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Archive for the ‘Authority of Arbitrators’ Category

Federal Arbitration Act Section 1: SCOTUS Says Courts Decide Whether FAA Applies to Contract and this Time Answer is “No”

January 25th, 2019 Appellate Practice, Applicability of Federal Arbitration Act, Arbitrability, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Authority of Arbitrators, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 1, Federal Arbitration Act Section 2, Federal Arbitration Act Section 3, Federal Arbitration Act Section 4, Separability, Severability, United States Court of Appeals for the First Circuit, United States Supreme Court 1 Comment »

Section 1 of the Federal Arbitration Act exempts from the FAA’s scope disputes involving “contracts of employment of . . . workers engaged in . . . interstate commerce.”  9 U. S. C. § 1. If parties to an arbitration agreement clearly and unmistakably delegate arbitrability questions to an arbitrator, who decides whether a contract containing the arbitration agreement is such a “contract of employment?”   

Federal Arbitration Act Section 1 1
United States Supreme Court

In New Prime Inc. v. Oliveira, 586 ___ U.S. ___, slip op. (Jan. 15, 2019), the nation’s highest court held that courts decide whether a contract is within the scope of the FAA’s coverage, even where the parties clearly and unmistakably delegate arbitrability questions to an arbitrator. Slip op. at 4. Addressing the merits of the FAA’s applicability to the contract, the United States Supreme Court held that under Section 1 it was exempt from the FAA because in 1925, the year Congress enacted the FAA, the term “contracts of employment” was ordinarily understood to include not only contracts establishing an employer-employee (or master and servant) relationship, but also independent contractor relationships. Slip op. at 15.

Federal Arbitration Act Secction 1 2
Who gets to decide whether the Federal Arbitration Act applies to the parties’ agreement?

Today we’ll focus on the first issue addressed by the Court: who gets to decide whether a contract falls within the Section 1 “contracts of employment” exemption when the parties have delegated arbitrability disputes to the arbitrators. In a later post we’ll look at how the Court decided the contract before it was under Section 1 a “contract of employment of a “worker[] engaged in interstate commerce[,]” and thus outside the scope of the FAA.  

Background

Federal Arbitration Act Secction 1 3
Dispute between a trucker and a trucking company

New Prime was a dispute between a truck driver and a trucking company. The relationship between the two was established by a written contract which, at least in form, established an independent contractor, rather than an employer-employee relationship. The contract contained an arbitration clause which provided that “any disputes arising out of the parties’ relationship should be resolved by an arbitrator—even disputes over the scope of the arbitrator ’s authority.” Slip op. at 1-2.

The trucker commenced a federal-court class action, which alleged that, irrespective of what the trucking company called its drivers, the trucking company “treat[ed] them as employees and fail[ed] to pay the statutorily due minimum wage.” Slip op. at 2.

The trucking company asked the district court to compel arbitration of the dispute. In response the trucker contended that his contract was outside the scope of the FAA because it was a “contract[] of em­ployment of . . . [a] worker[] engaged in foreign or interstate commerce.” 9 U.S.C. § 1. Thus, said the trucker, the FAA “supplied the district court with no authority to compel arbitration….” Slip op. at 2.

The trucking company replied that the parties had agreed to submit to arbitration the question whether the Section 1 “contracts of employment” exemption applied to the contract. The trucking company alternatively contended that, if the question was for the Court, then the term “‘contracts of employment’ refers only to contracts that establish an employer-employee relationship[,]” and the trucker was an independent contractor, not an employee, of the trucking company. Accordingly, said the trucking company, the Section 1 exclusion did not apply, the FAA applied, and the Court should stay the litigation and compel arbitration under FAA Sections 3 and 4. See 9 U.S.C. §§ 3 & 4; slip op. at 2-3.

The district court and the United States Court of Appeals for the First Circuit found in favor of the trucker. The First Circuit “held, first, that in disputes like this a court should resolve whether the parties’ contract falls within the Act’s ambit or [Section 1’s] exclusion before invoking the [FAA’s] au­thority to order arbitration.” Slip op. at 3. The First Circuit further “held that [Section 1’s] exclusion of certain ‘contracts of employ­ment’ removes from the Act’s coverage not only employer-employee contracts but also contracts involving independ­ent contractors.” Slip op. at 3. Accordingly, irrespective of whether the parties’ agreement established an employer-employee or independent contractor relationship, the district court lacked FAA authority to compel arbitration. Slip op. at 3.

