Confirmation / Vacation of Arbitration Awards

Georgia Court of Appeals Confirms Arbitration Award Holding That Arbitrator Did Not Manifestly Disregard Law or Overstep Authority

November 18, 2022 by Kenneth Cesta

Concluding that the arbitrator did not manifestly disregard contract law or overstep his authority, the Georgia Court of Appeals confirmed the arbitrator’s award and remanded the matter for consideration of an award of attorneys’ fees and post-award interest.

Claimants Southern Mountain Adventures LLC and Adventure Motorsports Reinsurance Ltd. entered into an arbitration agreement with Interstate National Dealer Services Inc. (INDS) to resolve their claims that INDS overcharged Southern Mountain Adventures. The limited facts included in the court’s decision confirm that the dispute between the claimants and INDS involved “payments collected by INDS pursuant to motorsport vehicle service contracts sold to customers by [Southern Mountain Adventures] and administered by INDS” and claims by the claimants that “INDS overcharged [Southern Mountain Adventures].” After the arbitrator found in favor of the claimants, INDS challenged the confirmation of the arbitration award. The Georgia Court of Appeals reversed the confirmation of the award, finding that the arbitrator manifestly disregarded the law. The Court of Appeals based its decision, in part, on the finding that “INDS charged an amount of money agreed to by the parties in a Rate Card” and that “the parties did not depart from the Rate Card structure.” Thereafter, the Supreme Court of Georgia reversed the holding of the Court of Appeals, holding that the arbitrator had not manifestly disregarded the law. The Supreme Court noted that “an arbitrator who incorrectly interprets the law has not manifestly disregarded it. The arbitrator has simply made a legal mistake,” and the legal standard for manifestly disregarding the law has not been met. The Supreme Court then remanded the case to the Court of Appeals.

On remand, the Court of Appeals confirmed the arbitrator’s award, concluding that the arbitrator did not manifestly disregard contract law. The court adopted the reasoning of the Supreme Court that the arbitrator had fashioned a remedy that he deemed “just and equitable within the scope of the agreements of the parties.” The Court of Appeals also considered INDS’ argument that the arbitrator overstepped his authority under Georgia’s arbitration statute, concluding that overstepping “like the other grounds for vacating arbitration awards is very limited in scope” and involves “addressing issues not properly before the arbitrator,” which the court concluded did not occur in this case. Finally, the court addressed the claimants’ argument that they were entitled to attorneys’ fees and post-award interest. The court held that “[b]ecause the court never addressed these issues, we remand for consideration of the appropriateness of awarding attorney fees arising out of the arbitration requested in the Claimant’s motion to confirm the award, attorney fees arising out of collection efforts as stated in the arbitration award, and post-award interest as stated in the arbitration award.”

Adventure Motor Sports Reinsurance, Ltd. v. Interstate National Dealer Services, Inc., No. A20A0036, A20A0037 (Ga. Ct. App. Oct. 18, 2022).

Sixth Circuit Rejects Claim of “Implicit Vacatur” of Arbitration Award and Affirms District Court’s Entry of Preliminary Injunction

November 16, 2022 by Kenneth Cesta

This case involves a dispute concerning the use of the name of a family business. The Grewal family managed real estate companies using the name “Singh” in the company name, and the companies obtained a trademark on their name. A member of the family, referred to in the opinion as Darshan, left the business and formed new companies that also used the Singh name. One of the original companies sued the new Singh companies alleging that the new companies infringed the Singh trademark. The dispute was submitted to arbitration where the original Singh companies prevailed. The arbitrator’s award prohibited the new companies from using the name Singh “as the only identifying proper noun used to describe their business.” The district court confirmed the arbitrator’s award and entered a permanent injunction. Thereafter, the new Singh companies “rebranded” and added “Michigan” to their company names. The original Singh companies filed a new suit requesting that the district court hold Darshan in contempt and modify the prior permanent injunction to prohibit the new companies from adding “Michigan” to their names. Before addressing those claims, the district court entered a preliminary injunction enjoining Darshan from “any use of, or Promotion with the term ‘Singh,’” including “the ‘Singh Michigan’ names.”

