main image

Overturning Arbitration Awards based on Clear Mistakes of Historical Fact or Conceded Nonfacts: Some Further Thoughts (Part IV): Will the Seventh Circuit Reverse the UpHealth District Court?

November 14th, 2024 Appellate Practice, Application to Vacate, Arbitration Agreements, Authority of Arbitrators, Award Fails to Draw Essence from the Agreement, Award Vacated, Awards, Challenging Arbitration Awards, Exceeding Powers, FAA Section 10, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 10, Judicial Review of Arbitration Awards, Manifest Disregard of the Agreement, Manifest Disregard of the Law, Outcome Review, Petition to Vacate Award, Post-Award Federal Arbitration Act Litigation, Practice and Procedure, Standard of Review, United States Court of Appeals for the Seventh Circuit, United States District Court for the Northern District of Illinois, United States Supreme Court, Vacate, Vacate Award | 10(a)(4), Vacate Award | Manifest Disregard of the Law, Vacatur for Conceded Nonfact or Clear Mistake of Historical Fact No Comments » By Philip J. Loree Jr.

Seventh CircuitWill the Seventh Circuit reverse the judgment in the UpHealth case?

In our October 7, 2024, post, “Can a Court under Section 10(a)(4) Overturn an Award Because it was Based on a Clear Mistake of Historical Fact or a Conceded Nonfact?”, we discudssed UpHealth Holdings, Inc. v. Glocal Healthcare Sys. PVT, No. 24-cv-3778, slip op. (N.D. Ill. Sept. 24, 2024), which granted partial vacatur of an arbitration award because it was, said the Court, based on a “nonfact.” Our October 18, 2024 post, Overturning Arbitration Awards based on Clear Mistakes of Historical Fact or Conceded Nonfacts: Some Further Thoughts (Part I), identified five questions relating to UpHealth designed to shed further light on the case and the arbitration award vacatur standard on which the Court relied.

The first four of those questions were answered in our October 18, October 21, and November 12, 2024, posts. This November 14, 2024, post answers the fifth question: “If there is a [United States Court of Appeals for the] Seventh Circuit appeal of the UpHealth decision, is it likely the decision will be overturned on appeal, and if so, on what grounds?”

We explained in our November 12, 2024, post that UpHealth has appealed the district court decision to the Seventh Circuit. And if you’ve been reading our prior UpHealth posts, then you’ve probably already guessed that the answer is “yes,” it seems likely the Seventh Circuit will reverse the UpHealth decision.

In terms of the grounds, for such a reversal, we think the Seventh Circuit will probably conclude that the only forms of outcome review the Seventh Circuit recognizes is manifest disregard of the contract and violation of public policy, and that UpHealth involves neither of those grounds. That is all the more so where, as here, there is no agreement or concession concerning the allegedly mistaken fact. (See November 12, 2024, post.)

We think the Seventh Circuit may also conclude that recognizing vacatur based on a clear mistake of historical fact or a conceded nonfact would embroil courts in review of the arbitrator’s fact findings, including the sufficiency of evidence. Under Seventh Circuit and U.S. Supreme Court authority, the FAA does not authorize such review.  Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 566-70 (2013); Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 671-72, 676-77 (2010). Major League Baseball Players Assoc. v. Garvey, 532 U.S. 504, 509-10, 511 (2001); Hill v. Norfolk & Western Ry., 814 F.2d 1192, 1194-95 (7th Cir. 1987) (citations omitted) (Posner, J.); American Zurich Ins. Co. v. Sun Holdings, Inc., 103 F.4th 475, 477-78 (7th Cir. 2024) (Easterbrook, J.); Affymax, Inc. v. Ortho-McNeil-Janssen Pharms., Inc., 660 F.3d 281, 284 (7th Cir. 2011) (citing George Watts & Son, Inc. v. Tiffany & Co., 248 F.3d 577 (7th Cir.2001); Eljer Mfg., Inc. v. Kowin Development Corp., 14 F.3d 1250, 1254, 1256 (7th Cir. 1994).

We discussed all of these shortcomings in the UpHealth Court’s analysis in our October 7, 18, 21, and November 12, 2024, posts. We believe that the Seventh Circuit will probably also conclude that the UpHealth court erred by vacating the award in part, particularly since the Seventh Circuit recognizes outcome review in extremely narrow circumstances only and none of those circumstances are present here—where the district court has, for intents and purposes, second-guessed the arbitrator’s fact finding.

It will be interesting to see how the appellee (Damodaran) attempts to square the district court’s decision with Seventh Circuit and Supreme Court authority. We will continue to watch the appeal and report on significant developments.

Contacting the Author

If you have any questions about this article, arbitration, arbitration-law, arbitration-related litigation, then please contact Philip J. Loree Jr., at (516) 941-6094 or PJL1@LoreeLawFirm.com.

Philip J. Loree Jr. is principal of the Loree Law Firm, a New York attorney who focuses his practice on arbitration and associated litigation. A former BigLaw partner, he has nearly 35 years of experience representing a wide variety of corporate, other entity, and individual clients in matters arising under the Federal Arbitration Act, as well as in insurance- or reinsurance-related, and other, matters.

ATTORNEY ADVERTISING NOTICE: Prior results do not guarantee a similar outcome.

Photo Acknowledgment

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

 

International Institute for Conflict Prevention and Resolution (CPR) Interviews Professor Angela Downes, Richard D. Faulkner, and Philip J. Loree Jr. about the Heckman v. Live Nation Entertainment Ninth Circuit Mass Arbitration Decision

November 13th, 2024 Appellate Practice, Applicability of Federal Arbitration Act, Application to Compel Arbitration, Arbitrability, Arbitrability | Clear and Unmistakable Rule, Arbitration Agreement Invalid, Arbitration Agreements, Arbitration Law, Arbitration Practice and Procedure, Arbitration Provider Rules, Arbitration Providers, Challenging Arbitration Agreements, Class Action Arbitration, Class Action Waivers, Class Arbitration Waivers, Clear and Unmistakable Rule, CPR Alternatives, CPR Video Interviews, Delegation Agreements, FAA Chapter 1, FAA Section 2, FAA Section 4, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 2, Federal Arbitration Act Section 4, International Institute for Conflict Prevention and Resolution (CPR), Mass Arbitration, New Era ADR, Petition to Compel Arbitration, Philip J. Loree Jr., Practice and Procedure, Pre-Award Federal Arbitration Act Litigation, Professor Angela Downes, Professor Downes, Repeat Players, Richard D. Faulkner, Russ Bleemer, Section 2, Section 4, The Loree Law Firm, Unconscionability, United States Court of Appeals for the Ninth Circuit No Comments » By Philip J. Loree Jr.

CPR Interview

Heckman

Do you want to learn more about the Heckman mass arbitration case?

As readers may know, over the last four years or so, our friend and colleague Russ Bleemer, Editor of Alternatives to the High Cost of Litigation, Newsletter of the International Institute for Conflict Prevention and Resolution (CPR) (“CPR Alternatives”), has hosted presentations about significant arbitration-law developments (principally in the United States Supreme Court) that feature interviews of our friends and colleagues: Professor Angela Downes, University of North Texas-Dallas College of Law Professor of Practice and Assistant Director of Experiential Education; arbitrator, mediator, arbitration-law attorney, and former judge, Richard D. Faulkner; and yours truly, Loree Law Firm principal, Philip J. Loree Jr. (See, e.g., here, herehereand here.) These interviews are posted on CPR’s YouTube channel, @CPRInstituteOnline.

On Monday, November 11, 2024, Russ interviewed Professor Downes, Rick and me about the Ninth Circuit’s recent mass-arbitration decision in Heckman v. Live Nation Entertainment, No. 23-55770, slip op. (9th Cir. Oct. 28, 2024). The video is here.

Heckman

The Heckman case centered around unusual mass-arbitration rules promulgated and administered by New Era ADR, which among many other things, included a broad delegation provision, which delegated to the arbitrator the authority to decide the validity of the parties’ arbitration agreement. The parties’ online ticket purchase agreement terms (the “Terms”) provided for arbitration pursuant to the New ERA Rules, which in the Heckman case meant New Era’s Rules for Expedited/Mass Arbitration proceedings.

Plaintiffs commenced in 2022 a putative class action against Live Nation Entertainment and Ticketmaster LLC, alleging that the companies violated the Sherman Act by engaging in anticompetitive practices. Those defendants  moved to compel arbitration, but the district court denied the motion, holding that the delegation clause and the arbitration agreement were procedurally and substantively unconscionable under California law.

