Florida Bar Journal

Legal Challenges to Arbitration Awards: Part 1

Until the 1925 enactment of the Federal Arbitration Act (FAA), 9 U.S.C. §§1-14, courts were reluctant to enforce contracts to arbitrate disputes. Section 2 of the FAA provides for the enforceability of written contracts to arbitrate “save on such grounds as exist at law or in equity for the revocation of any contract.” After the FAA’s passage, the enactment of §301 of the Labor Management Reporting Act of 1947, also known as the Taft Hartley Act, 29 U.S.C. §185(a), (§301) further promoted arbitration as a process for resolving labor disputes. Additionally, state statutes modeled after the FAA, such as the Florida Arbitration Code (FAC), F.S. §682.01, et seq., are often available to enforce agreements to arbitrate disputes not covered by the FAA or §301. Courts are not inclined to set aside or modify decisions of arbitration panels and will do so only under limited circumstances. This article discusses the authority considered in determining challenges to arbitration awards.

Challenging Arbitration Awards Under the FAA

Section 10 of the FAA sets out the following four circumstances under which a court is authorized to vacate an arbitration award:

(a) In any of the following cases the United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party to the arbitration—

(1) where the award was procured by corruption, fraud, or undue means;

(2) where there was evident partiality or corruption in the arbitrators, or either of them;

(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or

(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

The FAA requires a notice of a motion to vacate, modify, or correct an award to be served on the adverse party or the party’s attorney within three months after the award is filed or delivered.^[1] When the parties have agreed that a judgement must be entered on the award and specified in which court, a party may, within one year after the award was made, apply to that court for an order confirming the award.^[2] Where the FAA applies, challenges to arbitration awards are commonly decided where a party has invoked one of these two provisions.

Award Procured by Corruption, Fraud, or Undue Means

Challenges to awards under §10(a)(1) are commonly based on disclosures regarding witnesses or counsel. Courts have placed a high bar to vacating arbitration awards based on fraud but fraud will constitute grounds for vacation when it is shown to affect an award. It is important for counsel from the inception of the proceeding to look thoroughly for any relationships with opposing counsel, witnesses who have been identified and the parties as well.

In Bonar v. Dean Witter Reynolds, 835 F.2d 1378 (11th Cir. 1988), the court reversed the lower court’s refusal to vacate an arbitration award of punitive damages. One of the claimant’s two expert witnesses lied about his academic credentials, falsely claiming he had a degree from the University of Alabama and had attended Columbia. He also untruthfully testified that he worked for St. Paul Fire and Marine Insurance Company, where he managed a $30 million-dollar portfolio. The court observed that a party moving to vacate an award for fraud must demonstrate 1) that fraud existed by clear and convincing evidence; 2) the fraud would not have been discoverable by the exercise of due diligence, either before or during the evidentiary hearing; and 3) that the fraud related to an issue in the proceeding.^[3] The court reasoned that if the expert had not falsified his credentials it was questionable if he would have been permitted to testify as an expert witness. It further noted that the arbitration decision reflected the influence of the individual’s testimony, which “materially related to an issue in the arbitration.”^[4]

In International Brotherhood of Teamsters, Local 519 v. United Parcel Service, Inc., 335 F.3d 497 (6th Cir. 2003), the grieving employee, Thomas Loftis, was dismissed for violating the employer’s “zero-tolerance policy” during a confrontation with a co-worker, Adkins. The Sixth Circuit remanded the case to the district court, which had denied the union’s motion to vacate the award based on fraud on the part of UPS in obtaining the award. Adkins had told the investigating supervisor of security that Loftis had assaulted him both verbally and physically. Subsequently, Adkins partially recanted his allegations stating that Loftis’ assault had only been verbal and not physical. A UPS supervisor later disclosed that in his initial statement, Adkins only mentioned the verbal assault and did not claim physical contact by Loftis until later. The appellate court, applying §10(a)(1) for this §301 action, instructed the district court on remand to determine whether there was clear and convincing evidence of fraud and whether the complainant could have discovered the fraud prior to the arbitration by the exercise of due diligence.^[5]