In an 8-0 Opinion written by Associate Justice Neil M. Gorsuch, the U.S. Supreme Court affirmed the First Circuit’s decision (Associate Justice Brett Michael Kavanaugh took no part). Associate Justice Ruth Bader Ginsburg penned a brief concurring opinion.

The Court Must Decide Whether Section 1 Exempts the Contract from the FAA’s Scope

The Broad Authority the FAA Confers on Courts does not Extend to All Private Contracts 

Federal Arbitration Act Secction 1 4
SCOTUS: Judicial authority to compel arbitration under the FAA “may be considerable[,]” but it is not “unconditional”

The answer to the “who” question was “immediately” “clear” to the Court. Slip op. at 3. Though “a court’s authority under the [FAA] to compel arbitration may be considerable, it isn’t unconditional.” Slip op. at 3. FAA Sections 3 and 4 “often require a court to stay litigation and compel arbitration ‘according to the terms’ of the parties’ agreement[,]” “[b]ut this authority doesn’t extend to all private contracts, no matter how emphatically they may express a preference for arbitration.” Slip op. at 3.

Sections 1 and 2 are Antecedent Provisions that Limit Judicial Power to Stay Litigation and Compel Arbitration under Sections 3 and 4

Federal Arbitration Act Secction 1 5
Court must apply FAA Sections 1 and 2 to determine whether it has the authority to stay litigation or compel arbitration under Sections 3 and 4

Sections 1 and 2, the Court explained, are “antecedent statutory provisions” that “limit the scope of the scope of the court’s powers under [Sections] 3 and 4.” Slip op. at 3. Section 2 “applies only when the parties’ agreement to arbitrate is set forth as a ‘written provision in any maritime transaction or a contract evidencing a transaction involving commerce.’” Slip op. at 3. Section 1, which “helps define [Section] 2’s terms[,]” provides that “‘nothing’ in the [FAA] ‘shall apply’ to ‘contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.’” Slip op. at 3-4 (quoting 9 U.S.C. § 1).

According to the Court, Section 1’s exemption was included in the FAA, which was enacted in 1925, because “Congress had already prescribed alternative employment dispute resolution regimes for many transportation workers[,]” [a]nd it seems Congress ‘did not wish to unsettle’ those arrangements in favor of whatever arbitration procedures the parties’ private contracts might happen to contemplate.” Slip op. at (quoting Circuit City Stores, Inc. v. Adams, 532 U. S. 105, 121 (2001)).

The FAA’s “Terms and Sequencing” Demonstrates that Courts Decide whether a Contract Falls Under the FAA

The FAA’s “terms and sequencing” supported the Court’s conclusion that “a court should decide for itself whether [Section] 1’s ‘contracts of employment’ exclusion applies before ordering arbitration.” Slip op. at 4. Before a Court can “invoke its statutory powers under [Sections] 3 and 3 to stay litigation and compel arbitration according to a contract’s terms, a court must first know whether the contract itself falls within or be­yond the boundaries of [Sections] 1 and 2.” Slip op. at 4. That is so even if the “parties’ private agreement [is] crystal clear and require[s] arbitration of every question under the sun….” See slip op. at 4.  

The Court’s Prior Decisions have Stressed the Significance of the FAA’s “Sequencing”

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SCOTUS says its “holding” should come as no “surprise[,]” because its prior decisions require that a contract fall within the scope of Sections 1 and 2 before litigation may be stayed or arbitration compelled under Sections 3 or 4.

