main image

Archive for the ‘Arbitration Law’ Category

« Older Entries

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 No Comments »

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 that question to be 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 »

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.

 

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 »

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.,  here, here, and 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 No Comments »

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 »

Sanctions: Seventh Circuit Awards $40,000 in FRAP 38 Fees and Costs in Zurich v. Sun Holdings Case

August 28th, 2024 American Arbitration Association, Appellate Practice, Application to Vacate, Arbitration Law, Arbitration Practice and Procedure, Arbitration Provider Rules, Attorney Fee Shifting, Attorney Fees and Sanctions, Authority of Arbitrators, Award Confirmed, Challenging Arbitration Awards, Confirm Award | Exceeding Powers, Exceeding Powers, FAA Chapter 1, FAA Section 10, FAA Section 9, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 10, Federal Arbitration Act Section 9, Judicial Review of Arbitration Awards, Petition or Application to Confirm Award, Petition to Vacate Award, Post-Award Federal Arbitration Act Litigation, Practice and Procedure, Section 10, Section 9, United States Court of Appeals for the Seventh Circuit, Vacate Award | 10(a)(4), Vacate Award | Attorney Fees, Vacate Award | Attorney's Fees, Vacate Award | Exceeding Powers, Vacate Award | Excess of Powers, Vacatur No Comments »

sanctionsWe previously discussed the Seventh Circuit’s decision in American Zurich Ins. Co. v. Sun Holdings, Inc., 103 F.4th 475 (7th Cir. 2024) (Easterbrook, J.), in which the award challenger Sun Holdings, Inc. (“Sun Holdings”) claimed that the arbitrators exceeded their powers by imposing as sanctions a $175,000.00 attorney fee award, which they claimed, among other things, was barred by the language of the contract. (See our prior post, here.) 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. And the attorney fee  award comported with New York law and the American Arbitration Association Commercial Rules, both of which the parties made part of their agreement.

The challenger further undermined its position by not acknowledging the existence of controlling Seventh Circuit and U.S. Supreme Court authority and engaging in the arbitration proceedings what the Seventh Circuit believed was recalcitrant behavior. The challenger compounded that by attempting to second guess various determinations made by the arbitrators.

That this strategy backfired, exposing Sun Holdings to sanctions, is not surprising. 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).

The Court,  on July 1, 2024,  after considering Sun Holdings challenger’s response to the order to show cause, determined that Fed. R. App. P. (“FRAP”) 38 sanctions were warranted.  The Court “conclude[d] that Sun Holdings must compensate American Zurich for the legal fees and other costs that it was unnecessarily forced to incur by Sun’s unnecessary appeal.” July 3, 2024, Order, No 23-3134, Dkt. 42 at 1 of 2 (7th Cir. July 3, 2024) (available on PACER).

In response to the Order to Show Cause, Sun Holdings argued “that it did not litigate in bad faith because it was entitled to contest the Second Circuit’s understanding of New York law, as represented in ReliaStar Life Insurance Co. v. EMC National Life Co., 564 F.3d 81, 86-89 (2d Cir. 2009).” Dk. 42 at 1 of 2. (Our posts on ReliaStar are here and here.)

“But[,]” said the Court, “the dominant theme of [Sun Holdings’] brief in this court was that we should review and reject the arbitrators’ interpretation of its contract with American Zurich. That line of argument is incompatible with an agreement to arbitrate, as our opinion explains.” Dk. 42 at 1 of 2. The Court proceeded to quote in further support the following passage from its opinion:

[A]s if to highlight the fact that it disdains the limits on judicial review of arbitral awards, Sun wants us to reexamine the arbitrators’ conclusion that it engaged in frivolous conduct (it was “just putting on a defense,” Sun insists) and wants us to say that the arbitrators overestimated the amount of excess fees that American Zurich was compelled to incur. These arguments are unrelated to contractual meaning. They are unabashed requests to contradict the arbitrators’ findings, something the Federal Arbitration Act forbids.

Dk.42 at 2 of 2 (quoting  American Zurich Ins. Co. v. Sun Holdings, Inc. 103 F.4th 475, 478 (7th Cir. 2024) (Easterbrook, J.)).

The Court said “Sun Holdings’ response to our order to show cause does not address that baseless aspect of its appellate argument.” Dk. 42 at 2 of 2. Sanctions, concluded the Court, would be imposed.

Having determined that FRAP 38 sanctions were warranted, the Court ordered American Zurich “to file a statement of the fees and costs incurred in defending its judgment,” giving Sun Holdings an opportunity to respond.

