Pick up any textbook or treatise on arbitration law, and you’ll find the same thing in the chapter on enforcing arbitral awards: courts cannot conduct a merits review of awards. Courts, in other words, do not second guess the conclusions of the arbitrators about law or facts.

Or at least they’re not supposed to do so.

Still, losing parties often try to convince a reviewing court that the arbitrator “exceeded her powers.”  These sorts of excess of authority arguments have become quite common.

That’s exactly the sort of argument at issue in a hot-off-the-presses Tenth Circuit case, MEMC II, LLC v. Cannon Storage Sys., Inc., No. 18-6079, 2019 WL 549633 (10th Cir. Feb. 12, 2019).

In the case, the parties entered into a standard form construction contract, containing an arbitration clause. Cannon was supposed to build a commercial storage facility for MEMC. A dispute arose because Cannon decided that it needed to make some changes to the structural plans. When MEMC discovered this, it refused to continue to pay Cannon. Cannon then initiated arbitration to recover the payments.

MEMC defended by saying that Cannon had committed a material breach. It maintained that, under applicable Texas law, Cannon’s unilateral decision to depart from the specifications constituted a per se material breach discharging it from its duty to pay under the contract. The arbitrator listened to the arguments at a three-day hearing, reviewed over 100 exhibits, and concluded that MEMC had breached by failing to pay Cannon. She also found that Cannon had breached by not getting approval for several of the changes it made, but that the cost of remediating Cannon’s breaches had not be sufficiently proven by MEMC. Accordingly, she awarded $143,608 in damages to Cannon and nothing to MEMC.

MEMC challenged the award on the basis of excess of authority. The argument was essentially that “the arbitrator was required to apply the law and by awarding damages when the law would not allow for recovery of damages, the arbitrator exceeded her authority.”

The Tenth Circuit took the opportunity to give us all an Arbitration 101 lesson. Citing another Tenth Circuit case from last year – which indicates that parties may not be learning the lesson – the Court said, “[E]rrors in either the arbitrator’s factual findings or his interpretation of the law (unless that interpretation shows a manifest disregard of controlling law) do not justify review or reversal on the merits of the controversy.” (quoting Dish Network L.L.C. v. Ray, 900 F.3d 1240, 1243 (10th Cir. 2018)).

[F]ederal courts strongly defer to an arbitrator’s decisions. Because of this, “a party seeking relief under § 10(a)(4) bears a heavy burden.” [Oxford Health Plans LLC, 569 U.S. 564, 564 (2013) (quotations omitted).] “[C]onvincing a court of an arbitrator’s error—even his grave error—is not enough” to warrant vacatur under § 10(a)(4). Id. at 572. “Because the parties ‘bargained for the arbitrator’s construction of their agreement,’ an arbitral decision ‘even arguably construing or applying the contract’ must stand, regardless of a court’s view of its (de)merits.” [citations omitted]

First, SCOTUSblog referenced “arbitration nation” last fall, which was flattering.  Then last week the Ninth Circuit declared: “we have become an arbitration nation.”   That was basically the title of my first post on this blog seven years ago!  (“We are becoming an arbitration nation.”) I am going to turn up the  Janet Jackson  (“Rhythm Nation”) and feel smugly validated while I draft the rest of this post.  Because there is more to talk about than just the catchy phrase spreading far and wide.  Three federal circuits have vacated arbitration awards this month, giving new hope to parties who are trying to vacate awards and offering cautionary tales to arbitrators.

Aspic Eng’g & Constr. Co. v. ECC Centcom Constructors2019 WL 333339 (9th Cir. Jan. 28, 2019), dealt with a subcontractor constructing army facilities in Afghanistan.  The subcontractor claimed it was owed significant funds after the project was terminated for convenience by the U.S. government.  It proceeded to arbitration against the prime contractor, and an arbitrator awarded the subcontractor just over $1,000,000.  The prime contractor petitioned to vacate the award.

