I have saved up six opinions that considered whether to vacate an arbitration award over the summer.*  Only one of those opinions vacated the award; the other five confirmed.  To get a flavor of what types of arguments are winning and losing motions to vacate, here is a summary of those six.

Vacated

The lone vacatur came in Hebbronville Lone Star Rentals, LLC v. Sunbelt Rentals Industrial Services, LLC, 2018 WL 3719682 (5th Cir. Aug. 6, 2018). The issue in that case was whether the arbitrator exceeded his power by reforming the parties’ contract.  Sunbelt had purchased the assets of Lone Star, and agreed to later pay earnouts based on the post-sale revenue from Lone Star’s customers.  The asset purchase agreement provided that disputes over the amount of earnouts would be decided by the parties “jointly [selecting] the Accounting Firm to resolve any remaining dispute over Seller’s proposed adjustments…which resolution will be final.”  (If that doesn’t sound like an arbitration clause to you, be sure to read this post.)   A dispute arose over whether the revenues from certain Lone Star customers exceeded a target number established in the agreement.  The parties submitted that dispute to an accounting firm.

The arbitrator found that Sunbelt should have included the revenue of two additional customers, which would have resulted in a payment to Lone Star of $6.4M.  However, the arbitrator also concluded that the parties made a mutual mistake in calculating the target number in the agreement, and if the corrected target number was used, Lone Star was actually entitled to nothing.  Lone Star moved to vacate the portion of the arbitrator’s award that reformed the target amount based on mutual mistake.  The district court granted the vacatur, and the Fifth Circuit affirmed.  Oddly, the opinion is not framed in terms of vacatur at all; it does not reference Section 10(a) of the FAA.  Instead, the opinion framed the question as “who decides” the question of mutual mistake.  The court interpreted the language of the parties’ arbitration clause and found it too narrow to encompass the mutual mistake issue.  Therefore, that issue was remanded to the district court for determination.  (Also odd is the absence of any discussion of waiver in this opinion.   My sense is if the arbitrator had been a lawyer instead of a CPA, the analysis may have been quite different.)

Confirmed

The courts found the arguments for vacatur insufficient in five other cases:

  • In another case regarding earnout payments after an asset purchase, an accountant/arbitrator was appointed to hear the seller’s claim that the buyer was manipulating sales to ensure no earnout was owed.  DFM Investments, LLC v. Brandspring Solutions, LLC, 2018 WL 3569353 (8th Cir. July 25, 2018).  After reviewing documents and hearing arguments, the arbitrator found the seller not entitled to any revisions.  The seller moved to vacate, arguing the arbitrator had refused to consider material evidence.  The district court and Eighth Circuit disagreed, noting that the arbitrator concluded the additional evidence was not material.  “An arbitrator’s reasoned decision to forgo analyzing additional evidence does not, without more, provide grounds for vacating the decision.”
  • In a case that reminds all advocates to carefully preserve objections, the Ninth Circuit confirmed an award because the complaining party did not properly preserve its objection. Asarco LLC v. United Steel, 2018 WL 3028692 (9th Cir. June 19, 2018).  Like in Sunbelt, the issue was whether the arbitrator had the power to reform the parties’s labor agreement based on mutual mistake, despite a provision in the contract depriving the arbitrator of “authority to add to, detract from or alter in any way the provisions of” the contract.  The district court concluded the arbitrator had authority to reform the labor agreement.  The Ninth Circuit found Asarco had conceded the issue by arguing the arbitrator lacked authority, instead of preserving that issue for the courts by refusing to address jurisdiction with the arbitrator (0r seeking injunctive relief at the outset).  (Wow – what a harsh rule.)  Even so, the court analyzed the merits and found the arbitrator had authority to reform the agreement.  However, one dissenting judge wrote that he would vacate the award based on the arbitrator exceeding the scope of his powers.
  • In another case from the Eighth Circuit, the court refused to vacate an arbitration award, even though the arbitration award was nearly three times the contractual liability limit.  Beumer Corp. v. Proenergy Services, 2018 WL 3767135 (8th Cir. Aug. 9, 2018).  The arbitrator found the provision limiting damages to the “Contract Sum” was enforceable, but that attorneys fees and interest did not count as “damages” for the purpose of that provision.  The court found that, even if the arbitrator had overlooked Missouri decisions finding attorneys fees count as damages, it did not matter because manifest disregard of the law is not a valid basis to vacate an award.
  • Speaking of “manifest disregard,” Maryland’s high court took the opportunity to clarify that it lives on as a basis for vacating awards under Maryland’s Uniform Arbitration Act.  WSC/2005 LLC v. Trio Ventures Assoc., 2018 WL 3629441 (Md. July 30, 2018).  However, the arbitrator in Trio did not manifestly disregard the law, because he did not make “a palpable mistake of law or fact appearing on the face of the award.”  In fact, the arbitrator identified relevant principles of Maryland law, analyzed the parties’ contract, and issued damages that were “reasonably consistent” with principles of Maryland law.
  • Finally, the Supreme Court of Rhode Island confirmed an arbitration award, despite allegations that the arbitrator manifestly disregarded the law, in Prospect Chartercare LLC v. Conklin, 2018 WL 2945664 (R.I. June 13, 2018).  The arbitrator awarded 18 months of severance to an executive employee, and the employer moved to vacate the award based on the arbitrator’s alleged manifest disregard of the law by relying on “erroneous facts” and disregarding the contract language.  On appeal, the high court noted that even if the arbitrator had based his decision on a factual error, “such a mistake would not be a proper basis upon which to vacate the arbitration award.”  Furthermore, the arbitrator’s award was based upon a “passably plausible interpretation” of the parties’ agreement.

