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Archive for the ‘Manifest Disregard of the Law’ Category

Manifest Disregard of the Law | Manifest Disregard of the Agreement | Second Circuit Remands Award to Arbitrator for Do-Over

October 25th, 2019 Authority of Arbitrators, Award Vacated, Awards, Challenging Arbitration Awards, Contract Interpretation, Enforcing Arbitration Agreements, Exceeding Powers, FAA Chapter 1, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 10, Grounds for Vacatur, Manifest Disregard of the Agreement, Manifest Disregard of the Law, Uncategorized, United States Court of Appeals for the Second Circuit, Vacate Award | 10(a)(4), Vacate Award | Manifest Disregard of the Law, Vacatur No Comments »
Second Chance to Make Award not in Manifest Disregard of Law or Agreement

Arbitrators are human and occasionally they make awards that cannot be squared with logic and law, and courts may, in appropriate circumstances, vacate those awards as being in manifest the agreement, or in some circuits, in manifest disregard of the law. The U.S. Court of Appeals for the Second Circuit considered such an award in Weiss v. Sallie Mae, Inc., ___ F.3d ___, No. 18-2362, slip op. (Sept. 12, 2019), and solved the problem in a way that imposed minimal costs and delay on the parties and, at the same time, gave effect to the parties’ reasonable contractual expectations, including that the arbitrator would make an award with a colorable basis in the law or the parties’ agreement, not one in manifest disregard of the law or the agreement. It is therefore a good example of a case that promotes arbitration as an alternative to litigation.

Background

W is a student-loan borrower who in 2011 defaulted on a loan issued by S (N is the successor of S, but we shall refer to both as “S”). W gave S her phone number (“Phone Number 1”) when she obtained the loan and consented to S contacting her via an automatic telephone dialing system (“ATDS”). S made ATDS calls to her using Phone Number 1 prior to her default on the loan in 2011.

Also prior to her 2011 default W obtained a second telephone number (“Phone Number 2”) but did not give S consent to contact her on that number via an ATDS.

After W’s 2011 default, S contacted W seven or eight times a day at Phone Number 2 via an ATDS, attempting to collect the debt. S made 774 ATDS calls to Phone Number 2 during the period September 16, 2011 through July 1, 2013.

The Arbitration

A dispute arose between W and S about whether S’s ATDS calls had violated the Telephone Consumer Protection Act (“TCPA”) and W commenced an action in the U.S. District Court for the Western District of New York. The action was stayed after the parties stipulated to arbitration pursuant to an arbitration agreement in a student-loan promissory note.

The Award: Was it in Manifest Disregard of the Law or the Agreement?

Final Award 2 - yay-15399450

Following a hearing an arbitrator made an award granting W $108,000 in statutory damages under the TCPA. But the award held that W was a class member in a class action that S had settled. The class-action settlement (the “Arthur Settlement”) “included as a class member, ‘any person who received ATDS calls from [S] between October 27, 2005 and September 14, 2010.’” Slip op. at 5 (citation omitted).

W did not contend that the calls S made to Phone Number 1 violated the TCPA (W had consented to those calls), and W contended that, accordingly, she was not bound by the settlement, even though she had received ATDS on Phone Number 1 during the specified period. The arbitrator, however, found that argument “‘unpersuasive,’” and “ruled that Weiss was a class member and that ‘the proof was conclusive that [S] provided [W] with the required notice of the settlement and of her rights and obligations under the terms of the settlement.’” Slip op. at 5-6 (citation omitted).

The Arthur Settlement “notice offered class members the opportunity to file a ‘consent Revocation’ document by September 15, 2012; absent such a filing, ‘the ATDS calls would not stop and the borrower’s prior consent to give them [sic] would be deemed to have been given.’” Slip op. at 6 (citation omitted; bracketed text in original).  

While W contended that she was not aware of the Arthur Settlement, S testified that notice was successfully emailed to W.

The agreement implementing the Arthur Settlement featured a general release, “under which class members were ‘deemed to have fully released and forever discharged [S]’. . . from any and all claims and causes of action, inter alia, ‘that arise out of or are related in any way to the use of an [ATDS]. . . used by any of the Released Parties in connection with efforts to contact or attempt to contact Settlement Class Members including, but not limited to, claims under or for violations of the [TCPA].’” Slip op. at 6 (citations omitted; some bracketed text in original).

