Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

You are here: Home / Archives for Arbitration / Court Decisions / Confirmation / Vacation of Arbitration Awards

Confirmation / Vacation of Arbitration Awards

District Courts May Not “Look Through” Applications to Modify, Confirm, or Vacate Arbitral Awards

by

Ascension Data & Analytics LLC terminated its contract with Pairprep Inc. for data extraction services after an alleged data breach involving Pairprep’s servers and Pairprep’s alleged “failure to extract reliable data.” Ascension subsequently initiated arbitration proceedings against Pairprep pursuant to the parties’ contract in an attempt to recover the remediation costs incurred as a result of Pairprep’s data breach. Pairprep asserted counterclaims against Ascension, and the arbitration panel ultimately rendered a monetary award in Pairprep’s favor.

Ascension petitioned the Northern District of Texas to vacate the arbitration award. Shortly thereafter, Pairprep filed an application to confirm the arbitration award in Texas state court. The state court confirmed the award and entered a final judgment in favor of Pairprep. In the federal proceeding, Ascension filed a motion for a preliminary injunction against the state court proceeding, while Pairprep argued that the district court lacked subject matter jurisdiction. The district court agreed and dismissed the matter due to a lack of subject matter jurisdiction.

The Fifth Circuit Court of Appeals affirmed the dismissal, relying on the U.S. Supreme Court’s recent decision in Badgerow v. Walters. There, the Supreme Court concluded that district courts may not “look through” the application for confirmation or vacation of an arbitration award to determine whether the court has jurisdiction over the matter. Rather, “a court may look only to the application actually submitted to it in assessing its jurisdiction.”

The fact that a petition seeks enforcement or vacation of an arbitration award rendered under the Federal Arbitration Act is not sufficient. Rather, the court must identify some additional “independent basis for its jurisdiction,” such as satisfaction of the requirements for diversity jurisdiction or federal question jurisdiction. The court noted that an arbitration award “is no more than a contractual resolution of the parties’ dispute … [a]nd quarrels about legal settlements — even settlements of federal claims — typically involve only state law, like disagreements about other contracts.” As such, if there is no other additional basis for federal jurisdiction that is shown on the petition to modify, confirm, or vacate an arbitration award, then the matter is one for state courts, not federal courts.

Ascension Data & Analytics, LLC v. Pairprep, Inc., No. 23-11026 (5th Cir. June 25, 2024)

South Carolina Supreme Court Vacates Award, Finds Arbitration Panel Manifestly Disregarded Statutory Law

by

National Golf Management LLC sold 13 golf courses to a buyer represented by broker Andrew Waldo. NGM was represented in a previous transaction by Michael Cousins. Although Cousins had no written representation agreement with any of the parties involved in the 13-golf course deal, he and his real estate brokerage company sued Waldo, Waldo’s company, and NGM, among others, for a commission from the sale of the golf courses.

As a result of both Waldo and Cousins’ membership in a local realtor association, they were required to arbitrate their professional dispute. Despite South Carolina statutes stating that oral agreements for a commission from a real estate transaction were unenforceable, the arbitration panel ruled that Cousins was entitled to half of the commission Waldo earned from the sale.

Waldo petitioned the circuit court, which vacated the award. However, the court of appeals reversed, finding that there was a “barely colorable” ground for the arbitration award based on a line of cases upholding oral and implied contracts for real estate commissions that, while in conflict with statutory law, had not been directly overruled.

The South Carolina Supreme Court reversed. While acknowledging and reaffirming the “rare and narrow basis” upon which courts may disturb an arbitration award, the court found that the circumstances of this case constituted just such a “rare” occasion. The court explained that subsequent to the issuance of the opinions cited by the appellate court, the South Carolina legislature had enacted laws that “fundamentally changed real-estate licensing.” Cousins argued that he was a “cooperating broker” or a “subagent” of Waldo and therefore was entitled to a share of the commission. However, the newly enacted laws, which were in effect at the time of the transaction in question, required a subagent agreement to “be in writing” and to “set forth all material terms of the parties’ agency relationship.”

The law went further and explicitly prohibited oral or implied agency relationships, providing that “[f]or all real estate transactions, no agency relationship … exists unless the buyer, seller … and the brokerage company … agree, in writing, to the agency relationship. No type of agency relationship may be assumed … or created orally or by implication.” The court found that the arbitrators were aware of these statutes but nevertheless ordered the commission to be shared with Cousins.

The court noted that courts “may now vacate an arbitration award, but only when it is untethered from controlling legal principles known to, but shrugged off by, the arbitrator….  As we have held, ‘manifest disregard is an exacting standard, but it is not insurmountable.’” In light of the above facts, the court found that the arbitration award was in manifest disregard of the law and vacated the award.

Waldo v. Cousins, No. 2022-000134 (S.C. May 1, 2024).

Second Circuit Affirms District Court Order Confirming Chinese Arbitration Award

by

In Huzhou Chuangtai Rongyuan Investment Management Partnership v. Qin, the Second Circuit Court of Appeals affirmed a district court order granting summary judgment confirming a Chinese arbitration award totaling approximately $450 million, rejecting Respondent/Appellant’s contention that he was not provided with adequate notice of the underlying arbitration.

