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Archive for the ‘Confirmation of Awards’ Category

The Repeat Player, Arbitration Providers, Evident Partiality, and the Ninth Circuit

November 18th, 2019 Arbitration Practice and Procedure, Arbitration Providers, Award Vacated, Confirmation of Awards, Evident Partiality, FAA Chapter 1, Federal Arbitration Act Section 10, Grounds for Vacatur, Judicial Review of Arbitration Awards, Repeat Players, United States Court of Appeals for the Ninth Circuit, Vacate Award | Evident Partiality, Vacatur No Comments »
Disclosure | Evident Partiality | Repeat Player

Federal Arbitration Act (“FAA”) Section 10 permits Courts to vacate awards “where there was evident partiality. . . in the arbitrators. . . .” 9 U.S.C. § 10(a)(2). If an arbitrator fails to disclose an ownership interest in an arbitration provider, which has a nontrivial, repeat player relationship with a party, should the award be vacated for evident partiality?

What constitutes evident partiality and under what circumstances is a controversial and sometimes elusive topic. We’ve written about it extensively over the years, including here, here, here, and here, as well as in other publications. The author has briefed, argued, or both, a number of U.S. Courts of Appeals and federal district court cases on the subject over the years, including, among others, Certain Underwriting Members of Lloyds of London v. State of Florida, Dep’t of Fin. Serv., 892 F.3d 501 (2018); and Nationwide Mutual Ins. Co. v. Home Ins. Co., 429 F.3d 640 (2005).

The most recent significant evident partiality development is the U.S. Court of Appeals for the Ninth Circuit’s 2-1 decision in Monster Energy Co. v. City Beverages, LLC, ___ F.3d ___, No. 17-55813, slip op. (9th Cir. Oct. 22, 2019), a case that involved an award made in favor of a repeat player party in an administered arbitration. Monster held that an arbitrator who failed to disclose his ownership interest in an arbitration provider was guilty of evident partiality because the arbitration provider had nontrivial business relationship with the repeat player party.

The Repeat Player Problem

In administered arbitration the (inevitable) existence of repeat players raises important questions that bear on evident partiality. Repeat players are parties who use the services of an arbitration provider on a regular basis, and therefore are a source of repeat business for the provider.

Arbitrators who are part of an arbitration provider’s appointment pool have earned their appointments by satisfying certain criteria set by the arbitration provider, and may also be trained by the arbitration provider. Ordinarily they are not employees of the arbitration provider, and, at least ostensibly, are independent from the arbitration provider.

But the economic interests of these arbitrators are aligned with those of the arbitration provider. What’s good for the arbitration provider is generally good for the arbitration provider’s pool of arbitrators. Repeat business is good for arbitration providers, just as it is good for lawyers and others.

Let’s assume that an arbitrator appointed in an arbitration administered by provider X has never before served as an arbitrator for parties A and B. If the contract between A and B is a form contract used by Party A that appoints X to administer arbitrations, and the contract concerns a subject matter in which disputes are fairly common (e.g., a consumer, employment, or franchise matter), then the arbitrator knows or has reason to know that the customer is either a repeat player or is likely to be one in the not too distant future.

If party B is, for example, a consumer, employee, or franchisee, and is not a repeat player, then one might suggest that our hypothetical arbitrator has at least an indirect interest in the outcome of the arbitration, specifically, one that would be best served by an outcome favoring party A, the repeat player.

That creates a potential evident partiality problem, for to be neutral, arbitrators have to be not only independent, and unbiased, but also disinterested. To be disinterested, the arbitrator cannot have have “a personal or financial stake in the outcome of the arbitration.” Certain Underwriting Members, 892 F.3d at 510 (citations and quotations omitted).

Does the kind of indirect and general financial or personal interest in the outcome described above, without more, establish evident partiality? It should not, although arbitrators are well-advised to disclose the existence of such an indirect or general financial or personal interests.

We think an argument for evident partiality based solely on an arbitrator having reason to believe that one of the parties is a repeat player with respect to the arbitration provider’s services would prove too much. Carried to its logical conclusion it would destroy, or at least severely diminish, the utility of the arbitration-provider-administered arbitration model in a large number of cases.