Circuit Judge Lawrence VanDyke wrote a very interesting concurring opinion in Heckman in which he said he would have decided the case solely on the ground that the arbitration scheme violated the Discover Bank Rule, which was not preempted by the FAA because the scheme was not arbitration as envisioned by the FAA in 1925. This concurring opinion also discussed in some detail the conflict of interest that arises when arbitrators deciding arbitrability under a delegation clause conclude, or have reason to conclude, that an arbitration provider’s scheme—it’s business model—is unenforceable, pitting the arbitrator’s financial interest in continued employment against his or her neutral-decision-making interests.

Russ, Rick, Angela, and I discuss various aspects pertinent to the Heckman decision in the interview and identify issues that are likely to arise in future cases following the decision.
As always, we express our gratitude to Russ and CPR for hosting these interviews, and, along with Angela and Rick, look forward to contributing to future programs hosted by CPR.

Contacting the Author

If you have any questions about this article, arbitration, arbitration-law, arbitration-related litigation, then please contact Philip J. Loree Jr., at (516) 941-6094 or PJL1@LoreeLawFirm.com.

Philip J. Loree Jr. is principal of the Loree Law Firm, a New York attorney who focuses his practice on arbitration and associated litigation. A former BigLaw partner, he has nearly 35 years of experience representing a wide variety of corporate, other entity, and individual clients in matters arising under the Federal Arbitration Act, as well as in insurance or reinsurance-related and other commercial and business matters.

ATTORNEY ADVERTISING NOTICE: Prior results do not guarantee a similar outcome.

 Photo Acknowledgment

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

Overturning Arbitration Awards based on Clear Mistakes of Historical Fact or Conceded Nonfacts: Some Further Thoughts (Part III)

November 12th, 2024 Application to Confirm, Application to Vacate, Arbitrability, Arbitration Law, Arbitration Practice and Procedure, Authority of Arbitrators, Award Fails to Draw Essence from the Agreement, Award Vacated, Awards, Challenging Arbitration Awards, Confirmation of Awards, Exceeding Powers, FAA Chapter 1, FAA Section 10, FAA Section 9, Federal Arbitration Act Section 10, Federal Arbitration Act Section 9, Grounds for Vacatur, Petition to Vacate Award, Practice and Procedure, Section 10, Section 9, United States Court of Appeals for the Seventh Circuit, United States District Court for the Northern District of Illinois, Vacate, Vacate Award | 10(a)(4), Vacate Award | Arbitrability, Vacate Award | Exceeding Powers, Vacate Award | Excess of Powers, Vacatur for Conceded Nonfact or Clear Mistake of Historical Fact No Comments » By Philip J. Loree Jr.

UpHealthIn our October 7, 2024, post, “Can a Court under Section 10(a)(4) Overturn an Award Because it was Based on a Clear Mistake of Historical Fact or a Conceded Nonfact?”, we discussed UpHealth Holdings, Inc. v. Glocal Healthcare Sys. PVT, No. 24-cv-3778, slip op. (N.D. Ill. Sept. 24, 2024), which granted partial vacatur of an arbitration award because it was based on a “nonfact.” Our October 18, 2024 post, Overturning Arbitration Awards based on Clear Mistakes of Historical Fact or Conceded Nonfacts: Some Further Thoughts (Part I), identified five questions relating to UpHealth, which were designed to shed further light on the case and the vacatur standard on which the Court relied.

We answered the first three of the five in our October 18 and 21, 2024, posts:

  1. What is the difference, if any, between a “clear mistake of historical fact” and a “conceded nonfact?”
  2. What is or should be required to establish a “clear mistake of historical fact” or a “conceded nonfact?”
  3. Assuming Section 10(a)(4) authorizes courts to vacate awards based on a “clear mistake of historical fact” or a “conceded nonfact,” did the UpHealth district court err by holding that the award against Damodaran was based on a nonfact?

This post—which assumes familiarity with our October 7, 18, and 21, 2024 posts—answers the fourth question: “Assuming that the district correctly applied the “conceded nonfact” standard, does it comport with the FAA?”

We think the answer is no, unless the standard is construed to authorize vacatur in one of the two alternate situations only. First, where: (a) the parties clearly and unmistakably agree to the existence or nonexistence of a material fact, whether by stipulation or otherwise; (b) the arbitrator makes an award that clearly and unmistakably contravenes, or is otherwise inconsistent with, that agreement; and (c) the arbitrator does not even arguably interpret or apply the parties’ agreement about the existence or nonexistence of the material fact.
Second, and alternatively, where: (a) there is not even a barely colorable basis to conclude that the arbitrator’s material, mistaken finding of fact was based on ambiguous or disputed evidence; and (b) in making his or her award the arbitrator strongly relied on the clearly mistaken finding of fact. Of these two scenarios, we believe the first comports more closely with the FAA than the second.

The UpHealth Appeals to the Seventh Circuit

One brief update before we proceed: On October 24, 2024, UpHealth, not surprisingly, filed a notice of appeal from the order vacating the award. On November 6, 2024, Damodaran filed a notice of cross-appeal, appealing the district court’s order to the extent that that it remanded UpHealth’s claims against him to the arbitration panel, rather than terminating them.

Discussion: UpHealth

Assuming that the UpHealth District Correctly Applied the Clear Mistake of Historical Fact or Conceded Nonfact Standard, does it Comport with the FAA?

Our October 7, 18, and 21, 2024, posts pointed out a number of reasons why the clear mistake of historical fact or conceded nonfact standard, particularly as applied by UpHealth, violates, or may violate, the FAA. First, the FAA does not authorize courts to review an arbitrators’ findings of fact, no matter how “silly” or “improvident.” See, e.g., Major League Baseball Players Assoc. v. Garvey, 532 U.S. 504, 509-10, 511 (2001). The Second Circuit and certain other courts have rejected “manifest disregard of the facts” as a basis for vacating an arbitration award, see, e.g., Wallace v. Buttar, 378 F.3d 182, 191-93 (2d Cir. 2004) (discussing Halligan v. Piper Jaffray, Inc., 148 F.3d 197 (2d Cir. 1998)), and the Seventh Circuit (with a couple of narrow exceptions discussed in our October 7, 2024, post) has rejected even manifest disregard of the law as a ground for overturning an award. Affymax, Inc. v. Ortho-McNeil-Janssen Pharms., Inc., 660 F.3d 281, 284 (7th Cir. 2011) (citing George Watts & Son, Inc. v. Tiffany & Co., 248 F.3d 577 (7th Cir.2001)).

As we saw with respect to the UpHealth court’s application of the standard, when a Court purports to determine whether an arbitrator’s finding of fact is a clear mistake of historical fact—i.e., a fact finding that is contradicted by unambiguous or undisputed evidence to the contrary—the Court is required to review the arbitrator’s fact finding, and may inadvertently second-guess the arbitrator on a matter that is supposed to be within his or her discretionary ambit.
That is how the UpHealth court, in the author’s opinion, erred in applying the standard. (See October 21, 2024, post.) The Court made a determination about the ambiguity of evidence and its disputed or undisputed nature through the same lens as it would have made those determinations in cases that do not involve arbitration. (See October 21, 2024, post.)
Second, to the extent that the clear mistake of historical fact or conceded nonfact standard focuses on whether the arbitrator made a clear mistake of fact, and not on whether the arbitrator did or didn’t do his or her job by at least arguably interpreting the parties’ agreement or concessions about the facts, then it is not aligned with the only form of outcome review (other than public policy review) that has been authorized by the U.S. Supreme Court: manifest disregard of the agreement. See Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 566-70 (2013); Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 671-72, 676-77 (2010).

