A recent report showed that less than half of arbitration agreements in the consumer financial arena include delegation clauses in their arbitration agreements.  Two recent decisions from state high courts suggest that is a wise decision because courts do not like to enforce delegation clauses. (Reminder: a delegation clause gives the arbitrator explicit authority to decide issues of substantive arbitrability that would otherwise be decided by a court, like the enforceability and scope of the arbitration clause.)

In Schumacher Homes of Circleville v. Spencer, __ S.E.2d.___, 2015 WL 1880234 (W.Va. 2015), the highest court in West Virginia refused to enforce the parties’ delegation clause.  The construction contract contained an arbitration agreement, which stated that “The arbitrator(s) shall determine all issues regarding the arbitrability of the dispute.” When the homeowners sued over construction defects, the builder moved to compel arbitration. The trial court denied the motion, finding the arbitration clause unconscionable. On appeal, the builder focused on the delegation clause, arguing that the trial court erred in not sending the unconscionability issue to the arbitrator.

The West Virginia Supreme Court of Appeals called the rule in Rent-A-Center, that delegation clauses must be enforced unless the plaintiff alleges the clause itself is unenforceable, “absurd” and an “ivory-tower interpretation of the FAA.”  Yet, it also recognized the rule is binding on state courts, so it found a different basis to object to the delegation clause. Noting that delegation clauses must be “clear and unmistakable,” the court found that “arbitrability” is an ambiguous term, so the delegation clause here did not clearly delegate the question of unconscionability to the arbitrator. (It did not help that the builder first raised the delegation clause orally after the issues were briefed in the trial court.) One justice dissented from the opinion, calling it “blatant ‘judicial hostility’ toward arbitration” and noting that the court “has been notoriously chastised by” SCOTUS for singling out arbitration agreements for hostile treatment.

[Editor’s note: The decision in Circleville reiterates the need for this blog to exist and continue educating people about arbitration law. The opinion starts by 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.” That’s why I’m here, folks! To stop your eyes from glazing over and help lawyers and judges and “ordinary” people understand the FAA. Okay, back to our regular program.]

The Supreme Court of Kentucky did something similar in Dixon v. Daymar Colleges Group, LLC, __S.W.3d__, 2015 WL 1544450 (Ky. 2015). The single-page student enrollment agreement at issue in that case had an arbitration agreement on its back side, with a clause saying “all determinations as to the scope or enforceability of this arbitration provision shall be determined by the arbitrator, and not by the court.” After the students brought suit, the college moved to compel arbitration. The trial court denied the motion, finding the arbitration agreement was unconscionable. The Court of Appeals reversed, finding no unconscionability.

The state supreme court applied the FAA, but found a way out of Rent-a-Center by reframing the issue as not one over the enforceability of the delegation clause, but instead whether the parties formed an arbitration agreement at all. Because the students argued that their signature was only on the front side of the agreement, and they were fraudulently induced to sign the agreement, the court defined this as a formation dispute that belonged in the courts. Applying Kentucky’s Statute of Frauds, the court held that the signatures had to be at the end of the document and because they were not, the parties were not bound by the arbitration agreement that appeared after the students’ signature.

In drafting arbitration agreements, we must take it as a given that there will be state courts that are hostile to arbitration and eager to find ways not to enforce an arbitration agreement. That is likely exactly the sentiment that led drafters to invent delegation clauses in the first place – hoping that if the very validity of the arbitration agreement could be decided by the arbitrator, there was a higher chance of the arbitration agreement’s survival. However, if the delegation clause is not likely to be enforced anyway, it bears reconsidering its insertion. Reading these two opinions, it strikes me that the argument over enforcing the delegation clause, which involves arguing over Rent-A-Center, may instead remind some judges exactly why they dislike federal arbitration case law so much and give them extra incentive to throw out the arbitration agreement.

 

Three federal appellate courts recently affirmed lower courts’ refusal to compel arbitration.  These cases show that the federal policy favoring arbitration is not absolute – the parties must have agreed to arbitrate the claims at issue and the defendant cannot have waived its right to arbitrate by engaging in significant discovery and motion practice.

