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Attorney Fees and Arbitrability Addressed by New York Appellate Court

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

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

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

Background: Attorney Fee and Arbitrability Challenges

Terms and Conditions

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

The Term Sheet and Engagement Letter

In 2016 the Host and Network agreed to a “Binding Term Sheet” (the “Term Sheet”), which concerned the production and distribution of a television show. The Term Sheet contained a choice-of-law provision under which it “shall be governed by the laws of the United States and the State of New York, without reference to conflict of law principles.” It also provided that disputes “shall be settled exclusively by confidential binding agreement in accordance with the Federal Arbitration Act” and “[r]ules of the American Arbitration Association (AAA) applicable to general commercial disputes.”

By separate letter (the “Engagement Letter”), the Host engaged an entity related to him, OHM, to provide services to the Host. The letter was signed by OHM’s principal, Melissa Howe, a business partner of the Host. It required OHM “to procure guests for the show, as well as hire third parties such as makeup artists and public relations firms.” 2019 N.Y. Slip Op. 5341, at *2.

The Engagement Letter did not contain an arbitration agreement. 2019 N.Y. Slip Op. 5341, at *2.

The Dispute

The Network cancelled the show after only two months’ airtime. 2019 N.Y. Slip Op. 5341 at *2.

The Network blamed the cancellation on alleged “poor perforance by [the Host].” 2019 N.Y. Slip Op. 5341, at *3. The Host said he performed his obligations “but that ‘extraodinary personnel problems, construction delays, and technical shortcomings in the . . . studio largely prevented content production.’” 2019 N.Y. Slip Op. 5341, at *3.

The Arbitration

The Network demanded arbitration against the Host, seeking damages for breach of contract. The Host and OHM, who was not a party to the Term Sheet, and against whom the Host did not demand arbitration, filed an answering statement, which included counterclaims made by both the Host and OHM. 2019 N.Y. Slip Op. 5341, at *3.

The counterclaims demanded attorney fees and so did the Network’s answer. That was so also of the amended counterclaims and their amended answers.

Prior to the commencement of the arbitration, the Network “objected to the arbitrator’s jurisdiction over OHM’s counterclaim.” 2019 N.Y. Slip Op. 5341, at *3.

The Awards

The arbitrator issued an interim award after holding a hearing and receiving posthearing briefs. The interim award concluded that the Network “failed to meet its contractual obligation to provide a fully functional studio, did not have the right to declare a breach, and was in breach of its obligations to [the Host] and OHM.” 2019 N.Y. Slip Op. at 5341, at *3. The arbitrator further concluded that “petitioners [the Host] and OHM had performed their obligations under the contract, and thus [the Host] was entitled to $1.8 million in damages, and OHM was entitled to $908,124 in damages and unreimbursed expenses.” 2019 N.Y. Slip Op. at 5341, at *3.

As respects attorney fees, explained that the Host and OHM “had requested fees in their counterclaim, [the Network] had requested fees in its answer to the counterclaim, and Rule 47(d) of AAA provides for attorneys’ fees where all parties request it, or where it is authorized by law or agreement.” 2019 N.Y. Slip Op. at 5341, at *3.

But instead of awarding attorney fees at that juncture, the arbitrator requested “that the parties ‘set forth their claims and positions regarding an award of counsel fees. If counsel fees are to be considered, a fee affidavit shall be submitted and argument may be requested.’” 2019 N.Y. Slip Op. at 5341, at *3.

The Network contended in its post-interim-award  briefing that the arbitrator should not award fees because the Network did not demand fees in its arbitration demands or briefs, and therefore “there was no ‘unmistakably clear’ intention to seek such fees.” 2019 N.Y. Slip Op. at 5341, at *3. But the Host said that the Term Sheet’s arbitration provision incorporated by reference the American Arbitration Association (“AAA”) rules, including AAA Rule 47(d), which meant that the parties’ mutual demands for fees constituted an agreement that fees could be awarded.  2019 N.Y. Slip Op. at 5341, at *3.

