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Archive for the ‘Appellate Practice’ Category

Circuit Court Judge Richard A. Posner Weighs in on Federal Policy in Favor of Arbitration

May 23rd, 2015 Appellate Practice, Arbitrability, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Class Action Waivers, Contract Interpretation, Federal Arbitration Act Enforcement Litigation Procedure, Federal Policy in Favor of Arbitration, Labor Arbitration, Practice and Procedure, Presumption of Arbitrability, United States Court of Appeals for the Seventh Circuit, United States Supreme Court Comments Off on Circuit Court Judge Richard A. Posner Weighs in on Federal Policy in Favor of Arbitration

Introduction

Ronald v. Sprint Spectrum L.P., No. 14-3478, slip op. (7th Cir. May 11, 2015) (Posner, J.)

Ronald v. Sprint Spectrum L.P., No. 14-3478, slip op. (7th Cir. May 11, 2015) arose out of a class action lawsuit brought in the U.S. District Court for the Northern District of Illinois by a putative class of mobile phone customers—represented by Mr. and Ms. Andermann (the “Andermanns”)—against Sprint, which sought damages for alleged violations of the Telephone Consumer Protection Act, 47 U.S.C. § 227.

Sprint moved to compel arbitration, but the district court denied its motion. Sprint appealed to the U.S. Court of Appeals for the Seventh Circuit as authorized by 9 U.S.C. § 16(a)(1)(B). The Seventh Circuit, in an opinion written by Circuit Judge Richard A. Posner, and joined in by Circuit Judge Diane S. Sykes and Chief District Court Judge Philip P. Simon of the Northern District of Indiana (sitting by designation), reversed and remanded with instructions to compel arbitration.

The Sprint Spectrum facts; the legal rules and principles that determined the outcome; and the outcome itself were not controversial.  Had the court limited its task to applying the material facts to the applicable law, then the case likely would not have warranted a reported opinion.

But occasionally appellate judges, particularly ones as prominent, skilled and engaged as Judge Posner, will use a case like Sprint to make a point in passing that might influence other judges in the future and perhaps provide valuable information to attorneys and their clients. Judge Posner, with the apparent blessing of the other two judges, used the case to make a couple of points, one purely legal, the other bearing on both the law and, and at least to some extent, on matters pertinent to court administration.

The purely legal issue concerned the  proper scope and practical significance of the federal policy in favor of arbitration, which a majority of the U.S. Supreme Court, Judge Posner and some other judges apparently believe lawyers and judges may misunderstand or misinterpret. In Sprint Spectrum Judge Posner, in dictum, raises the topic and shares some important insights about it.

The hybrid legal and judicial administration point concerned his view of the merits of the underlying Telephone Consumer Protection Act dispute.  While the Court acknowledged that it was for the arbitrators to decide the merits, it nevertheless explained why it believed the claim would likely fail, whether in arbitration or in court.

Sprint Spectrum: Background

yay-985888-digital---CopyIn 2000 the Andermanns entered into a two-year renewable mobile-phone service contract with U.S. Cellular, which was renewed continuously, and for the last time in 2012. The contract contained an arbitration agreement requiring arbitration of “any controversy or claim arising out of or relating to this agreement.” The parties agreed that the obligation to arbitrate would “survive[] the termination of [the] [mobile phone] service agreement[,]” and that “U.S. Cellular may assign this Agreement without notice to” the customer.

In 2013 U.S. Cellular sold the contract to Sprint, and notified the Andermanns of the sale in a letter sent months later. The letter informed the Andermanns that their service would be terminated effective January 2014  because of a compatibility problem between the Andermann’s mobile phone and the Sprint network. The letter explained that the Andermanns would have to obtain a new cell phone or find a new carrier, but “that Sprint was offering attractive substitutes for the terminated service,” and, if interested, the customer should contact Sprint by telephone. See slip op. at 2.

In December Sprint phoned the Andermanns to remind them that their service was about to expire, and added that Sprint had “a great set of offers and devices available to fit [their] needs.'” Slip op. at 3. Sprint called each of three members of the Andermann family twice (a total of six calls), but by the time the calls were made, the Andermanns had obtained cell phone service from another carrier.

yay-10331162-digitalThe Andermanns did not answer any of the six calls, except by commencing a class action lawsuit against Sprint, which contended that the unsolicited calls violated the Telephone Consumer Protection Act. Sprint moved to compel arbitration, contending that the dispute arose out of and related to the contract renewed in 2012. Even though that contract was between U.S. Cellular and the Andermanns, U.S. Cellular had, as permitted by the contract, assigned its rights to Sprint, who had now stepped into U.S. Cellular’s shoes under the contract.

The Seventh Circuit’s Decision

The district court denied Sprint’s motion because its contract with the Andermanns had terminated prior to the allegedly offending telephone calls at issue in the lawsuit. The district court reasoned that the dispute did  not arise out of or relate to the terminated agreement.

But the Court  said “[a]ctually, there’s an intimate relation” between the dispute and the contract. “The contract,” said the Court, authorized an assignment, and because of the incompatibility of the assignor’s (U.S. Cellular’s) cellphones and the assignee’s (Sprint’s) mobile phone network, Sprint had had to terminate the U.S. Cellular customers, such as the Andermanns, whom it had acquired by virtue of the assignment.  .  .  .” Slip op. 4. Sprint made the calls, and “offer[red] substitute service[]”  “to prevent the loss of.  .  .  customers because of the incompatibility.  .  .  .” Slip op. at 4.

yay-10348120-digitalThe Andermanns attempted to support their argument by offering an “untenable interpretation” of Smith v. Steinkamp, 318 F.3d 775, 777 (7th Cir. 2003). See Slip op. at 4. Steinkamp explained “‘absurd results’ would ensue if the arising from and relating to provisions contained in a payday loan agreement defining what disputes would have to arbitrated rather than litigated, were cut free from the loan and applied to a subsequent payday loan agreement that did not contain those provisions.” Slip op. at 4-5 (quoting Steinkamp, 318 F.3d at 777).

