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Archive for the ‘Authority of Arbitrators’ Category

Class Arbitration: Second Circuit in Jock II Rejects Jock I Bootstrapping Bid and Nixes Class Certification Award that Purported to Bind Non-Parties

July 26th, 2017 Arbitrability, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Authority of Arbitrators, Awards, Class Action Arbitration, Consent to Class Arbitration, Exceeding Powers, Judicial Review of Arbitration Awards, United States Court of Appeals for the Second Circuit No Comments »

Arbitration law’s “first principle” is “arbitration is a matter of consent, not coercion[,]” and class arbitration is no exception. (See, e.g., here.) In Jock v. Sterling Jewelers, Inc.,  No. 15-3947, slip op. (2d Cir. July 24, 2017) (summary order), the U.S. Court of Appeals for the Second Circuit enforced that principle by vacating and remanding the district court’s judgment, which confirmed in part a class arbitration class certification award that purported to bind non-parties, that is, persons (other than named class representatives), who had not opted into the putative class. t

Because the Second Circuit held in an earlier appeal, Jock v. Sterling Jewelers, Inc., 646 F.3d 113, 124 (2d Cir. 2011) (“Jock I”), that the “issue of whether the agreement permitted class arbitration was squarely presentedo the Arbitrator,” see id., the district court concluded that holding was law of the case, and confirmed in part an award certifying a class that “included absent class members, i.e., employees other than the named plaintiffs and those who have opted into the class.” Slip op. at 3.

Photographer: stuartmilesThe Court vacated the judgment partially confirming the certification award because it purported to bind absent class members, who (because of their absence)  could not have “squarely presented’ to the arbitrator the question whether the agreement authorized class procedures, let alone the issue of whether they should be deemed part of a class in a class arbitration to which they had not consented. See slip op. at 2, 3-5.

While in Jock I the parties had “squarely presented” the issue of whether the agreement “permitted class arbitration,” Jock I did not address the more “narrow question” “ presented’ it for decision, may thereafter purport to bind non-parties to class procedures on this basis.” Slip op. at 3-4 (emphasis in original). The answer to that question is “no”— as Associate Justice Samuel A. Alito, Jr. suggested in his concurring opinion in Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064, 2071-72 (2013) (Alito, J., concurring), and as the Second Circuit confirmed in Jock II. See slip op. at 2, 4-5.

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. The Yay Images abbreviations of the photographer’s name for each of the two images are:

Image 1: CartoonResource

Image 2: stuartmiles

 

SCA v. Armstrong: Anatomy of the Lance Armstrong Arbitration Award—Part III.B.4: The Panel’s Remedial Authority

May 20th, 2015 Arbitrability, Arbitration Agreements, Arbitration Provider Rules, Attorney Fees and Sanctions, Authority of Arbitrators, Awards Comments Off on SCA v. Armstrong: Anatomy of the Lance Armstrong Arbitration Award—Part III.B.4: The Panel’s Remedial Authority

Introduction: Remedial Powers of Arbitrators under the Federal Arbitration Act

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The third issue the Armstrong Panel addressed was: “What jurisdiction, if any, does this Tribunal have to award sanctions?” This was a question of the Panel’s remedial authority — assuming the Panel had the authority to decide the dispute, what remedies were the arbitrators authorized to award?

The Panel determined that Armstrong had committed fraud and testified falsely, and had by those unlawful means procured the Settlement Agreement and Consent Award. All else equal, had the Armstrong Parties testified truthfully, and been prepared to do so from the outset of the dispute, then presumably the Armstrong Parties: (a) would not have claimed the $7.5 million in prize money; or (b) would have submitted to arbitration the question whether the Armstrong Parties’ use of performance enhancing drugs barred them from recovering the prize money under their contracts with the SCA Parties. If the Armstrong Parties chose option (a) above, then the SCA Parties would not have incurred any time or money costs dealing with the Armstrong Parties’ Claims. Had the Armstrong Parties chosen option (b), then the SCA Parties’ time and money costs would likely have been pretty modest, and in any event, nowhere near what they turned out to be.

Given that the Panel identified a breach of duty that caused harm, the next question from the standpoint of the merits was: what (if anything) should be the remedy? The SCA parties apparently argued that the Panel should grant a sanctions remedy, which the Panel apparently viewed as serving both deterrent and compensatory purposes.