American Zurich originally sought $46,300.30 in fees and costs, but amended its statement to seek $75,250.80. August 21, 2024, Fees and Costs Order, No 23-3134, Dkt. 47 at 1 -2 of 2 (7th Cir. August 21, 2024) (available on PACER).

But the Court ordered Sun Holdings to “pay $40,000 to American Zurich as compensation for this frivolous appeal.” Dkt. 47 at 2 of 2. The Court said that it “declined to award the full amount sought by American Zurich[]” because “[a]n award exceeding [$40,000.00] is difficult to justify, given that much of the legal work should have preceded the appeal and we are not awarding fees for legal work in the district court.” Dkt. 47 at 2 of 2.

Contacting the Author

If you have any questions about this article, arbitration, 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.

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.

Another Subject-Matter Jurisdiction Mishap, this Time in the Seventh Circuit

August 22nd, 2024 Appellate Jurisdiction, Appellate Practice, Application to Confirm, Application to Vacate, Arbitration Law, Arbitration Practice and Procedure, Award Confirmed, Diversity Jurisdiction, FAA Chapter 1, FAA Section 10, FAA Section 4, FAA Section 9, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 10, Federal Arbitration Act Section 9, Federal Courts, Federal Question, Federal Subject Matter Jurisdiction, United States Court of Appeals for the Seventh Circuit No Comments »

subject-matter-jurisdictionThe Seventh Circuit’s decision in King v. Universal Health Services of Hartgrove, Inc., No. 23-3254, slip op. (7th Cir. August 5, 2024) (nonprecedential disposition), is yet another lesson about how important it is to take great care to ensure that subject-matter and appellate  jurisdiction requirements are met. King may be a “nonprecedential disposition,” but that doesn’t mean one should disregard its lessons.     

Background

The story begins back in December 2018 when employee A (the “Employee”) commenced an action (“Action I”) against employer B (the “Employer”) that asserted various claims, including for employment discrimination based on the Americans with Disabilities Act, 42 U.S.C. § 12112(a). Employer moved under Section 4 of the Federal Arbitration Act (“FAA”) to compel arbitration based on an agreement Employee signed at the commencement of employment. See 9 U.S.C. § 4.

The district court in Action I granted the motion and entered judgment in May 2020. We cannot tell from the Court’s brief opinion whether anyone requested a stay pending arbitration. (See our recent post on Smith v. Spizzirri, 601 U.S. 472 (2024).)

The arbitration proceeded and the arbitrator made an award in favor of the Employer. Employee commenced a new district court action (“Action II”) in which it sought an order vacating the award. Around the same time, the Employer made a motion in Action I to confirm the award under FAA Section 9. See 9 U.S.C. § 9.

That prompted the Court in Action II to make an order consolidating Action I with Action II. The Court designated no lead case and maintained separate dockets for each Action.

The Court in Action I made an order granting the motion to confirm. More than a month later the Court in Action II entered judgment for the employer, stating “‘[n]o further action’ was needed regarding King’s motion to vacate the award in that case.” Slip op. at 2.

The employer filed a timely notice of appeal in Action II. The notice of appeal referenced the case numbers for Actions I and II, as well as the Action I Court’s 45-day-prior decision confirming the award.

The Action II Court Lacked Subject-Matter Jurisdiction

Action I was apparently commenced by the Employee based on federal question jurisdiction, as one of the claims asserted was under the Americans Continue Reading »

D.C. Circuit Says it has No Subject-Matter Jurisdiction over Competing Claims to Confirm or Vacate Award Made Pursuant to Collective Bargaining Agreement   

August 21st, 2024 Application to Confirm, Application to Vacate, Arbitration Law, Arbitration Practice and Procedure, Awards, Confirmation of Awards, Federal Courts, Federal Question, Federal Subject Matter Jurisdiction, Judicial Review of Arbitration Awards, Labor Arbitration, Labor Law, LMRA Section 301, LMRA Section 301(a), Post-Award Federal Arbitration Act Litigation, Practice and Procedure, Rights and Obligations of Nonsignatories, United States Court of Appeals for the D.C. Circuit No Comments »

Subject-Matter JurisdictionWe’ve made over the last several months months a point of discussing arbitration-enforcement litigation cases addressing the subject-matter jurisdiction because—particularly in the context of the Federal Arbitration Act (the “FAA”)—it is not only complex but frequently  counterintuitive. (See here, here, and here.) This case— International Union, United Mine Workers of Am. v. Consol Energy Inc., ___ F.4d ___, No. 22-7110, slip op. (D.C. Cir. August 9, 2024)—caught our eye because the Court held that that it lacked subject-matter jurisdiction over the plaintiff on one ground and over the defendants’ counterclaim on an independent ground, Article III standing.