The Andermanns argued that Steinkamp suggested that the same type of “absurd results” would ensue under the facts of this case. But Steinkamp, explained the Court, “is not this case[,]” which concerns a single contract containing an arbitration agreement, not two successive contracts, one with an arbitration agreement and one without an arbitration agreement. See slip op. at 5.

yay-2220659-digitalWhile the Andermanns received a mild (and perhaps well-deserved) rebuke, Sprint’s argument prompted the verbal version of a roll of the eyes coupled with a quiet sigh—not so much because there was anything really wrong with the argument, but presumably because it overstated the importance of the federal policy in favor of arbitration. But that gave Judge Posner an opportunity to make a somewhat subtle, but important point.

The Court  said “Sprint gilds the lily, however, in telling us that arbitration is a darling of federal policy, that there is a presumption in favor of it, that ambiguities in an arbitration clause should be resolved in favor of arbitration, and on and on in this vein.” Slip op. at 5. “It’s true,” said the Court, “that such language (minus the “darling”) appears in numerous cases.” Slip op. at 5 (citations omitted): “But the purpose of that language is to make clear, as had seemed necessary because of judges’ historical hostility to arbitration, that arbitration was no longer to be disfavored — especially in labor cases, see, e.g., Granite Rock Co. v. International Brotherhood of Teamsters, 561 U.S. 287, 298­-99 (2010), where arbitration is now thought a superior method of dispute resolution to litigation.” Slip op. at 5.

Noting that “[t]he Federal Arbitration Act is inapplicable to labor disputes,  .  .  . and merely makes clauses providing for the arbitration of disputes arising out of transactions involving interstate or foreign commerce.  .  . enforceable in federal and state courts[,]” the Court said it was “not clear that arbitration, which can be expensive because of the high fees charged by some arbitrators and which fails to create precedents to guide the resolution of future disputes, should [in commercial cases] be preferred to litigation.” Slip op. at 5-6. Continue Reading »

SCOTUS Denies Americo and Jupiter Medical Cert. Petitions: All Eyes now on DIRECTV. . . .

May 19th, 2015 American Arbitration Association, Appellate Practice, Arbitrability, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Arbitration Provider Rules, Arbitrator Selection and Qualification Provisions, Awards, Choice-of-Law Provisions, Class Action Arbitration, Class Action Waivers, Confirmation of Awards, Consent to Class Arbitration, Contract Interpretation, FAA Preemption of State Law, Federal Arbitration Act Enforcement Litigation Procedure, Judicial Review of Arbitration Awards, State Courts, United States Supreme Court Comments Off on SCOTUS Denies Americo and Jupiter Medical Cert. Petitions: All Eyes now on DIRECTV. . . .

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On March 28, 2015 we reported (here) that the U.S. Supreme Court (“SCOTUS”) had asked for a response to the petition for certiorari in Americo Life, Inc. v. Myer, 440 S.W.3d 18 (Tex. 2014). In Americo the Texas Supreme Court held that an arbitration award had to be vacated because it was made by a panel not constituted according to the parties’ agreement. The parties’ agreement, among other things, incorporated the American Arbitration Association (the “AAA”)’s rules, which at the time the parties entered into the contract followed the traditional, industry arbitration rule that party-appointed arbitrators may be partial, under the control of the appointing party or both. But by the time the dispute arose the AAA Rules had been amended to provide that the parties are presumed to intend to require parties to appoint only neutral arbitrators—that is, arbitrators that are both impartial and independent.

Five Justices of the nine-member Texas Court determined that the parties had agreed that party-appointed arbitrators need not be impartial, only independent. Because the AAA had, contrary to the parties’ agreement, disqualified the challenging party’s first-choice arbitrator on partiality grounds, the panel that rendered the award was not properly constituted and thus exceeded its powers. See 440 S.W.3d at 25. (Copies of our Americo posts are here and here.)

yay-12776482As reported here and here, the losing party requested Supreme  Court review to determine whether the Texas Supreme Court should have deferred to the AAA’s decision on disqualification rather than independently determining whether the parties intended to require party-appointed arbitrators to be neutral. The petition argues that there is a split in the circuits on the issue.

On Monday, May 18, 2015, SCOTUS denied the petition for certiorari.  (You can access the Court’s May 18, 2015 Order List here.)

On Monday May 4, 2015, SCOTUS also denied the petition for certiorari in another Federal Arbitration Act case, Jupiter Medical Center, Inc. v. Visiting Nurse Assoc., No. 14-944, which was decided by the Florida Supreme Court. (You can access the Court’s May 4, 2015 Order List here.) Jupiter Medical Center, like Americo, concerned a post-award challenge under Section 10(a)(4) of the Federal Arbitration Act, and also like Americo, was decided by a state supreme court. In Jupiter Medical, however, the Florida Supreme Court rejected the post-award challenge.

yay-5257980-digitalSupreme Court watchers interested in arbitration cases will have to get their fix next term from DIRECTV v. Imburgia, which we discussed here. Will SCOTUS hold that the California intermediate Court did not give effect to the presumption of arbitrability? Will SCOTUS go even further and explain that, just as a statute cannot be interpreted “‘to destroy itself,'” AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1748 (2011) (quoting  American Telephone & Telegraph Co. v. Central Office Telephone, Inc., 524 U.S. 214, 227-228 (1998) (quotation omitted)), so too cannot state law contract interpretation rules be applied in a way that would destroy an arbitration agreement to which the Federal Arbitration Act applies? Cf. Volt Info. Sciences, Inc. v. Trustees of Leland Stanford Junior Univ., 489 U.S. 468,  (1989) (“The question remains whether, assuming the choice-of-law clause meant what the Court of Appeal found it to mean, application of Cal. Civ. Proc. Code Ann. § 1281.2(c) is nonetheless pre-empted by the FAA to the extent it is used to stay arbitration under this contract involving interstate commerce.  .  .  . [because] “it would undermine the goals and policies of the FAA.”)

Stay tuned for DIRECTV.  .  .  .

 

Photo Acknowledgements:

All photos used in the text portion of this post are licensed from Yay Images and are subject to copyright protection under applicable law. Text has been added to image 2 (counting from top to bottom). Hover your mouse pointer over any image to view the Yay Images abbreviation of the photographer’s name.

