Back to cases today. There are conflicting views in two Circuits on the continued viability of grounds for vacatur other than those specifically enumerated in the FAA. We also have reminders of the importance of reasoned awards and the assertion of procedural objections in a timely manner.
Judicially Grounds for Vacatur
Section 10 of the Federal Arbitration Act lays out four bases for vacating an arbitration award. Courts have created other grounds, including an arbitrator’s “manifest disregard of the law” and the award’s “violation of public policy.” Spirit of the East, LLC v. Yale Products, Inc., 2023 U.S. App. LEXIS 8604 (11th Cir. April 11, 2023)(per curiam), is a reminder that those grounds do not apply in the 11th Circuit.
The case arises out of the Petitioner’s purchase of a custom-built yacht for $220,000. A month after signing the agreement, the purchaser inspected the vessel and discovered, among other alleged defects, that it did not have a name or hull number. He demanded the return of his escrow and rescission of the contract. Under the terms of the agreement, the parties arbitrated their dispute. At that proceeding, Petitioner maintained that sale of the vessel would be a crime under Florida law, as it did not have a hull number and was not properly registered. The arbitrator rejected that claim, opining that “the fact that the vessel was not documented or registered did not prevent it from being sold.” Therefore, he ordered the escrow agent to pay $220,000 which it was holding to Yale and awarded Yale its attorneys’ fees and costs. Spirit brought this action to vacate the award. The District Court denied the motion and confirmed the award. Circuit Judges Newsom, Branch, and Grant affirm.
The court opines that “Spirit’s arguments largely rest on public policy grounds,” i.e., that “courts will not enforce contracts requiring the performance of an illegal act.” It holds that such arguments for vacatur, whether characterized as “public policy” or “manifest disregard of the law,” are “no longer valid” and quotes the Eleventh Circuit’s holding in Frazier v. CitiFinancial Corp., LLC., 604 F. 3d 1313 (11th Cir. 2010) – “our judicially-created bases for vacatur are no longer valid in light of Hall St. [Associates, L.L.C. v. Mattel, Inc. 552 U.S. 576 (2008)].” The panel declines to distinguish Frazier on the basis that this award, to use Spirit’s phrase, “mandates or condones a criminal or illegal act or orders the performance of future criminal acts.” The court specifically rejects the Ninth Circuit’s holding in American Postal Workers Union v. United Sates Postal Service, 682 F. 2d 1280 (9th Cir. 1982), as that case predates Hall Street Associates.
Under the facts of Spirit of the East, the purchaser could probably mitigate any criminal exposure by registering the vessel after the sale. However, the panel seems to opine that, even if an arbitrator were to order a clearly felonious act, it is unlikely that an Eleventh Circuit court would vacate the award. Is that a bridge too far? Would an arbitrator not “exceed” his or her “power,” to cite FAA Section 10, if he or she directs a party to do something that society at large, through its legislature and the criminal code, has deemed universally heinous?
While Spirit of the East would seem to foreclose all challenges in the Eleventh Circuit to arbitration awards on the grounds of public policy, the doctrine remains alive elsewhere. One example is Zimmer Biomet Holdings, Inc. v. Insall, 2023 U.S. Dist. LEXIS 62827 (N.D. Ill. April 11, 2023)(Jenkins, J.). The case arose from a dispute over a patent licensing agreement, which provided that payments would continue until the expiration of the licensed patent or “so long as the Product is sold by Zimmer whichever is the last to occur.” Insall’s last licensed patent expired in March 2018. At that point, Zimmer said that it would cease paying royalties because “doing so would violate the Supreme Court’s instruction in Brulotte v. Thys Co. 379 U.S. 29 (1964), that patent license agreements are unenforceable once their licensed patents expire.” (parallel citations omitted). Arbitration ensued. The arbitrators held that Brulotte did not render the agreement, which had been partly restructured, unenforceable. Zimmer moved to vacate. As did Spirit of the East in the case above, it claimed that the award ordered it to act improperly by violating the Brulotte doctrine. Judge Jenkins agrees with the basic principle that, under Seventh Circuit law, “Subsection 10(a)(4) of the FAA [permitting vacatur when an arbitrator improperly executes his or her powers] has been interpreted to encompass scenarios where the arbitrator has shown a ’manifest disregard of the law’ by ‘direct[ing] the parties to violate the law,’” quoting George Watts & Sons, Inc. v. Tiffany & Co., 248 F. 3d 577 (7th Cit. 2001). Zimmer’s victory on the legal issue, however, is Pyrrhic, as Judge Jenkins finds that the arbitrators duly considered the Brulotte decision; he confirms the award.