 

* There were more than six judicial opinions on whether to confirm an arbitration award over the summer, of course.  I focus on federal appellate courts (circuits and SCOTUS) as well as the highest court of each state.

The last post focused on three recent state appellate court decisions that refused to compel arbitration or vacated an award, and this follow-up post focuses on seven recent cases that are friendly to arbitration.

My favorite is from Montana.  Although none of its arbitration decisions have been addressed by SCOTUS, Montana decided to preempt any federal preemption issues by adjusting its stance on unconscionability.  (It waited five years after the 9th Circuit put it on notice, though.)  Lenz v. FSC Sec. Corp., 2018 WL 1603927 (Mont. April 3, 2018), involves claims by investors against investment advisors over “substantial losses.”  The defendants moved to compel arbitration and the district court granted the motion.  On appeal, the Montana Supreme Court affirmed.  In its decision, it took the opportunity to clarify that the previous test it had used to determine unconscionability was improper, because it mixed unconscionability analysis with the reasonable expectations doctrine from the insurance context.  (Read this mea culpa: “We have continued to perpetuate confusion by inaccurately referencing [bad tests for unconscionability] …Even more problematic in particular regard to arbitration agreements, we have failed to recognize the manifest incompatibility of the insurance-specific reasonable expectations doctrine as a generally applicable contract principle.”)  I read that as “we do not want to be reversed by the U.S. Supreme Court.”

The others can be reviewed more quickly:

  • Substantive unconscionability cannot be established by showing only that the arbitration agreement is broad in scope.  SCI Alabama Funeral Servs. v. Hinton, 2018 WL 1559795 (Ala. March 30, 2018) [I’m a bit surprised that needed clarifying];
  • The Federal Arbitration Act applies to arbitration agreements within a common interest community’s covenants (and preempts conflicting state law).  In U.S. Home Corp. v. The Michael Ballesteros Trust, 2018 WL 1755536 (Nev. April 12, 2018), 12 homeowners argued that the FAA did not apply to the arbitration agreement in their covenants because land is traditionally a local concern.  The court found that the covenants’ larger purpose was to facilitate the creation of a community of multiple homes, and multiple out-of-state business contributed to construction of the homes.  Therefore, the FAA controlled and preempted Nevada rules requiring the same procedures as in court and requiring arbitration agreements to be more conspicuous than other text in a contract;
  • Non-signatories may compel arbitration if the plaintiff’s claims are based on facts that are “intertwined” with arbitrable claims.  Melendez v. Horning, 2018 WL 1191150 (N.D. March 8, 2018) (reversing district court order denying motion to compel arbitration);
  • Scope of arbitration agreement broad enough to encompass claims against related entity.  Bridgestone Americas Tire Operations v. Adams, 2018 WL 1355966 (Ala. March 16, 2018), concluded that where the employee’s arbitration agreement was with the “Company,” which was defined to include affiliate and related companies, the employee’s suit against a related company was arbitrable;
  • Arbitrator did not manifestly disregard contractual language in construction contract.  In ABC Building Corp. v. Ropolo Family, 2018 WL 1309761 (R.I. Mar. 14, 2018), the owner tried to vacate an arbitration award in favor of the general contractor.  It relied on contract language requiring submission of payroll records with payment applications in order to argue that the contractor could not receive additional compensation for labor without having provided that contemporaneous documentation.  However, the arbitrator considered that provision of the contract in his decision-making (and the owner had never complained), so vacatur was inappropriate (one judge dissented);
  • Delegation clause must be enforced if not specifically challenged.  Family Dollar Stores of W. Va. v. Tolliver, 2018 WL 1074947 (Feb. 27, 2018).  I know, it’s a stretch to call this one a spring decision.  But, it’s snowing in Minnesota on April 14th, so my seasons are totally confused.  That’s why we call it “Minnesnowta.”

 

What could be a better subject for a Black Friday weekend post than the Cabbage Patch Kids??!  Especially if you are old enough to remember the 1980s…  Whether you loved or hated the smushed-face dolls, the point of this post is that the 11th Circuit confirmed an arbitration award in their favor, showing significant deference to the arbitrator.  Original Appalachian Artworks, Inc. v. Jakks Pacific, Inc., 2017 WL 5508498 (11th Cir. Nov. 17, 2017).

The dispute was between the company that owns the Cabbage Patch Kids (CPK) brand and a company to which it licensed the intellectual property during 2012-2014 (the licensee).  As the end of the license agreement was approaching, CPK selected a new company to receive the license in 2015, and let them get started creating the new line of toys, so that the new line could launch right away in 2015.  The licensee claimed that was a breach of the agreement and started an arbitration.

The arbitrator concluded that CPK had not breached the agreement and ordered that the licensee had to repay CPK over a million dollars in unpaid royalties.  The licensee moved to vacate the award.  Curiously, it made arguments under both the Georgia Arbitration Code and the FAA, and the 11th Circuit considered them all.  [Maybe showing that New Hampshire was onto something in declaring the FAA does not preempt state law on vacatur?]

Under the Georgia Code, the licensee argued the arbitrator had manifestly disregarded the law by ignoring the parol evidence rule (and accepting extrinsic evidence regarding the agreement).  [Manifest disregard is a statutory basis for vacatur under the Georgia act, unlike the federal act.]  The court found there was no concrete evidence that the arbitrator purposely disregarded the law, which is the standard.  Instead, the transcript and award showed the arbitrator had understood Georgia law as instructing that the purpose of contract interpretation is to effectuate the parties’ intent, and that’s what he tried to do in reviewing the extrinsic evidence.  So, even “assuming the arbitrator incorrectly applied the parol evidence rule,” the court found he “simply made a mistake.”  That does not rise to the level of manifest disregard.

Under the FAA, the licensee separately argued that the arbitrator had exceeded his powers.  After quoting the standard from Sutter, the court quickly concluded that because the arbitrator did interpret the parties’ contract, it does not matter “whether he got its meaning right or wrong,” the award must be confirmed.

Three state supreme courts tackled arbitration law in recent weeks: Alabama, North Carolina, and Rhode Island.  Rhode Island reversed a construction arbitration award because it disagreed with the arbitrator’s analysis.  North Carolina found that an arbitration agreement in a doctor-patient setting was unenforceable as a breach of the doctor’s fiduciary duty.  And Alabama strictly enforced an arbitral venue, even though that precluded class action.