All Eyes on Americo. . . .SCOTUS Expected to Rule on Petition for Certiorari at Upcoming May 14, 2015 Conference

May 12th, 2015 American Arbitration Association, Appellate Practice, Arbitrability, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Arbitration Provider Rules, Arbitrator Selection and Qualification Provisions, Awards, Confirmation of Awards, Contract Interpretation, Evident Partiality, Judicial Review of Arbitration Awards, State Courts Comments Off on All Eyes on Americo. . . .SCOTUS Expected to Rule on Petition for Certiorari at Upcoming May 14, 2015 Conference

yay-677327-digitalOn March 28, 2015 we reported (here) that the U.S. Supreme Court had asked for a response to the petition for certiorari in Americo Life, Inc. v. Myer, 440 S.W.3d 18 (Tex. 2014). In Americo the Texas Supreme Court held that an arbitration award had to be vacated because it was made by a panel not constituted according to the parties’ agreement. The parties’ agreement, among other things, incorporated the American Arbitration Association (the “AAA”)’s rules, which at the time the parties entered into the contract followed the traditional, industry arbitration principle that party-appointed arbitrators may be partial, under the control of the appointing party or both. But by the time the dispute arose the AAA Rules had been amended to provide that the parties are presumed to intend that appointed arbitrators must be neutral.

Five Justices of the nine-member Court determined that the parties had agreed that party-appointed arbitrators need not be impartial, only independent. Because the AAA had, contrary to the parties’ agreement, disqualified the challenging party’s first-choice arbitrator on partiality grounds, the panel that rendered the award was not properly constituted and thus exceeded its powers. See 440 S.W.3d at 25. (Copies of our Americo posts are here and here.)

yay-34842-e1424841353823The losing party is requesting Supreme  Court review to determine whether the Texas Supreme Court should have deferred to the AAA’s decision on disqualification rather than independently determining whether the parties intended to require party-appointed arbitrators to be neutral. The petition argues that there is a split in the circuits on the issue.

At this week’s May 14, 2015 conference, the Court will presumably decide whether or not to grant certiorari.

In our March 28, 2015 post (here) we argued  that Americo‘s unique facts make it poor candidate for certiorari. At the time the parties agreed to arbitrate, the AAA rules “provided that ‘[u]nless the parties agree otherwise, an arbitrator selected unilaterally by one party is a party-appointed arbitrator and not subject to disqualification pursuant to Section 19.'” 440 S.W.3d at 23 (quoting AAA Commercial Rule § 12 (1996)). Section 19 permitted the AAA to disqualify neutral arbitrators for partiality, but, under Section 12, absent an agreement to the contrary, party-appointed arbitrators were not subject to disqualification under Rule 19. When the AAA Rules were amended to reverse the traditional presumption about partiality of party-appointed arbitrators, the Rules were also amended to authorize the AAA to determine whether party-appointed arbitrators were neutral.

yay-8590418-digitalThis is one of those (relatively rare) cases where a question of arbitrability—that is, whether the parties agreed to delegate to the AAA the authority to make a final and binding determination on whether a party-appointed arbitrator may be disqualified—is intertwined so inextricably with the merits of the dispute alleged to be arbitrable that, for all intents and purposes, the arbitrability and merits questions are identical. In other words, the AAA’s authority to disqualify turns on whether the parties agreed to neutral or non-neutral party-appointed arbitrators–the precise issue the petition claims the AAA should itself decide. In situations like these, the court cannot abdicate its duty to determine arbitrability, even if that means deciding some or all of the disputes that are alleged to be arbitrable. See, generally, Litton Financial Printing Div. v. National Labor Relations Board, 501 U.S. 190, 208-09 (1991).

Of course, the Supreme Court may believe otherwise, or may have other reasons for wanting  to grant certiorari.  But in any event, we’ll probably know by Monday, May 18, 2015 whether the Court will take the case.

 

Photo Acknowledgements:

All photos used in the text portion of this post are licensed from Yay Images and are subject to copyright protection under applicable law. Text has been added to images 1 and 3 (counting from top to bottom). Hover your mouse pointer over any image to view the Yay Images abbreviation of the photographer’s name.

What can a Federal Arbitration Act Practitioner Learn from an ERISA MPPAA Pension Plan Arbitration Case?

May 5th, 2015 Appellate Practice, Arbitration Practice and Procedure, Arbitration Risks, Awards, ERISA, Federal Arbitration Act Enforcement Litigation Procedure, Federal Courts, Federal Rules of Civil Procedure, Judicial Review of Arbitration Awards, Labor Arbitration, Managing Dispute Risks, MPPAA Arbitration, Practice and Procedure, United States Court of Appeals for the Fourth Circuit Comments Off on What can a Federal Arbitration Act Practitioner Learn from an ERISA MPPAA Pension Plan Arbitration Case?

 Fourth Circuit Says Proceeding to Overturn ERISA MPPAA Pension Plan Dispute Arbitration Award is Commenced by Filing a Complaint—not a Federal Arbitration Act Application, Petition or Motion

Introduction

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“Sorry, I’m a bit of a stickler for paperwork. Where would we be if we didn’t follow the correct procedures?”

Sam Lowry (played by Jonathan Pryce ), Brazil (1985)

Dystopian-future bureaucratic procedure may be one thing, but federal court litigation procedure is quite another—not because of where we might or might not be if we don’t follow it—but simply because not following it can have disastrous consequences. That is true in spades in Federal Arbitration Act enforcement litigation, where proceedings to enforce arbitration agreements and awards are governed by a strange amalgam of procedural rules derived from the Federal Arbitration Act, the Federal Rules of Civil Procedure and district court local rules. See Fed. R. Civ. P. 1, 2, 3, 6(c), 7, 8, 9, 10, 12, 15, 43(c) & 81(a)(6)(B); 9 U.S.C. §§ 6, 9, 10, 11, 12 & 13; see, e.g., IFC Interconsult v. Safeguard Int’l Partners, 438 F.3d 298, 308-09 (3rd Cir. 2006); Productos Mercantiles Industriales, S.A.  v. Faberge USA, Inc., 23 F.3d 41, 46 (2d Cir. 1994).