The arbitrator made a final award that addressed jurisdiction over non-party OHM, as well as attorney fees. The arbitrator acknowledged that the Engagement Letter, unlike the Term Sheet, did not contain an arbitration agreement. But the arbitrator said that the Network had raised the jurisdictional issue only twice (in its answer and posthearing reply), and that the Network “participated in defending against [the substance of]  OHM’s claim, by submitting exhibits and offering testimony to rebut. . . damages.” 2019 N.Y. Slip Op. at 5341, at *3.

The arbitrator concluded that the Network waived any objection to jurisdiction because it “did not seek a stay of arbitration as to OHM, and instead participated. . . .” in the arbitration on the merits. The arbitrator consequently awarded OHM $908,124 in breach of contract damages.

The arbitrator also rejected the Network’s arguments concerning the Host’s and OHM’s requests for attorney fees, finding that the Network itself had requested attorney fees in its answers to the counterclaims and in the AAA cover sheet. The arbitrator awarded $1,012,729 in attorney fees, the amount claimed, less a reduction for “overhead and other nonrecoverable costs.” 2019 N.Y. Slip Op. at 5341, at *3.

The Confirmation and Vacatur Proceedings: Attorney Fee and Arbitrability Challenges

OHM and the Host commenced a CPLR Article 75 special proceeding, which sought an order and judgment confirming the interim and final awards. 2019 N.Y. Slip Op. at 5341, at **3-4. The Network cross-moved to vacate those awards.

The trial court initially confirmed the awards, finding that under Matter of Warner Bros Records [PPX Enters.], 7 A.D.3d 330 (1st Dep’t 2014), the arbitrator had the authority to award attorney fees because “both parties had requested fees in their pleadings.” 2019 N.Y. Slip Op. at 5341, at *4.

But the Host’s and OHM’s victory was short lived, for on reargument the trial court reversed course, finding that, under Matter of Matza v. Oshman, Helfenstein & Matza, 33 A.D.3d 493, 494 (1st Dep’t 2006), “a boilerplate demand for [attorney] fees was insufficient evidence of the parties’ intent to waive the American Rule[,]” under which parties ordinarily bear their own attorney fees in litigation absent a statute or agreement that authorizes fee shifting.

Appeals to the Appellate Division, First Department followed.

Court Affirms the District Court’s Decision that the Arbitrator had the Authority to Award Attorney Fees

Attorney Fees Arbitration | Arbitration Law

One difference between New York and Federal arbitration law is that under federal law, as construed by the United States Court of Appeals for the Second Circuit, courts are authorized to vacate awards under the judicially-created “manifest disregard of the law” standard. New York arbitration law generally does not recognize manifest disregard of the law in cases not governed by the Federal Arbitration Act, but in cases governed by the Federal Arbitration Act, New York courts ordinarily apply the federal, manifest disregard of the law standard.

In Steyn there was no dispute about the applicability of the Federal Arbitration Act, and no dispute that manifest disregard of the law was “the only appropriate ground to vacate the arbitrator’s award of attorneys’ fees.” 2019 N.Y. Slip Op. at 5341, at *4.

Explaining the applicable standard, the Court said that “[f]or an award to be set aside for manifest disregard, the arbitrator must understand and correctly state the law, but proceed to disregard. . . .” it. 2019 N.Y. Slip Op. at 5341, at *4 (citation omitted). Citing First Department and Second Circuit authority, the Court said that the manifest-disregard-of-the-law calculus required consideration of: “(1) whether the legal principle allegedly ignored by the arbitrator was well defined, explicit, and clearly applicable; (2) whether the arbitrators knew of the governing legal principle; and, (3) whether knowing that principle, the arbitrators refused to apply it or ignored it.” 2019 N.Y. Slip Op. at 5341, at *4 (citations omitted).

Manifest disregard, explained the Court, did not authorize courts to vacate an award simply “because [they] think[] the arbitrators made the wrong decision.” 2019 N.Y. Slip Op. at 5341, at *4 (citation omitted). Irrespective of whether a court concludes “that the arbitrator reached the wrong result or applied the law incorrectly,” a “court should. . . confirm the award, despite [the] court’s disagreement with it on the merits, if there is a barely colorable justification for the outcome reached” 2019 N.Y. Slip Op. at 5341, at *4 (citation and quotation omitted).

