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Week's Best Posts

District Court Vacates Award Based on Violation of FINRA Rules for Manifest Disregard of the Law

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A district court has decided against giving an arbitration panel a third chance to get it right after the court found that the panel manifestly disregarded the law in its initial and modified arbitration awards.

The arbitration was initiated after claimants lost all of the money they had put into a set of investment accounts that they had opened with respondent Interactive Brokers LLC. Claimants alleged, among other things, that Interactive should not have allowed them to engage in the types of trades they did using the portfolio margin account they had with Interactive, as this violated FINRA Rule 4210. The panel issued an arbitration award in claimants’ favor, and claimants moved for confirmation. The court declined to do so, however, finding that it could not make sense of the award of compensatory damages, in part because the award stated that “[a]ny and all claims for relief not specifically addressed herein . . . are denied,” without explaining which claims had been specifically addressed. The court remanded the case to the arbitration panel with instructions to clarify the basis for its award.

The panel then issued a second award, and once again claimants moved to have it confirmed, while Interactive moved to have it vacated. The court found that the panel had done little to clarify its original award and focused on the panel’s emphasis on Interactive’s alleged violations of FINRA Rule 4210, which the court determined was the predicate for finding Interactive liable and denying its counterclaim.

Interactive argued that this reliance on Rule 4210 met the stringent standards for vacating an arbitral award based on manifest disregard for the law. Under Fourth Circuit precedent, this requires that the law at issue be “clearly defined and . . . not subject to reasonable debate, and that arbitrator was “aware of the law, understood it correctly, found it applicable to the case before [him], and yet chose to ignore it in propounding [his] decision.” The court found this standard was met based on the following:

  • it is clearly established that there is no private right of action for violations of FINRA Rules;
  • based on Interactive’s briefs explaining this law and the panel’s own references to that briefing, the panel was aware of that law;
  • the court’s own instructions to the panel to make clear the predicate for liability, to which the panel responded by further emphasize the alleged violation of FINRA Rule 4210, established that the panel understood the law, found it applicable to the case, and chose to ignore it.

The court thus vacated the award and reinstated Interactive’s counterclaims. Finding that the panel had both flagrantly ignored the law and struggled to follow the court’s prior order, the court remanded the matter to a new panel of arbitrators for reconsideration of Interactive’s counterclaims.

Interactive Brokers LLC v. Saroop et al., Civil Action No. 3:17-cv-127 (E.D. Va. Dec. 19, 2018)

Sixth Circuit Compels Arbitration in Putative Class Action between Shell Oil and Ohio Landowners

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Plaintiff entered into a lease agreement with Defendants (Shell Oil entities) governing extraction of oil and gas from his five-acre property located in Guernsey County, Ohio. The agreement provided a signing bonus to Plaintiff of $5,000 per acre, contingent upon Shell’s timely verification that he possessed good title to the property. The lease also contained a broad arbitration clause providing that any dispute under the lease was to be resolved by binding arbitration. Plaintiff brought suit, individually and on behalf of other landowners having similar contracts with Shell, for breach of contract after Shell allegedly failed to pay the signing bonus. The District Court for the Southern District of Ohio subsequently denied Shell’s motion to compel arbitration, and Shell appealed.

The Sixth Circuit reversed and remanded, compelling arbitration and a directing the district court to decide whether the lease allowed for class-wide arbitration. The panel found that the district court failed to address the threshold issue of who decides arbitrability and further reasoned that Plaintiff did not attack the enforceability of the “specific arbitration clause” but rather “argued that much of the contract, which happens to include the arbitration clause, is unenforceable.” In so finding, the panel determined that the arbitration clause was triggered at signing, leading to the applicability of the severability doctrine and the determination that an arbitrator must consider the issue first. As to the class-wide arbitration question, the Panel reasoned that because the parties did not identify a provision in the contract that clearly and unmistakably gave the arbitrator the power to decide the matter, and in light of “the importance of this issue to the case, given that the class could include hundreds of Ohio landowners,” that question would be for the district court to decide upon remand. In a dissenting opinion, Judge Moore opined that the district court was the proper body to decide whether the dispute should be arbitrated in light of the lease agreement’s two distinct triggering events – the signing of the agreement and the payment of the bonus. As such, Judge Moore opined that only after payment of the bonus would the arbitration clause apply.

Rogers v. Swepi LP, No. 18-3229 (6th Cir. Dec. 10, 2018).

This post written by Gail Jankowski.

