Confirmation / Vacation of Arbitration Awards

THIRD CIRCUIT AFFIRMS DISMISSAL OF SUIT TO VACATE FINRA ARBITRATION AWARD

September 21, 2016 by John Pitblado

This case involved an underlying arbitration before an arbitration panel operating under the Financial Industry Regulatory Authority (“FINRA”) rules, which was brought by Judith and Kenneth Goldman against their financial advisor, Barry Guariglia, and his employer Citigroup Global Markets. The Goldmans had followed their investment adviser when he left his prior employer, Merrill Lynch, and went to Citigroup. In the arbitration, they claimed that when they transferred their account to Citigroup, they were subjected to a “devastating margin call” that wiped out their retirement savings. After 10 days of evidence and argument, and after the Goldmans submitted their case in chief, Citigroup moved to dismiss for lack of evidence. The FINRA arbitration panel dismissed the case, noting that “[w]hile all the claims were quite stridently argued, not a single claim was proven to be true by evidence.”

The Goldmans then filed a motion to vacate the arbitration award in a Pennsylvania federal court, and Citigroup moved to dismiss for lack of subject matter jurisdiction, which was granted by the court. In its decision, the court noted that it did not have subject matter jurisdiction because the Federal Arbitration Act does not itself create federal subject matter jurisdiction, and that the parties were not diverse, and thus, federal question jurisdiction would be required for the court to consider a motion to vacate an arbitration award. The Pennsylvania federal court found that the Goldmans failed to raise a federal question and simply sought to “assert the same claims they unsuccessfully brought in their arbitration.” The Goldmans then appealed to the Third Circuit Court of Appeals.

In their appeal, the Goldmans asserted that a district court can “look through a motion to vacate” at the underlying subject matter, relying on footnote in a prior Third Circuit decision, Goldman Sachs v. Athena Venture Partners, which stated that the district court has subject matter jurisdiction over a motion to vacate because the arbitration included federal securities law claims. The Third Circuit, however, rejected that argument, and found that it was not bound to follow the footnote in that case, noting that the footnote was an “unexamined exercise of jurisdiction and so is without precedential effect” and that the “drive-by jurisdictional ruling” in Athena goes against Third Circuit precedent. Thus, the Third Circuit affirmed the Pennsylvania federal court’s order dismissing the suit for lack of subject matter jurisdiction.

Goldman et al. v. Citigroup Global Markets Inc., et al., No. 15-2345 (3d Cir. Aug. 22, 2016).

This post written by Jeanne Kohler.

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SECOND CIRCUIT COURT OF APPEALS ALLOWS FEDERAL COURTS TO “LOOK THROUGH” § 10 FAA PETITION TO DETERMINE FEDERAL JURISDICTION

September 13, 2016 by Carlton Fields

The United States Court of Appeals for the Second Circuit has reversed its own precedent to allow federal courts examining petitions under § 10 of the FAA to “look through” the petition to examine if there is federal jurisdiction. In the case, which arose out of a dispute involving registered FINRA members and their former employees, the district court dismissed the case for want of jurisdiction, finding that it did not state a “substantial federal question on its face.” On appeal, the petitioner argued that the Second Circuit’s precedent in Greenberg v. Bear, Stearns & Co., 220 F.3d 22 (2d Cir. 2000), which led the district court to its determination, had been displaced by Vaden v. Discovery Bank, 556 U.S. 49 (2009). The Second Circuit panel held that Vaden “rendered Greenberg’s result fundamentally inconsistent with the Act’s statutory context and judicial interpretations.” Thus, the Second Circuit returned the case to the district court with instructions that it could “look through” the § 10 petition, “applying the ordinary principles of federal-question jurisdiction to the underlying dispute as defined by Vaden.” Doscher v. Sea Port Group Securities, LLC, No. 15-2814 (2d Cir. Aug. 11, 2016).

This post written by Zach Ludens.

