Introduction: This Term’s SCOTUS Arbitration Cases
The 2021 Term was a busy and controversial one for the United States Supreme Court (“SCOTUS”) regarding abortion, First Amendment rights, Second Amendment rights, and administrative agency power. However, many may not know SCOTUS decided four Federal Arbitration Act cases during the 2021 Term (the “FAA Cases”), as well as a pair of cases consolidated into one concerning whether U.S. Courts may provide under 28 U.S.C. § 1782 judicial assistance to international arbitration panels sited abroad. See Viking River Cruises, Inc. v. Moriana, 596 U. S. ____, No. 20–1573, slip op. (June 15, 2022) (construing FAA); ZF Automotive US, Inc., et al. v. Luxshare, Ltd., 596 U.S. ___, No. 21–401, slip op. (June 13, 2022) (construing 28 U.S.C. § 1782); Southwest Airlines Co. v. Saxon, 596 U.S. ___, No. 21-309, slip op. (June 6, 2022) (construing FAA); Morgan v. Sundance, Inc., 596 U.S. ___, No. 21-328, slip op. (May 23, 2022) (construing FAA); Badgerow v. Walters, 596 U.S. ___, No. 20-1143, slip op. (March 31, 2022) (construing FAA).
Three of the SCOTUS FAA Cases, Badgerow, Morgan, and Southwest Airlines signal SCOTUS’s apparent intention to construe strictly the Federal Arbitration Act’s text without indulging in any pro-arbitration presumptions or applying arbitration-specific rules intentionally encouraging arbitration-friendly outcomes. ZF Automotive, the 28 U.S.C. § 1782 judicial-assistance case also employed a strict, textualist approach to interpreting 28 U.S.C. § 1782, used the FAA to help support its conclusion, and held that 28 U.S.C. § 1782 did not authorize U.S. district courts to provide judicial assistance to private arbitration panels sited abroad—an outcome not particularly solicitous of international arbitration. It is therefore at least indirectly supportive of the more textually oriented and arbitration-neutral approach SCOTUS appears to have endorsed with special force during the 2021 Term.
The SCOTUS 2021 Term FAA Cases are not the first ones in which the Court applied textualist interpretations to the FAA. There are others. See, e.g., New Prime Inc. v. Oliveira, ___ U.S. ___, 139 S. Ct. 532 (2019) (discussed here and here). But common themes in three of those FAA Cases—echoed in ZF Automotive —suggest a marked trend by the Court to interpret the FAA in a less expansive manner that is not presumptively arbitration friendly. The expression of these common themes in four cases decided in a single term is particularly significant because Morgan, Southwest Airlines, and ZF Automotive were decided unanimously by all participating Justices and Badgerow was decided 8-1, with now retired Associate Justice Stephen G. Breyer dissenting.
Many previous FAA SCOTUS decisions of the last three or four decades have been very indulgent of arbitration. The Court encouraged arbitration proliferation far beyond B-2-B commercial and industry arbitration between sophisticated and resource-laden entities of roughly equal bargaining power. Arbitration was introduced into consumer and employment disputes and other disputes involving persons (including businesses) of vastly disparate resources and sophistication. SCOTUS made arbitration agreements readily enforceable, interpreted them expansively in favor of arbitration, limited defenses to arbitration agreements and awards, and promoted arbitration to make it, at least in the eyes of some, an attractive alternative to litigation. Critics challenged that view and assailed arbitration as “do it yourself court reform.” The SCOTUS arbitration decisions developed and implemented an expansive federal policy in favor of arbitration and a presumption of arbitrability and championed a very pro-arbitration approach to arbitration law in general.
That SCOTUS, the lower federal courts, and eventually even the skeptical state courts that are bound by its FAA decisions, have been solicitous and supportive of arbitration is unsurprising. The assumed (but not necessarily realized) benefits of arbitration have long been touted by academics and promoted by business and industry representatives. Of course, courts have for many years recognized that arbitration helps reduce docket congestion, which was exacerbated by COVID and remains a problem today, even with the help of proliferated arbitration proceedings. Arbitral dispute resolution is also a very impressive business sector in and of itself, generating billions in revenues for law firms, arbitrators, and arbitration providers. It therefore has many proponents.
But Badgerow, Morgan, Southwest Airlines, and ZF Automotive suggest that SCOTUS is rethinking its prior expansive, and highly-arbitration-friendly approach to the FAA and might be more willing to entertain seriously arguments for interpreting: (a) arbitration agreements less expansively, and more like ordinary contracts; and (b) Sections 10 and 11 of the FAA strictly according to their text and not in an exceedingly narrow manner designed to encourage, arbitration-award-favoring outcomes. These cases may also embolden lower courts, especially the state courts, to do the same. Continue Reading »
Section 10(a)(1) of the Federal Arbitration Act authorizes courts to vacate awards where “the award was procured by corruption, fraud, or undue means. . . .” 9 U.S.C. § 10(a)(1). Cases vacating awards on Section 10(a)(1) grounds are rare, presumably because the circumstances that would trigger relief are relatively rare.