Both the district court and Ninth Circuit found that the award should be vacated.  The appellate court found the arbitrator exceeded his power within the meaning of Section 10 (a)(4) by issuing a “completely irrational” award.  And what made it completely irrational in the court’s view?  It was the fact that the arbitrator explicitly refused to enforce material provisions of the parties’ subcontract because the Arbitrator concluded  “it was not reasonable to expect that Afghanistan subcontractors would be able to conform to the strict and detailed requirements of general contractors on U.S. Federal projects.”    The court found that the resulting award directly conflicted with the parties’ subcontract.  “By concluding that [subcontractor] need not comply with the FAR requirements, the Arbitrator exceeded his authority and failed to draw the essence of the Award from the Subcontracts…Such an award is ‘irrational.'”

In the opinion’s conclusion, the court reminds us that it is more than just a rubber stamp for arbitral awards:

We have become an arbitration nation.  An increasing number of private disputes are resolved not by courts, but by arbitrators.  Although courts play a limited role in reviewing arbitral awards, our duty remains an important one.  When an arbitrator disergards the plain text of a contract without legal justification simply to reach a result that he believes is just, we must intervene.

The Ninth Circuit was not the only federal circuit court of appeals to vacate an arbitration award this month.  The Fifth Circuit vacated an award in Southwest Airlines Co. v. Local 555, Transport Workers Union of America, 2019 WL 139247 (5th Cir. Jan. 9, 2019) for a similar reason.  The court found “the arbitrator ignored the unambiguous terms of the CBA.”  In particular, the arbitrator treated the final execution date of the Collective Bargaining Agreement (CBA) as the effective date, even though the record established the parties had ratified it weeks earlier. The court found the arbitrator’s analysis “was not an arguable construction of the CBA and instead amounted to the arbitrator’s own brand of industrial justice.”  Indeed, it introduced the case by saying “this case is an example of when an arbitrator goes too far.”  (The allowable bases for vacatur in this case were governed by the Railway Labor Act, and are similar to those in the FAA.)

The third case comes from the Federal Circuit, in Koester v. U.S. Park Police, 2019 WL 81105 (Fed. Cir. Jan. 3, 2019).   In that labor case, an arbitrator had upheld the park police’s decision to remove an officer from service.  But the court found the arbitrator abused his discretion by refusing to consider evidence, then vacated the award and remanded back to the arbitrator.  (Vacatur in Koester is not governed by the narrow standards of the Federal Arbitration Act, but instead by by the less deferential standards in a federal statute specific to labor relations with government employees.)

In the Midwest, however, arbitration awards fared just fine under the FAA. In fact, the Eighth Circuit un-vacated an award in Great American Ins. Co. v. Russell, 2019 WL 387032 (8th Cir. Jan. 31, 2019).   That case involved a farmer’s claim that his crop insurer wrongfully denied his claim for damage to his corn crop.  A panel of three arbitrators awarded the farmer $1,433,008.  The insurer moved to vacate the award under the Federal Arbitration Act, claiming the arbitrators violated applicable federal regulations that require the arbitrators to make factual findings, including the basis for any award and breakdown any award by claim.  The insurer argued that because the panel did not break the award down by county or otherwise explain the damage calculation, the award must be vacated.  The district court agreed and vacated the award, but the Eighth Circuit reversed, finding “nothing in the regulations required the panel to segregate this claim into multiple separate claims.”

In today’s post I recount an epic battle between the Rules of Professional Conduct (tagline: saving clients from unscrupulous lawyers for over 100 years!) and the Uniform Arbitration Act (tagline: saving arbitration from hostile judges for 60 years!) in the Supreme Court of California.  Spoiler alert: the Rules of Professional Conduct win.

The story in Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., 2018 WL 4137103 (Cal. Aug. 30, 2018), begins with a “large law firm” [ed: with too many names] taking over the defense of J-M in a qui tam action in federal court in March of 2010.  The problem was that one of the public entities that had been identified as a real party in interest in the qui tam case was also a client of the firm (for employment matters).  Because both clients had signed engagement letters with general language waiving potential conflicts, the firm concluded it could take on the qui tam action.

