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The Third Circuit Affirms District Court’s Confirmation of Arbitration Award, Finding That the Panel Did Not Exceed its Powers or Manifestly Disregard the Law

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The complete procedural background of this “not precedential” case can be found here. In sum, this case stems from a 2007 lease agreement between Ross Dress for Less, Inc. (“Ross”) and VIWY, L.P. (“VIWY”) for Ross to be a tenant in VIWY’s shopping center. The lease included a provision which required VIWY to maintain a minimum amount of tenants in the shopping center, and allowed Ross to pay a reduced rent if the provision was not satisfied. In March 2011, Ross wrote to VIWY, claiming that the provision had not been met, it had overpaid its rent for two years and that VIWY must refund the excess rent payments, to which VIWY refused. In response, Ross paid a reduced rent from March 2011 until September 2011, at which time VIWY terminated the lease. In January 2012, Ross filed a lawsuit in Pennsylvania federal court against VIWY, alleging that VIWY breached the lease causing Ross to overpay rent (the “overpayment claim”). VIWY counter-claimed that Ross had improperly offset its rent from March 2011 to September 2011 (the “offset claim”), and moved to compel arbitration and dismiss the complaint. The Pennsylvania district court denied VIWY’s motion and stayed the offset claim, pending resolution of the overpayment claim. VIWY appealed to the Third Circuit, which vacated the order and remanded the matter to the Pennsylvania district court. The Third Circuit found that the terms of the lease required arbitration of the offset claim, but did not require arbitration of the overpayment claim. However, because the claims were “inextricably linked,” the Third Circuit held that arbitration of both claims was appropriate. On remand, the Pennsylvania district court stayed the litigation pending the completion of the arbitration. Thereafter, in March 2015, Ross demanded arbitration. VIWY raised a statute of limitations defense, arguing that because Ross had filed its demand more than four years after the alleged breach, his overpayment claim was untimely under Pennsylvania’s four-year statute of limitations. The Arbitration Panel rejected this argument, finding that Ross’s filing of its complaint had suspended the running of the limitations period, assuming the statute of limitations applied to arbitration proceedings (which the Panel noted was unsettled under Pennsylvania law). The Panel also concluded that VIWY breached the lease agreement, awarding Ross over $1.8 million. Ross then moved in the Pennsylvania district court to confirm the arbitration award, and VIWY cross-moved to vacate, arguing that the Panel exceeded its powers under the Federal Arbitration Act, or alternatively acted in manifest disregard of Pennsylvania law. The district court denied VIWY’s motion to vacate, and granted Ross’s motion to confirm. VIWY appealed to the Third Circuit.

First, in reviewing VIWY’s contention that the Panel exceeded its powers when it allegedly misapplied Pennsylvania’s statute of limitations, the Third Circuit noted that the Arbitration Panel assumed the statute of limitations applied to arbitration proceedings and analyzed whether tolling was warranted. Thus, the Third Circuit noted that Ross’s complaint asserting the overpayment claim — which was filed well within the four-year statute of limitations — tolled the limitations period. The Third Circuit also noted that, in any event, an erroneous ruling that Ross’s lawsuit tolled the statute of limitations does not amount to an excessive abuse of the Panel’s power. In its analysis, the Third Circuit also noted that VIWY previously took the position that an arbitrator should resolve Ross’s overpayment claim. Thus, according to the Third Circuit, resolution of Ross’s overpayment claim necessarily included determining how Pennsylvania law, and in particular Pennsylvania’s statute of limitations, affected the parties’ rights under the lease. Thus, the Court found that because the Panel’s interpretation “went against” VIWY does not now give VIWY the right “to rerun the matter in a court.” As to VIWY’s alternative argument that the arbitration award should be vacated because the Panel acted in manifest disregard of the law when it allegedly misapplied Pennsylvania’s statute of limitations, the Third Circuit noted that the Panel did not “willfully flout” Pennsylvania’s statute of limitations and its tolling jurisprudence. The Third Circuit held that because the answer to the tolling question was not obvious, it could not say that the Panel manifestly disregarded Pennsylvania’s law concerning the statute of limitations. Thus, the Third Circuit affirmed the Pennsylvania district court’s decision.

Ross Dress for Less Inc. v. VIWP, L.P., et al, No. 17-3145 (3rd Cir. Oct. 24, 2018).

This post written by Jeanne Kohler.

