Arbitration Process Issues

SDNY Declines to Adopt Collateral Attack Doctrine, Grants Motion to Compel Arbitration

June 17, 2021 by Alex Silverman

Petitioners Credit Suisse AG and Lara Warner sought to permanently stay an arbitration commenced by respondent Colleen Graham, who cross-moved to compel the arbitration. The petitioners claimed the proceeding was an impermissible “collateral attack” on a prior, related arbitration in which Graham’s claims against different parties were dismissed. As it relates to the second arbitration against the petitioners, there was no dispute as to whether Graham’s claims were subject to arbitration, nor that any threshold arbitrability questions were to be decided by an arbitrator. In deciding the petitioners’ motion, the court therefore started from the baseline that Graham’s motion to compel must be granted, absent a valid basis to stay.

The petitioners argued the issues raised in Graham’s arbitration against them were already resolved in the first arbitration, pointing to several cases in which courts found a second arbitration could not collaterally attack the final determination made in a first arbitration. According to the petitioners, the “collateral attack doctrine” is not a question or arbitrability, but rather a legal question to be decided by a court. But the court disagreed and declined to adopt the collateral attack doctrine. Under the FAA, the court explained, its role is to decide whether an arbitration falls within the terms of a valid arbitration agreement, not whether it is estopped by a prior arbitration. If, as here, an arbitration falls within a valid arbitration agreement, the court found it is well established that any threshold procedural questions about the arbitration “are presumptively not for the judge, but for an arbitrator, to decide.” The court found its role was even more limited here, as the parties specifically agreed to delegate any gateway issues to the arbitrator. Comparing the petitioners’ “collateral attack” argument to the res judicata argument raised and rejected in a 2015 Second Circuit decision, the court ruled that the preclusive effect of Graham’s first arbitration, if any, should be decided by the arbitrator in the second arbitration. Graham’s motion to compel arbitration was thus granted, and the petitioners’ motion to stay was denied.

Credit Suisse AG v. Graham, No. 1:21-cv-00951 (S.D.N.Y. Apr. 7, 2021)

Illinois District Court Denies Motion to Vacate Arbitration Award and Imposes Sanctions, Citing “Outright Hostility” to Such Challenges in the Seventh Circuit

June 15, 2021 by Alex Silverman

The U.S. District Court for the Northern District of Illinois denied a former employee’s motion to vacate an arbitration award in favor of defendant AT&T Mobility Services LLC. The plaintiff claimed the arbitrator exceeded his powers or imperfectly executed them and that the award manifestly disregarded the law, so as to warrant vacatur under section 10(a)(4) of the Federal Arbitration Act. The court disagreed, finding as an initial matter that the plaintiff failed to explain how exactly the arbitrator exceeded his powers until his reply brief. Because the court cannot consider arguments first raised on reply, the motion to vacate was denied on this basis alone. But even considering the motion on its merits, the court found no evidence requiring vacatur, noting the grounds for doing so are “extremely limited” and that the plaintiff failed to cite a single decision in which an arbitration award was vacated. The court took particular issue with the “incoherent and unsupported arguments” in the plaintiff’s moving papers and the plaintiff’s evident attempt to take “another bite at the apple.” Finding there is “an outright hostility in the Seventh Circuit to parties challenging arbitration awards,” the court granted AT&T’s motion for sanctions and directed the plaintiff to pay $1,500.

Skuja v. AT&T Mobility Services LLC, No. 1:18-cv-07945 (N.D. Ill. May 25, 2021).

Second Circuit Affirms Denial of Vacatur of Employment Arbitration Award Due to Failure to Provide Evidence of Alleged Perjury in Arbitration Proceedings

June 11, 2021 by Michael Wolgin

The district court had denied a motion filed by a former employee of a department store for vacatur of an arbitration award that rejected a grievance filed by the employee’s union against the store. On appeal, the employee argued that the district court erred when it denied vacatur because the award was obtained by fraud, namely, false testimony. The Second Circuit affirmed, holding that, because the employee provided no record evidence of the arbitration testimony, and only repeated “unsupported allegations,” the appellant failed to show (1) the existence of fraudulent activity; (2) that, even with the exercise of due diligence, he could not have discovered the fraud prior to the award issuing; and (3) that the fraud materially related to an issue in the arbitration. The court concluded: “Without providing at least the challenged testimony, [the appellant] has failed to show that any perjury occurred or even that the testimony he wishes to challenge was materially related to the arbitrator’s decision.” The court affirmed, ruling that the employee failed to demonstrate any error with the denial of the motion for vacatur.