The Court said “[n]othing in our holding on this score should come as a surprise[,]” because the Court has “long stressed the significance of the statute’s sequencing.” By way of example the Court cited and quoted Bernhardt v. Polygraphic Co. of America, 350 U. S. 198, 201–202 (1956), Circuit City, and Southland Corp. v. Keating, 465  U. S. 1, 10–11, and n. 5 (1984). In Bernhardt the Court explained that “‘Sections 1, 2, and 3 [and 4] are integral parts of a whole. . . . [Sections] 1 and 2 define the field in which Congress was legislating,’ and §§3 and 4 apply only to contracts covered by those provisions.” Slip op. at 4 (quoting Benhardt, 350 U.S. at 201-202). In Circuit City, the Court “acknowledged that ‘Section 1 exempts from the [Act] . . . contracts of employment of transportation workers.’” Slip op. at 4 (quoting Circuit City, 532 U. S., at 119). In Keating the Court “noted that ‘the enforce­ability of arbitration provisions’ under §§3 and 4 depends on whether those provisions are ‘ part of a written mari­time contract or a contract “evidencing a transaction in­volving commerce”’ under §2—which, in turn, depends on the application of §1’s exception for certain ‘contracts of employment.’” Slip op. at 4-5. (quoting Keating, 465  U. S. at 10–11, and n. 5).

The Trucking Company’s Delegation and Severability Arguments Put the Proverbial Cart before the Horse

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The trucking company’s arguments put the Section 3 and 4 cart before the Section 1 and 2 horse. Admittedly, the above photo doesn’t accurately depict that idiomatic scenario, but why make hay of it?

The trucking company contended that an arbitrator should decide the parties’ Section 1 dispute, relying on the delegation provision in the contract and the severability doctrine. “A delegation clause,” said the Court, “gives an arbitrator authority to decide even the initial question whether the parties’ dispute is subject to arbitration.” Slip op. at 5 (citing Rent-A-Center, West, Inc. v. Jackson, 561 U. S. 63, 68–69 (2010)).

Under the severability doctrine, the Court “treat[s] a challenge to the validity of the arbitration agreement (or a delegation provision) separately from a challenge to the validity of the entire contract in which it appears.” Slip op. at 5. If a party does not “specifically challenge[] the validity of the agreement to arbitrate, both sides may be required to take all their disputes—including disputes about the validity of their broader contract—to arbitration. Slip op. at 5 (citing Rent-a-Center).  

The trucking company argued that: (a) the trucker did not “specifically challenge[] the parties’ delegation clause. . .”; and, therefore, (b) the parties had to arbitrate their dispute over whether the contract fell within Section 1’s exemption.

The Court explained that this argument “overlooks the necessarily antecedent statutory inquiry we’ve just discussed.” Slip op. at 5. “A delegation clause,” said the Court, “is merely a specialized type of arbitration agreement, and the [FAA] ‘operates on this additional arbitration agreement just as it does on any other.’” Slip op. at 5 (quoting Rent-a-Center, 561 U. S. at 70.) To “use [Sections] 3 and 4 to enforce a delegation clause[,]” “the clause” must “appear[] in a ‘written provision in . . . a contract evidencing a transaction involving commerce’ consistent with [Section] 2[,]” “[a]nd only if the contract in which the clause appears doesn’t trigger [Section] ’s ‘contracts of employment’ exception.” Slip op. at 5.

“In exactly the same way,” said the Court, the FAA’s “severability principle applies only if the parties’ arbitration agreement appears in a contract that falls within the field [Sections] 1 and 2 describe.” Slip op. at 5-6. Indeed, the Court “acknowledged as much some time ago, ex­plaining that, before invoking the severability principle, a court should ‘determine[] that the contract in question is within the coverage of the Arbitration Act.’” Slip op. at 6 (citing and quoting Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U. S. 395, 402 (1967)).

Federal Arbitration Act Section 1 8

More to follow on New Prime

But if in the meantime you want to learn more now about arbitrability and delegation provisions, see prior posts here, here, here, here, and here.

Photo Acknowledgments:

The photos featured in this post were licensed from Yay Images and are subject to copyright protection under applicable law. 

