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Attorney Fees: Seventh Circuit to Consider Whether Exceeding Powers Challenge to Arbitrators’ Attorney’s Fees Award Warrants FRAP 38 Sanctions

June 19th, 2024 Appellate Practice, Application to Vacate, Arbitration Law, Arbitration Practice and Procedure, Attorney Fee Shifting, Attorney Fees and Sanctions, Authority of Arbitrators, Awards, Bad Faith, Challenging Arbitration Awards, Confirmation of Awards, Exceeding Powers, FAA Chapter 1, FAA Section 10, FAA Section 11, FAA Section 9, Federal Arbitration Act Section 10, Federal Arbitration Act Section 11, Federal Arbitration Act Section 9, Insurance Contracts, Judicial Review of Arbitration Awards, Petition or Application to Confirm Award, Petition to Vacate Award, Post-Award Federal Arbitration Act Litigation, Practice and Procedure, Retrospectively-Rated Premium Contracts, Section 10, Section 11, Section 9, Uncategorized, United States Court of Appeals for the Seventh Circuit, Vacate, Vacate Award | 10(a)(4), Vacate Award | Attorney Fees, Vacate Award | Attorney's Fees, Vacatur No Comments » By Philip J. Loree Jr.

Introduction

Attorney's Fees | Contract InterpretationMost challenges to arbitration awards—including attorney fees awards— fail because the standards of review are so demanding. The bar is exceedingly high by design. Otherwise—the reasoning goes—courts would “open[] the door to the full-bore legal and evidentiary appeals that can rende[r] informal arbitration merely a prelude to a more cumbersome and time-consuming judicial review process and bring arbitration theory to grief in post-arbitration process.” Hall St. Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576, 588 (2008) (citations and quotations omitted; some parenthetical material in original).

But the narrow margin for success is not a free pass for challengers to advance arguments that do not, in a court’s view, have a legitimate, good faith basis in the facts and the law, or in a reasonable argument for reversal or modification of the law.

A recent case in point is Circuit Judge Easterbrook’s decision in American Zurich Ins. Co. v. Sun Holdings, Inc., No. 23-3134, slip op. at 1 (7th Cir. June 3, 2024) (Easterbrook, J.). The award challenger claimed the arbitrators exceeded their power by imposing as a sanction an award of $175,000.00 in attorney fees because the contract allegedly barred such an attorney fees award. The problem was that the arbitrators at least arguably interpreted the language in question and concluded that it did not bar the award of attorney fees in question. Moreover,  the attorney fees  award comported with New York law and the American Arbitration Association Commercial Rules, both of which the parties made part of their agreement.

The Seventh Circuit has signaled that it believes there was no good faith basis for the challenge and that the challenger has offered none, apart from its insistence that its interpretation was the only one even barely plausible. The challenger appears to have further undermined its litigation position by engaging in what the Seventh Circuit believes was recalcitrant behavior in the arbitration proceedings, and, according to the Court, not acknowledging the existence of controlling Seventh Circuit and U.S. Supreme Court authority controverting its position. The challenger compounded that by asserting—contrary to FAA Sections 10 and 11— additional award challenges that the Court concluded were simply attempts to second guess various determinations made by the arbitrators.

That this strategy backfired should come as no surprise. It resulted in the Court issuing an order to show cause providing the challenger 14 days “to show cause why sanctions, including but not limited to an award of attorneys’ fees, should not be imposed for this frivolous appeal.” Zurich, slip op. at 5 (citing Fed. R. App. P. 38). At the time of this writing no decision has been made by the Court concerning whether it will, in fact, impose sanctions.

Background: The Award of Attorney Fees

Petitioner Sun Holdings, Inc. (“Sun” or the “Award Challenger”) is a Texas-based restaurant franchisor. It obtained from American Zurich Insurance Company (“Zurich or the “Award Defender”) a workers’ compensation (“WC”) insurance policy, which required Zurich to pay covered WC claims and Sun to reimburse Zurich for the first $250,000 of each covered claim. Zurich paid covered claims, but Sun did not reimburse Zurich for the first $250,000 of each claim, choosing instead to ignore Zurich’s bills without offering any explanation or justification for nonpayment.

The policy contained an arbitration clause (presumably a broad one), which provided for Illinois arbitration governed by New York law and the AAA Commercial Rules. Sun’s failure or refusal to reimburse Zurich for its share of  claim payments prompted Zurich to demand arbitration.

As, the Court put it, “[d]uring the arbitration, Sun offered one feeble excuse after another; as soon as each had been dispatched, Sun presented a new one.” Slip op. at 2. The arbitration panel, the Court explained, “deemed this whac-a-mole approach to be a waste of everyone’s time.” Slip op. at 2.

The arbitrators therefore made an award requiring Sun to pay the amounts Zurich demanded—i.e., roughly $1.1 million plus prejudgment interest at New York’s statutory, 9% rate—plus nearly $175,000 in “attorneys’ fees as a sanction for defending frivolously.” Slip op. at 2; see N.Y. CPLR §§ 5001, 5002, 5004(a).

When, according to the Court, “true to form,” Sun did not pay the award, Zurich moved to confirm it in the District Court for the Northern District of Illinois. Sun sought to vacate the award on the ground the arbitrators exceeded their powers by awarding the attorneys’ fees.

