Arbitration Process Issues

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

September 1, 2020 by Carlton Fields

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).

Uber Price Fixing Class Action Award Still Fares Despite Arbitrator’s Unfunny Joke

August 19, 2020 by Nora Valenza-Frost

The petitioner unsuccessfully sought to vacate an arbitration award permitting Uber’s use of a “surge” pricing algorithm to set fares, arguing that comments made by the arbitrator reflected his “evident partiality” toward Uber in violation of 9 U.S.C. § 10(a)(2). Specifically, on the third day of the arbitration hearing, the arbitrator offered concluding remarks on the record including the statement: “I must say I act out of fear. My fear is if I ruled Uber illegal, I would need security. I wouldn’t be able to walk the streets at night. People would be after me.” The petitioner also argued the arbitrator was “starstruck” by the presence of Kalanick, Uber’s co-founder and then CEO, taking his picture on the first day of the hearing.

Uber first argued that the petitioner waived his right to seek vacatur by waiting until after the arbitrator ruled against him. The court agreed, as attacks on the qualifications of arbitrators on grounds previously known but not raised until after an award has been rendered are precluded. The petitioner’s claim that vacatur of an “openly partial award” is not waivable was “belied by Second Circuit precedent.” The court also agreed with Uber’s second argument, that the arbitrator’s conduct did not justify vacatur, finding the arbitrators remarks “were simply an attempt at humor – one of many made by the arbitrator throughout the hearing.”

Meyer v. Kalanick & Uber Technologies, Inc., No. 1:15-cv-09796 (S.D.N.Y. Aug. 3, 2020).

Tenth Circuit Refuses to Vacate FINRA Arbitration Dismissal

August 18, 2020 by Brendan Gooley

The Tenth Circuit Court of Appeals recently rejected a claimant’s effort to vacate the dismissal of his FINRA claim following his repeated failure to comply with various deadlines.

Zane Piston initiated a FINRA arbitration against his former employer, Transamerica Capital Inc., claiming that Transamerica Capital incorrectly described the reason for his termination.

The arbitration panel issued a scheduling order. Piston’s attorney failed to make various filings in accordance with the scheduling order and timely respond to motions filed by Transamerica Capital.

Transamerica Capital eventually moved to have Piston’s claim dismissed with prejudice due to these failures. The arbitration panel held a hearing at which it required Piston to show good cause as to why his claim should not be dismissed. Piston’s counsel indicated that he had undergone surgery, been traveling in Europe, and that his wife had been hospitalized and that he had therefore been unable to make timely filings. The panel concluded that Piston’s counsel had not shown good cause for his various failings and dismissed Piston’s claim with prejudice as a sanction.

Piston moved to vacate that decision. The district court denied Piston’s motion, and Piston appealed to the Tenth Circuit. The Tenth Circuit affirmed the district court’s denial of Piston’s motion to vacate the dismissal of his claim. Piston primarily claimed that the arbitration panel exceeded its powers, disregarded the law, committed misconduct, and denied him a fair hearing because it allegedly dismissed his claim without a warning. The court rejected that claim. It concluded that the panel arguably interpreted and applied FINRA Rule 13212(c), which allows FINRA panels to dismiss a claim with prejudice as a sanction for material and intentional failure to comply with an order of the panel if prior warnings or sanctions proved ineffective. Whether the panel properly interpreted Rule 13212(c) was beyond the scope of the court’s review. The Tenth Circuit also rejected Piston’s claim that the panel misapplied the good cause standard, noting that Piston had to do more than show that the panel committed an error.

Piston v. Transamerica Capital, Inc., No. 19-1123 (10th Cir. July 21, 2020).

Second Circuit Affirms Denial of NFL Player’s Petition to Vacate Arbitration Award, Rejecting Arguments of Harm Caused by Failure to Disclose CBA-Related Documents

August 5, 2020 by Michael Wolgin

The case was brought by Philadelphia Eagles offensive tackle David Lane Johnson against the NFL Players Association, the NFL, and the NFL Management Council related to a 10-game suspension for using performance-enhancing substances. The collective bargaining agreement at issue included a policy regarding testing, discipline, and an arbitration appeal process for players found to be in violation. When Johnson appealed his suspension under the policy, the arbitrator issued an award upholding Johnson’s discipline. Johnson then sued the Players Association, the Management Council, and the NFL, seeking vacatur of the arbitration award and asserting claims for breach of the duty of fair representation, breach of the collective bargaining agreement, and violation of his rights under various labor laws. The district court denied Johnson’s petition for vacatur, confirmed the arbitration award, dismissed certain of Johnson’s claims, and ultimately granted summary judgment against Johnson as to all remaining claims.

