Confirmation / Vacation of Arbitration Awards

California District Court Denies Motion to Vacate FINRA Arbitration Award

December 18, 2018 by John Pitblado

A California district court recently denied a motion to vacate an arbitration award which had denied a plaintiff’s claims brought before the Financial Industry Regulatory Authority (“FINRA”).

The background of this case can be found here. In sum, in 2005, plaintiff Winnie Fang delivered certificates for shares of stock in Peet’s Coffee & Tea, Inc. (“Peet’s”) to Merrill Lynch that her deceased husband had previously held. In 2010, Fang was notified that the California Controller had received the Peet’s stock as unclaimed property. Fang then commenced an action against Peet’s and others in California state court for allegedly mishandling her investment, which was resolved by a “partial settlement.” Later, in 2015, Fang brought a FINRA arbitration against Merrill Lynch for breach of fiduciary duties and breach of contract. In February 2018, a FINRA arbitration panel issued an award, denying Fang’s claims in their entirety, and ordered her to pay $6,000 in expert witness fees incurred by Merrill Lynch. In the award, the panel detailed the prior proceedings. Among others, the panel noted that a hearing had been scheduled in October 2016, but that Fang failed to submit pre-hearing materials per an order of the panel. Instead, according to the panel, Fang filed an ex parte motion to continue the hearing on the grounds that Merrill Lynch had not provided certain discovery, and that Fang was planning to file a class action on the same claims, even though Fang had not filed any discovery motion by the deadline in the panel’s scheduling order, and had not filed a class action case. The panel denied Fang’s motion for a continuance. Fang then filed a motion to dismiss her claims without prejudice, and a motion for reconsideration of the denial of the continuance. The panel maintained the October 2016 hearing date, but said that it would take up Fang’s motions at the arbitration hearing. However, just before the hearing, Fang filed an action in California federal court, with a motion for a temporary restraining order to stop the FINRA arbitration for alleged procedural violations. The California district court denied a TRO. Fang then appealed to the Ninth Circuit, which affirmed the district court’s order. While the court proceedings were ongoing, the arbitration also proceeded. Fang and her counsel failed to appear at the October 2016 hearing. Merrill Lynch did appear, and an evidentiary hearing took place under FINRA rules. Merrill Lynch then sent the panel a copy of the Ninth Circuit decision affirming the denial of the TRO, and Fang submitted a “responsive” document that the panel interpreted to be another motion to dismiss without prejudice. The panel then suspended the arbitration until the California district court decided class certification in the case. The California district court, however, had already stayed that case, at the parties’ joint request, to allow for completion of the arbitration. Merrill Lynch then made a motion for the issuance of an award in the arbitration. A hearing took place in January 2018 on that motion and Fang’s new motion to dismiss. At the hearing, Fang’s lawyer said he could not attend the October 2016 hearing because “he had to appear in a matter for the United Nations,” which the panel noted had not been raised in his continuance papers. The panel then denied Fang’s motion to dismiss and issued the February 2018 award. Fang then moved in the California district court to vacate the award. Although she mentioned all four grounds in Section 10(a) of the Federal Arbitration Act (“FAA”) as a basis for overturning the panel’s award, the motion was based mainly on the claims that the award was the product of corruption, fraud and undue means, and exceeded the arbitrators’ authority.

The California district court, in denying the motion to vacate the award, noted that “courts may vacate an arbitrator’s decision ‘only in very unusual circumstances’” and that the party seeking to vacate the award bears a high “burden of establishing that one of the grounds . . . justifies vacating the award.” The court noted that Fang chose not to litigate the arbitration she had voluntarily commenced, and that there was no evidence indicating that the arbitrators were corrupt or partial to Merrill Lynch or that there was an actual bias against her, nor were there any facts that might create a reasonable impression of bias or otherwise indicate “evident corruption.” The court also held that Fang’s argument that the arbitrators exceeded their powers was also unavailing. In this regard, Fang argued that the panel misapplied FINRA rules to proceed with the arbitration. However, the court noted that interpretation of the FINRA rules is up to the arbitrators to decide. The court also found that Fang failed to show that the arbitrators somehow exceeded the bounds of the agreement that empowered them to hear Fang’s arbitration demand, and that Fang did not identify a FINRA rule stating that the arbitration should have been terminated after she expressed a desire to file a class action lawsuit, or any case that supports that proposition. The court noted that Fang was perfectly free to withdraw her claims at any time under FINRA rules, but the consequence would have been a withdrawal with prejudice, “which apparently did not suit Fang’s litigation plans.” Finally, the court held that Fang had also not shown that the arbitrators were “completely irrational” or guilty of “a manifest disregard of law.”

