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Arbitration Process Issues

Washington Supreme Court Declines To Intervene in Ongoing Arbitration, Finding Judicial Authority Under FAA Limited To “Gateway” Disputes and Review of Final Awards

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Evette Burgess and Lithia Motors were arbitrating an employment dispute when, during the proceedings, Burgess filed a motion with the court seeking to terminate the arbitration and to rescind the arbitration agreement. The motion alleged that Lithia breached the agreement by failing to comply with discovery deadlines and that the arbitrator did so by failing to enforce applicable procedural rules. The superior court denied the motion for lack of jurisdiction and certified the issue to the Supreme Court of Washington. The Court affirmed the order, concluding that judicial review under the Federal Arbitration Act (FAA) is limited to disputes over “gateway” issues (i.e., enforceability of the arbitration clause in the first instance), and to the review of final awards.

Burgess argued that interlocutory challenges during arbitration proceedings is permitted by section 2 of the FAA. Lithia disagreed, arguing judicial review under the FAA is limited to the “bookends” of the arbitration: initial enforceability and review of the final award. The Court noted that the majority of federal circuit courts that have addressed the issue have agreed with Lithia, and that Burgess cited no case in which a court provided relief once the arbitration commenced. The Court also agreed with Lithia in this regard, explaining that sections 2, 3, and 4 of the FAA authorize courts to decide gateway arbitrability disputes, while sections 9, 10, and 11 allow courts to confirm, vacate, modify, or correct a final arbitration award at the conclusion of proceedings. The Court relied on a Sixth Circuit decision involving similar facts, where the court found it significant that the FAA is silent on judicial review between gateway disputes and review of final awards. Finding other circuit courts have likewise interpreted this silence as precluding interlocutory review, the Court affirmed the superior court decision declining to intervene and rescind the arbitration agreement while the subject arbitration was ongoing.

Evette Burgess v. Lithia Motors, Inc., et al., No. 98083-7 (Wash. Sept. 3, 2020)

Arbitration Award In Favor Of Major League Baseball Confirmed As Southern District Of New York Bats Telemicro’s Challenges Away

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The dispute involved Telemicro’s breach of a contract with Major League Baseball Properties for the rights to broadcast MLB games in the Dominican Republic. Telemicro failed to make payments under the contract, prompting MLB to terminate the contract and demand arbitration. In response to the arbitration demand, Telemicro sought a stay of the arbitration proceedings in a New York state court, and failed to submit an arbitrator ranking list to the American Arbitration Association. As a result, the AAA deemed Telemicro to have accepted the entire list of proposed arbitrators and made an appointment from it. Shortly thereafter, Telemicro’s request for a stay was denied. After a six-month proceeding, the arbitrator issued a final award to MLB, including an award for attorneys’ fees.

On the motion to confirm the award before the Southern District of New York, Telemicro argued that the decision to proceed with the appointment of an arbitrator despite the pendency of its motion for stay in New York state court constituted a due process violation. Telemicro argued that it would not have been able to participate in the selection of the arbitrator without waiving its challenge to the jurisdiction of the arbitration. The court was not persuaded, noting that Telemicro failed to explain why it waited until the last day the list was due to seek a stay, and further that Telemicro took no action to challenge the appointment of the arbitrator within the arbitration process after the stay was denied. Furthermore, MLB made “a credible argument” that Telemicro’s submission of the list of potential arbitrators would not have waived its right to seek a stay.

Telemicro also argued that the arbitrator manifestly disregarded the law when making the award of attorney’s fees. The parties’ contract, however, stated that Telemicro would “reimburse MLB for any attorney’s fees and all costs and other expenses incurred by MLB in connection with the breach” of the agreement. Lastly, the court found Telemicro’s argument that the arbitrator acted in manifest disregard of the law because he viewed the MLB’s invoices in camera to be baseless, stating that such reviews are frequently performed in camera.

