Arbitration Process Issues

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).

Tecnocap LLC appealed a decision by the U.S. District Court for the Northern District of West Virginia, where it declined to vacate an arbitration award in favor of an employee and labor union in a grievance proceeding related to Tecnocap’s termination of an employee covered by the parties’ collective bargaining agreement.

The parties’ collective bargaining agreement prohibited Tecnocap from “summarily discharging” covered employees and required that termination of employment be “for just cause.” The agreement also subjected grievances involving the interpretation of express provisions of the arbitration agreement. Separate from the agreement, Tecnocap instituted an attendance program wherein employees accrued points for certain absences from work and were then subject to different disciplinary procedures based on the number of accrued points.

After a Tecnocap employee accrued nine points in the attendance program and failed to timely submit paperwork that would allocate one of his absences to FMLA leave, Tecnocap terminated his employment. The union then filed a grievance protesting the employee’s termination, which proceeded through arbitration.

The arbitrator determined that the grievance was arbitrable, rejecting Tecnocap’s argument that the grievance was untimely and should be denied or dismissed on procedural grounds, pointing to the parties’ past conduct of inattentiveness to grievance deadlines as evidence of a waiver of such deadlines. The arbitrator also ruled that Tecnocap did not have “just cause” to terminate the employee because it improperly assessed him with a ninth point.

Tecnocap filed an action in the U.S. District Court for the Northern District of West Virginia under section 301 of the Labor Management Relations Act, 29 U.S.C. § 185, to vacate the arbitrator’s award, and the union filed an action under the same provision to enforce the arbitrator’s decision, which it alleged Tecnocap had refused to follow.

The district court found Tecnocap failed to present evidence that would warrant overturning the arbitrator’s award, including any evidence that the award: (i) was the product of the arbitrator’s bias; (ii) ignored the evidence in favor of the arbitrator’s own brand of “industrial justice”; or (iii) altered the language of the collective bargaining agreement.

Tecnocap then appealed, arguing that the district court should have concluded that the arbitrator’s award did not draw its essence from the collective bargaining agreement and therefore should have been vacated. Affirming the district court’s decision, the panel rejected Tecnocap’s challenge, finding that Tecnocap presented nothing more than an ordinary disagreement with the outcome of the arbitration award based on Tecnocap’s preferred application of the collective bargaining agreement to the underlying facts.

The panel determined that the collective bargaining agreement plainly delegated authority to the arbitrator to adjudicate grievances involving the interpretation or application of the express provisions of the agreement and that upon being delegated with that authority, the arbitrator had the authority to review whether Tecnocap fulfilled its obligations under the agreement and whether the termination comported with the agreement’s “just cause” limitation. The panel held that the arbitrator’s decision was a clear exercise in applying the agreement’s provisions and that Tecnocap failed to point to any limitation in the agreement that prevented the arbitrator from making her decision.

Tecnocap, LLC v. United Steel, Paper & Forestry, Rubber, Mfg., Energy, Allied Industrial & Serv. Workers Int’l Union AFL-CIO/CLC, Local Union No. 152M, No. 19-1263 (4th Cir. Jan. 19, 2021).

This royalties dispute arose out of an agreement between Cognac Ferrand S.A.S., a French company that produces and sells various liquors and spirits, and Mystique Brands LLC, a company that imports and markets liquors and spirits in the United States, involving the importation and marketing of Ferrand’s cognac in the United States.

In 2008, the parties executed a contract in which Ferrand granted Mystique the five-year exclusive right to import and market certain products in the United States. Under that agreement, Mystique agreed to purchase certain minimum amounts of Ferrand’s products each year and to enter into a marketing agreement with the musical artist Calvin Brodus, aka Snoop Dogg, for the promotion of those products, the costs of which Mystique would pay. The agreement granted Ferrand the right to terminate the agreement if Mystique became insolvent or filed a bankruptcy petition, or if Mystique committed a “material breach” that it failed to cure within 30 days.

Ferrand terminated the agreement roughly a year later in 2010, citing Mystique’s purported insolvency and unpaid royalties owed to Snoop Dogg. Mystique then initiated arbitration proceedings before the International Centre for Dispute Resolution in New York (ICDR) against Ferrand claiming wrongful termination. Ferrand fought back with a $4.5 million counterclaim, alleging it had been fraudulently induced to enter the deal because Mystique lied about its finances.

The arbitration proceeding was stayed after Mystique filed bankruptcy in 2013, but once Mystique emerged from Chapter 11 in 2017, Ferrand sought to reinstate the arbitration proceeding so that it could pursue its counterclaims against Mystique. The ICDR advised that the matter had been closed administratively, and directed Ferrand to file a new notice of arbitration. The parties proceeded in a new arbitration before a new ICDR arbitrator in New York.

In May 2020, the new arbitrator in New York found in Mystique’s favor and dismissed all of Ferrand’s claims. There, the arbitrator found that Mystique did not breach its minimum purchase obligation or repudiate the agreement and that Mystique’s insolvency did not constitute a material breach. The arbitrator also rejected Ferrand’s breach of contract claim for Mystique’s failure to pay Snoop Dogg because Ferrand had not offered evidence of damages or causation. Finding that Mystique was the “prevailing party,” the arbitrator also awarded Mystique $2 million in attorneys’ fees and costs.

Ferrand thereafter sought relief in the U.S. District Court for the Southern District of New York, filing a petition to vacate the arbitral award pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Ferrand argued that the arbitrator erred by finding that Mystique was the prevailing party in the arbitration and wrongly awarded Mystique nearly $2 million in fees and costs. Mystique opposed the petition and cross-petitioned to confirm the award, also seeking sanctions under both 28 U.S.C. § 1927 and Federal Rule of Civil Procedure 11 against Ferrand for pursuing this action.

The district court denied Ferrand’s petition to vacate the award, finding that the arbitrator did not exceed her authority or act in manifest disregard and that the award was final and definite. The district court determined that Ferrand’s challenge amounted to a mere substantive disagreement with the arbitrator’s reasoning and ultimate determination, which is not a valid basis to overturn the award. Because Ferrand failed to show that any aspect of the award should be vacated, the district court granted Mystique’s cross-petition to confirm the award.

Cognac Ferrand S.A.S. v. Mystique Brands, LLC, No. 1:20-cv-05933 (S.D.N.Y. Jan. 13, 2021).