Even though the general release, to which the arbitrator determined W was bound, deemed W to have “waived ‘any and all’ TCPA claims effective the date of final judgment in the Arthur Settlement action[,]” the arbitrator’s award did not acknowledge the existence of that release. Slip op. at 6-7. “Instead,” said the Court, “the arbitrator interpreted [W]’s failure to submit a consent revocation pursuant to the Arthur class notice as precluding recovery for any calls placed to [Phone Number 2] after the September 15, 2012 deadline but also as permitting recovery for ATDS calls placed to [Phone Number 2] between September 6, 2011, and September 16, 2012.” Slip op. at 7.

The arbitrator awarded TCPA statutory damages in the amount of $108,500 ($500 per call for 217 calls during the applicable period). W moved to confirm the award and S cross-moved to vacate it.

The district court vacated the award, finding that “by neglecting to ‘apply—or even address—an explicit, unambiguous term of the settlement agreement,’ which “clearly and unambiguously bars recovery for claims until and including the date of the agreement,’ the arbitrator manifestly disregarded the law.” Slip op. at 7. W appealed.

The Second Circuit Decision: Remand to Arbitrator to Permit Him to Make an Award not in Manifest Disregard of the Law or the Agreement

Court Decisions | Manifest Disregard of the Law | Manifest Disregard of the Agreement

The Second Circuit agreed with much of the district court’s reasoning but disagreed on the remedy. Instead of vacating the award outright on the manifest disregard of the law or manifest disregard of the agreement grounds, the Second Circuit vacated the district court’s judgment and remanded the case to the district court with instructions to the district court to remand the matter to the arbitrator with instructions to clarify whether the class notice was or was not sufficient and, if determined to be sufficient, then to construe the general release provision in the first instance and to vacate or modify the arbitral award if necessary.” Slip op. at 14 (citation omitted). “The arbitrator,” said the Court, “shall be instructed either to interpret and apply the terms of the Arthur Settlement agreement’s general release provision or to explain why that provision does not bar [W’s] claims.” Slip op. at 15.

The Second Circuit also provided for streamlined district court, and if necessary, appellate, review of the arbitrator’s decision after remand, providing that “the district court shall thereafter rule on any subsequent objections to the arbitrator’s decision, which objections may be advanced by appropriate motion of either party.” Slip op. at 15. “Any appeal from the district court’s decision. . . ,” explained the Court, “may be advanced by letter notice to the Clerk of this Court without necessity of filing a new notice of appeal, and that appeal shall be assigned to this panel.”

The Second Circuit’s Rationale for its Decision: Arbitrator’s Failure to even Mention General Release Made it Impossible to Determine whether Award Colorably based in Contract or in Manifest Disregard of the Law/Manifest Disregard of the Agreement

The Court explained that “the arbitrator construed the Arthur class notice as establishing [W]’s consent to receive future ATDS calls, but he determined that such consent could not be applied retroactively to bar her recovery for calls placed prior to the revocation deadline.” Slip op. at 10. W made two arguments in an effort to justify the arbitrator’s decision: (a) the arbitrator interpreted the Arthur Settlement class notice and an arbitrator’s “misinterpretation of what amounts to a contractual provision does not provide sufficient grounds for vacatur under the FAA[]”; and (b) the class notice was not binding on her because it failed to “satisfy due process[,]” an argument that was essentially a “collateral attack on the sufficiency of” the notice. Slip op. at 11.

While the legal premise of W’s first argument was correct—”interpretation of the contract terms is within the province of the arbitrator and will not be overruled simply because [the Court] disagree[s] with that interpretation[,]” slip op. at 11 (citations and quotations omitted)—as the district court concluded, “‘this [was] not a case where the arbitrator’s interpretation of the contract was simply incorrect’ as ‘the arbitrator’s decision here ignored and contradicted an unambiguous term of the agreement[,]” that is, “the general release embodied in the Arthur Settlement.” Slip op. at 11.

For “even if the arbitrator believed that the class notice entitled [W] to recover for ATDS calls made prior to the consent revocation deadline, it is impossible to square that conclusion with the general release provision[,]” which “bar[s] [W]’s recovery for ‘any and all’ TCPA claims.” Slip op. at 11-12. The Court said that is “especially true given that the parties agreed in their arbitration agreement that ‘[t]he arbitrator shall follow applicable substantive law to the extent consistent with the FAA.” Slip op. at 12.