In Lloyd v. J.P. Morgan Chase & Co., __ F.3d __, 2015 WL 3937978 (2d Cir. June 29, 2015), the issue was whether putative class and collective actions by former financial advisors could proceed in court.  The employment agreements call for arbitration of “any claim or controversy … required to be arbitrated by the FINRA Rules … no claims shall be arbitrated on a  … collective or class-wide basis.”  The current FINRA Rules prohibit arbitration of any class or collective claims.  The employer moved to compel arbitration and the district court denied the motion, finding that plaintiffs’ class and collective action claims fall outside the scope of the arbitration clause.  The Second Circuit affirmed.  It engaged in a grammatical analysis of the arbitration clause (rejecting the employer’s argument about the “rule of the last antecedent”) and found that the phrase “required to be arbitrated by the FINRA Rules” modifies “claim or controversy.”  Therefore, because the current FINRA Rules did not require arbitration of class or collective actions, the claims could proceed in federal court.

In another case about whether the parties really intended to arbitrate their claims, the Eighth Circuit found that the plaintiff never accepted the terms of the contract containing the arbitration agreement, despite starting to perform under that contract.  LoRoad, LLC v. Global Expedition Vehicles, LLC, __ F.3d __, 2015 WL 3449847 (8th Cir. June 1, 2015).  The plaintiff and defendant had exchanged multiple revisions of the contract, until finally the defendant sent a version that plaintiff appeared to accept by wiring a deposit on the funds due under the contract and faxing the contract back with the signature of an (unauthorized) principal and “minor handwriting notations and changes.”  Later, however, plaintiff asserted “unfinished business” and threatened to rescind the contract, and the defendant suggested revising the contract.  Applying UCC and Missouri law, the Eighth Circuit found the plaintiff never accepted the contract.  Furthermore, even though every version of the agreement contained the same arbitration provision, the Eighth Circuit found “there was an enforceable agreement to arbitrate if, and only if, [plaintiff] proved there was a final, enforceable [contract].”  (Plaintiff had filed suit to compel arbitration.)

Finally, in a class action antitrust case, In re Cox Enterprises, Inc. Settop Cable Television Box Antitrust Litig., ___ F.3d __, 2015 WL 3875726 (10th Cir. June 24, 2015), the defendant’s motion to compel arbitration was denied because the court found the defendant waived its right to compel.  The appellate court found that the defendant waived its right by waiting until two years into the litigation – after moving to dismiss the claim, engaging in “extensive pretrial discovery,” and opposing class certification.  In particular, the district court was offended that the defendant’s failure to inform the court of the arbitration agreement until after class certification had wasted significant court resources and suggested an attempt at “multiple bites at the apple” and to “play heads I win, tails you lose.”

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.

Hawaii issued a bold arbitration decision this month. It applied its state contract law to conclude that the parties did not form a clear arbitration agreement, but even if they did, it was unconscionable because it prohibited both discovery and punitive damages.  Narayan v. The Ritz-Carlton Dev. Co., Inc., __ P.3d __, 2015 WL 3539805 (Haw. June 3, 2015).

The plaintiffs purchased the first condos in a development in Kapalua Bay.  The developer defaulted on loans, however, and it or its agent withdrew over a million dollars from the association’s operating fund.  The plaintiffs sued for breach of fiduciary duty and other claims.

In response, the developer moved to compel arbitration.  It argued that the plaintiffs’ purchase agreements incorporated the condominium declaration, which had an arbitration clause.  The trial court denied the motion to compel, but the intermediate court of appeals reversed.  The Hawaii Supreme Court found the intermediate court gravely erred and the plaintiffs did not have to arbitrate their claims.

Under Section 2 of the FAA, the Hawaii Supreme Court applied state law to decide whether an arbitration agreement existed and whether it was valid.

On the first question, the Hawaii Supreme Court found the parties did not form an agreement to arbitrate, because the purchase agreement was ambiguous regarding the parties’ intent to arbitrate.  Notably the purchase agreements themselves did not mention arbitration and instead stated that the venue for any action shall be in Hawaii state court.  The arbitration clause was only included in the separate condominium declaration.  The court found “it is facially ambiguous whether those disputes would be consigned to arbitration in Honolulu pursuant to the condominium declaration or the [state court] pursuant to the purchase agreement.”  The court’s analysis applied Hawaii case law that appears to create different (and higher) standards for proving the existence of an arbitration agreement than the standards required to prove other contracts.  But, Hawaii avoided any FAA preemption problem by offering up a second, independent basis for its refusal to enforce the arbitration clause: unconscionability.