The principal purpose of the FAA, and certainly that animating FAA review of arbitration awards, is to enforce the parties’ agreement to arbitrate. Stolt-Nielsen, 559 U.S. at 682-83; Wise v. Wachovia Securities, LLC, 450 F. 3d 265, 269 (7th  Cir. 2006). As the Seventh Circuit has aptly put it:

[T]he question for decision by a federal court asked to set aside an arbitration award . . . is not whether the arbitrator or arbitrators erred in interpreting the contract; it is not whether they clearly erred in interpreting the contract; it is not whether they grossly erred in interpreting the contract; it is whether they interpreted the contract. If they did, their interpretation is conclusive. By making a contract with an arbitration clause the parties agree to be bound by the arbitrators’ interpretation of the contract. A party can complain if the arbitrators don’t interpret the contract—that is, if they disregard the contract and implement their own notions of what is reasonable or fair. A party can complain if the arbitrators’ decision is infected by fraud or other corruption, or if it orders an illegal act. But a party will not be heard to complain merely because the arbitrators’ interpretation is a misinterpretation. Granted, the grosser the apparent misinterpretation, the likelier it is that the arbitrators weren’t interpreting the contract at all. But once the court is satisfied that they were interpreting the contract, judicial review is at an end, provided there is no fraud or corruption and the arbitrators haven’t ordered anyone to do an illegal act.

Hill v. Norfolk & Western Ry., 814 F.2d 1192, 1194-95 (7th Cir. 1987) (citations omitted) (Posner, J.); see, e.g., American Zurich Ins. Co. v. Sun Holdings, Inc., 103 F.4th 475, 477-78 (7th Cir. 2024) (Easterbrook, J.) (quoting Hill, 814 F.2d at 1194-95; citing Garvey, 532 U.S. at 509-10); Oxford, 569 U.S. at 571-73.

The same should be true of the clear mistake of historical fact or conceded nonfact standard. If there is to be vacatur of an award based on a mistake of historical fact or conceded nonfact it should be because the arbitrator did not do his or her job by at least arguably interpreting and applying the parties’ agreement or concessions concerning the facts.

In situations where the parties have agreed to, or conceded, facts that clearly evidence a clear mistake of historical fact, then that resolves both the problem associated with Courts purporting to review the arbitrators’ evidentiary findings as well as the problem associated with the vacatur standard of review not being grounded in the enforcement of the parties’ agreement. No judicial review of the sufficiency or existence of evidence supporting a fact finding is necessary or warranted when the issues are whether the parties agreed to that finding of fact and whether the arbitrators even arguably interpreted that agreement.

Those issues concern whether the arbitrators’ award is at least arguably an interpretation of the parties’ agreement, limiting judicial review to the scope approved by the U.S. Supreme Court: did the arbitrators at least arguably interpret the parties’ agreement? See Oxford, 569 U.S. at 566-70.

Stolt-Nielsen lends support to the argument that the standard should be limited to situations where the historical fact or nonfact was the subject of party agreement or concession. The U.S. Supreme Court there determined that the arbitrators exceeded their powers by not giving effect to the parties’ stipulation that their agreement was silent on the issue of class arbitration. Instead of determining what default rule governs consent to class arbitration when the parties’ agreement is silent on that score, the arbitrators ruled that extracontractual considerations of public policy required class arbitration. See Stolt-Nielsen, 559 U.S. at 671-72, 676-77. (See October 18, 2024, post.)

Third, the way the UpHealth Court construed and applied the standard effectively allows the court, applying a de novo standard of review, to determine whether the facts establishing the mistake were unambiguous and undisputed. That is troublesome for essentially the same reasons: it invites judicial review of arbitral fact finding rather than limited judicial review of whether the parties agreed or conceded the existence of facts contrary to those found by the arbitrator and, if so, whether the arbitrator at least arguably did his or her job by interpreting and applying that agreement or concession.

Two Proposals for Aligning the Mistake of Historical Fact or Conceded Nonfact Standard with the FAA

There are at least two alternative ways that the historical fact/conceded nonfact standard can be modified so that it can be applied in a way that at least arguably comports with the FAA. The first of these could not have been applied to the UpHealth facts, while the second of these could have been applied to those facts, but its proper application to those facts would, we think, result in a different outcome in UpHealth: denial of Damodaran’s motion to vacate. Of the two, we think the first is more closely aligned with the FAA than the second.

Proposal 1: The Facts Showing the Mistake Must be Agreed or Conceded

The first proposal fully addresses each of the weaknesses inherent in UpHealth’s interpretation and application. It would authorize vacatur for clear mistake of fact or conceded nonfact only where: (a) the parties clearly and unmistakably agree to the existence or nonexistence of a material fact, whether by stipulation or otherwise; (b) the arbitrator makes an award that clearly and unmistakably contravenes, or is otherwise inconsistent with, that agreement; and (c) the arbitrator does not even arguably interpret or apply the parties’ agreement about the existence or nonexistence of the material fact.

This proposed standard removes the Court entirely from evaluating, even in a very deferential fashion, the basis for the arbitral fact finding at issue. It requires the court to determine, by clear and unmistakable evidence, that: (a) the parties have reached an agreement or concession about the existence or nonexistence of the fact claimed to be the subject of the arbitrator’s alleged, clear mistake, and (b) the award contravenes, or is otherwise inconsistent with, that agreement or concession. It then, as a safeguard, and consistent with the manifest disregard of the agreement standard, requires the Court to determine whether the arbitrator even arguably interpreted or construed the agreement or concession concerning the existence or nonexistence of the fact the challenging party claims the arbitrator mistook.

The standard therefore confines judicial review to the parties’ agreement and accords the same deference to interpretation and application of the agreement that courts faithfully following the manifest disregard of the agreement standard accord to arguable interpretations or applications of the parties’ agreement by the arbitrator.

It would, however, have had no application to the facts in UpHealth. In UpHealth, the parties did not agree to or concede the existence or nonexistence of any of the facts the challenging party claimed were the subject of the arbitrator’s alleged mistake. Therefore, a Court employing such a standard would conclude that there was no basis to vacate the UpHealth award based on an alleged mistake of historical fact or conceded nonfact.

Proposal 2: No Barely Colorable Basis to Conclude that the Arbitrator’s Clearly Mistaken Finding of Fact was Based on Ambiguous or Undisputed Evidence

Proposal 2 is slightly more forgiving than Proposal 1 because it permits some extremely deferential review of the question whether the arbitrator’s fact finding was contradicted by, or otherwise inconsistent with, unambiguous or undisputed evidence to the contrary. While it could have been applied to the facts of UpHealth, the outcome it would yield would have been denial of the motion to vacate. (See October 21, 2024 post.)

Proposal 2 would allow vacatur where: (a) there is not even a barely colorable basis to conclude that the arbitrator’s material, mistaken finding of fact was based on ambiguous or undisputed evidence; and (b) in making his or her award the arbitrator strongly relied on the clearly mistaken finding of fact. It therefore limits any review of the arbitrator’s fact finding to that necessary to determine whether there was even a barely colorable basis to conclude that the arbitrator based the mistaken finding fact on ambiguous or undisputed evidence. If there is a barely colorable basis on which to conclude that the arbitrator’s mistaken fact finding was based on ambiguous or undisputed evidence, then vacatur is not permitted. Like UpHealth’s articulation of the standard, it requires that the arbitrator strongly relied on the clearly mistaken finding of fact.

Proper application of Proposal 2 to the UpHealth facts would, the author believes, lead to denial of Damodaran’s motion to vacate. Even though the UpHealth Court concluded that there was no basis in the record for the Damodaran finding, the author believes that there was a barely colorable basis on which to conclude that the Damodaran finding was supported by ambiguous or disputed evidence.

As explained in the October 21, 2024 post, the arbitrators did not pull their finding about Damodaran out of a proverbial hat. As the Court explained, the arbitrators “based [their] findings on ‘[a witness’s] evidence that at [the] EGM the minority shareholders voted against the Claimant’s designees being appointed to the Board.’” Slip op. at 21 (quoting Award at ¶¶ 360-61). That witness, the Court said, “did not identify which minority shareholders were present. . . and noted that the vote was limited to ‘Glocal Healthcare shareholders in attendance’” at the meeting. Slip op. at 21 (quoting Dkt. 48-1, Ex. 2 at ¶ 121).

The witness further testified that the minority shareholders voted against the appointment of the designees and the minority shareholders in attendance voted. Damodaran was a minority shareholder. There was therefore at least an arguable or barely colorable basis for the arbitrators to have drawn the inference that Damodaran was among the minority shareholders who were present and voted.

The Court’s conclusion that it could “only surmise from the record that the Tribunal assumed Damodaran was present with the rest of the Respondents at the EGM without ever receiving evidence that he was in fact present[,]” slip op. at 21, would have been warranted and meaningful if the FAA required arbitrators to have direct and conclusive evidence to support each fact finding in their awards. But arbitration awards are not subject to that kind of exacting, rigorous standard of review.

