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Arbitration Process Issues

First Circuit Refuses to Vacate Arbitration Award Following Stock Dispute

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The First Circuit recently denied a corporation’s numerous arguments seeking to vacate an arbitration award in favor of the individual who sold an entity to the corporation. The court’s decision reflected the narrow review of arbitration awards and the uphill battle that litigants face when trying to vacate such awards, even when arbitrators allegedly misinterpret contracts.

IBC Advanced Alloys Corp. purchased Beralcast from Gerald Hoolahan and Gary Mattheson in exchange for cash and IBC stock. When Hoolahan later tried to sell his stock, his brokerage firm told him it had been “unsuccessful in obtaining approval [for the sale] from the issuer.” Hoolahan’s attorney called IBC and was told that IBC had blocked the sale of Hoolahan’s shares because Hoolahan allegedly failed to disclose a claim against a sister company to one of Beralcast’s predecessor companies. Even worse, Hoolahan later learned that IBC had allowed Mattheson to sell his shares. Hoolahan initiated arbitration pursuant to the sale agreement.

The arbitrator ruled in Hoolahan’s favor, concluding that IBC had denied Hoolahan the benefit of the agreement and deliberately breached it. After concluding that IBC acted in bad faith, the arbitrator awarded Hoolahan his costs and fees. Hoolahan moved to confirm the award, while IBC moved to vacate or modify it. The district court confirmed the award and IBC appealed.

The First Circuit affirmed. Noting that review of arbitration awards is exceptionally narrow, the court first rejected IBC’s argument that the award was procured by undue means because it was based on testimony by Hoolahan’s attorney regarding his call to IBC, which IBC claimed violated ethical rules regarding contacting a party represented by counsel. The court explained that the arbitrator concluded that Hoolahan’s attorney’s call did not violate ethical rules because the attorney had credibly testified that he did not know IBC was represented by counsel until the end of the call and noted that the arbitrator’s determination of “ill-will” between IBC and Hoolahan was based on more than the call by Hoolahan’s attorney in any event.

IBC next claimed that the arbitrator acted improperly by not postponing the arbitration hearing when the IBC employee who spoke to Hoolahan’s attorney could not be present and by refusing to accept an affidavit from the employee. The First Circuit rejected that claim as well. The court noted that IBC never asked for a postponement and did not raise that argument before the district court. Nevertheless, applying plain error review to the argument, the court rejected this argument as “border[ing] on the absurd.” The arbitrator did not act improperly by not granting a continuance sua sponte or by allowing an affidavit in lieu of live testimony.

The First Circuit also rejected IBC’s argument that the arbitrator had exceeded his powers by awarding Hoolahan his costs and fees. Under Delaware law, which governed the agreement, costs and fees were appropriate where, as here, the arbitrator made a finding of “bad faith.”

IBC also claimed that the arbitrator misinterpreted the agreement because the agreement noted that IBC disclaimed any obligation to help Hoolahan sell his shares. The court rejected that argument, noting the very narrow scope of its review: “Even if IBC is right that the arbitrator did not correctly interpret the Agreement, he nonetheless interpreted it. And that is enough.”

Finally, the First Circuit also rejected IBC’s arguments regarding the arbitrator’s calculation of damages, concluding that IBC had not shown “manifest disregard of the law.”

The First Circuit awarded costs to Hoolahan.

Hoolahan v. IBC Advanced Alloys Corp., No. 19-1444 (1st Cir. Jan. 17, 2020).

Fifth Circuit Affirms Arbitration Award and Finds Panel Was Fairly Constituted and Did Not Award Punitive Damages

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In addition to awarding monetary damages against the defendants, the arbitration panel ordered that the defendants be divested of their shares in the plaintiff corporation. The defendants sought to vacate the award, arguing that the panel was improperly constituted and the award included speculative or punitive damages, rendering it unenforceable (among other reasons). The trial court’s judgment confirming the arbitration award was affirmed.

As to the argument that the panel was improperly constituted, the plaintiffs appointed five arbitrators and the defendants appointed two. The defendants argued that the method of selection was against the terms of the contract, which required an equal number of appointed arbitrators per side. While the court agreed that if the selection of the arbitration panel fundamentally departed from the contract’s selection process, the award should be vacated. However, the court found that there was no such departure here, as the contract’s selection process contemplated the number of parties, not the number of sides. Here there were seven parties and seven arbitrators.

As to the argument that the award included speculative or punitive damages, the court found that, while the panel did not have the authority to issue punitive damages per the parties’ agreement, it did possess powers to grant court-enforceable injunctive relief. Divesting the defendants of their shares in the plaintiff corporation “operates to achieve what the panel considered a fair result” to compensate the parties financially and achieve a just outcome, which “is precisely a matter of equity” and therefore distinguishable from punitive damages.

Soaring Wind Energy, LLC v. Catic USA Inc., No. 18-11192 (5th Cir. Jan. 7, 2020).

