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Arbitration / Court Decisions

Seller Wins “Battle” to Apply FAA Over VUAA to Arbitration Dispute, but Loses “War” Over Award Confirmation

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The case involved a seller of a 91% interest in a Virginia-based government contractor that provides overseas staffing and logistics support to government agencies. The parties’ sale contract contained a choice-of-law provision that stated the agreement “shall be governed by and construed in accordance with the internal laws of the Commonwealth of Virginia without giving effect to any choice or conflict of law provision or rule.” The contract also included an arbitration provision applicable to disputes related to any adjustment payments after the closing of the sale. The parties ultimately could not agree on the amount of a post-closing adjustment payment and proceeded to arbitration. The arbitrator awarded the buyer approximately $3.1 million, after which the parties filed cross-motions to confirm and to vacate the arbitration award. In support of its motion to vacate, the seller included an argument that the award was in “manifest disregard” of the applicable law.

The federal district court first noted that “manifest disregard” is recognized by the Fourth Circuit as a valid basis under federal arbitration common law to vacate an arbitration award, but it is not under Virginia law. As a result, the court was required to determine whether the contract’s general choice-of-law provision selecting Virginia law resulted in the application of the Virginia Uniform Arbitration Act to the parties’ dispute. Again relying specifically on controlling Fourth Circuit precedent, the court found that “a contract’s general choice-of-law provision does not displace federal arbitration law if the contract involves interstate commerce.” Rather, the parties “may displace the FAA only by specifying that state law should apply specifically to arbitration proceedings.” Neither party disputed that the contract involved interstate commerce. As such, the contract’s choice-of-law provision was sufficient to invoke Virginia law for issues of contract interpretation, but not for purposes of displacing the FAA, because the agreement did not specifically address the law that would govern arbitration disputes.

Having won the argument that federal arbitration law applied to the parties’ dispute regarding confirmation or vacatur of the arbitration award, the seller then lost its argument that the arbitrator “manifestly disregarded” the applicable law. The court noted that, under federal arbitration law, a party moving to vacate an arbitration award faces a “heavy burden” and that the scope of a federal court’s review of an arbitration award is “among the narrowest known at law.” The court’s review is limited to “whether the arbitrators did the job they were told to do — not whether they did it well, or correctly, or reasonably, but simply whether they did it.” Pursuant to Fourth Circuit precedent, an arbitrator’s determination is not in manifest disregard and must be upheld “so long as it draws its essence from the agreement.” An award “fails to draw its essence from the agreement only when the result is not rationally inferable from the contract.”

After analyzing the seller’s claim, the court found that, “[d]istilled to its essence, the Seller’s argument does nothing more than challenge the arbitrator’s interpretation of applicable law.” As this argument was “plainly insufficient” to support a claim of “manifest disregard” of the law, the court confirmed the arbitration award.

Vogel v. Gracias Juan, LLC, No. 1:21-cv-01355 (E.D. Va. Aug. 9, 2022).

Second Circuit Concludes Suit to Recover on Defaulted Foreign Bonds Was Untimely

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The Second Circuit Court of Appeals recently concluded that a claim to recover on defaulted bonds issued by a foreign sovereign was untimely under New York’s six-year statute of limitation.

Bainbridge Fund Ltd. owned several bonds issued by the Republic of Argentina. Argentina defaulted on those bonds in 2001. In 2016, Bainbridge sued to recover on those bonds. The Southern District of New York concluded that Bainbridge’s suit was barred by New York’s six-year statute of limitation for most breach of contract actions. Bainbridge appealed.

On appeal, Bainbridge argued that (1) a 20-year statute of limitation for recovery of certain bonds applied to its claim and (2) even if the six-year statute of limitations applied, it had been tolled because Argentina had “acknowledged” the debt it owed on the bonds.

The Second Circuit rejected both arguments and affirmed the district court’s dismissal.

First, the Second Circuit held that the 20-year statute did not apply to the bonds issued by Argentina because that statute applied only to bonds issued by “the state of New York or … any person, association or public or private corporation,” and Argentina, a foreign sovereign, was not a “person” or other qualified entity under the statute. The six-year statute therefore applied.

