Two Circuits issued important decisions over the last few days.  The Second has addressed the limits on appellate jurisdiction under the FAA.  The Fifth looks at the recurring issue of non-payment of arbitration fees – an issue that may become more prevalent in light of the expense related to mass arbitration filings.  Also, today’s Highlights looks at some mediation literature and two new petitions for certiorari.

Appellate Jurisdiction

“It ain’t over till it’s over,” Berra, Y., 1973.  Spliethoff Transportation B.V. v. Phyto-Charter, Inc., 2022 U.S. App. LEXIS 10224 (2^nd Cir. April 15, 2022)(Judges Kearse, Sullivan, and Robinson in a summary order), applies this principle to the review of orders compelling arbitration and denying stays.  The District Court ordered Phyto-Charter to arbitrate its dispute with Spliethoff.  As part of that order, the District Court Judge also ordered Phyto-Charter to either agree to the arbitrator whom Spliethoff had already designated or appoint a second arbitrator.  If it did neither by May 27, 2021, the court would “appoint an arbitrator on Phyto-Charter’s behalf.”   Phyto-Charter appealed that order.  The Second Circuit dismisses the appeal for lack of jurisdiction.

Section 16(a)(3) of the Federal Arbitration Act, in language quoted by the court,  provides that “’[a]n appeal may be taken from . . . a final decision with respect to an arbitration that is subject to’ the FAA.”  Since the District Court reserved the right to designate an arbitrator and had not done so prior to the filing of the appeal, the Court of Appeals holds that there is no “final decision.”   “[A] ‘final decision’ is one ‘that ends the litigation on the merits and leaves nothing more for the court to do but execute the judgment,” quoting Green Tree Financial Corp., Alabama v. Randolph, 531 U.S. 79 (2000).  Here “the district court deferred its decision on this matter [which] meant that this order was not ‘the last deliberative action of the court’ before the arbitrators then ‘take over the controversy and dispose of it.’” (Emphasis in opinion). The court distinguishes Farr & Co., v. Cia. Intercontinental De Navegacion De Cuba, S.A., 243 F. 2d 342 (2^nd Cir. 1957)(finding appellate jurisdiction), on the basis that, in Farr,  the court merely directed the parties to appoint an arbitrator; it did not, as here, reserve any authority to itself to act if the parties failed to do so.

Failure to Pay Fees

Noble Capital Fund Management, L.L.C., v. US Capital Global Investment Management, L.L.C., 2022 U.S. App. LEXIS 9979 (5^th Cir. April 13, 2022), addresses the ramifications of arbitration parties’ refusal to pay arbitration fees.  Noble and US Capital, as part of a joint real estate investment, created various entities, which culminated in a Real Estate Investment Fund (the “Fund).  The investment broke down, and, after the commencement of various pieces of litigation, the parties and the Fund entered arbitration before JAMS.   At an early stage of the arbitration, the arbitration panel placed a hold on the assets of the Fund.  Allegedly as a result of that freeze, the Fund claimed it could not pay its portion of JAMS’ expenses. None of the other parties stepped up to cover the Fund’s share of the costs.  Ultimately, the JAMS panel terminated the arbitration.  Noble then sued US Capital, which moved to compel arbitration. The District Court denied that motion and refused to stay the litigation; this appeal ensued.

The Fifth Circuit, with Judge Higginbotham writing for himself, Chief Judge Richman, and Judge Elrod, affirms.  Section 3 of the FAA requires a stay of judicial proceedings “until such arbitration has been had in accordance with the terms of the agreement.”  Joining the Ninth, Tenth, and Eleventh Circuits, the court holds that, once the proceeding begins, “arbitration ‘has been had,’” and, therefore, the FAA does not provide for a stay of the underlying litigation. “Even though the arbitration did not reach the final merits and was instead terminated because of a party’s failure to pay its JAMS fees, the parties still exercised their contractual right to arbitrate prior to judicial resolution in accordance with the terms of their agreements.”  The court specifically holds that the cause of the termination is irrelevant. “There is no arbitration to return this case to and parties may not avoid resolution of live claims through compelling a new arbitration proceeding after having let the first arbitration proceeding fail.”  So, is the practice lesson from this case that a party who wants to keep litigation alive can simply fail to pay its share of the arbitration fee and, thus, disempower the court from staying the litigation?  Or would such a self-induced failure of the arbitration process, absent good cause, be equivalent to a failure to exhaust administrative remedies as a precondition to litigation, thus forfeiting the right to go forward with the suit?  Does the court’s reference to the “right” to arbitrate, rather than an obligation to do so, impact such a forfeiture analysis?

