Arbitration Process Issues

Fourth Circuit Declines to Vacate Arbitration Award Where Challenge to the Award Was Nothing More Than an Ordinary Disagreement With Its Outcome

February 23, 2021 by Carlton Fields

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).

New York Federal Court Confirms $2M Arbitral Award to Defunct Liquor Distributor in Dispute Over Royalties Owed to Rapper Snoop Dogg

February 5, 2021 by Carlton Fields

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).

Seventh Circuit Affirms Wisconsin Federal Court’s Finding That Arbitration Panel’s Decision Was Arbitrary and Capricious Where It Was Contrary to the Evidence in the Record

February 4, 2021 by Carlton Fields

This action arises out of a grievance filed by Theresa Taylor, a blind vending machine operator, with the Wisconsin Department of Workforce Development (DWD) over the DWD’s decision to award Jocelyn Belsha, another blind applicant, a bid to operate the vending machine at the Racine/Sturtevant correctional facility over Taylor. In 2007, Taylor accepted the DWD’s invitation to run the vending machines at three Wisconsin correctional facilities on an interim basis. In 2011, the DWD bid out these sites on a permanent basis, granting Belsha a bid to operate the vending machine at the Racine/Sturtevant correctional site.

In July 2015, the DWD convened a three-member arbitration panel to hear Taylor’s grievance. The arbitration took place in September 2017, and in February 2018, the arbitration panel rendered a decision finding that the DWD “acted in an arbitrary, capricious and biased manner” when it failed to award Taylor the Racine/Sturtevant site during the two selection processes and that Taylor had proved her case “by substantial evidence,” even though she would have also prevailed under a “preponderance of the evidence” test.

The DWD filed a petition for judicial review of the arbitration panel’s decision favoring Taylor. The U.S. District Court for the Western District of Wisconsin vacated the arbitration award, ruling that there were no material deficiencies in the choice of Belsha for the Racine/Sturtevant site, the arbitration panel’s key factual findings were not supported by substantial evidence, and the arbitration panel’s ultimate conclusion was arbitrary and capricious.

Taylor appealed to the Seventh Circuit, which affirmed the district court’s decision. The Seventh Circuit held that Taylor’s appointment to Racine/Sturtevant by the arbitration panel ran afoul of administrative procedure in several ways.

First, the arbitration panel misapprehended the burden of proof — the Seventh Circuit held that preponderance of the evidence, rather than substantial evidence, was the correct burden of proof during the arbitration proceeding and that the arbitration panel fundamentally erred when it applied the substantial evidence standard.

Second, the key factual findings by the arbitration panel were not supported by substantial evidence — the Seventh Circuit held that the panel’s finding that the DWD should have evaluated Taylor based on earlier profitability data rather than more recent data in reinterviews was not supported by substantial evidence, under the Randolph-Sheppard Act, since there were only two questions in the selection criteria that assessed profitability data, and the record did not contain evidence of what operators’ scores would have been using recent data.

Third, the Seventh Circuit found that the arbitration panel’s decision for Taylor as the best operator for the Racine/Sturtevant site was contrary to the evidence and thus arbitrary and capricious.

State of Wisconsin, Dep’t of Workforce Development-Division of Vocational Rehabilitation v. U.S. Dep’t of Education, 980 F.3d 558 (7th Cir. 2020).

Texas Federal Judge Declines to Rule on Procedural Issues in Multiple Successive Arbitrations Filed by Same Parties, Leaving Dispute to Arbitrators

January 14, 2021 by Carlton Fields

This litigation involved 21 parties spread across six different arbitrations in front of six different arbitrators. The litigation arose out of a dispute between two doctors, their business entities, and captive insurers (the plaintiffs), and a lawyer, law firm, and its affiliates (the defendants). The doctors engaged the defendants to create captive insurers and tax shelters for the doctors. After the U.S. Tax Court issued a ruling with negative consequences for the shelters, the doctors asked the defendants to “liquidate and wind down” the doctors’ program, but the defendants refused.

The Arbitrations

Both sides sought arbitration: the defendants brought the first arbitration in Houston, Texas, before Judge Dorfman, and the plaintiffs brought the second arbitration in Louisiana before Judge Duval. The plaintiffs also commenced a lawsuit against the defendants in Texas state court, alleging breach of contract, breach of fiduciary duty, tort, legal malpractice, and breach of professional obligations, which was removed to the U.S. District Court for the Southern District of Texas, in which the defendants moved to compel the doctors’ business entities’ participation in the Texas arbitration. The plaintiffs responded with a cross-motion to compel the defendants to join in the Louisiana arbitration and to challenge the Texas arbitration, while also seeking a stay of the Texas arbitration pending a ruling on the motions. The defendants then initiated a third arbitration before Judge Baker in Houston Texas, asserting additional claims that the defendants were denied leave to supplement their arbitration demand in the first arbitration.

The district court granted the defendants’ motion to compel and ordered the parties to arbitrate two of their disputes before Judge Dorfman and Judge Baker in Houston, relying on a written arbitration agreement between the parties that required all arbitrations to be conducted in Houston. The district court denied the plaintiffs’ motion to compel arbitration in Louisiana and stayed the arbitration pending before Judge Duval and the related proceedings in the federal litigation so that the Texas arbitration could go forward. The plaintiffs appealed the district court’s decision to stay the litigation.

