Failure to Follow Procedural Rules: Introduction
Under both the Federal Arbitration Act (the “FAA”) and Section 301 of the National Labor Relations Act (the “NLRA”), arbitrators exceed their powers by making awards that do not “draw [their] essence” from the parties’ agreement. See Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 568-69 (2013) (FAA); Stolt-Nielsen S.A. v. Animalfeeds Int’l Corp., 559 U.S. 662, 671-72 (2010) (FAA); Eastern Associated Coal v. United Mine Workers, 531 U.S. 57, 62 (2000) (NLRA). (See, e.g., here, here, here, and here.)
In a case arising under Section 301 of the NLRA, the U.S. Court of Appeals for the Fourth Circuit “determine[d] whether an arbitration award failed to draw its essence from the agreement when an arbitrator ignored the parties’ agreed upon procedural rules for conducting the arbitration.” Advantage Veterans Servs. of Walterboro, LLC v. United Steel, Paper & Forestry, Rubber, Mfg. Energy, Allied Indus. & Serv. Workers Int’l, Local 7898, No. 22-1268, slip op. at 2 (4th Cir. June 15, 2023). The Fourth Circuit said, “[u]nder the language of the agreement here, the answer is yes[,]” and— reversing the district court’s order—vacated the award. Slip op. at 2 & 12.
Advantage Veterans is a proverbial breath of fresh air for those who wish—by way of clear, unambiguous, and precise contract language—to circumscribe the authority of arbitrators by conditioning the enforceability of an award on compliance with certain clear procedural rules. That is not to say it authorizes vacatur of an award every time the arbitrator does not comply with a clear procedural rule set forth in (or incorporated by) an arbitration agreement. The doctrine of procedural arbitrability counsels deference to an arbitrator’s procedural decisions that even arguably represent the arbitrator’s interpretation of the contract, and disputes concerning arbitrator failure to comply with procedural provisions are frequently disposed of on that basis. See, e.g., BG Grp. PLC v. Republic of Argentina, 572 U.S. 25, 27-29, 33-36 (2014).
But at least where parties expressly condition enforceability of an award on compliance with a clear procedural rule, Advantage Veterans gives life to the parties’ clearly expressed intent that an arbitration to take place only as explicitly prescribed.
Background
The grievance in Advantage Veterans challenged an employee’s dismissal for alleged want of just cause. The arbitrator ruled in favor of the union and the discharged employee.
Article 14 of the CBA gave the employer the right to discipline and fire or demote an employee for just cause. Article 13 provided a grievance procedure, which included arbitration.
But Article 13 expressly limited the arbitrator’s authority, specifying in Section 4(e) “that ‘in all discipline cases, the arbitrator shall determine whether [the employer] had a reasonable basis for concluding that the employee engaged in the conduct for which he/she is being disciplined.’” Slip op. at 3 (quoting J.A. 36) (the “reasonable basis determination”).
The CBA conditioned an award’s legitimacy on the arbitrator making the reasonable basis determination. To that end Section Article 13, Section 4(d) said that “‘[t]he decision of the arbitrator shall be final and binding on the Union and [the employer] so long as it is in accord with [Article 13 § 4(e)].’” Slip op. at 3 (quoting J.A. 35). Section 4(e) “states that ‘[i]f the Arbitrator’s Award complies with and is not contrary to this Agreement and the limitations imposed by [Article 13 § 4], the Award shall be final and binding on the parties.’” Slip op. at 3 (quoting J.A. 36). Section 4(e) further “states that ‘[i]f a court of competent jurisdiction finds that the Arbitrator abused his or her discretion in any way or if the Award is contrary to this Agreement in any way, the Award shall be deemed not to draw its essence from the Agreement and shall be vacated.’” Slip op. at 3 (quoting J.A. 36).
The employer discharged employee for allegedly violating two policies—one prohibiting discrimination, harassment or bullying, and another making falsifying records or committing “‘other acts of dishonesty[]’” grounds for termination. Slip op. at 4 (quoting J.A. 50). The employer and union submitted the ensuing dispute to arbitration pursuant to the CBA.
The Award
The arbitrator concluded “that to resolve the dispute, she needed to decide (a) ‘[w]hether [the employee] was terminated pursuant to the just cause provision of the parties’ [CBA] and, if not, what shall be the remedy[;]’ and (2) whether there was ‘a breach of any provision of the [CBA] related to the advance notice requirements of Article 14[.]’” Slip op. at 4-5 (quoting J.A. 91).
The Arbitrator then made her award after a one-day evidentiary hearing. Interpreting Article 14’s “just cause” provision, she said “just cause” required “‘strong, convincing evidence’” of the employee’s alleged violation of the policies. She, in turn, determined that the employer failed to meet that heightened evidentiary burden, and accordingly ordered the employee be reinstated with back pay. In addition, the arbitrator “determined that [the company] violated the provision in Article 14. . . that required [the employer] to notify the Union prior to suspending or discharging an employee.” Slip op. at 5.