“Because,” concluded the Court, “the arbitrator did not even mention the release in his decision, we are unable to ascertain from the record whether the arbitrator in fact based his decision on the four corners of the Arthur Settlement agreement and its accompanying class notice, as [W] appears to contend, or whether he instead discarded the agreement in favor of his own policy preferences.’” Slip op. at 12. (quoting Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 671-72 (2010).

As respects W’s argument (b), concerning class notice sufficiency, the “arbitrator expressly found that despite some of the ‘confusing’ terms of the Arthur Settlement agreement, ‘the proof was conclusive’ that [W] received ‘the required notice of the settlement and of her rights and obligations under the terms of the settlement.’” Slip op. at 12 (citation omitted). But the arbitrator “appeared to base his award on the fact that the class notice only apprised [W] of her consent to receive a subset of ATDS—those placed prospectively.”

“If. . . the arbitrator,” said the Court, “were of the view that the class notice did not satisfy due process, as [W] contends, then the arbitrator, in following applicable substantive law, would seemingly be obliged to hold that [W] could not be bound by any of the Arthur Settlement terms.” Slip op. at 12-13 (citation omitted).

The notice issue “is an all-or-nothing inquiry[,]” but “[i]nstead the arbitrator’s finding that the class notice ‘does not state that the recipient (i.e., [W]) will be deemed to have given prior consent to the making of calls by [S]’ appears to rest on a parsing of the applicable law grounded neither in a constitutional due process analysis nor in a faithful exercise in contract interpretation.” Slip op. at 13 (citation omitted). That would mean the award was both in manifest disregard of the law and in manifest disregard of the agreement.

The Court said its “concern [was] reinforced by” where in the arbitrator’s opinion the discussions of notice of settlement versus express and implied consent to ATDS calls appeared. Slip op. at 13. The discussion of settlement notice was “addressed up front as the first of the ‘issues considered’ by the arbitrator.” Slip op. at 13. The issues of express and implied consent to calls were discussed in subsequent “separate sections of the arbitrator’s opinion that address the merits of [S]’s defense to [W]’s TCPA claims.” Slip op. at 13.

But “[o]nce the arbitrator made the determination that ‘Weiss was adequately advised of the terms of the settlement and of the requirement that she revoke any consent given to [S] to place ATDS calls to [Phone Number 2],’ that conclusion would seem to obviate not only the arbitrator’s subsequent analysis concerning whether [S] had met its burden of proving Weiss’s consent but also any further determination as to the effect of the class notice.” Slip op. at 13-14. Put differently, “if the arbitrator intended to deem the class notice insufficient, he did not say so in his threshold analysis regarding the settlement’s applicability and strongly implied the opposite.” Slip op. at 14.  

Because of the award’s “incoherence,” and because the Court could not determine adequately whether the arbitrator based his decision on the class notice and Arthur Settlement agreement terms, the Court vacated the district court’s decision and remanded the case to the district court with directions to remand to the arbitrator “to construe the general release in the Arthur Settlement in the first instance and, if necessary, to vacate or modify the arbitral award.” Slip op. at 15.

Want to learn more about manifest disregard of the agreement and manifest disregard of the law? Read here, here, here, here, here, here, here, and here.

Photo Acknowledgments

The photos featured in this post are licensed from Yay Images and are subject to copyright protection under applicable law.  

New Clear and Unmistakable Outcome Exception to the Old Clear and Unmistakable Rule? (Part II)

August 15th, 2019 Arbitrability, Arbitrability | Clear and Unmistakable Rule, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Authority of Arbitrators, Class Action Arbitration, Class Action Waivers, Class Arbitration Waivers, Clause Construction Award, Clear and Unmistakable Rule, FAA Chapter 1, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 2, FINRA Arbitration, First Options Reverse Presumption of Arbitrability, Manifest Disregard of the Agreement, Manifest Disregard of the Law, United States Court of Appeals for the Fifth Circuit, United States Court of Appeals for the Second Circuit, United States Supreme Court 1 Comment »
Clear and Unmistakable Rule | Analysis

Part I of this post discussed how the Second and Fifth Circuits, in  Metropolitan Life Ins. Co. v. Bucsek, ___ F.3d ___, No. 17-881, slip op. (2d Cir. Mar. 22, 2019), and 20/20 Comms. Inc. v. Lennox Crawford, ___ F.3d ___, No. 18-10260 (5th Cir. July 22, 2019), suggest a trend toward what might (tongue-in-cheek) be called a “Clear and Unmistakable Outcome Exception” to the First Options Reverse Presumption of Arbitrability (a/k/a the “Clear and Unmistakable Rule”).

