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Confirmation / Vacation of Arbitration Awards

COURT VACATES ARBITRATION AWARD DUE TO EVIDENT PARTIALITY OF PANEL, BUT PARTIES MUST RE-ARBITRATE MATTER BEFORE SAME ARBITRAL FORUM

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In a dispute between the Washington Nationals, the Baltimore Orioles, and affiliated parties regarding the value of broadcasting rights for Nationals games, an appellate court has affirmed a trial court order vacating an arbitration award on the basis of evident partiality by the arbitration panel, while also denying a motion to compel the parties to re-arbitrate the matter in a different arbitral forum.

In 2005, the Montreal Expos moved to Washington, DC, and became the Nationals. This led to an agreement under which the Orioles Television Network, which the Orioles had established with TCR Sports Broadcasting Holding, LLP, became MASN, a regional sports network with rights to broadcast both Orioles and Nationals games. The agreement set the broadcast fees from 2005-2011, after which the parties were to negotiate those fees. The parties further agreed to arbitrate disputes before the Revenue Sharing Definitions Committee (“RSDC”), a MLB-created body comprised of representatives of other MLB clubs.

A fee dispute arose between the parties regarding the broadcasting of Nationals games, and the matter proceeded to arbitration. The Nationals were represented by Proskauer Rose, which the Orioles and MASN objected to based on Proskauer’s past representations of the Nationals, MLB, and each of the three teams with members participating on the RSDC. Despite this objection, the arbitration proceeded and resulted in an order setting the amount MASN would pay the Nationals from 2012-2016.

MASN moved to vacate the award on numerous grounds, but the district court rejected all but one; the court found that that Proskauer’s representation of the Nationals led to “evident partiality,” making the proceedings fundamentally unfair. However, the district court rejected MASN’s motion to order the parties to re-arbitrate the matter in an arbitral forum unaffiliated with MLB.

The appellate court upheld the finding of evident partiality, noting that, under the FAA, a party seeking to vacate an arbitration award on this basis “bears the burden of showing that a reasonable person, considering all the circumstances, would have to conclude that an arbitrator was partial to one party to the arbitration”. The court found that MASN and the Orioles had met this burden based on the sheer volume of Proskauer’s representation of the RSDC panel members and MLB and the failure of the panel members to investigate the issue sufficiently or to fully disclose their own relationships to Proskauer. The appellate court also upheld the trial court’s refusal to order the parties to re-arbitrate the matter in a different forum. Emphasizing the FAA’s strong bias in favor of enforcing agreements to arbitrate as written, the court held that parties are free agree to “insider” arbitral forums that, like the RSDC, may be inherently prone to certain conflicts. The court also noted that the problem that led the original award to be vacated – Proskauer’s conflicts – had been remedied by the National’s hiring of new counsel. Thus, the court found that the parties could not be ordered to arbitrate the matter in a forum other than the RSDC.

TCR Sports Broad. Holding, LLP v. WN Partner, LLC, 3595, Index 652044/14 (N.Y. App. Div. July 13, 2017)

SIXTH CIRCUIT AFFIRMS ARBITRATOR’S DECISION IN ENVIRONMENTAL REMEDIATION MATTER

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The Sixth Circuit has affirmed an order confirming an arbitration award regarding indemnification obligations for environmental cleanup owed by William Farley toward the Eaton Corporation arising out of the 1986 sale of an industrial property. Farley argued that the remediation in question was not covered by the relevant indemnification provision and that the arbitrator improperly ignored that provision’s unambiguous language. Applying the extreme deference given to arbitrator’s decisions, the Sixth Circuit disagreed.

Eaton purchased the property from Condec Corporation in 1986, and Condec agreed to indemnify Eaton for expenses “resulting from non-compliance prior to August 8, 1986 by [Condec], with any applicable laws, regulations, orders, or other requirements of any governmental authorities existing on or before August 8, 1986.” While a state environmental regulator had issued a Letter of Deficiency in 1982 and a Notice of Violation in 1984, both related to the environmental contamination that later needed to be remediated, and Condec was not ordered to clean it up until after the sale. After Condec’s successor entity went bankrupt, Farley assumed Condec’s indemnification obligations under a new agreement with materially identical terms.

After numerous indemnification payments were made to Eaton, Farley filed a claim against it contesting the validity of some of these payments, and Eaton counterclaimed for additional remediation costs. Farley argued that Eaton’s remediation costs were not covered by the indemnification provisions in the operative agreements, because Eaton was not ordered to clean up the site until after August 8, 1986. The arbitrator disagreed, finding that the intent of the agreement was to indemnify Eaton for the cleanup of contamination existing prior to the 1986 sale, and the arbitrator awarded Eaton over $175,000 in damages and over $1 million in attorneys’ fees and costs.