Where, as here, an arbitration panel that has the authority to resolve a dispute is considering what relief (if any) it should award to the prevailing party, that raises a remedial authority question: what remedies have the parties authorized the Panel to award? Under a broad arbitration agreement, remedial authority questions are typically not controversial, for parties ordinarily tend to seek standard remedies: damages, declaratory relief or traditional forms of equitable relief (such as rescission or reformation).  One party asks for the relief in its submission in the arbitrators and the other party doesn’t object because there is no reason to do so.

But where other non-standard forms of relief are requested—and particularly where the parties’ contract express a clear intent to limit remedial powers—then remedial authority can become more controversial.

The Armstrong Arbitration involved a claim for sanctions arising in unusual circumstances. While the parties’ contracts did not purport to limit the Panel’s remedial authority, the Armstrong Parties challenged the Panel’s authority to award sanctions and the Panel addressed that challenge in a reasoned award.

This segment of our Armstrong-Award Anatomy series focuses exclusively on whether the Panel had the authority to make an award of sanctions. It reviews the general rules concerning arbitrator remedial authority, considers the standard of review that a court reviewing the award will presumably apply if the Armstrong Parties contest the Panel’s remedial authority in court, discusses the Panel’s analysis and conclusions concerning sanctions and explains why we think it unlikely that a court will find that the Panel exceeded its authority by making an award of sanctions.

Our next Armstrong Arbitration Award Anatomy segment will address the related—but analytically distinct—issue whether the Panel had the authority to make a $10,000,000.00 sanctions award in the circumstances.

General Rules Governing Arbitrator Remedial Authority

yay-974131-e1425250054241As a general rule, where the parties have agreed to require each other to submit to arbitration a broad range of a disputes that might arise out of or relate to their legal relationship, the law presumes they intended to confer equally broad remedial powers on the arbitrators. See, e.g., ReliaStar Life Ins. Co. v. EMC Nat’l Life Co., 564 F.3d 81, 86-87 (2d Cir. 2009) (citing cases). Sometimes, arbitration-provider rules—such as Rule 47 of the American Arbitration Association Commercial Rules (formerly Rule 43)—expressly confer broad remedial authority on arbitrators. Rule 47, for example, states: Continue Reading »

Can a Court Order a Party not to Request in Arbitration a Remedy the Arbitrator may not have the Authority to Grant?

May 10th, 2015 Arbitrability, Arbitration Practice and Procedure, Authority of Arbitrators, Awards, Federal Arbitration Act Enforcement Litigation Procedure, Federal Courts, Injunctions in Aid of Arbitration, Practice and Procedure, United States Court of Appeals for the Second Circuit Comments Off on Can a Court Order a Party not to Request in Arbitration a Remedy the Arbitrator may not have the Authority to Grant?

Can a Court Forbid a Party from Requesting in Arbitration a Remedy the Arbitrator may not Have the Authority to Grant?

Benihana Case: Introduction

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In appropriate circumstances, Courts can vacate under Federal Arbitration Act Section 10(a)(4) an award that does not draw its essence from the parties’ agreement but instead was based on the arbitrators’ own notions of economic justice.

In Benihana, Inc. v. Benihana of Tokyo, LLC, ___ F.3d ___, No. 14-841, slip op. (2d Cir. April 28, 2015), the U.S. Court of Appeals for the Second Circuit  was faced with a different issue: whether before an award was made a court can enjoin a party from asking the arbitrators to award it a remedy that the parties’ contract does not authorize them to award.

The Court quite correctly ruled that district  courts do not  have the discretion to grant such an injunction because, among other things, doing so would violate the Federal Arbitration Act by infringing upon the parties’ agreement to arbitrate. In so holding the court was able to clarify a misunderstanding about arbitrability that is all too common among lay persons, a number of lawyers and apparently even the occasional judge.

Benihana Case: Background

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Benihana, Inc. (“Benihana U.S.”) and Beni-Hana of Toky (“Benihana Tokyo”)  were parties to a 1995 licensing agreement, which granted Benihana Tokyo the right to open Benihana restaurants in Hawaii. The agreement contained a New York choice of law clause.

yay-1557903The licensing agreement was designed, among other things, to require Benihana of Tokyo’s Hawaii restaurants to conform with Benihana standards, including those applicable to the menu and the use of Benihana trademarks. The Agreement, for example, required written approval by Benihana U.S. of “products and services” to be sold by Beni-Hana Tokyo, and stipulated that approval would “not be unreasonably withheld.”