But that doesn’t mean that administered-arbitration awards in favor of repeat players and against non-repeat-players are immune from evident partiality challenge in all circumstances. Monster Energy provides an example and may be a harbinger of closer scrutiny of repeat player evident partiality challenges. 

We discuss the majority opinion in Monster Energy below. In a future post or posts, we will discuss the dissenting opinion, what to make of the case, and how it might (or not) influence how other courts address repeat-player-related issues that may arise in future cases.

Monster Energy Repeat Player Case: Majority Opinion

Monster Energy was a dispute between a franchisor (the “Franchisor”) and a franchisee (the “Franchisee”), many of the details of which are not critical to our discussion. The dispute was submitted to arbitration under a form contract that contained an arbitration agreement that specified JAMS as the administrator.

The parties selected the arbitrator (the “Arbitrator”) from a slate of seven-candidates proposed by JAMS.

The Arbitrator was not only a member of the JAMS arbitrator pool, but also had an ownership interest in JAMS. He did not disclose that ownership interest but his pre-arbitration disclosure stated:

I practice in association with JAMS. Each JAMS neutral, including me, has an economic interest in the overall financial success of JAMS. In addition, because of the nature and size of JAMS, the parties should assume that one or more of the other neutrals who practice with JAMS has participated in an arbitration, mediation or other dispute resolution proceeding with the parties, counsel or insurers in this case and may do so in the future.

Slip op. at 6.

The Arbitrator also disclosed that he had served in a prior arbitration involving the Franchisor and had ruled against it in that matter, making an award against the Franchisor in the amount of nearly $400,000. The arbitrator did not disclose—and it is not clear from the opinion whether during the arbitration he knew—that JAMS had, over a five-year period, administered 97 arbitrations for the Franchisor, i.e., an average of more than one per month.

The Arbitrator made an award against the Franchisee, which included attorney fees;  the Franchisor moved to confirm the award; and the Franchisee cross-moved to vacate it on evident partiality grounds. The district court confirmed the award, finding that the Franchisee waived its evident partiality claim, and made an award of attorney fees against Franchisee for fees incurred post-award. (apparently pursuant to a fee sharing provision in the parties’ contract).

The Ninth Circuit reversed the district court’s judgement confirming the award and vacated the post-award attorney fee award.    

Monster Energy Repeat Player Case: The Franchisee did not Waive its Evident Partiality Claim

The district court determined, and the Franchisor argued on appeal, that the Franchisee waived its evident partiality claim “because it did not timely object when it first learned of potential ‘repeat player’ bias and the Arbitrator disclosed his economic interest in JAMS.” Slip op. at 9. It appears that knowledge of “potential ‘repeat player’ bias” may have been deemed imputed from: (a) the Franchisor’s use of a form contract appointing JAMS as arbitrator; and (b) the Arbitrator’s disclosure that “because of the nature and size of JAMS, the parties should assume that one or more of the other neutrals who practice with JAMS has participated in an arbitration, mediation or other dispute resolution proceeding with the parties, counsel or insurers in this case and may do so in the future.” It appears that the Franchisee did not learn until after the award was made that JAMS had administered 97 arbitrations for the Franchisor.

The Ninth Circuit held that the Franchisee did not waive its evident partiality claim. The question before it was whether the Franchisee had “constructive knowledge” of the arbitrator’s ownership interest in JAMS. “Unlike. . . prior cases[]” involving waiver of evident partiality, said the Court, “the situation here is more akin to a partial disclosure—the Arbitrator disclosed his ‘economic interest’ in JAMS prior to arbitration, but [the Franchisee] did not know it was an ownership interest.” Slip op. at 9-10. And while “the district court correctly noted that an ownership interest is ‘merely a type of economic interest,’ the key issue is whether [the Franchisee] had constructive notice of the Arbitrator’s potential non-neutrality.” Slip op. at 10.

