It has been about two weeks since the last “ADR Highlights.” I am sorry for the hiatus, but an arbitration, a speaking engagement, and some coursework have kept me tied up elsewhere.
I would have liked to return with a raft of exciting cases. However, the courts were quiet last Thursday and Friday. While the cases below raise nothing new, they are a good reminder of some basic principles. As a benefit, the paucity of cases leaves room for an update on two upcoming SCOTUS decisions and the reopening of the live arbitration world.
The FAA’s treatment of arbitrations terminated for a failure to pay fees
Noble Capital Fund Management, LLC v. US Capital Global Investment Management, LLC, 2021 U.S. Dist. LEXIS 92009 (W.D. Tex. May 14, 2021) follows the dismissal of an arbitration between the parties. In that arbitral proceeding, after Noble Capital Fund refused to pay the arbitration fees of the parties’ jointly owned investment fund and no other party, including U.S. Capital, was willing to advance those payments, defendant moved to terminate the arbitration under JAMS Rule 6(c); the panel granted the motion. Noble Capital thereafter filed this action, asserting essentially the same claims as in the arbitration. U.S. Capital moved to stay the case and compel arbitration of the claims therein. Here, Magistrate Judge Hightower recommends that the court deny that motion. Section 3 of the Federal Arbitration Act, which provides the legal basis for such a stay, requires that the court stay proceedings on issues subject to arbitration “until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.” (Emphasis in opinion). Relying on Tillman v. Tillman, 825 F. 3d 1069 (9th Cir. 2016), the Magistrate Judge holds that an arbitration which is terminated because of the failure of a party to pay fees has “been held.” Therefore, she finds that she has no authority under Section 3 to issue the requested stay. In addition, the court finds that, because of the unwillingness of movant U.S. Capital to cause the Fund of which it was general partner to advance the necessary fees, it was “in default in proceeding” with the arbitration, thus barring it from obtaining a stay. Finally, the Magistrate Judge finds that the arbitration panel simply gave U.S. Capital what it wanted – a termination of the arbitration; it is not entitled to a second bite at the apple.
Vacating an award based on fraud
In Bright-Asante v. Saks & Co., 2021 U.S. App. LEXIS 14292 (May 14, 2021), the plaintiff lost a grievance arbitration arising from his discharge from employment. The court, Circuit Judges Parker, Raggi and Carney, issues a summary order upholding the District Court’s denial of plaintiff’s application to vacate the award. In support of his application, Bright-Asante argued that the award was induced by fraud, in that it was based on perjured testimony. The panel finds that plaintiff “provided no evidence of the testimony taken during the arbitration (which he did not attend) in his moving papers before the district court. . . .” Accordingly, “he has failed to show that any perjury occurred or even that the testimony he wishes to challenge was materially related to the arbitrator’s decision.” While brief, the opinion is worth reading for its reminder of the elements comprising the “heavy burden” which a challenger must prove to vacate an award for fraud – (1) the existence of the fraud, (2) that he or she would not have discovered the fraud before issuance of the award through the exercise of “due diligence,” and (3) that the fraud “materially related to an issue in the arbitration.” The Court of Appeals affirms the District Court’s denial of vacatur.
Limited discovery on formation of an arbitration agreement
Lang v. Cigna Holding Co., 2021 U.S. Dist. LEXIS 92161 (W.D. Pa. May 14, 2021), reiterates the Third Circuit’s procedure for resolving a dispute over the arbitrability of an issue before it. Relying on Guidotti v. Legal Helpers Debt Resolution, LLC, 716 F. 3d 764 (3rd Cir. 2013), Judge Hardy opines that, where the existence of the arbitration clause is plain from the face of the complaint or incorporated documents, the court should resolve the issue of arbitrability under the provisions of Fed. R. Civ. P. 12(b)(6). However, where arbitrability cannot be determined solely within the complaint’s four corners, the court must allow limited discovery “focused on whether a valid agreement to arbitrate has been formed between the parties.” It, then, must apply the summary judgment standards of Rule 56 to determine whether there is a material issue of fact which the court must try. Finding that the complaint “is silent regarding the existence of an arbitration agreement [and] [f]urther that Plaintiff’s claims do not rely on documents that contain the contested arbitration clause,” the Court denies the defendant’s motion to compel without prejudice to the reassertion thereof after the completion of discovery.
While the effect of the differing standards may be minimal, it is worth noting that other Circuits may apply the summary judgment standards of Rule 56 from the initial consideration of the issue, never invoking Rule 12(b)(6)’s dismissal considerations. Counsel should always check as to the test applied by the specific court in which they are raising this issue.
Unopposed motion to confirm an award
District Council No. 9 v. Sahara Construction Corp., 2021 U.S. Dist. LEXIS 92354 (S.D.N.Y. May 14, 2021) is reminder that, unlike the process which Fed. R. Civ. P. 55 applies in litigation, there is no such thing as a default confirmation of an award; even without opposition “the district court is not relieved of its duty to decide whether the movant is entitled to judgment as a matter of law.” (Citation omitted) In the subject arbitration in Sahara, the Union claimed that defendant employed non-Union labor in violation of the parties’ collective bargaining agreement. The arbitral tribunal, a Joint Trade Committee, found for the Union, which, then, filed this petition to confirm the award. Sahara did not oppose the petition or otherwise participate in the court’s proceedings. Judge Engelmayer holds that such an unopposed application to confirm is evaluated under the summary judgment standards of Fed. R. Civ. P. 56. As a matter of law, the party seeking confirmation is entitled to judgment whenever there is a “barely colorable justification for the outcome reached” by the arbitrator. Finding that the award has met and probably exceeded that low bar and that there is no material issue of fact, the court confirms the award.
I am writing this issue of “ADR Highlights” on Sunday night. The U.S. Supreme Court may have considered applications for certiorari in two arbitration-related matters at its conference last Friday. We will know more once it issues orders on Monday morning.
Seldin v. Estate of Silverman, Dkt. No-20-895, was distributed for consideration at that conference. The case raises two important issues under the FAA. First, may a court vacate an award on the ground that it is contrary to public policy? Second, to set aside an award for an arbitrator’s evident partiality, must the challenging party show actual bias or need it only raise a reasonable impression thereof?
Badgerow v. Walters, Dkt. No. 20-895, has been relisted from the last conference, which some commentators believe increases the chance that the Court will grant cert. The issue in the petition centers on the “look through” doctrine, which provides that a District Court has federal question jurisdiction over an application to compel arbitration if the parties’ underlying dispute would create such jurisdiction had they commenced litigation. Badgerow asks whether the same “look through” procedure applies in determining jurisdiction for purposes of a petition to confirm or vacate an award.
I will check to see if the Justices issue any orders on Monday regarding these applications.
Coming out of COVID
At least two arbitral institutions are reopening live hearings as the pandemic weakens and the CDC issues new guidance. FINRA will begin live hearings in 62 of its 69 locations, effective July 5. The offices in Buffalo; Detroit; Philadelphia; Augusta, Georgia; Boca Raton; Providence; and Wilmington will not have live hearings until July 30. Parties may continue to hold remote hearings should they wish. Also, starting May 17th, all AAA-ICDR hearing rooms are open. The institution has established COVID protocols for those using its offices, so check the AAA website (adr.org) to make sure you are compliant.
It is good to be back into the cases and writing after a couple weeks away. More coming on Wednesday, plus any update on SCOTUS later today. Be safe.
David A. Reif