Appealing Arbitration Decisions: Practice Tips for Young Lawyers
By Sheila J. Carpenter – September 5, 2014
Lawyers new to arbitration practice quickly learn that the Federal Arbitration Act (FAA) provides very few grounds for appealing arbitration awards, primarily serious misconduct or fraud by the arbitrators (see 9 U.S.C. § 10(a)), and that the courts disfavor such appeals, particularly preaward appeals. Thus, appeals of arbitration awards should be rare; successful appeals are rare. However, legitimate grounds for appeal occasionally appear, so counsel must keep in mind from the beginning of the case both the rules regarding such appeals and the practical steps required to advance an appeal. Three recent cases aid those tasks.
An Appeal Requires a Record
In a recent (unpublished) decision, Physicians Insurance Capital v. Praesidium Alliance Group, 562 F. App’x 421 (6th Cir. 2014), the United States Court of Appeals for the Sixth Circuit reminds us that, as in litigation, it is fundamental that there must be a record of the proceedings said to contain error for the appellate court to review. Physicians arose from a failed investment project that was to create a novel medical malpractice insurance program. After regulators refused to approve the program, the organizers continued to spend $2 million invested by the claimants without advising them that the program had failed. When the investors discovered this wrongdoing, they demanded arbitration and ultimately received a $2 million damages award. The investors moved to confirm the award in federal district court, and the organizers moved to vacate it.
The court confirmed the award, and the organizers appealed. However, they had neither requested that a court reporter transcribe the hearing nor requested that the arbitration panel write a reasoned award, both of which were available under the applicable American Arbitration Association rules. Thus, the lower court and the Sixth Circuit had no reliable sources for reviewing the facts and theories considered by the panel in reaching its decision. The organizers attempted to create a record by submitting affidavits to the district court purporting to recite the facts. Not surprisingly, the facts submitted were disputed, and neither the district court nor the Sixth Circuit accepted this “record.” The Sixth Circuit concluded: “Because Praesidium failed to create a record of the arbitration, despite its ability to do so under the applicable arbitral rules, it is unable to support either of the grounds it advances in seeking to vacate the arbitration award.”
Practice tip: In smaller arbitration proceedings, the parties may agree that they do not need to incur the expense of a court reporter and transcript because they expect that they will accept the award and not appeal. This is particularly so when they use arbitration regularly for its intended purpose—expedited dispute resolution requiring less time and money than litigation—and understand that appeals usually are a waste of money.
A “reasoned award” provides an explanation of the arbitrators’ reasoning, whereas a “standard award” simply recites which party prevailed and any award of damages and costs. A reasoned award requires more time from the arbitrators, adding to their bill. Many parties choose not to incur this expense for the same reasons they waive the opportunity for a transcript.
In cases with large amounts of money at stake and/or disputes about business practices that may be ongoing, a transcript and a reasoned award can add more value than their cost. Also, when there are many days of testimony, particularly if there will be a significant period between the hearing days and the award, a transcript is helpful to the arbitrators and counsel. These choices should be discussed thoroughly with clients, and then among counsel, prior to the prehearing conference.
Mid-Arbitration Appeals Are Not Permitted
It has long been the rule that the courts will not entertain appeals while an arbitration proceeding is ongoing. In Savers Property & Casualty Insurance Co. v. National Union Fire Insurance Co. of Pittsburg, Pennsylvania, 748 F.3d 708 (6th Cir. 2014), industry-specific arbitration procedures encouraged a party’s and the district court’s attempt to bend the midstream appeals rule after an interim, but not final, damages award was entered. The Sixth Circuit rejected this attempt and in doing so provided a useful summary of the law from other circuit courts rejecting similar attempts.
Savers P&C involved a dispute between a group of ceding companies (collectively, Meadowbrook) and their reinsurer, National Union Fire Insurance Co. of Pittsburg (National Union). National Union accused Meadowbrook of overbilling its reinsurance claims, and Meadowbrook demanded arbitration. Pursuant to the arbitration clause in the parties’ reinsurance treaty, each party selected an arbitrator, and the arbitrators were to select the umpire. When the arbitrators failed to agree on an umpire, in accord with the treaty, each party submitted a list of three candidates, the other party striking two, with the final choice determined by a coin toss. National Union’s nominee, Thomas Greene, was chosen as umpire. When his name was submitted to Meadowbrook prior to selection, Greene disclosed that he was a friend of National Union’s arbitrator, Jonathan Rosen, and that they were both members of ARIAS, an organization formed to improve reinsurance arbitrations. At the organizational meeting for the arbitration, it was agreed that ex parte contact with members of the panel would cease upon the filing of prehearing briefs.