The court also found the arbitration agreement unconscionable under Hawaii law.  It found it was procedurally unconscionable because the plaintiffs could not negotiate it, it was “buried in an auxiliary document,” and it was ambiguous.  With respect to substantive unconscionability, the court focused on three provisions of the arbitration agreement.  The arbitration agreement provided that the arbitrator could order the parties to exchange copies of “nonrebuttable exhibits” and witness lists, but “the arbitrator shall have no other power to order discovery or depositions unless and then only to the extent that all parties otherwise agree in writing.”  The arbitration agreement  also precluded parties from “disclos[ing] the facts of the underlying dispute…without prior written consent of all parties.” The Hawaii Supreme Court concluded that “if the arbitration clause were enforced as written, the [plaintiffs] would have virtually no ability to investigate their claims, and thus, would be deprived of an adequate alternative forum.”  Furthermore, the arbitration agreement precluded punitive damages, which the court found “substantively unconscionable” in a contract of adhesion.

If there is a continuum of state arbitration decisions, varying from hostile to arbitration on one end to rubber-stamping of arbitration on the other end, I think Hawaii just situated itself on the very hostile end, even further than California and Missouri.  But, this case offers a reminder of two important rules for drafters of arbitration clauses: make the agreement to arbitrate very clear and easy to find; and do not overreach when inserting arbitration provisions that favor your client.

Arbitration has a brand recognition problem. Not enough people know what it is.

The recent CFPB report summarized studies showing that even among consumers who know they have an arbitration clause, the majority do not realize they cannot go to court or have their claims decided by a jury. One explanation is that those consumers are not aware what it means to sign an arbitration clause.

Often when I present to groups of sophisticated business people about arbitration, their questions make clear they think I am talking about mediation. I find many law students are also confused between arbitration and mediation, as are plenty of practicing lawyers.

Confusing arbitration and mediation is understandable, by the way. Arbitration and mediation rhyme. They are often taught together at law school under the “Alternative Dispute Resolution” umbrella, which ensures the concepts are forever linked in the minds of those lawyers. (Or included together in the same section of contracts.) And sure, they are both “alternatives” to litigation, but so are fistfights and “hugging it out” but we don’t teach those (and we would never confuse them).

Plus, arbitration does not come from a root word that most people recognize or can associate with a private system of dispute resolution. (At least mediation sounds a bit like middle-ation.) Instead, arbitration sounds like arbitrary. And that’s not a good connotation.

Does arbitration’s brand awareness matter? I think so. 80 million consumers are subject to arbitration agreements in their credit card agreements, and almost as many arbitrations are filed each year as new civil cases in the federal district courts. Tons of people are entering into arbitration agreements (as individuals and on behalf of companies). And, a good chunk of those people may have no idea what arbitration means. That undermines the primary rationale of arbitration acts – that contracting parties affirmatively chose to resolve disputes in a private arena with less formality and no government-paid decisionmaker and the courts are just enforcing those pre-dispute choices.

But, what can realistically be done? I suppose all the arbitral providers could form a marketing association and put out billboards and banner ads. And we could stop packaging arbitration and mediation together under an “ADR” banner.  Or we could just start calling arbitration something new. Like what… Disputation? Coolidgation (after the President who signed the FAA into law)? Scaliation (after the Justice whose opinions have strengthened enforcement of arbitration agreements)? Or even just simply litigation – instead of saying “they arbitrated their dispute” you could say “they litigated their dispute before the AAA.”

Something to ponder over your summer vacation… Send me your great ideas.

The Supreme Court of Missouri has issued two significant arbitration decisions in recent weeks, showing its willingness to sever any aspects of an arbitration agreement that it finds unconscionable (while enforcing the overall obligation to arbitrate).

First, in a contentious decision, the Supreme Court of Missouri found that a former employee of the St. Louis Rams football team does have to arbitrate his age discrimination claims, but he does not have to do so using the NFL Commissioner as the arbitrator. State ex rel. Hewitt v. Hon. Kristine Kerr, __ S.W.3d __, 2015 WL 2061986 (Mo. Apr. 29, 2015). The employment agreement incorporated rules stating the “Commissioner shall have full, complete and final jurisdiction and authority to arbitrate… any dispute between any player, coach, and/or other employee of any [team].” The court found that term unconscionable, because “[i]n effect, [] the commissioner is required to arbitrate claims against his employers.” (The team owners select the commissioner and determine his salary.) The decision has two full dissents and two partial dissents, but a majority of the court hung together for that gutsy decision. (Reading between the lines, the federal judge in the Adrian Peterson labor dispute appeared to agree that the Commissioner should not be arbitrating NFL employment disputes.)  Instead of invalidating the entire agreement to arbitrate, the Supreme Court of Missouri found that the state’s uniform arbitration act would provide the mechanism for appointing an arbitrator to decide the dispute.

