Commercial Litigation and Arbitration

Arbitration Award Not Reviewable for Legal or Factual Errors, Only FAA §10(a) Grounds — Vacatur for Exceeding Powers Requires Decision on Unsubmitted Issue Or Irrational Award — Meaning of Manifest Disregard, If It Survives

 PNY Techs. v. Netac Tech. Co., 2020 U.S. App. LEXIS 4003 (10th Cir. Feb. 10, 2020):


"On appeal from a district court's ruling on a motion to confirm or vacate an arbitration [*4]  award, we review its legal conclusions de novo and its factual findings for clear error." Sutter v. Oxford Health Plans LLC, 675 F.3d 215, 219 (3d Cir. 2012) (citation omitted). Review of the arbitration award itself is "extremely deferential[.]" Dluhos v. Strasberg, 321 F.3d 365, 370 (3d Cir. 2003). Indeed, "we begin with the presumption that the award is enforceable[,]" and "do not entertain claims that an arbitrator has made factual or legal errors." Sutter, 675 F.3d at 219 (citation omitted). Instead, "[a]n award may be vacated only upon one of the four narrow grounds enumerated in the Federal Arbitration Act[.]"2 Id.

     2. Those grounds are (1) where "the award was procured … by corruption, fraud, or undue means;" (2) where "there was evident partiality … or corruption in the arbitrators[;]" (3) "where the arbitrators were guilty of misconduct in refusing to postpone the hearing, [*5]  upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy[,] or of any other misbehavior by which the rights of any party have been prejudiced;" or (4) "where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made." 9 U.S.C. § 10(a)(1)-(4).

PNY invokes only one of those grounds here. According to 9 U.S.C. § 10(a)(4), a court may vacate an arbitration award if "the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made." 9 U.S.C. § 10(a)(4). Vacatur on that basis is appropriate only when the arbitrator "decides an issue not submitted to him, grants relief in a form that cannot be rationally derived from the parties' agreement and submissions, or issues an award that is so completely irrational that it lacks support altogether." Sutter, 675 F.3d at 219-20 (citation omitted). That standard is, by its terms, very hard to meet, and PNY has failed to do so.

PNY contends that the arbitrator erred by using sales data instead of supply data in arriving at a damages figure. That, however, is precisely the type of decision we have no authority to second-guess under the Federal Arbitration Act. The arbitrator explicitly relied on PNY's sales data and product coding data to calculate damages. It does not matter that using supply data may have been available as an alternate method. It would not even matter at this stage if the sales data were flawed. All that matters is that the arbitrator's decision had some basis in the record. See Sutter, 675 F.3d at 220 ("[E]ven serious errors of law or fact will not subject" an arbitrator's [*6]  award to vacatur.).

PNY next argues that the arbitrator manifestly disregarded the law in ordering that quarterly royalty payments must be made to Netac.3 Relying on Lear, Inc. v. Adkins, 395 U.S. 653, 673 (1969), PNY emphasizes that a licensee cannot "be required to continue to pay royalties during the time they are challenging patent validity in the courts." (Opening Br. at 48 (quoting Lear, 395 U.S. at 673).) PNY asserts that it cannot be made to pay royalties until its claims regarding patent invalidity and unenforceability have been adjudicated. But PNY again fails to overcome the stringent standard of review.4 The arbitrator clearly grappled with the import of the Lear decision. He rejected PNY's position and concluded that Netac's arguments were "more persuasive." (App. at 292.)

      3. PNY attempts to cast this decision as a "permanent injunction" that was outside the scope of the arbitrator's authority to order. It is no such thing. As the District Court correctly observed, ordering the reports was simply a "straightforward declaration of the parties' rights and obligations under the Settlement Agreement." (App. at 10.)

     4. Under the manifest disregard theory, a court may vacate an arbitration award "where the arbitrator's decision evidence[s] a manifest disregard for the law rather than an erroneous interpretation of the law." Dluhos, 321 F.3d at 370 (internal quotation marks omitted). A party proceeding on that theory "bears the burden of proving that the arbitrators were fully aware of the existence of a clearly defined governing legal principle, but refused to apply it, in effect, ignoring it." Duferco Int'l Steel Trading v. T.Klaveness Shipping A/S, 333 F.3d 383, 389 (2d Cir. 2003) (citation omitted).

That good faith effort is more than enough to demonstrate that he did not manifestly disregard Lear. There is no evidence that the arbitrator "ignor[ed]" [*7]  a "clearly defined governing legal principle[.]" Duferco Int'l Steel Trading v. T. Klaveness Shipping A/S, 333 F.3d 383, 389 (2d Cir. 2003).5

     5. Because we conclude that the arbitrator did not manifestly disregard the law, we need not decide if the "manifest disregard" theory survives as a basis [*8]  for vacatur after the Supreme Court's ruling in Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008).


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