On April 21, 2015 the U.S. Court of Appeals for the Fourth Circuit decided Freight Drivers and Helpers Local Union No. 557 Pension Fund v. Penske Logistics LLC,  ___ F.3d ___, No. 14-1464, slip op. (4th Cir. April 21, 2015), a case that helps illustrate the risks associated with assuming that the Federal Rules of Civil Procedure’s liberal pleading and amendment rules apply to applications for relief under the Federal Arbitration Act. As it turns out, the appellant did nothing wrong by assuming that the Federal Arbitration Act’s procedural rules did not trump Federal Rules of Civil Procedure, because the case fell under the Multiemployer Pension Plan Amendments Act of 1980 (“MPPAA”), and the district court erred by interpreting the MPPAA to require compliance with Federal Arbitration Act litigation procedure rules.

The MPPAA was enacted to strengthen the Employee Retirement Income Security Act (“ERISA”)’s provisions designed to protect multi-employer pension plans (i.e., collectively bargained pension plans funded by multiple employers, which are generally participants in the same industry).  It features a mandatory arbitration requirement applicable to disputes about collectively bargained pension plans funded by multiple employers, including disputes about an employer’s withdrawal liability—that is the amount an employer must contribute to  the fund when it stops participating in it.

It requires a party seeking judicial review of an award to do so in 30-days and, as we’ll see, it contains a provision that at first glance appears to make the Federal Arbitration Act’s litigation procedure rules applicable to judicial review of an MPPAA arbitration award. The Court held that under the MPPAA, the Federal Arbitration Act governed only arbitration procedure, not litigation procedure, and that accordingly, the award challenger’s amended complaint related back to the timely-filed original one.

yay-608942-digitalEndingFreight Drivers illustrates how important compliance with Federal Arbitration Act procedures can be, especially given the short limitation periods applicable to motions to confirm, vacate, modify and correct awards.  Had the Federal Arbitration Act’s litigation procedures applied, then the plaintiff’s “amended complaint” might have been deemed time-barred on the ground that Fed. R. Civ. P. 15(c)’s relation-back provisions apply to pleadings only, and under the Federal Rules of Civil Procedure, and the Federal Arbitration Act, the amended complaint had to be deemed to be a motion, not a pleading. As we’ll see, that’s what the district court concluded, and the Fourth Circuit decided the case on the sole ground that the Federal Arbitration Act did not apply to MPPAA litigation procedure. Continue Reading »

The First Department Affirm’s Citigroup’s Motion to Vacate an Award based on Manifest Disregard of the Law

April 22nd, 2015 Appellate Practice, Authority of Arbitrators, Awards, Confirmation of Awards, Contract Interpretation, Grounds for Vacatur, Judicial Review of Arbitration Awards, Manifest Disregard of the Agreement, Manifest Disregard of the Law, New York Court of Appeals, New York State Courts, Practice and Procedure, United States Court of Appeals for the Second Circuit Comments Off on The First Department Affirm’s Citigroup’s Motion to Vacate an Award based on Manifest Disregard of the Law

yay-1274371Earlier this month, New York’s Appellate Division, First Department affirmed a New York County Supreme Court, Commercial Division judgment vacating an arbitration award for manifest disregard of the law under the Federal Arbitration Act. See Citigroup Global Markets, Inc. v. Fiorilla, No. 14-747, slip op. (1st Dep’t April 9, 2015). The Court’s characteristically brief opinion does not delve very deeply into the facts or explain the Court’s reasoning in detail, but there’s enough there to make the decision worth noting.

The Court affirmed the trial court’s order vacating the award because the arbitrators apparently denied without explanation one of the parties’ motions to enforce a settlement even though the moving party informed the arbitrators of controlling, New York case law requiring the enforcement of settlement agreements. “Although,” said the Court, “arbitrators have no obligation to explain their awards, when a reviewing court is inclined to hold that an arbitration panel manifestly disregarded the law, the failure of the arbitrators to explain the award can be taken into account.” Slip op. at 1 (citing and quoting Matter of Spear, Leeds & Kellogg v. Bullseye Sec., 291 A.D.2d 255, 256 (1st Dep’t 2002) (quotations omitted)).

While the Court does not directly address the question, it appears that the case arose under the Federal Arbitration Act, because cases interpreting arbitration statute (CPLR Article 75) do not recognize “manifest disregard of the law” as a ground for vacating an award. Under Article 75, the only “outcome review” standards are those that permit vacatur of awards that are irrational, violate a strong public policy or exceed clearly an express limitation on the arbitrators’ authority. See, e.g., Wein & Malkin LLP v. Helmsley-Spear, Inc., 6 N.Y.3d 471, 477-78 (2006); Matter of New York City Transit Auth. v. Transport Workers’ Union of Am., 6 N.Y.3d 332, 336 (2005).

New York cases interpreting the Federal Arbitration Act, however, recognize manifest disregard as a ground for vacating an award. While New York state courts need defer only to the United States Supreme C0urt on federal-law questions, the New York Court of Appeals has traditionally tended to follow established Second Circuit precedent on such issues in Federal Arbitration Act cases. Since the Second Circuit recognizes manifest disregard of the law as a ground for vacating an award under Section 10 of the Federal Arbitration Act, so too have the New York State courts, even though the U.S. Supreme Court has left the question open. See Hall Street Associates, LLC v. Mattel, Inc., 128 S. Ct. 1396, 1403 (2008); see, e.g., T. Co Metals v. Dempsey Pipe & Supply, 592 F.3d 329, 339-40 (2d Cir. 2010) (manifest disregard of the law survives Hall Street); Wein, 6 N.Y.3d at 480-81 (pre-Hall Street New York Court of Appeals follows Second Circuit authority on manifest disregard of the law in Federal Arbitration Act governed case); Tullett Prebon Financial Serv. v. BGC Financial, L.P., 111 A.D.3d 480, 481-82 (1st Dep’t 2013) (applying manifest disregard of the law standard to Federal Arbitration Act governed case post-Hall Street).

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One question the First Department decision prompts is whether resort to manifest disregard of the law was even necessary. The U.S. Supreme Court has unequivocally endorsed post-Hall Street what some refer to in shorthand as the “manifest disregard of the agreement” standard, or “essence from the agreement” standard, under which a court may vacate an award where the arbitrators do not even arguably interpret the agreement. See Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064, 2098 (2013); Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758, 1767 (2010).

