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Arbitration Process Issues

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

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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

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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).

Fifth Circuit Suggests Question of Class Arbitrability Was for Arbitrator Not Court

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The Fifth Circuit has suggested that the question of class arbitrability was for the arbitrator, not the court, based on the language of the arbitration clause at issue. The court ultimately concluded, however, that it did not need to reach that issue because the appellant challenging the arbitrator’s conclusion that class arbitration was available forfeited the argument.

Roy Conrad initiated arbitration against his employer Sun Coast Resources Inc. regarding purported violations of the Fair Labor Standards Act. The arbitrator concluded that the parties’ agreement “clearly provide[d] for collective actions.” Sun Coast moved to vacate that determination, but the district court rejected Sun Coast’s arguments. The Fifth Circuit affirmed.

The court explained that although there was a presumption that class arbitrability is a question for the court, “the arbitration agreement … appear[ed] to assign the question of class arbitrability to the arbitrator rather than to the court.” The arbitration clause covered “any dispute concerning the arbitrability of any such controversy or claim” and incorporated the American Arbitration Association rules for arbitration. Those provisions “strongly indicate[d] that the parties bargained for the arbitrator to decide class arbitrability.”

The Fifth Circuit nevertheless found it unnecessary to decide that issue. Sun Coast had forfeited its argument that the arbitrator invaded the province of the court by failing to raise that argument before the arbitrator and then failing to properly raise it before the district court.

In fact, Sun Coast had “affirmatively agreed that the arbitrator should decide whether collective proceedings were appropriate.”

The court also refused to vacate the arbitrator’s award on the merits. It concluded that the arbitrator interpreted the agreement and focused on the arbitration clause’s text, which was sufficient regardless of whether the arbitrator’s decision was in fact correct.

Sun Coast Resources, Inc. v. Conrad, No. 19-20058 (5th Cir. Apr. 16, 2020).

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

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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

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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).