In our October 7, 2024, post, “Can a Court under Section 10(a)(4) Overturn an Award Because it was Based on a Clear Mistake of Historical Fact or a Conceded Nonfact?”, we promised some further analysis of UpHealth Holdings, Inc. v. Glocal Healthcare Sys. PVT, No. 24-cv-3778, slip op. (N.D. Ill. Sept. 24, 2024), the principal case discussed in that post, which held warranted partial vacatur of an award because the award was based in part on a “nonfact.” In this and at least one other post, let’s take a closer, analytical look at UpHealth’s “clear mistake of historical fact or conceded nonfact” vacatur standard, consider whether UpHealth comports with the Federal Arbitration Act (“FAA”), and take an informed guess about how the U.S. Court of Appeals for the Seventh Circuit might decide the case if there is an appeal.
We’ll focus on the following questions and our answers will presume familiarity with the October 7, 2024, UpHealth post, here:
What is the difference, if any, between a “clear mistake of historical fact” and a “conceded nonfact?”
What is or should be required to establish a “clear mistake of historical fact” or a “conceded nonfact?”
Assuming Section 10(a)(4) authorizes courts to vacate awards based on a “clear mistake of historical fact” or a “conceded nonfact,” did the UpHealth district court err by holding that the award against Damodaran was based on a nonfact?
Assuming that the district correctly applied the “conceded nonfact” standard, does it comport with the FAA?
If there is a Seventh Circuit appeal of the UpHealth decision, is it likely the decision will be overturned on appeal, and if so, on what grounds?
This Part I addresses questions 1 and 2. One or more subsequent posts will address questions 3 through 5.
Discussion
What is the Difference, if any, between a “Clear Mistake of Historical Fact” and a “Conceded Nonfact?”
In a case arising under Section 301 of the NLRA, the U.S. Court of Appeals for the Fourth Circuit “determine[d] whether an arbitration award failed to draw its essence from the agreement when an arbitrator ignored the parties’ agreed upon procedural rules for conducting the arbitration.” Advantage Veterans Servs. of Walterboro, LLC v. United Steel, Paper & Forestry, Rubber, Mfg. Energy, Allied Indus. & Serv. Workers Int’l, Local 7898, No. 22-1268, slip op. at 2 (4th Cir. June 15, 2023). The Fourth Circuit said, “[u]nder the language of the agreement here, the answer is yes[,]” and— reversing the district court’s order—vacated the award. Slip op. at 2 & 12.
Advantage Veterans is a proverbial breath of fresh air for those who wish—by way of clear, unambiguous, and precise contract language—to circumscribe the authority of arbitrators by conditioning the enforceability of an award on compliance with certain clear procedural rules. That is not to say it authorizes vacatur of an award every time the arbitrator does not comply with a clear procedural rule set forth in (or incorporated by) an arbitration agreement. The doctrine of procedural arbitrability counsels deference to an arbitrator’s procedural decisions that even arguably represent the arbitrator’s interpretation of the contract, and disputes concerning arbitrator failure to comply with procedural provisions are frequently disposed of on that basis. See, e.g., BG Grp. PLC v. Republic of Argentina, 572 U.S. 25, 27-29, 33-36 (2014).
But at least where parties expressly condition enforceability of an award on compliance with a clear procedural rule, Advantage Veterans gives life to the parties’ clearly expressed intent that an arbitration to take place only as explicitly prescribed. Continue Reading »
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.
One advantage of arbitration is that parties can define and delineate the scope of disputes they agree to submit to arbitration, the basis on which disputes can or must be resolved and the scope of the arbitrator’s remedial powers. If parties impose clear limits on an arbitrator’s authority (usually by expressly excluding certain matters from arbitration or expressly providing that an arbitrator cannot or must grant certain remedies), then courts and arbitrators are supposed to enforce those limitations. See, e.g., Stolt-Nielsen S.A. v. Animalfeeds Int’l Corp., 559 U.S. 662, 680-81 (2010).
Far too frequently, parties simply agree to a broad arbitration agreement that places no limitations on arbitral power, and when they end up on the wrong-end of an award they didn’t expect, they discover to their dismay that they have no judicial remedy. Whether or not they understood that at the time they agreed to arbitrate is, of course, irrelevant. The only relevant consideration is whether their agreement could be reasonably construed to grant the arbitrator that authority, even if it could also be reasonably construed to withhold it. See, e.g., Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 62 (1995) (“when a court interprets such provisions in an agreement covered by the FAA, due regard must be given to the federal policy favoring arbitration, and ambiguities as to the scope of the arbitration clause itself resolved in favor of arbitration”) (quotation and citation omitted).