The Ninth Circuit determined there was no waiver, slip op. at 10, for even though the Franchisee “knew that the Arbitrator had some sort of ‘economic interest’ in JAMS[,]” “the Arbitrator expressly likened his interest in JAMS to that of ‘each JAMS neutral,’ who has an interest in the ‘overall financial success of JAMS.’” Slip op. at 9. Further, the “Arbitrator. . . disclosed his previous arbitration activities that directly involved Monster, in which he ruled against the company.” Slip op. at 9. “In context,” the Court explained, “these disclosures implied only that the Arbitrator, like any other JAMS arbitrator or employee, had a general interest in JAMS’s reputation and economic wellbeing, and that his sole financial interest was in the arbitrations that he himself conducted.” Slip op. at 9.

In view of these disclosures, “even if the number of disputes that [Franchisor] sent to JAMS was publicly available, that information alone would not have revealed that this specific Arbitrator was potentially non-neutral based on the totality of JAMS’s [Franchisor]-related business.” Slip op. at 9.

The “crucial fact[]” “that triggered the specter of partiality[,]” said the Court, was “the Arbitrator’s ownership interest[,]” and [the Franchisee] did not have constructive notice” of that fact. Slip op. at 9 & 10. That “ownership interest[]” “was not unearthed through public sources, and it is not evident that [the Franchisee] could have discovered this information prior to arbitration.” Slip op. at 9. And after the arbitration, “JAMS repeatedly stymied [the Franchisee’s] efforts to obtain details about JAMS’ ownership structure and the Arbitrator’s interest. . . .” Slip op. at 9.

Noting that the Court has “repeatedly emphasized an arbitrator’s duty to investigate and disclose potential conflict[,]” the Court said that here, “the Arbitrator undoubtedly knew of his ownership interest in JAMS prior to arbitration yet failed to disclose it.” Slip op. at 10. A waiver finding “would put a premium on concealment in a context where the Supreme Court has long required full disclosure.” Slip op. at 10 (citations and quotations omitted). 

The District Court Should have Vacated the Award on Evident Partiality Grounds

Different circuits have interpreted the standard for evident partiality in different ways, and the standard articulated in the Ninth Circuit is that an award may be vacated for evident partiality where dealings or relationships between the arbitrator and a party create a “reasonable impression of partiality.” Slip op. at 11 (quotations and citations omitted). Following Associate Justice Byron R. White’s concurrence in Commonwealth Coatings v. Continental Cas. Co., 393. U.S. 145 (1968), the Court explained that an arbitrator must disclose a “‘substantial interest in a firm which has done more than trivial business with a party. . . .’” Slip op. at 10 (quoting 393 U.S. at 151-52 (White, J., concurring)).

Applying Justice White’s rationale to the facts of Monster, the Court explained that it had to undertake a two-pronged “inquiry”[:] we must determine (1) whether the Arbitrator’s ownership interest in JAMS was sufficiently substantial, and (2) whether JAMS and [the Franchisor] were engaged in nontrivial business dealings.” Slip op. at 12 (emphasis in original). “If[,]” said the Court, “the answer to both questions is affirmative, then the relationship require disclosure, and supports vacatur.” Slip op. at 12.

The Arbitrator’s Ownership Interest in JAMS was Substantial

The Court found that the Arbitrator’s interest in JAMS was substantial because the Arbitrator “has a right to a portion of profits from all of [JAMS’] arbitrations, not just those that he personally conducts.” Slip op. at 12. That interest “greatly exceeds the general economic interest that all JAMS neutrals naturally have in the organization. . . .” Slip op. at 12.

JAMS and the Franchisor were Engaged in Nontrivial Business Dealings

The Court found that JAMS and the Franchisor were in engaged in nontrivial business dealings because the Franchisor’s “form contracts contain an arbitration provision that designates JAMS Orange County as its arbitrator[,]” and accordingly, “over the past five years, JAMS has administered 97 arbitrations for [the Franchisor: an average rate of more than one arbitration per month.” That “rate of business dealing is hardly trivial, regardless of the exact profit-share that the Arbitrator obtained.” Slip op. at 12.

The Court concluded by holding “that before an arbitrator is officially engaged to perform an arbitration, to ensure that the parties’ acceptance of the arbitrator is informed, arbitrators must disclose their ownership interests, if any, in the arbitration organizations with whom they are affiliated in connection with the proposed arbitration, and those organizations’ nontrivial business dealings with the parties to the arbitration.” Slip op. at 17.