Evident Partiality or Corruption in the Arbitrators Under FAA §10(A)(2)

In Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U.S. 145 (1968), a supposedly neutral arbitrator who was appointed by the arbitrators selected by each party had not disclosed that he had performed consulting work for one of the parties. While Commonwealth Coating’s unsuccessful district court challenge to the award based on this failure to disclose was affirmed by the First Circuit, Justice Black, writing for a four-justice plurality of the Supreme Court, reversed, noting:

It is true that arbitrators cannot sever their ties with the business world, since they are not expected to get all their income from work deciding cases, but we should, if anything, be even more scrupulous to safeguard the impartiality of arbitrators than judges, since the former have free rein to decide the law as well as the facts and are not subject to appellate review.^[6]

Justice Black further opined at:

…any tribunal permitted by law to try cases and controversies not only must be unbiased but also must avoid even the appearance of bias. We cannot believe that it was the purpose of Congress to submit their cases and controversies to arbitration boards that might reasonably be thought biased against one litigant and favorable to another.^[7]

Emphasis was placed on the importance for arbitrators to “disclose to the parties any dealings that might create an impression of possible bias.”^[8] In a concurring opinion joined by Justice Marshall, Justice White wrote, “The Court does not decide today that arbitrators are to be held to the standards of judicial decorum of [a]rticle III judges, or indeed of any judges. It is often because they are men of affairs, not apart from but of the marketplace, that they are effective in their adjudicatory function.”^[9]

It appears some post-Commonwealth Coatings appellate court decisions have chosen to follow Justice Black’s requirement of avoiding the appearance of bias, while others have favored Justice White’s view that arbitrators are not restricted to the standards of article III judges.

In Jean Schmitz v. Carlos Zilveti, III., 20 F.3d 1043 (9th Cir. 1994), the court applied Justice Black’s view that avoiding the “appearance of bias” was the standard to which arbitrators must be held in their prehearing disclosures. Schmitz was an action under §10(a)(2) to vacate an award in an arbitration conducted under the auspices of the National Association of Securities Dealers (NASD). One member of a panel of three arbitrators did not disclose on a required NASD disclosure form that his law firm had represented the losing party’s parent corporation over an extended period, a fact of which he was not aware when he submitted his disclosure form. This was discovered by the moving party in a post-award investigation. The court reversed the district court’s dismissal of the motion to vacate the award, reasoning that the arbitrator had a duty to perform a check that would have revealed the conflict. His lack of actual knowledge was, therefore, not an excuse for the nondisclosure. The court observed that “an arbitrator may not know facts of which he may have been suspicious or of which he was on notice which, if true, would create a reasonable impression of partiality if not investigated and disclosed.”^[10]

The arbitration proceeding involved in Fidelity Federal Bank v. Durga Ma Corporation, 386 F.3d 1306 (9th Cir. 2004), was not administered by the American Arbitration Association or any other agency. Each party selected one arbitrator and a third arbitrator was selected by the party-selected arbitrators. Neither party requested a disclosure statement from the arbitrators nor were any provided. The district court denied Fidelity’s §10(a)(2) motion to vacate the award on the basis of Durga Ma’s selection of an arbitrator, Alton Leib. Arbitrator Leib had connections with Durga Ma’s counsel, including a divorce 17 years previously from the sister of a named partner in the firm representing it. Additionally, the lead counsel for Dura Ma had worked with arbitrator Leib on a securities fraud case more than three decades before the hearing. The Ninth Circuit affirmed the district court’s order denying Fidelity’s motion to vacate the award and granting Durga Ma’s motion to confirm the award. The court reasoned that Fidelity had waived the right to contest the arbitrator’s impartiality. The court opined that the fact that Leib had originally been appointed by Durga Ma as a non-neutral arbitrator put Fidelity on notice of a possible connection between the arbitrator and Durga Ma.^[11] By not asking for a disclosure statement or further investigating a possible connection, Fidelity waived its belated objection since it bore the burden to obtain a disclosure statement from the arbitrator.^[12]

