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Posts Tagged ‘Sanctions’

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

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.

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

June 19th, 2024 Appellate Practice, Application to Vacate, Arbitration Law, Arbitration Practice and Procedure, Attorney Fee Shifting, Attorney Fees and Sanctions, Authority of Arbitrators, Awards, Bad Faith, Challenging Arbitration Awards, Confirmation of Awards, Exceeding Powers, FAA Chapter 1, FAA Section 10, FAA Section 11, FAA Section 9, Federal Arbitration Act Section 10, Federal Arbitration Act Section 11, Federal Arbitration Act Section 9, Insurance Contracts, Judicial Review of Arbitration Awards, Petition or Application to Confirm Award, Petition to Vacate Award, Post-Award Federal Arbitration Act Litigation, Practice and Procedure, Retrospectively-Rated Premium Contracts, Section 10, Section 11, Section 9, Uncategorized, United States Court of Appeals for the Seventh Circuit, Vacate, Vacate Award | 10(a)(4), Vacate Award | Attorney Fees, Vacate Award | Attorney's Fees, Vacatur 1 Comment »

Introduction

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

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

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

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

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

Background: The Award of Attorney Fees

Petitioner Sun Holdings, Inc. (“Sun” or the “Award Challenger”) is a Texas- Continue Reading »

Delegation Provisions: SCOTUS Says Courts Must Compel Arbitration of Even “Wholly-Groundless” Arbitrability Disputes

January 16th, 2019 American Arbitration Association, Arbitrability, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Practice and Procedure, Arbitration Provider Rules, Authority of Arbitrators, Class Action Arbitration, Class Action Waivers, Exceeding Powers, Existence of Arbitration Agreement, Federal Arbitration Act Enforcement Litigation Procedure, Stay of Litigation, United States Supreme Court 3 Comments »
Wholly Groundless 1

Arbitrability questions are ordinarily for courts to decide, but parties may, by way of a “delegation provision,” clearly and unmistakably agree to submit them to arbitration. See, e.g., First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 942-46 (1995); Rent-A-Center, West, Inc. v. Jackson, 130 S. Ct. 2772, 2777 (2010). (See, e.g., Loree Reinsurance and Arbitration Law Forum posts here, here, and here.)

But suppose parties to a delegation provision disagree about whether they are required to arbitrate a dispute, yet their contract clearly excludes the dispute from arbitration. Can a Court preemptively decide the merits of an arbitrability question delegated to the arbitrators, and refuse to compel arbitration of the arbitrability question, if the Court decides that the argument for arbitration of the underlying dispute is wholly groundless?

Some federal courts have held that a federal court can, despite a clear and unmistakable agreement to arbitrate arbitrability, refuse to compel arbitration of a “wholly groundless” arbitrability question, but others have held that the FAA requires Courts to refer to arbitration even “wholly groundless” arbitrability questions. Compare Simply Wireless, Inc. v. T-Mobile US, Inc., 877 F. 3d 522 (4th Cir. 2017); Douglas v. Regions Bank, 757 F. 3d 460 (5th Cir. 2014); Turi v. Main Street Adoption Servs., LLP, 633 F. 3d 496 (6th Cir. 2011); Qualcomm, Inc. v. Nokia Corp., 466 F. 3d 1366 (Fed. Cir. 2006), with Belnap v. Iasis Healthcare, 844 F. 3d 1272 (10th Cir. 2017); Jones v. Waffle House, Inc., 866 F. 3d 1257 (11th 2017); Douglas, 757 F. 3d, at 464 (Dennis, J., dissenting).

On January 8, 2019 the U.S. Supreme Court, in a 9-0 decision, held that where parties have clearly and unmistakably agreed to arbitrate arbitrability disputes, courts must compel arbitration even if the argument in favor of arbitration is “wholly groundless.” Schein v. Archer & White Sales, Inc., 586 U.S. ____, slip op. at *2, 5, & 8 (January 8, 2019).

Wholly Groundless Exception 2

The Court said that “[t]he [FAA] does not contain a ‘wholly groundless’ exception, and we are not at liberty to rewrite the statute….” Slip op. at 2; see also slip op. at 8. “When,” said the Court, “the parties’ contract delegates the arbitrability question to an arbitrator, the courts must respect the parties’ decision as embodied in the contract.” Slip op. at 2; see also slip op. at 8. The “wholly groundless” exception, said the Court, “is inconsistent with the statutory text and with precedent[,]” and “confuses the question of who decides arbitrability with the separate question of who prevails on arbitrability.” Slip op. at 8.