Background

The United Mine Workers of America (the “Union”) and coal mining companies (the “Mining Companies”), all subsidiaries of  Consol Energy, Inc. (“Consol”), signed a collective bargaining agreement (the “CBA”)  but Consol did not. The CBA provided for arbitration of grievances. It also provided to Union members lifetime health care benefits. The Union claims that the Mining Companies could not reduce benefits unilaterally, even if a member no longer mined coal.

For its part Consol was the Mining Companies’ health care administrator. Prior to the CBA’s expiration date, Consol informed the Mining Companies’ mining employees that Consol would consider modifying miner benefits once the CBA expired.

That prompted a retired miner to file a grievance against Consol, an arbitration followed, and with the support of the Union, the miner obtained an award in his favor. The arbitrators determined they had jurisdiction over Consol, a nonsignatory to the CBA, which by the time the arbitration took place, had expired. They also determined that the proposed benefit modifications would violate the CBA and made an award that prohibited Consol from making them.

The Union brought against Consol and the Mining Companies an action in district court to confirm the award, invoking Labor Management Relations Act (“LMRA”) Section 301(a)’s grant of subject-matter jurisdiction over actions “for violation of contracts between an employer and a labor organization.” 29 U.S.C. § 185(a). Consul and the Mining Companies brought a separate action to vacate the award, and the district court consolidated the two cases.

Prior to the district court reaching its decision Consol was split into two successor entities and otherwise ceased to exist. One of the two was joined but the district court dismissed it because its business did not concern coal mining. The other successor entity (the parent of the Mining Companies) was never made a party. The Mining Companies remained parties to the consolidated action.

The district court dismissed on standing grounds the Union’s confirmation action. It found the Union suffered no injury because there was no CBA violation. While Consul proposed to modify benefits it never did so. But the district court nevertheless determined on the merits that there was no basis for vacating the award, either. An appeal by both parties followed.

Subject-Matter Jurisdiction: The D.C. Circuit’s Decision

The D.C. Court of Appeals determined that “[n]o party in this appeal has shown that federal courts have jurisdiction over its claim.” United Mine Workers, slip op. at 8. It therefore affirmed the district court’s dismissal of Union’s claim, vacated the district court’s determination on the merits of the vacatur counterclaim, and remanded the counterclaim with instructions to dismiss it on standing grounds. Id.

The District Court had No Subject-Matter Jurisdiction to Confirm the Award

Continue Reading »

Manifest Disregard of the Agreement: Third Circuit Says Arbitrator Rewrote the 10-Day Time Limit For Grievance Filing and Affirms District Court Judgment Vacating Award

July 19th, 2024 Application to Vacate, Arbitration as a Matter of Consent, Arbitration Law, Arbitration Practice and Procedure, Authority of Arbitrators, Award Fails to Draw Essence from the Agreement, Award Irrational, Award Vacated, Awards, Challenging Arbitration Awards, Enforcing Arbitration Agreements, Exceeding Powers, FAA Chapter 1, FAA Section 10, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 10, First Principle - Consent not Coercion, Grounds for Vacatur, Judicial Review of Arbitration Awards, Labor Arbitration, LMRA Section 301, Manifest Disregard of the Agreement, Petition to Vacate Award, Practice and Procedure, Section 10, U.S. District Court for the District of New Jersey, United States Court of Appeals for the Second Circuit, United States Court of Appeals for the Third Circuit, Vacate, Vacate Award | 10(a)(4), Vacate Award | Exceeding Powers, Vacate Award | Excess of Powers, Vacatur No Comments »

disregard of the agreementAn arbitration award may be vacated for “manifest disregard of the agreement” if the award does not draw its essence from the contract and instead reflects the arbitrator’s own notions of economic or industrial justice. (See, e.g., here, here,  here,  here.)  Such an award exceeds the arbitrator’s powers within the meaning of Section 10(a)(4) of the Federal Arbitration Act. 9 U.S.C. § 10(a)(4) and federal common law in Labor Management Relations Act Section 301 cases (which tracks Section 10(a)(4)).