“Here,” held the Court, the Arbitrator’s failure to disclose his ownership interest in JAMS—given its nontrivial business relations with [the Franchisor]—creates a reasonable impression of bias and supports vacatur of the arbitration award.” Slip op. at 17.

More to Come….

In an upcoming post or posts we’ll discuss Circuit Judge Michelle Taryn Friedland’s dissent and what to make of Monster.

Photo Acknowledgment

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

Attorney Fees and Arbitrability Addressed by New York Appellate Court

July 30th, 2019 Applicability of Federal Arbitration Act, Arbitrability, Arbitrability | Existence of Arbitration Agreement, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Attorney Fees and Sanctions, Authority of Arbitrators, Award Confirmed, Award Vacated, Awards, Choice-of-Law Provisions, Confirm Award | Attorney Fees, Confirm Award | Exceeding Powers, Confirm Award | Manifest Disregard of the Law, Confirmation of Awards, Contract Interpretation, Enforcing Arbitration Agreements, Exceeding Powers, FAA Chapter 1, Federal Arbitration Act Section 10, Grounds for Vacatur, Judicial Review of Arbitration Awards, Manifest Disregard of the Law, New York Arbitration Law (CPLR Article 75), Practice and Procedure, Vacate Award | 10(a)(4), Vacate Award | Arbitrability, Vacate Award | Attorney Fees, Vacate Award | Exceeding Powers, Vacate Award | Excess of Powers, Vacate Award | Existence of Arbitration Agreement, Vacate Award | Manifest Disregard of the Law, Vacatur Comments Off on Attorney Fees and Arbitrability Addressed by New York Appellate Court
Attorney Fees in Arbitration | TV

In Steyn v. CRTV, LLC (In re Steyn), ____ A.D. 3d ____, 2019 N.Y. Slip Op. 5341, at *1 (1st Dep’t July 2, 2019), New York’s Appellate Division, First Department decided a case falling under the Federal Arbitration Act (the “FAA”) that involved two challenges: one to an award of attorney fees on manifest disregard of the law grounds, and the other to an award that a nonsignatory obtained by joining the petitioner’s counterclaim.

The Court rejected the manifest-disregard challenge to the attorney fee award in favor of a signatory to the arbitration agreement, but held that the trial court should have vacated the award made in favor of a nonsignatory (which included both damages and attorney fees).

Background: Attorney Fee and Arbitrability Challenges

Terms and Conditions

The appeal arose out of a contract “dispute between Mark Steyn, a renowned author and television and radio personality, and CRTV, an online television network, currently known as BlazeTV, which features conservative commentators such as Glenn Beck and Phil Robertson.” 2019 N.Y. Slip Op. 5341, at *2. We’ll call Steyn the “Host” and CRTV the “Network.”

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Look Through: Second Circuit Holds that District Courts Must “Look Through” a Section 9 Petition to Confirm to Ascertain Subject Matter Jurisdiction

May 13th, 2019 Amount in Controversy, Arbitration Practice and Procedure, Awards, Confirmation of Awards, Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Diversity Jurisdiction, FAA Chapter 1, FAA Chapter 2, FAA Chapter 3, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 10, Federal Arbitration Act Section 11, Federal Arbitration Act Section 4, Federal Arbitration Act Section 9, Federal Courts, Federal Question, Look Through, Petition to Modify Award, Petition to Vacate Award, Subject Matter Jurisdiction, United States Court of Appeals for the Second Circuit Comments Off on Look Through: Second Circuit Holds that District Courts Must “Look Through” a Section 9 Petition to Confirm to Ascertain Subject Matter Jurisdiction
Look Through

In Landau v. Eisenberg, ___ F.3d ___, No. 17-3963, slip op. (May 1, 2019) (per curiam), the U.S. Court of Appeals for the Second Circuit recently held that district courts must “look through” a Section 9 petition to confirm an arbitration award to determine whether the court has subject matter jurisdiction to adjudicate the petition. District courts must therefore ascertain whether the district court would, absent an arbitration agreement, have had subject matter jurisdiction over the underlying controversy that resulted in the arbitration, and ultimately the award.