Continuing its streak of hewing closely to the lead of federal courts on arbitration, the Supreme Court of Alabama held that plaintiffs have to arbitrate with the Better Business Bureau, even though the BBB does not conduct class action arbitration proceedings.  University Toyota & University Chevrolet Buick GMC v. Hardeman, _ So. 3d __, 2017 WL 382651 (Ala. Jan. 27, 2017).  The plaintiffs were a putative class of customers harmed by two car dealerships’ decision to stop honoring their earlier agreement to provide free oil changes.  The arbitration clause between the dealerships and purchasers called for arbitration of all disputes pursuant to the FAA, and said “either party may demand arbitration by filing with the Better Business Bureau.”  When the plaintiffs filed their demand, the BBB responded that it did not conduct class arbitrations.    The plaintiffs then withdrew their demand and filed in court, asking either to keep their fight in court or go to a forum that allowed class arbitration.  The trial court sent the plaintiffs to the AAA to decide whether class actions were available.  On appeal, the supreme court reversed in a 7-1 decision.  The majority quoted heavily from SCOTUS decisions stating that arbitration agreements should be enforced according to their terms, and found that the BBB forum was an integral part of the arbitration agreement that must be given effect.  The lone dissenter argued that, because the availability of class arbitration was for the arbitrator, it should be decided by a forum that at least retains that option.

Without any consideration of the Federal Arbitration Act, the Supreme Court of Rhode Island vacated an arbitration award.  Nappa Construction Management, LLC v. Flynn, __ A.3d __, 2017 WL 281812 (R.I. Jan. 23, 2017). (Maybe an allergy to the FAA is contagious… remember nearby New Hampshire last year?)  In a dispute between the owners of a automobile repair facility and the construction company that was hired to build it, the arbitrator issued an award that analyzed the parties’ contract and found the construction company was owed money.  The trial court refused to vacate the award, finding the arbitrator grounded his analysis in the contract and did not manifestly disregard the law.  On appeal, the Supreme Court of Rhode Island cited only cases from its own court, including labor cases, and found that the arbitrator had exceeded his authority (and the award failed to draw its essence from the agreement) by finding that the owners had effectively terminated the contract, when there was no evidence that the owners actually terminated the contract.  The court also accused the award of reaching an “irrational result.”  Two justices dissented, noting the “exceptionally deferential standard of review” for arbitration awards.  They did not, however, cite to the line from Sutter, as I would have, that even “grave error” by an arbitrator is not sufficient to vacate an award if the arbitrator in fact analyzed the contract.  (Maybe no one argued the FAA applied?  A commercial construction contract would almost certainly involve interstate commerce…)

Finally, the Supreme Court of North Carolina refused to enforce the arbitration agreement between a doctor and patient, finding that the agreement “was obtained as a result of defendants’ breach of fiduciary duty that they owed to” the patient.  King v. Bryant, __ S.E.2d __, 2017 WL 382910 (N.C. Jan. 27, 2017).  The patient had brought a medical malpractice action against his surgeon, and the surgeon tried to enforce the arbitration agreement between them.  The arbitration agreement called for application of the FAA and arbitration under health care procedures of the AAA.

The N.C. trial court refused to compel arbitration, finding the agreement was only an “agreement to agree,” and started off a crazy game of appeals court-district court ping pong involving this case.  The court of appeals reversed and remanded.  On second thought, the trial court refused to enforce the agreement because the surgeon had a fiduciary duty to disclose the arbitration agreement to his patient as a material term, and because he did not it was unenforceable.  The court of appeals affirmed, noting the application of the FAA, but finding the agreement unconscionable.  The supreme court then remanded to the trial court for further findings of fact regarding the existence of a physician-patient relationship when the agreement was signed, and the trial court complied.  Finally, the case returned to the supreme court, which held that the doctor owed a fiduciary duty to the patient and breached it “by failing to make full disclosure of the nature and import of the arbitration agreement to him at or before the time that it was presented for his signature.”  Recognizing the possibility of an argument that its holding is preempted by the FAA, the court noted “we would have reached the same result on these facts with respect to any agreement that substantially affected [the patient’s] substantive legal rights.”  However, the opinion cites no N.C. cases to support that statement, which may be fatal under the DirecTV analysis.  Two justices wrote separate dissents, based largely on FAA preemption.  (“This jiggery-pokery is precisely the type of impermissble ‘rationalization’ admonished by the United States Supreme Court. Such a tortured attempt to obviate the FAA fails.”)