Darshan appealed the preliminary injunction in the new suit, contending that the preliminary injunction “implicitly vacated the arbitration award.” The Sixth Circuit rejected the argument, concluding that “[c]ourts use preliminary injunctions as temporary devices to maintain the status quo while they adjudicate disputes.” The court noted that “the district court entered the preliminary injunction while it considered how the arbitration award applied to Darshan’s new act of alleged infringement.” With regard to Darshan’s argument that the preliminary injunction “implicitly vacated” the arbitration award, the Sixth Circuit explained that “implicit vacatur can occur when a district court rules on a motion to confirm, modify, or vacate an arbitration award.” The court then ruled that because the district court had yet to rule on the original Singh companies’ motion to modify the earlier award, no implicit vacatur had occurred. The court also rejected Darshan’s argument that the arbitration confirmation action resolved all issues and claims in the new action and that “claim and issue preclusion” applied. The court held that claim and issue preclusion “apply to claims and arguments that were resolved before,” which it concluded did not apply in this case. Finally, the court rejected Darshan’s argument that “law of the case precludes us from reconsidering issues decided in the previous action,” finding that “[t]his is a separate suit, arising out of Darshan’s actions after the arbitration award was confirmed. So law of the case does not apply.” The Sixth Court affirmed the district court’s rulings.

Singh Management Co. v. Singh Michigan Homes, LLC, No. 21-1826 (6th Cir. Oct. 26, 2022).

Schwab Wins Battle Over Confirmation of FINRA Arbitration Award Predicated on Alleged Discovery Abuses

November 9, 2022 by Benjamin Stearns

Charles Schwab & Co. successfully petitioned the Southern District of New York for confirmation of a FINRA arbitration award against one of its account holders, fending off challenges predicated on Schwab’s alleged discovery abuses in the process.

The Evan K. Halperin Revocable Living Trust initiated arbitration against Schwab through FINRA’s dispute resolution office. The trust alleged that certain security features of the schwab.com trading platform caused the trust to be logged out of its schwab.com account without explanation while attempting to execute various options trades. The trust alleged that these unexplained interruptions in service caused approximately $1.5 million in losses for which Schwab was liable. The “key dispute” in the arbitration was whether the trust was logged out due to certain malfunctions or security features internal to schwab.com or whether it occurred due to the computer and systems used by the trust.

The discovery process during the arbitration proceeding was highly contentious. The trust repeatedly filed motions alleging that Schwab was engaging in discovery abuses and refusing to produce certain materials that it alleged were key to its case, chiefly in the form of certain electronically stored information (ESI) that Schwab purportedly maintained related to a “fraud detection system.” Schwab repeatedly denied that it was withholding discovery, going so far as to file a declaration from its director of client authentication stating that no such “fraud detection system” existed. In addition, Schwab produced substantial amounts of other ESI related to a user’s activity and log-on/log-off records. The FINRA arbitration panel ruled in Schwab’s favor and, pursuant to the parties’ arbitration agreement, ordered the trust to pay Schwab’s attorneys’ fees and costs totaling $142,750.

The trust petitioned the district court for vacatur based on its view that the arbitrators had exhibited “evident partiality or corruption” or had engaged in misconduct. Its arguments were principally based on the FINRA panel’s refusal to compel Schwab to produce the ESI that the trust alleged pertained to the fraud detection system maintained by Schwab.

The court found that the FINRA panel did not refuse to hear evidence by not compelling Schwab to produce the ESI sought by the trust, information that did not exist per Schwab’s representation in a declaration executed under penalty of perjury. The court noted that “[t]he Trust provides no evidence beyond the Panel’s denial of several of its motions and Schwab’s ultimate success in the Arbitration to support its claim of the Panel’s ‘evident partiality’ in favor of Schwab.” The court stated that “bias” of an arbitration panel is “not even established by showing that an arbitrator consistently agrees with the arguments of one side and repeatedly finds in their favor. … Fundamental fairness does not mean that a party must win a minimum percentage of motions.”

The trust’s “dissatisfaction with the Panel’s rulings and the Award” did not render the arbitration fundamentally unfair. The court denied the trust’s petition for vacatur and granted Schwab’s cross-petition for confirmation, including the award of fees and costs, and awarded Schwab prejudgment interest at the rate of 9% per annum, based on the presumption in favor of the award of prejudgment interest on a motion to confirm an arbitration award.

Evan K. Halperin Revocable Living Trust v. Charles Schwab & Co., No. 1:21-cv-08098 (S.D.N.Y. Sept. 19, 2022).

Second Circuit Holds That Summons Is Not Required When Seeking Confirmation of Foreign Arbitral Award Against Foreign Instrumentalities

November 4, 2022 by Brendan Gooley

The Second Circuit Court of Appeals recently held that a summons is not required to initiate proceedings to compel a foreign arbitration award against a foreign instrumentality. The court also confirmed the arbitration award at issue but vacated the district court’s award of additional fees because the losing party’s arguments did not amount to bad faith or vexatious arguments.

