Confirmation / Vacation of Arbitration Awards

NINTH CIRCUIT AFFIRMS MONTANA DISTRICT COURT’S ORDER CONFIRMING ARBITRATION AWARD

February 8, 2018 by Carlton Fields

This case involves an appeal to the Ninth Circuit Court of Appeals by Appellants Schilling Livestock, Inc., Kenneth Schilling and Lesley Schilling (collectively, the “Schillings”), of a Montana federal district court’s order confirming an arbitration award in favor of Appellee Umpqua Bank, FKA Sterling Savings Bank (“Sterling”). On appeal, the Schillings contended that the arbitration award should be vacated on two grounds: 1) that the arbitrators engaged in misconduct by allowing Sterling to rely on an undisclosed defense premised on the Gramm-Leach-Bliley Act (“GLBA”); and 2) that Sterling’s expert falsely testified that Sterling was not liable for fraudulent investment advice due to a networking exception to the GLBA.

The Ninth Circuit held that the Schillings failed to meet the high standard for vacating an arbitration award. First, the Court noted that the Schillings’ assertion that they were deprived of adequate notice of Sterling’s reliance on the GLBA defense was not supported by the record. The Court further noted that the district court correctly found that the Schillings opened the door to Sterling’s introduction of a rebuttal witness concerning the bank’s statutory duties, and that they were afforded an opportunity to submit supplemental briefing on the GLBA defense, but did not do so. Thus, the Court held that the arbitrators did not engage in misconduct in permitting rebuttal expert testimony regarding the GLBA defense, and that the arbitrators’ decision did not deprive the Schillings of a fair hearing. The Ninth Circuit also found that the record did not support the Schillings’ argument that Sterling’s expert falsely testified concerning the GLBA defense. Rather, it noted that the district court found that the expert responded to an ambiguous question and did not otherwise provide false testimony. The Court further noted that the arbitrators’ award did not refer to the expert’s testimony in finding that Sterling was not liable. Thus, the Ninth Circuit held that the Schillings failed to demonstrate by clear and convincing evidence that any fraud or false testimony warranted vacating the arbitration award. Based on the foregoing, the Ninth Circuit affirmed the Montana district court’s order confirming the arbitration award.

Schilling Livestock, Inc. et al v. Umpqua Bank, FKA Sterling Savings Bank, No. 15-35995 (9th Cir. Dec. 28, 2017).

This post written by Jeanne Kohler.
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NINTH CIRCUIT CONSIDERS JURISDICTION TO HEAR APPEAL OF DECISION VACATING ARBITRATION AWARD AND REMANDING FOR A NEW ARBITRATION

January 30, 2018 by Carlton Fields

The Ninth Circuit has found that it had jurisdiction to hear an appeal of a district court decision vacating an arbitration award and remanding the case for a new arbitration.

The appeal arose out of a FINRA arbitration involving claims that a securities broker had mismanaged a client’s investment portfolio. The petitioner claimed damages of $100,000 in his complaint. Because FINRA rules only provide for three arbitrator panels for claims over $100,000, the case was assigned to a single arbitrator.

Shortly before the arbitration hearing, the petitioner filed a brief in which he claimed his damages were $125,500, but he did not amend his complaint. The respondent objected to proceeding with a single arbitrator, but the arbitrator considered and rejected this objection, proceeded to hear the case alone, and awarded petitioner $75,000. The respondent asked a district court to vacate this award on several grounds, which the court did on the basis that the arbitrator exceeded his powers by proceeding as a single arbitrator despite the increased damages claim. The district court then remanded the case for a new arbitration before a three arbitrator panel.

On appeal, the court considered two issues: (1) whether the district court’s decision remanding the case for a new arbitration meant that the appellate court lacked jurisdiction over the case; and (2) if jurisdiction was present, whether the arbitrator had exceeded his authority.

In answer to the first question, the court found that while the FAA does not directly address the circumstance of a case that has been remanded for a new arbitration, the fact that the district court had vacated an award was enough under the statute to create appellate jurisdiction. In doing so, the court followed the lead of every circuit to have considered this issue, including the First, Second, Third, Fifth, and Seventh Circuits.