The underlying arbitration involved a contract dispute between the original shareholders and subsequent investors in a Chinese company that owned and operated movie theaters. The petitioners initiated the arbitration before the China International Economic and Trade Arbitration Commission (CIETAC), alleging that the respondent breached a capital increase agreement. The petitioners were awarded approximately $450 million in connection with the arbitration, which was confirmed by the district court. The respondent then appealed, contending that he was not provided with adequate notice of the arbitration and was unable to participate in the selection of the arbitrators.

In affirming the district court’s order, the Second Circuit first confirmed its standard of review, noting that “we review legal issues de novo and findings of fact for clear error.” Citing the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the court recognized that lack of proper notice of the arbitration is a defense to enforcement under Article V(1)(b) of the New York Convention. The court further noted, however, that the review of arbitral awards under the New York Convention is “very limited in order to avoid undermining the twin goals of arbitration … settling disputes efficiently and avoiding long and expensive litigation.” The court then rejected the respondent’s contention that he was not provided with adequate notice of the arbitration and was unable to participate in the selection of the arbitrators, finding that CIETAC’s efforts to provide notice to the respondent were “reasonably calculated to provide notice under the circumstances of this case,” thus satisfying due process. The court affirmed the district court’s orders granting the petitioners’ motion to confirmation the arbitration award and denying the respondent’s motion for reconsideration.

Huzhou Chuangtai Rongyuan Investment Management Partnership v. Qin, No. 23-0747 (2d Cir. Mar. 20, 2024).

Fourth Circuit Holds That District Court Lacks Jurisdiction to Confirm Arbitration Award

by

The Fourth Circuit Court of Appeals recently held that a district court lacked jurisdiction to confirm an arbitration award because the court did not have an independent basis for jurisdiction on the face of the application and could not “look through” to see if it had such jurisdiction.

An arbitration panel issued an award in favor of SmartSky Networks LLC. SmartSky moved to enforce that award. The district court confirmed the award and the parties who lost the arbitration appealed to the Fourth Circuit. They claimed that the district court lacked subject matter jurisdiction to confirm the award under the U.S. Supreme Court’s 2022 decision in Badgerow v. Walters, which held that to enforce or vacate an arbitration award under Sections 9 or 10 of the Federal Arbitration Act, a court “must have a basis for subject matter jurisdiction independent from the FAA and apparent on the face of the application” (i.e., the court cannot “look through” to see if it has jurisdiction in applications under Sections 9 or 10).

The Fourth Circuit agreed that the district court lacked jurisdiction:

At the time the parties filed their respective Section 9 and 10 applications, they were no longer litigating over their fraught business relationship — those issues and claims had been resolved by the Tribunal. Instead, the parties’ dispute focused on the enforceability of the arbitral award. To find it had jurisdiction over what was in essence a contract dispute among the parties, the district court had to “look through” to the civil lawsuit and determine that a federal claim existed.

The Fourth Circuit explained that the district court could not do that under Badgerow.

The Fourth Circuit also rejected SmartSky’s argument that the district court had jurisdiction because it had stayed the action pending arbitration and therefore retained jurisdiction. The court explained: “Section 8 [of the FAA] is the only section that expressly provides that a district court may ‘retain’ jurisdiction to enforce, vacate, or modify an award. Sections 9 and 10 do not contain such language and … do not provide any escape from Badgerow’s holding that there must be an independent basis for subject matter jurisdiction for applications.”

SmartSky Networks, LLC v. DAG Wireless, Ltd., No. 22-1253 (4th Cir. Feb. 13, 2024).

D.C. Circuit Affirms Decision Vacating and Remanding Arbitration Decision

by

The D.C. Circuit Court of Appeals recently affirmed a district court’s decision to vacate and remand an arbitration decision in a case concerning companies’ withdrawal from a retirement fund.

For many years, various companies made contributions on behalf of their employees to the IAM National Pension Fund. Several of those companies decided to withdraw from the fund, however. Pursuant to the Multiemployer Pension Plan Amendments Act (MPPAA), the employers had to pay fees associated with their withdrawal. The fees were calculated by an actuary. Under the MPPAA, employers who seek to challenge the fees assessed must do so through arbitration. In this case, several employers initiated arbitration to dispute the fees.

The arbitrator concluded that the fund “erred in its calculations” by using certain assumptions and issued an array of other rulings. The fund sought to confirm in part and vacate in part the arbitrator’s award. The district court vacated the arbitration award and remanded the case to the arbitrator after ruling, in relevant part, that the actuaries had broader discretion to make assumptions that the arbitrator had concluded. The fund and several companies appealed.

The D.C. Circuit affirmed, holding that the district court “correctly found that the arbitrator erred in concluding that an actuary must use” certain assumptions and methods as of a particular date “when calculating withdrawal liability” under the MPPAA.

Trustees of the IAM National Pension Fund v. M&K Employee Solutions, LLC, No. 22-7157 (D.C. Cir. Feb. 9, 2024).