While the Second Circuit ruled in a per curiam decision, the issue it decided was of first impression. But it followed on the heels of, and heavily relied on, Doscher v. Sea Port Grp. Sec., LLC, 832 F.3d 372, 379-89 (2d Cir. 2016), which held that district courts should look through a Section 10 or 11 petition to ascertain the existence of federal subject matter jurisdiction. Doscher instructed federal courts to focus not on whether the Section 10 and 11 FAA award review and enforcement process presented substantial federal questions, but on the same thing they would have focused on had they been asked to compel arbitration of the controversy: whether the underlying controversy, in keeping with the well-pleaded complaint rule, would have been within the Court’s subject matter jurisdiction had it not been submitted to arbitration. See Doscher, 882 F.3d at 379-89.  

While Eisenberg and Doscher concerned the question whether federal-question subject matter jurisdiction exists over FAA Sections 9, 10, and 11 petitions, the reasoning of those cases also applies to the question whether there is federal subject matter jurisdiction over such petitions based on the diversity jurisdiction.

The Problem Addressed by Eisenberg and Doscher

Problem | Issue

The Federal Arbitration Act is “something of an anomaly in the realm of federal legislation: It bestows no federal jurisdiction but rather requires for access to a federal forum an independent jurisdictional basis over the parties’ dispute.” Vaden v. Discover Bank, 556 U.S. 49, 59 (2009).

Section 4 of the FAA, which governs motions to compel arbitration, provides that to determine the “independent jurisdictional basis” the court must ascertain whether “save for such agreement, [the district court] would have jurisdiction. . . of the subject matter of a suit arising out of the controversy [claimed to be arbitrable][:]”

[a] party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court which, save for such agreement, would have jurisdiction under title 28, in a civil action or in admiralty of the subject matter of a suit arising out of the controversy between the parties, for an order directing that such arbitration proceed in the manner provided for in such agreement.


9 U.S.C. § 4 (emphasis added).

The Supreme Court held in Vaden that “§ 4 of the FAA does not enlarge federal court jurisdiction,” 556 U.S. at 66, and district courts must “look through” the petition to the controversy between the parties to ascertain whether the court had subject matter jurisdiction over the controversy. 556 U.S. at 62. District courts must therefore “assume the absence of the arbitration agreement and determine whether it would have jurisdiction under title 28 without it.” Id. at 63.

But section 4 of the FAA expressly specifies the circumstances under which a federal district court will have jurisdiction over an application to compel arbitration, whereas Sections 9, 10, and 11 of the FAA—which address applications to confirm, vacate, and modify awards—say nothing about subject matter jurisdiction. The availability of relief under those portions of the FAA is not conditioned on either the existence of a lawsuit over which the Court already has subject matter jurisdiction (and which may have been stayed pending arbitration under Section 3 of the FAA) or on a party having previously invoked the court’s jurisdiction by filing a proceeding to compel arbitration under Section 4.

Sections 9, 10, and 11 of the FAA do not in and of themselves vest jurisdiction in a district court simply because they are part of a federal statute—the FAA requires an independent basis for federal subject matter jurisdiction. But what determines subject matter jurisdiction, the nature of the petition to confirm, vacate, or modify the award, or the nature of the underlying dispute that ultimately resulted in the arbitration award?   

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Can Arbitrators Exceed their Powers by Making an Award in Manifest Disregard of the Parties’ Agreement?

April 17th, 2019 Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Authority of Arbitrators, Awards, Challenging Arbitration Awards, Confirmation of Awards, Contract Interpretation, Contract Interpretation Rules, Exceeding Powers, Grounds for Vacatur, Manifest Disregard of the Agreement, Nuts & Bolts, Nuts & Bolts: Arbitration, Outcome Risk, Practice and Procedure, United States Court of Appeals for the Eighth Circuit, United States Supreme Court, Vacatur Comments Off on Can Arbitrators Exceed their Powers by Making an Award in Manifest Disregard of the Parties’ Agreement?
authority

Suppose arbitrators decide an issue within the scope of their authority but do so in manifest disregard the parties’ contract. Do they exceed their authority by making an award that has not even a barely colorable basis in the parties’ contract or in applicable law?