Having articulated the standard, the Court said that the question whether the arbitrator was guilty of manifest disregard of the law depends on whether, in the circumstances of this case, a New York arbitration law requirement that implied party consent to fee shifting be “clear and unmistakable” applied to this case. .

New York CPLR 7513 provides that arbitrators cannot award fees absent an agreement by the parties:

Unless otherwise provided in the agreement to arbitrate, the arbitrators’ expenses and fees, together with other expenses, not including attorney’s fees, incurred in the conduct of the arbitration, shall be paid as provided in the award. The court, on application, may reduce or disallow any fee or expense it finds excessive or allocate it as justice requires.

CPLR § 7513 (emphasis added).

The Court explained that New York Courts have interpreted CPLR 7513 as barring arbitrators from imposing attorney fees, except: “(1) where a statute provides for such an award[;] (2) where it was authorized by an express provision in the agreement; or (3) where it is “unmistakably clear” that both parties intended such an award.” 2019 N.Y. Slip Op. at 5341, at *4 (citations omitted).

The trial court determined that neither a statute nor the terms of the parties’ agreement authorized fees “concluded that the third exception might apply,” but ultimately decided that it was not “‘unmistakably clear’ that the parties intended that attorneys’ fees be awarded.” 2019 N.Y. Slip Op. at 5341, at **45. According to the trial court, the parties’ mutual requests for attorney fees were “mere ‘boilerplate requests’ that did not satisfy an ‘unmistakably clear’ intent to agree that attorneys’ fees be awarded.” 2019 N.Y. Slip Op. at 5341, at *5.

The First Department, however, determined that the arbitrator did not manifestly disregard the law because it was reasonable for the arbitrator to conclude that the “unmistakably clear” requirement concerning party intent to authorize attorney fee awards did not apply in the circumstances of this case. For the parties “incorporated the rules of the AAA as controlling, and Rule 47(d) of the AAA explicitly provides that an award of attorneys’ fees may be made ‘if all parties have requested such an award or it is authorized by law or [the] arbitration agreement.’” 2019 N.Y. Slip Op. at 5341, at *5.

“Rule 47(d),” said the Court, “does not require any specific language to be used in making a request for attorneys’ fees[,]” and “[t]hus, under Rule 47(d). . . , an arbitrator would be empowered to award attorneys’ fees provided, as here, ‘all parties have requested . . . [it]’ even if the ‘unmistakably clear’ standard for requesting attorneys’ fees under New York law was not met.” 2019 N.Y. Slip Op. at 5341, at *5.

It was thus “not unreasonable” for the arbitrator to conclude that Rule 47(d) authorized an award of attorney fees in the circumstances, even where the party would not otherwise be entitled to such an award under New York’s “unmistakably clear” standard. 2019 N.Y. Slip Op. at 5341, at *5. That conclusion was undoubtedly correct.

The parties agreed to make the AAA rules, including Rule 47(d), part of their contract. Thus, Rule 47(d) was an “express provision” of the parties’ agreement that authorized attorney fees provided both parties “requested” them, and without regard to whether the parties’ mutual requests constituted “clear and unmistakable” evidence of intent, the default standard under New York law in cases where express agreement on fees is absent.

In further support, the Court cited several cases in which it has “held that the power to award attorneys’ fees can arise from the submission of the dispute under the rules of a given organization, like the AAA, if the rules themselves authorize the fees.” 2019 N.Y. Slip Op. at 5341, at *5 (citations and quotations omitted). An “example,” said the Court, was Matter of Warner Bros. Records [PPX Enters.], 7 A.D.3d 330, 330-331 (1st Dep’t 2004), in which the “Court upheld the arbitrators’ award of attorneys’ fees because the arbitration in question was governed by the AAA, which permits an award of attorney fees and where, like here, both parties so requested it in their respective pleadings.” 2019 N.Y. Slip Op. at 5341, at *5 (citing 7 A.D.3d at 330-331).