Facts and Procedural History

Wholly Groundless Exception 3

Schein was a dispute between a dental equipment manufacturer and a distributor. The parties’ contract contained an arbitration agreement, which required arbitration of “[a]ny dispute arising under or related to [the Parties’] Agreement (except for actions seeking injunctive relief and disputes related to trademarks, trade secrets, or other intellectual property of [the manufacturer]….” Slip op. at 2. Arbitration was to be “in accordance with the arbitration rules of the American Arbitration Association [(the “AAA”)].” Slip op. at 2.

Continue Reading »

SCA v. Armstrong: Anatomy of the Lance Armstrong Arbitration Award—Part III.B.4: The Panel’s Remedial Authority

May 20th, 2015 Arbitrability, Arbitration Agreements, Arbitration Provider Rules, Attorney Fees and Sanctions, Authority of Arbitrators, Awards Comments Off on SCA v. Armstrong: Anatomy of the Lance Armstrong Arbitration Award—Part III.B.4: The Panel’s Remedial Authority

Introduction: Remedial Powers of Arbitrators under the Federal Arbitration Act

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The third issue the Armstrong Panel addressed was: “What jurisdiction, if any, does this Tribunal have to award sanctions?” This was a question of the Panel’s remedial authority — assuming the Panel had the authority to decide the dispute, what remedies were the arbitrators authorized to award?

The Panel determined that Armstrong had committed fraud and testified falsely, and had by those unlawful means procured the Settlement Agreement and Consent Award. All else equal, had the Armstrong Parties testified truthfully, and been prepared to do so from the outset of the dispute, then presumably the Armstrong Parties: (a) would not have claimed the $7.5 million in prize money; or (b) would have submitted to arbitration the question whether the Armstrong Parties’ use of performance enhancing drugs barred them from recovering the prize money under their contracts with the SCA Parties. If the Armstrong Parties chose option (a) above, then the SCA Parties would not have incurred any time or money costs dealing with the Armstrong Parties’ Claims. Had the Armstrong Parties chosen option (b), then the SCA Parties’ time and money costs would likely have been pretty modest, and in any event, nowhere near what they turned out to be.

Given that the Panel identified a breach of duty that caused harm, the next question from the standpoint of the merits was: what (if anything) should be the remedy? The SCA parties apparently argued that the Panel should grant a sanctions remedy, which the Panel apparently viewed as serving both deterrent and compensatory purposes.

Where, as here, an arbitration panel that has the authority to resolve a dispute is considering what relief (if any) it should award to the prevailing party, that raises a remedial authority question: what remedies have the parties authorized the Panel to award? Under a broad arbitration agreement, remedial authority questions are typically not controversial, for parties ordinarily tend to seek standard remedies: damages, declaratory relief or traditional forms of equitable relief (such as rescission or reformation).  One party asks for the relief in its submission in the arbitrators and the other party doesn’t object because there is no reason to do so.

But where other non-standard forms of relief are requested—and particularly where the parties’ contract express a clear intent to limit remedial powers—then remedial authority can become more controversial.

The Armstrong Arbitration involved a claim for sanctions arising in unusual circumstances. While the parties’ contracts did not purport to limit the Panel’s remedial authority, the Armstrong Parties challenged the Panel’s authority to award sanctions and the Panel addressed that challenge in a reasoned award.

This segment of our Armstrong-Award Anatomy series focuses exclusively on whether the Panel had the authority to make an award of sanctions. It reviews the general rules concerning arbitrator remedial authority, considers the standard of review that a court reviewing the award will presumably apply if the Armstrong Parties contest the Panel’s remedial authority in court, discusses the Panel’s analysis and conclusions concerning sanctions and explains why we think it unlikely that a court will find that the Panel exceeded its authority by making an award of sanctions.

Our next Armstrong Arbitration Award Anatomy segment will address the related—but analytically distinct—issue whether the Panel had the authority to make a $10,000,000.00 sanctions award in the circumstances.