Challenging this award, Farley argued that the arbitrator had disregarded the explicit language of the indemnification provision and read an intent into that provision that was not supported by its language. The Sixth Circuit, noting that it could not overturn the decision of the arbitrator “[s]o long as the arbitrator is arguably construing or applying the contract and acting within the scope of his authority,” even if the court were “convinced that he committed serious errors,” found that Farley’s arguments were insufficient, and it upheld the arbitrator’s decision.

Farley v. Eaton Corp., Case No. 16-3893 (6th Cir. July 20, 2017)

This post written by Jason Brost.

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IN DECIDING WHETHER TO VACATE CONFIRMATION OF ARBITRAL AWARD SUBSEQUENTLY VACATED BY PRIMARY JURISDICTION, SECOND CIRCUIT CONSIDERS NORMAL RULE 60(B)(5) FACTORS PLUS INTERNATIONAL COMITY

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The Second Circuit recently affirmed a lower court’s decision to vacate its earlier judgment enforcing a Malaysian-based arbitration award against the government of Laos where a Malaysian court subsequently set aside the award. After a dispute between a Thai company and its Laotian subsidiary (“TLL”) against the Laotian government over mining contracts, an arbitration panel in Malaysia found Laos in breach and awarded TLL $57 million. Once the period for challenging the award under Malaysian law passed, TLL pursued enforcement actions against Laos in the U.S., U.K., and France. In late 2010, nine months after the operative deadline, Laos moved for an extension of time to challenge the award, which the Malaysian court granted. While a U.S. district court issued relief enforcing the award in 2011, the Malaysian court then set aside the award in 2012. The present appeal arose from the district court’s 2014 decision granting Laos’ Rule 60(b)(5) motion to vacate its previous confirmation order to give effect to the Malaysian court’s set-aside judgment and two subsequent orders.

First, the court held that Rule 60(b)(5) applies to motions to vacate judgments confirming arbitral awards that are subsequently set aside by the primary jurisdiction. Reviewing the New York Convention and FAA texts, it found the Convention’s requirement of enforcing arbitral awards in accordance with the secondary jurisdiction’s procedural rules includes post-judgment procedures like Rule 60(b). Further, the FAA provision subjecting judgments to the “provisions of law relating to” judgments in an action extends to the Federal Rules of Civil Procedure.

Next, the court discussed what a district court’s Rule 60(b)(5) analysis should entail in this context. It found that a district court should take into consideration the Convention’s concern for international comity as well as the “full range of Rule 60(b) considerations.” In the present case, the Second Circuit concluded that the lower court did not exceed its discretion in applying Rule 60(b)(5). The lower court did not explicitly lay out its Rule 60(b) analysis, but the appellate court reviewed the record and found all the circumstances potentially influencing the Rule 60(b) motion did not bar the district court from vacating its prior judgment. The Second Circuit observed that throughout the proceedings the lower court explicitly considered the interests of justice, appropriately declined to find Laos acted inequitably, and the interests of finality did not weigh against the lower court’s decision. The court concluded that had the lower court expressly reviewed the relevant conduct in context of Laos’s Rule 60(b)(5) motion, it would not have enforced the annulled award.

Finally, the Second Circuit found no abuse of discretion in two other district court decisions rejecting TLL’s request for a security bond and refusing to enforce the English judgment. It noted the English judgment’s strong connection (and reliance upon) the district court’s original confirmation award which had since been vacated and rejected TLL’s other arguments on that order.

Thai-Lao Lignite (Thailand) Co. v. Gov’t of the Lao People’s Democratic Republic, Nos. 14-597, 14-1052, 14-1497 (2d Cir. July 20, 2017).

This post written by Thaddeus Ewald .

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TENTH CIRCUIT UPHOLDS CONFIRMATION OF ARBITRAL AWARD IN LLC DISSOLUTION DISPUTE

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The Tenth Circuit recently affirmed a district court’s confirmation of an arbitration award in a dispute regarding the dissolution of Knowledge Strategy Solutions, LLC (“KSS”). KSS was a partnership between the professional corporations of Anne Kershaw (“Kershaw”) and Shannon Spangler (“Spangler”). On less than amicable terms, the two negotiated a withdrawal from KSS effective June 30, 2014, but Kershaw filed the necessary paperwork terminating the corporation four days early without Spangler’s knowledge. Kershaw did not tender to Spangler PC its share of KSS’s capital account or other assets, and instead created a new LLC (“KSS-New York”) and placed KSS’s assets into that company, prompting Spangler to file suit.