Delegation Provisions: SCOTUS Says Courts Must Compel Arbitration of Even “Wholly-Groundless” Arbitrability Disputes

January 16th, 2019 American Arbitration Association, Arbitrability, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Arbitration Provider Rules, Authority of Arbitrators, Class Action Arbitration, Class Action Waivers, Exceeding Powers, Existence of Arbitration Agreement, Federal Arbitration Act Enforcement Litigation Procedure, Stay of Litigation, United States Supreme Court 1 Comment »
Wholly Groundless 1

Arbitrability questions are ordinarily for courts to decide, but parties may, by way of a “delegation provision,” clearly and unmistakably agree to submit them to arbitration. See, e.g., First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 942-46 (1995); Rent-A-Center, West, Inc. v. Jackson, 130 S. Ct. 2772, 2777 (2010). (See, e.g., Loree Reinsurance and Arbitration Law Forum posts here, here, and here.)

But suppose parties to a delegation provision disagree about whether they are required to arbitrate a dispute, yet their contract clearly excludes the dispute from arbitration. Can a Court preemptively decide the merits of an arbitrability question delegated to the arbitrators, and refuse to compel arbitration of the arbitrability question, if the Court decides that the argument for arbitration of the underlying dispute is wholly groundless?

Some federal courts have held that a federal court can, despite a clear and unmistakable agreement to arbitrate arbitrability, refuse to compel arbitration of a “wholly groundless” arbitrability question, but others have held that the FAA requires Courts to refer to arbitration even “wholly groundless” arbitrability questions. Compare Simply Wireless, Inc. v. T-Mobile US, Inc., 877 F. 3d 522 (4th Cir. 2017); Douglas v. Regions Bank, 757 F. 3d 460 (5th Cir. 2014); Turi v. Main Street Adoption Servs., LLP, 633 F. 3d 496 (6th Cir. 2011); Qualcomm, Inc. v. Nokia Corp., 466 F. 3d 1366 (Fed. Cir. 2006), with Belnap v. Iasis Healthcare, 844 F. 3d 1272 (10th Cir. 2017); Jones v. Waffle House, Inc., 866 F. 3d 1257 (11th 2017); Douglas, 757 F. 3d, at 464 (Dennis, J., dissenting).

On January 8, 2019 the U.S. Supreme Court, in a 9-0 decision, held that where parties have clearly and unmistakably agreed to arbitrate arbitrability disputes, courts must compel arbitration even if the argument in favor of arbitration is “wholly groundless.” Schein v. Archer & White Sales, Inc., 586 U.S. ____, slip op. at *2, 5, & 8 (January 8, 2019).

Wholly Groundless Exception 2

The Court said that “[t]he [FAA] does not contain a ‘wholly groundless’ exception, and we are not at liberty to rewrite the statute….” Slip op. at 2; see also slip op. at 8. “When,” said the Court, “the parties’ contract delegates the arbitrability question to an arbitrator, the courts must respect the parties’ decision as embodied in the contract.” Slip op. at 2; see also slip op. at 8. The “wholly groundless” exception, said the Court, “is inconsistent with the statutory text and with precedent[,]” and “confuses the question of who decides arbitrability with the separate question of who prevails on arbitrability.” Slip op. at 8.

Facts and Procedural History

Wholly Groundless Exception 3

Schein was a dispute between a dental equipment manufacturer and a distributor. The parties’ contract contained an arbitration agreement, which required arbitration of “[a]ny dispute arising under or related to [the Parties’] Agreement (except for actions seeking injunctive relief and disputes related to trademarks, trade secrets, or other intellectual property of [the manufacturer]….” Slip op. at 2. Arbitration was to be “in accordance with the arbitration rules of the American Arbitration Association [(the “AAA”)].” Slip op. at 2.

Continue Reading »

Class-Arbitration-Consent: The Eleventh Circuit Creates Circuit Split by Ruling that Incorporation of AAA Rules is Clear and Unmistakable Consent to Arbitrate Class-Arbitration-Consent Questions

August 24th, 2018 Arbitrability, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Authority of Arbitrators, Class Action Arbitration, Class Action Waivers, Consent to Class Arbitration, FAA Preemption of State Law, United States Court of Appeals for the Eleventh Circuit, United States Supreme Court Comments Off on Class-Arbitration-Consent: The Eleventh Circuit Creates Circuit Split by Ruling that Incorporation of AAA Rules is Clear and Unmistakable Consent to Arbitrate Class-Arbitration-Consent Questions

Introduction

Class-Arbitration-Consent 1

Class-Arbitration-Consent 1

In prior posts we’ve discussed how footnote 2 of the U.S. Supreme Court’s decision in Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064, 2072 n.2 (2013) said it was an open issue whether class-arbitration-consent presented a question of arbitrability, and how certain U.S. Circuit Courts of Appeals have, subsequent to Oxford, held that consent-to-class-arbitration presents a question of arbitrability, which is ordinarily for the court to decide. (See, e.g., here.)