The Court did not believe the evidence was sufficient here because: (a) the witness did not identify the minority shareholders that were present; and (b) the evidence left open the possibility that not all minority shareholders were present and voted. While the evidence on Damodaran was arguably equivocal, the arbitrators nevertheless drew the inference that Damodaran was present.

Arbitrators limitless (or nearly limitless) leeway in terms of their fact-finding ability, and who knows what other sources of information the arbitrators gleaned from the hearings that led them to draw the inference that Damodaran was present and voted at the meeting against the appointment of the designees. Under the circumstances, there was at least a barely colorable or arguable basis for the arbitrators to draw the inference that Damodaran was present and voted at the meeting against the appointment.

The evidence was therefore ambiguous in the sense that there was at least a barely colorable basis for interpreting it more than one way, and one of those ways was to conclude Damodaran was present at the meeting and voted against the appointment of designees. The arbitrators’ Damodaran fact finding was therefore not a clear mistake of historical fact or a conceded nonfact.

Contacting the Author

If you have any questions about this article, arbitration, arbitration-law, arbitration-related litigation, then please contact Philip J. Loree Jr., at (516) 941-6094 or PJL1@LoreeLawFirm.com.

Philip J. Loree Jr. is principal of the Loree Law Firm, a New York attorney who focuses his practice on arbitration and associated litigation. A former BigLaw partner, he has nearly 35 years of experience representing a wide variety of corporate, other entity, and individual clients in matters arising under the Federal Arbitration Act, as well as in insurance- or reinsurance-related, and other, matters.

ATTORNEY ADVERTISING NOTICE: Prior results do not guarantee a similar outcome.

Photo Acknowledgment

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

 

Overturning Arbitration Awards based on Clear Mistakes of Historical Fact or Conceded Nonfacts: Some Further Thoughts (Part II)

October 21st, 2024 Application to Vacate, Arbitration Practice and Procedure, Authority of Arbitrators, Award Fails to Draw Essence from the Agreement, Award Vacated, Awards, Exceeding Powers, FAA Chapter 1, FAA Section 10, Federal Arbitration Act Section 10, Grounds for Vacatur, Judicial Review of Arbitration Awards, Manifest Disregard of the Agreement, Manifest Disregard of the Law, Petition to Vacate Award, Post-Award Federal Arbitration Act Litigation, Practice and Procedure, Section 10, United States Court of Appeals for the Seventh Circuit, United States District Court for the Northern District of Illinois, Vacate, Vacate Award | 10(a)(4), Vacate Award | Exceeding Powers, Vacate Award | Excess of Powers, Vacatur, Vacatur for Conceded Nonfact or Clear Mistake of Historical Fact No Comments » By Philip J. Loree Jr.

clear mistakeIn our October 7, 2024, post, “Can a Court under Section 10(a)(4) Overturn an Award Because it was Based on a Clear Mistake of Historical Fact or a Conceded Nonfact?”, we discussed UpHealth Holdings, Inc. v. Glocal Healthcare Sys. PVT, No. 24-cv-3778, slip op. (N.D. Ill. Sept. 24, 2024), which granted partial vacatur of an arbitration award because it was based on a “nonfact.”  We promised to take a closer, analytical look at UpHealth and its “clear mistake of historical fact or conceded nonfact” vacatur standard, and, in our October 18, 2024 post, Overturning Arbitration Awards Based on Clear Mistakes of Historical Fact or Conceded Nonfacts: Some Further Thoughts (Part I), identified five questions relating to UpHealth that help shed further light on the case and the arbitration award vacatur standard on which it relied:

  1. What is the difference, if any, between a “clear mistake of historical fact” and a “conceded nonfact?”
  2. What is or should be required to establish a “clear mistake of historical fact” or a “conceded nonfact?”
  3. Assuming Section 10(a)(4) authorizes courts to vacate awards based on a “clear mistake of historical fact” or a “conceded nonfact,” did the UpHealth district court err by holding that the award against Damodaran was based on a nonfact?
  4. Assuming that the district correctly applied the “conceded nonfact” standard, does it comport with the FAA?
  5. If there is a Seventh Circuit appeal of the UpHealth decision, is it likely the decision will be overturned on appeal, and if so, on what grounds?

That October 18, 2024 post went on to address questions 1 and 2. This Part II address the third question: “Assuming Section 10(a)(4) authorizes courts to vacate awards based on a “clear mistake of historical fact” or a “conceded nonfact,” did the UpHealth district court err by holding that the award against Damodaran was based on a nonfact?” The author thinks the answer is “yes.” One or more subsequent posts will answer questions 4 and 5.

Discussion

 

Assuming Section 10(a)(4) Authorizes Courts to Vacate Awards Based on a “Clear Mistake of Historical Fact” or a “Conceded Nonfact,” did the UpHealth District Court Err by Holding that the Award against Damodaran was Based on a Nonfact?

The UpHealth Court’s application of the “mistake of historical fact” or “conceded nonfact” standard raises serious questions about whether the Court substituted its judgment for that of the arbitrators. On balance, the author thinks it did for the reasons set forth below (which presume familiarity with our October 7, 2024, and our October 18, 2024, posts).

There are at least three flaws in the Court’s analysis: Continue Reading »

Overturning Arbitration Awards Based on Clear Mistakes of Historical Fact or Conceded Nonfacts: Some Further Thoughts (Part I)

October 18th, 2024 Application to Vacate, Arbitration Law, Arbitration Practice and Procedure, Award Fails to Draw Essence from the Agreement, Awards, Challenging Arbitration Awards, FAA Chapter 1, FAA Section 10, Federal Arbitration Act Section 10, Grounds for Vacatur, Imperfectly Executed Award or Powers, Judicial Review of Arbitration Awards, Post-Award Federal Arbitration Act Litigation, Practice and Procedure, Section 10, United States Court of Appeals for the Seventh Circuit, United States District Court for the Northern District of Illinois, Vacate Award | 10(a)(4), Vacate Award | Exceeding Powers, Vacate Award | Excess of Powers, Vacatur, Vacatur for Conceded Nonfact or Clear Mistake of Historical Fact 1 Comment » By Philip J. Loree Jr.

Historical factIn our October 7, 2024, post, “Can a Court under Section 10(a)(4) Overturn an Award Because it was Based on a Clear Mistake of Historical Fact or a Conceded Nonfact?”, we promised  some further analysis of UpHealth Holdings, Inc. v. Glocal Healthcare Sys. PVT, No. 24-cv-3778, slip op. (N.D. Ill. Sept. 24, 2024), the principal case discussed in that post, which held warranted  partial vacatur of an award because the award was based in part on a “nonfact.”  In this and at least one other post, let’s take a closer, analytical look at UpHealth’s  “clear mistake of historical fact or conceded nonfact” vacatur standard, consider whether UpHealth comports with the Federal Arbitration Act (“FAA”), and take an informed guess about how the U.S. Court of Appeals for the Seventh Circuit might decide the case if there is an appeal.

We’ll focus on the following questions and our answers will presume familiarity with the October 7, 2024, UpHealth post, here:

  1. What is the difference, if any, between a “clear mistake of historical fact” and a “conceded nonfact?”
  2. What is or should be required to establish a “clear mistake of historical fact” or a “conceded nonfact?”
  3. Assuming Section 10(a)(4) authorizes courts to vacate awards based on a “clear mistake of historical fact” or a “conceded nonfact,” did the UpHealth district court err by holding that the award against Damodaran was based on a nonfact?
  4. Assuming that the district correctly applied the “conceded nonfact” standard, does it comport with the FAA?
  5. If there is a Seventh Circuit appeal of the UpHealth decision, is it likely the decision will be overturned on appeal, and if so, on what grounds?

This Part I addresses questions 1 and 2. One or more subsequent posts will address questions 3 through 5.

Discussion

 

What is the Difference, if any, between a “Clear Mistake of Historical Fact” and a “Conceded Nonfact?”