In Middlesex Mutual Life Insurance Company v. Levine, 675 F.2d 1197 (11th Cir. 1982), the 11th Circuit affirmed the vacation of an arbitration award by a three-arbitrator panel due to the partiality of a purportedly neutral arbitrator who had failed to disclose that his family corporation had litigated with two respondents to the arbitration proceeding. The Middlesex Mutual court rejected the argument that the insurance company was estopped from objecting to the arbitrator’s failure to disclose a potential conflict. The court found the company was not chargeable from the start with knowledge of the arbitrator’s involvement with the family corporation. A large corporate organization is not required to examine its massive records to look for a potential conflict.^[13] In finding that it was the arbitrator who had a duty to disclose his party connections, the court gave consideration to “the code of strict morality and fairness which shapes the arbitrator’s affirmative duty of disclosure.”^[14]

The Fifth Circuit favorably considered Justice Marshall’s concurrence regarding the need to disclose in Positive Software Solutions, Inc. v. New Century Mortgage Corporation, 476 F.3d 278 (5th Cir. 2007). After receiving an unfavorable award, Positive Software made a background check of the arbitrator. The search revealed the arbitrator and his former law firm had represented the same party, apparently as co-counsel, in a patent litigation. This fact was not disclosed by the arbitrator when he was selected to hear the matter. Positive Software moved to vacate the award alleging that in not disclosing this former relationship the arbitrator violated §10(a)(2). A panel of the Fifth Circuit affirmed the district court’s order vacating the award. Sitting en banc, the full court reversed the panel decision and reinstated the award. The court found that there was no showing of “evident partiality” as called for in §10(a)(2). In reaching its decision, the court applied the more liberal standard espoused by Justices White and Marshall in their Commonwealth Coatings concurrence.

The court stated, “A majority of circuit courts have concluded that Justice White’s opinion did not lend majority status to the plurality opinion”^[15] and that the opinion was, therefore, not binding on lower courts. The Fifth Circuit then proceeded to hold: “The resulting standard is that in nondisclosure cases an award may not be vacated because of ‘…a trivial or insubstantial prior relationship between the arbitrator and the parties to the proceedings.’”^[16] The court reasoned:

Neither the FAA nor the Supreme Court, nor predominant case law countenances vacatur of FAA arbitral awards for nondisclosure by an arbitrator unless it creates a concrete, not speculative impression of bias. Arbitration may have flaws, but this is not one of them. The draconian remedy of vacatur is only warranted upon nondisclosure that involves a significant compromising relationship. This case does not come close to meeting this standard.^[17]

The case of Morelite Construction Corp. v. New York City Dist. Council Carpenters Benefit Funds, 748 F.2d 79 (2d Cir. 1984), involved the decision of an arbitrator who was the son of the vice president, and later the president, of the international union of which the union party to the arbitration was a local. Morelite had been unsuccessful in its attempt to disqualify the arbitrator before the hearing. Morelite’s motion to vacate the award, which favored the opposing union, was denied by the district court. In reversing, the Second Circuit determined that the father/son relationship between the arbitrator and president of the international union “deprived the opposing party of the impartiality to which it has a right.”^[18] Noting that the four-justice plurality in Commonwealth Coatings did not constitute a majority of the Supreme Court, the Morelite court expressed a preference for Justice White’s view that arbitrators are not held to the standards of [a]rticle III judges. The court ruled that “‘evident partiality’ within the meaning of 9 U.S.C. [§]10 will be found where a reasonable person would have to conclude that an arbitrator was partial to one party to the arbitration.”^[19]