But suppose the parties take the time to consider whether they desire to limit arbitral authority, and their arbitration agreement unambiguously expresses an intention to limit arbitral authority to resolve certain disputes or impose certain remedies, or to expressly require that the arbitrators grant certain types of relief, such as fee shifting to a prevailing party. Should a court vacate the award if the arbitrator does not abide by the parties’ unambiguously expressed intentions? Continue Reading »
In Part I (here) we explained why the standard for challenging an award based on its outcome is important in reinsurance arbitration practice. And, after briefly reviewing pre-Stolt-Nielsenlaw on outcome-based standards of review, we explained how Stolt-Nielsen has established a fairly searching, standard of review. This Part II explores the legal and practical implications of that standard of review.
B. Legal Implications of the Stolt-Nielsen Decision’s Manifest Disregard of the Agreement Standard of Review
1. Courts May Interpret Stolt-Nielsen’s Outcome-Based Standard of Review Liberally
Reinsurance- and other commercial-arbitration awards are now subject to the same standard of review as labor-law awards – and in Stolt-Nielsen, the Court applied that standard of review pretty liberally. The Court has put to rest the notion that Federal Arbitration ActSection 10(a)(4) vacatur is limited to questions concerning whether the arbitrators decided a matter falling within the scope of the parties’ arbitration agreement or submission. The outcome of the arbitration is now subject to at least some, limited scrutiny.
The focus will now be on whether the arbitrators interpreted, applied and enforced the contract, and applied applicable law or norms. Express or implied reliance on extra-contractual considerations, such as public policy, may spoil an award, unless those extra-contractual considerations are grounded in applicable law. Not heeding clear and unambiguous contract language, effectively deleting or disregarding contractual provisions or otherwise rewriting the contract may also subject the award to vacatur. Continue Reading »
Shortly before the United States Supreme Court decided Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., ___ U.S. ___, slip op. (April 27, 2010), we wrote about the implications the case might have on reinsurance arbitration practice. (See our post here.) But since then, you have not heard much from us, other than our brief report (here) about the Supreme Court vacating and remanding to the United States Court of Appeals for the Second Circuit the American Express Merchants’ Litigation judgment for further consideration in light of Stolt-Nielsen. One — but by no means the only — reason is that after Stolt-Nielsen was decided, we wrote a comprehensive article on it, which will be published in a subscription-only publication in June.
But that article – while comprehensive in scope – is directed at folks interested in the Federal Arbitration Actin general, not necessarily those interested in reinsurance arbitration in particular. And that’s what we want to cover in this multi-part series: Stolt-Nielsen’s implications on reinsurance arbitration practice.
Stolt-Nielsen affects reinsurance arbitration in two very important ways. First, it has set a fairly liberal standard of review that now applies to commercial arbitration awards in cases where a party asserts that the arbitrators exceeded their powers under Federal Arbitration Act Section 10(a)(4) because of the award’s outcome. That, as we shall see, has all sorts of implications for persons involved in reinsurance arbitrations.
Second, it has changed the rules applicable to consolidated-reinsurance-arbitration practice – or at least it requires a wholesale reevaluation of those rules. That, too, has a number of important implications for reinsurance-arbitration practice.
This Part I of the series explains why the standard for challenging an award based on its outcome is important in reinsurance arbitration practice. And, after briefly reviewing pre-Stolt-Nielsen law on outcome-based standards of review, it explains how Stolt-Nielsen has established for the lower courts a fairly searching standard of review. Part II (here) will delve into what the implications of that standard of review will likely be.
Part III (here) will provide the background necessary to understand how Stolt-Nielsen affects the law applicable to consolidated reinsurance arbitration. Part IV (here) will delve into the details of how Stolt-Nielsen changes – or at least requires reconsideration of – the legal status quo in this area. And Part V will discuss the implications of all of this.
We do not set out to discuss the background of Stolt-Nielsen in any detail or to provide a play-by-play of how the Court decided the case. If you are a regular reader you probably already know the background in detail, and our upcoming article does a pretty good job of mapping out the Court’s reasoning. Instead, we focus our attention on the aspects of the decision that are relevant to the two key subjects of discussion.
