A recent decision from the 10th Circuit shows there is a whole new way to invalidate an arbitration agreement.  In Citizen Potawatomi Nation v. Oklahoma, 2018 WL 718606 (10th Cir. Feb. 6, 2018), the court found the arbitration agreement unenforceable because the parties provided for de novo review of any arbitration award in federal court, which is prohibited under the Hall Street decision from SCOTUS in 2008.

The agreement at issue was a Tribal-State gaming compact between the Citizen Potawatomi Nation and the State of Oklahoma.  The Compact had a dispute resolution procedure providing for arbitration under AAA rules.  But it also stated that “notwithstanding any provision of law, either party to the Compact may bring an action against the other in a federal district court for the de novo review of any arbitration award …”

The parties then had a dispute over liquor licensing and taxes, which was heard in arbitration.  The Potawatomi Nation moved to confirm the award in federal court, and argued for narrow review under FAA Section 10.  Oklahoma moved to vacate the award,  seeking de novo review of the dispute under the Compact.  The district court applied the narrow review in Section 10 and confirmed the award.

On appeal, the 10th Circuit upended the entire arbitration agreement.  It noted that the 2008 Hall Street decision makes clear that parties cannot alter the standard of review in Section 10.  It also found that the provision for de novo review could not just be severed, because it was material to the parties’ decision to choose arbitration, as evidenced by a review of the Compact as a whole.  As a result, the court found the arbitration agreement as a whole unenforceable.

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If you are an arbitrator, litigator or in-house counsel ready to advance your knowledge and skills in arbitration, join me at the ABA’s 11th Annual Arbitration Training Institute this May!  I will present on Trends in Arbitration Law (plus, it is in Miami….)

 

Two cases recently fit in one of my favorite categories: those awards that get “un-vacated.”  These cases went through arbitration, had that arbitration award vacated by a district court, only to have the award later resurrected by an appellate court.  In today’s edition, the whiplash happens in both state and federal court.

In Caffey v. Lees, 2018 WL 327260 (R.I. Jan. 9, 2018), Lees was the winner after bringing a personal injury case in arbitration. He was awarded nearly $200,000.  Caffey moved to vacate the award, arguing every possible basis under the Rhode Island arbitration statute.  The trial court granted the motion to vacate, based on the initial failure of Lees’ counsel to disclose a document from its expert.  Not just any document, of course, but an early assessment that contradicted the expert’s eventual opinion about causation.  The trial court found that omission meant the award was procured by “undue means.”

On appeal, the Supreme Court of Rhode Island noted it had not addressed “undue means” since 1858.  It looked to more recent definitions from federal circuit courts of the phrase — noting that proving undue means involves proving “nefarious intent or bad faith” or “immoral” conduct.   It found that standard was not met in this case, since the losing party had the critical document well before it submitted its final brief to the arbitrator.  Indeed, the issue of the untimely disclosure was placed before the arbitrator, and the expert explained the discrepancy.  Because the expert had a plausible explanation, the court could not agree that Lees’ counsel obtained the award through underhanded or conniving means.  The Supreme Court reinstated the award.

A case in the Ninth Circuit followed the same path.  In Sanchez v. Elizondo, 2018 WL 297352 (9th Cir. Jan. 5, 2018), an investor won a $75,000 award in a FINRA arbitration.  The district court granted the broker’s motion to vacate based on an argument that the arbitrator exceeded his powers.  In particular, the arbitrator allowed the arbitration to proceed with a single arbitrator, even after the claimant had submitted a pre-hearing brief increasing its damage request to just over the FINRA line that requires a three-arbitrator panel.  (The FINRA rules provide that claims over $100,000 must be heard by three arbitrators.  The claimant had initially requested exactly $100,000, so was assigned the single arbitrator, but then sought $125,000 in the pre-hearing brief, without amending the claim.)

The Ninth Circuit reinstated the award.  After first establishing that it had appellate jurisdiction, it considered the arbitrator’s powers.  Importantly, the court affirmed that arbitrators have discretion on matters of substance as well as matters of procedure.  In this case, FINRA rules explicitly gave the arbitrator power to interpret the FINRA Code and rules. Furthermore, the arbitrator asked the parties to address the issue of the increased damage amount, considered their arguments, and interpreted the rule to reference the amount initially claimed in the demand, instead of any amount later sought in the arbitration.  Because the arbitrator had power to interpret the rule and did so, the court found he did not exceed his powers.