Arbitrators

• Arbitrators Refusal to Postpone a Hearing — Courts give wide latitude to arbitrators to decide whether a party’s request for a postponement should be allowed. In Schmidt v. Finberg, 942 F.2d 1571 (11th Cir. 1991), the 11th Circuit upheld the district court’s refusal to vacate an award when the complaining party had asked for a continuance due to the unavailability of a witness. The matter had been postponed several times during a period in excess of one year. The court pointed out that no information was provided by the moving party as to what the absent witness’ testimony would have been nor was there any attempt to subpoena him or take his deposition.

In DVC-JPW Investors v. Gershman, 5 F.3d 1172 (8th Cir. 1993), the Eighth Circuit affirmed the district court’s refusal to vacate a monetary award entered against the respondent after neither he nor his attorney showed up for the hearing. The appellate court held the arbitration panel was justified in declining to allow the respondent a second rescheduling of the hearing. The court held that “[i]f any reasonable basis exists for the arbitrator’s decision not to postpone a hearing we will not intervene.”^[20]

The Second Circuit, in Tempo Shain Corporation v. Bertek, Inc., 120 F.3d 16 (2d Cir. 1997), reversed a district court’s decision to confirm an arbitration award when Bertek was denied a request to keep the record open until one individual, a Mr. Pollock, was able to testify. Mr. Pollock was unavailable to testify as his wife was dying of cancer and he could not determine when he would be available. Bertek contended that Pollock was the only witness who could testify about the contract negotiations that were central to the dispute. In denying Bertek’s continuance request, the arbitrators reasoned that the testimony would merely be a cumulative rehash of existing record testimony.

However, the Bertek court held that failing to grant the request for a continuance violated FAA §10(a)(3). The court acknowledged that under the FAA, great deference is given to arbitration panel decisions.^[21] However, the panel’s decision contained no support for the proposition that Mr. Pollock’s testimony would be cumulative.^[22] Preventing his testimony deprived Bertek the opportunity to rebut the opposition’s evidence on the subject.

In Scott v. Prudential Securities, 141 F.3d 1007 (11th Cir. 1998), the arbitrators denied pro se party Scott’s motion for a continuance and his request to attend the hearing by telephone. Scott’s district court motion to vacate the eventual award against him was denied, and Prudential’s motion to confirm the award was granted. In affirming the district court’s decision, the appellate court pointed out that the statute requires one seeking a postponement to show “sufficient cause” for delaying the proceeding.^[23] Scott’s reason was that he was involved in another case in Miami at the time of the hearing. However, he made no showing that he was compelled to be in Miami on the hearing date.

The denial of a request for a postponement by an arbitrator was upheld when Continental Casualty’s counsel’s 18-month-old son was scheduled for outpatient surgery to alleviate an ear infection in Eldorado School District #15, Union County, AR v. Continental Casualty Company, 247 F.3d 843 (8th Cir. 2001). A pecuniary award was entered against the party requesting the continuance after a hearing at which the party and his counsel did not show up. In upholding the district court’s entry of judgement on the arbitrator’s award, the court commented:

That the arbitrator did not give specific reasons for the denial does not evidence misconduct.…[A]n arbitrator is not required to elaborate on the reasoning supporting his decision. On the record before us, the arbitrator may have determined that postponement was inappropriate because the parties had expended considerable time, and money based on the hearing dates, because of the arbitrator’s own schedule or because appellant’s counsel made an insufficient showing that he was unable to attend any of the three-day hearing. Any or all of these explanations would provide a reasonable basis not to postpone.^[24]

• Arbitrators Refusing to Hear Evidence — The Eighth Circuit, in Grahams Service, Inc. v. Teamsters Local 975, 700 F.2d 420 (8th Cir. 1982), affirmed the district court’s ruling denying the employer’s FAA §10(a)(3) motion to vacate the arbitration award when the arbitrator refused to hear evidence pertinent to the hearing. The employer complained that the arbitrator declined to accept into evidence notarized letters regarding the grievant’s work record. The court took note of the fact that company officials testified as to grievant’s conduct, which was the central issue in the matter.

