Arbitration Process Issues

SDNY Concludes Arbitrators Did Not Exceed Authority in Interpreting Product Pollution Liability Exception to Policy’s Pollution Exclusion

May 26, 2020 by Nora Valenza-Frost

Petitioner sought to vacate an arbitration award, arguing that the arbitration panel exceeded its authority in interpreting the terms of an insurance policy when it determined that certain claims fell within the policy’s product pollution liability exception to the pollution exclusion. The court found that the petitioner did not demonstrate that the panel manifestly disregarded the terms of the policy: first, the arbitration agreement specifically instructed the panel to interpret the terms of the policy and to determine whether and to what extent the respondent’s losses were excluded by the pollution exclusion or restored by the production pollution liability exception; second, the text of the policy served as the basis for the award, reflecting that the panel did not disregard its terms; and third, the panel explained that the product pollution liability exception only granted coverage for pollution that satisfies the exception’s three requirements, and the court could not review the merits of the panel’s contract interpretation. Accordingly, the award was confirmed.

HDI Global SE v. Phillips 66 Co., No. 1:20-cv-00631 (S.D.N.Y. May 12, 2020).

Court Confirms Arbitration Award Against Parties Who Failed to Attend Arbitration

April 20, 2020 by Benjamin Stearns

The Northern District of Texas has confirmed an arbitration award for Wells Fargo against Energy Product Co. and Energy Transport and Logistic LLC. Neither Energy Product nor Energy Transport participated in the arbitration or filed a response to the motion to confirm. Unanswered motions to confirm an arbitration award are treated as unopposed motions for summary judgment and do not result in a default judgment. Therefore, the movant must demonstrate that there is no genuine dispute as to any material fact and that the movant is entitled to judgment as a matter of law.

Wells Fargo demonstrated that there was no factual dispute here and that it was entitled to judgment. Wells Fargo was required to show that, as required by the Federal Arbitration Act, the proceedings were not “fundamentally unfair.” A “fundamentally fair hearing requires only notice, opportunity to be heard and to present relevant and material evidence before the decision-makers, and that the decision-makers are not infected with bias.” After reviewing the record, the court determined that standard was met in this case, despite that neither Energy Product nor Energy Transport attended the arbitration hearing. The court found that they had both received fair notice of the hearing but simply chose not to attend. While all parties to an arbitration proceeding are entitled to notice and an opportunity to be heard, “due process is not violated if the hearing proceeds in the absence of one of the parties when that party’s absence is the result of his decision not to attend.”

Wells Fargo Bank, N.A. v. Energy Prod. Co., No. 3:19-cv-02014 (N.D. Tex. Mar. 26, 2020).

First Circuit Affirms Confirmation of FINRA Award Over Claim That Arbitration Panel Should Have Held Investment Firm Liable Under Doctrine of Respondeat Superior

April 14, 2020 by Brendan Gooley

The First Circuit has affirmed the confirmation of a FINRA award over an appellant’s claim that the arbitrators erred by, among other things, not holding an investment firm liable under the doctrine of respondeat superior. The court held that the evidence supported the arbitrators’ finding and that the appellant had not come close to satisfying the “manifest disregard” standard.

Kenneth Ebbe invested his pension and 401(k) with Richard Cody. Cody told Ebbe that the distributions Ebbe was receiving were interest only and that his account’s balance remained around $500,000. The distributions were actually significantly reducing Ebbe’s principal.

FINRA’s appeals panel suspended Cody. Cody therefore transferred Ebbe’s account to his wife, who worked as an investment adviser at Concorde Investment Services LLC. Cody nevertheless continued to meet with Ebbe regarding his account. Ebbe received monthly statements that accurately reflected that his account balance was declining, but Cody told Ebbe that those statements did not include all of Ebbe’s investments. After his suspension ended, Cody joined Concorde as an investor. Both he and his wife were eventually terminated after Concorde discovered that Cody had contacted customers during his suspension.