The Court added that even if “the AAA rules did not grant the arbitrator broader authority to award attorneys’ fees than New York’s ‘unmistakably clear’ standard, that the arbitrator gave the AAA Rule 47(a) a broader interpretation does not evidence a manifest disregard of the law.” 2019 N.Y. Slip Op. at 5341, at *5 (citation omitted).

Finally, the Court said that the applicability of the FAA to this case meant that it was reasonable for the arbitrator to conclude that he had the authority to award fees. The Court explained that “[a] New York choice of law provision in the agreement to arbitrate, without greater specificity, does not bar damages permitted under the FAA and AAA rules, but barred by New York law.” 2019 N.Y. Slip Op. at 5341, at *5.

The FAA, observed the Court, preempts New York’s restrictions on arbitral awards of punitive damages and attorneys’ fees in cases where the parties’ contract includes both an FAA-governed arbitration agreement and a general, New York choice-of-law provision. See 2019 N.Y. Slip Op. at 5341, at *6 (citations omitted). Citing Mastrobuono v Shearson Lehman Hutton, Inc., 514 US 52 (1995) as an example, the Court explained that an arbitrator has the power to “award punitive damages, in accordance with FAA rules, despite the fact that a contract contains a New York choice of law provision and punitive damages would be precluded under New York law.” 2019 N.Y. Slip Op. at 5341, at *5-*6.

“Thus,” said the Court, “although attorneys’ fees are generally barred under New York law, pursuant to the “American Rule,” they are not barred in arbitration when the agreement contains a New York choice of law provision.” 2019 N.Y. Slip Op. at 5341, at *6.

Award to OHM of Attorney Fees and Other Relief Vacated Because Network was not Required to Arbitrate with OHM

arbitrability attorney fees

Having rejected the Network’s manfest-disregard challenges to the fee awards, the Court addressed the Network’s argument that it never agreed to arbitrate with the Network. The Network pointed to the lack of an arbitration agreement between the Network and OHM—OHM was not a party to the Term Sheet, only the Engagement Agreement, and the Engagement Agreement, unlike the Term Sheet, did not contain an arbitration agreement.

But the Host contended that the Network could not challenge arbitrability because by participating in the arbitration, it “manifested its clear and unmistakable intent to subject itself to the arbitration process.” 2019 N.Y. Slip Op. at 5341, at *6. The Court disagreed, and concluded that the award against the Network “should be vacated.” 2019 N.Y. Slip Op. at 5341, at *6

The Court explained that under U.S. Supreme Court authority, whether or not the “‘parties have submitted a particular dispute to arbitration , i.e., the question of arbitrability, is an issue for judicial determination [u]nless the parties clearly and unmistakably provide otherwise.’” 2019 N.Y. Slip Op. at 5341, at *6 (quoting Howsam v Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002); other citations and quotations omitted).

The Court also acknowledged the so-called “first principle” of arbitration law: “[a]rbitration is a matter of contract, and a party cannot be forced to arbitrate a dispute that it did not expressly agree to submit to arbitration.” 2019 N.Y. Slip Op. at 5341, at *6 (citations omitted).

It next explained the roles of courts and arbitrators in determining arbitrability. Quoting First Options of Chicago, Inc. v Kaplan, 514 U.S. 938, 944-945 (1995), the First Department said “‘[c]ourts should not assume that the parties agreed to arbitrate arbitrability unless there is clear and unmistakable evidence that they did so . . . . In this manner the law treats silence or ambiguity about the question who (primarily) should decide arbitrability differently from the way it treats silence or ambiguity about the question whether a particular merits-related dispute is arbitrable because it is within the scope of a valid arbitration agreement for in respect to this latter question the law reverses the presumption.” 2019 N.Y. Slip Op. at 5341, at *6 (quoting 514 U.S. at 944-45; other citations and quotations omitted).

When, said the Court, a party during the arbitration objects to jurisdiction, and the arbitrator decides to assert jurisdiction in the face of the objection, the “arbitrator’s decision. . . is subject to a much broader and more rigorous judicial review than an arbitral decision on the merits, and because it is a question for the court to decide, it is subject to de novo judicial review. 2019 N.Y. Slip Op. at 5341, at *6 (citations and quotations omitted).