Second, the Second Circuit held that the six-year statute had not been tolled. Although the Second Circuit acknowledged that the statute could be tolled where a debtor makes a written acknowledgement from which a promise to pay may be fairly implied, Argentina had made no such acknowledgement. To the contrary, quarterly financial statements issued by Argentina did not manifest an implied promise to pay defaulted bonds and Argentina had “repeatedly stated that it would not repay bonds not submitted to [an] exchange [program] and that these bonds ‘may remain in default indefinitely.’” Because tolling did not apply, Bainbridge’s claim was time barred.

Bainbridge Fund Ltd. v. Republic of Argentina, Nos. 21-37, 21-38 (2d Cir. June 22, 2022).

Eleventh Circuit Enforces Employee Arbitration Agreement, Concluding That Agreement Was Not Unconscionable

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In Lambert v. Signature Healthcare LLC, the Eleventh Circuit Court of Appeals reversed the district court’s denial of the defendants-appellants’ motion to dismiss and to compel arbitration under the FAA, holding that the arbitration agreement signed by the plaintiff-appellee was not “procedurally unconscionable” and was enforceable.

After a six-month job search, Claire Lambert accepted a position at Signature Healthcare. As a condition of employment, Lambert was required to sign Signature’s arbitration agreement and handbook acknowledgment. The arbitration agreement provided that it covered claims relating to “recruitment, employment, or termination of employment,” claims under the Americans with Disabilities Act and the Fair Labor Standards Act, and “any and all claims under federal, state, and local laws and common law.” Lambert was ultimately fired and brought claims against Signature in Florida state court under the FMLA, the FLSA, and state law. Signature removed the case to federal court and moved to dismiss and compel arbitration under the FAA. The district court denied the motion, concluding that the arbitration agreement was unconscionable, both procedurally and substantively, and thus unenforceable. The district court found the arbitration agreement was procedurally unconscionable because it was a “contract of adhesion” and presented on a “take it or leave it” basis. The court also found the arbitration agreement was substantively unconscionable because the handbook reserved Signature’s right to modify the terms of the arbitration agreement unilaterally.

The Eleventh Circuit reversed the order denying Signature’s motion to dismiss and to compel arbitration, concluding that the arbitration agreement was not procedurally unconscionable. After addressing the FAA and Florida law, the court found that the district court “misapprehended procedural unconscionability under Florida law” when it determined that Lambert lacked a “meaningful choice” when she signed the arbitration agreement and noted that the fact that an arbitration agreement is presented on a take-it-or-leave-it basis “is not dispositive.” The court noted that even when an arbitration agreement is a condition of employment, the circumstances surrounding the execution of the agreement should be explored by the court before concluding it is procedurally unconscionable. The court engaged in an “independent review of the record” and found they could not identify “any additional factors that weigh in favor of procedural unconscionability.” The court concluded Lambert had not shown the arbitration agreement was procedurally unconscionable and, as a result, the court need not consider whether the agreement was substantively unconscionable.

Lambert v. Signature Healthcare, LLC, No. 19-11900 (11th Cir. July 8, 2022).

Third Circuit Reverses Order Confirming Arbitration Award, Concluding Award Was Procured by Fraud

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Recognizing that it’s “a steep climb to vacate an arbitration award” and that “[c]ourts will disturb an arbitration award only in limited circumstances,” the Third Circuit Court of Appeals reversed a district court’s order confirming an arbitration award, finding that the award was procured by fraud.

The parties, Todd France and Jason Bernstein, are “agents” registered with the National Football League Players Association (NFLPA). Bernstein’s clients included Kenny Golladay, a well-known NFL wide receiver. Golladay terminated his relationship with Bernstein and his company, Clarity Sports International, on January 29, 2019. Three days before the termination, Golladay participated in an autograph signing event in Chicago that Bernstein did not arrange, even though the event was the type of opportunity that Bernstein and Clarity were hired to do for Golladay. Once Golladay’s agreement with Bernstein was terminated, he signed agreements with France. Bernstein then filed a written grievance against France pursuant to the dispute resolution process set forth in the NFLPA regulations. Bernstein alleged that France arranged the autograph signing event for Golladay and induced him to terminate his relationship with Bernstein. The dispute was referred to arbitration pursuant to the NFLPA regulations.