More recently, in an uncontentious opinion, the Supreme Court of Missouri also refused to enforce an aspect of an arbitration agreement that it found unconscionable.  Eaton v. CMH Homes, Inc., __ S.W.3d __, 2015 WL 3387910 (Mo. May 26, 2015). In Eaton, a purchaser sued a seller for fraud and negligent misrepresentation. The seller sought to compel arbitration. The purchaser responded that the arbitration agreement was unenforceable, largely because it lacked mutuality. Both the trial court and the intermediate appellate court refused to compel arbitration. The Supreme Court of Missouri reversed.

Missouri’s highest court clarified that lack of mutuality in an arbitration agreement is not sufficient by itself to make the arbitration agreement unconscionable, but is a factor that courts should consider.  In doing so, the court confirmed that its recent Bristol Care decision (which refused to enforce an arbitration agreement in an employment agreement, finding it illusory and without consideration) is not as sweepingly anti-arbitration as some had feared. The court limited the Bristol Care decision to its unique facts: an arbitration agreement that was added by amendment to an existing contract without sufficient consideration and with an illusory promise in return. Even so, the court found that the lack of mutuality in the Eaton arbitration agreement, in combination with an “anti-waiver” provision (requiring the purchaser to arbitrate claims, even if those claims arose as counterclaims to a court action by the buyer), was unconscionable. Instead of refusing to enforce the entire arbitration agreement, the court found those terms were not essential to the agreement to arbitrate and severed them.

 

Usually, when faced with a respondent who refuses to pay its share of the arbitration fees, a claimant simply pays both sides’ fees, so that the arbitration can proceed.  A new case out of the Tenth Circuit answers the question: what happens if it does not pay both sides’ fees?  Pre-Paid Legal Services, Inc. v. Cahill, __ F.3d__, 2015 WL 3372136 (10th Cir. May 26, 2015).  Somewhat surprisingly, the answer is that the claimant can choose to litigate its case in court, where there are no fees.

Pre-Paid Legal Services sued its former employee for allegedly taking its trade secrets to a new employer.  Pre-Paid brought that suit in state court.  The employee removed to federal court and moved to stay the case pending arbitration.  The district court agreed.  The day after the district court’s order, Pre-Paid started a AAA arbitration against the ex-employee.  Pre-Paid paid its share of the arbitration fees, but the ex-employee never paid its share.  “Pre-Paid declined to pay [the employee’s] share of the fees.”  (Maybe it wanted to be a test case??)  After many warnings, the AAA terminated the arbitration for non-payment of fees.  Because the employee refused to pay its share of the fees, and Pre-Paid would not pay its share either, Pre-Paid’s claims were never heard on the merits in arbitration.

So, Pre-Paid went back to federal court, asking the district court to lift the stay and allow litigation to proceed.  The ex-employee opposed the motion based on Section 3 of the FAA.  He argued that the language of Section 3 only allows a stay to be lifted after an arbitration is heard on the merits.  The statute says that if suit is brought on an arbitrable issue, the court:

shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.

Both the district court and the Tenth Circuit disagreed with the ex-employee.  They refused to allow him to create a loophole whereby a defendant/respondent could avoid ever getting to the merits of a claim against him by simply refusing to pay his share of arbitration fees.

The Tenth Circuit analyzed two key phrases in the statutory language quoted above.  First, it found that “arbitration has been had in accordance with the terms of the agreement” does not necessarily mean a full hearing on the merits.  Instead, where the parties incorporate the rules of the AAA in their arbitration agreement, and those rules allow the AAA to terminate an arbitration for non-payment, even a terminated arbitration did happen “in accordance with the terms of the agreement.”

Second, the Tenth Circuit identified an alternative basis for lifting the stay: the ex-employee was “in default in proceeding” with the arbitration.  The ex-employee’s failure to pay constituted a default under Section 3, especially since he made no attempt to show he was unable to pay or ask the arbitrators for any relief from the payment obligation.

What is the result of this decision?  Pre-Paid will “resume with litigation” in the federal district court, almost three years after it initially filed its court case against the ex-employee.  What else?  Defendants everywhere are on notice that non-payment is not a “get out of litigation free” card.

—————————–

Another interesting tidbit: Judge Posner, writing for a panel of the Seventh Circuit, recently expressed his displeasure with the “strong federal policy” in favor of arbitration.  “It’s not clear that arbitration, which can be expensive because of the high fees charged by some arbitrators and which fails to create precedents to guide the resolution of future disputes, should be preferred to litigation.”  Andermann v. Sprint Spectrum L.P., No. 14-3478 (7th Cir. May 11, 2015).

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.

VACATED

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.)

UN-VACATED

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.

NEVER VACATED

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.