The licensing agreement’s termination provisions provided that Benihana U.S. could terminate Benihana Tokyo’s license for good cause in the event of a “violation of ‘any substantial term or condition of th[e] Agrement [that Benihana Tokyo] fails to cure. .  . within thirty days after written notice from [Benihana U.S.].” Three cured defaults within a 12 month period also constituted good cause.

The Agreement contemplated both arbitration and injunctions in aid of arbitration (i.e., to preserve the status quo) as respects “violation of certain articles— including Article 5.2 restricting Benihana of Tokyo’s trademark use and Article 8.1(c) restricting the items Benihana of Tokyo may advertise or sell.  .  .  .” The injunctive-relief provisions specified that violations of those articles “would result in irreparable injury to [Benihana U.S.] for which no adequate remedy at law may be available. . . .”  They also  stipulated that Benihana U.S. “may obtain ‘an injunction against [such] violation . . . without the necessity of showing actual or threatened damage.'”

yay-1916763-digitalArticle 13 of the Agreement provided for arbitration in two types of situations. First, disputes about termination of the Agreement were subject to mandatory arbitration:

If this Agreement shall be terminated by [Benihana U.S.] and [Benihana of Tokyo] shall dispute [Benihana U.S.’s] right of termination, or the reasonableness thereof, the dispute shall be settled by arbitration at the main office of the AmericanArbitration Association in the City of New York in accordance with the rules of said association and judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. The arbitration panel shall consist of three (3) members, one (1) of whom shall be chosen by [Benihana U.S.], and (1) by [Benihana Tokyo] and the other by the two (2) so chosen.

Slip op. at 7.

Second, the agreement contained a broad, catchall provision that provided for arbitration of “any other dispute” at the election of either party:

In the event that any other dispute arises between the parties hereto in connection with the terms or provisions of this Agreement, either party by written notice to the other party may elect to submit the dispute to binding arbitration in accordance with the foregoing procedure. Such right shall not be exclusive of any other rights which a party may have to pursue a course of legal action in an appropriate forum. Enforcement of any arbitration  award, decision or order may be sought in any court having competent jurisdiction.

Slip op. at 7.

yay-10331162-digitalDuring the period 1995 until 2012 the parties enjoyed an amicable contractual relationship, but after a 2012 sale of Benihana U.S. to Angelo Gordon & Co., disputes started to arise. In May 2013 Benihana U.S., now under new ownership, notified Benihana Tokyo that: (a) Benihana U.S. had learned that Benihana Tokyo was selling “BeniBurgers” (a type of hamburger) at its Honolulu restaurant; (b) the licensing agreement required that new menu items be approved by Benihana U.S.; and (c) Benihana U.S. had not approved the sale of “BeniBurgers.” Benihana U.S. demanded that Benihana Tokyo remove BeniBurgers from the menu.

Benihana Tokyo did not remove BeniBurgers from the menu, which prompted Benihana U.S. to declare a breach of contract and notify Benihana Tokyo that it had 30 days to cure. Benihana U.S. extended the cure period twice, and Benihana Tokyo commenced  an action in New York State Supreme Court for an injunction staying the cure period pending arbitration of the parties’ dispute about BeniBurgers. Continue Reading »

First Circuit Court of Appeals Decides Close Case in Favor of Confirming FINRA Arbitration Panel Award: Raymond James Financial Services, Inc. v. Fenyk

May 1st, 2015 Arbitration Practice and Procedure, Authority of Arbitrators, Awards, Choice-of-Law Provisions, Confirmation of Awards, Federal Courts, Grounds for Vacatur, Judicial Review of Arbitration Awards, Manifest Disregard of the Agreement, Manifest Disregard of the Law, Securities Arbitration, Statute of Limitations, United States Court of Appeals for the First Circuit Comments Off on First Circuit Court of Appeals Decides Close Case in Favor of Confirming FINRA Arbitration Panel Award: Raymond James Financial Services, Inc. v. Fenyk