We have also discussed how, under First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 942-46 (1995), even though questions of arbitrability are ordinarily for the court to decide, parties may clearly and unmistakably agree to submit questions of arbitrability to the arbitrators. In Rent-A-Center, West, Inc. v. Jackson, 130 S. Ct. 2772, 2777 (2010), the Supreme Court of the United States referred to such agreements as “delegation provisions.” Id.

Class-Arbitration-Consent 2

Class-Arbitration-Consent 2

In Spirit Airlines, Inc. v. Maizes, ___ F.3d ___, slip op. (11th Cir. August 15, 2018), the United States Court of Appeals for the Eleventh Circuit addressed a question that called in to play these two related concepts: “whether the [parties’] agreement’s choice of American Arbitration Association rules, standing alone, is clear and unmistakable evidence that [the parties] intended that the arbitrator decide” the consent-to-class-arbitration question. Slip op. at 2. The Court said the answer to that question was “yes.”

Continue Reading »

Eighth Circuit: Arbitrator did not Disregard Parties’ Missouri Choice-of-Law Provision

August 19th, 2018 Arbitration Practice and Procedure, Authority of Arbitrators, Awards, Choice-of-Law Provisions, Exceeding Powers, Judicial Review of Arbitration Awards, Manifest Disregard of the Agreement, Manifest Disregard of the Law, United States Court of Appeals for the Eighth Circuit Comments Off on Eighth Circuit: Arbitrator did not Disregard Parties’ Missouri Choice-of-Law Provision

Introduction

Choice-of-Law Provision 1

Choice-of-Law Provision 1

A choice-of-law provision is as much a part of a parties’ contract as any other, and an arbitrator might manifiestly disregard the parties’ contractual choice-of-law, which might provide grounds for vacating the award under Section 10(a)(4) of the Federal Arbitration Act (“FAA”). But, as well-illustrated by the U.S. Court of Appeals for the Eigth Circuit’s decision in Beumer Corp. v. ProEnergy Servs., LLC, ___ F.3d ____, slip op. (8th Cir. August 8, 2018), the circumstances that might justify such a decision would be very unusual, to say the least.

Beumer Corp. v. ProEnergy Servs., LLC

Choice-of-Law Provision 2

Choice-of-Law Provision 2

Owner and Contractor had a construction contract that contained an arbitration agreement, limitation-of-liability, provision, and a Missouri choice-of-law clause. The Owner complained that the Contractor’s work was deficient and, accordingly, no payment was due. The Contractor commenced arbitration for the amount due under the contract and the Owner counterclaimed for damages.

The parties disputed the scope and enforceability of their contract’s limitation of liability provision, which stated:

Notwithstanding any of the foregoing or any other term in this Contract, the total liability of Contractor for any loss, indemnity, damage or delay of any kind will not under any circumstances exceed 100% of the Contract Sum.

The contract contained a broad Missouri choice-of-law clause, and provided that a prevailing party could collect its attorney’s fees.

The Award

Choice-of-Law Provision 3

Choice-of-Law Provision 3

The Arbitrator ruled that the clause was enforceable, that the Contract Sum (i.e., the liability cap) was $699,702.39., and that the terms “loss, indemnity, damage or delay of any kind” did not include the prevailing party’s contractual right to attorney fees. The Arbitrator thus awarded Beumer: (a) $699,702.39 in damages; (b) $191,680.14 in pre-judgment interest; (c) post-judgment interest at 9%; and (d) $916,027.90 in attorney’s fees and expenses.