What is the take away here?  It is that there is still a huge amount of variation in how a given arbitration dispute will be handled, depending on what court hears the dispute.  And the preemption rules set out in Concepcion and DirecTV are either not well understood, or are being intentionally avoided.

While regular people count down the days to summer blockbusters that come in the form of high-paid actors fighting aliens or robots, I prefer my summer blockbusters in the form of arbitration opinions that have been months in the making (maybe finally released because the clerks are about to turn over?). Today, I report on three of these arbitration blockbusters, all from state high courts.

Blockbuster 1: New Hampshire Rejects Application of FAA.

In the most ambitious of the three decisions, the New Hampshire Supreme Court found that the FAA’s sections regarding confirming and vacating awards do not apply in state courts.  Finn v. Ballentine Partners, LLC, __ A.3d __, 2016 WL 3268852 (NH June 14, 2016) (an opinion that took five months to produce).  In that case, a company ousted one of its founders, and she instituted an arbitration challenging her termination.  She was awarded about $6.5 million.  After the company engaged in some major restructuring, which resulted in lots of cash, the ousted founder started a new arbitration.  Although the company argued her claims were barred by res judicata, the second arbitration went all the way through hearing and she was awarded another $600,000.

The New Hampshire Supreme Court refused to confirm the award.   Because the FAA allowed no avenue for vacating the award, the court based its decision on a state statute allowing courts to vacate an award for “plain mistake.”  The founder had argued that the state statute was preempted by the FAA.  The court responded that “we conclude that §§ 9-11 of the FAA apply only to arbitration review proceedings commenced in federal court.”  WAIT, WHAT?? (Truly, this stuff is what keeps me blogging.  There is never a dull moment with state courts and arbitration law.)*  The court essentially found that since most of the state court cases that have ended up at SCOTUS were about enforcing arbitration agreements in the first place, enforcing arbitration agreements is the limit of the FAA’s application in state courts.  (“Preemption… is at its apex when parties cannot get to arbitration…  In contrast, state rules . . . without the potential consequence of invalidating an arbitration agreement are not preempted.”)  Having gotten that pesky FAA out of the way, the court easily found that the failure to apply res judicata as the court interprets it was a “plain mistake” and reversible error.

Blockbuster 2: Michigan Allows Law Firm To Compel Arbitration Of Suit Against Its Principals

Michigan’s decision has more interesting facts but less of a jaw-dropping result.   In Altobell v. Hartmann, __ N.W.2d__, 2015 WL 3247615 (Mich. June 13, 2016), a principal in a law firm had gotten the chance to be an assistant football coach at the University of Alabama.  (What attorney has a second act as a football coach?  I imagine him giving his clients half-time type pep talks during trial: “Clear eyes.  Full hearts.  Can’t lose!”)   He got the impression that his firm would allow him to keep his ownership interest for a year, but the firm audibled and declared the coach had withdrawn from the partnership.  No law firm money was coming his way.

The coach then sued seven principals of the law firm in court, and the firm moved to compel arbitration.  Although the lower courts had found that naming individual defendants was sufficient to avoid his arbitration agreement with the firm, the Michigan Supreme Court sided with common sense. The arbitration agreement called for binding arbitration of any dispute “between the Firm…and any current or former Principal.”  The court found it “must consider the concept of agency” in interpreting whether the firm was meant to include the individuals who makes its decisions.  Therefore, the court found claims against the individual defendants were arbitrable, and the coach’s claims were also within the scope of the arbitration agreement.