Having found that it had jurisdiction, the court found that the arbitrator had not exceeded his authority. The court emphasized that in order to overturn an arbitral award on the basis that the arbitrator exceeded his powers, the objecting party must show not simply that the arbitrator erred in his interpretation of the law or the agreement to arbitrate, but also that the arbitrator’s decision was “completely irrational” or showed a “manifest disregard of the law.” Finding that the arbitrator’s interpretation of FINRA’s rules on when to use a three arbitrator panel, while arguably incorrect, was neither irrational nor showed a manifest disregard for the law, the court remanded the case so that the district court could consider the respondent’s other arguments in favor of vacating the arbitrator’s award.

Sanchez v. Elizondo, No. 16-17345 (9th Cir. Dec. 4, 2017).

This post written by Jason Brost.
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SECOND CIRCUIT AFFIRMS COURT’S CONFIRMATION OF MULTIPLE ARBITRATION AWARDS

January 18, 2018 by Carlton Fields

This matter involved appeals by appellant Best Made Floors Inc. (“Best Made”) from a December 22, 2016 corrected judgment of a district court confirming two arbitration awards in favor of appellees, and from the district court’s denial of its motion to vacate a third arbitration award in favor of the appellees.

Three arbitration hearings on claims asserted against Best Made, which resulted in three arbitration awards in favor of the appellees. On November 3, 2015, the arbitrator found that Best Made failed to pay an employee for 98 hours of work and ordered that Best Made pay $5,399.60 in wages, less statutory deductions (“November 3 Award”). On June 7, 2016, the arbitrator found that Best Made violated collective bargaining agreement procedures for cash payments and ordered that Best Made pay a $50,000 penalty (“June 7 Award”). On August 15, 2016, the arbitrator also found that Best Made failed to remit required payments to appellees and ordered that Best Made pay $20,424.55 (“August 15 Award”). Best Made attended only the first hearing, which culminated in the November 3 Award. Best Made sought to vacate all three awards, which was denied by order dated November 23, 2016, and the district court confirmed the November 3 and August 15 Awards. A corrected judgment was then entered on December 22, 2016, which also confirmed only the November 3 and August 15 Awards, and did not address the June 7 Award. Best Made then appealed. After the notice of appeal was filed, on June 10, 2017, the arbitrator issued a new award superseding the June 7 Award, and which reduced the original $50,000 penalty to $10,000. No party had moved to confirm or vacate the June 10, 2017 Award.

On appeal, Best Made argued that the three initial arbitration awards should be vacated because: (1) the arbitration procedures were fundamentally flawed; (2) the arbitrator was biased; (3) the appellee provided inadequate notice of a hearing; and (4) the appellee committed fraud by failing to present Best Made’s evidence to the arbitrator at the hearings that Best Made failed to attend. The Second Circuit concluded that these arguments were without merit, that Best Made had not established that the arbitration proceedings were fundamentally unfair, and that the district court properly confirmed the awards. N.Y. City District Council of Carpenters et al. v. Best Made Floors, Inc., No. 16-4281 (2nd Cir. Dec. 15, 2017).

This post written by Jeanne Kohler.
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COURT REFUSES TO RECONSIDER ARBITRATOR’S FACTUAL DETERMINATIONS

January 12, 2018 by Rob DiUbaldo

In a case emphasizing the deference courts give to factual findings of arbitrators, a magistrate judge in the Eastern District of New York has confirmed an arbitration award granting damages and attorneys’ fees to a company that repossessed a leased car when the leasee fell behind on his payments.

The case arose out of the lease of a car by plaintiff Kevin Love and his wife Maria. After the Loves failed to make timely payments on the lease, defendant BMW Financial Services repossessed the car, sold it at auction, and sought payment of a deficiency balance. Mr. Love sued BMW in state court, where he asserted Fair Credit Reporting Act, tort, and contract claims. BMW removed the case to federal court, then successfully moved to compel arbitration per the terms of the lease agreement. The arbitrator entered an award in favor of BMW, rejecting all of Mr. Love’s claims and awarding BMW $34,826.64 in damages plus interest and $50,000 in attorneys’ fees. BMW then moved in federal court to confirm the award and sought its fees incurred in connection with that proceeding, and Mr. Love cross-moved to vacate the award.