Introduction

Probably most of the Federal Arbitration Act Section 10(a)(4) outcome-review challenges that parties file are disposed of pretty easily because the applicable highly-deferential standard of review forecloses relief as long as the arbitrators were at least arguably interpreting the parties’ agreement, the applicable law or both. The most challenging cases are those falling either on or close to that imaginary, blurry line dividing arguable interpretation from clear disregard of the contract.  CfChicago Typographical Union v. Chicago Sun-Times, 935 F.2d 1501, 1506 (7th Cir. 1991) (“The zanier the award, the less plausible it becomes to ascribe it to a mere error in interpretation rather than to a willful disregard of the contract. This approach can make the line between error and usurpation waver.”).

yay-14640034-digitalIn Raymond James Financial Services, Inc. v.  Corp. v. Fenyk, No. 14-1252, slip op. (3rd Cir. Mar. 11, 2015), the U.S. Court of Appeals for the First Circuit addressed one of those challenging cases. The panel in a FINRA arbitration (the “FINRA Arbitration Panel” or “Panel”) awarded a discharged stock broker $600,000.00 in back pay for wrongful termination, but the district court vacated the arbitration award because it concluded that the FINRA Arbitration Panel did not have the authority to award back pay in the circumstances. On appeal the First Circuit reversed, explaining in clear and cogent terms why the case, while close, was not one warranting Section 10(a)(4) vacatur.

Facts

Mr. Fenyk served as a Raymond James Financial Services (“Raymond James” or “James”) securities broker for seven years. His career there began in New York City, but he worked in Vermont beginning in 2004, managing a small branch office. He had an independent contractor agreement with Raymond James, entitled “Independent Sales Associate Agreement,” which stipulated that Florida law would govern any disputes. He also executed a Business Ethics Policy, which required him to arbitrate disputes “arising out of the independent contractor relationship.”

yay-17336082-digitalIn May 2009 Raymond James, during a routine client-communication review, discovered an e-mail sent to Fenyk’s former domestic partner, which suggested that Fenyk had an alcohol problem.  The e-mail referred to “Fenyk’s ‘slip’ and his ‘need [for] meetings and real sobriety for a dialoug [sic] with you.'” The e-mail also explained that “Fenyk’s ‘new AA friend was very hard on [him] last night.'” Slip op. at 3.

Raymond James terminated its relationship with Fenyk after it learned about Fenyk’s apparent alcohol problem. About  two years later, Fenyk filed suit “in Vermont state court alleging that he had been fired on account of his sexual orientation and his status as a recovering a recovering alcoholic, in violation of Vermont’s Fair Employment Practices Act (“VFEPA”), Vt. Stat. Ann. tit. 21, § 495.” Slip op. at 4. Fenyk subsequently agreed to dismiss his complaint and commence a Financial Industry Regulatory Authority (“FINRA”) arbitration, as required by his agreement with Raymond James. 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 »

SCA v. Armstrong: Anatomy of the Lance Armstrong Arbitration Award—Part III.B.3: Panel Issue No. 2: Whether the Panel Could Bind Nonsignatory Mr. Stapleton to the Armstrong Arbitration Award

April 13th, 2015 Arbitrability, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Attorney Fees and Sanctions, Authority of Arbitrators, Awards, Confirmation of Awards, Grounds for Vacatur, Judicial Review of Arbitration Awards, Practice and Procedure, Rights and Obligations of Nonsignatories, State Courts Comments Off on SCA v. Armstrong: Anatomy of the Lance Armstrong Arbitration Award—Part III.B.3: Panel Issue No. 2: Whether the Panel Could Bind Nonsignatory Mr. Stapleton to the Armstrong Arbitration Award

 Part III.B.3

Panel’s Analysis of Whether it Had the Authority to Bind Nonsignatory Mr. Stapleton to the Lance Armstrong Arbitration Award (Panel Issue No. 2)

yay-7966136-digitalIn Part III.B.2 we explained why we believe the Panel’s analysis of whether the parties agreed to arbitrate their dispute about sanctions (Panel Issue No. 1) was on the mark, and why the state court considering the issue de novo should find it helpful in the event the Armstrong parties challenge the panel’s jurisdiction. Today we briefly examine the Panel’s decision on Panel Issue No. 2: “Which parties are properly subject to this Tribunal’s jurisdiction?” (Award at 5)

The issue arose because the SCA Parties contended that Mr. William Stapleton was bound by the arbitration agreement and award because he executed the Settlement Agreement, albeit apparently only in his capacities as an officer of Tailwind and an authorized agent of Armstrong.  (See Award at 7.)