But before we delve into what Stolt-Nielsen has to say about the standard of review, we pause briefly to address why the standard of review applicable to an outcome-based challenge is so important in reinsurance and other forms of commercial arbitration. Continue Reading »
Back in January the Ninth Circuit decided United States Life Ins. Co. v. Superior National Ins. Co., ___ F.3d ___, slip op. (9th Cir. Jan. 4, 2010), a Federal Arbitration Act Section 10(a)(3) procedural misconduct decision that affords reinsurance and other arbitrators a good deal of leeway to devise and implement nontraditional procedures for resolving complex problems. The case centered around a rather unusual procedure the arbitrators ordered and implemented to determine whether the cedents improperly handled some 12,604 contested workers compensation claims. It also concerned the authority of arbitrators to interpret the scope of the submission and to award a disgorgement of investment income remedy in addition to pre-award interest. Continue Reading »
The Seventh Circuit recently decided an important case concerning what happens when Party A asks its party-appointed arbitrator to resign, the agreement is silent on how the vacancy should be filled, the remaining two arbitrators devise and implement a procedure for appointing a replacement, Party B (whose arbitrator did not resign) reserves its right to challenge the replacement procedure, and the Panel ultimately renders an award in favor of Party A. The Court held that the Panel did not exceed its powers by adopting and implementing — in the face of the agreement’s silence, and in the absence of Party B seeking court intervention under Federal Arbitration ActSection 5 – a procedure that allowed Party A to replace its party-appointed arbitrator and continue with the arbitration. See WellPoint, Inc. v. John Hancock Life Ins. Co., ___ F.3d ___, slip op. (7th Cir. August 7, 2009) (Slip op. here). Continue Reading »
Victoria VanBuren’s May 4, 2009 guest post, Hall Street Meets S. Maestri Place: What Standards of Review will the Fifth Circuit Apply to Arbitration Awards Under FAA Section 10(a)(4) after Citigroup? (available here), looked at the scope of Section 10(a)(4) in the Fifth Circuit after Hall Street Assoc. v. Mattel, Inc., 128 S. Ct. 1396 (2008) and Citigroup Global Markets, Inc. v. Bacon, 562 F.3d 349 (5th Cir. 2009). Today we look at the scope of Section 10(a)(4) in the Second Circuit after Hall Street met Pearl Street in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 548 F.3d 85 (2d Cir. 2009), petition for cert. filed Mar. 26, 2009 (No. 08-1198),in which the Second Circuit said that, notwithstanding its prior case law suggesting otherwise, “manifest disregard of the law” is not an independent basis for vacating an arbitration award foreclosed by Hall Street, but one encompassed within Section 10(a)(4)’s prohibition against arbitrators “exceed[ing] their powers. . . .” As we shall see, the Second Circuit justified that holding by taking a more expansive view of Section 10(a)(4) than it previously had, a view that may also permit challenges based on “manifest disregard of the agreement.” Continue Reading »
I am delighted to be invited to guest-blog today by Philip J. Loree Jr. of the Loree Reinsurance and Arbitration Law Forum. I was thrilled that Phil jumped right on it when I suggested that we should guest-post on each others blogs in the near future.
Phil did an outstanding job discussing the Arbitration Fairness Act of 2009 (read the post here) last week as a guest-blogger at Disputing. He suggested that I explore the topic of “manifest disregard of the law,” in light of the United States Supreme Court decision Hall Street Associates, LLC v. Mattel, Inc. 128 S.Ct. 1396 (2008), and the Fifth Circuit ruling in Citigroup Global Markets, Inc. v. Bacon, ___ F.3d ___ (5th Cir. 2009). So, after conquering some initial, mild trepidation about my first guest-blogging experience, here I am. Continue Reading »
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In our October 7, 2024, post, “Can a Court under Section 10(a)(4) Overturn an Award Because it was Based on a Clear Mistake of Historical Fact or a Conceded Nonfact?”, we promised some further analysis of UpHealth Holdings, Inc. v. Glocal Healthcare Sys. PVT, No. 24-cv-3778, slip op. (N.D. Ill. Sept. 24, 2024), the principal case discussed in that post, which held warranted partial vacatur of an award because the award was based in part on a “nonfact.” In this and at least one other post, let’s take a closer, analytical look at UpHealth’s “clear mistake of historical fact or conceded nonfact” vacatur standard, consider whether UpHealth comports with the Federal Arbitration Act (“FAA”), and take an informed guess about how the U.S. Court of Appeals for the Seventh Circuit might decide the case if there is an appeal.
Under both the Federal Arbitration Act (the “FAA”) and Section 301 of the National Labor Relations Act (the “NLRA”), arbitrators exceed their powers by making awards that do not “draw [their] essence” from the parties’ agreement. See 