Under this Clear and Unmistakable Outcome Exception to the Clear and Unmistakable Rule, courts consider the merits of an underlying arbitrability issue as part of their analysis of whether the parties clearly and unmistakably agreed to arbitrate arbitrability issues.

But the Clear and Unmistakable Outcome Exception runs directly counter to the U.S. Supreme Court’s decision in Schein v. Archer & White Sales, Inc., 586 U.S. ___, 139 S. Ct. 524 (January 8, 2019), and thus contravenes the Federal Arbitration Act as interpreted by Schein. 139 S. Ct. at 527-28, 529-31.

This Part II analyzes and discusses how Met Life and 20/20 Comm. effectively made an end run around Schein and considers what might have motivated those Courts to rule as they did.

Making an End Run Around Schein?

Clear and Unmistakable Rule | Circumvent | End Run

When, prior to 20/20 Comm. we wrote about Met Life, we said it “an important decision because it means in future cases where parties have not expressly agreed to arbitrate arbitrability questions, but have agreed to a very broad arbitration agreement, the question whether the parties’ have nevertheless clearly and unmistakably agreed to arbitrate arbitrability questions may turn, at least in part, on an analysis of the merits of the arbitrability question presented.” (See here. )

But after the Fifth Circuit decided 20/20 Comm. this July, in comments we made to Russ Bleemer, Editor of Alternatives, the Newsletter of the International Institute for Conflict Prevention & Resolution (“CPR”)—which were reproduced with our consent in Mr. Zhan Tze’s CPR Speaks blog article about 20/20 Comm. (here)—we expressed the belief that the Fifth Circuit was (whether intentionally or unintentionally) making an end run around Schein, effectively creating an exception to the Clear and Unmistakable Rule.

After analyzing 20/20 Comm. and comparing it to the Second Circuit’s Met Life decision, we concluded that the Second Circuit’s decision also ran counter to Schein.

Schein’s Abrogation of the “Wholly Groundless Exception” to the Clear and Unmistakable Rule

Clear and Unmistakable Rule | Jettison

In Schein the U.S. Supreme Court abrogated the so-called “wholly groundless exception” to the Clear and Unmistakable Rule. Prior to Schein certain courts, including the Fifth Circuit, held that even when parties clearly and unmistakably agreed to arbitrate arbitrability questions, courts could effectively circumvent the parties’ agreement and decide for itself arbitrability challenges that it determined were “wholly groundless.”  

The rationale Schein used to jettison the “wholly groundless exception” to the Clear and Unmistakable Rule is incompatible with the rationales the Second and Fifth Circuit used to support their decisions in Met Life and 20/20 Comm.

Under FAA Section 2, the Schein Court explained, “arbitration is a matter of contract, and courts must enforce arbitration contracts according to their terms.” Schein, 139 S. Ct. at 529 (citation omitted). When those contracts delegate arbitrability questions to an arbitrator, “a court may not override the contract[,]” and has “no power to decide the arbitrability issue.” 139 S. Ct. at 529. That is so even where a Court “thinks that the argument that the arbitration agreement applies to a particular dispute is wholly groundless.” 139 S. Ct. at 529.

Schein explained that its conclusion was supported not only by the FAA’s text, but also by U.S. Supreme Court precedent. Citing and quoting cases decided under Section 301 of the Labor Management and Relations Act, the Court explained that courts may not “‘rule on the potential merits of the underlying’ claim that is assigned by contract to an arbitrator, ‘even if it appears to the court to be frivolous[,]’” and that “[a] court has “‘no business weighing the merits of the grievance’” because the “‘agreement is to submit all grievances to arbitration, not merely those which the court will deem meritorious.’” 139 S. Ct. at 529 (quoting AT&T Technologies, Inc. v. Communications Workers, 475 U.S. 643, 649–650 (1986) and Steelworkers v. American Mfg. Co., 363 U.S. 564, 568 (1960)).

This “principle,” said the Schein Court, “applies with equal force to the threshold issue of arbitrability[]”—for “[j]ust as a court may not decide a merits question that the parties have delegated to an arbitrator, a court may not decide an arbitrability question that the parties have delegated to an arbitrator.” 139 S. Ct. at 530.