The answer to that question, is, of course, “yes,” and over the years we’ve discussed in a number of posts how arbitrators can exceed their powers under Federal Arbitration Act Section 10(a)(4) or Section 301 of the Labor Management Relations Act by making awards in manifest disregard of the parties’ agreement. (See Loree Reinsurance and Arbitration Law Forum Posts here, here, here, here, here, here, here, here, and here.) As discussed in those posts, the U.S. Supreme Court has on multiple occasions ruled that commercial and labor arbitrators can exceed their powers by making an award that manifestly disregards—or does not “draw its essence” from—the parties’ agreement. See Stolt-Nielsen S.A. v. AnimalFeeds Int’l Inc., 130 S.Ct. 1758, 1768-70 (2010); Oxford Health Plans LLC v. Sutter, 133 S.Ct. 2064, 2067, 2068 (2013); Eastern Associated Coal Corp. v. Mine Workers, 531 U.S. 57, 62 (2000); Steelworkers v. Enterprise Wheel & Car Corp., 363 U.S. 593, 599 (1960); Paperworkers v. Misco, Inc., 484 U.S. 29, 38 (1987).

In our April 12, 2019 post (here) we reviewed how it is that the limited review powers courts have to vacate commercial and labor arbitration awards are designed to provide a limited, but very important, safety net to protect parties against egregious, material violations of arbitration agreements. Without that limited protection, the risks associated with agreeing to arbitrate would be intolerably high and parties would be much less apt to opt for arbitration over court litigation.

Courts vacate arbitration awards where arbitrators act outside the scope of their authority by ruling on issues that the parties did not agree to submit to them. That’s what happened in Brock Indus. Servs., LLC v. Laborers’ Int’l Union., __ F.3d ___, No. 17-2597, slip op. (7th Cir. April 8, 2019), which we discussed in our April 12, 2019 post here.

But to obtain vacatur of an award based on manifest disregard of the agreement, however, an award challenger must satisfy an exceedingly demanding standard. We’ve addressed the parameters of that standard in a number of other posts. (See, e.g., here, here, here, here, here, here, here, here, and here. Our blog has also tried to give a feel for how Courts apply (or are supposed to apply) the standard by comparing the U.S. Supreme Court decision in Stolt-Nielsen, which held that an award should be vacated for manifest disregard of the agreement, to the Supreme Court decision in Oxford, which held that an award should not be vacated under that manifest disregard standard. (See Loree Reinsurance and Arbitration Law Forum posts here, here, and here.) And from time-to-time we’ve reported on other cases that have applied the standard.

While challenges to awards based on manifest disregard of the agreement are not uncommon, a very large majority of those challenges are either virtually certain to fail or at least highly unlikely to succeed. It is a relatively small universe of remaining, close cases that pose the biggest challenges for parties and courts.

Today we’ll look at one of those close cases, which was decided by the Eighth Circuit Court of Appeals and explain why the case failed to satisfy the demanding standard, even though, at least at first glance, it may be difficult to square the arbitration award with the parties’ agreement.

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California Appeals Court Says Clause Construction Award is not Final Award Subject to Confirmation or Vacatur

August 29th, 2018 Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Awards, California State Courts, Class Action Arbitration, Clause Construction Award, Confirmation of Awards Comments Off on California Appeals Court Says Clause Construction Award is not Final Award Subject to Confirmation or Vacatur

Introduction

Clause Construction Award 1

Clause Construction Award 1

We have discussed (here) what constitutes a final award under the Federal Arbitration Act, an issue that is important for a host of reasons, but is particularly so to any business faced with an adverse clause construction award. A clause construction award is an interim or partial final arbitration ruling that determines the threshold issue of whether the parties consented to class arbitration.