Presumably what happened in this case (though the opinion does not say) is that the parties had an agreement that contained an arbitration agreement, and the dispute arose out of or related to that main agreement. One or both parties demanded arbitration, the parties agreed to settle and one of the parties sought to enforce that agreement, which obviously arose out of or related to the main agreement, and was within the scope of issues that the parties agreed to submit and submitted to arbitration.

Under these circumstances it makes little sense to say that the manifest disregard of the agreement standard does not apply because the agreement that was manifestly disregarded was not the main agreement. And if, as the Court said, the arbitrators simply denied the motion to enforce the settlement agreement without comment, it seems to us that it did not even arguably interpret the settlement agreement and thus manifestly disregarded the parties’ agreement.

The opinion, however, relies solely on manifest disregard of the law. Given the uncertainty surrounding whether manifest disregard is a viable ground for vacatur, and the corresponding certainty that manifest disregard of the agreement is a valid basis for vacating an award under Section 10(a)(4) of the Federal Arbitration Act, that sole reliance has the potential to cause relying solely on that standard without any explanation might confuse litigants who are not well-versed in Federal Arbitration Act practice and procedure. We are quite certain, however, that was not the Court’s intention, and there may well be good reasons why the court did not rely on manifest disregard of the agreement as at least an alternative basis for its sound conclusion.

 

Photo Acknowledgements:

All photos used in the text portion of this post are licensed from Yay Images and are subject to copyright protection under applicable law. Text has been added to both images. Hover your mouse pointer over any image to view the Yay Images abbreviation of the photographer’s name.

The Fifth Circuit’s PoolRe Decision: Captives, Insurance, Reinsurance, Arbitration, Multiple Parties, Multiple Contracts, Conflicting Arbitration Agreements: Does it Get any Better than this?! (Part II)

April 21st, 2015 Appellate Practice, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Arbitration Provider Rules, Arbitration Risks, Arbitrator Selection and Qualification Provisions, Authority of Arbitrators, Awards, Captive Insurance Companies, Grounds for Vacatur, Judicial Review of Arbitration Awards, Making Decisions about Arbitration, Managing Dispute Risks, Practice and Procedure, Small and Medium-Sized Business Arbitration Risk, Small Business B-2-B Arbitration, United States Court of Appeals for the Fifth Circuit Comments Off on The Fifth Circuit’s PoolRe Decision: Captives, Insurance, Reinsurance, Arbitration, Multiple Parties, Multiple Contracts, Conflicting Arbitration Agreements: Does it Get any Better than this?! (Part II)

Part II

Analysis of the Pool Re Decision

If you read Part I you know the arbitration program in PoolRe case was, to put it mildly, inadequate to meet the needs of the multi-party, multi-contract dispute that arose out of the parties’ legal relationships. Perhaps the saving grace is that the both the district court and the Fifth Circuit Court of Appeals vacated the award, which is what Sections 5 and 10 of the  Federal Arbitration Act require.

yay-12688786 - WavebreakmediaThe Fifth Circuit addressed whether the district court erred by: (a) vacating the arbitration award on the ground the arbitrator exceeded his powers; (b) vacating the entire award; and (c) denying the motion to compel arbitration of the Phase II Claims. Finding no error, the Fifth Circuit affirmed the district court’s judgment in its entirety.

The District Court Correctly Concluded that the Arbitrator Exceeded his Powers

 

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The Fifth Circuit held that the arbitrator exceeded his powers because the Arbitrator: (a) was not properly appointed under the terms of the Reinsurance Agreement’s arbitrator selection provisions, which required him to be “selected by the Anguilla, B.W.I. Director of Insurance;” and (b) decided the dispute under the American Arbitration Association’s rules when the Reinsurance Agreement required arbitration under International Chamber of Commerce (“ICC”) Rules.

Arbitrator not Selected as Required by the Reinsurance Agreement’s Arbitrator Selection Provisions

 

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The district court held vacatur was required  because the Arbitrator “was not ‘the actual decisionmaker that [PoolRe and the Captives] selected as an integral part of their agreement.'” Slip op. at 9 (quoting district court). The Fifth Circuit held that “the district court properly vacated the arbitrator’s award with regard to the claims against PoolRe[,]” because the Arbitrator “was appointed in the manner provided in the [Engagement Agreement’s] Billing Guidelines — to which PoolRe was not a party — but was appointed in a manner contrary to that provided in the Reinsurance Agreements between PoolRe and the Captives, which required ‘select[ion] by the Anguilla, B.W.I. Director of Insurance.'” Slip op. at 10-11. The Capstone Entities “submitted [their] original arbitration demand to [the Arbitrator][,]” but “PoolRe,” said the Court, “only intervened in that arbitration after [the  Anguilla Financial Services Commission] notified Pool Re that no Director of Insurance existed.” Slip op. at 10-11. The Arbitrator thus “had not been ‘selected according to the contract specified method’.  .  .  when he  decided the dispute between Pool Re and the Captives.” Slip op. at 11 (quoting Bulko v. Morgan Stanley DW Inc., 450 F.3d 622, 625 ((5th Cir. 2006)).

The Fifth Circuit’s decision is fully consistent with the Federal Arbitration Act, under which “arbitration is a matter of consent, not coercion.” Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 678-80 (2010) (citation and quotations omitted). Courts are supposed to enforce arbitration agreements according to their terms, and among the most important terms of an arbitration agreement are those concerning arbitrator selection. See Lefkovitz v. Wagner, 395 F.3d 773, 780 (2005) (Posner, J.) (“Selection of the decision maker by or with the consent of the parties is the cornerstone of the arbitral process.”); see, e.g., 9 U.S.C. § 5 (“If in the agreement provision be made for a method of naming or appointing an arbitrator or arbitrators or an umpire, such method shall be followed.  .  .  .”); Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Art. V(1)(d), June 10, 1958, 21 U.S.T. 2519, T.I.A.S. No. 6997 (a/k/a the “New York Convention”) (implemented by 9 U.S.C. §§ 201, et. seq.) (award subject to challenge where “[t]he composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties”); Stolt-Nielsen, 559 U.S. at 668, 670 (one of the FAA’s “rules of fundamental importance” is parties “may choose who will resolve specific disputes”) (emphasis added; citations omitted); Encyclopaedia Universalis S.A. v. Encyclopaedia Brittanica, Inc., 403 F.3d 85, 91-92 (2d Cir. 2005) (vacating award by panel not convened in accordance with parties’ agreement); Cargill Rice, Inc. v. Empresa Nicaraguense Dealimentos Basicos, 25 F.3d 223, 226 (4th Cir. 1994) (same); Avis Rent A Car Sys., Inc. v. Garage Employees Union, 791 F.2d 22, 25 (2d Cir. 1986) (same).