 The standard adopted in UpHealth—which was derived from Electronics Corp. of Am. v. International Union of Elec., Radio and Mach. Workers, 492 F.2d 1255 (1st Cir. 1974); National Post Office, Mailhandlers, Watchmen, Messengers & Grp. Leaders Div, Laborers Int’l Union of N. Am., AFL-CIO v. United States Postal Serv., 751 F.2d 834, 843 (6th Cir. 1985) (Stewart, Associate Justice (ret.), sitting by designation), and Mollison-Turner v. Lynch Auto Grp., No. 01 6340, 2002 WL 1046704, at *3 (N.D. Ill. May 23, 2002)—authorizes vacatur of awards based on: (a) a “clear mistake of historical fact” or (b) a “conceded nonfact.” Both of these bases for vacating an award may, at least to some, suggest a fairly broad authorization to vacate awards that is not already encompassed within the manifest disregard of the agreement (a/k/a “essence of the agreement”) standard. That is especially so of vacatur based on a “clear mistake of historical fact.” Continue Reading »

Can a Court under Section 10(a)(4) Overturn an Award Because it was Based on a Clear Mistake of Historical Fact or a Conceded Nonfact? 

October 7th, 2024 Application to Confirm, Application to Vacate, Arbitration Law, Arbitration Practice and Procedure, Award Fails to Draw Essence from the Agreement, Award Irrational, Award Vacated, Awards, Exceeding Powers, FAA Chapter 1, FAA Section 10, Federal Arbitration Act Section 10, Grounds for Vacatur, Judicial Review of Arbitration Awards, Labor Arbitration, LMRA Section 301, Petition to Vacate Award, Practice and Procedure, Section 10, United States District Court for the Northern District of Illinois, Vacate, Vacate Award | 10(a)(4), Vacate Award | Exceeding Powers, Vacate Award | Excess of Powers, Vacate Award | Public Policy, Vacatur, Vacatur for Conceded Nonfact or Clear Mistake of Historical Fact 3 Comments » By Philip J. Loree Jr.

nonfact | clear historical factCan a court vacate an award because it was based on a clear mistake of historical fact or on a conceded nonfact? Some might consider asking that question to be akin to using fighting words, but it is one that the U.S. Court of Appeals for the Seventh Circuit may ultimately answer if an appeal of the UPHealth Holdings, Inc. v. Glocal Healthcare Sys. PVT, No. 24-cv-3778, slip op. (N.D. Ill. Sept. 24, 2024) is taken.

In vacating in part the award in that case the UpHealth district court took a rather bold step, albeit one that has support in two circuit court labor arbitration cases (decided in 1974 and 1985), Electronics Corp. of Am. v. International Union of Elec., Radio and Mach. Workers, 492 F.2d 1255 (1st Cir. 1974); National Post Office, Mailhandlers, Watchmen, Messengers & Grp. Leaders Div, Laborers Int’l Union of N. Am., AFL-CIO v. United States Postal Serv., 751 F.2d 834, 843 (6th Cir. 1985) (Stewart, Associate Justice (ret.), sitting by designation), and at least one district court case, decided under the Federal Arbitration Act (the “FAA”) in 2002, Mollison-Turner v. Lynch Auto Grp., No. 01 6340, 2002 WL 1046704, at *3 (N.D. Ill. May 23, 2002). It vacated in part an award because the Court determined the arbitrators strongly relied on a conceded nonfact. Whether UpHealth will withstand appellate review is unclear at this juncture, but at least for the time being, it provides award challengers with some additional support for vacating a very narrow class of questionable but rare awards that feature the kind of unusual circumstances present in UpHealth, Electronics Corp., National Post Office, and Mollison-Turner. Each of these cases presented a situation where an award was based on a clear mistake of historical fact, a conceded nonfact, or both.

This post reviews what transpired in UpHealth. In one or more later posts we shall subject the Court’s decision to analytical scrutiny and consider whether, and if so, to what extent, the notion that an award can be vacated based on a mistake of historical fact or a conceded nonfact will likely gain traction in future cases. We may also consider whether, and if so, to what extent, vacatur on that ground comports with Federal Arbitration Act (“FAA”) principles, and discuss in more detail Electronics Corp., National Post Office, and Mollison-Turner. 

Legal Background: Outcome Review of Arbitration Awards

Manifest Disregard of the Agreement and Manifest Disregard of the Law

Under the Federal Arbitration Act (“FAA”), and in labor arbitration cases, courts can vacate Continue Reading »

Clause Conflicts: Supreme Court, New York County Finds Arbitration and Jurisdiction/Venue Clauses do not Conflict

September 30th, 2024 American Arbitration Association, Applicability of Federal Arbitration Act, Application to Stay Arbitration, Arbitrability, Arbitrability | Clear and Unmistakable Rule, Arbitrability | Existence of Arbitration Agreement, Arbitration Agreements, Arbitration Law, Arbitration Practice and Procedure, Arbitration Provider Rules, Arbitration Providers, Authority of Arbitrators, Clear and Unmistakable Rule, Conflict between Arbitration Clause and Another Clause, Drafting Arbitration Agreements, FAA Chapter 1, Federal Arbitration Act Enforcement Litigation Procedure, Formation of Arbitration Agreement, Gateway Disputes, Gateway Questions, Jurisdiction Clause, New York County, New York State Courts, State Courts, Stay of Arbitration, Venue No Comments » By Philip J. Loree Jr.

clauseWhat happens if a contract containing a broad arbitration clause also contains a clause that provides for federal or state court personal jurisdiction and venue over claims that would also fall within the scope of the arbitration clause? If you’ve ever worked on an insurance or reinsurance case in which the policy or contract contained both an arbitration agreement and a service of suit clause, then you’re probably familiar with how courts typically deal with apparent conflicts of that sort.

A service of suit clause—commonly found in, among others, London Market insurance and reinsurance policies and contracts—is a consent to personal jurisdiction provision that provides for personal jurisdiction in a court of competent subject-matter jurisdiction selected by the plaintiff or petitioner. See, e.g., Brooke Group Ltd. v. JCH Syndicate 488, 87 N.Y.2d 530, 534 (1996). It might provide, for example: “‘in the event of the failure of the Underwriters hereon to pay any amount claimed to be due’ the underwriters will, ‘at the request of the Insured. . . submit to the jurisdiction of a Court of competent jurisdiction within the United States.’” JCH Syndicate 488, 87 N.Y.2d at 534 (quoting service-of-suit clause).

At least at first glance, service of suit clauses appear to conflict with the kind of broad arbitration agreements typically found in reinsurance treaties and many London Market policies written for the U.S. excess and surplus lines market. Submitting to the jurisdiction of a court of competent jurisdiction in the event of a party’s failure to pay any amount claimed to be due under a contract seems antithetical to submitting the same failure to pay claim to arbitration.

Contentions of this sort have—not surprisingly—been made, but the Courts usually resolve them by harmonizing the service-of-suit clause with the arbitration clause, finding that the service-of-suit clause complements the arbitration clause by facilitating arbitration enforcement litigation. See, e.g., Pine Top Receivables of Illinois, LLC v. Transfercom, Ltd., 836 F.3d 784, 787 (7th Cir. 2016) (“Read as a whole, the reinsurance agreement[’s service of suit clause] requires Transfercom to submit to the jurisdiction of any court of competent jurisdiction chosen by PTRIL, whether it be to determine the arbitrable nature of the dispute, to confirm an arbitration award, to compel arbitration, or to resolve on the merits, a claim not subject to arbitration—including PTRIL’s breach of contract claim”); The Pointe on Westshore LLC v. Certain Underwriters at Lloyd’s of London, 670 F. Supp. 3d 1342, 1349-53 (M.D. Fla. 2023) (citing numerous cases).

As today’s case—Kennelly v. Myron & Selina Siegel Family Ltd. P’ship LP, No. 654950/2023, 2024 N.Y. Slip Op. 33278 (Sup. Ct. N.Y. Co. Sept. 17, 2024)—aptly demonstrates, apparent conflicts between arbitration agreements and venue or jurisdiction provisions in other types of contracts are addressed in a similar manner. They are resolved according to state law contract interpretation principles, and if the contract provisions can be harmonized, then the interpretation that gives effect to both provisions must prevail.

Clause Conflicts: Background

The interpretation issue in Kennelly arose out of an operating agreement (the “Operating Agreement”) for a limited liability company (the “LLC”). Two members and a manager (the “Arbitration Petitioners”) demanded arbitration against another member and another manager (the “Arbitration Respondents”), alleging that the LLC “and. . . [the Arbitration Respondent manager] failed to pay [those Arbitration Petitioners] all of the monies owed to [them] under the Operating Agreement, including the proper distributive share of [the LLC’s] net profits, and failed to properly manage and operate the venture’s property.” 2024 N.Y. Slip Op. at * 3. The Arbitration Petitioners sought between $1 million and 10 million dollars in damages, as well as interest, legal fees and expenses. Id.

