Nothing dramatic this week, but some reminders from the Circuits as to basics. So, today, Highlights will take a spin around the country.
Second Circuit: Email Service of Petition to Vacate
Section 12 of the Federal Arbitration Act requires that a party moving to vacate an arbitration award make service of the application within three months of the date the award is filed or delivered. Dalla-Longa v. Magnetar Capital, LLC, 2022 U.S. App. LEXIS 12818 (2nd Cir. May 12, 2022), holds that email service is inadequate, unless opposing counsel agrees thereto, and affirms the District Court’s dismissal of the application.
At 9:35 p.m. on the last day to vacate, counsel for Dalla-Longa served counsel for Magnetar with a copy of the application to vacate by email. Plaintiff’s counsel had not asked defendant to consent to email service nor had defense counsel agreed to accept an email. In response to Magnetar’s motion to dismiss the application to vacate, Dalla-Longa relied upon Rule 38 of the AAA’s Employment Rules. Section a thereof requires mail service of “any papers, notices or process necessary . . . for any court action in connection with [an arbitration under the rules].” Subsection b allows email service of notices “required by these rules” by email where all parties agree to electronic service. The court, Judge Chin, writing for himself and Judges Calabresi and Nardini, holds that neither section permitted email service in this case. Subsection a only allows service by mail. Subsection b does not apply to an application to vacate the award; as vacatur is a new proceeding which occurs after the arbitration, notice thereof is not “required by” the employment rules.
The panel also rejects Dalla-Longa’s equitable argument. The court does not reach the “question of whether there may ever be equitable exceptions to the rule of strict compliance with § 12’s three-month deadline.” Rather, it affirms the District Court’s finding that Plaintiff failed to demonstrate “any equitable reason for excusing his failure to serve his petition properly.”
Fifth Circuit: Further re: Badgerow
In Badgerow v. Walters, 142 S. Ct. 1310 (2022), SCOTUS held that “look through” federal question jurisdiction does not apply to an application to vacate or confirm an arbitration award. It reversed the Fifth Circuit’s contrary holding and remanded the case. In Badgerow v. Walters, 2022 U.S. App. LEXIS 12711 (May 11, 2022)(Judges Jolly, Graves, and Duncan per curiam), the Fifth Circuit holds that there is no other ground for federal jurisdiction. As the case had been removed from Louisiana state court, the Fifth Circuit remands the matter to the District Court, with instructions to remand to the state system.
Third Circuit: Standard of Review; Public Policy Exception
Caputo v. Wells Fargo Advisors, LLC, 2022 U.S. App. LEXIS 12420 (3rd Cir. May 9, 2022), arises out of a FINRA arbitration addressing the termination of a financial advisor and the repayment of notes which he gave the defendant in the amount of approximately $1.7 Million. The FINRA arbitration panel found for Wells Fargo and enforced the notes. Caputo sought to vacate. The District Court denied the motion. The Third Circuit, with Judge Fuentes writing for himself, Chief Judge Chagares and Judge Bibas, affirms.
Caputo argues that his contract with Wells Fargo contained provisions “prohibited by state labor statutes and designed to evade taxes.” Therefore, he claims that the arbitration award requiring payment of the notes violates public policy and should be set aside. The court rejects the argument, holding that any policy justifying vacatur must be “explicit.” “The public policy must be well defined and dominant, and is to be ascertained by reference to the laws and legal precedents and not from general considerations of supposed public interests.” (citations omitted). Even if the promissory notes, which effectively constituted advances against potential future earnings, violated a general policy “condemning tax evasion,” any law specifically prohibiting such notes “would not be ‘well defined [or] dominant.’” (Brackets in original; citations omitted).
In a potentially important footnote, the court raises the question of whether the public policy exception “survive[s] the Supreme Court’s decision in Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576, 170 L. Ed. 2d 254 (2008).” Like Caputo, any number of courts have avoided this issue by “presuming for purposes of [the] appeal” that “these grounds ‘continue to exist as a basis for vacatur after Hall Street.’” Hopefully, at some point a court will tackle this issue head-on and clarify the fate of the “manifest disregard” and “public policy” exceptions to the FAA.