Kershaw moved to compel arbitration, which a Missouri state court ordered for some of the claims regarding the alleged breach of KSS’s operating agreement and breach of fiduciary duties, but retained jurisdiction over other counts. Arbitration was temporarily delayed when KSS-New York filed for bankruptcy and a bankruptcy court issued an automatic stay, but after the stay was lifted the arbitrator issued an award in Spangler’s favor. The award encompassed Spangler’s share of KSS’s capital account, but did not include any award for KSS’s intangible assets which were then in possession of KSS-New York in bankruptcy. A district court confirmed the arbitral award, and Kershaw appealed.

On appeal, the Tenth Circuit affirmed the district court’s confirmation over Kershaw’s three objections: that the district court’s decision demonstrated (1) disregard for the bankruptcy court’s order, (2) disregard for the Missouri state court’s order, and (3) disregard of a Missouri statute.

First, the appeals court upheld the lower court’s finding that the arbitrator did not exceed the scope of his arbitral authority by awarding Spangler its value of KSS’s capital account upon termination. Despite Kershaw’s argument that the capital account money was transferred to KSS-New York and thus subject to bankruptcy protection, the court explained that money is fungible and Kershaw retained liability for the undistributed capital account even though it transferred the actual money to KSS-New York. Unlike money, however, KSS’s intangible assets now in KSS-New York’s possession were not fungible and the arbitrator thus appropriately refrained from awarding any part of those assets subject to bankruptcy protection. The Tenth Circuit specifically noted that this differential treatment of monetary and intangible assets demonstrated the arbitrator was aware of the limits of his authority imposed by the bankruptcy proceeding and fastidiously adhered to those limits.

Second, the court rejected Kershaw’s argument that the arbitrator disregarded the state court’s order compelling arbitration by improperly including compensation in the arbitral award. Inclusion of compensation via revenue, Kershaw argued, encroached upon the Missouri court’s retention of jurisdiction over compensation-based claims, which were excluded from the arbitration provision. The Tenth Circuit affirmed the district court’s holding that this argument impermissibly challenged the arbitrator’s legal conclusions and factual findings.

Third, the appeals court declined to decide whether Kershaw’s argument that the omission of a statute’s complete language in a quotation by the district court was manifest disregard of the law. The court noted that the lower court’s statutory analysis was an alternative finding, and thus even a favorable ruling for Kershaw would not require reversal of the award’s confirmation, because the lower court’s primary holding is undisturbed.

A. Kershaw, P.C. v. Shannon L. Spangler, P.C., No. 16-1483 (10th Cir. July 10, 2017).

This post written by Thaddeus Ewald .

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COURT FINDS NO EXCEEDING OF POWERS OR MANIFEST DISREGARD OF THE LAW IN CONFIRMING ALLEGEDLY SPECULATIVE ARBITRATION AWARD

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This case concerned an agreement by which Clos La Chance Wines, Inc., a wine producer, appointed AV Brands, Inc., a wine importer and wholesaler, as the exclusive brand agent and distributor of its wine products for the United States and Puerto Rico for a five year period. Pursuant to the agreement, AV Brands was required to use “best efforts” and “commercially reasonable efforts” in staffing the account and selling product, and was subject to yearly goals dictating the number of wine cases it was required to purchase. Several years into the arrangement and pursuant to the agreement’s dispute resolution provision, Clos La Chance Wines filed a demand for arbitration alleging that AV Brands breached the agreement by failing to meet those marketing requirements.

In a final arbitration award, Retired Judge William J. Cahill found, among other things, that Clos La Chance Wines was entitled to damages in the amount of $1,739,681, which included $200,000 to compensate it for future time and costs associated with recapturing its market position. Clos La Chance Wines then sought confirmation of the award and this decision followed.

AV Brands challenged Judge Cahill’s $200,000 award for lost market share, primarily arguing that in doing so, Judge Cahill (1) exceeded his powers, since contracts generally permit only the recovery of foreseeable damages, and (2) manifestly disregarded California law prohibiting breach of contract damages based on speculative evidence. With regard to the first ground, the court rejected AV Brands’ argument, likening it to a claim that Judge Cahill misunderstood the applicable law, which the Court stated is not a valid reason for vacatur. Regarding the latter ground, the Court found that AV Brands overlooked Judge Cahill’s finding that while much of the testimony regarding market share damages was speculative, some was not speculative and thus persuasive. Therefore, the Court refused to “re-weigh the evidence” and confirmed the award. Clos La Chance Wines, Inc. v. AV Brands, Inc., Case No. 5:16-cv-04047 (USDC N.D. Cal. June 23, 2017).

This post written by Gail Jankowski.
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