The Operating Agreement (at Section 12.13) contained an arbitration agreement, which provided, in pertinent part:

Each Member agrees that the arbitration procedures set forth below shall be the sole and exclusive method for resolving and remedying claims for money damages arising out of a breach of this agreement (the ‘Disputes’); provided that nothing in this Section 12.13 shall prohibit a party hereto from instituting litigation to enforce any Final Determination (as defined below). The Members hereby acknowledge and agree that except as otherwise provided in this Section 12.13 or in the Commercial Arbitration Rules (the ‘Rules’) promulgated by the American Arbitration Association as in effect from time to time, the arbitration procedures and any Final Determination hereunder shall be governed by, and shall be enforced pursuant to the United States Arbitration Act, 9 U.S.C. § 1, et seq. . . .

(b) . . . . The arbitration shall be conducted in New York, NY, under the Rules as in effect from time to time. The arbitrator shall conduct the arbitration so that a final result, determination, finding, judgment and/or award (the “Final Determination”) is made or rendered as soon as practicable.

(c) Any applicable Member may enforce any Final Determination in any state or federal court of competent jurisdiction. For the purposes of any action or proceeding instituted with respect to any Final Determination, each party hereto hereby irrevocably submits to the jurisdiction of such courts, irrevocably consents to the service of process by registered mail or personal service and hereby irrevocably waives, to the fullest extent permitted by law, any objection which it my have or hereafter have as to personal jurisdiction, the laying of the venue of any such action or proceeding bought in any such court and any claim that any such action or proceeding brought in any court has been brought in an inconvenient forum.

2024 N.Y. Slip Op. 33278 at *4 (quoting Operating Agreement, § 12.13).

Section 12.14 of the Operating Agreement, “Venue,” stated:

Any suit, action or proceeding seeking to enforce any provision of, or based on any matter arising out of or in connection with this Agreement or the transactions contemplated hereby or thereby may be brought in any state or federal court in The City of New York, Borough of Manhattan, and each Member hereby consents to the exclusive jurisdiction of any court in the State of New York (and of the appropriate appellate courts therefrom) in any suit, action or proceeding and irrevocably waives, to the fullest extent permitted by law, any objections which he, she or it may now or hereafter have to the laying of the venue of any such suit, action or proceeding in any such court or that any such suit, action or proceeding which is brought in any such court has been brought in an inconvenient forum. Each Member hereby waives the right to commence an action, suit or proceeding seeking to enforce any provision of, or based on any matter arising out of or in connection with this Agreement or the transactions contemplated hereby or thereby in any court outside of The City of New York, Borough of Manhattan.

2024 N.Y. Slip Op. 33278 at *4 (quoting Operating Agreement, § 12.14).

The Arbitration Respondent brought a special proceeding in Supreme Court, New York County (the “special proceeding”), which sought, among other things,  to stay the arbitration on the ground that the Arbitration Petitioner’s  claims were not arbitrable. According to the Arbitration-Respondent (petitioner in the special proceeding), “the Operating Agreement’s separate venue provision, Section 12.14, conflicts with the arbitration provision and, as such, there was no meeting of the minds. . . .” N.Y. Slip Op. 33278 at *7. The Court rejected this argument. N.Y. Slip Op. 33278 at *7 & 8.

Clause Conflicts: Discussion

At the outset the Court noted that the parties agreed that the Federal Arbitration Act (“FAA”) applied, and that where, as here, the existence of an arbitration agreement is at issue, the court decides the question. N.Y. Slip Op. 33278 at *6-7 (citations omitted). It pointed out that there is no dispute that the parties entered into the Operating Agreement and that the Agreement is binding. In the arbitration provision,  Section 12.13, the parties unambiguously agreed that arbitration pursuant to the American Arbitration Association (“AAA”)’s Commercial Arbitration Rules was the “‘sole and exclusive method for resolving and remedying claims for money damages arising out of a breach’ of the Operating Agreement.” N.Y. Slip Op. 33278 at *7.

The Court explained that the alleged conflict between Section 12.13 and Section 12.14 was false. Under New York contract interpretation rules, courts must avoid interpretations that would render contractual provisions without meaning, and if reasonably possible, allegedly conflicting provisions should be harmonized, giving both force and effect. N.Y. Slip Op. 33278 at *7 (citations omitted).

The Court cited five cases where New York courts had harmonized similar apparent conflicts between arbitration clauses and jurisdiction-related clauses, including one involving a clause providing for “exclusive jurisdiction” in New York State courts. N.Y. Slip Op. 33278 at *7.  Three of these were decided by the Appellate Division, First Department, and two by the Supreme Court, New York County. See N.Y. Slip Op. 33278 at *7 (citing cases).

The Court had little difficulty harmonizing the arbitration (Section 12.13) and jurisdiction and venue clause (Section 12.14). The arbitration clause applied only to claims for money damages. That arbitration clause further provided that “the arbitration mandate [did] not ‘prohibit a party hereto from instituting litigation to enforce  any’ final arbitration determination.” N.Y. Slip Op. 33278 at *8 (quoting Section 12.13). The jurisdiction and venue clause said that “any ‘suit, action, or proceeding’ seeking to enforce any provision of the Operating Agreement, or any matter arising out of the agreement, ‘may be brought in any state or federal court’ located in new York County and that the parties consent to exclusive jurisdiction in any such court.” N.Y. Slip Op. 33278 at *8 (quoting Section 12.14).

From that, in turn, the Court drew three conclusions, which collectively demonstrated that the clauses were in harmony:

  1. Because Section 12.13 required arbitration only of monetary relief claims, claims for “equitable or other relief —e.g., specific performance or to stay or compel arbitration—must be brought in a court, and Section 12.14 would apply to any such suit.” N.Y. Slip Op. 33278 at *8 (citation omitted; emphasis in original).
  2. The arbitration clause (Section 12.13) refers to suits brought to enforce arbitration awards and Section 12.14 governed jurisdiction and venue for those suits. N.Y. Slip Op. 33278 at *8.
  3. The ejusdem generis canon of contract construction indicates that the specific should prevail over the general, and here the arbitration clause is “a specific, mandatory clause” while the jurisdiction and venue provision is “a general clause. . . .” Id.  

The Court thus held that “the plain language of Sections 12.13 and 12.14 permits an interpretation that does not result in an irreconcilable conflict between the two provisions or in one provision being rendered meaningless.” N.Y. Slip Op. 33278 at *8.

Delegation of Arbitrability to the Arbitrator

There were two other issues before the Court, one of which we’ll briefly address. The Arbitration Respondent argued that the Arbitration Petitioner’s claims were all “derivative in nature and should be precluded on that ground as well.” N.Y. Slip Op. 33278 at *8. In response, the Arbitration Petitioner argued that whether the claims were derivative [i.e., would have to be brought on behalf of the LLC], and if so, whether they were subject to arbitration, presented questions of arbitrability—questions the parties had delegated to the arbitrator by incorporating the AAA Commercial Rules into their contract. The Arbitration Respondent also apparently made arguments about “lack of proper service or notice,” but the Court’s opinion does not provide details on those claims.

The Arbitration Petitioner argued that these questions concerning the allegedly derivative nature of the claims, and proper service and notice, all had to be submitted to arbitration. The Court agreed with the Arbitration Petitioner.

The parties did not dispute that they had agreed to arbitrate according to the AAA Commercial Rules, which provided “that the ‘arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim.’” N.Y. Slip Op. 33278 at *9 (quotation and citation omitted).

Citing Second Circuit and New York state court authority, the Court explained that incorporation of the AAA Commercial Rules into an arbitration agreement delegates arbitrability questions to the arbitrator. See N.Y. Slip Op. 33278 at *9 (citing and quoting Contec Corp. v. Remote Solution, Co., 398 F.3d 205, 208 (2d Cir. 2005); other citations omitted); see, e.g., post here. The Court therefore held that the derivative-claim, notice, and service claims raised questions of arbitrability, which the Arbitration Respondent was required to submit to arbitration. N.Y. Slip Op. 33278 at *10.

Contacting the Author

If you have any questions about this article, arbitration, arbitration-law, arbitration-related litigation, then please contact Philip J. Loree Jr., at (516) 941-6094 or PJL1@LoreeLawFirm.com.

Philip J. Loree Jr. is principal of the Loree Law Firm, a New York attorney who focuses his practice on arbitration and associated litigation. A former BigLaw partner, he has nearly 35 years of experience representing a wide variety of corporate, other entity, and individual clients in matters arising under the Federal Arbitration Act, as well as in insurance or reinsurance-related and other matters.