The SMRH firm defended J-M for just one year before its employment client moved to disqualify it.  In that time, the firm had put in 10,000 hours defending J-M, and was still owed over one million dollars in fees.  The district court disqualified the firm based on the firm’s failure to adequately inform the employment client and J-M of the adversity before obtaining waivers, as required by the Rules of Professional Conduct.

At that point, the law firm sought its million dollars of unpaid fees from J-M in a state court action, and J-M in turn sought disgorgement of the two million dollars it had already paid.  The law firm successfully moved to compel arbitration, with the trial court dismissing J-M’s argument that the conflict of interest made the whole contract illegal and unenforceable. (And, the Court of Appeals refused a discretionary review which could have avoided the wasted fees of the arbitration.)

A panel of arbitrators awarded the law firm more than $1.3 million.  The parties were then back in state court with cross-motions to confirm and vacate the award.  The trial court confirmed the award.  However, the Court of Appeal reversed.

On appeal, the Supreme Court of California agreed that the arbitration award must be vacated.  It rested its decision on precedent from 1949, noting that “an agreement to arbitrate is invalid and unenforceable if it is made as part of a contract that is invalid and unenforceable because it violates public policy.”  In this case, the court found that the Rules of Professional Conduct were an expression of public policy, such that a violation of those rules could render an arbitration agreement void.  And it also found that the firm’s failure to give both of its clients notice of the actual adversity, and obtain informed consent of the representation, was a violation that tainted the entire contract and made it illegal.  (For you ethics geeks, the rule violated was 3-310(C)(3).)

Because the contract between the law firm and J-M was unenforceable, the court found the firm was “not entitled to the benefit of the arbitrators’ decision” and the parties could resume “where they were before the case took its unwarranted detour to arbitration.”  (Not sure why the court refused to say it was vacating the arbitration award.)  But, don’t shed too many tears for the lawyers.  The law firm will be able to argue in the trial court regarding whether it is entitled to any of its fees under the equitable doctrine of quantum meruit.  (Two judges dissented from that last part, finding that the ethical conflict should prevent the firm from recovering at all.)

I leave it to other blogs to discuss the ethical issues for lawyers present here, and to therapists and firm counsel to address the rising panic that lawyers may feel when reading this opinion.  For my purpose, this case is further demonstration that the type of arbitration agreement that is most susceptible to arguments of invalidity is the one between an attorney and client.  (Recall the recent decision in Maine.)  It is also interesting in that it does not discuss whether J-M “waived” its objection to arbitrability at all by participating in the arbitration, indeed there is no discussion of whether or how often J-M raised its objection during the arbitration.  That is a sharp contrast to the rule cited by the 9th Circuit in the Asarco decision (summarized last post), and an example of how inconsistent the rules are regarding waiver.

Okay, folks, we are still combating the summer slide here.  Today’s refresher rule is this: If an arbitrator fails to disclose a substantial relationship, the resulting award can be vacated under 9 U.S. C. 10 (a)(2).  But, not all relationships are substantial, as the cases today make clear.

Beginning in my backyard,  the appellant in Ploetz v. Morgan Stanley Smith Barney LLC, 2018 WL 3213877 (8th Cir. June 12, 2018), sought to vacate a FINRA arbitration award due to an alleged failure to disclose.  The chairperson disclosed that he was currently serving as an arbitrator in two other cases where Morgan Stanley was a party and had served in 8 previous cases involving Morgan Stanley or an affiliated company.  However, he did not disclose he had once served as a mediator in a case involving Morgan Stanley, and the FINRA rules require disclosure of past service as a mediator.  After the three-person panel dismissed appellant’s claims, she moved to vacate the award.  The district court denied the motion, and the 8th Circuit affirmed that result.  After noting the test for evident partiality is unclear in this circuit and refusing to clarify it (srsly??), the court found no evidence that the lack of disclosure “creates even an impression of possible bias.” Instead, the court found it “represented at most a trivial and inconsequential addition to that relationship.”  It also faulted appellant for failing to seek discovery into the earlier mediation.