Section 10(a)(1) is an excellent example of how Section 10 is designed to provide relief in situations where putting a court’s imprimatur on an award would deprive one of the parties of the benefit of its freely-bargained-for arbitration agreement. It says that corruption, fraud, or undue means in the procurement of an award, whether perpetrated by the arbitrators or a party, spoils the award (assuming the aggrieved party timely moves to vacate). See 9 U.S.C. § 10(a)(1).
There is nothing particularly controversial about that. Persons who agree to arbitrate do not implicitly consent to awards procured through chicanery. And who would want to agree to arbitrate if they would have no recourse against such an award? (See here.)
“Fraud” and “corruption” describe dishonest, illegal, and deceptive conduct, whereas “undue means” arguably broader in scope. But “[t]he term ‘undue means’ must be read in conjunction with the words ‘fraud’ and ‘corruption’ that precede in the statute.” PaineWebber Group, Inc. v. Zinsmeyer Trusts P’ship, 187 F.3d 988, 991 (8th Cir. 1999) (citing Drayer v. Krasner, 572 F.2d 348, 352 (2d Cir. 1978)). To establish “undue means” courts therefore require “proof of intentional misconduct” or “bad faith,” interpreting “undue means” as “connoti[ing] behavior that is immoral if not illegal.” PaineWebber, 187 F.3d at 991 (quotations and citations omitted).
In addition to establishing “corruption, fraud or undue means” by clear and convincing evidence, a Section 10(a)(1) claimant must demonstrate: (a) “that that the fraud [, corruption or undue means] materially relates to an issue involved in the arbitration[;] and [b] that due diligence would not have prompted the discovery of the fraud [corruption or undue means] during or prior to the arbitration.” United Parcel Serv., 335 F.3d at 503; Renard, 778 F.3d at 569; MCI Constructors, 610 F.3d at 858; A.G. Edwards, 967 F.2d at 1404; Bonar, 835 F.2d at 1383; see Karppinen, 187 F.2d at 35.
A party will ordinarily be deemed to waive the right to vacate the award under Section 10(a)(1) if it failed to exercise due diligence in discovering the corruption, fraud or undue means during the arbitration; if it discovered the improper conduct during the arbitration but did not seek relief from the arbitrators; if it unsuccessfully sought relief and failed to object to the arbitrator’s pre-final-award denial of relief; or if the denial of relief was first made in the final award, to preserve its objection by informing the arbitrators that a failure to grant relief would constitute grounds for vacating the award.
As respects the materiality requirement, Section 10(a)(1) says that the “award” must be “procured” by “corruption, fraud or undue means,” which arguably suggests a causal nexus between the proscribed conduct and the award. While the conduct must “materially relate to an issue in the arbitration,” must it also be outcome determinative? In other words, must the party seeking relief show that the award would have been different but for alleged fraud, corruption or undue means, or is it enough to show that it tainted the proceedings simply because it related materially to an issue at stake?
The circuits are split on this point. Some courts require the challenger to show that the corruption, fraud or undue means “caused the award to be given.” See PaineWebber, 187 F.3d at 994 (“there must be some causal relation between the undue means and the arbitration award”); A.G. Edwards & Sons, Inc., 967 F.2d at 1403 (“the statute requires a showing that the undue means caused the award to be given”). Others say that the challenger is required to show a “nexus” between the conduct and the award—that is, materiality—but need not “establish that the result of the proceedings would have been different had the fraud[, corruption, or undue means] not occurred.” See, e.g., Odeon Capital Grp. LLC v. Ackerman, 864 F.3d 191, 196 (2d Cir. 2017) (citing cases); Bonar, 835 F.2d at 1383.
Section 10(a)(1) is probably the least commonly invoked ground for vacating an arbitration award. That said, it provides an important safety valve to address rare, but extremely important cases where an award is the product of corruption, perjured testimony or other egregious, dishonest misconduct, and where the challenger was unable to address the problem adequately before the arbitrators.
The next instalment of this series shall address a more commonly invoked ground for vacatur: evident partiality.
Please note. . .
This guide, including prior instalments, and instalments that will follow in later posts, does not purport to be a comprehensive recitation of the rules and principles of arbitration law pertinent or potentially pertinent to the issues discussed. It is designed to give clients, prospective clients, and other readers general information that will help educate them about the legal challenges they may face in arbitration-related litigation and how engaging a skilled and experienced arbitration attorney can help them confront those challenges more effectively.
This guide is not intended to be legal advice and it should not be relied upon as such. Nor is it a “do-it-yourself” guide for persons who represent themselves pro se, whether they are forced to do so by financial circumstances or whether they elect voluntarily to do so.
If you want or require arbitration-related legal advice, or representation by an attorney in an arbitration or in litigation about arbitration, then you should request legal advice from an experienced and skilled attorney or law firm with a solid background in arbitration law.
Contacting the Author
If you have any questions about arbitration, arbitration-law, arbitration-related litigation, this article, or any other legal-related matter, please contact the author, Philip Loree Jr., at (516) 941-6094 or at PJL1@LoreeLawFirm.com.
Philip J. Loree Jr. has 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.
ATTORNEY ADVERTISING NOTICE: Prior results do not guarantee a similar outcome.