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District Court Finds that the Convention on the Recognition and Enforcement of Foreign Arbitral Awards is Not Preempted By State Law Prohibiting Arbitration of Insurance Disputes

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A district court judge in the U.S. District Court for the Eastern District of Louisiana has issued an order attempting to resolve the apparent tension created by Louisiana law barring compulsory arbitration provisions in insurance contracts, a contract containing both an arbitration provision and a “conformity to statute” clause, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the Convention), and the McCarran-Ferguson Act.

The matter arose out of the defendant’s refusal to pay claims under an insurance policy covering hail and wind damage. Plaintiffs sued in Louisiana state court, but defendant, which is a citizen of the United Kingdom, removed the matter to federal court pursuant to the Convention. Plaintiff Pannagl then moved to remand on several grounds.

First, plaintiff argued that the removal was untimely, as it was not filed within 30 days after service of the complaint, as is required for removal based on diversity jurisdiction. The court found that the timeliness argument would not apply if the Convention applied, as removal under the Convention may occur at any time before trial. The court further found that the basic requirements for application of the convention— (1) an agreement arising out of a commercial legal relationship, (2) a written agreement to arbitrate in the territory of a Convention signatory, and (3) a party that is not an American citizen—were all met.

Second, plaintiff argued that the Convention only applies to the recognition of arbitral awards, but the court held that the plain language of the statute implementing the Convention requires its application to attempts to enforce covered arbitration agreements.
Third, plaintiff argued that the policy’s “conformity to statute” clause required the policy to be amended to remove the arbitration provision in order to comply with Louisiana law barring compulsory arbitration provisions in insurance contracts. The court held, however, that the Convention preempts state law, such that the policy could not be amended to remove an arbitration provision covered by the Convention.

Finally, plaintiff argued that Louisiana’s prohibition of arbitration in insurance disputes reverse-preempts the Convention under the McCarran-Ferguson Act, as the Convention as applied is contrary to a Louisiana public policy enacted for the purpose of regulating the business of insurance. But the court held that while the McCarran-Ferguson Act applies generally to federal statutes, it does not apply to treaties such as the Convention. As a result, the court denied the motion to remand.

Plaintiff immediately appealed this ruling to the Fifth Circuit Court of Appeals, which denied the appeal on the basis that denial of a motion to remand is interlocutory and not appealable unless the district court certifies the issue, which had not occurred in this case.

Gulledge and Pannagl v. Certain Underwriters at Lloyds, London, Case No. 18-6657 (USDC E.D. La. Sept. 27, 2018)

This post written by Jason Brost.
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Seventh Circuit Joins Five Other Circuits, Holds Availability of Class or Collective Arbitration is a Gateway Issue of Arbitrability to be Decided by Courts, Not Arbitrators

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A former employee of Waterstone Mortgage Corporation filed a class action against Waterstone in Wisconsin federal court in 2011 alleging wage violations and breach of contract. The District Court for the Western District of Wisconsin compelled arbitration pursuant to an agreement between the plaintiff and Waterstone, but it struck as unlawful a waiver clause that appeared to forbid class or collective arbitration of her claims, reasoning that the plaintiff could not waive her right to bring a class action under the National Labor Relations Act. The arbitrator conducted a collective arbitration over Waterstone’s objection and ultimately awarded more than $10 million in damages and fees to the plaintiff and 174 similarly situated employees. On appeal, the Seventh Circuit was faced with reconciling the district court’s decision with a subsequently-decided U.S. Supreme Court case, Epic Systems Corporation v. Lewis. Specifically, Epic Systems upheld the validity of waiver provisions like the one at issue here, and therefore, if the district court’s imposition of collective arbitration on Waterstone violated that waiver, the Seventh Circuit would be required to instruct the district court to vacate the award.

The primary issue on appeal was whether the district court incorrectly struck the subject waiver from the parties’ arbitration agreement. Because the plaintiff did not concede that collective arbitration violated the waiver, the Seventh Circuit framed the issue as such: “If the availability of class or collective arbitration is a threshold question of arbitrability, the district court has to decide it. Otherwise, it falls to the arbitrator.” Ultimately, the Panel concluded that the availability of class or collective arbitration is a threshold question of arbitrability. In so finding, the court reasoned that “[d]etermining whether [an] agreement reflects the parties’ consent to class or collective arbitration requires the decisionmaker to determine whether the parties agreed to arbitrate those disputes as well. And that is a gateway matter for the court to decide.” In addition, the court reasoned that such “fundamental” questions belong in the “gateway” category in part due to the Supreme Court’s 2010 decision in Stolt-Nielsen S.A. v. AnimalFeeds International Corporation, which found that class arbitration is available only if an arbitration agreement contains evidence that the parties affirmatively consented to that procedure. As such, the court noted that the structural features of class arbitration make it a “fundamental” change from the norm of bilateral arbitration. As such, the Seventh Circuit’s ruling meant that on remand, the district court, rather than the arbitrator, must evaluate the plaintiff’s contract with Waterstone to determine whether it permits class or collective arbitration.