The D.C. Circuit reached a similar result in Republic of Argentina v. AWG Group Ltd., 2018 WL 3233070 (D.C. Cir. July 3, 2018).  There, the losing party in arbitration (Argentina) argued the award should be vacated because one of the three arbitrators failed to disclose her service on a board of directors.  Three years into a twelve-year arbitration, this arbitrator was named to UBS’s board of directors, and UBS managed investments in two of the other parties in the arbitration (the “opposing parties”).  The arbitrator did not know of UBS’s investments, and they did not turn up in a conflict check run by UBS when she joined the board.  Argentina asked her to recuse due to her service on the UBS board, but the other arbitrators rejected the challenge.   After the award, both the district court and D.C. Circuit found this did not rise to the level of evident partiality.  Critically, while the arbitrator had “some degree” of interest in Argentina’s opposing parties, it failed to show she had a “substantial interest.”  In addition, there was no proof that the opposing parties had “more than trivial” import to UBS, a passive investor (though it had invested more than $2 billion).  The court raised public policy concerns about how many disqualifications and vacaturs could result if this type of financial relationship was sufficient to establish evident partiality.

In Certain Underwriting Members of Lloyds of London v.  Florida, 2018 WL 2727492 (2d Cir. June 7, 2018), the issue was what disclosure standards apply to party-appointed arbitrators.  In the reinsurance arbitration at issue, one party (ICA) had appointed Campos as its arbitrator.  Campos failed to disclose that he was president of a human resources firm that officed out of the same suite as ICA, and used a former director of ICA as a vendor, and had just hired a former director of ICA as its CFO.  The district court vacated the award based on evident partiality, citing the number and depth of relationships.  The Second Circuit remanded, finding that a different test should apply to party-appointed arbitrators.  It noted that reinsurers seek arbitrators with industry expertise, who are often “repeat players with deep industry connections”, and courts should be “even more indulgent” of undisclosed relationships for party-appointed arbitrators who are expected to serve as advocates.  Therefore, the Second Circuit followed the lead of four other circuits, and set a different standard for evident partiality by a party-appointed arbitrator.  It clarified that nondisclosure by a party-appointed arbitrator is only fatal if it violates the “contractual requirement” (here, “disinterested”) or “prejudicially affects the award.”  On remand, the district court must determine whether Campos was disinterested (had a personal or financial stake in the outcome) and whether his failure to disclose had a prejudicial impact on the award.

The focus today is recent state appellate court decisions on arbitration. Because there are an awful lot of them, I am going to divide them roughly into those that are pro arbitration, and those that are hostile to arbitration.  This post focuses on the three relatively hostile cases (with the friendly cases coming in a sequel), on issues of scope, delegation clause, and vacatur.

In Keyes v. Dollar General Corp., 2018 WL 1755266 (Miss. April 12, 2018),  the Mississippi Supreme Court wrestled with whether claims of “malicious prosecution” are within the scope of an arbitration agreement.  Just as it did a few months ago, the court concluded those claims are not within the scope of the arbitration agreement.  Even though in Keyes, the employee’s arbitration agreement provided for arbitration of all disputes “arising out of your employment…or termination of employment” and the employee was accused of stealing a gift card, which led to a criminal complaint.  The court noted that there was no evidence the employee “contemplated” this situation and that the employer could have specifically included claims of malicious prosecution, false imprisonment, etc. in the arbitration agreement.  [Can you imagine if we all had to list every possible claim for it to be covered by an arbitration agreement?  So.  Many.  Pages.]  On a similar issue, Texas reached the opposite result.