While the district court was making its decision to stay the litigation, the plaintiffs filed a fourth arbitration before arbitrator Robert Kutcher in Louisiana. The plaintiffs thereafter filed a fifth arbitration, based on allegedly newly discovered facts, before Judge Medley in Louisiana, and a sixth arbitration before Judge Gill-Jefferson in Louisiana, but the plaintiffs requested that the new arbitrations be held in Houston.

Defendants’ Emergency Motion to Lift the Stay

After the district court issued its decision to stay the litigation, the defendants filed an emergency motion asking the district court to lift its stay and enjoin the fourth, fifth, and sixth arbitrations, arguing that these Louisiana arbitrations were proceeding in an improper venue and were inefficient “copycat” arbitrations seeking to resolve the same “core dispute” at issue in the Judge Baker and Judge Dorfman arbitrations in Texas.

The district court found no appropriate circumstances justifying an order lifting the stay in the case or staying the recently filed fourth, fifth, and sixth arbitrations. The district court recognized the interesting procedural questions that arose with respect to whether only the final hearing, or also interim hearings, must occur in Houston — as the arbitrators in these later-filed arbitrations were hearing disputes virtually via Zoom and some had issued interim decisions from Louisiana, but none had required the parties to travel to Louisiana. The district court also rejected the defendants’ argument that the fourth, fifth, and sixth arbitrations were inefficient “copycat” arbitrations, noting that the arbitration agreement did not preclude the parties from proceeding with separate arbitrations for disputes involving overlapping but different facts.

However, the district court concluded that while the more recently filed arbitrations must “proceed” in Houston under the arbitration agreement, the required location for interim hearings, the manner in which arbitrators must appear in a location, and permissible consolidation procedures are disputes about procedural questions that are best left for the arbitrators to address, not the court.

Defendants’ Motion to Confirm the Final Award

After the emergency motion was filed, Judge Dorfman issued a final award in the first arbitration, finding that the defendants were not required to immediately wind down and liquidate the captive insurers. The defendants moved to confirm that award before the district court.

The plaintiffs argued that the district court lacked jurisdiction to lift the stay it imposed in the litigation and confirm the award by Judge Dorfman because the plaintiffs were appealing the district court’s decision allowing arbitration before Judge Dorfman. Rejecting the plaintiffs’ argument that it lacked jurisdiction to lift the stay, the district court noted that this case involved several arbitrations that were not implicated by the plaintiffs’ appeal, and thus it had jurisdiction to lift the stay to address issues in arbitration proceedings not implicated by the plaintiffs’ appeal.

The district court, however, agreed with the plaintiffs that their appeal targeted Judge Dorfman’s appointment and his ability to preside over the parties’ arbitration. Because the defendants were asking the district court to confirm an award Judge Dorfman granted, which would require the district court to decide that Judge Dorfman had the power to grant an arbitration award, the district court recognized that such a decision may conflict with a decision of the appellate court. The district court therefore declined to exercise jurisdiction over issues currently on appeal.

The district court explained that these proceedings were “inefficient and messy” when it compelled arbitration back in August 2020, but since “the parties applied their contract to make this mess but agreed that arbitration would resolve their disputes, no matter how messy,” the district court was not going to “step in to clean it up and risk making it worse.” The district court simply refused to interfere.

Sullivan v. Feldman, No. 4:20-cv-02236 (S.D. Tex. Dec. 4, 2020).

Federal Court Refuses To Compel Arbitration or Appoint Arbitrators Where No Party Had Refused To Arbitrate and Both Parties Were Working on Selecting Arbitrators

December 16, 2020 by Brendan Gooley

A federal court recently refused to compel arbitration after it concluded that there had been no refusal to arbitrate. The court also refused to appoint arbitrators for the parties.

Linda L. Allen claimed Horter Investment Management, LLC’s “representatives sold fraudulent and unregistered investments.” She claimed those claims were subject to arbitration pursuant to a clause in a client agreement that provided that “[c]lient and [a]dvisor both agree that all controversies which may arise between them concerning any transaction or construction, performance or breach of this agreement that cannot be settled, be submitted to binding arbitration.”

Allen and her fellow plaintiffs moved to compel arbitration or, in the alternative, for the appointment of arbitrators. Horter responded that the plaintiffs lacked standing because it had not refused to arbitrate and was participating in the selection of arbitrators.

The United States District Court for the Southern District of Ohio (Western Division) agreed with Horter. Although the plaintiffs “initiated arbitration with the AAA, but the AAA declined to administer the clams because of [Horter’s] past actions,” the court did “not find that [Horter’s] acts amount to an unequivocal refusal to arbitrate. Instead, Defendant has expressly acknowledged the agreement to arbitrate. The parties have been working together in the Bruns case and this case to reach an agreement regarding the selection of arbitrators. The Court notes that some of the delay in this process is attributable to Plaintiffs’ change in position regarding consolidated arbitration.” The court also declined to appoint arbitrators because “[b]oth parties are amenable to private arbitration and the names of specific arbitrators have been exchanged.”

Linda L. Allen, et al. v. Horter Investment Management, LLC (S.D. Oh. Sept. 30 2020).