General Rules Governing Arbitrator Remedial Authority

yay-974131-e1425250054241As a general rule, where the parties have agreed to require each other to submit to arbitration a broad range of a disputes that might arise out of or relate to their legal relationship, the law presumes they intended to confer equally broad remedial powers on the arbitrators. See, e.g., ReliaStar Life Ins. Co. v. EMC Nat’l Life Co., 564 F.3d 81, 86-87 (2d Cir. 2009) (citing cases). Sometimes, arbitration-provider rules—such as Rule 47 of the American Arbitration Association Commercial Rules (formerly Rule 43)—expressly confer broad remedial authority on arbitrators. Rule 47, for example, states: Continue Reading »

SCA v. Armstrong: Anatomy of an Arbitration Award—Part I

February 23rd, 2015 Arbitration Practice and Procedure, Attorney Fees and Sanctions, Authority of Arbitrators, Awards, Confirmation of Awards, State Courts Comments Off on SCA v. Armstrong: Anatomy of an Arbitration Award—Part I

Armstrong Arbitration Award: Introduction

yay-15106666-digitalArmstrong-e1424717219396On Monday morning, February 16, 2015 attorneys for SCA Promotions, Inc. (“SCA”) and SCA Insurance Specialists, Inc. (“SCA Insurance”) (collectively, the “SCA Entities”) filed a petition in a Dallas County, Texas state court to confirm a $10,000,000.00 arbitration award recently made in the Matter of the Arbitration between Lance Armstrong and SCA Promotions, Inc. Ordinarily something like that is an event accompanied with all the fanfare of a tree falling in a deserted forest.

But this petition is different. It seeks to confirm an arbitration panel’s award of $10,000,000.00 in sanctions levied against cyclist Lance Armstrong for having lied under oath to the arbitration panel and the SCA Entities in an earlier arbitration proceeding. So its filing was widely reported and discussed by major national and international media providers.

Here’s a condensed and simplified version of the background: Continue Reading »

Fifth Circuit Says District Court That Compelled Arbitration Does Not Have Inherent Power to Impose Sanctions on Counsel for Arbitration Misconduct

September 17th, 2010 Arbitration Practice and Procedure, Attorney Fees and Sanctions, Practice and Procedure, United States Court of Appeals for the Fifth Circuit Comments Off on Fifth Circuit Says District Court That Compelled Arbitration Does Not Have Inherent Power to Impose Sanctions on Counsel for Arbitration Misconduct

Introduction

An arbitration panel acting under a broad, unrestricted arbitration agreement can generally impose sanctions on a party.  But if a federal district court compels arbitration, and retains jurisdiction, can it impose sanctions on counsel who allegedly misbehave during the arbitration proceedings?  On September 13, 2010 the United States Court of Appeals for the Fifth Circuit held 3-0 that the answer is “no,” unless the conduct was in direct defiance or disobedience of the district court’s orders or otherwise threatened the district court’s own judicial authority or proceedings.  See Positive Software Solutions Inc. v. New Century Mtg. Corp., No. 09-10355, slip op. (5th Cir. September 13, 2010). 

Background

Positive Software Solutions arose out of arbitration between Positive Software Solutions, Inc. and New Century Mortgage Corp.  A district court in Texas compelled arbitration and retained jurisdiction.  Positive Software lost, and sought to vacate the award on evident partiality grounds, which were ultimately rejected by the Fifth Circuit en banc.  See Positive Software Solutions Inc. v. New Century Mtg. Corp., 476 F.3d 278 (5th Cir. 2007) (en banc).  After the Fifth Circuit remanded the award for confirmation, New Century declared bankruptcy, the parties settled, and the American Arbitration Association administratively closed the proceedings. 

As part of the settlement, New Century waived the attorney-client privilege, and turned over to Positive Software its arbitration files, which Positive Software would use in support of a motion in the district court for sanctions against New  Century’s arbitration counsel, Ophelia Camiña, a partner at Susman, Godfrey, LLP (“Susman Godfrey”); Susman Godfrey; and Barry Barnett (apparently another lawyer who represented New Century).   On March 2008 Positive Software filed its motion for sanctions pursuant to Fed. R. Civ. P. 37, 28 U.S.C. § 1927, and the court’s inherent power. 

In February 2009 the district court imposed pursuant to its inherent power $10,000 in sanctions against Camiña, which represented a portion of Positive Software’s attorney fees incurred during arbitration.  The district court ruled that the sanctions were for conduct that “took place in connection with the arbitration, not in connection with discovery under the Court’s supervision.” 

Camiña appealed, and the Fifth Circuit reversed. Continue Reading »