In Citizens of Humanity, LLC v. Applied Underwriters Captive Risk Assurance Co., Inc., 299 Neb. 545 (April 6, 2018), the Nebraska Supreme Court refused to enforce the delegation clause in the parties’ agreement.  [Yes, *that* Citizens of Humanity, of fancy jean fame.]  Just as in a similar 4th Circuit case, the party wanting to avoid arbitration alleged an anti-arbitration insurance statute precluded enforcement of the arbitration agreement (under the dreaded McCarran-Ferguson doctrine, which for a long time I refused to even acknowledge on this blog for fear of getting sucked into the morass).  The party seeking to arbitrate argued that the parties’ delegation clause assigned the issue of the anti-arbitration statute to the arbitrator, and that there had been no specific challenge to the delegation clause as required by Rent-A-Center. The Nebraska Supreme Court found the challenge was sufficiently specific in this case because the amended complaint mentioned the anti-arbitration statute and sought a declaration that the arbitration agreement was invalid, and because the challenger said during its hearing that its challenge included the delegation of arbitrability.  [Well, if you uttered the magic words at oral argument, then I guess that’s good enough…]  The court went on to find the delegation clause invalid and remanded the remaining arbitrability issues to the district court.

[The Third Circuit also found that a plaintiff had asserted a sufficiently specific challenge to a delegation clause in MacDonald v. Cashcall, Inc., 2018 WL 1056942 (Feb. 27, 2018).  But there, the complaint alleged that “any provision requirement that the enforceability of the arbitration procedure must be decided through arbitration is [] illusory and unenforceable.”  And the plaintiff’s brief at least stated that the delegation clause had the same defect as the arbitration provision.]

Last but not least, the Minnesota Court of Appeals issued a decision vacating an arbitration award for violating public policy. In City of Richfield v. Law Enforcement Labor Servs., Inc., 2018 WL 1701916 (Minn. Ct. App. April 9, 2018), the city terminated a police officer following his improper use of force in a traffic stop and failure to self-report that force.  The officer challenged his discharge in arbitration, and the arbitrator found the use of force was not excessive and that the failure to report it was not malicious, and ordered the city to reinstate him.  The city appealed the award.  The district court refused to vacate the award, but the appellate court found vacatur appropriate under the public-policy exception.  The court looked to the officer’s previous failures to report his use of force and found “the interest of the public must be given precedence over the arbitration award.”  The court noted its decision is rare and unusual, but that it did “not take this action lightly.”

Sometimes current events provide an occasion perfect storm to educate about arbitration basics. This is one of those occasions.

Here are questions that friends and colleagues  storming mad people have asked me in the past day or so, with my best answers:

  • Does an arbitration agreement have to be signed by both parties to be enforceable (i.e. ride out the storm)?
    • The Federal Arbitration Act provides that an arbitration agreement must be “written,” but it does not also say it must be signed by all parties.  Whether a signature is required, along with all answers about the enforceability of arbitration agreements, depends on state contract law. In general, a contract requires an offer, acceptance, and consideration. And in most states, “acceptance” of an offer can take many forms. (See, for example,  this case (about Macy’s) finding a valid agreement without one party’s signature , but these cases finding no valid agreement where a signature was missing.)
  • Do arbitrators have authority to issue temporary or ex parte injunctions?
    • It depends. Arbitrators derive their authority from the parties’ arbitration agreement. If that arbitration agreement expressly grants the power to issue emergency, temporary, or ex parte injunctions, or if the arbitration agreement incorporates rules of an administrator (like the AAA) and those rules grant the power to issue those types of injunctions, then the arbitrator has power to enjoin the parties on an emergency or temporary basis (but only the parties, otherwise non-parties will kick up a storm and vacate the award).
  • How are injunctions from arbitrators enforced?
    • Within the arbitration proceeding, a party may seek sanctions from the arbitrator if the arbitrator’s temporary injunction is violated. Those sanctions can include anything authorized by the applicable rules. (Remember in this case, when the sanction was over $600 million?  Oh, that created a sh*tstorm.) Outside the arbitration proceeding, the party wanting to enforce the injunction (whether temporary or permanent) must first obtain a final arbitration award, and then have that award confirmed in federal court. (Remember, only “final” awards can be confirmed under the Federal Arbitration Act.) After that final award is confirmed in court, it is a judgment that can be enforced like any other court judgment.
    • However, when the winning party asks a court to confirm an award, the losing party often moves to vacate the arbitration award.  And the absence of a valid arbitration agreement is a solid basis to vacate the award.  For example, the Revised Uniform Arbitration Act authorizes vacatur if: “there was no agreement to arbitrate, unless the person participated in
      the arbitration proceeding without raising the objection.”

