The Fourth Circuit issued an opinion yesterday in an under-developed area of arbitration law: when are awards “mutual, final, and definite”?  This is an important issue because under Section 10(a)(4) of the Federal Arbitration Act, arbitration awards can be vacated if they don’t meet the standard of “mutual, final and, definite.”

In Norfolk Southern Railway Co. v. Sprint Communications Co., 2018 WL 1004805 (4th Cir. Feb. 22, 2018), the parties’ lease agreement called for a three-person appraisal panel to establish the price for the renewal period.  Each party selected their own appraiser, and those two appraisers chose a third appraiser.  (Let’s just call him the Chair.)  In December of 2014, the Chair issued a “majority decision,” setting a payment amount and identifying two critical assumptions underlying that payment amount.  The majority decision clarified that  “[i]f either of these extraordinary assumptions are found to not be true, [the Chair] … reserves the right to withdraw his assent.”   A panel of AAA arbitrators then determined the Majority Decision was final and binding.

Norfolk Southern then moved to confirm the Majority Decision and the district court granted the motion.  The Fourth Circuit reversed, finding the Majority Decision was not “final”.  It cited cases for the proposition that “[a]n award is not ‘final’ under the FAA if it fails to resolve an issue presented by the parties to the arbitrators.”  The court focused on the Chair’s reservation of his right to withdraw his assent as the key aspect of the Majority Decision that made it lack finality.  It wrote: the Chair “did not merely base his assent on certain assumptions, but rather reserved the right to withdraw his assent if his assumptions proved to be incorrect. This outcome cannot be squared with any conception of ‘finality.'”

The Fourth Circuit remanded to the district court with instructions to vacate the award, and told the parties to go back to arbitration for “an arbitration award that is “final” and otherwise complies with the FAA and this opinion.”

This is an important case for arbitrators to read in order to be sure they issue awards that are final and can be confirmed.

 

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.

In a decision that is very skinny on the facts, a unanimous Nevada Supreme Court recently un-vacated a significant arbitration award in a dispute over dental franchises.  In Half Dental Franchise, LLC v. Houchin, 2017 WL 3326425 (Nev. Aug. 3, 2017), the court found the arbitrators did not exceed their power in exercising authority over non-signatories.

The dispute began when Half Dental Franchise filed an arbitration demand against Precision Dental Professionals and Robert Houchin (among others).  They asserted breaches of contract and tort claims (including tortious interference with contract and usurping corporate opportunities).  A three-arbitrator panel found that both those respondents were proper parties, and granted Half Dental about $6.7M in damage.  Houchin filed a motion to vacate the arbitration award  The district court granted the motion, finding that the arbitrators exceeded their power in finding authority over Houchin, and vacated the award.

On appeal, the Nevada Supreme Court found that the district court improperly conducted a de novo review of the arbitrator’s decision finding Houchin bound to the arbitration agreement by estoppel.  (Precision Dental was also a non-signatory to the franchise agreement that the arbitrator found was bound to arbitrate based on estoppel.)  The court noted that under Nevada’s state arbitration statutes, the district court should have asked simply whether there was “colorable justification for the outcome.”  Finding that the arbitrator’s citation to contemporaneous documents provided at least colorable justification for estoppel, the appellate court found no basis for vacatur.  The “colorable justification” standard was especially appropriate because the parties’ arbitration agreement contained a delegation clause, authorizing the arbitrator to “decide any questions relating in any way to the parties’ agreement or claimed agreement to arbitrate.”  (Otherwise, the question of whether non-signatories are bound is presumptively for a court to determine.)  For those reasons, the supreme court reversed the district court’s decision.

What’s the lesson here?  It might be that dentistry is a very competitive field, but it is also that if an award is vacated at the trial court, it’s usually worth bringing an appeal.

 

So you’ve got an arbitration award, what next? In other types of civil cases, the Federal Rules of Civil Procedure (Rules) control service, and they have greatly reduced the role of U.S. Marshals in serving parties. See Fed. R. Civ. P. 4(c). But enter the Federal Arbitration Act § 9 and § 12 (FAA). When a party seeks to confirm, vacate, or modify an arbitration award, § 9 and § 12 say that a nonresident party must be “served by the marshal of any district within which the adverse party may be found in like manner as other process of the court.” Which set of requirements controls here?