Ebbe eventually discovered that his account had no value and filed for arbitration with FINRA against the Codys, Concorde, and others. The Codys did not appear. During the four-day hearing, Ebbe’s expert testified that Cody committed defalcations and that Concorde had a duty to reasonably supervise the Codys, but did not opine that Concorde had violated that duty and admitted there was no evidence that Cody’s wife had made any misrepresentation to Ebbe.

Concorde presented evidence that it had hired Cody’s wife after a diligent background check, that it supervised her, and that it had complied with all industry rules.

The arbitration panel found that the Codys were jointly and severally liable for $286,000 in damages but denied Ebbe’s remaining claims, including the claims against Concorde.

Ebbe moved to confirm in part and vacate in part the award. Concorde and another defendant moved to confirm it. The district court confirmed the award and Ebbe appealed.

The First Circuit rejected Ebbe’s claims, including his principal claim that the panel had committed manifest disregard for the law and that Concorde should be liable as well under the doctrine of respondeat superior. The court noted that arbitrators are not required to explain their awards and that a party is hard pressed to satisfy the demanding standard for manifest disregard. The court also noted that the evidence supported the arbitrator’s finding in favor of Concorde and that the award against the Codys could have been nothing more than a default judgment.

Ebbe v. Concorde Investment Services, LLC, No. 19-1819 (1st Cir. Mar. 24, 2020).

Third Circuit Addresses Interplay Between LMRA and FAA and Affirms Arbitration Award in Favor of Union Under Collective Bargaining Agreement

March 31, 2020 by Michael Wolgin

The case relates to the disposition of accrued vacation time of unionized nurses after a new employer (Prospect) assumed a collective bargaining agreement. Prospect construed the collective bargaining agreement differently than the prior employer and refused to allow more than 200% of the annual vacation time limit. An arbitrator ultimately decided in favor of the nurses’ ability to maintain the full amounts of their previously accrued vacation time, determining that the collective bargaining agreement did not curtail the nurses’ right to the full amount of their accumulated leave. The arbitrator further found that Prospect assumed the collective bargaining agreement and that Prospect, therefore, was obligated to honor the excess accumulated leave. After the district court upheld the arbitration award, Prospect appealed to the Third Circuit.

As an initial matter, the Third Circuit found that Prospect’s attempt to vacate the award was timely, rejecting the union’s argument that the state 30-day statute of limitations period authorized by the Labor Management Relations Act applied. Because Prospect was entitled to sue under the Federal Arbitration Act, which applies to collective bargaining agreements, it could rely on the lengthier three-month limitations period of the FAA.

Next, the Third Circuit rejected Prospect’s three arguments attempting to show that the award should be vacated under the FAA. First, the court rejected Prospect’s argument that the award was in excess of the arbitrator’s powers because the arbitrator failed to arguably interpret the collective bargaining agreement. The court found that the arbitrator’s ruling could be supported by a canon of contract construction and that “[w]hether or not that is the best reading of the CBA, it is certainly sufficient to uphold the arbitrator’s award.” Second, the court rejected Prospect’s argument that the arbitrator manifestly disregarded federal labor law pertaining to successor employers. Because the arbitrator “did not foreclose the possibility that Prospect, as a successor employer, could have, as an initial condition of employment, capped the nurses’ carry-over of vacation time” but, instead, found only that there was “no evidence that Prospect did so in time” it was not a manifest disregard of the principles of successor employment. And third, the court rejected Prospect’s argument that the arbitrator was guilty of misconduct in “refusing to hear evidence pertinent and material to the controversy” about a similar National Labor Relations Board decision in a different case. The Third Circuit ruled that the evidentiary ruling was “not patently incorrect,” and it was “certainly not an error that deprived Prospect of a fair hearing.” The Third Circuit, therefore, affirmed the order confirming the award.

Prospect CCMC LLC v. Crozer-Chester Nurses Association, Nos. 19-1439 & 19-1440 (3d Cir. Feb. 26, 2020).

