Federal Arbitration Developments
One of the problems many perceive with arbitration is that the panel, unlike a judge, is not subject to meaningful appellate review and may not feel constrained to exert the same level of analytic rigor. Parties sometimes attempt to address this by negotiating a requirement for a reasoned award or for substantive judicial review. This article reviews 2011 federal cases addressing the success of these efforts and other federal arbitration issues.
"Reasoned Award." The claimant in Cat Charter, LLC v. Schurtenberger, 2011 U.S. App. LEXIS 14266 (11th Cir. July 13, 2011), paid $2 million for a yacht that was never delivered. The Eleventh Circuit described the dispute, as "a swearing match" whose "resolution necessarily depended on credibility determinations made by the arbitrators." The parties agreed that the panel must issue a "reasoned award." The award the panel delivered took the form of a numbered list seven sentences in length that almost entirely consisted of its holdings. The respondents moved to vacate on the ground that the panel exceeded its authority by failing to issue a reasoned award.
Stressing that "arbitrators 'do not act as junior varsity trial courts where subsequent appellate review is readily available to the losing party,'" the Eleventh Circuit first described a "reasoned award" as "something short of findings and conclusions but more than a simple result." It proceeded through a lexicographical analysis to define "a 'reasoned' award [a]s an award that is provided with or marked by the detailed listing or mention of expressions or statements offered as a justification of" the arbitrators' decision. Particularly since "the controversy here turned primarily upon credibility determinations," the Court held that the short list provided by the panel satisfied this standard.
The level of rigor in Cat Charter was appropriate for the case, but the lesson of the opinion is that the only way to ensure a detailed award is to require findings of fact and conclusions of law.
Negotiated Judicial Review. In Hall Street Assocs. v. Mattel, Inc., 552 U.S. 576 (2008), the Supreme Court held that the statutory grounds for judicial review of arbitration awards are exclusive, and parties may not by agreement confer jurisdiction on a federal court to apply an expanded scope of review. It left the door slightly ajar by alluding to the possibility that, after an action has commenced, the parties might be able to achieve expanded review by means of a Court order so providing, entered pursuant to Fed.R.Civ.P. 16.
The parties in Johnson v. Wells Fargo Home Mortgage, Inc., 635 F.3d 401 (9th Cir. 2011), thought they had done just that. In a pending action, they obtained an order providing that the "parties shall participate in a binding arbitration with appeal rights;" that the Federal Rules of Evidence and Civil Procedure, as well as "the Federal Arbitration Act [FAA] ... shall apply to the arbitration proceedings;" and that, after the award was entered, either party could move to compel in accordance with the FAA. Wells Fargo was unhappy with the award and sought to appeal.
On the motion to confirm, the District Court stated that it understood the parties' agreement as providing that the Court would, "in essence, rubber stamp the arbitrator's decision, and whichever party [was] unhappy [could] then appeal it directly to the Ninth Circuit." The Court of Appeals reversed. First, it held that the District Court remained obligated to review the award under the criteria set forth in the FAA. Second, it held that nothing in the order provided for anything other than the circumscribed review dictated by the FAA. Without deciding whether broader review might be available under a properly-drafted Rule 16 order, it ruled that the provision that "the FAA ... shall apply to the arbitration proceedings" adopted FAA review criteria, and that the enigmatic "phrase 'appeal rights'" did not substantively expand it.
Any similar effort in the future should (i) avoid reference to the FAA; (ii) specify permissible discovery, evidence and trial procedures to be followed, as by reference to the appropriate Federal Rules, however modified; (iii) provide that there will be full appellate review - by the District Court; and (iv) set forth the standard of that review (e.g., clearly erroneous as to findings of fact and de novo as to issues of law). That will at least tee up the Rule 16 issue in the most favorable light. Consider also avoiding the term "arbitration" and substituting something like "alternative adjudication."