 

But not all arbitrations – even class arbitrations – are governed by the Federal Arbitration Act (“FAA”), and even when they are, parties may agree to procedural rules that are different from those of the FAA. See Preston v. Ferrer, 128 S.Ct. 978, 987-89 (2008); Volt Info. Sciences, Inc. v. Board of Trustees of Leland Stanford Jr. Univ.,  489 U.S. 468, 478-79 (1989). In Maplebear, Inc. v. Busick, ___ Cal. App.5th ___, slip op. (Cal. App., 1st Dist. August 21, 2018) (certified for publication), the parties agreed that  “the arbitration would be conducted by JAMS under its rules and procedures; the arbitrator would apply California substantive law; the arbitrator had no ‘power or authority to commit errors of law or legal reasoning’; and ‘[a]ny action to review the arbitration award for legal error or to have it confirmed, corrected or vacated’ would be decided under California law by ‘a California state court of competent jurisdiction.’” Slip op. at 2.

At issue in Maplebear was whether the California courts had jurisdiction to vacate a partial final Clause Construction Award, which concluded that the parties had consented to class arbitration. The California Appeals Court said “no,” which means that—unless the California Supreme Court (or the U.S. Supreme Court) hears an appeal and says otherwise—the parties have to endure through an entire class arbitration procedure before there is any judicial review of the Clause Construction Award. (Whether or not review by the California Supreme Court or the U.S. Supreme Court is even possible given the procedural posture of this case is outside the scope of this post.)

 

An Unfair Burden on the Clause Construction Award Challenger?

Clause Construction Award 2

Clause Construction Award 2

Consider the burden the decision imposes on the class-arbitration opponent. According to the majority opinion in Concepcion, then fairly current American Arbitration Association statistics showed that: (a) “[a]s of September 2009, the AAA had opened 283 class arbitrations[;]” (b) “[o]f those, 121 remained active, and 162 had been settled, withdrawn, or dismissed[;]” (c) “[n]ot a single one, however, had resulted in a final award on the merits[;]” and (d) “[f]or those cases that were no longer active, the median time from filing to settlement, withdrawal, or dismissal—not judgment on the merits—was 583 days, and the mean was 630 days.” AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740, 1751 (2011).

Clause Construction Award 4

Clause Construction Award 4

While we have not researched whether more recent statistics tell a different story, it seems quite likely that the Court’s decision on finality means that the class arbitration opponent will have to spend an awful lot of time and money before the issue of class arbitration consent is reviewed by a court, assuming it is ever reviewed.

 

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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 »

Can a Party Obtain Post-Judgment Relief from a Confirmed Arbitration Award Procured by Fraud?

May 26th, 2015 Arbitration Practice and Procedure, Arbitration Risks, Asbestos-Related Claims, Bad Faith, Confirmation of Awards, Corruption or Undue Means, Definition of Occurrence, Federal Courts, Federal Rules of Civil Procedure, Final Awards, Grounds for Vacatur, United States Court of Appeals for the Second Circuit, United States District Court for the Southern District of New York Comments Off on Can a Party Obtain Post-Judgment Relief from a Confirmed Arbitration Award Procured by Fraud?

Introduction

Relief from an Arbitration Award Procured by Fraud

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Section 10(a)(1) of the Federal Arbitration Act authorizes Courts to vacate arbitration awards that were “procured by fraud, corruption or undue means.”  9 U.S.C. § 10(a)(1). (For a discussion of Section 10(a)(1), see L. Reins. & Arb. Law Forum post here.) But a motion to vacate an arbitration award procured by fraud (or otherwise) is subject to a strict three-month deadline, and Section 10, unlike certain of its state-law counterparts, does not provide for tolling of the three-month deadline on the ground the challenging party did not know or have reason to know it had grounds to allege the arbitration award was procured by fraud. Compare 9 U.S.C. § 10(a)(1) with 2000 Revised Uniform Arbitration Act § 23(b) (Uniform Law Comm’n 2000) (If “the [movant] alleges that the award was procured by corruption, fraud, or other undue means, [then, in that].  .  .   case the [motion] must be made within 90 days after the ground is known or by the exercise of reasonable care would have been known by the [movant].”);  1955 Uniform Arbitration Act § 12(b) (Uniform Law Comm’n 1955) ( “[I]f predicated upon corruption, fraud or other undue means, [the motion to vacate] shall be made within ninety days after such grounds are known or should have been known.”).