Following the hearing, the panel issued a unanimous interim final award, ruling in favor of National Union on all liability issues, and ordering Meadowbrook to pay National Union $1.95 million plus its attorney fees and costs. The panel further advised that it had insufficient information to make a final damages award, retained jurisdiction solely as to the final damages award, and directed Meadowbrook to submit additional information the panel needed for that task.
After Meadowbrook submitted additional information, Rosen and National Union’s attorney discussed the submission ex parte,and then National Union moved to strike it. The panel then struck Meadowbrook’s submission for failing to comply with its order and directed Meadowbrook to resubmit the requested information promptly on pain of the panel’s relying solely on National Union’s submission. Meadowbrook promptly filed a motion to clarify the ruling and to extend the deadline for its submission. Greene responded “for the panel,” clarifying what documentation Meadowbrook was required to submit and granting the requested extension. The panel’s decisions concerning Meadowbrook’s damages submission were made without the participation of Meadowbrook’s arbitrator, Rex Schlaybaugh; National Union later argued that he was on vacation and could not be reached despite several attempts.
Meadowbrook sued in Michigan state court, asserting that the ex parte contact between Rosen and National Union’s attorney after the interim award was improper, that the panel’s failure to consult Schlaybaugh on Meadowbrook’s motions resulted in the panel exceeding its authority, and that Rosen had failed to disclose that he had spoken at an industry conference held at National Union’s attorney’s offices, at which that attorney was also a speaker (during a different part of the program). At the same time, Meadowbrook sought relief from the arbitration panel on the same grounds; relief was denied by a 2–1 vote, Schlaybaugh dissenting, with the panel writing that it saw “no merit” in Meadowbrook’s arguments. After the panel denied Meadowbrook’s motions, National Union responded to Meadowbrook’s submission by requesting an award of over $25 million in additional damages. Meadowbrook then sought a stay of the arbitration from the state court so that it could challenge the fundamental fairness of the proceeding.
National Union removed the case to federal court. The federal district judge, while acknowledging that appeals are not permitted while an arbitration is ongoing, held that the court could entertain Meadowbrook’s complaint pursuant to § 2 of the FAA, which provides that arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. The court reasoned that Meadowbrook was asserting a breach of contract claim for violations of rules to which the parties had agreed and enjoined the panel from issuing any further orders without the court’s approval.
National Union appealed to the Sixth Circuit, which determined that the question of whether the district court could hear a request for injunctive relief during an arbitration would be reviewed de novo, and the grant of the injunction would be reviewed for abuse of discretion. Because the answer to the first question was “no,” the court did not reach the discretion issue. It rejected the district court’s breach of contract theory and vacated the injunction as improper interference with an arbitration prior to final award, noting that Meadowbrook had not argued that it was entitled to relief under FAA § 2, nor had it argued that the reinsurance treaty was unenforceable. Meadowbrook’s complaint went to the fairness of the proceeding, a claim that must be made through a motion to vacate the final award under FAA § 10.
The Sixth Circuit reviewed the text, purpose, and structure of the FAA (“which all foster a speedy and less formal method of dispute resolution”); noted the Supreme Court’s repeated instruction that arbitration is to be an expedited form of dispute resolution unfettered by judicial interference, e.g., Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064 (2013); and briefly summarized cases from other federal courts of appeals rejecting mid-arbitration appeals. Savers P&C, 748 F.3d at 716–18. The court reasoned that the FAA does not contemplate interlocutory appeals, which interfere with the streamlined proceedings mandated by the statute. In addition, there are sound policy reasons to bar interlocutory appeals in arbitration; such appeals facilitate delay tactics and obstruction and add to the cost of arbitration. Courts may determine “gateway issues” concerning the arbitrability of a dispute when arbitration is sought, and they may decide whether to confirm or vacate an award when the arbitration is complete. Issues arising between these two points are for the arbitrators.
For one of the rare exceptions to this rule, see the discussion of Sussex v. Turnberry/MGM Grand Towers, LLC, No. 2:08-cv-00773-MMD-PAL (D. Nev.), and Oakland-Macomb Interceptor Drain Drainage District v. Ric-Man Construction, Inc., 850 N.W.2d 498 (Mich. Ct. App. 2014) (removal of an arbitrator during an arbitration).
