly refused to enforce material provisions of the parties’ subcontract because the Arbitrator concluded “it was not reasonable to expect that Afghanistan subcontractors would be able to conform to the strict and detailed requirements of general contractors on U.S. Federal projects.” The court found that the resulting award directly conflicted with the parties’ subcontract. “By concluding that [subcontractor] need not comply with the FAR requirements, the Arbitrator exceeded his authority and failed to draw the essence of the Award from the Subcontracts…Such an award is ‘irrational.'”
In the opinion’s conclusion, the court reminds us that it is more than just a rubber stamp for arbitral awards:
We have become an arbitration nation. An increasing number of private disputes are resolved not by courts, but by arbitrators. Although courts play a limited role in reviewing arbitral awards, our duty remains an important one. When an arbitrator disergards the plain text of a contract without legal justification simply to reach a result that he believes is just, we must intervene.
The Ninth Circuit was not the only federal circuit court of appeals to vacate an arbitration award this month. The Fifth Circuit vacated an award in Southwest Airlines Co. v. Local 555, Transport Workers Union of America, 2019 WL 139247 (5th Cir. Jan. 9, 2019) for a similar reason. The court found “the arbitrator ignored the unambiguous terms of the CBA.” In particular, the arbitrator treated the final execution date of the Collective Bargaining Agreement (CBA) as the effective date, even though the record established the parties had ratified it weeks earlier. The court found the arbitrator’s analysis “was not an arguable construction of the CBA and instead amounted to the arbitrator’s own brand of industrial justice.” Indeed, it introduced the case by saying “this case is an example of when an arbitrator goes too far.” (The allowable bases for vacatur in this case were governed by the Railway Labor Act, and are similar to those in the FAA.)
The third case comes from the Federal Circuit, in Koester v. U.S. Park Police, 2019 WL 81105 (Fed. Cir. Jan. 3, 2019). In that labor case, an arbitrator had upheld the park police’s decision to remove an officer from service. But the court found the arbitrator abused his discretion by refusing to consider evidence, then vacated the award and remanded back to the arbitrator. (Vacatur in Koester is not governed by the narrow standards of the Federal Arbitration Act, but instead by by the less deferential standards in a federal statute specific to labor relations with government employees.)
In the Midwest, however, arbitration awards fared just fine under the FAA. In fact, the Eighth Circuit un-vacated an award in Great American Ins. Co. v. Russell, 2019 WL 387032 (8th Cir. Jan. 31, 2019). That case involved a farmer’s claim that his crop insurer wrongfully denied his claim for damage to his corn crop. A panel of three arbitrators awarded the farmer $1,433,008. The insurer moved to vacate the award under the Federal Arbitration Act, claiming the arbitrators violated applicable federal regulations that require the arbitrators to make factual findings, including the basis for any award and breakdown any award by claim. The insurer argued that because the panel did not break the award down by county or otherwise explain the damage calculation, the award must be vacated. The district court agreed and vacated the award, but the Eighth Circuit reversed, finding “nothing in the regulations required the panel to segregate this claim into multiple separate claims.”