Eleventh Circuit Affirms Confirmation of Arbitration Award Over Claims of Fraud, AAA Rule-Breaking, and Lack of Jurisdiction

March 26, 2020 by Brendan Gooley

The Eleventh Circuit recently affirmed the confirmation of an arbitration award in a dispute involving a contract to obtain signatures for a Florida solar energy ballot initiative over claims that the prevailing party engaged in fraud, violated AAA rules, and that the arbitrator lacked jurisdiction to add attorneys’ fees to his award months after the arbitration hearing.

PCI Consultants Inc. contracts with entities and organizations to obtain signatures for petitions for ballot initiatives in exchange for a fee. In 2015, PCI contracted with Floridians for Solar Choice Inc. and Solar Alliance for Clean Energy Inc. (together, the Solar parties) to obtain signatures to support a proposed ballot initiative for a solar energy amendment to the Florida Constitution. A dispute arose regarding payment. The Solar parties believed they paid PCI what it was due, but PCI withheld 217,000 signed petitions due to purported nonpayment. The dispute concerned additional expenses for a different ballot initiative concerning medical marijuana. PCI claimed the Solar parties agreed to share expenses with the medical marijuana campaign while the Solar parties disputed that they agreed to cover those expenses.

Floridians for Solar Choice sued alleging various claims in a U.S. District Court in Florida and moved to compel arbitration. The court granted that motion, and Solar Alliance subsequently appeared in the arbitration. After a three-day hearing, the single arbitrator who heard the dispute ruled in favor of the Solar parties and awarded $1,271,250 in damages. Several months later, the arbitrator also tacked on interest, costs, and fees for a total award of approximately $2,015,900.

The district court confirmed the award over PCI’s motion to vacate, agreeing that the award of interest, costs, and fees was proper. PCI appealed to the Eleventh Circuit.

On appeal, PCI claimed (1) the Solar parties committed fraud during the arbitration proceedings by altering their damages analysis; (2) the Solar parties violated AAA rules that PCI claimed required the appointment of three arbitrators rather than one; and (3) the arbitrator lacked jurisdiction to award fees months after the arbitration hearing.

The Eleventh Circuit rejected all of PCI’s claims and affirmed the award’s confirmation.

First, PCI claimed that the Solar parties committed fraud by increasing their claimed damages in their post-hearing brief. The Eleventh Circuit disagreed, noting that the requirements of the test it applied for the FAA’s fraud exception were not satisfied. The court noted that PCI cited no case holding that “a change in damages theory constitutes ‘fraud’ or ‘undue means’ under” the FAA’s fraud exception. The Solar parties’ post-hearing demand for more than $1,000,000 was supported by the record even though they initially sought less than $500,000. (The Solar parties apparently initially sought partial reimbursement for the per-signature fee of the 217,000 withheld petitions, but later successfully argued they were entitled to full reimbursement for those petitions.)

Second, the court rejected PCI’s contention that it was entitled to a three-arbitrator panel, noting that AAA rules allowed the parties to agree on one or three arbitrators and provided that if the parties were unable to agree and the claim involved more than $1 million, then the matter would be heard by three arbitrators. The facts established that PCI had agreed to a single arbitrator knowing that this case potentially involved more than $1 million. In its statement of claim, Floridians for Solar Choice demanded $500,000 to $1 million-plus punitive damages, and when Solar Alliance was added as a party it sought additional damages. Despite being on notice that the claimed damages exceeded $ million, PCI did not request a three-arbitrator panel and instead stipulated to one arbitrator.

Third, the Eleventh Circuit rejected PCI’s contention that the arbitrator lacked jurisdiction to award fees when he did so several months after the arbitration because the arbitrator lost jurisdiction over the case 30 days after the hearing. The court noted that it has rejected the notion that arbitrators act outside their authority merely because they do not follow the AAA’s rules regarding the time for issuing decisions. It also noted that several other circuits have held that whether an arbitration award was timely is not a jurisdictional issue. In this case, the parties also stipulated that all motions for attorneys’ fees would be resolved after the hearing.

Floridians for Solar Choice, Inc. v. Paparella, No. 18-12907 (11th Cir. Mar. 3, 2020).