In response to Caputo’s argument that the award was in “manifest disregard” of the tax laws, the court reiterates the strict standard applied to that test. “[T]here must be absolutely no support at all in the record justifying the arbitrator’s determinations for a court to deny enforcement of an award.” (citations omitted; emphasis added). The panel applies a similarly strict standard to the review of the arbitrators’ refusal to consider certain evidence and rejects the claim. “Vacatur under [FAA] § 10(a)(3) is ‘warranted only where the arbitrator’s refusal to hear proffered testimony so affects the rights of a party that it may be said that he was deprived of a fair hearing’” (Internal citation omitted).
Eighth Circuit: Standard of Review
In Industrial Steel Construction, Inc. v. Lunda Construction Co., 2022 U.S. App. LEXIS 12910 (8th Cir. May 13, 2022), the court, Kelly, J., writing for herself and Judges Colloton and Kobes, also reaffirms the narrow scope of review over an arbitration award.
ISC and Lunda were parties to an arbitration under the AAA’s Construction Industry Rules. The dispute arose under a contract for steel fabrication. The arbitrator found in favor of Lunda. In addition to damages, he awarded Lunda its attorneys’ fees and expert costs. ISC moved to vacate only that latter portion of the award. It argued that, based on inked changes to the contract, the right to receive fees was one-way; only ISC, not Lunda, was entitled to such reimbursement. The Construction Rules, upon which Lunda and the arbitrator relied, provide that “the arbitrator may include. . . an award of attorneys’ fees if all parties have requested such an award or it is authorized by law or their arbitration agreement.”
The District Court denied Lunda’s application to confirm, holding that the arbitrator exceeded his authority in granting fees. The Eighth Circuit reverses, applying the now-standard narrow review of an arbitrator’s award. “[W]hether the arbitrator’s interpretation is correct is not a question before this court,” citing Oxford Health Plans LLC v. Sutter, 569 U.S. 564 (2013). Since the arbitrator “at least arguably construed” the agreement and the Construction Industry Rules appropriately, the District Court should have confirmed the award. “The ‘sole question’ for the court is ‘whether the arbitrator (even arguably) interpreted the parties’ contract, not whether he got its meaning right or wrong,’” quoting Baumer Corp v. ProEnergy Services, LLC., 899 F. 3d 563 (8th Cir. 2018).
Ninth Circuit: Determining Who Is Subject to Arbitration
In a Memorandum opinion, Alire v. The Gap, Inc., 2022 U.S. App. LEXIS 13169 (9th Cir. May 16, 2022)(Judges Smith, sitting by designation; Bade, and Lee), the court affirms the District Court’s denial of the Gap’s motion to compel arbitration. As part of a credit card agreement with Synchrony Bank, Alire agreed to arbitrate certain disputes. The Gap, while not a party to that agreement, sought to enforce the arbitration term. Looking to Utah law, the court holds that the Gap is not a third-party beneficiary thereof. The value of the case for non-Utah lawyers is that it serves as a reminder that a court “appl[ies] state law to determine whether an arbitration clause in an agreement applies to a non-party to that agreement.”
The Supreme Court will be issuing opinions on Tuesday. We will wait to see if it will address any of the three arbitration cases that were argued in March. Stay tuned. In the cert. arena, the Court adopted the recommendation of the Solicitor General in Robertson v. Intratek Computer, Inc., Dkt. No 20-1229, and denied cert. The case would have resolved whether an employment agreement may compel arbitration of Whistleblower claims. The U.S. had taken the position that, although arbitration could not be compelled, there was not a Circuit split or other reason to grand certiorari. The S.G.’s amicus brief is available through the SCOTUS website.
Have a good weekend.
David A. Reif, FCIArb