Arbitrator Exceeded his Powers by Deciding the Disputes between Pool Re and the Captives under the AAA Rules Rather than under the ICC Rules

 

 

The Fifth Circuit also held that the Arbitrator exceeded his powers by deciding the disputes between Pool Re and the Captives under the AAA Rules because the Reinsurance Agreements required “all disputes [to] ‘be submitted for biding, final, and nonappealable arbitration to the [ICC] under and in accordance with its then prevailing ICC Rules of Arbitration.'” Slip op. at 10-11. The Court explained that it “interpret[s] clauses providing for arbitration in accordance with a particular set of rules as forum selection clauses.” Slip op. at 10-11 (quotation and citations omitted). And “[i]f the parties’ agreement specifies that the laws and procedures of a particular forums shall govern any arbitration between them, that forum-selection clause  is an important part of the arbitration agreement, and, therefore, the court need not compel arbitration in a substitute forum if the designated forum becomes unavailable.” Slip op. at 11 (quotations and citations omitted). By applying the “the AAA rules [instead  of the ICC Rules] to the dispute[,]” the Arbitrator “acted contrary to an express contractual provision,” and therefore exceeded his powers within the meaning of Section 10(a)(4) of the Federal Arbitration Act. Slip op. at 11 (quotation, citation and brackets omitted). Continue Reading »

The Fifth Circuit’s PoolRe Decision: Captives, Insurance, Reinsurance, Arbitration, Multiple Parties, Multiple Contracts, Conflicting Arbitration Agreements: Does it Get any Better than this?!

April 17th, 2015 Appellate Practice, Arbitrability, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Arbitration Provider Rules, Arbitration Risks, Arbitrator Selection and Qualification Provisions, Authority of Arbitrators, Awards, Captive Insurance Companies, Confirmation of Awards, Consolidation of Arbitration Proceedings, Contract Interpretation, Dispute Risk - Frequency and Severity, Drafting Arbitration Agreements, Federal Courts, Grounds for Vacatur, Making Decisions about Arbitration, Managing Dispute Risks, Outcome Risk, Practice and Procedure, Reinsurance Arbitration, Small and Medium-Sized Business Arbitration Risk, Small Business B-2-B Arbitration, United States Court of Appeals for the Fifth Circuit Comments Off on The Fifth Circuit’s PoolRe Decision: Captives, Insurance, Reinsurance, Arbitration, Multiple Parties, Multiple Contracts, Conflicting Arbitration Agreements: Does it Get any Better than this?!

Part I: PoolRe Introduction and Background

 Introduction

yay-4463438-digitalArbitration offers rough justice on the merits. Arbitrators have broad discretion not only in deciding the dispute but in fashioning remedies. Skilled, experienced and responsible arbitrators can cut through all sorts of legal and contractual “red tape” to resolve a dispute, applying just enough gloss on the law and the contract to make things work in a businesslike fashion while remaining true to the “essence of the agreement.”  Applied just so, that kind of rough justice is sometimes exactly what the parties need to make their agreement work, and in some cases, preserve (or even improve) their commercial relationship going forward. And it is not something that Court adjudication necessarily—or even ordinarily—can achieve.

But rough justice does not govern whether the parties agreed to arbitrate, who’s bound by an arbitration agreement and whether the parties agreed to delegate authority to a particular arbitrator or to follow a particular method of arbitrator selection as set forth in the parties’ agreement. Those questions are governed principally by state contract law and—particularly when multiple agreements and multiple parties are involved, or the question concerns whether an arbitrator was validly appointed—they frequently must be decided by courts, even if some or all of the parties have clearly and unmistakably agreed to submit arbitrability questions to arbitration.

Details, Details.  .  .

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Details always matter, but they are all the more important when a dispute will presumably be decided under state contract law rules and principles by a decision maker whose decisions—unlike those of an arbitrator—are often subject to independent review by an appellate court. Courts generally do not (or at least are not supposed to) substitute rough justice, pragmatism or equity in place of contract law, which is not always so flexible. The casebooks are littered with examples where doing so might arguably have achieved a more desirable outcome but doing so could not be squared with contract rules and principals in a way that befitted higher-court precedent and the circumstances apparently did not warrant departure from precedent.

The U.S. Court of Appeals for the Fifth Circuit’s decision in PoolRe Ins. Corp. v. Organizational Strategies, Inc., No. 14-20433, slip op. (5th Cir. April 7, 2015), is a case where the parties apparently lost sight of some important details in their apparent haste to do a deal that unfortunately went sour. Then, an arbitrator appointed under one of the contracts compounded the problem by making an award that could not even arguably be squared with the clear terms of one of the contracts’ arbitration agreements.

 

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The parties that were probably best positioned to ensure that the arbitration agreements in the various service-provider and reinsurance contracts probably lost the most, and perhaps to some extent at least, there’s some poetic justice to that. They claimed the clients breached their service contracts, the clients said the service providers breached the contracts and independent legal duties and the arbitrator ruled in favor of the service providers. The district court, as we’ll see, properly vacated the award and the Fifth Circuit affirmed.  Now the parties are essentially back at square one, albeit much worse for the wear in terms of legal expenses and protracted delay.

The facts and procedural history of the case is somewhat complex, but critically important. Not only do they drive the outcome but they read like a primer on what not to do when attempting to devise a cost-effective arbitration program for disputes that may involve multiple parties and interrelated and interdependent contracts. And they demonstrate pretty starkly some of the consequences that parties can suffer when: (a) they do not properly structure their agreement; and (b) end up with an arbitrator who is not be as savvy as he or she might otherwise be about scope of authority (or simply makes a bad call about it).