Blockbuster 3: Kentucky Finds CPA Determination Is Not “Arbitration”

Kentucky waded into the muddy issue of defining arbitration in The Kentucky Shakespeare Festival, Inc. v. Dunaway, __ S.W.3d__, 2016 WL 3371085 (Ky. June 16, 2016).  In that case, a theater fired its director but agreed to pay his bonus for 2013.  The agreement noted that “the parties agree to abide by the determination of the … certified public accountants…in case of a dispute as to the true amount of the net profits, and each party agrees to accept such determination as final.”  After the CPAs concluded the director was entitled to no bonus, the director filed suit.  A year later, the theater filed for summary judgment, arguing the CPA determination was a binding arbitration award.  The district court denied the motion and the intermediate appellate court agreed.

The Kentucky Supreme Court affirmed for two reasons. First, it found even if the language was binding, it related only to “net profits” not to the director’s bonus.  But more interestingly, it rejected the concept that this was an arbitration clause, as it “makes no express reference to arbitration”, did not allow for “fundamental components of due process” like presenting evidence and cross-examining witnesses, and the agreement had a general venue provision selecting Kentucky state court.

Speaking of defining arbitration, watch for an upcoming post about how courts around the country are trying to put some parameters on what is and is not an arbitration. 

________

*Would love to hear from any academic types who have looked into this argument. What about these statements from SCOTUS, not limited to Sections 2-4 of the FAA??

  • “State and federal courts must enforce the Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq., with respect to all arbitration agreements covered by that statute.” Marmet Health Care Ctr., Inc. v. Brown, 132 S. Ct. 1201, 1202, 182 L. Ed. 2d 42 (2012).
  • “It is well settled that ‘the substantive law the Act created [is] applicable in state and federal courts.’” Nitro-Lift Technologies, LLC v. Howard, 133 S.Ct. 500, 503 (2012).

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.

Two posts ago, I reviewed four recent cases in which appellate courts enforced arbitration awards that district courts had refused to enforce.  Today I review two more appellate courts coming to the rescue of arbitration, this time by confirming arbitration awards that had been vacated by lower courts.

In SPX Corp. v. Garda USA, Inc., __A.3d__, 2014 WL 2708631 (Del. June 16, 2014), the Delaware Court of Chancery vacated an arbitration award (under its state arbitration act) after concluding the arbitrator manifestly disregarded the terms of the parties’ agreement. That court found that a section of the parties’ agreement unambiguously required the company’s working capital to reflect liabilities associated with workers compensation claims and the arbitrator manifestly disregarded that contractual requirement in issuing its award. The Supreme Court of Delaware reversed that decision. It found that there were two “colorable” interpretations of the contract, and that even if the arbitrator’s interpretation was wrong, it did not constitute manifest disregard because the arbitrator did not consciously choose to ignore a contract term that is not subject to reasonable debate.

In American Postal Workers Union, AFL-CIO v. U.S. Postal Service, __F.3d__, 2014 WL 2535249 (2d Cir. June 6, 2014), the district court had vacated an award in favor of the Postal Service after finding the arbitrator exceeded his powers. The district court found the arbitrator exceeded his power when he found the worker’s claims were barred based on the doctrine of collateral estoppel, because the collective bargaining agreement (CBA) did not explicitly provide for collateral estoppel. The Second Circuit reversed, finding that even if the CBA did not specifically allow collateral estoppel, it did not explicitly preclude it either, and case law allows arbitrators to apply collateral estoppel under broad arbitration agreements. Because of that, the arbitrator was arguably construing the contract (within the meaning of Sutter) and the award must be confirmed.

**Have any of the 154 posts on Arbitration Nation helped you brief a motion, draft an arbitration clause, or advise a client?  If so (or even if you just come for the photos and pop culture references), please consider nominating Arbitration Nation for the next ABA Blawg 100 here: http://www.abajournal.com/blawgs/blawg100_submit/ . Fingers crossed for making the list for a third year! **

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.

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.