Arbitration awards do not qualify for vacatur under this manifest disregard of the agreement standard unless the arbitrator did not even arguably interpret the agreement. And if you have any doubts about how much extensive leeway arbitrators have to “arguably interpret” contracts, go back and review the U.S. Supreme Court’s decision in  Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 566-70 (2013).

The margins for a reasonable argument for manifest disregard of the agreement vacatur are slim, for once the arbitrator offers—or the award is otherwise susceptible to—an even barely plausible interpretation supporting the arbitrator’s award, then it’s game over, even if the barely plausible interpretation is one a court would almost certainly not adopt as its own.

But in StoneMor, Inc. v. The Int’l Bhd. Of Teamsters, Local 469, ___ F.4d ___, No. 23-1489, slip op. (3d Cir. July 10, 2024), the Third Circuit reminds everyone that, while it is “‘a steep climb to vacate an . . . award[,]’” slip op. at 6 (quoting France v. Bernstein, 43 F.4th 210, 219 (3d Cir. 2022)), the Court’s “review is ‘not toothless,’ and [it] will reverse if the arbitrator ‘rewrites the contract[.]’” Slip op. at 6 (quoting Independent Lab’y Employees’ Union, Inc. v. ExxonMobil Research & Engineering Co., 11 F.4th 210, 219 (3d Cir. 2021)). (You can read our France v. Bernstein post here.)

The award before the Court in StoneMor, was the product of an arbitrator who “did just that[,]” and the Court affirmed the district court’s judgment vacating that award—an award which resulted from manifest disregard of the agreement. Slip op. at 6 & 3. Because the Court was able to conclude that the award was not based on—and did not otherwise reflect—an even barely colorable interpretation of the contract, vacatur was warranted. Continue Reading »

Seventh Circuit Blocks Mass Arbitration: Wallrich v. Samsung Electronics America, Inc.  

July 16th, 2024 American Arbitration Association, Appellate Jurisdiction, Arbitrability, Arbitrability | Clear and Unmistakable Rule, Arbitrability | Existence of Arbitration Agreement, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Fees, Arbitration Law, Arbitration Practice and Procedure, Arbitration Provider Rules, Arbitration Providers, Authority of Arbitrators, Class Action Arbitration, Class Action Waivers, Class Arbitration Waivers, Clear and Unmistakable Rule, Delegation Agreements, Equal Footing Principle, FAA Chapter 1, FAA Chapter 2, FAA Section 4, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 202, Federal Arbitration Act Section 203, Federal Arbitration Act Section 4, Federal Subject Matter Jurisdiction, Mass Arbitration, Petition to Compel Arbitration, Practice and Procedure, Procedural Arbitrability, Questions of Arbitrability, Richard D. Faulkner, Section 4, United States Court of Appeals for the Seventh Circuit No Comments »

Mass ArbitrationIntroduction: Mass Arbitration

For many years consumers, employees, and others fought hard—with varying degrees of success—to compel class arbitration, and sellers, employers, and other more economically powerful entities fought equally hard to compel separate arbitrations in multi-claimant situations. Over time, companies included in their agreements—and courts enforced—clear class-arbitration waivers.

That might have been the end of the story but for a stroke of genius on the part of certain plaintiffs’ attorneys. These clever attorneys devised what is now known as “mass arbitration.”

In mass arbitration, as in class arbitration, multiple claimants—each represented by the same lawyer or group of lawyers—assert at the same time numerous  claims against a corporate defendant.

The result is that business entity defendants may be are forced to pay upfront hundreds of thousands or millions of dollars in arbitration provider and arbitrator fees as a precondition to defending thousands of individual arbitration proceedings that raise one or more common issues.

Saddling the business entity defendants at the outset with those enormous arbitration fees obviously puts them in an untenable settlement position. The business entities also incur very substantial legal costs for arbitration-related litigation.

Given the vigor with which business entities have opposed class arbitration—which, despite its cumbersome nature, purports to be (but really isn’t) a workable mechanism for resolving multiple, similar, arbitral claims—one can hardly fault a judge for concluding that business entity defendants have reaped what they’ve sown. But it would be strange to think that Federal Arbitration Act (“FAA”) arbitration should, in multiple claimant situations, boil down to the business entity choosing one form of economic extortion (endless, inefficient, and prohibitively expensive class arbitration) over another (being forced to pay millions of dollars of arbitration fees upfront before being able to defend any of the individual arbitrations).

There have been some recent efforts on the part of arbitration providers to amend their rules to address mass arbitration in a more equitable manner. But those rules, and the ins, outs, and idiosyncrasies of mass arbitration are beyond this post’s ambit.