Major League Baseball Props., Inc. v. Corporacion de Television y Microonda Rafa, S.A., Case No. 1:19-cv-8669-MKV (S.D.N.Y. Sept. 14, 2020).

S.D.N.Y. Affirms Arbitration Award Over Challenge to Impartiality of Arbitrator

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Schuyler Line Navigation Co., LLC (“SLNC”) argued, in part, that the arbitrator’s partiality should be inferred from his previous representation of KPI Bridge Oil, Inc. (“KPI”) and its affiliates, alleged hope for future business from KPI, and the extent of his relationship with KPI and other business relationships. The District Court rejected these arguments, finding that SLNC fell short of demonstrating evidence of partiality or corruption.

SLNC also raised an issue with the arbitrator’s “belated disclosure and the lack of his transparency regarding his prior representation of KPI and its affiliate.” The Second Circuit “has repeatedly cautioned that it is not quick to set aside the results of an arbitration because of an arbitrator’s alleged failure to disclose information. Mere failure to disclose, by itself, is an insufficient ground for vacatur. Rather, the critical question is whether the facts that were not disclosed suggest a material conflict of interest.” The District Court, while noting that the arbitrator’s “behavior may not have been exemplary,” found that the belated disclosure did not give rise to an inference of evident partiality sufficient to vacate the arbitration award.

Schuyler Line Navigation Co., LLC v. KPI Bridge Oil, Inc., 1:20-cv-02772 (S.D.N.Y. Sept. 2, 2020)

Georgia Supreme Court Finds Mandatory Arbitration Clause in Law Firm Engagement Agreement Is Neither Unconscionable nor Void as Against State Public Policy

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The plaintiff sued its former lawyer and law firm for legal malpractice. The defendants moved to dismiss and compel arbitration based on a mandatory arbitration clause in the parties’ engagement agreement. The trial court denied the motion, finding the arbitration clause was unconscionable, and thus unenforceable, having been entered into in violation of the Georgia Rules of Professional Conduct (GRPC). The appellate court reversed, finding the clause was neither void as against public policy nor unconscionable. Plaintiff appealed to the Supreme Court of Georgia, which granted review of two questions: (1) whether the GRPC requires an attorney to obtain the informed consent of his/her client before including a clause mandating arbitration of legal malpractice claims in the parties’ engagement agreement; and if so, (2) whether failing to obtain that consent renders such a clause unenforceable under Georgia law.

Substantively addressing the second question only, the Court affirmed the decision of the appellate court, finding the first question need not be answered. Specifically, the Court held, even assuming the failure to obtain a prospective client’s informed consent does violate the GRPC, the arbitration clause at issue here would still not be unenforceable. The Court rejected the argument that clauses of this kind violate state public policy, noting that Georgia has a clear public policy in favor of arbitration, and that “[t]here is nothing about attorney-client contracts in general that takes them outside this policy and makes mandatory arbitration of disputes arising under them illegal.” The Court also found Georgia does not have a categorical policy against mandating arbitration of legal malpractice claims. Rather, and contrary to the plaintiff’s argument, the Court held that a contract is void as against public policy, and thus unenforceable, where the agreement itself effectuates illegality, not because the process of entering the contract was allegedly improper. Thus, because the arbitration clause at issue would still be lawful even if the defendants had complied with the GRPC, the Court found the clause is not void as against public policy. In addition, based on the limited record before it, the Court found no basis to conclude the arbitration clause at issue is either procedurally or substantively unconscionable.

Innovative Images, LLC v. James Darren Summerville, et al., Case No. S19G1026 (Ga. Sept. 8, 2020)

New York Federal Court Confirms Arbitration Award Where Plaintiff Offered No Grounds to Vacate, Modify, or Correct Award

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PB Life and Annuity Co. Ltd. brought this action seeking a declaratory judgment that a breach of contract dispute with Universal Life Insurance Co. was not subject to arbitration and must be litigated in federal or state courts in New York. Universal Life filed a motion to compel arbitration, and PB Life filed a motion for a preliminary injunction, which the parties later agreed would be converted into a motion for a permanent injunction.

