Under the federal Federal Arbitration Act statutory claims are generally arbitrable if they fall within the scope of the arbitration agreement, but arbitrator and arbitration-service-provider fees that may impose undue financial burdens on employees or other individuals seeking to vindicate those rights.   Cost provisions in arbitration agreements allocate these fees and costs, and even when the allocation is 50-50, disputes may arise concerning whether they are so burdensome as to effectively deny one of the parties a forum in which to pursue his or her claims.   

In Green Tree Financial Corp v Randolph, 531 U.S. 79 (2000), the United States Supreme Court acknowledged that “the existence of large arbitration costs could preclude a litigant from effectively vindicating her federal statutory rights in the arbitral forum.”  531 U.S. at 90.  And it said that “where, a party seeks to invalidate an arbitration agreement on the ground that arbitration would be prohibitively expensive, that party bears the burden of showing the likelihood of incurring costs that would deter the party from arbitrating the claim.”  531 U.S. at 92.   While the Court did not purport to enunciate the standards courts should apply in evaluating challenges to cost provisions, it held that the “risk” of  “prohibitive costs is too speculative to justify the invalidation of an arbitration agreement.”  531 U.S. at 91.

The New York Court of Appeals Weighs In 

On March 25, 2010 the New York Court of Appeals adopted as a matter of New York State law the federal approach to evaluating challenges to costs provisions.  See Re Brady v. Williams Capital Group, L.P., No. 36, slip op. (N.Y. Ct. App. March 25, 2010).  In Brady the dispute was between an “investment bank and broker-dealer of debt equity securities” and “a[n NASD] ‘registered’ salesperson of fixed income securities,” and it arose under state and federal discrimination laws.  Slip op. at 2, 3 & 4.  The court below held that the 50-50 cost-sharing provision in question violated public policy and should be excised from the arbitration agreement.  Slip op. at 6.  The Court of Appeals reversed and remanded the matter to the trial court for a hearing on whether the employee was financially able to pay arbitration fees and costs, and set forth the governing standards.  Slip op. at 1-2.   

The Court decided hat the “case-by-case, fact-specific approach employed by the federal courts.  .  .  properly acknowledge[s] and balance[s]” the “competing interests” “of the strong State policy favoring arbitration agreements and the equally strong policy requiring the invalidation of such agreements when they contain terms that could preclude a litigant from vindicating his/her statutory rights in the arbitral forum.”  Slip op. at 10-11 (citations omitted).  Adopting the approach outlined in Bradford v. Rockwell Semiconductor Sys., Inc . 238 F.3d 549, 556 (4^th Cir. 2001), the Court held that “the issue of a litigant’s financial ability is to be resolved on a case-by-case basis and that the inquiry should at minimum consider the following questions:  (1) whether the litigant can pay the arbitration fees and costs; (2) what is the expected cost differential between arbitration and litigation in court; and (3) whether the cost differential is so substantial as to deter the bringing of claims in the arbitral forum.”  Slip op. at 11.   The Court said that “a full hearing is not required in all situations,” but “there should be a written record of the findings pertaining to a litigant’s financial ability.”  Slip op. at 11.  The Court did “not see the need to detail the precise documentation a court should request to resolve this issue,” leaving that “to the [trial] court’s discretion.”  Slip op. at 11. 

The Court did “not decide what the remedy should be if the ‘equal share’ provision is found unenforceable.”  In that event, it directed the trial court to “decide, in the first instance, whether to sever the clause and enforce the rest of the Arbitration Agreement, or to offer petitioner a choice between accepting the ‘equal share’ provision or bringing a lawsuit in court .”  Slip op. at 11.

What if the Parties Clearly and Unmistakably Agree to Arbitrate the Issue Whether a Cost Provision is Unconscionable or Otherwise Unenforceable?

There is a tie-in between the issue addressed in Brady and the issue before the United States Supreme Court in Rent-A-Center West v. Jackson, No. 09-497.  As readers may recall, Rent-A-Center concerns who decides unconscionability questions when the parties, in their predispute arbitration agreement, clearly and unmistakably agree that arbitrators decide arbitrability questions.  (Rent-A-Center is discussed here, here, here and here.) 