Fang v. Merrill Lynch, Pierce, Fenner & Smith, Inc., No. 16-cv-06071 (N.D. Ca. Nov. 23, 2018).

This post written by Jeanne Kohler.

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Florida Court Finds that Arbitration Agreement Broadening Judicial Review Violates Florida Public Policy

December 10, 2018 by Rob DiUbaldo

In a lawsuit brought by a contractor against a subcontractor and its insurer, Florida’s Fourth District Court of Appeals found a provision in an arbitration agreement allowing for a broad ranging review of any arbitration award to be void as a matter of law and policy.

The subcontractor and insurer moved to compel arbitration under an agreement providing that on review of any award issued pursuant to that agreement, “the court shall be empowered to address on review any failure by the arbitrator(s) to properly apply Florida law to the dispute. To the extent the arbitrator(s) or the court fail to apply the law properly, the Award of the arbitrator(s) is subject to further review through the Florida appellate process.” This is, of course, a much broader judicial review than is normally permitted with respect to arbitration awards, and thus the contractor argued that the provision was void and that the entire arbitration agreement should be discarded.

The trial court granted the motion to compel arbitration, but the appellate court reversed, finding that the subject provision violated public policy as expressed in the Florida Arbitration Code. The Code limits a courts’ ability to vacate an arbitration award to a fairly narrow set of circumstances, such as when an arbitration award is “procured by corruption, fraud, or other undue means,” when there is “evident partiality,” corruption, or misconduct on the part of the arbitrator, or when the arbitrator exceeds the authority provided by the parties’ agreement. The Code also prohibits parties from waiving or agreeing to vary their right to seek judicial confirmation of awards or the grounds for vacating or modifying an arbitration award.
The court found that the Code clearly prohibited expansions of the scope of judicial review of arbitration awards and thus made the contested provision in the arbitration agreement unenforceable. Rather than finding that the arbitration agreement was unenforceable as a whole, however, the court remanded the matter to the trial court to determine whether this provision was severable, such that the arbitration agreement could be enforced with that provision removed.

National Millwork, Inc. v. ANF Group, Inc. and Liberty Mutual Insurance Company, No. 4D18-545 (4th DCA, Sep. 25, 2018)

This post written by Jason Brost.

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Arbitration Award Against HGTV Designer Confirmed Due to Failure to Raise Fairness Objections During Arbitration

December 5, 2018 by Michael Wolgin

The case involved an award in excess of $800,000 against a home designer and some affiliated companies for a renovation project that went bad. One of the affiliated companies brought an arbitration proceeding against the homeowners for nonpayment, and after appointment of the arbitrator, the homeowners sought to join the home designer pursuant to Construction Industry Arbitration Rules R-7.

The designer’s participation in the arbitration was limited. He did not file an answer to the homeowners’ claims against him and failed to appear at the hearing. After the arbitrator issued a final award holding the designer and other companies jointly and severally liable, the designer moved the federal district court for vacatur.

The district court held that, under the FAA, the appointment of the arbitrator prior to the designer’s participation in the arbitration did not result in a proceeding that was “not fundamentally fair,” distinguishing a case under the New York Convention that had held otherwise because the Convention specifically provides a defense based on “improper composition of the arbitral tribunal.” Under the FAA, the requirements for a “fundamentally fair hearing” are “notice, opportunity to be heard, and to present relevant and material evidence and argument before the decision makers, and that the decision makers are not infected with bias.” There was no indication that those requirements were not met here.

