Confirmation / Vacation of Arbitration Awards

Third Circuit Affirms Confirmation of Arbitration Award Despite Challenge That Damages Figure Was Completely Irrational

March 4, 2020 by Nora Valenza-Frost

In a challenge to an arbitration award on the basis that the arbitrators exceeded their powers in determining damages, the Third Circuit affirmed the District of New Jersey’s confirmation of the award.

First, the appellant argued that the arbitrator erred by using sales data instead of supply data in arriving at a damages figure. The court stated that this “is precisely the type of decision we have no authority to second-guess under the Federal Arbitration Act. … All that matters is that the arbitrator’s decision had some basis in the record.”

Second, the appellant argued that the arbitrator manifestly disregarded the law in ordering quarterly royalty payments be made to the appellee, since the appellant cannot be made to pay royalties until its claims regarding patent invalidity and unenforceability have been adjudicated. The court noted that the “arbitrator clearly grappled with the import of the Lear decision” and found the appellee’s arguments to be more persuasive. “That good faith effort is more than enough to demonstrate that he did not manifestly disregard Lear.”

PNY Technologies, Inc. v. NETAC Technology Co., No. 19-1635 (3d Cir. Feb. 10, 2020).

Kentucky District Court Confirms Arbitration Award Allocating All Environmental Contamination Costs to Petitioner

March 2, 2020 by Nora Valenza-Frost

Following a 2007 settlement concerning the allocation of investigation and remediation costs incurred due to environmental contamination at an industrial complex, the parties agreed to resolve the litigation between the parties and arbitrate the allocation of certain environmental costs. The parties engaged in arbitration from May 2017 to May 2019. The panel issued a final unanimous award assigning 100% of the allocable costs to the plaintiff. The plaintiff sought to vacate the award on the basis that: (1) the arbitrators exceeded their powers by imposing the burden of proof on the plaintiff in violation of the 2007 settlement agreement; (2) the arbitrators manifestly disregarded the legal principle that rejects incremental cost allocation; and (3) the award violated public policy requiring polluters to pay for the environmental harm they cause. The court disagreed with the plaintiff’s arguments and confirmed the award.

As to the plaintiff’s first argument concerning the burden of proof, the court concluded that the settlement agreement was silent as to which party should bear the burden of proof at arbitration. Additionally, the section cited by the plaintiff merely established the procedure by which the parties may initiate arbitration and required “the initiating party to state the amount of Allocable Costs it contends should be assigned to each party, including a brief statement in support of that allocation, presumably to notify the other party what issues will be arbitrated.”

As to the plaintiff’s second argument as to incremental cost allocation, the court found that the panel did not disregard any legal principal but simply found that the plaintiff failed to prove that the defendant “had actually contributed in any material way to the contamination at the Site, or that [the defendant’s] activities were the cause of any of the costs at issue.”

As to the plaintiff’s third argument regarding public policy, the panel found that the “evidence did not establish the amount of contamination caused by [the defendant’s] alleged poor remediation, or the fact or amount of any cost for remediation of any such contamination” for which the defendant would be financially responsible. Thus, 100% of the allocable costs were assigned to the plaintiff, which was not in violation of any public policy.

PolyOne Corp. v. Westlake Vinyls, Inc., No. 5:19-cv-00121 (W.D. Ky. Feb. 11, 2020).

First Circuit Refuses to Vacate Arbitration Award Following Stock Dispute

February 13, 2020 by Brendan Gooley

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

February 12, 2020 by Nora Valenza-Frost

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).

Maryland District Court Finds Damages Award, Not Liability Award Was “Final” Decision Triggering Time to Challenge Award Under FAA

January 24, 2020 by Nora Valenza-Frost

The plaintiff moved to vacate an arbitration award and the defendant moved to dismiss and confirm. The defendant’s dismissal motion challenged confirmation of an arbitration award, arguing that the matter was filed in violation of the arbitration agreement’s confidentiality clause, was prohibited by the defense of arbitration and award, failed to comply with the Federal Arbitration Act, was untimely, and failed to include any legal authority.

The court dispensed with the defendant’s first argument, as the arbitration agreement expressly preserved the parties’ statutory right to judicial review of arbitration proceedings. As to the second argument – that confirmation is prohibited by the defense of arbitration and award – the court noted that the plaintiff was not attempting to re-litigate the claims that were resolved by the arbitration but rather “exercise its statutory right to request that a district court vacate the arbitration award.”

As to the third argument, timeliness, the FAA requires that a party challenging an arbitration award serve notice on the adverse part “within three months after the award is filed or delivered,” which period begins to run once the arbitrator issues its final award. Here, the liability award was issued on July 9, 2018, and the damages award on January 3, 2019. Thus, the plaintiff’s complaint, filed on January 25, 2019, was within the three-month period. Additionally, “[a]lthough the FAA provides that the sole method for challenging an arbitration award is by serving a motion to vacate within three months of the final award and does not expressly permit a party to initiate a challenge to an arbitration award by filing a complaint, a court may construe a complaint challenging an arbitration decision as a motion to vacate when doing so would not prejudice the opposing party.” Finding no prejudice, the court rejected the defendant’s third argument.

As to the fourth argument – that the plaintiff failed to include any legal authority to support vacating the arbitration award – the court noted that, in considering a Rule 12(b)(6) motion, its “role is not to determine whether a party has proven its case” but rather “to determine whether a party has stated a claim for which relief can be granted.” Finding that the complaint met this requirement, the court rejected the defendant’s argument.

The parties cross-moved for summary judgment. The court rejected the plaintiff’s argument that the arbitrator exceeded her legal authority and manifestly disregarded the law, and confirmed the award.

Benchmark Elecs., Inc. v. Myers, No. 8:19-cv-00242 (D. Md. Dec. 3, 2019).