CVG Ferrominera Orinoco, C.A. is a Venezuelan company that produces and exports iron ore. Commodities & Minerals Enterprise Ltd. (CME) is a British Virgin Islands company that trades commodities and minerals, including iron ore. CME and Ferrominera executed a contract for a ship named the General Piar to transport Ferrominera-owned iron ore to an offshore transfer station where CME would then ship it onward. The contract specified U.S. law as the choice of law and contained a broad arbitration clause.

CME commenced arbitration for unpaid invoices, lost profits, and attorneys’ fees. The arbitration panel rejected jurisdictional, fraud/corruption, and other defenses from Ferrominera and entered an award in favor of CME. CME moved to confirm that award. The U.S. District Court for the Southern District of New York confirmed the award and awarded costs and fees.

The Second Circuit affirmed, except with respect to the district court’s fee award.

First, the Second Circuit rejected Ferrominera’s argument that the district court lacked personal jurisdiction because CME had not served a summons when it initiated its action to confirm. The Second Circuit held that “a summons is not required to properly effect service when seeking confirmation of a foreign arbitral award against a foreign instrumentality” because the Federal Arbitration Act does not require a summons and the FAA’s references to the Foreign Sovereign Immunities Act, which Ferrominera relied on, were only to fill gaps in the FAA regarding the manner of serving documents.

Second, the Second Circuit disagreed with Ferrominera’s arguments that the agreement was invalid under Venezuelan law because the proper Venezuelan officials had not signed off on it, that, even if valid, the arbitrators had exceeded their authority by refusing to allow Ferrominera to allocate payments between various agreements with CME as it wished, and that the award violated U.S. public policy. The agreement contained a U.S. choice-of-law provision, which rendered Ferrominera’s reliance on Venezuelan law regarding who must approve agreements meritless. The allocation argument was merely a damages argument, and damages were for the arbitrators to determine. Ferrominera’s public policy argument meanwhile relied on a claim that the agreement was obtained through “corruption,” but that did not challenge the award, and the FAA’s narrow public policy exception concerned whether the award offended public policy.

Third, the Second Circuit agreed with Ferrominera that the district court erred by awarding further fees. Although the district court had inherent authority to award fees for bad faith, vexatious, etc., arguments, Ferrominera’s arguments did not meet that standard. The summons issue, for example, was an issue of first impression for the Second Circuit that Ferrominera had prevailed on in other courts. The Second Circuit vacated the additional fees.

Commodities & Minerals Enterprise Ltd. v. CVG Ferrominera Orinoco, C.A., No. 20-4248 (2d Cir. Oct. 3, 2022).

Court Confirms Almost $23M Arbitration Award

November 2, 2022 by Brendan Gooley

A court recently confirmed an arbitration award totaling nearly $23 million after rejecting the losing party’s arguments that the arbitrator exceeded his authority, improperly calculated damages, and violated an American Arbitration Association rule.

AIDS Healthcare Foundation (AHF) operated a number of pharmacies that supported AIDS patients. AHF contracted with Caremark LLC and Caremark PCS LLC for certain pharmacy benefit management services. Pursuant to the agreement, Caremark took Medicare Part D monies earmarked to pay for prescriptions for people of limited financial means to pay that money to Medicare Part D plan sponsors. AHF claimed that the manner in which Caremark did that violated the agreement between AHF and Caremark. An arbitrator agreed and awarded AHF $22.6 million in damages plus approximately $366,000 in costs and fees.

Caremark moved to vacate the award. The U.S. District Court for the District of Arizona rejected Caremark’s claims and added additional costs, fees, and interest to the award.

Caremark first claimed that the arbitrator exceeded his authority by adjudicating the claims of 51 separate pharmacies collectively. According to Caremark, that violated the arbitration agreement’s provision that “[a]ll disputes are subject to arbitration on an individual basis, not on a class or representative basis, or through any form of consolidated proceedings.” The court concluded that the arbitrator’s interpretation of the anti-class action provision as not being violated by consolidating claims from separate AHF pharmacies was not “completely irrational” or in “manifest disregard of the law” and further noted that the agreement permitted consolidation of claims from any contracts and agreements from participation in Caremark’s networks.

The court similarly rejected Caremark’s argument that the arbitrator’s damages computation was irrational. It agreed with the arbitrator that Caremark first raised that claim in a motion to recalculate the damages and that the argument should have been raised earlier.

Finally, the court found that the arbitrator acted properly in increasing the damages after the deadline set by Rule 50 of the AAA rules had passed. The arbitrator concluded that Rule 50 did not apply because the award he amended was an interim award. The court found that the arbitrator’s interpretation of Rule 50 was plausible and therefore acceptable.

The court also awarded costs, fees, and interest related to Caremark’s motion to vacate.

Caremark LLC v. AIDS Healthcare Foundation, No. 2:21-cv-01913 (D. Ariz. Sept. 15, 2022).