Like Panel Issue No. 1—whether the parties agreed to arbitrate SCA’s sanctions claims—Panel Issue No. 2 is a question of arbitrability. See Howsam v. Dean Whitter Reynolds, Inc., 537 U.S. 79, 84 (2002); First Options of Chicago v. Kaplan, 514 U.S. 938, 941, 946-47 (1995). So, as discussed in Parts III.B.1 and III.B.2, the Court would presumably decide it independently—that is, without according deference to the Panel’s decision— were it necessary for it to decide it in the first place.

The SCA Parties, however, wisely chose to confirm the award as a whole rather than attempt to vacate it in part and confirm it in part, for as the Panel’s decision made very clear, there was no basis for finding Mr. Stapleton to be bound by the award. But even though the Court will presumably not have to address the issue, it is helpful for those interested in learning more about arbitration law to understand why the Panel got it right, and why the Texas Court would likely agree. Continue Reading »

Arbitrator-Imposed Claims Protocols, Honorable Engagement and Access-to-Records: First State Ins. Co. v. National Cas. Co.

April 10th, 2015 Access to Records, Arbitration Practice and Procedure, Arbitrator-Imposed Claims Protocols, Authority of Arbitrators, Claims Handling, Follow-the-Settlements/Follow-the Fortunes, Grounds for Vacatur, Honorable Engagement, Judicial Review of Arbitration Awards, Practice and Procedure, Reinsurance Arbitration, Reinsurance Claims, United States Court of Appeals for the First Circuit Comments Off on Arbitrator-Imposed Claims Protocols, Honorable Engagement and Access-to-Records: First State Ins. Co. v. National Cas. Co.

Introduction

yay-10424184---CopyAt first glance the U.S. Court of Appeals for the First Circuit’s opinion in First State Ins. Co. v. National Cas. Co., No. 14-1644, slip op. (1st Cir. Mar. 20, 2015) appears to be an honorable engagement clause case, but it is really an arbitrator-imposed-claims-payment-protocol case.  First State concerned a claims protocol (the “Claims Protocol”) which said claims payments “may be made subject to an appropriate reservation of rights by [the reinsurer] in instances where it has or does identify specific facts  which  create a reasonable question regarding coverage under the subject reinsurance agreement(s).” It also explained that “[p]ayment obligations on the part of [the reinsurer] are not conditioned upon the exercise of its right to audit or the production of additional information or documents, other than those provided by [the cedent] as described . . .[in the portion of the protocol specifying the cedent’s proof-of-loss requirements].” Slip op. at 3.

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The reinsurer contended the protocol’s reservation-of-rights procedure impaired its contractual rights to access of records, including its right to recoup claim payments in circumstances where, as of the time the Claims Protocol required the reinsurer to pay a  claim, the reinsurer had not yet been given the opportunity to inspect the cedent’s records concerning the claim and thus would not have the opportunity to determine whether there were “specific facts which create a reasonable question regarding coverage.  .  . ”  That, argued the reinsurer, denied or effectively impaired its contractual rights in a least two ways: (a) once it paid a claim as required by the Protocol without reserving its rights based on “specific facts” creating a reasonable question about coverage, then the Cedent could refuse to provide it access to its records of the claim; and (b) even if the cedent provided post-payment access-to-records, and even if the reinsurer’s post-payment audit uncovered for the first time specific facts demonstrating the claim was invalid, the Protocol’s reservation of rights feature would foreclose the reinsurer from obtaining recoupment of the claim unless the reinsurer somehow had knowledge of those specific facts, and asserted them at the time it was required to pay the claim.

Had the reinsurer’s interpretation of the Claims Protocol’s reservation of rights procedure been the only one to which it was susceptible, then the reinsurer’s Section 10(a)(4) challenge might have succeeded. As it turned out, there was at least one other interpretation of the Protocol, and under that interpretation, the reinsurer’s access-to-records and recoupment rights were not foreclosed by the reinsurer not making a Claims-Protocol-compliant reservation of rights.