Photo Acknowledgment
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Favorable arbitration awards are wonderful things, but they do not enforce themselves. Sometimes the other side voluntarily complies, but if not, there is little the arbitrator can do to help.
Arbitrators are not judges and do not have the authority to garnish wages, seize property, foreclose on encumbered property, freeze bank accounts, impose contempt sanctions, and so forth. Parties can delegate to arbitrators broad adjudicatory and remedial authority, but that is relevant only to the nature and scope of their awards and does not confer power on the arbitrators to enforce their awards coercively.
Apart from its potential preclusive effect in subsequent litigation or arbitration, an arbitration award stands on the same footing as any other privately prepared legal document, and for all intents and purposes it is a contract made for the parties by their joint agent of sorts—the arbitrator or arbitration panel. It may be intended by the arbitrator or panel, and at least one of the parties, to have legal effect, but it is up to a court to say what legal effect it has, and, if necessary, to implement that legal effect through coercive enforcement.
A judgment, by contrast, is an official decree by a governmental body (the court) that not only can be coercively enforced through subsequent summary proceedings in the same or other courts (including courts in other states and federal judicial districts), but is, to some extent, self-enforcing. A judgment, for example, can ordinarily be filed as a statutory lien on real property, and applicable state or federal law may, for example, authorize attorneys to avail their clients of certain judgment-enforcement-related remedies without prior judicial authorization.
The Federal Arbitration Act, and most or all state arbitration statutes, provide for enforcement of arbitration awards through a procedure by which a party may request a court to enter judgment on the award, that is to “confirm” it. Once an award has been reduced to judgment, it can be enforced to the same extent as any other judgment. See, e.g., 9 U.S.C. § 13 (Under Federal Arbitration Act, judgment on award “shall have the same force and effect, in all respects, as, and be subject to all the provisions of law relating to, a judgment in an action; and it may be enforced as if it had been rendered in an action in the court in which it is entered”); Fla. Stat. § 682.15(1)( “The judgment may be recorded, docketed, and enforced as any other judgment in a civil action.”); N.Y. Civ. Prac. L. & R. § 7514(a) (“A judgment shall be entered upon the confirmation of an award.”).
Chapter One of The Federal Arbitration Act (the “FAA”), and most or all state arbitration statutes, authorize courts to confirm domestic awards in summary proceedings. State arbitration-law rules, procedures, limitation periods, and the like vary from state to state and frequently from the FAA, and state courts may apply them to FAA-governed awards (provided doing so does not frustrate the purposes and objectives of the FAA).
Chapter 2 of the FAA provides some different rules that apply to the confirmation of domestic arbitration awards that fall under the Convention on the Recognition of Foreign Arbitral Awards (the “Convention”), and the enforcement of foreign arbitration awards falling under the Convention (i.e., awards made in territory of a country that is a signatory to the Convention).
Our focus here is on the Federal Arbitration Act’s requirements for confirming arbitration awards made in the U.S., including awards that fall under Chapter 2 of the Federal Arbitration Act. These awards fall into two categories: (a) awards that fall under Chapter One of the Federal Arbitration Act only (“Chapter One Domestic Awards”); and (b) awards made in the U.S. that fall under the Convention, and thus under both Chapter One and Chapter Two of the Federal Arbitration Act (“Chapter Two Domestic Awards”).
This segment addresses FAQs concerning the confirmation of Chapter One Domestic Awards and focuses on the substantive requirements for confirming Chapter One Domestic Awards under the Federal Arbitration Act. The next segment will discuss the procedural requirements for confirming such Awards. Future posts will answer some additional FAQs concerning the confirmation of such Awards, and another future segment will review special requirements applicable to the confirmation of Chapter Two Domestic Awards.
Single arbitrators are required under the Federal Arbitration Act to be neutral unless the parties otherwise agree. See, e.g., Morelite v. N.Y.C. Dist. Council Carpenters, 748 F.2d 79, 81-85 (2d Cir. 1984). In tripartite arbitration, one arbitrator (usually designated the umpire or chair) is ordinarily required to be neutral, while party-appointed arbitrators are presumed to be non-neutral, except to the extent otherwise required by the parties’ arbitration agreement. SeeCertain Underwriting Members London v. Florida Dep’t of Fin. Serv., 892 F.3d 501, 510-11 (2d Cir. 2018); Sphere Drake Ins. v. All American Life Ins., 307 F.3d 617, 622 (7th Cir. 2002); Trustmark Ins. Co. v. John Hancock Life Ins. Co. (U.S.A.), 631 F.3d 869, 872-74 (7th Cir. 2011). Arbitration provider rules, which may govern arbitrator qualifications in appropriate cases, often provide that all three arbitrators of a tripartite panel are required to be neutral.
Section 10(a)(2) of the Federal Arbitration Act—which authorizes federal district courts to vacate arbitration awards “where there was evident partiality…in the arbitrators…”—imposes in part and enforces these neutrality requirements. Section 10(a)(2) establishes that parties who agree to arbitrate can legitimately expect that neutral arbitrators will meet a certain minimal standard of arbitral impartiality, and that arbitrators not appointed as neutrals can, in appropriate circumstances, be held to a substantial, material breach of a stipulated arbitrator qualification requirement related-to, but not necessarily coextensive with, neutrality. See Certain Underwriting Members, 892 F.3d at 510-11; Sphere Drake, 307 F.3d at 622; Trustmark, 631 F.3d at 872-74.