Practice tip: Reinsurance arbitration is a tradition that predates the FAA and formal arbitration organizations such as the American Arbitration Association and JAMS. Most types of commercial arbitration use neutral arbitrators, but reinsurance arbitration, guided by industry custom, generally uses party-appointed arbitrators who are not expected to be neutral, at least until the panel enters the hearing phase. Ex parte pre- and post-appointment discussion between a party and its arbitrator may be permitted. At the prehearing conference, as in Savers P&C, the cutoff date for ex parte contacts is often a topic. In Savers P&C, the decision was to cut off ex parte contact at the filing of prehearing briefs; other panels might have chosen immediate cutoff or allowed such contact until the beginning of the hearing. (In recent years, ARIAS has attempted to increase transparency in the selection of arbitrators and encourage a more formal structure for arbitration proceedings. See “ARIAS·US Rules for the Resolution of U.S. Insurance and Reinsurance Disputes,” which codify many of the traditional rules, including allowing certain ex parte contacts.)
Reinsurance treaties typically require that arbitrators have worked in the industry, with each party choosing its own arbitrator and the two party-appointed arbitrators choosing the umpire. The relatively small pool of experienced reinsurance arbitrators and even smaller pool of qualified umpires results in panel members often being well-acquainted with one another through business dealings, professional associations, prior arbitrations, and other contacts. Thus, the choice of an arbitrator and an umpire should take into consideration who works well with whom, in addition to whether the candidate might be more likely to be sympathetic to the ceding company or the reinsurer. When there is a deadlock on the choice of umpire, the deadlock is often broken by lot. Reinsurance arbitration procedures are so different from the classic commercial arbitration that courts occasionally react negatively, as the district court did here, to the custom of ex parte contact.
Practice tip: When in an arbitration with party-appointed arbitrators, it is essential to find out as much as possible about the other side’s arbitrator and proposed umpire candidates. The advent of online research has expanded the sources of information available and should be thoroughly explored. However, this research is not a substitute for picking up the phone and talking to other lawyers and arbitrators about proposed umpire candidates, especially about potential conflicts of interest, whether the candidate is likely to be fair and keep an open mind, and whether there is a close relationship between the candidate and other members of the panel.
Court Review of Awards Appealed Within the Arbitration
Because arbitration is a creature of contract, parties are free to be creative in drafting arbitration clauses. Some arbitration agreements include the option to appeal within the arbitration. Dunham v. Lithia Motors Support Services, Inc., No. S-15068, 2014 WL 1421780 (Alaska Apr. 9, 2014), involved an arbitration clause incorporating such a procedure. The Supreme Court of Alaska’s memorandum decision is three sentences; the superior court opinion it affirmed and approved is attached. The superior court denied motions to vacate both the original award and the decision rendered by the arbitrator to whom the initial decision was appealed.
Dunham involved a claim by service advisors and managers that their employer (Lithia Motors) violated the Alaska Wage and Hour Act by treating them as exempt employees not entitled to overtime. Some advisors filed a class action complaint in the superior court; Lithia Motors successfully moved to compel arbitration pursuant to the arbitration clause in its employment agreement. The initial arbitrator certified the service advisors as a class but passed away prior to further proceedings. His successor heard the case and ruled in favor of Lithia Motors, finding that the service advisors were exempt employees due to their commission-based compensation. Another arbitrator provided an appellate review of this decision and upheld it in a written opinion. The employees moved to vacate both the initial arbitration award and the decision upholding it.
The employees asserted that courts should review an arbitrator’s decision on statutory claims using a different (stricter) standard of review than the usual deference shown when reviewing arbitration awards in contract disputes. Rejecting that argument, the superior court noted that the Ninth Circuit has held that arbitrators do not exceed their powers unless their award is in “manifest disregard of the law” or “completely irrational,” a standard followed for 50 years. Dunham, 2014 WL 1421780, at *4–5 (citing San Martine Compania de Navegacion, S.A. v. Saguenay Terminals Ltd., 293 F.2d 796 (9th Cir. 1961)). The court reasoned that parties who wish to agree to arbitrate statutory claims should be able to do so in accord with these traditional standards. Applying a different standard would weaken the arbitration process, contrary to public policy in Alaska and in the Ninth Circuit. The court considered both the arbitration award and its affirmance by the second arbitrator together and did not distinguish between them in considering the employees’ challenges.
Keywords: litigation, ADR, alternative dispute resolution, arbitration, interlocutory appeals, record, ex parte contact, Federal Arbitration Act
Sheila J. Carpenter is with Carpenter ADR LLC in Vienna, Virginia.