So the Court quite correctly affirmed the district court’s decision to confirm the award. But National Casualty did not walk away empty handed. As we’ll see, the Court’s opinion confers upon National Casualty a deserved benefit that is arguably as valuable as would have been a decision reversing the district court’s judgment with instructions to vacate the arbitration award.

Let’s first briefly review what transpired in First State, and what the Court, in Senior Circuit Court Judge Bruce M. Selya’s sometimes arcane and colorful—but always clear, concise and well-organized— prose, had to say about it. Continue Reading »

SCA v. Armstrong: Anatomy of the Lance Armstrong Arbitration Award—Part III.B.2: Panel’s Authority to Decide the SCA Parties’ Sanctions Claims

April 2nd, 2015 Arbitrability, Arbitration Practice and Procedure, Attorney Fees and Sanctions, Authority of Arbitrators, Awards, Contract Interpretation, Functus Officio, Judicial Review of Arbitration Awards, Practice and Procedure, State Arbitration Law, State Arbitration Statutes, State Courts, United States Supreme Court Comments Off on SCA v. Armstrong: Anatomy of the Lance Armstrong Arbitration Award—Part III.B.2: Panel’s Authority to Decide the SCA Parties’ Sanctions Claims

Part III.B.2

Panel’s Analysis of the Merits of the Arbitrability Issue (Panel Issue No. 1)

Now that we’ve discussed why we think the Court will review the arbitrator’s threshold arbitrability decision de novo, let’s take a closer look at the Panel’s analysis of the arbitrability issue and whether the Texas state courts will conclude that the Panel had the jurisdiction to decide the SCA Parties’ sanctions claims.

yay-15706730-digitalThe procedural posture of  the jurisdictional issue before the Panel is unusual because the Panel, with the parties’ consent, had previously made a partial final award expressing its views on jurisdiction. The intent was to permit expedited judicial review of the issue. The Panel’s 2-1 ruling finding jurisdiction was confirmed by the trial court, which means that the trial court will almost certainly reject Armstrong’s putative challenge to the Panel’s jurisdiction.

The Armstrong Parties’ appeal to the intermediate court of appeals was dismissed for lack of appellate jurisdiction, presumably because the intermediate court of appeals concluded that the trial court’s order confirming the partial final award was not a final order or judgment from which an appeal could be taken. The Armstrong Parties sought temporary relief and mandamus review in the Texas Supreme Court, but the Supreme Court denied those requests.

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Issue No. 1 is simply whether the parties agreed  to submit to arbitration the SCA Parties’ claims against Armstrong relating to Armstrong’s alleged procurement of the consent award through perjury, fraud and other deceptive means. The key question is whether the SCA Parties’ disputes fell within the broad scope of the parties’ arbitration agreement. And the answer is driven in large part by the presumption in favor of arbitration, under which ambiguities about the scope of an arbitration agreement are resolved in favor of arbitration.

By comparison, recall that the answer to the question who decides arbitrability questions was driven by a presumption against arbitration: courts presume that arbitrability questions are for the court to decide unless the parties “clearly and unmistakably” agree to delegate those questions to the arbitrators. The whole point of agreeing to arbitrate is to have arbitrators decide disputes about the merits, and so when the question is whether the parties empowered the arbitrators to decide the merits of a party’s claim for relief, courts presume those questions are for the arbitrators to decide.

The presumption of arbitrability applies to case governed by the Federal Arbitration Act as well as cases falling under the Texas General Arbitration Act. It provides that ambiguities in the scope of an arbitration agreement are to be resolved in favor of arbitration. See, e.g., Moses H. Cone Mem. Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983); Mitsubishi Motors v. Soler Chrysler Plymouth, 473 U.S. 614, 626 (1985); G.T. Leach Builders, LLC v. Sapphire V.P. LP, No. 130497, at *21-22 & nn. 14 & 16 (Tex. Mar. 20, 2015); Branch Law Firm, L.L.P. v. Osborn, 447 S.W.3d 390, 394-98 & n.10 (Tex. App. 14 Dist. 2014). That means that if the scope provision of an arbitration agreement is susceptible to more than one interpretation, and at least one of those interpretations would require the dispute to be submitted to arbitration, then the court, as a matter of law, must find that the parties agreed to submit the dispute to arbitration. Continue Reading »