The requirement that an arbitrator be “neutral” can be divided into three, distict components. The arbitrator must be (a) impartial; (b) disinterested; and (c) independent.
While federal, and many state, courts have class-action procedural rules that permit them to bind absent class members to a judgment or settlement, arbitration is different because it is based on party consent, not coercion. While the critical, threshold issues presented in class arbitration is party consent to class arbitration, class certification disputes arising out of a class arbitration proceeding can be just as challenging, especially when they involve absent class members who have not opted in to the proposed or certified class (“absent class members” or “absent members”).
Suppose Employer A requires each of its employees to sign a form arbitration agreement that clearly and unmistakably authorizes the arbitrator to decide all disputes arising out of or relating to the employment relationship as well as arbitrability and procedural issues. More than 250 employees (including putative class representatives) assert that an arbitrator (the “Arbitrator”) should determine whether Employer A consented to class arbitration. Employer A submits that issue to the Arbitrator.
The Arbitrator hears and considers the evidence and arguments and makes a Clause Construction Award, which rules that Employer A and each of the employees consented to class arbitration by signing the employment agreement. Employer A challenges the award as exceeding the arbitrator’s powers under Section 10(a)(4) of the Federal Arbitration Act, but the challenge fails because an appellate court finds that the Arbitrator was at least arguably construing the employment agreement. .
After further proceedings the Arbitrator makes another award, this one certifying a class consisting of approximately 44,000 employees, which included not only the more than 250 persons who were either class representatives or opted in to the class, but also tens of thousands of persons who were absent class members in the sense that they had been notified of the class arbitration and proposed class but had not opted in to the class and had not otherwise appeared in the arbitration proceedings.
Did the Arbitrator have the power to make that class certification award, which purports to bind each of the 44,000 class members, the vast majority of whom were never parties to the arbitration and had never submitted to the Arbitrator any of the issues that were decided by the Arbitrator’s Clause Construction and class certification awards?
On November 18, 2019, the United States Court of Appeals for the Second Circuit said the answer to that question was “yes.” But with all due respect to the Second Circuit, and understanding that reasonable minds can and do differ on this subject, we think the better answer would have been “no.”
This post briefly discusses the Second Circuit’s decision.
A subsequent post will explain why we believe the Second Circuit should have held that the arbitrator in that case did not have the authority to bind absent class members, who were not parties to the Clause Construction Award, did not opt into the class, did not otherwise agree to be bound by the Clause Construction Award or the class certification award, and did not otherwise submit to the Arbitrator the issues decided by the Clause Construction and class certification Awards.
The result would be that the class arbitration could proceed, albeit with a far smaller, certified class (which might be expanded to accommodate any absent members who might be given an additional opportunity to opt-in). But that result, we think, is consistent with the consensual nature of arbitration— a dispute resolution method that is fundamentally different from its coercive counterpart, court litigation.
Absent Class Members: Background and Procedural History of Jock v. Sterling Jewelers Inc.
The Second Circuit’s recent decision was the fourth appeal in the Jock v. Sterling Jewelers Inc. case, a long-running class arbitration dispute. The first of these appeals, Jock v. Sterling Jewelers, Inc., 646 F.3d 113 (2d Cir. 2011) (“Jock I”), was decided in 2011—the most recent one, Jock v. Sterling Jewelers Inc., No. 18-153-cv, slip op. (2d Cir. November 18, 2019) (“Jock IV”), and the subject of this post, was decided November 18, 2019.
Jock and her co-plaintiffs are retail sales employees of Sterling Jewelers, Inc. (“Sterling”). Back in 2008 they sought relief on behalf of a class under Title VII of the Civil Rights Act of 1964, and under the Equal Pay Act, alleging Sterling, based on their gender, paid them less than their similarly situated male co-workers.
Sterling employees, including Jock and her co-plaintiffs were required to sign a “RESOLVE Program” agreement (the “Agreement”), which imposed mandatory arbitration. By executing the agreement employees expressly “waiv[ed] right[s] to obtain any legal or equitable relief . . . through any government agency or court, and . . . also waiv[ed] [their] right[s] to commence any court action.” The Agreement provided that they “may. . . seek and be awarded equal remedy through the RESOLVE Program.”
The Agreement provided that “[t]he Arbitrator shall have the power to award any types of legal or equitable relief that would be available in a court of competent jurisdiction[,]” and that any claim arising thereunder will be arbitrated “in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association.”
Class arbitration ensued, and the arbitrator construed the Agreement to permit class arbitration. The district court overturned the award on the ground that the class construction award exceeded under the arbitrator’s powers for the reasons stated in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010).