Exception to Clear and Unmistakable Rule? Why the Second and Fifth Circuit Decisions Conflict with Schein

Continue Reading »

Attorney Fees and Arbitrability Addressed by New York Appellate Court

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

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

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

Background: Attorney Fee and Arbitrability Challenges

Terms and Conditions

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

Continue Reading »

Eighth Circuit: Arbitrator did not Disregard Parties’ Missouri Choice-of-Law Provision

August 19th, 2018 Arbitration Practice and Procedure, Authority of Arbitrators, Awards, Choice-of-Law Provisions, Exceeding Powers, Judicial Review of Arbitration Awards, Manifest Disregard of the Agreement, Manifest Disregard of the Law, United States Court of Appeals for the Eighth Circuit Comments Off on Eighth Circuit: Arbitrator did not Disregard Parties’ Missouri Choice-of-Law Provision

Introduction

Choice-of-Law Provision 1

Choice-of-Law Provision 1

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

Choice-of-Law Provision 2

Choice-of-Law Provision 2

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

Choice-of-Law Provision 3

Choice-of-Law Provision 3

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

Choice-of-Law Provision 4

Choice-of-Law Provision 4

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 »

The Fourth Circuit: What Constitutes a Final Award and Who Makes the Call?

August 3rd, 2018 Appellate Practice, Arbitrability, Arbitration Practice and Procedure, Authority of Arbitrators, Awards, Confirmation of Awards, Exceeding Powers, Federal Arbitration Act Enforcement Litigation Procedure, Grounds for Vacatur, Judicial Review of Arbitration Awards, Manifest Disregard of the Agreement, Manifest Disregard of the Law, United States Court of Appeals for the Fourth Circuit 1 Comment »

Final Award 2 - yay-15399450

Final Award 2

What constitutes a “final arbitration award” for purposes of the Federal Arbitration Act is important because it bears on whether an award can be confirmed, vacated, or modified under Sections 9, 10, or 11 of the Federal Arbitration Act (the “FAA”). We addressed the basics concerning final awards in a 2009 post, here.

In Northfolk Southern Railway Co. v. Sprint Communications Co., L.P., 883 F.3d 417 (4th Cir. 2018), the U.S. Court of Appeals for the Fourth Circuit was faced with the question whether an award (the “Appraisal Award”), convened under an agreement’s appraisal clause, and issued by three appraisers, was a final arbitration award under the FAA. The unusual procedural posture of the case raised an additional, related question: whether under the FAA an arbitration panel, convened under the arbitration provision of the parties’ agreement, had the authority to declare the Appraisal Award to be a final award. That question matters, for if an arbitration panel has that power, then its decision concerning finality is subject only to the very highly deferential review permitted by Section 10 of the FAA. See First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 942-43 (1995); Oxford Health Plans LLC v. Sutter, 133 S. Ct.  2064, 2068-69 (2013).

Concededly with the benefit of 20/20 hindsight, we wonder whether a different litigation and appellate strategy might have yielded a different outcome. The Court held that the Appraisal Award was not final, and remanded the matter back to the appraisers. But the Court did not, for the reasons set forth below, definitively answer the “who” question. The Court’s decision that the Appraisal Award was not final was unquestionably correct if one considers from a purely objective standpoint, without deference to the Arbitration Award, which declared that the Award was final.  But the correct outcome would be considerably less certain had the Railroad sought confirmation of the Arbitration Award and urged the Court to accord deference to the arbitrators who made it.

Background: Northfolk Southern Railway Co. v. Sprint Communications Co., L.P., 883 F.3d 417 (4th Cir. 2018)

Final Award 1 - yay-1618918-digital

Final Award 1

The dispute between Northfolk Southern Railway Co. (the “Railroad” or the “Appraisal Award Defending Party”) and Sprint Communications Co., L.P. (the “Carrier” or the “Appraisal Award Challenging Party”) arose out of a 25-year-term 1987 licensing agreement (the “Agreement”) under which the Carrier’s predecessor licensed from the Railroad’s predecessor the right to use for fiber-optics-cable purposes certain parts of the Railroad’s rights of way. The Carrier renewed that Agreement for an additional 25-year term (the “renewed Agreement term”), and a dispute arose about the renewal price. Continue Reading »

First Circuit Court of Appeals Decides Close Case in Favor of Confirming FINRA Arbitration Panel Award: Raymond James Financial Services, Inc. v. Fenyk