We understand that one of the policy arguments the employee, Jackson, makes on appeal is that allowing arbitrators to decide whether a cost provision is unconscionable or otherwise unenforceable may effectively deny the arbitration agreement’s challenger from having a forum in which to assert his or her unconscionability claim.  If the arbitration clause’s cost provisions are so onerous as to deter the challenger from arbitrating even the threshold issue of unconscionability, then it may be deprived of a forum in which to resolve its statutory claims.  While the issue is not presented in Rent-A-Center – the lower courts already ruled that the cost provision was not unconscionable, and Jackson does not challenge those findings on appeal – it has the potential to arise in a future case if the Supreme Court rules that arbitrators decide unconscionability claims where the parties clearly and unmistakably so agree. 

The potential for such a case is not a legitimate reason for the United States Supreme Court to affirm the Ninth Circuit’s ruling in Rent-A-Center.  Should the issue arise in a future case it could be dealt with by finding that the disputed cost provisions do not apply to the clear and unmistakable agreement to arbitrate arbitrability, allowing the type of limited court hearing prescribed by Brady, or reviewing under Section 10’s deferential standards the arbitrator’s findings on financial ability.  While the relative merit and effectiveness of each of these alternative approaches may stir debate, that debate is better left for a case that properly presents it.     

In any event, enabling a court to address the limited issue of whether a cost provision deters arbitration would not necessarily deprive the arbitrators from ruling on whether the cost provision is unconscionable or unenforceable for some reason other than the challenger’s ability to pay.  Suppose a cost provision purported to shift all costs of the arbitration on to the employee.  Such a provision might be challenged as unconscionable without regard to the challenger’s ability to pay, depending on applicable state law.  And if the challenger could pay, then the issue of whether the cost provision was otherwise unconscionable under state law would be one for the arbitrators to decide where the parties clearly and unmistakably so agreed.

On November 2, 2009 Kyriaki Karadelis of the U.K.-based trade publication Global Arbitration Review (“GAR”)  (website here) wrote what I thought was a concise and insightful article on the case.  And we would have said that even if she had not quoted some of our comments in her article!  But she did, and we’re flattered by that. 

With Global Arbitration Review’s permission, and with the required copyright disclaimer, we have posted the article as a “Slide Share Presentation” in my LinkedIn profile, which you can view by clicking here.  Also posted there (again with GAR’s permission and the required disclaimer) is a Global Arbitration Review Article on the United States Court of Appeals for the Second Circuit’s decision in  ReliaStar Life Ins. Co. v. EMC National Life Co., ___ F.3d ___, ___ (2009) (Raggi, J.) (blogged here and here), in which the United States Court of Appeals for the Second Circuit held that an arbitration panel was authorized to award under the bad faith exception to the American Rule attorney and arbitrator fees to a ceding company in a case where the parties had agreed that “[e]ach party shall bear the expense of its own arbitrator.  .  .  and related outside attorneys’ fees, and shall jointly and equally bear with the other party the expenses of the third arbitrator.”  We reported on GAR’s article concerning ReliaStar case here, which also quotes some of our comments on that case. 

We ask our readership to remember that GAR is a subscription-only publication and that it has copyrights in these posted materials.  GAR has authorized us to post them online and distribute them for marketing purposes, but that authorization does not extend to others not similarly situated.  Please do the right thing and respect GAR’s copyrights – GAR has to make a living just like the rest of us!     

The power of arbitrators appointed to resolve a particular dispute or disputes is defined by the submission, not the arbitration agreement. The scope of the agreement to arbitrate tells us only what must be submitted to arbitration. It is the submission itself that “serves not only to define, but to circumscribe the authority of the arbitrators.” Ottley v. Schwartzberg, 819 F.2d 373, 376 (2d Cir. 1987) (here).   