Arbitrators’ Discretion on Procedural Issues

Rollins v. Goldman Sachs & Co., LLC, 2022 U.S. Dist. LEXIS 69463 (S.D.N.Y. April 14, 2022), reaffirms arbitrators’ broad discretion to manage the proceedings before them.  Goldman terminated Rollins, a former managing partner of a Goldman Sachs entity, and filed an unfavorable Form U5 which stated Goldman terminated Plaintiff because he had allowed trades with a party (the “Financier”) whom the firm had placed on a restricted list. (FINRA requires the filing of a form U5 within thirty days after a broker leaves employment.  It is a public record available both to investors and to potential employers).  Rollins brought this action, and the court compelled arbitration.  The arbitration entered an award in favor of Goldman, and these cross motions to confirm and vacate ensued.

Rollins’ primary claim was that the panel denied his request for the production of  documents from Goldman’s compliance office showing that the Financier was, in fact, on the restricted list.  That failure, he argued, constituted arbitrator “misconduct,” requiring vacatur of the award under Section 10(a)(3) of the FAA.  Judge Ramos begins with the general proposition that “[n]ot every failure of an arbitrator to receive relevant evidence, such as excluding witness testimony, constitutes misconduct requiring vacatur.”  “[A]ny ‘misconduct must amount to a denial of fundamental fairness of the arbitration proceeding,’” (internal citation omitted).   Here, the court holds, “the parties introduced ample evidence concerning the company’s decision to terminate Rollins.  He called eleven witnesses over the seven-day hearing, and the parties introduced over 100 exhibits.”  Perhaps recognizing the importance of the core nature of the discovery which the arbitrators denied, i.e., whether the Financier was, in fact, on the restricted list, the court reiterates the discretion given to an arbitrator.  “Arbitrators have ‘great latitude to determine the procedures governing their proceedings and to restrict or control evidentiary proceedings.” “[T]he issue for this Court is not whether it would have handled the arbitration proceedings in the same way as the [p]anel or reached the same result that the [p]anel reached.” (Citations omitted).

The alternative grounds on which the court relies are reminders of the need to preserve any potential grounds for vacatur during the arbitration itself.  First, the court opines that Rollins did not question any witnesses about the compliance records.  Second, it finds that Rollins did not adequately demonstrate how the failure to require production of the records prejudiced him.  Finally, the court twice references the affirmative response which Rollins’ counsel gave to the Panel Chair’s question -“Do you feel that you got a fair hearing?” – at the conclusion of evidence.  What an unfair inquiry!  Isn’t a party implicitly pressured to say “of course” to the arbitrators who are about to decide his or her case?  However, this case is a warning to counsel to be prepared to give a tactful demurrer if asked that question, so as to preserve any issues for vacatur.

Literature

The April edition of the American Bankruptcy Institute Journal has two interesting articles on mediation.  In one, Sylvia Mayer, an arbitrator and mediator in Houston, addresses the difference between permissible puffery and lying in mediation, with a focus on the Model Rules of Professional Conduct, Mayer, Straight & Narrow, Ethics and the Art of Mediation, 41-4 ABIJ 28 (April 2022).  Edward Schnitzer, an education co-director of the American Bankruptcy Institute, and his law partner, Leslie Barkoff, address the issue of a party’s failure to follow through on an agreement reached in mediation and raise suggested remedies, Berkoff and Schnitzer, Mediation Matters: Remedies for Refusing to Consummate a Settlement Agreement Reached at Mediation, 41-4 ABIJ 18 (April 2022).  Both articles are available on Lexis Advance.

SCOTUS

Two new, related petitions for cert. raise a question related to the delegation of gateway issues, such as the enforceability of an agreement, to arbitrators,  Asner v. Hengle, Dkt. No 21-1132, and Treppa v. Hengle, Dkt. No. 21-1138.  The parties’ dispute arose out of loans by tribal lenders pursuant to agreements which applied tribal law to the exclusion of state and federal law.  The Fourth Circuit held that such a choice-of-law provision was unenforceable as a matter of public policy, since it prospectively waived federal rights which would otherwise be available to borrowers. Accordingly, it invalidated the entire loan agreement, including the delegation clause.  The Second and Third Circuits have held similarly.   However, the Ninth Circuit has taken the opposite view, holding that the delegation clause refers the enforceability issue to arbitration.  Based on this Circuit split, certain non-tribe defendants in the litigation seek cert., with the goal of enforcing the delegation clause. They assert that the prevalence of tribal lending makes the issue important. However, for arbitration practitioners, even if such loans do not rise to the level of general interest, the cases would be important as they address the scope of the “gateway” delegation authority in Rent-A-Center, W., Inc. v. Jackson, 561 U.S. 63 (2010).  SCOTUS has extended the Respondents’ briefing deadline to May, so it will be a while before we find out if the Court, which has shown its interest in arbitration by taking five cases this Term, will review this niche of arbitration jurisprudence.   As always, you can find the full petitions and responses at the Scotus Blog, Scotusblog.com.

Have a good week.  I’ll see you Friday. 

David A. Reif, FCIArb
Reif ADR
Dreif@reifadr.com
Reifadr.com