Bernstein sought discovery from France in the arbitration proceeding. France produced some discovery but denied having any documents responsive to key requests about Golladay’s appearance at the autograph signing event. Bernstein also obtained authorization from the arbitrator to issue subpoenas to nonparties for relevant documents; however, Bernstein received no information in response to the subpoenas and did not enforce the subpoenas in federal court. During the hearing, France repeatedly denied that he had anything to do with the autograph signing event, and the arbitrator ruled in favor of France concluding that Bernstein had not met his burden of proving that France had violated NFLPA regulations. France then filed a petition and motion to confirm the arbitrator’s award in the U.S. District Court for the Eastern District of Virginia. Bernstein cross-moved to vacate the award, arguing that France had procured the arbitration award by fraud, relying on evidence that came to light after the arbitration in another lawsuit showing that France was indeed involved in arranging the autograph signing event.

The matter was transferred to the U.S. District Court for the Middle District of Pennsylvania, which granted France’s motion to confirm the award and denied Bernstein’s motion to vacate it. The district court noted the narrow circumstances in which a court may vacate an arbitration award, and then concluded that Bernstein had not offered a satisfactory reason for why evidence of France’s involvement in the signing event was not discovered before or during the arbitration hearing. The district court specifically noted that Bernstein had not sought judicial enforcement of the discovery subpoenas he had issued pursuant to 9 U.S.C. § 7, which the court saw as a lack of diligence further supporting its decision to deny the motion to vacate the award.

Observing that the case was “like something out of the film Jerry Maguire,” the Third Circuit noted that a party making a claim like Bernstein — i.e., that the arbitration award was procured by fraud because of non-production of responsive documents and false testimony — must make a three-part showing: “first, that there was a fraud in the arbitration, which must be proven with clear and convincing evidence; second, that the fraud was not discoverable through reasonable diligence before or during the arbitration; and third, that the fraud was materially related to an issue in the arbitration.” The court closely examined all three factors and concluded that Bernstein had established that there was fraud in the arbitration that was not discoverable through reasonable diligence and that the fraud was material to the case. The court ruled in favor of Bernstein, reversed the district court’s decision, and remanded the case for entry of an order vacating the arbitration award.

France v. Bernstein, No. 20-3425 (3d Cir. Aug. 9, 2022).

Alleged Witness Coaching via Text in Deposition Was “Discoverable” in Arbitration Proceeding and Could Not Support Vacatur of Arbitration Award

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The Fifth Circuit Court of Appeals affirmed the confirmation of an arbitration award over protests from a pro se litigant that the award was procured by undue means as a result of opposing counsel “coaching” a witness via text during a remote deposition.

The plaintiff claimed that USAA had wrongfully terminated him in violation of the Family and Medical Leave Act because he had taken several months of FMLA leave. During the ensuing arbitration proceedings, the plaintiff remotely deposed a USAA employee. While the deposition was ongoing, plaintiff’s counsel discovered the witness was texting with USAA’s attorney. Counsel for both parties then contacted the arbitrator off the record and agreed that the witness would thereafter keep her phone out of reach for the remainder of the deposition. Both the witness and USAA’s attorney immediately deleted the text messages.

The arbitrator subsequently rendered an award in favor of USAA. USAA filed a motion in district court to confirm the award. Plaintiff’s counsel sought and was granted permission to withdraw, while the plaintiff proceeded pro se to seek vacatur of the award, claiming, among other things, that the award was procured by undue means under 9 U.S.C. § 10(a)(1) because the arbitrator considered the witness’s deposition testimony despite the texting.

The district court confirmed the award, explaining that the plaintiff was not entitled to vacatur under section 10(a)(1) because he could not show that the improper behavior of USAA was “not discoverable by due diligence before or during the arbitration hearing,” as required by the statute. In fact, the improper behavior not only was discoverable but actually was discovered before the arbitration hearing. Therefore, the plaintiff could not show any undiscoverable improper behavior to support his section 10(a)(1) claims.

On appeal, the Fifth Circuit affirmed the district court’s denial of the motion for vacatur and the court’s confirmation of the award.

Rodgers v. United Services Automotive Association, No. 21-50606 (5th Cir. July 8, 2022).