Bright-Asante v. Saks & Co., No. 20-1280 (2d Cir. May 14, 2021).

Ninth Circuit Vacates “Bizarre” Arbitration Award in Drug-Related Employment Termination Dispute

April 12, 2021 by Carlton Fields

In a 2-1 decision, the Ninth Circuit Court of Appeals recently reversed a district court’s order confirming an arbitration award in favor of a former Costco employee who had been fired for selling cocaine on company property. The arbitrator found that the employee’s termination was barred by the doctrine of “industrial double jeopardy,” because he had already incurred a three-day suspension for his conduct, and awarded that the employee be “made whole.”

The Ninth Circuit took issue with the fundamental fairness of the arbitration proceedings. Following the presentation of evidence, the arbitrator engaged in extensive ex parte communications with the terminated employee and the Teamsters Union, which had represented the employee at arbitration. The arbitrator also conveyed a $6,000 settlement offer to the employee, which Costco was unaware of and had not authorized. When rendering his decision, the arbitrator did so via a “vague and bizarre” email sent only to the Teamsters Union, which said: “The above named grievant prevails in his grievance. The Union’s arguments as to double jeopardy were correct. Union remedy is adopted. So that I can look at myself in the mirror, my resignation is effective today.” The arbitrator failed to provide any reasoned basis for his decision, without any finding of fact or statement of law. He then resigned after rendering his email judgment.

Acknowledging the high standard that must be met to vacate an arbitration award, the Ninth Circuit ultimately decided that the arbitration proceedings deprived Costco of a fundamentally fair hearing, and entitled Costco to vacatur of the award. “For all we know,” the majority commented, “the arbitrator flipped a coin, consulted a ouija board, or threw darts at a dartboard to determine the outcome.” The court concluded: “No Party agreeing to arbitration bargained for a proceeding such as this.”

Court Confirms “Baseball Arbitration” Award, Finds Party Alleging Unfairness Was Caught Looking When It Failed to Object

March 31, 2021 by Benjamin Stearns

The U.S. District Court for the Eastern District of Missouri confirmed an arbitration award in favor of Clayco Inc. in a dispute with its subcontractor arising from a construction contract. The parties’ contract provided detailed dispute resolution procedures comprising 13 paragraphs providing for mediation followed by arbitration if the mediation was unsuccessful. However, the contract also provided for an “alternate condensed and accelerated procedure” that could be “invoked” at Clayco’s option. This condensed procedure called for eight hours of mediation “followed by a ‘baseball arbitration’ in which the mediator immediately takes the role of arbitrator, each side submits a best and final offer and the arbitrator chooses of the two offers as the award.”

Clayco invoked the “baseball arbitration” procedure by letter to the subcontractor and the American Arbitration Association (AAA), as provided in the parties’ contract. More than nine months later, the mediation and arbitration were held according to the condensed procedure, and the arbitrator selected Clayco’s best and final offer as the award, resulting in an approximate $1.7 million award.

The subcontractor sought to vacate the award, arguing that Clayco had not properly “invoked” the procedure because it never received a copy of Clayco’s letter to the AAA selecting the condensed procedure. The court found that whether the subcontractor received a copy of the letter was irrelevant under the terms of the parties’ contract, which only required Clayco to make a “written application” to the AAA. Furthermore, the subcontractor had ample notice of the mediation and arbitration and never “made a formal written objection” to the proceeding. Instead, after the unfavorable arbitration award was rendered, it submitted an affidavit of counsel to the court in support of its motion for vacatur stating that counsel “asserted that [the ‘baseball arbitration’ was unfair.”

The court described the subcontractor’s argument as a “flimsy post hoc excuse[]” and stated that “a party may not sit idle through an arbitration procedure and then collaterally attack that procedure on grounds not raised before the arbitrators when the result turns out to be adverse,” quoting Marino v. Writers Guild of America, East, Inc., 992 F.2d 1480 (9th Cir. 1993). Since the arbitration process took place according to the parties’ contract, and the subcontractor had waived any procedural defects even if it did not, the court confirmed the award.

Clayco, Inc. v. Food Safety Grp., Inc., No. 4:20-mc-00739 (E.D. Mo. Mar. 8, 2021).