In National Post Office, Mailhandlers, Watchmen, etc. v. United States Postal Service, 751 F. 2d 834 (6th Cir. 1985), the appellate court affirmed a refusal to vacate an award. One of the grounds of the union’s motion to vacate was the arbitrator’s refusal to allow witnesses to testify when the record reflected that the witnesses would have presented information similar to testimony already presented. The appellate court ruled that the arbitrator “had discretion to prohibit cumulative testimony…” and that “fundamental fairness does not require that an arbitrator must hear any and all evidence that a party might wish to offer, regardless of its length, repetitiveness or irrelevance.”^[25]

When Arbitrators Exceed Their Powers or So Imperfectly Execute Them

The Supreme Court affirmed the appellate court’s affirmation of the district court’s denial of the employer’s motion to vacate an arbitration award in Oxford Health Plans LLC v. John Ivan Sutter, 569 U.S. 564 (2013). In that case, the Court held the arbitrator did not exceed his authority by finding the parties’ CBA permitted class arbitration. The Court reasoned:

Here, the arbitrator did construe the contract (focusing per usual, on its language), and did find an agreement to permit class arbitration. So to overturn his decision, we would have to rely on a finding that he misapprehended the parties’ intent. But §10(a)(4) bars that course: it permits courts to vacate an arbitral decision only when the arbitrator strayed from his delegated task of interpreting a contract, not when he performed that task poorly.^[26]

The Court added: “The arbitrator’s construction holds, however good, bad, or ugly.”^[27]

International Brotherhood of Electrical Workers Local Union 824 v. Verizon Florida, 803 F.3d 1241 (11th Cir. 2015), involved an arbitrator’s issuing of a second award nullifying his first award and changing the outcome of the arbitration. The appellate court affirmed a ruling that the arbitrator exceeded his jurisdiction by entering the second award. The court reasoned that once an arbitrator publishes an award, jurisdiction in the matter is lost, at least to the extent jurisdiction to dispose of other issues is not retained in the body of the award. Rather, under Rule 40 of the AAA Labor Arbitration Rules (which were applicable to the parties in this case by virtue of their arbitration agreement), the completed award is said to be functus officio (“task performed”).^[28]

The award that was appealed in AIG Baker Sterling Heights, LLC v. American Multi-Cinema, Inc., 508 F.3d 995 (11th Cir. 2007), included the amount of a real estate tax payment for which American was liable. At the time of the evidentiary hearing, American was not cognizant of the fact that it had paid a considerable portion of the tax. Baker appealed the district court’s order granting American’s motion to modify the award to give it credit for the subsequently recollected payments. The appellate court reversed the lower court’s order, reasoning that “the award does not ‘contain an evident material mistake in the description of any person, thing, or property referred to in the award.’”^[29]

Correction or Modification of an Award Under FAA §11

Section 11 of the FAA allows for the correction or modification of an arbitration award by a court as follows:

In either of the following cases, the United States court in and for the district wherein the award was made may make an order modifying or correcting the award upon the application of any party to the arbitration—

(a) Where there was an evident material miscalculation of figures or an evident material mistake in the description of any person, thing, or property referred to in the award.

(b) Where the arbitrators have awarded upon a matter not submitted to them, unless it is a matter not affecting the merits of the decision upon the matter submitted.

(c) Where the award is imperfect in matter of form not affecting the merits of the controversy.

The order may modify and correct the award, so as to effect the intent thereof and promote justice between the parties.

