Confirmation / Vacation of Arbitration Awards

COURT CONFIRMS ARBITRATION AWARD, REJECTING CLAIM THAT ARBITRATOR EXCEEDED HIS POWERS AND IGNORED THE LAW

March 1, 2017 by Rob DiUbaldo

A court has confirmed an arbitration award of more than $8 million in damages, attorneys’ fees and costs against Sirona Dental Systems, Inc. and Arges Imaging Inc. (collectively “Respondents”) in favor of Petitioners, who were shareholders of Arges before it merged with Sirona. Respondents asked that the award be vacated because the arbitrator had exceeded his powers and acted in manifest disregard for the law, but the court disagreed.

The merger occurred because of Sirona’s desire to acquire a scanner created by Arges called the Apollo. The arbitration involved Petitioners’ claim that Respondents breached the merger agreement. First, Petitioners alleged that Sirona owed them $3 million that the merger agreement said they would earn if the Apollo product met certain criteria. While those criteria were not met, the tribunal awarded Petitioners the full amount sought after finding that Sirona deprived Petitioners the chance to test the Apollo product by the contractual deadline and that the product met the requisite criteria in informal tests.

Second, Petitioners alleged that they should be paid a “Revenue Earn Out” greater than that provided by the merger agreement based on the revenue actually achieved, because Sirona breached its obligation to conduct the business in good faith and exercise commercially reasonable efforts to promote the business. The tribunal agreed that Sirona had breached this duty and awarded Petitioners more than $4 million based on its calculations of what the revenue would have been without this breach.

The court further stated that, when an arbitrator is alleged to have to exceed his powers, the question “is whether the arbitrator (even arguably) interpreted the parties’ contract, not whether he got its meaning right or wrong,” and found that the arbitrator had met this standard. The court also rejected the argument that the arbitrator acted in manifest disregard for the law by awarding damages based on revenue estimates for a new product, despite significant Delaware case law rejecting such awards. The court noted that none of these cases explicitly prohibits such an award and found that Respondents had not shown that the arbitrator ignored the law. Bergheim et al. v. Sirona Dental Systems, Inc., et al., No. 16 CV 1692-LTS (S.D.N.Y. Jan. 24, 2017)

This post written by Jason Brost.

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APPELLATE COURT REJECTS CLAIM OF ARBITRATOR BIAS BASED ON UMPIRE’S SERVICE AS A PARTY ARBITRATOR IN OTHER MATTERS INVOLVING A RETROCESSIONAIRES’ ALLEGED AFFILIATE

February 28, 2017 by Rob DiUbaldo

The Second Circuit has rejected the attempt of a retrocedent, IRB Brasil Reseguros S.A. (“IRB”), to vacate certain arbitration awards against it in favor of its retrocessionaire, National Indemnity Company (“NICO”). IRB argued that vacatur was required because the neutral umpire on a three arbitrator panel accepted a position as party arbitrator on behalf of an alleged affiliate of NICO while the NICO/IRB arbitration was ongoing. Notwithstanding this, the court found that this did not amount to “evident partiality” or any other basis for vacatur of an arbitration award under the Federal Arbitration Act based upon arbitrator misconduct.

IRB and NICO were involved in a series of arbitrations over seven years regarding NICO’s obligations to indemnify IRB for losses it incurred under certain reinsurance contracts that covered losses suffered by large Brazilian company. The three-member arbitration panel was made up of two party-appointed arbitrators and one neutral umpire. In 2012, IRB demanded that the neutral umpire withdraw from the arbitration because he had served as a party-arbitrator for an alleged affiliate of NICO in another matter. The umpire refused to step down and later accepted another appointment as a party-arbitrator for that same purported NICO affiliate. The majority of the arbitration panel in the NICO/IRB matters ultimately issued three awards in NICO’s favor.

The court found that the umpire’s conduct did not demonstrate “evident partiality” under the FAA, which the court, quoting an earlier Second Circuit decision, said exists when “a reasonable person, considering all the circumstances, would have to conclude that an arbitrator was partial to one side.” The umpire was not alleged to have a familial, business, or employment relationship with NICO or its alleged affiliate, or a financial interest in the outcome of the arbitrations, and had in fact voted against NICO’s purported affiliate when acting as party arbitrator. The court also rejected IRB’s argument that his conduct constituted “misbehavior” under the FAA because this argument was not raised before the district court. However, the court found that IRB’s arguments were not frivolous and thus rejected NICO’s request for attorneys’ fees and costs. National Indemnity Co. v. IRB Brasilia Reseguros S.A., No. 16-627-cv (2d Cir. Jan. 31, 3017)

This post written by Jason Brost.

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NINTH CIRCUIT AFFIRMS CALIFORNIA DISTRICT COURT’S CONFIRMATION OF ARBITRATION AWARD

February 16, 2017 by John Pitblado

In this matter, a California district court confirmed an arbitration award in favor of D.A.R.E. America, and denied a motion to vacate the arbitration award by D.A.R.E. New Jersey, Inc. D.A.R.E. New Jersey, Inc. appealed to the Ninth Circuit.