The employer sued under Section 301 of the LMRA to vacate the award, and the employer and union cross-moved for summary judgment. The union contended the arbitrator’s award was entitled to deference as an interpretation of the contract, and accordingly should be confirmed. The employer said that the arbitrator did not make the reasonable basis determination, and consequently the award did not “draw its essence from the CBA and must be vacated.” Slip op. at 5.
Granting summary judgment for the union, and denying summary judgment to the employer, the district court determined that the arbitrator made the reasonable basis determination as well as a just cause determination. The district court alternatively ruled that, even assuming the arbitrator did not make the reasonable basis determination, making such a determination “would not compel an opposite result.” Slip op. at 6. Accordingly, “[t]he district court explained that ‘it is not for the court to find that [the arbitrator’s] analysis constitutes the best or most accurate reading of the CBA; it is enough for purposes of this action to find that her analysis reflects a plausible reading of the CBA.’” Slip op. at 6 (quoting J.A. 1175).
The Fourth Circuit Reverses the District Court’s Decision Confirming the Award
Standard of Review
Turning to the question before it, the Court first discussed the limited and highly deferential standard of review applicable to labor arbitration awards. Slip op. at 6-7. Under that standard of review, said the Court, “[a] court must affirm the award so long as the arbitrator ‘is even arguably construing or applying the contract and acting within the scope of [her] authority . . . . [even if the] court is convinced [she] committed serious error.’” Slip op. at 7 (quoting Major League Baseball Players Ass’n v. Garvey, 532 U.S. 504, 509 (2001) (quotations omitted)).
That narrow standard of review, said the Court, “nonetheless requires us to ensure that an arbitrator acted consistent with the agreement’s contractually defined scope of authority.” Slip op. at 7. If an award “‘fails to to draw its essence’ from the agreement[,]’” said the Court, it is illegitimate and must be vacated. Slip op. at 7 (citation omitted). If an “award ‘reflects merely the arbitrator’s personal notions of right and wrong,’ or ‘the arbitratrator’s words manifest an infidelity’ to the agreement[,]” it does not draw its essence from the agreement. Slip op. at 7.
Questions the Court had to Resolve to Apply the Standard of Review
To ascertain whether the Award should be confirmed or vacated under the applicable standard of review it had to resolve two questions:
- “[D]id the arbitrator make the required reasonable basis determination?”
- “[I]f not, does our standard of review require us to vacate the award?”
Slip op. at 8.
Did the Arbitrator Make the Requisite Reasonable Basis Determination?
The Court explained that the arbitrator did not “explicitly” make the reasonable basis determination. The only references in the award to any reasonable basis determination were recitations of the CBA’s provisions and a summary of the employer’s position. “Besides that,” said the Court, “the only other hint that the arbitrator might have actually considered the requirement is the award’s description of information that [the employer] had when it terminated [the employee’s] employment.” Slip op. at 8. This description, included, for example, the award’s finding “that, prior to terminating [the employee’s] employment, the union’s administrator was briefed, reviewed all witness statements regarding the event leading to [the employee’s termination and interviewed the two parties directly involved in that incident.” Slip op. at 8. “[T]he award” also “recognizes [the employer’s] argument that the misconduct was ‘attested to by numerous other employees.’” Slip op. at 8.
The union argued that this opaque record was all that was required because arbitrators generally are not required to disclose the reasons for their decisions. That, the union argued, meant the Court should presume that the arbitrator made the required determination.
While the union was correct that arbitrators ordinarily are not required to reveal the basis for their awards, reviewing courts nevertheless must determine whether the award is “grounded in the CBA.” Slip op. at 9. And here the Court had to “satisfy itself that the arbitrator made the [reasonable basis] determination explicitly required by the CBA.” Slip op. at 9.
“Nothing in the award[,]” the Court explained, “indicates the arbitrator made that determination.” Slip op. at 9. Article 13 § 4(e) said the arbitrator must determine whether the employer “had” a reasonable basis for finding that the employee engaged in the conduct leading to her discharge. The Court found the use of the word “had” significant because it “signals a backwards-looking” analysis, that is, “it required the arbitrator to determine whether,” at the time of the discharge, the employer had a reasonable basis for the discharge. Slip op. at 9. The arbitrator never made such a determination. Id.
The arbitrator’s award demonstrated that, instead of engaging in the backwards-looking analysis described above—which focused on whether the arbitrator determined the employer had, at the time of discharge, a reasonable basis for the action taken—the arbitrator made her decision on just cause based on “the evidence presented at the time of the hearing.” Slip op. at 9. For example, the Court explained, the award said “‘[t]his is a case that must be decided upon the credibility of the only two witnesses to the critical events leading to [the employee’s] termination who appeared at the arbitration.’” Slip op. at 9 (quoting J.A. 120 (emphasis added by Court). That is obviously very different from the arbitrator determining whether at the time of the discharge the employer had a reasonable basis for firing the employee.
The award also “conclude[d] that, at the arbitration, [the employer] did not present strong, convincing evidence that [the employee] committed the misconduct for which she was discharged.” Slip op. at 9-10. That likewise shows that the arbitrator did not determine or purport to determine whether, at the time of the discharge, the employer had a reasonable basis for terminating the employee. See slip op. at 10.