The Tenth Circuit confirmed the district court’s ruling, and denied the designer’s appeal on the additional ground that the designer failed to object to the arbitrator and failed to invoke CIAR R-7(c), which provides an opportunity for the arbitrator to “establish a process for selecting arbitrators for any ongoing or newly constituted case” after the joinder of additional parties. The designer’s failure to invoke CIAR R-7 was fatal to his claim to have been denied due process through the pre-joinder selection of the arbitrator. Gidding v. Fitz, No. 18-1106 (10th Cir. Nov. 6, 2018).

This post written by Benjamin E. Stearns.

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Federal District Court Declines to Rule on Arbitration Award, Finding No Independent Basis for Jurisdiction

December 4, 2018 by Michael Wolgin

Following arbitration, the parties filed cross-motions to confirm and vacate the arbitration award. The District Court for the Southern District of California issued an order to show cause why the case should not be dismissed for lack of subject matter jurisdiction because the FAA does not independently confer jurisdiction, and the parties did not adequately plead a jurisdictional basis that would permit the court to rule. Golub, moving that the award be vacated, argued that the court had jurisdiction because (1) she was denied a fair arbitral hearing, and (2) the award was in manifest disregard of federal law. The court rejected both arguments, reasoning that federal question jurisdiction to enforce or vacate an arbitration award exists only when ultimate disposition of the matter by the federal court necessarily depends on resolution of a substantial question of federal law, such as when the petition alleges that the arbitrator manifestly disregarded federal substantive law. The court went on to warn that “even in those cases where the arbitrator manifestly disregarded federal substantive law, courts are reluctant to find jurisdiction.” Last, the court stated that the allegation that the arbitrator denied a party a fair opportunity to present its case by refusing to compel production of documents, does not raise a “substantial question of federal law.” The court was “aware of no case … stating that failure to follow federal procedure in an arbitration can give rise to federal question jurisdiction.” BOFI Fed. Bank v. Golub, Case No. 3:18-cv-00816 (USDC S.D. Cal. Nov. 8, 2018).

This post written by Gail Jankowski.

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$100 Million Arbitration Award Supported by “Even a Barely Colorable Justification” Upheld Under the FAA

December 3, 2018 by Michael Wolgin

A $100 million arbitration award against NutraSweet was reinstated by a New York state appellate court due to the “emphatic federal policy in favor of arbitral dispute resolution embodied in the FAA, a policy that applies with special force in the field of international commerce.” NutraSweet’s acquisition of a Korean aspartame producer went sour, and the two companies proceeded to arbitration. The arbitration panel ruled against NutraSweet on all of the issues and rendered an award in excess of $100 million to Daeseng Corp. However, when Daeseng petitioned a New York trial court for confirmation of the award, the court reversed and remanded, finding the arbitrators had “manifestly disregarded the law and had misconstrued the procedural record.”

On appeal, the New York appellate court held the reversal to be in error, stating that “ordinary errors” of law are insufficient to constitute the required “manifest disregard of the law” necessary to overturn an arbitration award. The doctrine of manifest disregard of the law is “severely limited” and is a “doctrine of last resort limited to the rare occurrences of apparent egregious impropriety on the part of the arbitrators.” To modify or vacate an award on that ground, a court must find that “the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether, and (2) the law ignored by the arbitrators was well defined, explicit, and clearly applicable to the case.”

Under this demanding standard, even if the court held the arbitrators had made a mistake in their application of the law, that would not be sufficient to set the award aside where the issue was “far from obvious and capable of being readily and instantly perceived by the average person qualified to serve as an arbitrator.” The court walked through each of NutraSweet’s arguments, and, without deciding that the arbitrators’ decisions were correct, nevertheless found that there was at least a “barely colorable justification” for each of them, and therefore they must be upheld. In re Daeseng Corp. v. NutraSweet Co., Case No. 2018 NY Slip Op. 06331 (NY. Sup. Ct. App. Div., Sept. 27, 2018).

This post written by Benjamin E. Stearns.

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