Since adequate service is necessary for the court to have personal jurisdiction, the question of service has been litigated in a few district courts, but no federal appellate courts. See Logan & Kanawha Coal Co.v. Detherage Coal Sales, LLC, 789 F. Supp. 2d 716, 718 (2011) (chronicling the courts that have analyzed the issue). Some courts, like the D.C. District Court in VentureForth Holdings LLC v. Joseph, have found that service consistent with the Rules also satisfies FAA § 9 and § 12. Those courts rely on the final phrase of § 9 or § 12 that says, “in like manner as other process of the court.” They read that phrase as indicating that arbitration award confirmation or modification service should follow the same rules as other civil suits. They derisively dismiss the requirement in §§ 9 and 12 as an artifact or an anachronism.

However, some courts, like the Southern District of West Virginia in Logan & Kanawha v. Detherage Coal Sales, require service by U.S. Marshal. The first and primary argument for those courts is that the plain language of the FAA §§ 9 and 12 requires service by U.S. Marshal. When confronted with the apparent tension between the Rules and the FAA, they point to the fact that Congress has not yet repealed the marshal requirement in the FAA even if the new Rules reduce the role of U.S. Marshals. The Rules, in fact, still retain the option of using U.S. Marshals to serve other parties, so a court could order service by U.S. Marshal without violating Rule 4.

All in all, there are some district courts—but not circuit courts—talking about the potential conflict between the service requirements in the Rules and the FAA, and they do not all agree. There is no circuit law on it yet, but at least some of the district courts seem content to allow Congress’ anachronism to control current outcomes. The safest bet for any party seeking to confirm, vacate, or modify an arbitration award in federal court is to use a U.S. Marshal for service, or to get an express waiver of that requirement from the opposing party.

ArbitrationNation thanks Claire Williams, a law student at the University of Minnesota Law School, for researching and drafting this post.

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A nonexhaustive list of courts not requiring marshal service

  • VentureForth Holdings LLC v. Joseph, 80 F. Supp. 3d 147, 148 (D.D.C. 2015) (“[T]his Court holds that service of a nonresident complies with § 9 of the FAA if service is provided in accordance with Rule 4 of the Federal Rules of Civil Procedure.”)
  • United Cmty. Bank v. Campbell, No. 1:10 CV 79, 2011 WL 815684, at *2 (W.D.N.C. Mar. 1, 2011) (The Court finds that the Bank properly effected service pursuant to Rule 4(e).)
  • Elevation Franchise Ventures, LLC v. Rosario, No. 1:13-CV- 719 AJT/JFA, 2013 WL 5962984, at *4 (E.D. Va. Nov. 6, 2013) (“Service of process upon an individual is governed in this court by Fed. R. Civ. P. 4(e)(1) . . . .”)
  • Hancor, Inc. v. R &R Eng’g Prod., Inc., 381 F. Supp. 2d 12, 15 (D.P.R. 2005) (relying on Reed & Martin, Inc. v. Westinghouse Elec. Corp.)
  • Litigants in the Second Circuit should be aware of Reed & Martin, Inc. v. Westinghouse Elec. Corp., 439 F.2d 1268, 1277 (2d Cir. 1971). In it, the Second Circuit analyzed the same phrase “in like manner” that courts point to when arguing that service in accordance with Rule 4 is sufficient. The court held that “[t]he phrase ‘in like manner as other process of the court’ found in § 9 of the Arbitration Act refers to Fed. R. Civ. P. 4 on the accomplishment of appropriate service, not to Fed. R. Civ. P. 12(a). . . .” While this quote appears to support service in accordance with the Rules, there are two big caveats. First, the court was addressing an issue on which the FAA is silent (time to answer). Second, this case was decided in 1971 when Rule 4 required “[s]ervice of all process shall be made by a United States marshal . . .” so at the time there was no conflict between the Rules and the FAA and therefore the court could not have addressed the current tension between the FAA and the Rules.