Jock I
But the Second Circuit in Jock I reversed the district court’s judgment. As the Court explained in Jock IV, the Jock I Court “reversed, holding that the District Court impermissibly substituted its own legal analysis for that of the arbitrator instead of focusing its inquiry on whether the arbitrator was permitted to reach the question of class arbitrability that had been submitted to her by the parties.” Jock IV, slip op. at 5-6. The Jock I Court also “explained. . . that the arbitrator had a colorable justification under the law to reach the decision she did.” Jock IV, slip op. at 6.
Jock I “distinguished Stolt-Nielsen on the ground that the parties in Stolt-Nielsen stipulated that their arbitration agreement contained ‘no agreement’ on the issue of class arbitration, whereas the plaintiffs in [Jock I] merely conceded that there was no explicit agreement to permit class arbitration, thus leaving open the possibility of an ‘implied agreement to permit arbitration.’” Jock IV, slip op. at 6 (citation omitted).
The Class Certification Award
After Jock I the arbitrator made a class certification award, certifying a class of “approximately 44,000 women, comprising the then-254 plaintiffs as well as other individuals who had neither submitted claims nor opted in to the arbitration proceeding (‘the absent class members’).” Jock IV, slip op. at 6 (parenthetical in original). The arbitrator’s class certification was limited to those with Title VII disparate impact claims seeking declaratory and injunctive relief.
The district court denied Sterling’s motion to vacate the certification award. As Jock IV explains, the district court reasoned “that Sterling’s argument that the arbitrator had exceeded her powers in ‘purporting to bind absent class members who did not express their consent to be bound’ was ‘foreclosed by’ this Court’s holding in Jock I that ‘there is no question that the issue of whether the agreement permitted class arbitration was squarely presented to the arbitrator.’” ” Jock IV, slip op. at 7 (citation omitted).
Jock II
The district court’s decision refusing to vacate the class certification award resulted in the second appeal, Jock v. Sterling Jewelers Inc., 703 Fed. Appx. 15 (2d Cir. 2017) (summary order). (“Jock II”). In July 2017 we wrote a short post (here) about Jock II.
Jock II vacated and remanded the district court’s decision refusing to vacate the certification award because it purported to bind absent members, who (because of their absence) could not have “squarely presented” to the arbitrator the question whether the agreement authorized class procedures, let alone the issue of whether they should be deemed part of a class in a class arbitration to which they had not consented. SeeJock II, 703 Fed. Appx. at 16, 17-18 (quotation and citation omitted).
In Jock II, the Second Circuit directed the district court to “consider[] on remand. . . ‘whether an arbitrator, who may decide. . . whether an arbitration agreement provides for class procedures because the parties “squarely presented” it for decision, may thereafter purport to bind non-parties to class procedures on this basis.’”) Jock IV, slip op. at 7-8 (citation omitted).
The Jock II Remand
The district court vacated the class determination award on remand for two reasons. First, the district court said that it had ruled in 2010 that the Agreement did not authorize class procedures and that, accordingly, the absent class members had not consented to class arbitration.
Second, the submission by the plaintiffs and defendants (not the absent members) to the arbitrator of the question whether the Agreement authorized class arbitration did not confer on the arbitrator the authority to make a ruling binding on the absent members (who did not submit the issue to the Arbitrator). “The District Court[,]” said the Second Circuit, “reasoned that, even if the arbitrator’s ‘erroneous interpretation’ of the [Agreement] could bind the 254 plaintiffs who had ‘authorized the arbitrator to make that determination by submitting the question to her or opting into the proceeding, that erroneous interpretation could not bind absent class members.” Jock IV, slip op. at 8.
The Jock IV Appeal
The district court ruling on the Jock II remand resulted in the Jock IV appeal. (The Jock III decision was the dismissal of an appeal of a district court ruling that it lacked subject matter jurisdiction to vacate an interim decision rendered by the arbitrator. Jock v. Sterling Jewelers Inc., 691 F. App’x 665 (2d Cir. 2017) (summary order).)
Since the issue before the district court on the Jock II remand was whether the arbitrator’s class certification decision should be vacated under Section 10(a)(4) of the Federal Arbitration Act, the applicable standard of review was the manifest disregard of the agreement standard set forth in Stolt-Nielsen and Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 568-69 (2013). See Jock IV, slip op. at 9-11. (For discussion of that deferential standard, see here, here, here, and here)
Sterling (the “Award Challenger”) argued, consistent with the district court’s decision, that the deferential standard should not apply to the question whether the absent members had consented to class arbitration, because they were not parties to the class construction award that was the subject of Jock I, did not submit the issue of class consent to the arbitrator, or otherwise agree to be bound by a determination of consent to class arbitration to which they were not parties.
But the Second Circuit did not agree with the district court or the Award Challenger. It agreed with the plaintiff-appellants (the “Award Defending Parties”), who “argue[d] that the absent class members have, in fact, authorized the arbitrator to determine whether the [Agreement] permits class arbitration procedures.” Jock IV, slip op. at 11. They urged “that because all Sterling employees signed the RESOLVE Agreement, all Sterling employees “agreed that, if any of them initiated a putative class proceeding, the arbitrator in that proceeding would be empowered to decide class-arbitrability—and, if he or she found it appropriate, to certify a class encompassing other employees’ claims.” Jock IV, slip op. at 11-12.