Sun invoked two contract provisions. The first said: “Each party shall pay its own costs of counsel and witnesses.” The second: “The arbitrators shall not limit, expand or modify the terms of this Agreement nor award damages in excess of compensatory damages under this Agreement.”

Sun argued that the attorney fee award violated both. The first because the fee award caused Sun to pay the costs of not only its own, but the opposing party’ counsel; and the second because the award was allegedly “in excess of compensatory damages under this Agreement,” that is, the award was allegedly “a form of punitive damages.” Slip op. at 2.

The Seventh Circuit Rejects Challenge to Attorney Fees Award 

 The Court rejected the argument that the attorney fee award was not compensatory, stating that it was “designed to put [Zurich] in the position it would have occupied had Sun refrained from frivolous tactics[,]” and the parties’ agreement “allow[ed] compensatory awards.” Slip op. at 2.

As to the argument that the fee award violated the first provision, which required the parties to bear their own attorney fees, the court explained that “the arbitrators found this to be a restatement of the American Rule on legal fees, under which each side pays its own lawyers.” That finding was decisive because “the American Rule is not understood to forbid sanctions for frivolous litigation.” Slip op. at 3.

That was so, explained the Court, under both New York law and under Rule 49(d)(ii) of the AAA Commercial Rules. Slip op. at 3. Though not quoted by the Court, Rule 49(d)(ii) provides that an award “may include:. . . (ii) an award of attorneys’ fees if all parties have requested such an award or it is authorized by law or the parties’ arbitration agreement.” American Arbitration Association, AAA Commercial Arbitration Rules and Mediation Procedures R. 49(d)(ii) (eff. Sept. 1, 2022). The Court interpreted that rule to “allow awards of legal fees as sanctions even when the American Rule governs.” Slip op. at 3. For its statement concerning New York law, the Court cited to ReliaStar Life Insurance Co. v. EMC National Life Co., 564 F.3d 81, 86-89 (2d Cir. 2009), a case discussed here and here.

Sun argued that the language of the agreement pertinent to fee shifting was “broader than the American Rule and prohibits all sanctions measured by the adversary’s legal expenses. . . .” Slip op. at 3.

The Court initially noted that “on this view the arbitrators would have had the authority to levy a sanction using some other yardstick.” Id. But more importantly, the Court explained that Sun’s argument misses the point.

“Perhaps[,]” observed the Court, Sun’s interpretation was correct, but “perhaps” was the operative term. See Slip op. at 3. “An arbitration clause[,]” said the Court, “delegates interpretive power to the arbitrators.” Slip op. at 3. The Court does not determine whether the arbitrators interpreted the contract “correctly; it is enough that they tried to apply the contract that the parties signed.” Slip op. at 3 (emphasis in original).

To illustrate, the Court quoted from Hill v. Norfolk & Western Ry., 814 F.2d 1192, 1194-95 (7th Cir. 1987) (Posner, J.), “an opinion that has been quoted and re-quoted in intervening years:”

As we have said too many times to want to repeat again, the 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 arbitrator’s 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 were not 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, 814 F.2d at 1194-95; see slip op. at 3-4.

The Court further explained that the U.S. Supreme Court in Garvey and Oxford “said the same thing.” Slip op. at 4 (citing Major League Baseball Players Association v. Garvey, 532 U.S. 504, 509-10 (2001); Oxford Health Plans, LLC v. Sutter, 569 U.S. 564, 571-73 (2013)).

The Court declared that it was “satisfied that the arbitrators interpreted this contract when they concluded that its reference to legal fees did no more than adopt the American Rule.” Slip op. at 4. “Whether[,]” said the Court, “the arbitrators were right or wrong is none of our business.” Slip op. at 4.

The Court then criticized Sun’s conduct of the litigation. “Instead of acknowledging Hill and similar decisions,” the Court explained, “Sun proceeds as if the only possible meaning of the contract is the one it espouses.” Slip op. at 4. It wanted the Court to “ignore the fact that the arbitrators took the language seriously and interpreted in a way different from the reading Sun prefers.” Slip op. at 4.

The Court also criticized Sun for requesting that the Court review the arbitrators finding that it engaged in “frivolous” conduct and asking it to rule that the arbitrators “overestimated the amount of excess fees that American Zurich was compelled to incur.” Slip op. at 4.

These were, said the Court, “unabashed requests to contradict the arbitrators’ findings, something the Federal Arbitration Act forbids.” Slip op. at 4-5 (citing and parenthetically discussing 9 U.S.C. §§ 9, 10, & 11, and noting “neither. . .  [Sections 10 or 11] allows a federal court to disagree with arbitrators’ findings of fact or legal conclusions.)

More Attorney Fees?

The Court Orders the Challenger to Show Cause why Sanctions Should not be Imposed

Stating that “Hill and many other decisions in this circuit hold that woebegone contests to arbitrators’ awards are sanctionable[,]” the Court made an order giving “Sun 14 days to show cause why sanctions, including, but not limited to an award of attorneys’ fees, should not be imposed for this frivolous appeal.” (Slip op. at 5 (citing Fed. R. App. P. 38).

Contacting the Author

If you have any questions about this article, arbitration, arbitration-law, or  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.

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