As the United States Court of Appeals for the Fifth Circuit explained, a predispute arbitration agreement generally is “not self-executing” — “[b]efore arbitration can … proceed, it is necessary for the parties to supplement the agreement to arbitrate by defining the issue to be submitted to the arbitrator and by explicitly giving him the authority to act.”  Piggly Wiggly Operators’ Warehouse Inc v. Piggly Wiggly Operators’ Warehouse Independent Truck Drivers Union, 611 F2d 580 (5th Cir. 1980) (here).  The disputes presented to the panel for resolution without objection constitute the submission, which may be embodied in a formal submission agreement or determined from the arbitration demand in conjunction with the arguments and contentions made by the parties during the proceeding.

The submission is effectively a delegation of authority to one or more particular arbitrators to resolve one or more particular issues.  And once arbitrators have ruled on those issues, their authority is exhausted; they have no authority to hear any further disputes between the parties unless the parties delegate to them that further authority. See, generally, U.S. v. American Soc’y of Composers, Authors and Publishers, 32 F.3d 727, 732-33 (2d Cir. 1994) (here); Ottley, 819 F.2d at 376.

The scope of the delegated authority may be broader or narrower than the scope of the arbitration agreement, or it may be coextensive with it. The parties may, for example, agree to arbitrate all disputes between them, but if they empanel arbitrators to resolve only a subset of those disputes, then the arbitrators’ authority is limited to that subset of disputes. And parties that have agreed to arbitrate only a subset of potential disputes can nevertheless submit other disputes to the arbitrators, which will have the authority to resolve them. See, generally, Ottley, 819 F.2d at 376; see also Rocket Jewelry Box, Inc. v. Noble Gift Packaging, Inc., 157 F.3d 174, 177 (2d Cir. 1998) (here); Trade & Transport, Inc. v. Natural Petroleum Charterers Inc., 931 F.2d 191, 195 (2d Cir. 1991) (here).

For example, in the reinsurance context, a dispute may arise over a claim or series of claims, a party may demand arbitration of those claims, and a panel may be appointed to resolve the dispute.  Midstream in the proceeding disputes may arise over different claims.  The empanelled arbitrators have the authority to resolve those disputes only if the parties agree to submit them to the panel (they may be impliedly submitted if one party asserts them in the arbitration and the other party contests them without a reservation of rights).  

Those additional claims – not the subject of the original demand for arbitration – must, of course be arbitrated if they fall within the scope of the arbitration clause.  But the empanelled arbitrators cannot force the parties to submit them in the ongoing proceeding.  A new arbitration must be commenced, perhaps with new panel members. 

Issues concerning what was submitted to the arbitrators can also arise in other contexts.  One example is what happened in KX Reinsurance Co. v. General Reinsurance Corp., 08 Civ. 7807 (SAS), 2008 WL 4904882 (S.D.N.Y. Nov. 18, 2008) (Scheindlin, J.), where the Court held that the panel exceeded its authority when, after resolving all the issues the parties submitted, the panel nevertheless retained jurisdiction to hear future disputes between the parties. You can read more about that case here.

As is true with most rules, there is an exception.  Some arbitration agreements are self-executing in that they provide that the parties are to submit all disputes to a particular arbitrator or permanent arbitration panel.  Under such a self-executing arbitration agreement, the permanent arbitrator or panel generally has the authority to resolve additional disputes arising in the course of the proceedings, or to retain jurisdiction to hear future disputes, as long as the arbitration clause requires the parties to submit those disputes.   

In view of how the submission limits the authority of the empanelled arbitrators, parties need to give careful thought to the scope of the demand for arbitration, and the relief requested.  Sometimes a proverbial ounce of prevention is worth a pound of cure.

Today we look at Stern v. Lavoott Bluestone, ___ N.Y. 2d ___, slip op. (June 11, 2009), a New York Court of Appeals decision that has nothing to do with either reinsurance or arbitration law.  Before you conclude that we’ve finally lost our marbles, let us explain:  The decision is of critical importance to all reinsurance and arbitration attorneys subject to attorney advertising restrictions — indeed, it is important to all attorneys subject to those restrictions.    The Court held that an attorney’s newsletter that was purely informational in content was not an “unsolicited advertisement” for the purposes of the Telephone Consumer Protection Act of 1991 (“TCPA”), 47 U.S.C. § 227, as added by Pub. L. 102-243, 105 U.S. Stat. 2394, which prohibits the dissemination of such advertisements by facsimile.