On appeal, the Second Circuit rejected Johnson’s argument that the Players Association’s “failure to provide him with documents including ‘the complete Policy, his discipline file, and his testing history file’ amounted to a ‘per se‘ breach of its duty of fair representation.” Even assuming the failure of a union to produce documents constituted a breach, which the court indicated was unprecedented, Johnson still could not identify how the failure of the Players Association to provide these documents affected the outcome of his arbitration.

The Second Circuit also ruled that the district court did not err in granting summary judgment to the Players Association on Johnson’s claim that the union failed to provide him with copies of “side agreements” to the Management Council’s policy. The court was not persuaded by Johnson’s arguments, including that Johnson was entitled to damages for the late production of documents by the Players Association. Johnson was unable to dispute (1) the evidence in the record that all relevant documents had been produced; and (2) that there was no showing of any impact on the arbitral outcome or of bad faith.

The Second Circuit also affirmed the denial of the motion to vacate the arbitration award based on Johnson’s argument that he lacked a full and fair hearing. The Second Circuit concluded, “Johnson was given clear notice of the contemplated disciplinary action that was to be taken against him, the appeal was heard by a qualified arbitrator, and he had a full and fair opportunity to present arguments. That was more than sufficient under our precedent to confirm the award.”

Johnson v. National Football League Players Association, No. 19-2734 (2d Cir. July 17, 2020).

€643 Million Arbitration Award Was Within Arbitration Panel’s Power to Award and Not a Result of Manifest Disregard of the Law

August 3, 2020 by Benjamin Stearns

Precision Castparts Corp. purchased companies with manufacturing facilities in the United States and Germany for €800 million. After the sale closed, Precision discovered that the seller had “manipulated financial documents of the acquired companies to show that they were ‘high margin’ and ‘high cash flow’ businesses. In fact, the acquired companies were ‘functionally insolvent.'”

Precision instituted an arbitration before the American Arbitration Association, International Centre for Dispute Resolution, alleging claims for fraudulent inducement and breach of warranty. The tribunal found that the seller breached the contractual agreement and fraudulently induced Precision to purchase the acquired companies. The tribunal awarded damages of €643 million for the fraudulent inducement claim, and €100 million for the breach of contract claim, which was subject to a contractual cap of the same amount. The tribunal stated that the breach of contract award was subsumed within the €643 million fraudulent inducement award and was not in addition to that amount.

The Southern District of New York confirmed the award, finding that it was within the scope of the arbitrators’ power and that the arbitrators had not engaged in manifest disregard of the law. The seller argued that the tribunal disregarded two Delaware legal doctrines, the rehash doctrine and the bootstrapping doctrine, which are “intended to prevent taking contract breach and damages allegations and dressing them up as a fraud claim for the same damages where the contract and fraud allegations are materially identical.”

In rejecting the seller’s argument that the claim was subject to the rehashing or bootstrapping doctrines, the tribunal found that, although there was overlap between the two claims, the “fraudulent misconduct went well beyond breaches of the [contract].” “The broader and different nature of the conduct pleaded to support the fraudulent inducement claims, combined with the additional pleading of intent, which is an element of fraud but not contract breach, was enough to defeat [the seller’s] bootstrapping argument.”

With regard to the rehashing doctrine (which focuses on the claimed damages as opposed to the bootstrapping doctrine, which focuses on the claimed basis for liability), the court found that the rehashing doctrine did not apply because the contract breach claim was limited to €100 million by the contractual indemnity cap, but the fraudulent inducement claim was not subject to any cap. The court found that the tribunal’s determinations did not manifestly disregard the law but rather were well supported by the law. In addition, the issues were within the scope of the arbitrators’ powers as both claims arose from the acquisition that was the subject of the contract, and the contract provided for arbitration of any claim or controversy arising out of or related to it.

Precision Castparts Corp. v. Schulz Holding GmbH & Co. KG, No. 1:20-cv-03029 (S.D.N.Y. July 20, 2020).