On its motion to vacate the Award the Contractor did not dispute that the Arbitrator “arguably construed” the limitation of liability clause, but contended that the Arbitrator exceeded its powers by “disregarding” the Missouri choice-of-law clause, because: (a) the Arbitrator relied on caselaw from four jurisdictions outside of Missouri to support his construction of the limitation of liability provision as exclusive of costs and attorney fees, and did not cite any Missouri decisions on this construction question; and (b) the Contractor claimed that the Missouri cases required a cost-inclusive interpretation of the clause, not a cost-plus one.

The Arbitrator did not Disregard the Choice-of-Law Provision

Choice-of-Law Provision 4

Choice-of-Law Provision 4

Did the Arbitrator exceed his powers by ruling that the limitation of liability clause did not limit liability for contractual attorney fees? The Eighth Circuit, in a well-reasoned decision, said the answer was “no.” Continue Reading »

Appellate Division, Fourth Department Vacates Imperfectly Executed Arbitration Award

August 15th, 2018 Authority of Arbitrators, Awards, Exceeding Powers, Imperfectly Executed Award or Powers, Labor Arbitration, New York State Courts Comments Off on Appellate Division, Fourth Department Vacates Imperfectly Executed Arbitration Award

Imperfectly Executed 1

Imperfectly Executed 1

New York Civil Practice Law & Rules (“CPLR”) Section 7511(b)(1)(iii) provides that an arbitration award “shall be vacated” where the arbitrator “so imperfectly executed [the award] that a final and definite award upon the subject matter submitted was not made” CPLR 7511(b)(1)(iii). The Federal Arbitration Act similarly authorizes vacatur “where the arbitrators…so imperfectly executed [their powers] that a mutual, final, and definite award upon the subject matter submitted was not made.” 9 U.S.C. § 10(a)(4).

In Professional, Clerical, Tech. Emps. Ass’n v. Board of Ed. for Buffalo City School Dist., ___ A.D.3d ___, 2018 N.Y. Slip Op. 04128, at *1 (4th Dep’t June 8, 2018), the New York Supreme Court, Appellate Division, Fourth Department, held that the trial court erred by confirming a labor arbitration award that did not adequately explain the basis for the compensation to be awarded or how it should be calculated. Continue Reading »

The Fourth Circuit: What Constitutes a Final Award and Who Makes the Call?

August 3rd, 2018 Appellate Practice, Arbitrability, Arbitration Practice and Procedure, Authority of Arbitrators, Awards, Confirmation of Awards, Exceeding Powers, Federal Arbitration Act Enforcement Litigation Procedure, Grounds for Vacatur, Judicial Review of Arbitration Awards, Manifest Disregard of the Agreement, Manifest Disregard of the Law, United States Court of Appeals for the Fourth Circuit 1 Comment »

Final Award 2 - yay-15399450

Final Award 2

What constitutes a “final arbitration award” for purposes of the Federal Arbitration Act is important because it bears on whether an award can be confirmed, vacated, or modified under Sections 9, 10, or 11 of the Federal Arbitration Act (the “FAA”). We addressed the basics concerning final awards in a 2009 post, here.

In Northfolk Southern Railway Co. v. Sprint Communications Co., L.P., 883 F.3d 417 (4th Cir. 2018), the U.S. Court of Appeals for the Fourth Circuit was faced with the question whether an award (the “Appraisal Award”), convened under an agreement’s appraisal clause, and issued by three appraisers, was a final arbitration award under the FAA. The unusual procedural posture of the case raised an additional, related question: whether under the FAA an arbitration panel, convened under the arbitration provision of the parties’ agreement, had the authority to declare the Appraisal Award to be a final award. That question matters, for if an arbitration panel has that power, then its decision concerning finality is subject only to the very highly deferential review permitted by Section 10 of the FAA. See First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 942-43 (1995); Oxford Health Plans LLC v. Sutter, 133 S. Ct.  2064, 2068-69 (2013).

Concededly with the benefit of 20/20 hindsight, we wonder whether a different litigation and appellate strategy might have yielded a different outcome. The Court held that the Appraisal Award was not final, and remanded the matter back to the appraisers. But the Court did not, for the reasons set forth below, definitively answer the “who” question. The Court’s decision that the Appraisal Award was not final was unquestionably correct if one considers from a purely objective standpoint, without deference to the Arbitration Award, which declared that the Award was final.  But the correct outcome would be considerably less certain had the Railroad sought confirmation of the Arbitration Award and urged the Court to accord deference to the arbitrators who made it.