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Court Enforces Arbitration Subpoena Against Third-Party Walgreens in Pharmaceutical Drug Overcharge Dispute

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The plaintiff in the underlying arbitration (Health Options) served a third-party subpoena on Walgreens to attend a hearing and produce documents concerning the prices it charged for pharmaceuticals to Navitus that Health Options ultimately covered. Walgreens initially declined to produce the requested information and a corporate representative for the hearing, claiming its headquarters was more than 100 miles from the hearing location in Madison, Wisconsin, and that the court lacked personal jurisdiction over it. The court, however, granted a motion to enforce the arbitration subpoena. First, the court rejected Walgreens’s territoriality argument, accepting Health Options’s proposed method of measuring distance “as the crow flies” and finding that Walgreens’ headquarters in Deerfield, Illinois was less than 100 miles from Madison. Second, the court held that it had personal jurisdiction over Walgreens. The court concluded that Walgreens’s suit-related in-state activities—submitting inflated prices to Navitus that Navitus in turn submitted to Health Options—were sufficiently related to Health Options’s injuries—overpaying on Navitus’s claims. Walgreens’s “purposely-directed communications” to Navitus in Wisconsin were “part of the wrongful conduct” that prompted the lawsuit. Because it is unclear whether the traditional minimum contacts inquiry applies in the third-party discovery context, the court examined the additional criterion some circuits apply: whether a close relationship exists between the non-party’s contacts with the specific discovery request. Even with the heightened scrutiny, the court found the subpoena sought documents related specifically to Walgreens’s contact with Wisconsin. Finally, the court denied Walgreens’s request that Health Options pay its subpoena compliance costs up front. It found Walgreens did not demonstrate the subpoena would be unduly burdensome nor did it provide an estimate of costs, both flaws that precluded an award of costs, let alone upfront costs. Maine Community Health Options v. Walgreen Co., Case No. 18-0009 (USDC W.D. Wis. Dec. 20, 2018).

Ninth Circuit Holds that Federal Rules of Civil Procedure Govern How to Calculate the FAA’s Three-Month Filing Deadline to Seek Vacatur of an Arbitration Award

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The Ninth Circuit affirmed the denial of a petition to vacate an arbitration award because the petition was filed one day late. The court determined that whether a petition to vacate is filed within the applicable three-month deadline under the FAA is based upon the method of calculating provided by Federal Rule of Civil Procedure 6(a). That Rule provides a three-step process: (1) exclude the day the arbitrator delivered the final award (in this case, September 14, 2016); (2) calculate three months from the following day (in this case September 15); and (3) include the last day of the period, unless it is on the weekend or a legal holiday, in which case the period concludes at the end of the next weekday that is not a legal holiday. Here, the court focused on Step 2. The court stated that each month began on the 15th day of the month and ended on the 14th day of the following month, just as “the month beginning January 1 concludes on January 31, not February 1.” Because the plaintiffs filed their petition for vacatur on December 15, when the last day for filing within the available three-month window under the FAA was December 14, the Ninth Circuit found that the petition was properly denied as untimely. The Ninth Circuit also addressed the standard for whether a post-judgment motion tolls the time to file an appeal pursuant to Federal Rule of Appellate Procedure 4(a)(4). Stevens v. Jiffy Lube International, Inc., No. 17-15965 (9th Cir. Dec. 27, 2018).

This post written by Benjamin E. Stearns.

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The Ninth Circuit Reverses California District Court’s Ruling Vacating Arbitration Award Based on Evident Partiality

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The background of the case can be found here. In sum, in 2009, plaintiffs American Brokerage Network and its owner Cung Thai (collectively, “ABN”) and American General Life and Accident Insurance Company (“AGLA”), a subsidiary of American International Group, Inc. (“AIG”), entered into a master general agent agreement, which was terminated in 2013. In 2015, ABN brought an arbitration under the rules of the American Arbitration Association (the “AAA”) against AGLA, AIG and later American General Life Insurance Company, successor to AGLA (collectively, “American General”), asserting claims of intentional interference with business relationships, breach of contract and breach of the implied covenant of good faith and fair dealing in connection with the agreement. Defendants counterclaimed for breach of contract and contractual indemnity. The sole arbitrator in the case made disclosures of certain relationships of her law firm with defendants and their subsidiaries. ABN asked no questions about her disclosures and she was accepted as arbitrator. In June 2016, the arbitrator dismissed AIG from the case. Thereafter, in September 2016, after ten days of testimony and other evidence, the arbitrator issued a Final Award, denying both sides’ claims for relief. After receiving the Award, ABN learned, through public records, of alleged undisclosed relationships between the arbitrator’s law firm and defendants’ alleged subsidiaries. ABN then moved in the California district court to vacate the Final Award due to the alleged incomplete disclosures. In June 2017, the district court granted the motion to vacate, finding that the arbitrator breached her duties of disclosure and investigation, and that the nondisclosures created a reasonable impression of bias, and that ABN did not waive its right to challenge the arbitrator. Defendants appealed to the Ninth Circuit.

The Ninth Circuit overturned the California district court’s decision, noting that “[g]iven the arbitrator’s disclosure that AIG was a former client of her firm, ABN had some duty to inquire about the nature of that relationship.” But the Ninth Circuit further noted that “ABN asked no questions and proceeded with the hearing.” According to the Court, “the laborious efforts required to discover the undisclosed relationships give credence to the reasonableness of the arbitrator’s investigation.” Finally, the Court held that “the undisclosed relationships, considered in the light of those the arbitrator did disclose, are insufficient to create a ‘[r]easonable impression of partiality.’” Thus, the Ninth Circuit reversed the California district court’s decision and remanded the case to the district court with instructions to enter judgment confirming the arbitration award.

American Brokerage Network and Cung Thai v. American General Life Insurance Co., No. 3:16-cv-06952 (9th Cir. Nov. 30, 2018).

This post written by Jeanne Kohler.

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