Our focus instead is on a very important mass-arbitration development: the first U.S. Circuit Court of Appeals decision to address mass arbitration, Wallrich v. Samsung Electronics America, Inc., No. 23-2842, slip op. (7th Cir. July 1, 2024). The case is especially significant because it may portend the end of mass arbitration, at least in the form it typically takes.

The U.S. Court of Appeals for the Seventh Circuit derailed petitioners’ efforts to compel judicially the respondent to pay millions of dollars of arbitration fees demanded by mass arbitration claimants. It did so in two blows, the second more decisive than the first. Continue Reading »

S.K.A.V. v. Independent Specialty Ins. Co.: Fifth Circuit Decides Louisiana Statute Invalidating Arbitration Agreements in Insurance Contracts Applies to Surplus Lines Policies

June 27th, 2024 Anti-Arbitration Statutes, Applicability of Federal Arbitration Act, Application to Compel Arbitration, Arbitrability, Arbitrability | Clear and Unmistakable Rule, Arbitrability | Existence of Arbitration Agreement, Arbitration Agreement Invalid, Arbitration Law, Arbitration Practice and Procedure, Clear and Unmistakable Rule, Delegation Agreements, Existence of Arbitration Agreement, FAA Chapter 1, FAA Preemption of State Law, FAA Section 2, FAA Section 4, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 2, Federal Arbitration Act Section 4, Formation of Arbitration Agreement, Gateway Disputes, Gateway Questions, Insurance Contracts, Louisiana Supreme Court, McCarran-Ferguson Act, Motion to Compel Arbitration, Petition to Compel Arbitration, Practice and Procedure, Pre-Award Federal Arbitration Act Litigation, Questions of Arbitrability, Section 2, Section 4, State Arbitration Law, State Arbitration Statutes, State Courts, Statutory Interpretation and Construction, United States Court of Appeals for the Fifth Circuit Comments Off on S.K.A.V. v. Independent Specialty Ins. Co.: Fifth Circuit Decides Louisiana Statute Invalidating Arbitration Agreements in Insurance Contracts Applies to Surplus Lines Policies

Introduction: LA Stat. Ann. § 22.868 and its Application to Surplus Lines Policies

surplus lines policy regulation

Louisiana has a statute, LA Stat. Ann. § 22.868, that courts have construed to make unenforceable arbitration provisions in insurance contracts, including surplus lines policies. The statute has an exception or savings provision that removes from the statute’s scope “a forum or venue selection clause in a policy form that is not subject to approval by the Department of Insurance[,]” LA Stat. Ann. § 22.868(D), for example, a venue- or forum-selection provision in a surplus lines policy.

The question before the U.S. Court of Appeals for the Fifth Circuit in S.K.A.V. v. Independent Specialty Ins. Co., ___ F.4th ___, No. 23-30293, slip op. (5th Cir. June 5, 2024), was whether the statute invalidates arbitration provisions contained in surplus lines insurance policies, that is, whether arbitration provisions in such contracts fall within the subsection (D) exception. Predicting how it thinks the Louisiana Supreme Court would rule if faced with the question, the Court held that the subsection (D) exemption did not apply, and accordingly, the statute rendered unenforceable arbitration agreements in surplus lines contracts. The Court accordingly affirmed the judgment of the district court, which denied the arbitration proponent’s motion to compel arbitration.

Pushing the Elephant Out of the Room. . .

Before taking a closer look at how the Court arrived at its conclusion, let’s deal with the “elephant in the room.” Why is the Court in a case governed by the Federal Arbitration Act (“FAA”) even considering enforcing a state statute that would (or could) render unenforceable an FAA-governed arbitration agreement? Doesn’t the FAA preempt state law that puts arbitration agreements on a different footing than other contracts?

The answer is “undoubtedly”, but, as insurance and reinsurance practitioners know, under the McCarran-Ferguson Act, 15 U.S.C. §§ 1011, et seq., “[n]o Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance. . . .” 15 U.S.C. § 1012(b).

LA Stat. Ann. § 22.868 has been construed to be one that “regulat[es] the business insurance[,]” and the FAA is not an “Act [that] specifically relates to the business of insurance. . . .” Section 22.868 thus “reverse preempts” the FAA under McCarran-Ferguson. See slip op. at 2. (See, e.g., here.)

The Court’s Interpretation of Section 22.868, Including its Surplus Lines Policy Exemption

  LA Stat. Ann. § 22.868, provides, in pertinent part: Continue Reading »

« Older Entries