Background: Northfolk Southern Railway Co. v. Sprint Communications Co., L.P., 883 F.3d 417 (4th Cir. 2018)

Final Award 1 - yay-1618918-digital

Final Award 1

The dispute between Northfolk Southern Railway Co. (the “Railroad” or the “Appraisal Award Defending Party”) and Sprint Communications Co., L.P. (the “Carrier” or the “Appraisal Award Challenging Party”) arose out of a 25-year-term 1987 licensing agreement (the “Agreement”) under which the Carrier’s predecessor licensed from the Railroad’s predecessor the right to use for fiber-optics-cable purposes certain parts of the Railroad’s rights of way. The Carrier renewed that Agreement for an additional 25-year term (the “renewed Agreement term”), and a dispute arose about the renewal price. Continue Reading »

Appellate Division, First Department Vacates Arbitration Award Because it Rewrote the Parties’ Collective Bargaining Agreement

July 13th, 2018 Appellate Practice, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Authority of Arbitrators, Awards, Labor Arbitration, Manifest Disregard of the Agreement, New York Arbitration Law (CPLR Article 75), New York State Courts Comments Off on Appellate Division, First Department Vacates Arbitration Award Because it Rewrote the Parties’ Collective Bargaining Agreement

yay-1663484-digitalNew York’s arbitration law (Article 75 of the CPLR), like the Federal Arbitration Act (the “FAA”), strictly limits award challenges premised on an arbitrator’s disregard of the parties’ contract. Arbitrator interpretations of the parties’ agreement cannot be second-guessed, even if the arbitrator has “disregarded” “the apparent, or even the plain, meaning of the words of the contract….” Maross Constr. v Central N. Y. Regional Transp. Auth., 66 N.Y 2d 341, 346 (1985) (quotations and citations omitted). To succeed, an award challenger must show that the  award “is irrational or clearly exceeds a specifically enumerated limitation on the arbitrator’s power.” Kowaleski  v. New York State Dep’t Correctional Serv., 16 N.Y. 3d 85, 91 (2010).

In City of New York v. District Council 37, ___ A.D. 3d ___, 2018 NY Slip Op 3220 (1st Dep’t May 3, 2018), the New York’s Supreme Court, Appellate Division, First Department set aside an award because it exceeded “a specifically enumerated limitation” on arbitral power: The parties’ agreement prohibited the arbitrator from adding to or modifying the agreement.

“The arbitrator’s decision,” said the Court, “rewrote the contract for the parties by expanding the number of workers entitled to the [collective bargaining agreement’s] assignment differential, when the contract expressly limited the differential to workers at a specific facility.” 2018 N.Y. Slip Op. 3220 at *1.

Acknowledging that “[a] provision in a contract that the arbitrator may not alter or modify a contract does not limit the arbitrator’s power to resolve the dispute by interpreting the contract based on his or her findings as to the parties’ intent[,]” the Court explained that “an award should be vacated where it is not derived from the contract, but from the deliberate and intentional consideration of matters outside the contract.” 2018 N.Y. Slip Op. 3220 at *1.

To learn more about vacating awards based on an arbitrator’s manifest disregard of the contract click here, here, here, here, here, and here.

Photo Acknowledgement:

The photo featured in this post was licensed from Yay Images and is subject to copyright protection under applicable law.

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

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., 703 Fed.Appx. 15 (2d Cir. 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.

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 presented to 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.” 703 Fed. Appx. at 17-18.

Photographer: stuartmilesThe Second Circuit vacated and remanded 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 703 Fed. Appx. at 16, 17-18.

While in Jock I the parties had “squarely presented to the arbitrator” the issue of whether the agreement “permitted class arbitration,” Jock I did not address the more “narrow question” “whether an arbitrator, who may decide … whether an arbitration agreement provides for class procedures because the parties `squarely presented’ it for decision, may thereafter purport to bind non-parties to class procedures on this basis.” Id. at 18. 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 703 Fed. Appx. at 16, 17-18.

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 »