The Award Defending Parties asserted that “the District Court erred by ‘never ask[ing] what authority absent class members conferred on [the arbitrator] by joining the RESOLVE Program [i.e., signing the Agreement],’ a question that is a matter of contract interpretation.” Jock IV, slip op. at 12.
The Second Circuit determined that, by signing the Agreement, the employer and the absent class members agreed that: (a) any other employee who signed the Agreement was authorized to arbitrate on behalf of any absent member of a yet-to-be certified class the issue of consent to class arbitration, irrespective of whether the absent class member was a party to the arbitration, and irrespective of whether the absent member had notice of, and consented to, the arbitration; (b) any absent class member would be bound by the outcome of such a class-arbitration-consent arbitration proceeding, even though the absent class member did not participate in the arbitration, did not consent to the arbitration (apart from signing the Agreement), and did not play any role in the selection of the arbitrator who presided over the arbitration; and (c) the decision on class arbitration reached by the arbitrator in his or her absence would be subject to review under the exceedingly deferential Oxford/Stolt-Nielsen standard only, and the absent members would be bound by the result of that judicial review even though they were not parties to the Clause Construction Award or to the judicial proceeding in which the Clause Construction Award was reviewed.
Federal Arbitration Act (“FAA”) Section 10 permits Courts to vacate awards “where there was evident partiality. . . in the arbitrators. . . .” 9 U.S.C. § 10(a)(2). If an arbitrator fails to disclose an ownership interest in an arbitration provider, which has a nontrivial, repeat player relationship with a party, should the award be vacated for evident partiality?
The most recent significant evident partiality development is the U.S. Court of Appeals for the Ninth Circuit’s 2-1 decision in Monster Energy Co. v. City Beverages, LLC, ___ F.3d ___, No. 17-55813, slip op. (9th Cir. Oct. 22, 2019), a case that involved an award made in favor of a repeat player party in an administered arbitration. Monster held that an arbitrator who failed to disclose his ownership interest in an arbitration provider was guilty of evident partiality because the arbitration provider had nontrivial business relationship with the repeat player party.
The Repeat Player Problem
In administered arbitration the (inevitable) existence of repeat players raises important questions that bear on evident partiality. Repeat players are parties who use the services of an arbitration provider on a regular basis, and therefore are a source of repeat business for the provider.
Arbitrators who are part of an arbitration provider’s appointment pool have earned their appointments by satisfying certain criteria set by the arbitration provider, and may also be trained by the arbitration provider. Ordinarily they are not employees of the arbitration provider, and, at least ostensibly, are independent from the arbitration provider.
But the economic interests of these arbitrators are aligned with those of the arbitration provider. What’s good for the arbitration provider is generally good for the arbitration provider’s pool of arbitrators. Repeat business is good for arbitration providers, just as it is good for lawyers and others.
Let’s assume that an arbitrator appointed in an arbitration administered by provider X has never before served as an arbitrator for parties A and B. If the contract between A and B is a form contract used by Party A that appoints X to administer arbitrations, and the contract concerns a subject matter in which disputes are fairly common (e.g., a consumer, employment, or franchise matter), then the arbitrator knows or has reason to know that the customer is either a repeat player or is likely to be one in the not too distant future.
If party B is, for example, a consumer, employee, or franchisee, and is not a repeat player, then one might suggest that our hypothetical arbitrator has at least an indirect interest in the outcome of the arbitration, specifically, one that would be best served by an outcome favoring party A, the repeat player.
That creates a potential evident partiality problem, for to be neutral, arbitrators have to be not only independent, and unbiased, but also disinterested. To be disinterested, the arbitrator cannot have have “a personal or financial stake in the outcome of the arbitration.” CertainUnderwriting Members, 892 F.3d at 510 (citations and quotations omitted).
Does the kind of indirect and general financial or personal interest in the outcome described above, without more, establish evident partiality? It should not, although arbitrators are well-advised to disclose the existence of such indirect or general financial or personal interests.
We think an argument for evident partiality based solely on an arbitrator having reason to believe that one of the parties is a repeat player with respect to the arbitration provider’s services would prove too much. Carried to its logical conclusion it would destroy, or at least severely diminish, the utility of the arbitration-provider-administered arbitration model in a large number of cases.
But that doesn’t mean that administered-arbitration awards in favor of repeat players and against non-repeat-players are immune from evident partiality challenge in all circumstances. Monster Energy provides an example and may be a harbinger of closer scrutiny of repeat player evident partiality challenges.
We discuss the majority opinion in Monster Energy below. In a future post or posts, we will discuss the dissenting opinion, what to make of the case, and how it might (or not) influence how other courts address repeat-player-related issues that may arise in future cases.
In Steyn v. CRTV, LLC (In re Steyn), 175 A.D. 3d 1 (1st Dep’t 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
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.”
Favorable arbitration awards are wonderful things, but they are not self-enforcing. Sometimes the other side voluntarily complies, but if not, there is really not much of anything the arbitrator can do to help.