May 1st, 2015 Arbitration Practice and Procedure, Authority of Arbitrators, Awards, Choice-of-Law Provisions, Confirmation of Awards, Federal Courts, Grounds for Vacatur, Judicial Review of Arbitration Awards, Manifest Disregard of the Agreement, Manifest Disregard of the Law, Securities Arbitration, Statute of Limitations, United States Court of Appeals for the First Circuit Comments Off on First Circuit Court of Appeals Decides Close Case in Favor of Confirming FINRA Arbitration Panel Award: Raymond James Financial Services, Inc. v. Fenyk

Introduction

Probably most of the Federal Arbitration Act Section 10(a)(4) outcome-review challenges that parties file are disposed of pretty easily because the applicable highly-deferential standard of review forecloses relief as long as the arbitrators were at least arguably interpreting the parties’ agreement, the applicable law or both. The most challenging cases are those falling either on or close to that imaginary, blurry line dividing arguable interpretation from clear disregard of the contract.  CfChicago Typographical Union v. Chicago Sun-Times, 935 F.2d 1501, 1506 (7th Cir. 1991) (“The zanier the award, the less plausible it becomes to ascribe it to a mere error in interpretation rather than to a willful disregard of the contract. This approach can make the line between error and usurpation waver.”).

yay-14640034-digitalIn Raymond James Financial Services, Inc. v.  Corp. v. Fenyk, No. 14-1252, slip op. (3rd Cir. Mar. 11, 2015), the U.S. Court of Appeals for the First Circuit addressed one of those challenging cases. The panel in a FINRA arbitration (the “FINRA Arbitration Panel” or “Panel”) awarded a discharged stock broker $600,000.00 in back pay for wrongful termination, but the district court vacated the arbitration award because it concluded that the FINRA Arbitration Panel did not have the authority to award back pay in the circumstances. On appeal the First Circuit reversed, explaining in clear and cogent terms why the case, while close, was not one warranting Section 10(a)(4) vacatur.

Facts

Mr. Fenyk served as a Raymond James Financial Services (“Raymond James” or “James”) securities broker for seven years. His career there began in New York City, but he worked in Vermont beginning in 2004, managing a small branch office. He had an independent contractor agreement with Raymond James, entitled “Independent Sales Associate Agreement,” which stipulated that Florida law would govern any disputes. He also executed a Business Ethics Policy, which required him to arbitrate disputes “arising out of the independent contractor relationship.”

yay-17336082-digitalIn May 2009 Raymond James, during a routine client-communication review, discovered an e-mail sent to Fenyk’s former domestic partner, which suggested that Fenyk had an alcohol problem.  The e-mail referred to “Fenyk’s ‘slip’ and his ‘need [for] meetings and real sobriety for a dialoug [sic] with you.'” The e-mail also explained that “Fenyk’s ‘new AA friend was very hard on [him] last night.'” Slip op. at 3.

Raymond James terminated its relationship with Fenyk after it learned about Fenyk’s apparent alcohol problem. About  two years later, Fenyk filed suit “in Vermont state court alleging that he had been fired on account of his sexual orientation and his status as a recovering a recovering alcoholic, in violation of Vermont’s Fair Employment Practices Act (“VFEPA”), Vt. Stat. Ann. tit. 21, § 495.” Slip op. at 4. Fenyk subsequently agreed to dismiss his complaint and commence a Financial Industry Regulatory Authority (“FINRA”) arbitration, as required by his agreement with Raymond James. Continue Reading »

The First Department Affirm’s Citigroup’s Motion to Vacate an Award based on Manifest Disregard of the Law

April 22nd, 2015 Appellate Practice, Authority of Arbitrators, Awards, Confirmation of Awards, Contract Interpretation, Grounds for Vacatur, Judicial Review of Arbitration Awards, Manifest Disregard of the Agreement, Manifest Disregard of the Law, New York Court of Appeals, New York State Courts, Practice and Procedure, United States Court of Appeals for the Second Circuit Comments Off on The First Department Affirm’s Citigroup’s Motion to Vacate an Award based on Manifest Disregard of the Law

yay-1274371Earlier this month, New York’s Appellate Division, First Department affirmed a New York County Supreme Court, Commercial Division judgment vacating an arbitration award for manifest disregard of the law under the Federal Arbitration Act. See Citigroup Global Markets, Inc. v. Fiorilla, No. 14-747, slip op. (1st Dep’t April 9, 2015). The Court’s characteristically brief opinion does not delve very deeply into the facts or explain the Court’s reasoning in detail, but there’s enough there to make the decision worth noting.