We do not mean to suggest that the Arbitrator in this case was in any way incompetent or otherwise blameworthy. To err is human, and even if the arbitrator had made the best permissible decision possible under the circumstances, the parties would still be exposed to the consequences of  having not properly structured their arbitration agreements. The arbitrator’s missteps certainly exacerbated the problem, but such things are foreseeable risks that the parties could have managed by, for example, agreeing to an arbitration agreement that was drafted in simple, unambiguous  terms governing what is supposed to happen in the event of a multi-contract, multi-party dispute like the one at issue. Such disputes were foreseeable, as they are in any relatively complex transaction involving multiple parties and multiple interrelated contracts.

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The mess that is described in the balance of this post could have  been avoided had some or all of the parties: (a) understood that their dispute resolution system needed the attention of a skilled and experienced arbitration lawyer; and (b) were willing to invest the modest sum needed to make that possible. Apparently the parties did not appreciate the risks they faced or, if they did, they made a conscious decision to ignore them, perhaps finding it preferable to avoid paying a few extra thousand dollars up front, roll the dice and hope that all would turn out well (and certainly not as it did).

Perhaps one might wonder what the odds were that an underlying dispute like the one at issue would arise. Nobody knows the precise answer, of course, but we’d have to say there was a meaningful risk in view of the nature and structure of the transaction. And given the rather obvious and dramatic disparity between the two arbitration agreements, the risk that Federal Arbitration Act enforcement proceedings would be necessary was likewise meaningful and fairly easy to foresee.

Suppose the risk was 1 in 6—that is, there was approximately a 17% chance that the parties would spend hundreds of thousands of dollars and spend at least an additional year or more embroiled in Federal Arbitration Act enforcement litigation centered on issues collateral to the merits. If we’re talking about a single round roll of a single die, with the idea being to avoid one possible outcome (represented by a whole number ranging from one to six), then that’s about as minimal a risk as could be measured (since there are only six possible outcomes). It also happens to be the same risk one would accept were one to play a round of Russian Roulette with a six-round revolver and a single bullet.

The point is that it is not just a matter of assessing the odds; severity of potential outcomes obviously drives risk assessment and management decisions as well. Most responsible corporate officers and directors aren’t going to take on a Russian-Roulette type risk (i.e., a “bet-the-company” risk) unless they have no choice, and if they must take the risk, they do what they reasonably can to minimize the odds the undesirable outcome will materialize and to mitigate any loss incurred if it does.

Here, the outcome that could have been avoided was very costly—though presumably not a death knell for either party— whereas the cost of substantially decreasing the likelihood of that outcome would probably have been less than a percentage point of the loss.

What would you have done?

Continue Reading »

U.S. Supreme Court Grants Certiorari in Another Class Arbitration Case: Can the Federal Arbitration Act Spare DIRECTV an Extended Stay in Class-Arbitration-Waiver Purgatory?

March 31st, 2015 Appellate Practice, Arbitrability, Arbitration Agreements, Arbitration Practice and Procedure, California State Courts, Choice-of-Law Provisions, Class Action Arbitration, Class Action Waivers, Contract Interpretation, FAA Preemption of State Law, Practice and Procedure, State Courts, United States Supreme Court Comments Off on U.S. Supreme Court Grants Certiorari in Another Class Arbitration Case: Can the Federal Arbitration Act Spare DIRECTV an Extended Stay in Class-Arbitration-Waiver Purgatory?

On March 23, 2015 the U.S. Supreme Court granted certiorari in DIRECTV, Inc. v. Imburgia, No. 14-462. If decided on its merits, the case will be by our count the fifth U.S. Supreme Court decision concerning class arbitration decided on its merits during the period 2010 forward.

yay-1341284-digitalImburgia is a decision by the California Court of Appeals, Second District, Division One of which the California Supreme Court denied review. Like many other Federal Arbitration Act cases, it presents some interesting vertical conflict of law questions, but the California Court of Appeals does not appear to have resolved them in the way the U.S. Supreme Court presumably intended them to be resolved under the Volt and Mastrobuono lines of cases. 

The case centers  on a class-action waiver non-severability provision included in a consumer contract DIRECTV entered into in 2007, about four years before the U.S. Supreme Court ruled in Concepcion that the Federal Arbitration Act preempted California’s Discover Bank rule. The Discover Bank rule provides that class action waivers are unenforceable in litigation or arbitration proceedings. See, generally, AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740, 1753 (2011).

yay-3535433-digitalBefore Concepcion not only did the California state courts hold that the Federal Arbitration Act did not preempt the Discover Bank rule, but so did the U.S. Court of Appeals for the Ninth Circuit. Thus, at the time, the risk companies like DIRECTV and others with consumer class arbitration exposure had was that applicable state law would not only ban class arbitration waivers, but applicable federal law would permit that to happen.

So companies like DIRECTV and others built into their arbitration agreements a fail-safe mechanism under which the entire arbitration agreement would be rendered uneneforceable if state law rendered the class arbitration waiver unenforceable. In other words, the companies understandably viewed class action litigation to be a more favorable alternative than class arbitration if forced to choose between the two. Continue Reading »

United States Supreme Court Requests Response to Petition for Certiorari in Texas Party-Appointed Arbitrator Qualification Case

March 28th, 2015 American Arbitration Association, Appellate Practice, Arbitrability, Arbitration Agreements, Arbitration Practice and Procedure, Arbitration Provider Rules, Arbitrator Selection and Qualification Provisions, Authority of Arbitrators, Awards, Contract Interpretation, Evident Partiality, Grounds for Vacatur, Judicial Review of Arbitration Awards, State Arbitration Law, State Courts, Texas Supreme Court, United States Supreme Court Comments Off on United States Supreme Court Requests Response to Petition for Certiorari in Texas Party-Appointed Arbitrator Qualification Case

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On June 20, 2014 the Texas Supreme Court held in Americo Life, Inc. v. Myer, 440 S.W.3d 18 (Tex. 2014), that an arbitration award had to be vacated because it was made by a panel not constituted according to the parties’ agreement. The parties’ agreement, among other things, incorporated the American Arbitration Association (the “AAA”)’s rules, which at the time the parties entered into the contract followed the traditional, industry arbitration principle that party-appointed arbitrators may be partial, under the control of the appointing party or both. But by the time the dispute arose the AAA Rules had been amended to provide that the parties are presumed to intend that appointed arbitrators must be neutral.