Arbitrators are not judges and do not have the authority to garnish wages, seize property, foreclose on encumbered property, freeze bank accounts, impose contempt sanctions, and so forth. Parties can delegate to arbitrators broad adjudicatory and remedial authority, but that is relevant only to the nature and scope of their awards, and does not confer power on the arbitrators to enforce their awards coercively.
Apart from its potential preclusive effect in subsequent litigation or arbitration, an arbitration award stands on the same footing as any other privately prepared legal document, and for all intents and purposes it is a contract made for the parties by their joint agent of sorts—the arbitrator or arbitration panel. It may be intended by the arbitrator or panel, and at least one of the parties, to have legal effect, but it is up to a court to say what legal effect it has, and, if necessary, to implement that legal effect through coercive enforcement.
A judgment, by contrast, is an official decree by a governmental body (the court) that not only can be coercively enforced through subsequent summary proceedings in the same or other courts (including courts in other states and federal judicial districts), but is, to some extent, self-enforcing. A judgment, for example, can ordinarily be filed as a statutory lien on real property, and applicable state or federal law may, for example, authorize attorneys to avail their clients of certain judgment-enforcement-related remedies without prior judicial authorization.
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The Federal Arbitration Act, and most or all state arbitration statutes, provide for enforcement of arbitration awards through a procedure by which a party may request a court to enter judgment on the award, that is to “confirm” it. Once an award has been reduced to judgment, it can be enforced to the same extent as any other judgment. See, e.g., 9 U.S.C. § 13 (Under Federal Arbitration Act, judgment on award “shall have the same force and effect, in all respects, as, and be subject to all the provisions of law relating to, a judgment in an action; and it may be enforced as if it had been rendered in an action in the court in which it is entered”); Fla. Stat. § 682.15(1)( “The judgment may be recorded, docketed, and enforced as any other judgment in a civil action.”); N.Y. Civ. Prac. L. & R. § 7514(a) (“A judgment shall be entered upon the confirmation of an award.”).
Chapter One of The Federal Arbitration Act (the “FAA”), and most or all state arbitration statutes, authorize courts to confirm domestic awards in summary proceedings. State arbitration-law rules, procedures, limitation periods, and the like vary from state to state and frequently from the FAA, and state courts may apply them to FAA-governed awards (provided doing so does not frustrate the purposes and objectives of the FAA). And Chapter 2 of the FAA provides some different rules that apply to the confirmation of domestic arbitration awards that fall under the Convention on the Recognition of Foreign Arbitral Awards (the “Convention”), and the enforcement of non-domestic arbitration awards falling under the Convention (i.e., awards made in territory of a country that is a signatory to the Convention.
But let’s keep things simple, and take a brief look at the FAA’s requirements for confirming arbitration awards, as applicable in federal court for domestic awards not falling under Chapter Two of the Federal Arbitration Act in situations where there is no prior pending action related to the arbitration, and there are no issues concerning federal subject-matter jurisdiction, personal jurisdiction, sufficiency or service of process, venue (i.e., whether the suit should have been brought in a different federal judicial district), or the applicability of Chapter One of the FAA (9 U.S.C. §§ 1-16). We’ll also discuss how applications to confirm are supposed to be summary proceedings, why timing of an application is important, and how courts decide them.
What are the Requirements for Confirming Arbitration Awards under the Federal Arbitration Act?
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Like most other issues arising under the FAA, whether a court should confirm an award depends on what the parties agreed. Section 9 of the FAA, which governs confirmation of awards, says—with bracketed lettering added, and in pertinent part: “[A] If the parties in their agreement have [B] agreed that a judgment of the court shall be entered upon [C] the award made pursuant to the arbitration, and [D] shall specify the court, then [E] at any time within one year after the award is made any party to the arbitration may apply to the court so specified for an order confirming the award, and [F] thereupon the court must grant such an order unless [G] the award is vacated, modified, or corrected as prescribed in sections 10 and 11 of this title.” 9 U.S.C. § 9. Items [A] through [D] above each concern party consent as evidenced by the parties’ arbitration agreement.
The key substantive requirements for confirming arbitration awards are thus: Continue Reading »
This two-part Arbitration Law FAQ guide is designed to provide individuals and businesses with a basic overview of what the Federal Arbitration Act has to say about challenging arbitration awards in court. This is Part I and Part II is here.
It assumes that the award is governed by the Federal Arbitration Act; the challenge is made in a federal district court having subject matter and personal jurisdiction; and venue is proper.
This guide is not legal advice or a substitute for legal advice. If you are an individual or business which wants or has to challenge or defend an arbitration award, or make an application to confirm the award, then you should consult with an attorney or firm that has experience and expertise in arbitration law matters.
I just received an arbitration award against me, which I believe is governed by the Federal Arbitration Act (the “FAA”). Does the FAA allow me to appeal the award to a court?
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You cannot—at least in any meaningful sense of the word—“appeal” an FAA-governed arbitration award to a court. An appeal involves judicial review by an appellate court under which a panel of judges reviews trial-court rulings on questions of law independently—that is, as if the appellate court were deciding the question for itself in the first instance. The appellate court generally reviews the trial court’s findings of fact on a “clearly erroneous” or “clear error” standard of review, that is, paying a certain degree of deference to the finder of fact (the jury or, in a bench trial, the judge). Appellate review of a court decision is thus fairly broad and searching, particularly where outcomes turn solely on questions of law.