These don’t seem like hard cases to me.  Given the standard for vacating awards, these arbitration awards should have been straightforward to confirm.  The fact that they weren’t suggests either that the speed of development under the FAA is difficult for advocates and judges to keep up with, or that there may be some judicial hostility toward arbitration coloring the application of the standard for vacatur.

Before I can sum up 2015 in arbitration (next post!), I need to report on some new cases coming out of the federal and state appellate courts in recent weeks.  Two are just good reminders of basic arbitration law, but the third addresses an interesting question of double recovery.

Our first “reminder” case comes from New York’s highest court.  In Cusimano v. Schnurr, 2015 WL 8787554 (N.Y. Dec. 16, 2015), that court held that the Federal Arbitration Act applies, even to intrafamily transactions among New York residents (sing: “it’s a family affaaaair…”), and even when defendants argue their family business is “passive” and has no impact on interstate commerce.  The court basically said family shmamily, look at the type of business you have and what it owns.  “The idea that the intrafamilial nature of the agreements has some bearing on whether the FAA is applicable finds no support in the caselaw.”  Instead, the fact that the family business owned commercial properties inside and outside New York was key.  (But, the plaintiffs waived their right to arbitrate by litigating aggressively for a year.)

The second “reminder” comes from the Eleventh Circuit and relates to appeal timing.  In the Wise Alloys case, 2015 WL 8119326 (11th Cir. Dec. 8, 2015), that court held that the defendant did not appeal the district court order compelling arbitration within the allowed deadline.  (The court had fun with this one, quoting Carole King to say “it’s too late…”)  Critically, the entire complaint related to the union’s effort to compel the defendant company to arbitration.  The district court compelled arbitration in June of 2012, but the company did not appeal until after the arbitration was complete and the award had been confirmed in late 2014 (well beyond the 30-day deadline in the federal rules).  The lesson from this case is that while Section 16 of the FAA commands that “interlocutory” orders compelling arbitration are not immediately appealable, not all orders compelling arbitration are interlocutory: if the only relief a complaint seeks is an order compelling arbitration, then the order granting that relief is final and immediately appealable.

The most interesting outcome in this group comes from the Ninth Circuit (with Judge Shira Scheindlin from SDNY sitting by designation on the opposite coast).  In Uthe Technology Corp. v. Aetrium, Inc., 2015 8538090 (9th Cir. Nov. 19, 2015), the plaintiff had already been awarded millions of dollars against related defendants in an arbitration and then brought a RICO claim for treble damages in U.S. federal court for the same conspiracy.  The question was whether that RICO claim was precluded by the “one satisfaction” rule that avoids double recovery.  (P.s. That arbitration lasted two decades.  Score one for litigation.)   The Ninth Circuit found the RICO claims were not precluded, largely because the arbitration claim was against a different set of defendants, and RICO provides remedies that were not available to Uthe in the arbitration, and the arbitration award specifically noted that it was made without prejudice to Uthe’s right to bring further claims in federal court.  The 9th Circuit did note that any damages in the RICO case must be offset by the sums paid as a result of the arbitral award

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.

 

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.”

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…

In an opinion released yesterday, the Seventh Circuit schooled appellant’s counsel first on the application of the New York Convention and Panama Convention, then on the high standard of review it applies to commercial arbitration awards, and finally expressed profound disappointment with the frequency of motions to vacate arbitration awards.  “Attempts to obtain judicial review of an arbitrator’s decision undermine the integrity of the arbitral process.”  Johnson Controls, Inc. v. Edman Controls, Inc., __ F.3d __, 2013 WL 1098411 (7th Cir. Mar. 18, 2013).  No doubt hoping to reduce that frequency, the court warned that “challenges to commercial arbitral awards bear a high risk of sanctions.”

In this case, Johnson Controls contracted with an exclusive distributor in Panama.  The contract called for arbitration of any disputes and provided that the prevailing party was entitled to recover its attorneys’ fees and costs.  Johnson Controls started directly competing with the distributor in Panama, so the distributor demanded arbitration and won.  After finding for the distributor on claims of tortious interference and breach of good faith and fair dealing, the arbitrator awarded the distributor over $733,000 in damages, plus almost $300,000 in attorneys’ fees and costs.