 

A nonexhaustive list of courts requiring marshal service:

  • Johnson v. Drake, No. 3:16-CV- 1993-L, 2017 WL 1173275, at *6 (N.D. Tex. Mar. 30, 2017) (“[C]ourts cannot simply disregard the plain language of 9 U.S.C. § 9 . . . .”)
  • PTA-FLA, Inc. v. ZTE USA, Inc., No. 3:11-CV- 510-J- 32JRK, 2015 WL 12819186, at *6 (M.D. Fla. Aug. 5, 2015) (“[S]ervice on nonresidents must be made via marshal. . . “)
  • Logan & Kanawha Coal Co. v. Detherage Coal Sales, LLC, 789 F. Supp. 2d 716, 722 (S.D.W. Va. 2011)
  • Nu-Best Franchising, Inc. v. Motion Dynamics, Inc., No. 805 CV 507T27TGW, 2006 WL 1428319, at *3 (M.D. Fla. May 17, 2006) (“Plaintiffs were required to serve notice through the United States Marshal.”)
  • Int’l Union of Operating Engineers Local 825 Employee Benefit Funds v. Getty Contracting LLC, No. CIV. 2:14-7799 KM, 2015 WL 4461512, at *2 (D.N.J. July 20, 2015) (“If it is a nonresident of New Jersey, Getty must be served via the U.S. Marshal in its home district.”)
  • Dobco, Inc. v. Mery Gates, Inc., No. CIV. 06-0699 (HAA), 2006 WL 2056799, at *2 (D.N.J. July 21, 2006) (“Rather, Dobco had an obligation to have Mery Gates served by a marshal, as the strict language of the statute provides.”)

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.

The Second Circuit reminded us yesterday that judicial review of arbitration awards is “among the most deferential in the law.”  And when district courts are not sufficiently deferential, their decisions are likely to be overturned.  That happened recently in Tom Brady’s “deflate-gate” arbitration, and in an arbitration over how much a pedestrian was owed after a car accident.

In the pedestrian’s dispute, the arbitrator was assigned to determine the extent of the pedestrian’s injury and what compensation should flow from that injury.  Lemerise v. The Commerce Ins. Co., 2016 WL 1458213 (R.I. April 13, 2016).  The arbitrator determined the pedestrian was entitled to $150,000 in damages plus interest of $47,550.  The insurance company moved to modify the arbitration award down to $100,000 – the limits of the policy.  The trial court granted that motion, and the pedestrian appealed.  The Supreme Court of Rhode Island reinstated the full arbitration award.  It found that the trial court had erred by considering the limits of the policy, when the insurance company had not introduced that policy as an exhibit in the arbitration.  Furthermore, the court found the limited statutory grounds for modifying the arbitrator’s award were not present.

In a case that garnered much more news coverage, the four-game suspension against Tom Brady was also reinstated yesterday by the Second Circuit Court of Appeals.  Although the district court had found the arbitration hearing lacked fundamental fairness, in a 2-1 decision the Second Circuit found the arbitrator met the low bar required by the LMRA: he acted within his authority and he was at least arguably construing the parties’ contract.

Perhaps not surprisingly, the appellate court’s description of the Brady arbitration sounds like an entire different proceeding than the one described by the district court.  This opinion describes the evidence against Brady to support the conclusion that he participated in the scheme to deflate game balls (not just was “generally aware”).  It makes ten hours of testimony and 300 exhibits sound exorbitant.  And it places significant emphasis on the cell phone destruction.

The opinion also went out of its way to emphasize that this process was what the players association bargained for, even if it “may appear somewhat unorthodox” to have the Commissioner first impose discipline and then preside over a challenge to his discipline in arbitration.  As a result, the players’ remedy “is not judicial intervention, but” to negotiate a different deal next time.  In an example of the snarky tone used for many of the arguments made on behalf of Brady, the majority wrote (about the comparison to substance abuse) that even if Brady “may have been entitled to notice of his range of punishment, it does not follow that he was entitled to advance notice of the analogies the arbitrator might find persuasive in selecting a punishment within that range.”

Today’s lesson is that famous athletes are not entitled to a less deferential standard of review for arbitration awards than the rest of us.  And, if an arbitration award in your favor is vacated by a trial court, it may be worth your while to appeal.

The Supreme Court of Hawaii ruled recently that if a neutral arbitrator fails to meet disclosure requirements, it constitutes “evident partiality” as a matter of law, and requires the vacatur of the arbitrator’s award.  Furthermore, Hawaii interpreted its disclosure requirements broadly, and in this case found an arbitrator’s failure to disclose the “concrete possibility” of his attorney-client relationship with the claimant’s counsel was enough to create a reasonable impression of partiality and demand vacatur.  Noel Madamba Contracting, LLC v. Romero, __ P.3d __, 2015 WL 7573420 (Haw. Nov. 25, 2015).
The underlying dispute involved homeowners who claimed their contractor had abandoned the construction of their new home.  After the homeowners demanded arbitration and the parties filed their ranked lists of neutrals, a retired judge, Patrick Yim, was appointed as the arbitrator in May of 2011.  The hearing took place in November of 2012, and Yim issued a partial award for the homeowners of about $155,000 on January 26, 2012.  In April of 2012, Yim also awarded the homeowners $42,000 in attorneys’ fees.  The homeowners were represented by lawyers from Cades Schutte LLP.