Review of Final Partial Awards. In Pearl Seas Cruises, LLC v. Irving Shipbuilding, Inc., 2011 U.S. Dist. LEXIS 12487 (D. Conn. Feb. 9, 2011), the parties requested interim arbitral determinations on several issues. The panel complied with a series of partial final awards, one of which the plaintiff sought to vacate. In declining to address it, the Court identified the two recognized exceptions to the finality requirement for judicial review of an award under the FAA, neither of which was satisfied: (1) "wholly separable claims where an award 'finally and conclusively dispose[s] of a separate and independent claim and [i]s subject to neither abatement nor set-off,'" and (2) "explicitly bifurcated arbitration proceedings." The Court rejected a proposed third exception "for 'gateway' issues," urged in light of the Supreme Court's vacatur in Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., 130 S. Ct. 1758 (2010) - before issues of liability and damages were addressed - of an award permitting classwide arbitration.
Emergency Injunctive Award. The Court in Chinmax Med. Sys. v. Alere San Diego, Inc., 2011 U.S. Dist. LEXIS 57889 (S.D. Cal. May 27, 2011) was asked to review an interim injunctive award issued by an emergency arbitrator appointed by the American Arbitration Association pending constitution of the panel. The respondent in this international arbitration moved to vacate because the parties' agreement required a three-person panel and provided that the parties would seek interim relief in court. The Court noted that "temporary equitable orders calculated to preserve assets or performance needed to make a potential final award meaningful ... are final orders that can be reviewed" under the FAA. Nonetheless, the Court found the order before it non-final and unreviewable because, while it required immediate conservatory measures, it provided that "that the temporary equitable order was issued 'in order to facilitate any consideration by the full panel of conservancy'" (emphasis in original). The Court concluded that it did not face "an 'extreme' case permitting judicial review of a non-final order."
No Power to Decline Relief. The plaintiff in Countrywide Home Loans, Inc. v. Mortgage Guar. Ins. Corp., 642 F.3d 849 (9th Cir. 2011) filed a declaratory judgment action in state court contesting the defendant's denial of its insurance claims. The parties' agreement mandated arbitration. After the defendant removed, the plaintiff moved the District Court to remand "exercise[ing] its broad discretion under the" Declaratory Judgment Act ("DJA"). The defendant filed a cross motion to compel arbitration. The District Court remanded without reaching the motion to compel. The Ninth Circuit reversed, holding that the case law's "regular use of 'discretionary jurisdiction' language" with respect to the DJA is inaccurate because the DJA does not confer jurisdiction, and "the FAA gives the adjudicating court no discretion as to whether to award relief." It held that the District Court was required to decide the motion to compel.
Factual Allegations Determine Arbitrability. The parties to an asset sale agreed to an earn-out, in E.S. Originals Inc. v. Totes Isotoner Corp., 734 F. Supp. 2d 523 (S.D.N.Y. 2010), and the plaintiff filed suit for breach of contract and other claims when it did not receive the payments to which it thought itself entitled. The purchase agreement had an arbitration clause limited to the earn-out payments, which, the plaintiff claimed, was narrower than its claims. The Court rejected the argument because the factual allegations of the complaint all related to the earn-out payments and, "[i]n determining whether a particular claim falls within the scope of the parties' arbitration agreement, this Court 'focuses on the factual allegations in the complaint rather than the legal causes of action asserted.'"
May a Magistrate Judge Order Arbitration? Is a motion to compel arbitration dispositive - requiring a magistrate judge to issue a report and recommendation - or non-dispositive, so that the magistrate judge may decide it? Conflicting case law is collected in Chen-Oster v. Goldman, Sachs & Co., 2011 U.S. Dist. LEXIS 46994 (S.D.N.Y. April 28, 2011), in which the Magistrate Judge concluded that the issue is non-dispositive and subject to his decision. Accord Next Step Med. Co. v. Davila-Nieves, 619 F.3d 67 (1st Cir. 2010) ("In this circuit, motions to compel arbitration are non-dispositive motions"); Wilken Partners, L.P. v. Champps Operating Corp., 2011 U.S. Dist. LEXIS 36153 (D. Kan. April 4, 2011).
Mr. Joseph is the President of the American College of Trial Lawyers and a past Chair of the Section of Litigation of the American Bar Association. He can be reached at Gregory P. Joseph Law Offices LLC in New York and email@example.com.
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