Facts

During a 16-month period, Peter Marc Stern, a solo practitioner, received 14 unsolicited facsimile communications from Andrew Lavoott Bluestone, another solo practitioner who represents plaintiffs in attorney malpractice cases.  Each of the faxes, entitled “Attorney Malpractice Report,” contained a short article on a topic pertinent to attorney malpractice, and contained Bluestone’s contact information and web addresses.   

In August 2005 Stern commenced an action against Bluestone in New York State court under the TCPA, which prohibits the use of “any telephone facsimile machine.  .  .  to send an unsolicited advertisement,” 47 U.S.C. § 227(b)(1)(C), and provides a private right of action for money damages.  See 47 U.S.C. § 227(b)(3).  During the period Bluestone sent the faxes, the TCPA defined “unsolicited advertisement” as “any material advertising the commercial availability or quality of any products, goods, or services which is transmitted to any person without that person’s invitation or permission.”   See former 47  U.S.C. § 227(a)(4).  Stern sought $500 per fax as damages, contending that each was an “unsolicited advertisement” within the meaning of the TCPA.  He requested that the court treble the damages because Bluestone allegedly violated the TCPA willfully and knowingly. 

In December 2005 Stern moved for summary judgment on the issues of liability and willful and knowing violation of the TCPA.  Bluestone did not cross-move for summary judgment, but opposed the motion, contending that his faxes were not advertisements, or, alternatively, that there was a question of fact on that score.  The trial court granted the motion, concluding that the faxes “indirectly advertise[d] the commercial availability” of Bluestone’s services.  The court also held that Bluestone willfully and knowingly violated the TCPA.  The intermediate appellate court affirmed, with two Justices dissenting.

The Court’s Holding and Analysis

The New York Court of Appeals — New York’s highest court — reversed.  The Court pointed out that, in 2006 the Federal Communications Commission (“FCC”) elaborated on what constitutes an “informational message” — as opposed to an “unsolicited advertisement” – for the purposes of the TCPA: 

facsimile communications that contain only information, such as industry news articles, legislative updates, or employee benefit information, would not be prohibited by the TCPA rules.  An incidental adverstisement contained in such a newsletter does not convert the entire communication into an advertisement.  .  . Thus, a trade organization’s newsletter sent via facsimile would not constitute an unsolicited advertisement, so long as the newsletter’s primary purpose is informational, rather than to promote commercial products.

Slip op. at 4 (quoting 71 Fed. Reg. 25967, 25973 (2006), codified at 47 C.F.R. § 64.1200) (emphasis supplied by the Court).   

The Court concluded that Bluestone’s faxes were “informational message[s]” within the meaning of the FCC regulation and therefore were not “unsolicited advertisement[s]” within the meaning of the TCPA: 

In these reports, Bluestone furnished information about attorney malpractice lawsuits; the substantive content varied from issue to issue; and the reports did not promote commercial products.  To the extent that Bluestone may have devised the reports as a way to impress other attorneys with his legal expertise and gain referrals, the faxes may be said to contain, at most, “[a]n incidental advertisement” of his services, which ‘does not convert the entire communication into an advertisement.’ 

Slip op. at 4. 

In today’s world of attorney-advertising restrictions, the Bluestone decision provides needed clarity as to whether newsletters, blogs, LinkedIn or Twitter posts, and other writings that are principally informational in nature are prohibited “solictitations” or otherwise subject to attorney advertising restrictions.  If an attorney newsletter or other article transmitted to another person via fax does not violate the TCPA, then it should not be prohibited under attorney ethical rules concerning solicitation of legal business or otherwise subject to attorney advertising restrictions. 

One way that lawyers and other professionals can indirectly demonstrate their skills, knowledge and prowess to the general public is by writing informational articles, blog posts and the like.  These writings serve the public good in that they are often read by other professionals, students, governmental organizations and the public at large, and are often a useful source of information, ideas and opinions on a variety of topics.  To quell this discourse would not only be unfair to attorneys, but would deprive the public of an important source of pertinent information.  Time will tell us the extent to which the Bluestone decision will influence the law on attorney advertising.   