Massachusetts District Court Appoints Arbitrator in Light of Parties Inability to Do So

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When two parties in an arbitration were unable to select a “mutually agreeable” arbitrator, the Massachusetts district court stepped in to handle the selection. The parties’ arbitration agreement provided that the parties would select a “mutually agreeable single arbitration with experience in commodity futures contracts for coffee, to preside over the arbitration.” While both parties proposed candidates, they were unable to agree on the arbitrator.

The Massachusetts Appeals Court has stated that, while Massachusetts General Laws chapter 251, section 3 permits the courts to enforce arbitrator selection clauses, it “only requires the court to appoint an arbitrator if the arbitration agreement at issues fails to specify a method for doing so.” The arbitration agreement at issue had a mechanism for arbitrator selection — it was the parties who could not find a “mutually agreeable” arbitrator. The court found that section 3 permits a court to appoint an arbitrator in such circumstances when “the arbitrator selection method set forth [in the] contract has ‘failed.'” Additional support for the court’s interpretation of Massachusetts law is found in section 5 of the Federal Arbitration Act and cases interpreting the statute.

Green Valley Trading Co. v. Olam Americas, Inc., No. 1:19-cv-11524 (D. Mass. Jan. 7, 2020).

Eighth Circuit Reinstates Arbitration Award Stemming From Federal Crop Insurance Policy

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The Eighth Circuit reversed a district court decision vacating an arbitration award relating to a federal crop insurance policy issued through a standard reinsurance agreement with the Federal Crop Insurance Corp. (FCIC). The district court had ruled that the arbitrator exceeded his powers under the arbitration agreement by interpreting the crop insurance policy. Pursuant to FCIC regulations, the policy included a provision prohibiting the arbitrator from interpreting either the policy or FCIC procedures, and instead requiring the parties to obtain such an interpretation from the FCIC itself.

The Eighth Circuit found that the question whether the arbitrator was required to interpret the policy was not raised by either party until after the award had already been issued. Emphasizing that the courts are to “accord an extraordinary level of deference” to the arbitrator’s decision, the Eighth Circuit stated that an “arbitrator has not exceeded his powers where neither party suggested that a term of the policy was subject to interpretation, but the interpretation dispute instead arose after the arbitration proceedings.” The Eighth Circuit reversed and remanded, directing the district court to enter an order confirming the arbitration award.

Balvin v. Rain & Hail, LLC, No. 18-3018 (8th Cir. Dec. 2, 2019).

Court Finds No Manifest Disregard of the Law or Exceeding of Powers in Upholding Arbitration Award Related to Dispute Over Earn-Out Payment

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Markmidco S.àr.l., a Luxembourg company, sold to Zeta Interactive Corp. its interest in a customer relationship management business consisting of several companies that provided to retailers email and text message marketing, database management, and related services. The parties’ agreement called for several earn-out payments to be made upon the determination that the CRM business had surpassed certain revenue thresholds laid out in the contract. Zeta refused to make the first earn-out payment of $4 million, claiming the revenue threshold had not been reached as of the deadline. Markmidco disagreed and referred the parties’ dispute to an arbitrator. The arbitrator agreed with Markmidco and awarded it the earn-out payment.

The parties’ dispute then moved to federal court where Markmidco’s award was confirmed over several arguments from Zeta seeking its vacatur. Zeta argued that the parties’ contract called for a “manifest error” standard of review. However, the court held that the parties “cannot contract for more judicial review than the FAA and Convention grant them.” Zeta next argued that the award should be vacated due to the arbitrator’s manifest disregard of the law, but failed to identify any instance of the arbitrator ignoring the applicable law.

The court also denied Zeta’s claim that the arbitrator exceeded his powers, stating that his findings were reasonable interpretations based on analysis of specific provisions of the purchase agreement. When presented with an argument that an arbitrator has exceeded his powers, 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.” As such, Zeta’s argument failed.

Zeta also argued that the grounds for vacatur stated in the Delaware Uniform Arbitration Act should apply rather than those provided by the Federal Arbitration Act because the parties’ contract included a choice-of-law provision selecting Delaware law. The court held that, under Third Circuit law, state law vacatur standards apply only when the parties express a clear intent to supplant the FAA standards with state law standards. A choice-of-law provision that applied broadly to the parties’ contract was not a sufficiently clear expression of the parties’ intent to opt out of the FAA scheme.

Lastly, Zeta argued that enforcement of the award was premature because other proceedings between the two parties were ongoing. The court held that Zeta’s claims in the collateral proceeding did not overlap with the issues submitted by the parties to the arbitrator. The court also held that issuing a stay or denying enforcement of the award at this time “would transform a summary proceeding into a protracted dispute,” contrary to the “basic purpose” of arbitration. The court ordered enforcement of the arbitration award.

Markdutcho 1 B.V. v. Zeta Interactive Corp., No. 1:17-cv-01420 (D. Del. Nov. 12, 2019).