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EX PARTE COMMUNICATIONS BETWEEN REINSURER’S ATTORNEY AND PARTY-APPOINTED ARBITRATOR LEAD TO VACATUR OF AWARD

September 7, 2016 by Carlton Fields

The Sixth Circuit recently held that a lower court erred by refusing to vacate an arbitration panel’s interim and final awards due to ex parte communications between one of the arbitrators and the attorney for the appellee, reinsurer National Union Fire Insurance Company of Pittsburgh (NUFIC). The appellant, cedent Meadowbrook Insurance Group (Meadowbrook), and NUFIC entered into a reinsurance agreement containing an arbitration provision. When NUFIC asserted that Meadowbrook overbilled its reinsurance claims, the parties instituted an arbitration in front of a three person panel, including two party-appointed arbitrators and a neutral umpire. The parties agreed to scheduling orders that instituted a ban on all ex parte communications after the filing of the first brief in any arbitration. After the date of filing, the attorney for NUFIC and the arbitrator that had been selected by NUFIC commenced ex parte communications on three different occasions. The Sixth Circuit, upon review, found that while such ex parte communications did not void an award per se, the communications could void an award if they violated the terms of the arbitration agreement. The Sixth Circuit found here that the ex parte communications violated the scheduling orders and also prejudiced Meadowbrook’s rights under the arbitration agreement. The Sixth Circuit therefore vacated both awards. Star Insurance Co. v. National Union Fire Insurance Co. of Pittsburgh, Pa., Case Nos. 15-1403/1490 (6th Cir. Aug. 18, 2016).

This post written by Joshua S. Wirth.

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FEDERAL COURT CONFIRMS ARBITRATION AWARD DESPITE DISSENTING ARBITRATOR’S “FAR MORE PERSUASIVE” ANALYSIS

August 25, 2016 by Carlton Fields

Although a New York federal district court would have found the same result as the dissenting arbitrator if it were resolving this case as an original matter, the limited scope of judicial review of arbitral decisions prevented the court from vacating the arbitration award. The petitioner and respondent were parties to a license agreement concerning the operation of a Benihana restaurant. The respondent allegedly committed various breaches of the license agreement, and petitioner exercised its option to terminate the agreement. The respondent commenced arbitration to declare it was not in default. The panel construed the license agreement “to permit termination only when reasonable,” finding the petitioner was not reasonable as respondent’s breaches were “trivial” and it had taken corrective measures to cure them. A dissenting arbitrator concluded that the petitioner had been justified as a result of the numerous material breaches by the respondent, as New York law holds “a non-breaching party may terminate a contract where the other party committed a material breach” – precisely what occurred here.

The court was unable to review the panel’s findings of fact, even for manifest disregard, nor can a claim of factual error support vacatur. As to the petitioner’s challenge that principles of equity were not properly considered, it fell “short of showing either that the panel ‘ignored’ these principles where their application was clear, or that this misapplication ‘led to an erroneous outcome.’” Nor did the court find the panel exceeded its authority by construing the license agreement as it did, as the license agreement did not define “reasonableness,” a term the arbitration panel was left to determine. As to the petitioner’s last challenge – that the panel refused to hear evidence by rejecting the petitioner’s request to submit a decision in a separate case between the parties relating to similar misconduct of the respondent – such conduct did not rise to the level of a violation of fundamental fairness. Benihana, Inc. v. Benihana of Tokyo, LLC, Case No. 15 Civ. 7428 (USDC S.D.N.Y. July 15, 2016).

This post written by Nora A. Valenza-Frost.

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FIFTH CIRCUIT CONFIRMS AWARD UNDER FEDERAL ARBITRATION ACT’S “EXCEEDINGLY DEFERENTIAL” STANDARD

August 24, 2016 by Carlton Fields

The United States Court of Appeals for the Fifth Circuit recently confirmed an arbitration award in an underlying employment dispute, finding that the appellant failed to demonstrate that the award was the product of corruption and adhering to the “exceedingly deferential” standard of review of an arbitrator’s factual findings required by the Federal Arbitration Act.

Plaintiff Tommy L. Parker brought suit against his former employer, ETB Management, L.L.C., alleging age discrimination and retaliation. The United States District Court for the Northern District of Texas compelled arbitration of the dispute, and an arbitrator found in ETB’s favor after hearing witness testimony and analyzing documentary evidence and briefing. After the District Court confirmed the award, Parker appealed seeking vacatur under the FAA on the grounds that the award was “procured by corruption” and that the arbitrator acted with “evidence of partiality or corruption.” Specifically, Parker argued that the arbitrator ignored conflicting statements given by ETB’s witnesses regarding the events that immediately preceded Parker’s firing, and thus that there was no factual basis to support the arbitrator’s findings. The Fifth Circuit rejected Parker’s arguments, declining to reexamine the witness credibility determinations of the arbitrator pursuant to the deferential standard of review afforded to arbitral decisions under the FAA, and noting that Parker had failed to make any showing that the arbitrator or the process was corrupt. Parker v. ETB Management L.L.C., No. 15-11128 (5th Cir. Aug. 4, 2016).

This post written by Rob DiUbaldo.

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