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.

It is not uncommon for lenders to exempt small claims actions from their arbitration provisions. The question confronted by the Court of Appeals of Maryland in a recent case was: when a lender opts for small claims court, does that waive any later right to enforce the arbitration clause?  The court’s answer was yes, if the claims are related.

In Cain v. Midland Funding, LLC, __ A.3d__, 2017 WL 1101804 (Md. Mar. 24, 2017), the lender pursued its collection action against the credit card holder in small claims court in 2009.  It obtained a default judgment for $4,520.  In 2013, that same credit card holder filed a class action complaint against the lender, arguing the lender had been an unlicensed collection agency. The lender moved to compel arbitration.  The trial court compelled arbitration, finding the lender had not waived its right to arbitrate by bringing the 2009 case, and the intermediate appellate court agreed.

A five-member majority of Maryland’s highest court applied a de novo standard of review and reversed on the issue of waiver (two judges dissented).  It applied Maryland case law that holds participating in a judicial proceeding only constitutes a waiver of the right to arbitrate issues raised in that proceeding, but not “unrelated issues.”  Therefore, the court looked at whether the lender could have arbitrated its collection action, and if so, whether that was related to the licensing issue raised in 2013.

The arbitration agreement at issue states that “claims filed in a small claims court are not subject to arbitration, so long as the matter remains in such court and advances only an individual. . . Claim.” The court found that language, along with the broad language that “all Claims . . . are subject to arbitration,” gave the lender the choice to litigate or arbitrate the collection issue.

The court also found the 2009 and 2013 claims were sufficiently related to apply the waiver doctrine. “Put simply, if Midland had not pursued its 2009 collection action, Cain’s current claims would not exist.”  The majority noted that 2016 cases from both Nevada and Utah had reached similar conclusions.  Finally, the court refused to require a showing of prejudice: “Cain does not have to demonstrate that he will suffer prejudice if the arbitration clause is enforced.”

This issue is an important one for lending institutions. If the small claims court option is generally efficient, it may be worthwhile adding a clause to those arbitration provisions that pursuit of a claim in small claims court does not waive the right to raise arbitration as a defense in any later action.

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Maryland did not make my list of 5 states most hostile to arbitration last summer (and still wouldn’t). BUT, some of the states on that list have recently issued surprisingly pro arbitration decisions.  Check these out:

  • WEST VIRGINIA recently reversed a lower court’s refusal to enforce arbitration. It found the employee had failed to show the arbitration provision was unconscionable. It wasn’t all sunshine and arbitration butterflies, though.  One justice wrote a concurring opinion asking Congress to take action. “We can only hope that…Congress will implement better safeguards to the FAA to ensure that the legal rights of unsophisticated employees are protected.” Employee Resource Group, LLC v. Harless, 2017 WL 1371287 (W.Va. April 13, 2017).
  • WEST VIRGINIA also enforced an arbitration clause waiving class actions in Citizens Telecommunications Co. v. Sheridan, 2017 WL 1457006 (W.Va April 20, 2017). In that case, the class action waiver had been added via notice to all consumers pursuant to a modification clause in the original terms of the agreement. Because the new terms and conditions were distributed with a paper billing statement and “accepted” via continued use of the internet service, the court found they were a valid unilateral contract, just like an employee handbook. Therefore, the court enforced individual arbitration of the claims.
  • HAWAII confirmed an arbitration award in RT Import v. Torres, 2017 WL 1366999 (Ha. April 13, 2017), although reversed the trial court’s award of additional costs above the award. The court did get a jab in at arbitration in a footnote, though. It noted that the arbitrator awarded damages for emotional distress to a corporation. After commenting that there is no legal authority allowing such damages, the opinion states: “parties who submit their claims to binding arbitration assume all the hazards of the arbitration process, including the risk that the arbitrator may make mistakes in the application of law and in their findings of fact.”
  • ALABAMA found the arbitration agreement between a family and a funeral home was not unconscionable in Newell v. SCI Alabama Funeral Services, LLC, 2017 WL 1034469 (March 17, 2017).

I really should have titled this post “State Court Smorgasbord”…