**Thanks for all the nudges about writing this post.  You convinced me that my desire to offer context to the news should trump my desire to storm off and pretend it is not happening.

Despite how often I talk about whack-a-mole and the tug-of-war between the state courts and SCOTUS on arbitration, the truth is that the majority of state supreme courts follow SCOTUS’s arbitration precedent (whether holding their noses or not, we don’t know). Recent weeks have given us multiple of those pro-arbitration state court decisions to highlight – from Alabama, Rhode Island, Texas, and West Virginia.  Yes, that West Virginia.

In STV One Nineteen Senior Living, LLC v. Boyd, 2018 WL 914992 (Alabama Feb. 16, 2018), the Supreme Court of Alabama enforced the arbitration agreement in the admission documents of an assisted living facility.  The trial court had denied the facility’s motion to compel arbitration without explanation.  On appeal, the supreme court found the language of the arbitration agreement, which required arbitration of “any controversy or claim arising out of or relating to” the parties’ agreement, was broad enough to cover the tort claims asserted.

In Disano v. Argonaut Ins. Co., 2018 WL 1076522 (R.I. Feb. 28, 2018), the Supreme Court of Rhode Island refused to vacate an arbitration award.  Although the losing party argued that the panel of arbitrators had miscalculated damages, the supreme court applied a very deferential standard of review and noted that even if the arbitrators’ math skills were lacking, that “does not rise to the level necessary to vacate such an award.”

In Henry v. Cash Biz, 2018 WL 1022838 (Tex. Feb. 23, 2018), the Supreme Court of Texas found that a pay day lender did not waive its right to arbitrate by alerting the district attorney’s office to the borrowers’ conduct (issuing checks that were returned for insufficient funds).  The trial court had denied the lender’s motion to compel arbitration, the court of appeals had reversed, and the supreme court affirmed the intermediate appellate court.  It found: 1) that the borrowers’ claims of malicious prosecution were within the scope of the arbitration clause; and 2) that the lender’s status as the complainant in the criminal charge was not sufficient to prove that it “substantially invoked the judicial process.”  [Recall that Mississippi’s high court reached the opposite result in a very similar case just a few months ago.]

In another waiver case, the Supreme Court of Appeals of West Virginia held that a party’s “pre-litigation conduct” did not waive its right to arbitrate. In Chevron U.S.A. v. Bonar, 2018 WL 871567 (W. Va. Feb. 14, 2018), the trial court had denied Chevron’s motion to compel arbitration.  It found that Chevron’s decision to take actions consistent with its interpretation of the parties’ agreement had waived the right to arbitrate, because Chevron had “unilaterally decided” the questions instead of posing them to an arbitrator.  On appeal, the supreme court found “such a result simply is unreasonable” and “absurd.”  Therefore, it reversed with instruction for the trial court to issue an order compelling arbitration.

Just two days later, the Supreme Court of Appeals of West Virginia enforced the arbitration agreement in a contract of adhesion, again reversing the decision of a trial court. In Hampden Coal, LLC v. Varney, 2018 WL 944159 (W. Va. Feb. 16, 2018), an employee sued his employer and the employer moved to compel arbitration.  In response, the employee argued the arbitration clause was unenforceable.  On appeal, the supreme court clarified that it applies “the same legal standards to our review of all arbitration agreements,” and not a special standard if they involve employees or consumers.  It then found that the mutual agreement to arbitrate was sufficient consideration for the arbitration clause and that the arbitration clause was not unconscionable.

In a fitting ending to a post about high courts,  our nation’s highest court has agreed to decide a new arbitration case.  The case, New Prime Inc. v . Oliveiracomes from the 1st Circuit and raises two questions: whether a court or arbitrator should decide if an exemption to the FAA applies; and whether the FAA’s exemption (in Section 1) includes independent contractors.

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.

 

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

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

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

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

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

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

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.