ATTORNEY ADVERTISING NOTICE: Prior results do not guarantee a similar outcome.

 Photo Acknowledgment

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

 

Southern District of California Dismisses Petition to Vacate Arbitration Award for Lack of Subject Matter Jurisdiction

September 25th, 2024 Amount in Controversy, Application to Vacate, Arbitration Practice and Procedure, Awards, Challenging Arbitration Awards, FAA Chapter 1, FAA Section 10, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 10, Federal Courts, Federal Question, Federal Subject Matter Jurisdiction, Look Through, Petition to Vacate Award, Post-Award Federal Arbitration Act Litigation, Practice and Procedure, Section 10, United States Court of Appeals for the Ninth Circuit, United States District Court for the Southern District of California, Vacate, Vacatur No Comments » By Philip J. Loree Jr.

vacate subject-matter jurisdictionWe’ve repeatedly emphasized that—particularly since  Badgerow v. Walters, 596 U.S. 1 (2022)—subject-matter jurisdiction issues arising out of petitions to confirm, vacate, modify, or correct arbitration awards present traps for the unwary. (See, e.g., posts here, , herevacate subject matter jurisdiction, and here.) White v. U.S. Center For SafeSport, No. 22-cv-04468-JD, slip op. (C.D. Cal. Sept. 18, 2024), illustrates another subject- matter jurisdiction problem that arises, especially post-Badgerow: Is the amount-in-controversy requirement met when a petitioner seeks to vacate a “take nothing” award? The Court said the answer is “no,” at least in the circumstances of the case before it.

Petition to Vacate: Background

Respondent, United States Center for SafeSport (“SafeSport”) has been charged by Congress with “investigat[ing] and adjudicat[ing] allegations of sexual abuse and misconduct within U.S. Olympic and Paralympic organizations. Slip op. at 1 (citing 36 U.S.C. § 220541(a)). SafeSport investigated horse training and riding instructor Charles White (“White”) for allegedly engaging, over a period of three decades, in sexual misconduct against minors and adult females who participated in equestrian sports. Concluding those allegations had merit, SafeSport banned for life White from participating in in Olympic and Paralympic activities.   Slip op. at 1.

SafeSport’s rules provided White with an option to submit to arbitration the question whether the lifetime ban was warranted. White pursued that option but the arbitrator made an award upholding the ban. Slip op. at 1-2.

White petitioned the District Court for the Southern District of California to vacate the award under Section 10 of the Federal Arbitration Act (“FAA”). He alleged diversity jurisdiction under 28 U.S.C. § 1332(a), which required him to show not only diversity of citizenship but also that the amount-in-controversy exceeded $75,000, exclusive of interests and costs. 28 U.S.C. § 1332(a).

The petition sought to: (a) vacate the award, which awarded neither him nor anyone else any monetary relief, and simply upheld the lifetime ban; or (b) remand the award for reconsideration. The petition was bereft of any allegations or evidence demonstrating that the amount-in-controversy requirement was met. Slip op. at 2 (citing 28 U.S.C. § 1332(a)).

The Court ordered White to show cause why the petition should not be dismissed on subject matter jurisdiction grounds. Initially, White submitted to the Court a declaration stating “he had lost more than $75,000 in income as a hay dealer and horse stable operator ‘as a direct result’ of the arbitration decision.” Slip op. at 2 (quoting Dkt. No. 44 ¶ 4). The Court dismissed the case because White did not amend his petition to make those allegations but granted leave for White “to ‘articulate the basis for his claim that the amount-in-controversy requirement is satisfied for purposes of diversity jurisdiction,’ among other possible amendments.” Slip op. at 2 (quoting Dkt. No. 47).

White’s amended petition “include[d] the hay dealer and stable operator losses mentioned in his declaration[,]” and “contend[ed] that the losses were ‘a direct result of [the arbitrator’s] decision, which upheld the sanction of lifetime ineligibility to participate in the sport.’” Slip op. at 2 (quoting Dkt. No. 48 ¶ 10).

Discussion: No Subject Matter Jurisdiction Over Petition to Vacate

Focusing on the allegation that the losses directly resulted from the arbitrator “upheld[ing]” the ban, the Court found White’s amended subject-matter jurisdiction allegations to be flawed. “Vacating the arbitration decision or remanding for new arbitration proceedings,” said the Court, “which is the sole relief White seeks in the amended petition, might start the arbitration process anew, but it would not overrule or otherwise reverse the ban imposed by SafeSport.” Slip op. at 2 (record citation omitted).

“The SafeSport ban[,]” explained the Court, “remains in full effect unless an arbitrator were to decide otherwise, which has not happened.” Slip op. at 2. Even if the Court vacated the award, that “would not restore to White the income he says he lost in his hay and stables businesses.” Slip op. at 2. White would not recover any of its losses because, even in the event of vacatur, the lifetime ban would remain effective. Slip op. at 3.

The Court explained that where, as here, an action seeks “nonmonetary relief, ‘the amount in controversy is measured by the value of the object of the litigation.’” Slip op. at 3 (quoting Maine Community Health Options v. Albertsons Cos., Inc., 993 F.3d 720, 723 (9th Cir. 2021))(quotation and citation omitted).

The Court concluded that White had failed to satisfy his burden to show that the amount in controversy requirement had been met “because a remand for further arbitration proceedings would not terminate or reverse the SafeSport ban, and would not restore the lost income White alleges. . . .” Slip op. at 3 (citations omitted).

White argued that Badgerow’s requirement that “the determination of subject matter jurisdiction over petitions to vacate under the FAA looks only to ‘the face of the application itself[,]’” Badgerow, 596 U.S. at 9, was inapplicable. According to White, that requirement applied only when the basis for the petition was federal question, as it was in Badgerow. Slip op. at 3. But the Court said “there is no good reason why an FAA petition based on diversity jurisdiction should be treated any differently[]” from one falling under federal question jurisdiction, and White offered none. Slip op. at 3.

But the Court did not decide whether or not White’s argument might have merit “because, as discussed, White’s petition comes up short under established principles of diversity jurisdiction.” Slip op. at 3.

The Court also pointed out that White’s reliance on Theis Research, Inc. v. Brown & Bain, 400 F.3d 659 (9th Cir. 2005), was misplaced. Theis was a legal malpractice case in which the arbitrator awarded no monetary relief to either side. The client plaintiff filed in federal court a notice of motion to vacate, an application to vacate and a complaint seeking more than $200 million in damages. The defendant law firm moved to confirm the award. The Court denied the motion to vacate, granted the motion to confirm and entered summary judgment for the law firm on the complaint.

The Ninth Circuit determined that the district court had subject matter jurisdiction based on “‘the amount at stake in the underlying litigation.’” Slip op. at 4 (quoting 400 F.3d at 662-65.) “Because[,]” said the Court, the [Theis] plaintiff ‘sought to obtain by its district court complaint substantially what it had sought to obtain in the arbitration,’ the circuit court had no trouble concluding that the prayer for more than $200 million in damages established the required amount in controversy.” Slip op. at 4 (quoting 400 F.3d at 662-65).

The Court said the circumstances here were completely different in that there were no damages claims before the arbitrator, and that, in any event, “[i]t is also not clear that Theis survives Badgerow and its rejection of the ‘look-through’ approach to subject matter jurisdiction.” Slip op. at 4 (citing Badgerow, 596 U.S. at 9). We are not sure that is necessarily so because Theis involved a claim seeking more than $200 million damages, and the amount in controversy was not solely based (and did not have to be based) on the amount in controversy in the arbitration but on the $200 million-plus amount the complaint sought.

The Court found that granting further leave to amend was unwarranted and “dismissed [the case] on jurisdictional grounds without prejudice to a vacatur proceeding in state court, as circumstances might permit.”  Slip op. at 4.

Contacting the Author

If you have any questions about this article, arbitration, arbitration-law, arbitration-related litigation, then please contact Philip J. Loree Jr., at (516) 941-6094 or PJL1@LoreeLawFirm.com.

Philip J. Loree Jr. is principal of the Loree Law Firm, a New York attorney who focuses his practice on arbitration and associated litigation. A former BigLaw partner, he has nearly 35 years of experience representing a wide variety of corporate, other entity, and individual clients in matters arising under the Federal Arbitration Act or state arbitration law, as well as in insurance or reinsurance-related and other matters.