Did the Arbitrator’s Failure to make the Reasonable Basis Determination Warrant Vacatur of the Award?
The union believed the answer should be “no,” but the Court disagreed.
The union argued that the Court could vacate the award only if (a) “it blatantly ignores the unambiguous language of the CBA and”; (b) application of “that unambiguous language. . . would compel a result opposite from that reached by the arbitrator.” Slip op. at 10 (citations omitted).
The union said that the CBA required only the making of the reasonable basis determination and that even if the arbitrator determines the employer had the requisite reasonable basis for the discharge, the arbitrator may nevertheless rule against the employer. For example, argued the union, “[t]he arbitrator could have. . . found that [the employer] had a reasonable basis for concluding that [the employee] engaged in the conduct for which she was disciplined but still found that [the employer] did not present sufficient evidence of misconduct to satisfy the just-cause standard at the arbitration hearing.” Slip op. at 10.
The union thus argued that a materiality requirement applied— the arbitrator might ignore the reasonable basis requirement, but that would matter only if a different result would have been compelled had the arbitrator made the reasonable basis determination. Because the arbitrator found that the employer did not present sufficient, clear evidence of misconduct, a different result would not have been compelled, the union argued, even had the arbitrator also found that the employer, at the time of the discharge, had a reasonable basis for discharging the employee.
The Court rejected this argument, which the union argued was supported by MCI Constructors, LLC v. Serv. Emps. Int’l Union, 846 F.3d 716, 859-62 (4th Cir. 2010). The Court explained that the contract language the arbitrator ignored in MCI Constructors “involved the substantive issues underlying the dispute[,]” and “did not provide the procedural rules the parties agreed had to be followed in the arbitration.” Slip op. at 11 (citation omitted).
Noting that “neither party has pointed us to a previous case in our circuit in which an arbitrator ran afoul of a clear procedural requirement laid out in the parties’ arbitration agreement[,]” the Court said the Ninth Circuit had “addressed that type of provision in Western Employers Insurance Co. v. Jeffries & Co. Inc., 958 F.2d 258 (9th Cir. 1992).” Slip op. at 11. “There[,]” explained the Court, “the . . . arbitration agreement required arbitrators to include a statement of findings of fact and conclusions of law with any arbitration award, and the award failed to include such a statement.” Slip op. at 11. The Ninth Circuit vacated the award “because arbitration is a creature of contract,” and the parties therefore “have a ‘right to arbitration according to the terms for which it contracted.’” Slip op. at 11.
The Fourth Circuit explained that the “deferential standard for determining whether an arbitrator erred substantively is rooted in the contractual nature of arbitration.” Slip op. at 12. When “the parties agree to resolve disputes by arbitration,” the Court “defer[s] to the determinations made in the process the parties agreed to.” Slip op. at 12.
But where the question is whether the arbitrator violated a clear procedural requirement set forth in the parties’ agreement—especially one that clearly limits arbitral power by, for example, expressly conditioning enforceability of the award on the arbitrators’ compliance with the procedural requirement—the analysis is different. Here the CBA “limit[ed] the arbitrator’s power[]” by: (a) “requir[ing] that the arbitrator make the reasonable basis determination[;]” and (b) “premis[ing] the legitimacy of any arbitration award on the arbitrator’s complying with that directive.” Slip op. at 12. The CBA, said the Court, “even provides that any award that is contrary to the CBA in any way—which includes that directive—‘shall be deemed not to draw its essence from the [CBA] and shall be vacated.’” Slip op. at 12 (quoting J.A. 36).
The Court pointed out that in light of this language “it would be paradoxical to use our highly deferential standard of review, which once again, is rooted in principles of contract, to look past the arbitrator’s failure to follow contractually agreed-upon procedural rules for the arbitration.” “We cannot[,]” the Court said, “ignore such clear and unambiguous procedural requirements.” Slip op at 12.
“Because[,]” concluded the Court, “the arbitration award failed to make the required reasonable basis determination, it does not ‘draw its essence’ from the CBA. And we must vacate any arbitration award that fails to draw its essence from the parties’ arbitration agreement.’” Slip op. at 12 (citation omitted).
Contacting the Author
If you have any questions about this article, arbitration, arbitration-law, arbitration-related litigation, or the services that the Loree Law Firm offers, then please contact the author, Philip J. Loree Jr., at (516) 941-6094 or PJL1@LoreeLawFirm.com.
Philip J. Loree Jr. has more than 30 years of experience handling matters arising under the Federal Arbitration Act and in representing a wide variety of clients in arbitration, litigation, and arbitration-related litigation. He is licensed to practice law in New York and before various federal district courts and circuit courts of appeals.
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Tags: Authority, Award Vacated, CBA, Clear and Unambiguous, collective bargaining agreement, economic justice, employee, employer, Essence from Agreement, Exceeding Powers, Fourth Circuit, industrial justice, Just Cause, Labor Arbitration, LMRA, LMRA Section 301, Manifest Disregard of Agreement, Procedural Arbitrability, Procedural Rule, Reasonable Basis, Section 10(a)(4), Standard of Review, Taft Hartley, U.S. Court of Appeals for the Fourth Circuit, union