On a related note, kudos to Scott Greenfield, a solo practitioner who handled the case for Bluestone.  Carolyn Elefant’s widely-read and highly-recommended blog, My Shingle, covered the case here.  Ms. Elefant’s blog post features an interview of Mr. Greenfield and offers further commentary and insight.

On May 4, 2009 the United States Supreme Court decided Arthur Andersen LLP v. Wayne Carlisle, ___ U.S. ___ (2009), holding that a nonsignatory to a contract containing an arbitration clause may invoke Section 3 of the Federal Arbitration Act — which authorizes courts to stay litigation in favor of arbitration —  if state contract law allows it to enforce the contract.  The case is significant in its own right and one we intend to discuss in a subsequent post.  It further undermines the rationale of ReliaStar because the Court makes what may be  its strongest statement to date about state contract law governing the scope, validity, and  revocability of arbitration agreements falling under the Federal Arbitration Act:  

Neither [Section 2 nor 3 of the FAA].  .  .  purports to alter background principles of state contract law regarding the scope of agreements (including the questions of who is bound by them).  Indeed [Section] 2 explicitly retains an external body of law governing revocation (such grounds ‘as exist at law or in equity’).  And we think [Section] 3 adds no substantive restriction to [Section] 2′s enforceability mandate.  State law, therefore, is applicable to determine which contracts are binding under [Section] 2 and enforceable under [Section] 3 if that law arose to govern issues concerning the validity, revocability, and enforceability of contracts generally.  .  .  . 

Slip op. at 6-7 (citations, quotations and footnote omitted; emphasis in original). 

The “scope of agreement” question addressed by ReliaStar concerned the scope of the parties’ agreed prohibition on fee shifting.  Applicable New York rules of contract interpretation and construction required that agreement to be enforced as written.  The dictum in Arthur Andersen underscores that the ReliaStar majority should have analyzed the contract like the New York Court of Appeals would have analyzed any other contract, concluded it was clear and unambiguous, and enforced it accordingly.

We recently reported on ReliaStar Life Ins. Co. v. EMC National Life Co., ___ F.3d ___, ___ (2009) (Raggi, J.) (blogged here), in which the United States Court of Appeals for the Second Circuit held that an arbitration panel was authorized to award under the bad faith exception to the American Rule attorney and arbitrator fees to a ceding company in a case where the parties had agreed that “[e]ach party shall bear the expense of its own arbitrator.  .  .  and related outside attorneys’ fees, and shall jointly and equally bear with the other party the expenses of the third arbitrator.”  This post takes a critical look at ReliaStar.  

The Second Circuit is one of the most influential and respected  Circuit Courts of Appeal in the United States, yet on occasion even this prestigious court renders a decision that is open to question.  ReliaStar is one of those decisions.  The majority opinion lost sight of what the parties agreed about the arbitrators’ power to award attorney fees.  Rather than adhere to the plain meaning of the parties’ agreement as required by New York  law, the Court construed an unambiguous limitation on arbitral authority to mean something other than what it said. 

No doubt that the Court believed that its decision would encourage resort to arbitration by construing arbitral authority broadly.  But the Court would have done a far better job encouraging resort to arbitration had it simply enforced the parties’ agreement as written.  One of the most attractive features of arbitration is that parties get to dictate how they want their dispute decided, including, among other things, how best to allocate the costs, fees and expenses of deciding it.   But that feature falls by the wayside if courts cannot be relied upon to enforce arbitration agreements as written. 

Discussion 

Background

The question before the Court was one of arbitrability:  Did the arbitrators have the power to award attorneys fees for EMC’s alleged bad faith conduct in the arbitration?  It turned on what the contract had to say about attorney fees.  State law governed the interpretation of the arbitration clause, including the question of whether it was reasonably susceptible to more than one interpretation.  See First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938,  944 (1995); Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 62-63 & n.9 (1995).  If the clause was ambiguous under applicable state law, then federal law required that the ambiguity in its scope be resolved in favor of arbitration.   See 514 U.S. at 62.