Not kindly, the court noted “losers sometimes cannot resist the urge to try for a second bite at the apple.  That is what has happened here.”  Johnson Controls moved to vacate the arbitral award and its motion was denied by the district court.  Substantively, it made two primary arguments.  It argued that the arbitrator “exceeded its power” within the meaning of Section 10(a)(4) of the Federal Arbitration Act in two respects: 1) by awarding damages to the distributor, even though the distributor had planned to sell through two subsidiaries; and 2) by awarding attorneys’ fees in a contingent fee case without using the lodestar approach.  The district court and appellate court found the arbitrator acted within its power, because the distributor itself was injured by the breach (and the arbitrator properly refused to address separate claims by the subsidiaries), and because the lodestar method is not required in the Seventh Circuit when attorneys’ fees are shifted by contract.

The court also went out of its way to provide three kernels of wisdom to counsel in appeals from arbitrations.  First, it noted that the distributor is incorporated in the British Virgin Islands, and therefore any attack on the arbitration award “almost certainly falls under either the New York or the Panama Convention,” which have slightly different grounds for vacating awards.  (Counsel for both parties had argued under Chapter 1 of the FAA.)  Second, it emphasized that, at least in the Seventh Circuit, “even ‘manifest disregard of the law is not a ground on which a court may reject an arbitrator’s award.'”  (Not all circuits agree, see this summary post.)

Third and finally, the Seventh Circuit hinted that it will be liberal in its use of sanctions for parties who try to vacate arbitration awards without a strong basis.  It complained that “[b]ecause of Johnson’s appeal, [the distributor] has been deprived not only of the value of the distributorship it expected to have for Panama, but also part of the value of the arbitration to which both parties agreed.”  That sentence follows the explicit warning that, while the court did not award sanctions on this appeal because there was already a fee-shifting clause, “challenges to commercial arbitral awards bear a high risk of sanctions.”

Don’t say I didn’t warn you.

 

In answer to the proverbial question “how much litigation waives the right to arbitrate?,” the Third Circuit has responded that ten months does the trick, if the party seeking arbitration has engaged in significant motion practice, regardless of whether any discovery was exchanged. In re Pharmacy Benefit Managers Antitrust Litig., __ F.3d __, 2012 WL 5519658 (3d Cir. Nov. 15, 2012).  This marks a change in the Third Circuit’s case law on waiver, which had previously placed a strong emphasis on the exchange of discovery as the point of no return.

In re Pharmacy involves a class of retail pharmacies that brought suit in federal court alleging the pharmacy benefits manager violated antitrust laws.  The defendant/benefits manager responded by first bringing a motion to dismiss, arguing the plaintiffs had no antitrust injury.  After that motion was denied, defendant filed its answer without asserting any right to arbitrate.  After the defendant obtained new counsel, and the case had been underway for ten months, the defendant filed a motion to compel arbitration.  The district court granted the motion to compel and stayed the case, finding that defendant had not waived arbitration.  The plaintiffs refused to bring their claims in arbitration and instead dismissed their claims in order to appeal the order compelling arbitration.

The Third Circuit first addressed its jurisdiction over the appeal.  The defendant argued the plaintiffs should not be rewarded for dismissing their claims in order to find an “end run” around the rule that a successful motion to compel arbitration is not normally appealable unless the judge simultaneously dismisses the case.  However, the Third Circuit found it irrelevant how the claims were dismissed–jurisdiction over the appeal was proper because the plaintiffs’ claims were dismissed (as opposed to just stayed).

Then the Third Circuit reversed the district court, finding that the defendant had waived its right to arbitrate.  The court analyzed all six relevant factors from its Hoxworth decision on waiver, but focused heavily on these two acts by the defendant: waiting ten months to bring its motion to compel arbitration without any explanation other than its change of counsel; and making a significant motion to dismiss on the merits.  However, another factor, the extent of discovery, cut against waiver because the parties had not engaged in any discovery.  Indeed, the Third Circuit acknowledged that its “cases finding waiver have uniformly featured significant discovery activity in the district court.”  Even so, the Third Circuit relied on cases from other circuits and the general rule that a defendant cannot “act inconsistently with the right to arbitrate” in finding that the benefits manager had waived its right to arbitrate.  

Because the Third Circuit reversed on the question of waiver, it did not address whether the arbitration clause was unenforceable due to its limitation on the remedies available under antitrust laws.