ATTORNEY ADVERTISING NOTICE: Prior results do not guarantee a similar outcome.

 Photo Acknowledgment

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

 

Charles Bennett, Richard D. Faulkner, and Philip J. Loree Jr. Participate in Federalist Society Webinar Discussing SCOTUS’s 2023 Term Arbitration Decisions  

September 20th, 2024 and Podcasts, Arbitration Law, Arbitration Practice and Procedure, Charles Bennett, CPR Video Interviews, Events, FAA Chapter 1, Federal Arbitration Act Enforcement Litigation Procedure, Federal Courts, Federal Subject Matter Jurisdiction, International Institute for Conflict Prevention and Resolution (CPR), Loree and Faulkner Interviews, Practice and Procedure, Professor Angela Downes, Professor Downes, Richard D. Faulkner, Russ Bleemer, The Federalist Society, United States Supreme Court No Comments » By Philip J. Loree Jr.

Rick Faulkner, Chuck Bennett, and Phil Loree As readers may remember on May 29, 2024, our friend and colleague Russ Bleemer, Editor of Alternatives to the High Cost of Litigation, Newsletter of the International Institute for Conflict Prevention and Resolution (CPR) (“CPR Alternatives”), interviewed our friends and colleagues—Professor Angela Downes, University of North Texas-Dallas College of Law Professor of Practice and Assistant Director of Experiential Education; arbitrator, mediator, arbitration-law attorney,  former judge, and overall arbitration guru, Richard D. Faulkner (“Rick Faulkner”); and yours truly, Loree Law Firm principal, Philip J. Loree Jr.— about the three arbitration cases the United States Supreme Court (“SCOTUS”) heard and decided this 2023 Term: (a) Bissonnette v. LePage Bakeries Park St.LLC, 601 U.S. 246 (2024); (b) Smith v. Spizzirri, 601 U.S. 472 (2024); and (c) Coinbase, Inc. v. Suski, 602 U.S. ___ (2024). (See here and here.) That interview was one of several that we have given to CPR concerning arbitration law developments. (See, e.g.,  herehereand here.) All of them are posted on CPR’s YouTube channel, @CPRInstituteOnline.

On September 10, 2024, Rick Faulkner, whom regular readers should know well by now;  highly-skilled and successful trial lawyer (and former pro basketball player), Charles Bennett (“Chuck Bennett”); and the author, Philip J. Loree Jr., participated in a Federalist Society webinar entitled “Recent Supreme Court Decisions: Implications for the Business World.”  (See here.) The webinar was sponsored by the Federalist Society’s Litigation Practice Group, and hosted by Caroline Bryant, Associate Director, Practice Groups, The Federalist Society, who introduced the panel’s members and otherwise ensured that things ran smoothly.  Chuck Bennett’s, Rick Faulkner’s, and my own Federalist Society bios are here, here, and here.

As the Federalist Society aptly put it, “[t]he U.S. Supreme Court continues to shape arbitration law through a strict interpretation of the Federal Arbitration Act (FAA), with each term introducing new nuances.” (See here.) The webinar was designed to “explore Supreme Court decisions from the latest term and examine recent interpretations by federal appeals courts, focusing on their impact on arbitration practice.” (See here.)  It sought to “offer practical insights into the evolving landscape of arbitration law, updates for attorneys to ensure compliance with the latest legal developments, and strategies to optimize arbitration for clients currently using or considering arbitration.” (See here.)

Rick Faulkner, Chuck Bennett, and I discussed in detail the Bissonnette, Spizzirri, and Coinbase decisions, as well as “infinite arbitration clauses,” subject matter jurisdiction, and a recent highly publicized (but now voluntarily resolved) arbitration dispute concerning the Walt Disney Company. Chuck provided the unique perspective of a trial lawyer thoroughly versed in arbitration matters.

You can view the webinar here. That link also allows you to download it, or listen to it on Apple, Google, Spotify, or Amazon podcast platforms.

Chuck, Rick Faulkner, and I express our sincere gratitude to Caroline, the Federalist Society’s Litigation Group, and the Federalist Society itself, for sponsoring the program and giving us an opportunity to share with others some of our thoughts on arbitration-law matters, including the arbitration-law cases SCOTUS decided this year.

Please note that, as set forth in its website, “the Federalist Society takes no position on particular legal or public policy issues; all expressions of opinion are those of the speaker.” (See here.)

Contacting the Author

If you have any questions about this article, arbitration, arbitration-law, arbitration-related litigation, then please contact Philip J. Loree Jr., at (516) 941-6094 or PJL1@LoreeLawFirm.com.

Philip J. Loree Jr. is principal of the Loree Law Firm, a New York attorney who focuses his practice on arbitration and associated litigation. A former BigLaw partner, he has nearly 35 years of experience representing a wide variety of corporate, other entity, and individual clients in matters arising under the Federal Arbitration Act, as well as in insurance or reinsurance-related and other matters.

ATTORNEY ADVERTISING NOTICE: Prior results do not guarantee a similar outcome.

 Photo Acknowledgment

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

 

 

Ineffective Objections and Untimely Filings Lead to FAA Forfeiture: Sivanesan v. YBF, LLC, ___ A.D. 3d ___, 2024 N.Y. Slip Op. 4327 (2d Dep’t 2024)

September 4th, 2024 Applicability of Federal Arbitration Act, Application to Confirm, Application to Vacate, Arbitrability, Arbitrability - Nonsignatories, Arbitrability | Clear and Unmistakable Rule, Arbitrability | Existence of Arbitration Agreement, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Law, Arbitration Practice and Procedure, Authority of Arbitrators, Award Confirmed, Challenging Arbitration Awards, Clear and Unmistakable Rule, Confirm Award | Exceeding Powers, Confirmation of Awards, Delegation Agreements, Enforcing Arbitration Agreements, Existence of Arbitration Agreement, FAA Chapter 1, FAA Section 10, FAA Section 11, FAA Section 9, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 10, Federal Arbitration Act Section 11, Federal Arbitration Act Section 9, First Department, First Options Reverse Presumption of Arbitrability, First Principle - Consent not Coercion, Formation of Arbitration Agreement, Grounds for Vacatur, Modify or Correct Award, New York Arbitration Law (CPLR Article 75), Petition or Application to Confirm Award, Petition to Vacate Award, Post-Award Federal Arbitration Act Litigation, Practice and Procedure, Procedural Arbitrability, Questions of Arbitrability, Rights and Obligations of Nonsignatories, Second Department, Section 10, Section 11, Section 9, Service of Process, State Arbitration Law, Time Limit for Vacating, Modifying, or Correcting Award, Vacate Award | 10(a)(4), Vacate Award | Arbitrability, Vacate Award | Excess of Powers, Vacate Award | Existence of Arbitration Agreement Comments Off on Ineffective Objections and Untimely Filings Lead to FAA Forfeiture: Sivanesan v. YBF, LLC, ___ A.D. 3d ___, 2024 N.Y. Slip Op. 4327 (2d Dep’t 2024) By Philip J. Loree Jr.

Objections Must be Timely and Effective in Federal Arbitration Act Litigation, Including Litigation Relating to Consulting AgreementsA good chunk of FAA practice and procedure —including FAA practice and procedure in state court—involves knowing when, how, and why to make timely and effective objections and filings in arbitration enforcement litigation.  Sivanesan v. YBF, LLC, ___ A.D. 3d ___, 2024 N.Y. Slip Op. 4327 (2d Dep’t 2024), which New York’s Appellate Division, Second Department, decided on August 28, 2024, illustrates this point well.

Appellants were not signatories to the arbitration agreement, did not agree to arbitrate any matters, and did not clearly and unmistakably agree to arbitrate questions of arbitrability. But the Court found that they participated in the arbitration without lodging adequate objections to the arbitrator’s jurisdiction and did not timely file in the confirmation litigation their petition to vacate the awards at issue. Accordingly, the Appellants were—by their participation in the arbitration without effective objections to the arbitrator’s jurisdiction—deemed to have impliedly consented to arbitrate all issues before the arbitrator, including whether they were bound by the contract and arbitration agreement as successors-in-interest. Not a happy place to be.

Background

The transactions pertinent to Sivanesan began in 2008 when YBF, LLC (“YBF”) sold to Cosmetics Specialties, East LLC (“CSE”) an exclusive license to Continue Reading »