The parties agreed that New York law, “and to the extent applicable the Federal Arbitration Act,”  would “govern the interpretation and application” of their agreement.  For many years the New York Court of Appeals (New York’s highest court) has adhered to what is known as the “plain meaning” rule of contract interpretation.  The theory behind the plain meaning rule is that the most persuasive indication of what the parties intended their written contract to mean is embodied in the words, phrases and sentences they used.    

Here is what the New York Court of Appeals has to say about the plain meaning rule:        

A familiar and eminently sensible proposition of law is that, when parties set down their agreement in a clear, complete document, their writing should as a rule be enforced according to its terms.  Evidence outside the four corners of the document as to what was really intended but unstated or misstated is generally inadmissible to add to or vary the writing.  That rule imparts stability to commercial transactions by safeguarding against fraudulent claims, perjury, death of witnesses.  .  .  infirmity of memory .  .  . [and] the fear that the jury will improperly evaluate the extrinsic evidence.  .  .  . 

W.W.W. Associates, Inc. v. Giancontieri, 77 N.Y.2d 157, 162-63 (1990) (citations and quotations omitted).   

The key phrase that the ReliaStar Court had to analyze stated “[e]ach party shall bear the expense of its own arbitrator.  .  .  and related outside attorneys’ fees, and shall jointly and equally bear with the other party the expenses of the third arbitrator”   (the “Fee and Expense Provision”).   Under the plain meaning rule, there is no reasonable interpretation of this unqualified provision, but that: 

1. Each party “bears the expense of its own arbitrator. . .fees”;
2. Each party “bears the expense of its own. . . outside attorneys’ fees”; and
3. Each party “shall jointly and equally bear with the other party the expenses of the third arbitrator.”

There are no qualifications or exceptions stated in these simple risk allocation rules and they are not susceptible to construction.   As the dissent observed, the Fee & Expense Provision is “no more susceptible to construction than is Article II, Section I of the U.S. Constitution which provides that no person shall be eligible to be President ‘who shall not have attained to the Age of thirty five years.’”  Slip op. at 17. 

When the majority considered what the parties intended by the plain and unambiguous words they used, they focused not on the said, but the unsaid.   According to the majority, the Fee and Expense provision “simply states the general American Rule that each party will bear its own attorney fees and extends that principle to apply also to the fee of the arbitrator selected by each party.”  Slip op. at 11.  The Court found that the provision said nothing about how fees were to be allocated in the event a party acted in bad faith and it interpreted this understandable silence to mean that the parties intended to incorporate into their contract the bad faith exception to the American Rule applicable in federal courts. 

Analysis

The Court’s reasoning and findings cannot withstand scrutiny under New York rules of contract interpretation.  First, the Court should have determined whether or not the Fee & Expense Provision was ambiguous as written, without regard to its supposed purpose or the reason for its inclusion.  The provision might have been agreed upon for any number of reasons, and even if there were extrinsic evidence of what the parties’ intended, that evidence would be irrelevant.  The only relevant consideration was what the parties said.  The majority’s speculation about what the parties meant or intended but did not say was besides the point where, as here, the language they used was clear and unqualified.   

Second, the Court violated New York contract interpretation rules by determining that the parties’ failure to address fee shifting in the event of bad faith effectively created an ambiguity in the Fee & Expense Provision.  To ascertain whether a contract is ambiguous, courts are required by New York law to focus on what is said, not what is omitted:     

An omission or mistake in a contract does not constitute an ambiguity [and].  . . the question of  whether an ambiguity exists must be ascertained from the face of an agreement without regard to extrinsic evidence.

Reiss v. Financial Performance Corp., 97 N.Y.2d 195, 199 (2001) (citations and quotations omitted).   

The Fee & Expense Provision is unqualified; by its terms it applies whether or not one of the parties acted in bad faith.  Expressly stating that the parties intended the rule against fee shifting to apply where a party acted in bad faith would not have broadened the provision’s scope or made it any clearer than it already was.  Having already used unqualified language, there was simply no reason the drafters would or should have believed that it was necessary to say more to ensure that the arbitrators would not be permitted to shift fees under any circumstances.  