The Fifth Circuit, in McElroy v. Painewebber, Incorporated, 989 F.2d 817 (5th Cir. 1993),^[30] affirmed the district court’s refusal to modify an award under 9 U.S.C. §11(a) when Mr. McElroy claimed the subject arbitration award was grossly less than the amount he claimed. The court pointed out that McElroy “provided no support for his contention that the arbitration panel committed an ‘evident miscalculation’ except to point out again the discrepancy between the award he requested and the one he received.”^[31] Quoting National Post Office v. United States Postal Service, 751 F.2d 834, 843 (6th Cir. 1985), the Fifth Circuit ruled that “where the record that was before the arbitrator demonstrates an unambiguous and undisputed mistake by the arbitrator in making the award, it can fairly be said that the arbitrator ‘exceeded [his] powers….’ We interpret the term ‘undisputed’ to mean we should look to see whether there is any rational basis for disputing the truth of the fact.”

Manifest Disregard of the Law

Prior to the Supreme Court’s decision in Hall Street Associates, LLC v. Mattel, Inc., 522 U.S. 576, 581 (2008), some judicial decisions allowed vacation of an arbitration award that was in “manifest disregard of the law” in a dispute covered by the FAA. The parties arbitration agreement that was the subject of Hall Street provided, in part, that the federal district court of Oregon “shall vacate, modify, or correct any award: (1) where the arbitrator’s findings of fact are not supported by substantial evidence, (2) or where the arbitrator’s conclusions of law are erroneous.”^[32] Applying this provision in the arbitration agreement, the district court vacated an award in favor of Mattel based on legal error in the award. The Court agreed with the Ninth Circuit’s ruling that §§10 and 11 of the FAA are the exclusive bases for vacating or modifying an award.^[33] The Court noted that §9 requires that on application of a party for an order confirming an award, “the court ‘must grant’ such an order unless the award is vacated, modified, or corrected as prescribed in sections 10 and 11.”^[34] The Court reasoned that this language dictated that those sections provide the only grounds for vacating an award. The Court also noted that under the doctrine of ejusdem generis, the naming of the specific grounds in §10 barred supplementing those grounds with other bases.^[35]

The federal courts remain undecided as to whether Hall Street put to rest the question of whether bases other than those set out in the FAA can be grounds for challenging an arbitration award. The 10th Circuit observed in its unpublished opinion in Abbott v. Mulligan, 440 F. App’x 612, 2011 WL 4375087 (10th Cir. 2011):

In the wake of Hall Street, the circuits have split as to whether manifest disregard of the law is still a viable ground on which to overturn an arbitration award. According to the Second, Sixth (in an unpublished decision) and Ninth [c]ircuits, manifest disregard remains a viable standard because an arbitrator who manifestly disregards the law exceeds his powers under 9 U.S.C. §10(a)(4). See Comedy Club, Inc. v. Improv W. Assocs., 553 F.3d 1277, 1290 (9th Cir. 2009) (“We have already determined that the manifest disregard ground for vacatur is shorthand for a statutory ground under the FAA, specifically 9 U.S.C. §10(a)(4), which states that the court may vacate ‘where the arbitrators exceeded their powers….’”); Stolt-Nielsen SA, 548 F.3d at 95 (“[The Supreme Court in Hall Street] did not, we think, abrogate the “manifest disregard doctrine altogether….”^[36]

But the Abbott court also observed that “the Fifth, Eighth and [11]th [c]ircuits have concluded Hall Street left no room for the judicially created doctrine of manifest disregard.”^[37]

In part two of this article, I will examine challenges to arbitration awards that arguably violate public policy, as well as the criteria for challenging awards in arbitrations covered by §301 of the Labor Management Reporting and Disclosure Act of 1947 (the Taft Hartley Act, 29 U.S.C. §185(a)). Additionally, considerations involved in contesting an award that is subject to the Florida Arbitration Code, F.S. §682.01, et seq., will be explored.

This column is submitted on behalf of the Labor and Employment Law Section, Cathleen A. Scott, chair, and Robert Eschenfelder, editor.