During that same time period, Yim’s retirement accounts needed some legal attention.  He used a third party (PSC) to manage his retirement accounts, and PSC decided it was time for an attorney to ensure those accounts complied with ERISA (and other laws).  In May of 2011, Yim was told that either Cades or another firm would be chosen to handle that review.  In December of 2011, PSC told Yim the approximate cost for the review and that his file was being sent to an unspecified law firm.  At the end of January, just days before the partial award was issued, PSC told Yim that Cades would likely do the work.  Yim first spoke with a Cades attorney in February of 2012, but Cades had not yet done any work for him and there was no engagement letter.

Within a day or so of the February meeting, which was a month after the partial award for the homeowners, Yim first disclosed his potential client relationship with Cades to the parties in the arbitration.  The contractor objected and requested more information, which resulted in two further supplemental disclosures.  In those disclosures, Yim said he had not yet actually engaged Cades and instead had instructed PSC to send his file to another firm.  The contractor was not satisfied, but the administrator affirmed Yim’s role.  The contractor then moved to vacate the award, arguing evident partiality under the Hawaii Uniform Arbitration Act.  Both the trial court and the intermediate appellate court refused to vacate the award, largely due to their analysis that arbitrators only have to disclose current or past relationships, not potential future relationships.

The Supreme Court of Hawaii remanded the case with instructions to vacate the arbitration award.  It concluded that “Yim’s failure to disclose his relationship with Cades created a reasonable impression of partiality, and as such, resulted in a violation of the disclosure requirements” in the Uniform Arbitration Act, necessitating vacatur of the award.  In its analysis, the court noted that while one subsection of the UAA requires disclosure of an arbitrator’s “past or present relationships,” the more general rule in the UAA is that arbitrators must disclose “any known facts that a reasonable person would consider likely to affect the impartiality of the arbitrator.”  The court cited to Ninth Circuit case law holding that the failure to disclose a “concrete possibility” of a connection between an arbitrator and a party or a party’s law firm can result in a reasonable impression of partiality.  Therefore, Yim’s failure to  disclose his anticipated relationship with Cades constituted evident partiality, even without any showing that Yim was “actually biased.”  The court grounded its decision in policy: “because review of an arbitration award is limited, an arbitrator’s impartiality and appearance of impartiality is paramount.”

This is an interesting opinion for many reasons, but here are a few.

  • Why is this entire case decided under the Hawaii Uniform Arbitration Act?  Was that written into the parties’ contract?  The arbitration agreement is not quoted and there is no analysis in this decision of whether the parties’ transaction involved interstate commerce.  That could have been dispositive, as many federal cases require actual proof of bias.
  • The high court did not reach the issue of whether the trial court should have allowed the contractor’s attorney to depose Yim about his contacts with the Cades firm.  However, it did say that Yim was “not immune” from testifying under the UAA, because the contractor had established prima facie grounds to vacate the award.  I would have liked to see the Hawaii court tackle this issue because there is little good analysis of that issue.
  • Yim’s status as a 24-year member of the Hawaii state courts is likely a critical, but unaddressed, factor in how this decision came out.  Did the lower courts not want to embarrass their former colleague by finding that he failed to disclose?  Conversely, did the high court want to be especially firm with former judges, to avoid any allegation that it was soft on them?  This is not unique to Hawaii — many retired judges become active arbitrators, making it awkward when their former judicial colleagues have to pass on the soundness of their decisions as arbitrators.  Maybe the rule should be that the arbitrator is never named in motions to vacate?  (Ironic…worrying about “evident partiality” by the judges who are considering whether the arbitrator showed “evident partiality.”)

 

Recent decisions from the 3d and 11th Circuits drive home this point: an arbitration award is final and should not be revisited.

In Robinson v. Littlefield, 2015 WL 5520017 (3d Cir. Sept. 17, 2015), the parties arbitrated their dispute over the quality of a new RV.  The arbitrator ruled for the RV buyers, awarding them about $85,000.  The seller made an untimely motion with the AAA to modify or correct the award, and the arbitrator ignored it.