The court confirmed the award, emphasizing that courts in the Second Circuit will not vacate an arbitration award except in narrowly-defined circumstances described in the Federal Arbitration Act or if the court finds that it was rendered in “‘manifest disregard’ of the law or the terms of the parties’ agreement.” The court further emphasized that manifest disregard of the evidence is not a grounds for vacatur within the Second Circuit. Thus, the court rejected Mr. Love’s claim that the arbitration award was too large because the arbitrator failed to properly account for the time that the car was not available to Mr. Love, finding that it had no power to review such a factual finding. The court likewise rejected Mr. Love’s argument that the arbitrator’s decision dismissing his FCRA claim should be vacated, as this was also based on a non-reviewable finding of fact. The court also found that because the plain language of the lease provided for attorneys’ fees incurred in connection with a default on the lease, BMW was entitled to recover the $12,690.02 in attorneys’ fees it incurred in seeking to have the award confirmed and responding to Mr. Love’s motion for vacatur.

Love v. BMW Financial Services NA, LLC, No. 15-cv-0124 (E.D.N.Y. Dec. 5, 2017)

This post written by Jason Brost.

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ELEVENTH CIRCUIT FINDS NO MANIFEST DISREGARD OF THE LAW AND UPHOLDS ORDER CONFIRMING ARBITRATION AWARD IN LICENSING DISPUTE

January 3, 2018 by Michael Wolgin

The case involved a dispute between the owner of the Cabbage Patch Kids brand and related intellectual property (“CPK”), and licensee JAKKS Pacific, Inc., which had an exclusive license to use the brand and intellectual property between 2012 and 2014. Prior to the end of the license agreement, CPK selected a new licensee, Wicked Cool Toys, to manufacture and sell Cabbage Patch Kids dolls and products beginning in 2015. To that end, CPK and Wicked Cool Toys entered into a deal memorandum on May 30, 2014 whereby CPK permitted Wicked Cool Toys to immediately begin the process of creating and promoting a new line of dolls. Shortly thereafter, JAKKS asserted that CPK had breached its exclusive license and stopped paying royalties due under the agreement. CPK responded by filing suit in a federal court in Georgia seeking an order compelling arbitration and confirmation of any arbitration award.

At issue during arbitration was the meaning of a provision in the license agreement reserving to CPK the right to “engage, during the 365-day period prior to the termination or expiration of [the agreements], in the negotiation, with potential licensees (including competitors of Licensee), of one or more license agreements granting licenses with respect to” the products covered by JAKKS’s exclusive license, “to become effective upon the expiration or earlier termination of [the agreements].” JAKKS argued that, under that provision, CPK could only “negotiate” with potential licensees in 2014, and was prohibited from actually reaching an agreement with a new licensee or doing anything else to make it possible for a new licensee to actually launch a new line of Cabbage Patch Kids products in 2015. The arbitrator concluded that this provision, particularly the word “negotiate,” was ambiguous in light of the circumstances, and that “it was the intention of the parties” that CPK and Wicked Cool Toys “could do what they did in order to transition into the manufacture and launch in 2015 of a new seasonal line of [Cabbage Patch Kids] products, without the de facto creation of a ‘gap’ of about one year.” The arbitrator therefore awarded CPK the royalties withheld by JAKKS and the court confirmed the award.

On appeal, JAKKS moved to vacate the award and argued under both Georgia law and the FAA that the arbitrator manifestly disregarded the law and exceeded his authority. The Eleventh Circuit disagreed and affirmed the district court’s confirmation of the award. The court found that the arbitrator did not manifestly disregard the law by considering the commercial context of the relevant market when determining whether the license agreement provision allowing CPK to engage in the negotiation of a new license agreement in 2014 was ambiguous. In addition, the court held that because “the subject of the arbitration proceeding was the parties’ dispute about the construction, meaning, or enforceability of certain terms” of the license agreement, the arbitrator did not overstep his authority by deciding the meaning of the provision at issue. The court also rejected JAKKS’ argument that the arbitrator violated the FAA and held that the arbitrator was interpreting, rather than modifying, the relevant provision because it was ambiguous on its face. Original Appalachian Artworks, Inc. v. Jakks Pacific, Inc., Case No. 17-11513 (11th Cir. Nov. 17, 2017).

This post written by Gail Jankowski.
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