We have previously addressed the district court’s May 12, 2020, decision granting Universal Life’s motion to compel arbitration and denying the plaintiff’s motion for a permanent injunction of the arbitration.

On June 2, 2020, the arbitral panel issued an interim award to Universal Life. Universal Life subsequently moved to confirm the arbitration award, and PB Life cross-moved to vacate the award on four grounds:

1. Whether the Panel Denied PB Life Due Process

PB Life argued that the arbitral panel denied it a fair opportunity to present its case under the Federal Arbitration Act and the New York Convention because PB Life was not given the opportunity to generate new independent expert reports showing the value of the trust assets, or the opportunity to obtain important discovery from Universal Life on the same issue. The court rejected PB Life’s argument, noting that the basis for the panel’s ruling was not the value of the assets in the trust account, but rather whether they were qualifying assets, and that the panel’s conclusion that they were not qualifying would not be undermined by evidence that the assets were valuable. The court found that PB Life “does little more than complain that the panel issued its interim award without conducting a full hearing on the merits of its defenses.”

2. Whether the Award Was Entered in Manifest Disregard of the Law

PB Life argued that the panel manifestly disregarded the law by finding irreparable harm when Universal Life sought money damages alone. The court found that PB Life failed to provide any law that is contrary to the panel’s decision or provide any basis for its assertion that the panel misapplied the law to find “immediate and irreparable loss or damage” other than its bare disagreement with the outcome.

3. Whether Recognition or Enforcement of the Award Would Be Contrary to Public Policy

PB Life argued that the award would be contrary to public policy under the Convention because its recognition or enforcement would require PB Life to violate a temporary restraining order entered by a North Carolina state court to which PB Life voluntarily subjected itself.

The court construed PB Life’s arguments in one of two ways:

  • First, that PB Life argued the temporary restraining order relieved it of its obligations under the reinsurance agreement. The court rejected this argument, finding that PB Life forfeited such an argument when it failed to raise this argument before the panel.
  • Second, that PB Life was in essence stating a restraint on the power of the court – that it would be contrary to public policy for the court to enter a judgment that would require PB Life to violate an order of another court. Again, the court rejected PB Life’s argument, finding that PB Life offered no reason to believe that the North Carolina state court would not honor the district court’s judgment, nor identified any public policy that prevents a second court from awarding judgment in favor of a party entitled to it simply because the defendant is subject to a prior court order from an earlier court that would make compliance difficult or impossible.

Simply put, PB Life had not identified any public policy that prevented the court from ordering interim relief in favor of Universal Life that the panel determined Universal Life was plainly entitled to under the Convention and the FAA. The panel found in favor of Universal Life, and under governing law, Universal Life was entitled to confirmation of the award. The court advised that to the extent the judgment conflicts with that of the temporary restraining order in the North Carolina court, PB Life has the means to address that conflict by either petitioning the North Carolina court for relief or, if the plaintiffs in the North Carolina proceeding can successfully resist, find another way to satisfy those parties.

4. Whether the Dispute Is Arbitrable

Lastly, PB Life argued that the dispute was not arbitrable because the arbitration clause of the reinsurance agreement was superseded by the trust agreement. The court stood by its original decision, which held that the reinsurance agreement and its arbitration clause were not superseded by the trust agreement and that the question of arbitrability was for the arbitrators to decide, who ultimately determined that the dispute was arbitrable. The court found that PB Life failed to show an “intervening change of controlling law, the availability of new evidence, or the need to correct a clear error or prevent manifest injustice.”

Ultimately concluding that PB Life had not provided any ground to vacate, modify, or correct the award, the U.S. District Court for the Southern District of New York confirmed the arbitration award.

PB Life & Annuity Co. v. Universal Life Insurance Co., No. 1:20-cv-02284 (S.D.N.Y. July 30, 2020).