Herrington v. Waterstone Mortgage Corp., No. 17-3609 (7th Cir. Oct. 22, 2018).

This post written by Gail Jankowski.

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Court Invalidates Modified Arbitration Award Because it Exceeded Panel’s Authority Under the Functus Officio Doctrine

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An insured and its insurer were fighting over whether the insured’s settlement payment in separate litigation was a covered loss and whether there was a duty to defend in the separate litigation. During arbitration, the parties agreed the panel would issue an immediate decision on the insurer’s liability under the policies and subsequently determine the amount of defense costs. The panel issued a “partial final award” finding the insured was entitled to defense and indemnification on the claims at issue in the separate litigation, but also finding the settlement payment itself was not a covered loss; thus, the panel ordered an evidentiary hearing on the calculation of defense costs. The insured requested reconsideration of the partial final award and the panel issued a “corrected partial final award.” The insurer sought relief in court to vacate the corrected award and confirm the original award, and while that proceeding was pending the panel issued a “final” award calculating the appropriate defense costs. The court denied the insurer’s motion to vacate.

On appeal of the lower court’s denial of the motion to vacate, the appellate court vacated the corrected and purported final awards and confirmed the original award because the panel exceeded its authority in reconsidering the “partial final award.” Specifically, the court relied upon the common law doctrine of functus officio that prevents arbitrators from changing a previously-rendered, final award except in limited technical circumstances. During the arbitration, the parties agreed the panel would make an immediate and final determination as to liability before proceeding to a second evidentiary hearing on the calculation of defense costs. Once the panel exercised its authority to make a final decision on liability and issued the “partial final award,” its authority ended and it could not revisit the issue of liability. The court dismissed the panel’s statement in the corrected awards that the “partial final award” was not in fact “final” because that would eviscerate the purpose of functus officio to allow a panel to regain authority by stating its prior award was not final. Am. Int’l Specialty Lines Ins. Co. v. Allied Capital Corp., Case No. 656341/16 (N.Y. App. Div. Oct. 25, 2018).

This post written by Thaddeus Ewald .

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Court Refuses to Confirm “Interim Decision” Arbitration Award Under the New York Convention

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An “Interim Decision” issued by three Rabbinical Court arbitrators based in New York was not “final” and therefore could not be confirmed in federal court pursuant to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”). Under the New York Convention, an award is “final” if it “resolves the rights and obligations of the parties definitively enough to preclude the need for further adjudication with respect to the issue submitted to arbitration. Thus, an award that finally and conclusively disposes of a ‘separate and independent claim’ may be confirmed even if it does not dispose of all the claims that were submitted to arbitration.”

In this case, the Interim Decision issued by the Rabbinical Court was not confirmable because, although the award finally determined liability as to some of the issues presented, it did not finally determine the amount of damages flowing from that liability, but rather left open the possibility that the amount of damages awarded could change depending on evidence yet to be presented. Although there is some authority stating that the parties can agree to treat an arbitration panel’s partial final determination as to certain issues as “final” for purposes of confirmation, those cases involved “express bifurcation of issues,” which did not exist in this case. Instead, the parties had “merely consented to the issuance of such intermediate decisions.” Their agreement was silent as to whether those intermediate decisions were to be treated as “final” with regard to the issues therein.

The court also found that the Interim Decision’s statement that certain issues were not susceptible to adjudication by the panel was not capable of being confirmed by the court because it was not even an “award,” let alone a “final award,” as it did not “in any way resolve any issue submitted to arbitration.” With regard to certain “other claims” that were summarily denied via the Interim Decision, the court could not confirm them on the present record because there was no indication in the award “as to what the other claims … are” and as a result the court was “without a basis to determine whether any justification exist[ed] for confirmation of the Interim Decision.”
In addition, the court denied the petitioner’s motion to enforce an arbitration subpoena under section 7 of the FAA because section 7 “explicitly confers authority only upon arbitrators” to issue subpoenas, and the subpoena in this case was issued by the petitioner himself, albeit purportedly “in the name of” the arbitration panel. The court held that a party may not invoke the authority of section 7 by issuing a subpoena “in the name of” the arbitrators; rather, the arbitrators themselves must issue the subpoena. Sharbat v. Muskat, Case No. 17-CV-4776 (USDC E.D.N.Y. Sept. 27, 2018).

This post written by Benjamin E. Stearns.

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