Five Justices of the nine-member Court determined that the parties had agreed that party-appointed arbitrators need not be impartial, only independent. Because the AAA had, contrary to the parties’ agreement, disqualified the challenging party’s first-choice arbitrator on partiality grounds, the panel that rendered the award was not properly constituted and thus exceeded its powers. See 440 S.W.3d at 25. (Copies of our Americo posts are here and here.)

The losing party has petitioned the United States Supreme Court for a writ of certiorari, arguing that the Court should determine whether the Court should have deferred to the AAA’s decision on disqualification rather than independently determining whether the parties intended to require party-appointed arbitrators to be neutral. Continue Reading »

Third Circuit Opalinski Class Arbitration Arbitrability Case Cert. Petition Set for Conference

February 25th, 2015 Appellate Practice, Arbitrability, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Authority of Arbitrators, Class Action Arbitration, Class Action Waivers, Consolidation of Arbitration Proceedings, Drafting Arbitration Agreements, Judicial Review of Arbitration Awards, United States Court of Appeals for the Sixth Circuit, United States Court of Appeals for the Third Circuit, United States Supreme Court Comments Off on Third Circuit Opalinski Class Arbitration Arbitrability Case Cert. Petition Set for Conference

yay-10417208Classarb-e14248919879081 - CopyOn August 28, 2014 we posted an article discussing the United States Court of Appeals for the Third Circuit’s decision in Opalinski v. Robert Half Int’l Inc., 761 F.3d 326 (3rd Cir. 2014), which held that the question of consent to class arbitration was one of arbitrability. Prior to Opalinski the United States Court of Appeals for the Sixth Circuit ruled in Reed Elsevier, Inc. v. Crockett, 734 F.3d 594 (6th Cir. 2013), “that the question whether an arbitration agreement permits classwide arbitration is a gateway matter, which is reserved for judicial determination unless the parties clearly and unmistakably provide otherwise.” 734 F.2d at 599 (quotation and citation omitted).

 

 

yay-10343058Arbitrability-e1424891774286Opalinski “join[ed] the Sixth Circuit Court of Appeals in holding that the availability of class arbitration” is a substantive gateway question rather than a procedural one[,]” and thus “is a question of arbitrability.” 761 F.3d at 335. The Third Circuit’s decision turned on “the critical differences between individual and class arbitration and the significant consequences of that determination for both [a] whose claims are subject to arbitration[;] and [b] the type of controversy to be arbitrated.” Id. (emphasis and bracketed letters added). Where, as in Opalinski, the arbitration agreement did not “mention” class arbitration, the Court “believ[ed] the parties would have expected a court, not an arbitrator, to determine the availability of class arbitration[,]” and that was “especially so given the critical differences between individual and class arbitration and the significant consequences” of the class-arbitration-consent determination as respects “whose claims are subject to arbitration and the type of controversy to be arbitrated.” 761 F.3d at 335.

 

yay-34842-e1424891828235As we explained in our prior post, both Opalinski and Reed Elsevier followed on the heels of the U.S. Supreme Court’s 2013 decision in Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064 (2013), which in footnote pointed out that the award-challenger in Oxford had unreservedly submitted to the arbitrator the issue of whether class arbitration consent was one of arbitrability, but that the case before it would have been “different” had Oxford “argued below that the availability of class-arbitration is a so-called ‘question of arbitrability.’” 133 S. Ct. at 2068 n.2. The Oxford Court said that Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 680 (2010) “made clear that this Court has not yet decided” whether class-arbitration-consent presents a question of arbitrability. But “Oxford agreed that the arbitrator should determine whether its contract with Sutter authorized class procedures[,]” and “Oxford submitted that issue to arbitrator not once, but twice and the second time after Stolt-Nielsen flagged that it might be a question of arbitrability.” 133 S. Ct. at 2068 n.2. (emphasis added)

 

yay-4295955StandardReview-e1424891877565Had Oxford opted to request the Supreme Court to determine whether class-arbitration consent presented a question of arbitrability, and had the Court determined that it was such a question, then the Court would have determined “independently, that is, without deferring to the arbitrator’s decision” whether the parties consented to class arbitration. See BG Group plc v. Republic of Argentina, No. 12-138, slip op. at 6 (U.S. March 5, 2014); First Options of Chicago, Inc. v. Kaplan, 543 U.S. 938, 942 (1995). And we doubt that a majority of the Supreme Court would have upheld the Oxford award had it reviewed the class-arbitration-consent determination de novo. See, e.g., Oxford, 133 S. Ct. at 2071 (Alito, J., concurring) (“If we were reviewing the arbitrator’s interpretation of the contract de novo, we would have little trouble concluding that he improperly inferred “[a]n implicit agreement to authorize class-action arbitration.  .  .  from the fact of the parties’ agreement to arbitrate.”) (quoting Stolt-Nielsen, 559 U.S. at 685).

 

yay-14148680-digital-e1424891905695 - CopyAfter the Third Circuit denied rehearing en banc, the Opalinsky parties petitioned for certiorari. The petition has been distributed and is set to be considered at the Supreme Court’s March 6, 2015 conference. See Docket, Opalinski v. Robert Half Int’l Inc., No. 14-625.

The United States Supreme Court regularly holds private conferences at which it, among other things, votes on whether to grant particular petitions for certiorari. Four votes is required to grant a petition for cert. The vast majority of the many cert. petitions the Court considers considers are denied. When the Supreme Court grants a petition, it simply means that it has agreed to hear the case, which will then be fully briefed, and in most cases, orally argued. Neither the grant or denial of a petition for certiorari suggests approval or disapproval with the lower court’s decision on the merits.

It will be interesting to see if the U.S. Supreme Court is will agree to hear and determine the important arbitrability question addressed in Opalinski. If it does the Court will have an opportunity to provide some needed, uniform guidance on it, and perhaps even some indirect guidance on the related issue of whether, and if so, under what circumstances, consent to consolidated arbitration may present a question of arbitrability.