Third, the Court violated New York contract interpretation rules by effectively adding a “bad faith exception” to the unqualified Fee & Expense Provision.  New York law generally forbids courts from adding implied terms to the parties’ contract under the guise of interpretation or construction:   

Even where a [contractual] contingency has been omitted, we will not necessarily imply a term since courts may not by construction add or excise terms, nor distort the meaning of those used and thereby make a new contract for the parties under the guise of interpreting the writing. 

Reiss, 97 N.Y.2d at 199 (citations and quotations omitted).   While implying a term may be appropriate under certain limited circumstances, New York courts “will not imply a term where the circumstances surrounding the formation of the contract indicate that the parties, when the contract was made, must have foreseen the contingency at issue and the agreement can be enforced according to its terms.”  97 N.Y.2d at 199. 

There was no dispute that the parties knew or should have known at the time of drafting that a party might arbitrate in bad faith.  That is one of the risks parties undertake when they agree to arbitrate and they can choose to allocate that risk as they see fit.  The Court’s reasoning assumed the parties were aware that there was a possibility the other might not arbitrate in good faith.  One of the key predicates for the Court’s decision was that the Fee & Expense Provision was simply a restatement of the American Rule and that “bad faith was a well-recognized exception to the American Rule.  .  .  .”  Slip op. at 13. 

There was likewise no legitimate dispute that the Fee & Expense Provision could be enforced as written.   The provision was clear and unambiguous and all it required the parties to do was bear their own attorney and party-appointed arbitrator fees, and split the umpire’s fee, irrespective of the outcome of the dispute, and irrespective of whether one party alleged the other arbitrated in bad faith.   

In any event, even if New York rules of contract interpretation and construction allowed the Court to look behind the plain meaning of the Fee & Expense Provision to ascertain the parties’ intent, the Court looked askew.   The Court assumed, without explanation, that the Fee & Expense Provision was intended to incorporate the federal version of the American Rule, including the bad faith exception to that federal rule.  But the parties agreed their contract would be interpreted according to New York Law, and the American Rule as articulated by the New York courts does not feature a bad faith exception:  “attorney’s fees are incidents of litigation and a prevailing party may not collect them from the loser unless an award is authorized by agreement between the parties, statute or court rule.”   Hooper Associates, Ltd. v. AGS Computers, Inc., 74 N.Y.2d 487, 491 (1989).     While there is a New York court rule authorizing courts to award attorney fees against a party that litigates in bad faith, that rule does not purport to authorize arbitrators to award attorney fees for bad faith.  The only statute even arguably applicable is Section 7513 of  New York’s Civil Practice Law and Rules, which establishes a presumption that arbitrators do not have the authority to award attorney fees unless the parties otherwise agree.  See New York Civ. Prac. L. & R. 7513; Synergy Gas Co. v. Sasso, 853 F.2d 59, 65 (2d Cir. 1988),

Finally, the breadth of the arbitration clause did not create an ambiguity when read together with the Fee & Expense Provision.  New York rules of contract interpretation provide that specific contract provisions trump general ones.  See, generally, Katz v. Feinberg, 290 F.3d 95, 96 (2d Cir. 2002) (per curiam).  The arbitration clause’s broad grant of authority was a general provision, which made no reference whatsoever to attorney fees, arbitrator fees, or any other form of relief.  By contrast, the Fee & Expense Provision specifically and unambiguously dealt with the subject of attorney and arbitrator fees.  Just as an insurance policy’s broad grant of coverage is subject to an unambiguous exclusion, so is an arbitration clause’s broad grant of authority subject to a specific, unambiguous provision limiting that authority. 

It seems to us that the majority of the ReliaStar Court may have been motivated more by a desired result than by applicable law and the parties’ agreement.  Given that the preeminent purpose of the Federal Arbitration Act is to enforce the parties’ arbitration agreement as written, ReliaStar may be one of those rare Second Circuit decisions that warrant rehearing and reversal en banc.