In the arbitration, D.A.R.E. New Jersey attempted to amend its arbitration demand to include a new claim under the New Jersey Franchise Practices Act on the eve of the arbitration hearing. The Ninth Circuit found that the arbitrator did not manifestly disregard the law by refusing to allow D.A.R.E. New Jersey to arbitrate its New Jersey Franchise Practices Act claim, noting that “[t]o vacate an arbitration award on this ground, [i]t must be clear from the record that the arbitrator[] recognized the applicable law and then ignored it.” The Ninth Circuit also noted that “[t]he scope of the arbitrator’s jurisdiction extends to issues not only explicitly raised by the parties, but all issues implicit within” the arbitration demand, and that an arbitrator’s interpretation of the scope of her powers is given great deference. The Court noted that the arbitrator found that the determination that D.A.R.E. New Jersey materially breached the charter agreement was necessary to resolve the breach of contract claim. Finally, the Ninth Circuit noted that arbitration awards may be vacated on public policy grounds where an explicit, well defined, and dominant public policy exists and that the policy specifically militates against the relief ordered by the arbitration. It then found that D.A.R.E. New Jersey had not identified an explicit public policy that militates against the relief ordered by the arbitration. Thus, the Ninth Circuit affirmed the district court’s confirmation of the arbitration award. D.A.R.E. New Jersey, Inc. v. D.A.R.E. America, No. 2:12-cv-09805 (9th Cir. Jan. 17, 2017).

This post written by Jeanne Kohler.

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ARBITRATOR’S DECISION ON AVAILABILITY OF COLLECTIVE AND CLASS ARBITRATION WITHSTANDS PROCEDURAL AND SUBSTANTIVE CHALLENGES

February 9, 2017 by Rob DiUbaldo

A Colorado federal court recently denied DISH Network (“DISH”)’s petition to vacate an arbitration award that decided an arbitration agreement with former employee Ray permitted collective or class certification. The arbitrator had decided as a jurisdictional matter that he had authority to determine whether the agreement permitted collective or class arbitration, and then held on the merits that the disputed agreement permitted arbitration of this kind.

First, the court upheld the arbitrator’s decision that he had authority to determine whether the agreement permitted collective or class arbitrations, but on slightly different grounds than the arbitrator decided the issue. The arbitrator found that the question of whether an agreement permits collective or class arbitration is not a “gateway” issue—or “question of arbitrability”—so she therefore had jurisdiction to decide the substantive issue. Alternatively, the arbitrator found that the agreement itself clearly and unmistakably indicated the parties’ intent to submit the issue to the arbitrator. The court, on the other hand, followed persuasive authority from other circuits holding that the question of whether an agreement permits collective or class arbitration is a question typically decided by a court and not the arbitrator. It still upheld the finding of jurisdiction, however, because it found that the parties manifested an intent to delegate questions of arbitrability to the arbitrator by incorporating the American Arbitration Association’s National Rules for the Resolution of Employment Disputes—which provide for determination of such issues by the arbitrator—into their arbitration agreement.

Second, the court refused to vacate the arbitrator’s decision that the agreement permitted collective or class certification, based primarily on the limited review applicable to arbitration awards under the Federal Arbitration Act. The arbitrator weighed a series of six features of the agreement’s language, three of which counseled for construing the agreement to permit collective or class arbitration of Ray’s claims and three counseled against permitting collective or class arbitration. Regarding the permissibility of collective arbitration provided by the Fair Labor Standards Act, the arbitrator decided that the three features supporting collective arbitration outweighed the three opposing it. Regarding the permissibility of class arbitrations, the arbitrator found a closer case and proceeded to interpret the agreement against DISH as the drafter to permit class arbitration.

In reviewing DISH’s merits challenges, the court found that the arbitrator’s decision was entirely consistent with relevant Supreme Court and Colorado precedent. The court also noted that even if the arbitrator’s analysis was inconsistent with the relevant authority, errors in interpreting or applying the law do not constitute grounds for vacating an arbitration award. Furthermore, it found the decision to interpret the contract against DISH was appropriate, because other rules of contract interpretation failed.

Dish Network, L.L.C. v. Ray, Case No. 16-314 (USDC D. Colo. Dec. 28, 2016).

This post written by Thaddeus Ewald .

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COURT APPLIES THE “LOOK THROUGH” APPROACH TO FAA SECTION 10 PETITIONS IN DETERMINING SUBJECT MATTER JURISDICTION

February 1, 2017 by Michael Wolgin

Plaintiffs, members of the Harman family, sold their family farm and sought investment advice from defendant Wilson-Davis. The Harmans claimed they were damaged after making certain investments due to forged financial statements by Wilson-Davis, and that Wilson-Davis spoliated evidence pertaining to those investments. At arbitration, the panel found no liability against Wilson-Davis. The Harmans then sought to vacate the panel’s award.

The court considered whether it had subject matter jurisdiction, and whether there were sufficient grounds to vacate the award under either public policy grounds or section 10 of the FAA. Regarding subject matter jurisdiction, the court analyzed whether it could “look through” the face of the petition to vacate the award, and find jurisdiction based on whether federal-law claims were raised in the underlying arbitration. (There is a split among the federal circuits as to whether a court may look through a section 10 petition to vacate an award in order to find federal question jurisdiction; the Supreme Court previously applied “look through” only under section 4.) The Tenth Circuit, in which the district court in this matter is located, has not yet addressed the issue. The court here sided with the Second Circuit, and not the opposing view of the Third and Seventh Circuits, holding that applying the “look through” approach to the entire FAA was the only logical construction of the law, notwithstanding differences in statutory language between sections 4 and 10. The court, however, denied the Harmans’ petition because it found no public policy or statutory grounds supporting vacatur. Harman v. Wilson-Davis & Co., Case No. 2:2016-cv-00229-CW (USDC D. Utah Jan. 6, 2017).

This post written by Gail Jankowski.

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