There was no dispute that the Network did not agree to arbitrate with OHM, and that the Network did not demand arbitration against OHM, who appeared in the arbitration as a counterclaim plaintiff. The Network did not execute a submission agreement with OHM, and objected to the arbitrator’s jurisdiction over OHM’s counterclaim against the Network. 2019 N.Y. Slip Op. at 5341, at *6.

The Court distinguished Matter of Arbitration between Halcot Navigation Ltd. Partnership v. Stolt-Nielsen Transp. Group, B.V., 491 F Supp 2d 413, 417-419 (S.D.N.Y. 2007), because “in that case, Halcot, the party denying arbitrability of its claim, requested that the arbitrator decide that objection as a ‘preliminary issue[,]’” and “[a]fter discovery and briefings, the three arbitrator panel decided against Halcot[,]” finding “Halcot’s attempt to vacate the arbitration on jurisdictional grounds to be a ‘second bite at the apple.’” 2019 N.Y. Slip Op. at 5341, at **6-7.

But “[h]ere, . . . as with the Kaplans in First Options. . . , no request was made for the arbitrator to decide arbitrability.” 2019 N.Y. Slip Op. at 5341, at *7. The Network simply objected to the arbitrator’s jurisdiction and participated in the arbitration. Under First Options, “a party does not have to try to enjoin or stay an arbitration proceeding in order to preserve its objection to jurisdiction. . . [;] a jurisdictional objection, once stated, remains preserved for judicial review absent a clear and unequivocal waiver.” 2019 N.Y. Slip Op. at 5341, at *7 (citation omitted). The Kaplan’s mere participation in the arbitration under a full reservation of rights did not constitute such a waiver.

The Court also distinguished “[c]ases. . . dealing with whether parties disagreed on the scope of the arbitration,” finding that they are “not comparable to this matter, where the issue is whether a party had the right to arbitrate at all.” 2019 N.Y. Slip Op. at 5341, at *7. As respects at least one of those cases, T.Co Metals, LLC v Dempsey Pipe & Supply, Inc., 592 F.3d 329 (2d Cir. 2010), the Court “noted that [the Second Circuit’s] decision was based, in part, on the fact that the arbitrator was empowered by a broadly worded arbitration agreement between the parties.” 2019 N.Y. Slip Op. at 5341, at *7.

The Court next rejected OHM’s argument that the Term Sheet’s incorporation of the AAA Rules, which delegate arbitrability decisions to arbitrators, constituted a clear and unmistakable delegation of arbitrability issues to the arbitrator. OHM never agreed to arbitrate any issues with the Network, and thus certainly did not clearly and unmistakably agree to arbitrate arbitrability issues with the Network. 2019 N.Y. Slip Op. at 5341, at *7.

The Court also rejected two potential grounds on which nonsignatories can, in appropriate circumstances, invoke the terms of an arbitration agreement to which they are not signatory parties. First, the Court rejected, without much comment,  OHM’s argument that a “‘sufficient relationship’ existed between [OHM] and [the Network] such that [the Network] is obligated to arbitrate claims with OHM. 2019 N.Y. Slip Op. at 5341, at *7 2019 N.Y. Slip Op. at 5341, at *7 (citing and quoting Contec Corp. v Remote Sol., Co., 398 F.3d 205 (2d Cir. 2005)) (quotation omitted).

Second, the Court said that “the issues between OHM and [the Network]” were not “so intertwined with those between [the Network] and [the Host], such that [the Network] would be estopped from avoiding arbitration.” 2019 N.Y. Slip Op. at 5341, at *7 (citations and quotations omitted).

According to the Court, “the services under the [Engagement Letter] arose, but differed, from the work created by the Term Sheet[,]” and “[t]he Term Sheet did not depend upon the viability of the [Engagement Agreement] in any way[,]” for “a different company could have been easily hired as a guest booker.”

The Court therefore reversed the trial court’s judgment, vacated the money judgment award in favor of OHM, and reinstated the arbitration award of attorneys’ fees to the Host.

Want to learn more about attorney fees in arbitration? Read here, here, and here.

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