After the buyers entered their judgment in state court, the seller removed to federal court and moved to strike the judgment as not final (because the motion to modify had not been ruled upon).  The district court asked the arbitrator to indicate whether the case was active, and the arbitrator clarified that he would not amend the previous award and it remained in full effect.   The district court concluded that the arbitration award was not final until the arbitrator responded to the court, and so struck the entry of judgment.  The Third Circuit un-vacated the arbitration award in no time, noting that arbitration awards are final when it is clear the arbitrator intends the award to be a complete determination of all submitted claims (including damages).  In this case, the final award was the award for $85,000, and the motion to modify it “does nothing to change that conclusion.”

In IBEW, Local Union 824 v. Verizon Florida, 2015 WL 5827517 (11th Cir. Oct. 7, 2015), the court found the arbitrator exceeded his power by issuing a substituted award in a labor arbitration.  The arbitrator had issued the original award, interpreting a clause in the parties CBA and applying it to particular employees.  Two days later, the union asked the arbitrator to clarify the award (saying that applying the arbitrator’s rationale, more employees should have benefitted).  In response, the company asked for a reconsideration of the entire award, asserting that a significant topic of the award had not been properly before the arbitrator.  The arbitrator agreed with the company and issued a substituted award, eliminating the topic in question.

The union then sought to confirm the original award and vacated the substituted award.  The district court ruled in favor of the union and the appellate court affirmed.  It analyzed the union’s grievance and found it was broad enough to encompass all the issues addressed in the original award.  “Where — as here–the parties refuse to stipulate to the issues at arbitration, the arbitrator is ’empowered’ to frame and decide all the issues in the grievance as he sees them.”

Furthermore, the 11th Circuit concluded the arbitrator lacked authority to revisit his original award.  Importantly, the court noted that the governing AAA rules preclude an arbitrator from “redetermin[ing] the merits of any claim already decided.”  The hardest issue for the court was the company’s argument that the union had “open[ed] the door” to a full reconsideration by asking for a clarification.  The court agreed that contracting parties can authorize an arbitrator to reconsider his decision by mutual agreement, but said the parties did not mutually consent in this case, because the union sought much narrower relief than that sought by the company.  The arbitrator’s original award stands.

The lesson from these cases?  The parties should not seek reconsideration of the merits of a final award, and arbitrators should not grant a reconsideration of the merits.  Final means final.

The Eleventh Circuit has a lesson for future litigants: the presence of a repeat player is not enough to show the evident partiality needed to vacate an arbitration award under the Federal Arbitration Act.

In  Johnson v. Directory Assistants, Inc., __ F.3d __, 2015 WL 4939578 (11th Cir. Aug. 20, 2015), an advertising company demanded arbitration against its client for breach of contract.  The arbitrator disclosed that he had arbitrated a dispute involving the advertising company five years earlier.  The client challenged the arbitrator and the arbitral forum (the Alternative Dispute Resolution Center, “ADRC”) denied the challenge.  Days before the hearing, the client requested and received a continuance.  A week before the rescheduled hearing, the client declared that because of “the current state of affairs” in its industry, it was “not able to continue with the arbitration.”  Therefore, the arbitrator proceeded with the hearing and allowed the advertising company to put on its case, despite the absence of the client.  The arbitrator awarded the advertising company roughly $100,000 in liquidated damages, late fees, and arbitration costs.

The client sought to vacate the award.  The federal district court granted the motion to vacate, finding that the arbitrator was biased.  The appellate court disagreed.  With respect to the client’s primary argument, that there was “evident partiality” because the arbitral forum refused to disclose how often the advertising company had used ADRC, the court noted that there was no record the client even asked how many times the advertising company had used the arbitral forum.  Furthermore, the court was “unconvinced that the failure to disclose that information would justify vacatur” because that fact alone would not “lead a reasonable person to suspect partiality.”

With respect to the client’s argument that vacatur was appropriate under Section 10(a)(3) because the arbitrator did not postpone the hearing a second time, the court had little sympathy.  “Under these circumstances, where a party participated in an arbitration proceeding only to withdraw a week before the hearing with little explanation and no request for extension, vacatur is inappropriate.”

While the client’s arguments for vacatur in this case were not strong, the Eleventh Circuit did more than it needed to dispose of them.  Its comment that evidence of repeat arbitrations before a single arbitrator or forum is not enough to show vacatur is important because many opponents of consumer arbitration point to the existence of repeat players as a critical flaw in the system.

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.