The Court affirmed the trial court’s order vacating the award because the arbitrators apparently denied without explanation one of the parties’ motions to enforce a settlement even though the moving party informed the arbitrators of controlling, New York case law requiring the enforcement of settlement agreements. “Although,” said the Court, “arbitrators have no obligation to explain their awards, when a reviewing court is inclined to hold that an arbitration panel manifestly disregarded the law, the failure of the arbitrators to explain the award can be taken into account.” Slip op. at 1 (citing and quoting Matter of Spear, Leeds & Kellogg v. Bullseye Sec., 291 A.D.2d 255, 256 (1st Dep’t 2002) (quotations omitted)).

While the Court does not directly address the question, it appears that the case arose under the Federal Arbitration Act, because cases interpreting arbitration statute (CPLR Article 75) do not recognize “manifest disregard of the law” as a ground for vacating an award. Under Article 75, the only “outcome review” standards are those that permit vacatur of awards that are irrational, violate a strong public policy or exceed clearly an express limitation on the arbitrators’ authority. See, e.g., Wein & Malkin LLP v. Helmsley-Spear, Inc., 6 N.Y.3d 471, 477-78 (2006); Matter of New York City Transit Auth. v. Transport Workers’ Union of Am., 6 N.Y.3d 332, 336 (2005).

New York cases interpreting the Federal Arbitration Act, however, recognize manifest disregard as a ground for vacating an award. While New York state courts need defer only to the United States Supreme C0urt on federal-law questions, the New York Court of Appeals has traditionally tended to follow established Second Circuit precedent on such issues in Federal Arbitration Act cases. Since the Second Circuit recognizes manifest disregard of the law as a ground for vacating an award under Section 10 of the Federal Arbitration Act, so too have the New York State courts, even though the U.S. Supreme Court has left the question open. See Hall Street Associates, LLC v. Mattel, Inc., 128 S. Ct. 1396, 1403 (2008); see, e.g., T. Co Metals v. Dempsey Pipe & Supply, 592 F.3d 329, 339-40 (2d Cir. 2010) (manifest disregard of the law survives Hall Street); Wein, 6 N.Y.3d at 480-81 (pre-Hall Street New York Court of Appeals follows Second Circuit authority on manifest disregard of the law in Federal Arbitration Act governed case); Tullett Prebon Financial Serv. v. BGC Financial, L.P., 111 A.D.3d 480, 481-82 (1st Dep’t 2013) (applying manifest disregard of the law standard to Federal Arbitration Act governed case post-Hall Street).

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One question the First Department decision prompts is whether resort to manifest disregard of the law was even necessary. The U.S. Supreme Court has unequivocally endorsed post-Hall Street what some refer to in shorthand as the “manifest disregard of the agreement” standard, or “essence from the agreement” standard, under which a court may vacate an award where the arbitrators do not even arguably interpret the agreement. See Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064, 2098 (2013); Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758, 1767 (2010).

Presumably what happened in this case (though the opinion does not say) is that the parties had an agreement that contained an arbitration agreement, and the dispute arose out of or related to that main agreement. One or both parties demanded arbitration, the parties agreed to settle and one of the parties sought to enforce that agreement, which obviously arose out of or related to the main agreement, and was within the scope of issues that the parties agreed to submit and submitted to arbitration.

Under these circumstances it makes little sense to say that the manifest disregard of the agreement standard does not apply because the agreement that was manifestly disregarded was not the main agreement. And if, as the Court said, the arbitrators simply denied the motion to enforce the settlement agreement without comment, it seems to us that it did not even arguably interpret the settlement agreement and thus manifestly disregarded the parties’ agreement.

The opinion, however, relies solely on manifest disregard of the law. Given the uncertainty surrounding whether manifest disregard is a viable ground for vacatur, and the corresponding certainty that manifest disregard of the agreement is a valid basis for vacating an award under Section 10(a)(4) of the Federal Arbitration Act, that sole reliance has the potential to cause relying solely on that standard without any explanation might confuse litigants who are not well-versed in Federal Arbitration Act practice and procedure. We are quite certain, however, that was not the Court’s intention, and there may well be good reasons why the court did not rely on manifest disregard of the agreement as at least an alternative basis for its sound conclusion.

 

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