When a person agrees to arbitrate it gives up the right to appellate review, which focuses on issues relating to the merits of the case the court decided or on important litigation-procedure rulings.
Does the FAA permit a party to challenge an arbitration award?
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The Federal Arbitration Act provides some limited remedies for challenging arbitration awards where a party can show certain kinds of unusual and material violations of an arbitration agreement by an arbitrator or an opposing party, or an obvious mathematical, typographical, or technical error that appears on the face of the award. The remedies are orders: (a) modifying or correcting the award; or (b) vacating the award in whole or in part.
To vacate an award means to annul it, that is, to declare it null and void. When an award is vacated, then the parties generally must (absent a settlement) go back and re-arbitrate the matters that were the subject of the award. When an award is modified or corrected, the correction or modification may be made by the court, or the court may remand the matter back to the arbitrators for that purpose. Continue Reading »
A choice-of-law provision is as much a part of a parties’ contract as any other, and an arbitrator might manifiestly disregard the parties’ contractual choice-of-law, which might provide grounds for vacating the award under Section 10(a)(4) of the Federal Arbitration Act (“FAA”). But, as well-illustrated by the U.S. Court of Appeals for the Eigth Circuit’s decision in Beumer Corp. v. ProEnergy Servs., LLC, ___ F.3d ____, slip op. (8th Cir. August 8, 2018), the circumstances that might justify such a decision would be very unusual, to say the least.
Beumer Corp. v. ProEnergy Servs., LLC
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Owner and Contractor had a construction contract that contained an arbitration agreement, limitation-of-liability, provision, and a Missouri choice-of-law clause. The Owner complained that the Contractor’s work was deficient and, accordingly, no payment was due. The Contractor commenced arbitration for the amount due under the contract and the Owner counterclaimed for damages.
The parties disputed the scope and enforceability of their contract’s limitation of liability provision, which stated:
Notwithstanding any of the foregoing or any other term in this Contract, the total liability of Contractor for any loss, indemnity, damage or delay of any kind will not under any circumstances exceed 100% of the Contract Sum.
The contract contained a broad Missouri choice-of-law clause, and provided that a prevailing party could collect its attorney’s fees.
The Award
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The Arbitrator ruled that the clause was enforceable, that the Contract Sum (i.e., the liability cap) was $699,702.39., and that the terms “loss, indemnity, damage or delay of any kind” did not include the prevailing party’s contractual right to attorney fees. The Arbitrator thus awarded Beumer: (a) $699,702.39 in damages; (b) $191,680.14 in pre-judgment interest; (c) post-judgment interest at 9%; and (d) $916,027.90 in attorney’s fees and expenses.
On its motion to vacate the Award the Contractor did not dispute that the Arbitrator “arguably construed” the limitation of liability clause, but contended that the Arbitrator exceeded its powers by “disregarding” the Missouri choice-of-law clause, because: (a) the Arbitrator relied on caselaw from four jurisdictions outside of Missouri to support his construction of the limitation of liability provision as exclusive of costs and attorney fees, and did not cite any Missouri decisions on this construction question; and (b) the Contractor claimed that the Missouri cases required a cost-inclusive interpretation of the clause, not a cost-plus one.
The Arbitrator did not Disregard the Choice-of-Law Provision
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Did the Arbitrator exceed his powers by ruling that the limitation of liability clause did not limit liability for contractual attorney fees? The Eighth Circuit, in a well-reasoned decision, said the answer was “no.” Continue Reading »
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The 2021 Term was a busy and controversial one for the United States Supreme Court (“SCOTUS”) regarding abortion, First Amendment rights, Second Amendment rights, and administrative agency power. However, many may not know SCOTUS decided four Federal Arbitration Act cases during the 2021 Term (the “FAA Cases”), as well as a pair of cases consolidated into one concerning whether U.S. Courts may provide under 28 U.S.C. § 1782 judicial assistance to international arbitration panels sited abroad. See Viking River Cruises, Inc. v. Moriana, 596 U. S. ____, No. 20–1573, slip op. (June 15, 2022) (construing FAA); ZF Automotive US, Inc., et al. v. Luxshare, Ltd., 596 U.S. ___, No. 21–401, slip op. (June 13, 2022) (construing 28 U.S.C. § 1782); Southwest Airlines Co. v. Saxon, 596 U.S. ___, No. 21-309, slip op. (June 6, 2022) (construing FAA); Morgan v. Sundance, Inc., 596 U.S. ___, No. 21-328, slip op. (May 23, 2022) (construing FAA); Badgerow v. Walters, 596 U.S. ___, No. 20-1143, slip op. (March 31, 2022) (construing FAA). 
Section 10(a)(1) of the Federal Arbitration Act authorizes courts to vacate awards where “the award was procured by corruption, fraud, or undue means. . . .” 9 U.S.C. § 10(a)(1). Cases vacating awards on Section 10(a)(1) grounds are rare, presumably because the circumstances that would trigger relief are relatively rare.