Once an award has been confirmed, it has the same force and effect as any other judgment of the court. See 9 U.S.C. § 13. Federal Rule Civ. P. 60(b) provides that “[o]n motion and just terms, the court may relieve a party or its legal representative from a final judgment, order, or
proceeding for the following reasons:.  .  .  (3) fraud (whether previously called intrinsic or extrinsic), misrepresentation, or misconduct by an opposing party.  .  .  .” Fed. R. Civ. P. 60(c) provides that “[a] motion under Rule 60(b) must be made within a reasonable time—and for reasons (1), (2), and (3) [i.e., fraud, misrepresentation or misconduct] no more than a year after the entry of the judgment or order or the date of the proceeding.” Fed. R. Civ. P. 60(c).

So can a challenging party obtain relief from a confirmation judgment if: (a) an award-challenging party contends the Court entered judgment oin an arbitration award procured by fraud; (b) by extension, the judgment confirming the award was itself procured by fraud; (c) the award-challenging party did not know or have reason to know it was at the wrong end of an arbitration award procured by fraud until after the three-month statute of limitations for vacating an award had elapsed; and (d) the award-challenging party makes a timely motion for post-judgment relief under Fed. R. Civ. P. 60(b)? According to a district court judge of the U.S. District Court for the Southern District of New York, the answer is “no.”

 

Arrowood Indem. Co. v. Equitas Insurance Ltd., No. 13-cv-7680 (DLC), slip op. (S.D.N.Y. May 14, 2015)

No Post-Judgment Relief from Arbitration Award Procured by Fraud (Alleged or Otherwise)

Background

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Arrowood arose out of an excess-of-loss treaty Arrowood’s predecessor(s) in interest had entered into with Underwriters at Lloyd’s in the 1960s. The terms of the treaty were apparently part of, or incorporated into, a “Global Slip,” which the Court, without much elaboration, described as “a complex contractual  reinsurance program.” The Global Slip was first negotiated in 1966 and effective January 1, 1967 through December 31, 1968. It was apparently renewed a number of times thereafter, though the court does not say for what period or periods. The renewal agreements were “substantially similar” although they “contain[ed] new contractual language.” Slip op. at 2.

The Global Slip covered (apparently among other things) losses in excess of $1 million incurred under Arrowood’s casualty insurance policies under three different types of coverage. At issue was “Common Cause Coverage,” which covered losses arising out of an “occurrences” during the contract term, provided the occurrence or occurrences were the “probable common cause or causes” of more than one claim under the policies. The Global Slip also contained a “First Advised” clause, which said that “this Contract does not cover any claim or claims arising from a common cause, which are not first advised during the period of this Contract.”

yay-1299629-digitalLike so many other liability insurers, Arrowood began receiving, adjusting and settling asbestos bodily injury claims beginning in the 1980s. Underwriters at Lloyd’s London insisted that Arrowood present its asbestos reinsurance claims on a per claimant per exposure-year basis, absorbing one $1 million retention each year against the total asbestos claim liabilities allocated to that year under the Underwriters’ per claimant per exposure-year allocation methodology.

In 2008 Arrowood, after reviewing the contract language, stopped using exclusively the Underwriters-prescribed asbestos personal-injury claim reinsurance allocation methodology, which it had followed for almost 25 years, and began presenting a number of claims under the Common Cause Coverage provision of the Global Slip . Because those claims were not, “first advised” in the years 1967 or 1968, the Underwriters denied them.

The Arbitration and Confirmation Proceedings

One of the parties demanded arbitration in October 2010, and a tripartite panel was appointed. The Underwriters argued, among other things, that: (a) the parties’s 25-year course of dealing evidenced a binding agreement on how asbestos claims would be presented to the Underwriters; (b) some claims fell exclusively under employer’s liability coverage; and (c) Common Cause Coverage  did not apply because the requirements of the First Advised Clause were not satisfied. Continue Reading »

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

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

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

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

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

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

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

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

Stay tuned for DIRECTV.  .  .  .

 

Photo Acknowledgements:

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

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

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

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

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

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

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

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

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

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

 

Photo Acknowledgements:

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

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 »