Collateral Estoppel and Standard Awards
There are two principal types of arbitration awards – the standard award, which merely sets out the identity of the winner and any damages which the panel awards, and a reasoned award, which lays out the tribunal’s rationale. The latter is obviously a more expensive route. However, Holland v. Progressive Specialty Insurance Co., 2023 U.S. Dist. LEXIS 62149 (E.D. Pa. April 10, 2023)(Marston, J), demonstrates one reason for opting for a fuller opinion. Holland alleged that he was injured in a car accident. He arbitrated his claims against the other driver and was awarded approximately $58,000. Thereafter, Progressive denied payment under Holland’s uninsured/underinsured policy. Holland brought this action, alleging a breach of Progressive’s obligations under that policy. Progressive moved to dismiss, arguing that any claim for damages is barred because the arbitrator found that Holland’s damages were within the tortfeasor’s $100,000 coverage and that the arbitration award’s decision binds Holland under the collateral estoppel doctrine. Judge Marston rejects that claim, opining that the evidence submitted by Progressive was insufficient to demonstrate, among other things, that the “issue decided in the arbitration is identical to the one presented in the later action. . . .” While the court notes a number of items that were not provided for her consideration, some of the questions underlying the rejection of a collateral estoppel argument might have been resolved by a reasoned award. For example, the court opines that, “Other than the final dollar amount, it is also unclear how the arbitrator ruled and the scope of that ruling.” The essence of a reasoned award is that it answers that specific question.
Since the court’s ruling is only on a motion to dismiss, Progressive will have a chance at trial to supplement the record. However, the lesson from the case is simple. If you believe that there is any chance that you may want to use the award in later litigation, get a reasoned award. Even within the same proceeding, it is essentially impossible to win a motion to vacate for “manifest disregard” or arbitrator misconduct without a reasoned award which demonstrates the effect of any such error. In short, before you agree to a standard award, be sure that the savings are worth the collateral damage that may arise from your inability to show how the arbitrator got to his or her conclusion.
Choice of Laws; Final award; Objecting to the Arbitrator’s Jurisdiction
Ribadeneira v. New Balance Athletics, Inc,, 2023 U.S. App. LEXIS 8254 (1st Cir. April 6, 2023)(Lipez, J. for himself and Judges Kayatta and Howard), addresses concerns about “gamesmanship, inefficiency and fairness” when a party proceeds with arbitration before objecting to the panel’s jurisdiction. New Balance commenced an arbitration against its Peruvian distributor, PSG, in which it joined Ribadeneira and Superdeporte, another business entity which Ribadeneira owned. The arbitrator issued two awards against PSG, Ribadeneira and Superdeporte. Plaintiff and Superdeporte moved to vacate, claiming that, because they did not sign the subject contract, they were not bound to arbitrate and, therefore, that the arbitrator had no jurisdiction over them.
In response, New Balance first claimed that the agreement’s choice of laws provision invoked Massachusetts’ arbitration act, which requires a motion to vacate within thirty days of delivery of a copy of the award, rather than the three-month time frame under the FAA. Based on the language of the agreement, the court finds that the choice of Massachusetts law applies only to the “law the arbitrator will apply in deciding matters in dispute. . . It does not contemplate the application of Massachusetts law to actions in a judicial forum to enforce or vacate arbitration awards.” In a useful footnote, the Court cites contractual language which demonstrates the parties’ intention to apply state law for purposes other than deciding substantive issues with the arbitration itself.
Having determined that the three-month rule applies and that it, therefore, has jurisdiction, the court rejects New Balance’s argument that Superdeporte waived its objection by failing to assert it in a timely matter. The court makes clear that a party may not lie low and see how the panel will rule before challenging jurisdiction. It would be “inefficient” to allow “a late jurisdictional objection” because of the resulting waste of “the arbitrator’s time, the parties’ time, and the court’s time.” “It would likewise be unfair to the other parties to the arbitration who have shouldered the effort and expense of the arbitration proceedings until their conclusion, only to find that they still face the risk of having to relitigate the same issues in a judicial forum.” The court specifically “decline[s] to articulate any bright-line rule as to when a party’s participation in arbitration proceedings becomes so extensive as to preclude a challenge to arbitral jurisdiction, engaging instead in a fact-specific inquiry.” On the facts here, it holds that Superdeporte timely challenged the panel’s jurisdiction. The court further affirms the District Court’s finding that, because Superdeporte “only reluctantly and protectively” filed its counterclaim because of the arbitrator’s rulings, such filing does “not clearly signal an intention to submit to the arbitrator’s jurisdiction and abandon its earlier objection.” When it reaches the merits of the appeal, however, the appellate panel disagrees with the lower court. After considering principles of equitable estoppel and contract assumption under Massachusetts law, the panel holds that the District Court erred in vacating the arbitrator’s finding that Ribadeneira and Superdeporte were bound to arbitrate under those doctrines and remands with an instruction to confirm the award.
The opinion lays out and is driven by procedural questions and timing during the eight years of arbitration and litigation among the parties, and anyone seeking to understand the opinion needs to read that chronology. However, while the case provides a good roadmap for considering a claim of waiver in the rear-view mirror, the best advice during an arbitration is always the same. If you have an objection to jurisdiction – or, for that matter, to any issue – make that objection clearly; in detail; and, above all, often. Multiple objections will never hurt you, but omitting one at a crucial time can be fatal to your claim.
Have a good weekend. See you next week.
David Reif, FCIArb