August 22, 2016 Articles

Eleventh Circuit Makes Vacatur Challenges More Difficult

By Jaya Sharma

So, you think you have a strong case for challenging an unfavorable arbitral award on grounds that the arbitrator was (1) partial, (2) committed misconduct, or (3) exceeded his or her powers? Ponder your decision very carefully because history has shown that overturning an arbitral award on appeal is extremely difficult given that the standards of review under the Federal Arbitration Act (FAA) and analogous statutes are extremely narrow. Under section 10(a) of the FAA, vacatur is appropriate under the following four narrow circumstances: 

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

(2) where there was evident partiality or corruption in the arbitrators;

(3) where the arbitrators were guilty of misconduct; or

(4) where the arbitrators exceeded their powers.

See Federal Arbitration Act, 9 U.S.C. §10(a).  

In Johnson v. Directory Assistants, Inc., 2015 WL 4939578 (11th Aug. 2005), the Eleventh Circuit, applying the FAA’s procedural rules, preserved the sanctity of an arbitral award and “unvacated” a lower court’s ruling that vacated an arbitral award. The Eleventh Circuit concluded that the lower court erred in granting vacatur because the plaintiffs-appellees failed to provide convincing evidence or specific facts to demonstrate that the arbitrator was partial, committed misconduct, or exceeded his powers.  

Facts of the Case
Alleging breach of contract, Directory Assistants Inc. (DAI), an advertising company, filed for arbitration with the Alternative Dispute Resolution Center (ADRC) against one of its clients, the Alabama Women’s Center for Reproductive Alternatives (AWCRA). The arbitrator disclosed that he had arbitrated a dispute involving the advertising company five years earlier. The AWCRA challenged the selection and appointment of the arbitrator, which was denied by the ADRC. Days before the hearing, the AWCRA requested and received a continuance. A week before the rescheduled hearing, the AWCRA informed the opposing party that, because of “the current state of affairs” in its industry, it was “not able to continue with the arbitration.” In accordance with the ADRC’s arbitration rules, the arbitrator proceeded with the arbitration on an ex parte basis and allowed the advertising company to present its case, despite the absence of the AWCRA. The arbitrator awarded the advertising company about $100,000 in liquidated damages, late fees, and arbitration costs. 

The AWCRA filed a case against DAI in the Circuit Court of Madison County, Alabama, alleging fraud, misrepresentation, and breach of contract, and also sought the vacatur of the arbitral award. The federal district court granted the motion to vacate, finding that the arbitrator was biased and exceeded his powers by awarding liquidated damages. DAI appealed this decision to the Eleventh Circuit Court, which reversed the lower court’s vacatur ruling.  

The Eleventh Circuit Court’s Reasoning
The ACWRA challenged the award on three counts, arguing that vacatur was appropriate based on the FAA’s four statutory grounds, because (1) there was evident partiality (under section 10(a)(2)); there was arbitrator misconduct (under section 10(a)(3)); and the arbitrator exceeded his powers (under section 10(a)(4)). Evoking prior precedent in Frazier v. CitiFinancial Corp., LLC, 604 F.3d 1313 (11th Cir. 2010), the court reaffirmed that under the FAA, there is a presumption that arbitration awards will be confirmed and that federal courts should defer to the arbitrator’s decision.

The Standard for Evident Partiality
The Eleventh Circuit applied prior precedent from University Commons-Urbana, Ltd. v. Universal Constructors Inc., 304 F.3d 1331, 1339 (11th Cir. 2002), in which the court had reasoned that vacatur was appropriate only “when either (1) an actual conflict exists or (2) the arbitrator knows of, but fails to disclose, information that would lead a reasonable person to believe that a potential conflict exists.” The appellees conceded that no direct conflict existed but argued that under section 10(a)(2), there was “evident partiality” as demonstrated by the arbitral institution’s refusal to disclose how often DAI had used the ADRC and selected the same arbitrator in prior arbitrations. The court remained “unconvinced that the failure to disclose that information would justify vacatur” because “this fact alone would not lead a reasonable person to suspect partiality.” 

The Standard for Arbitrator Misconduct
Undertaking a section 10(a)(3) inquiry, the court analyzed the ACWRA’s second argument for vacatur where the ACWRA claimed that the arbitrator committed misconduct by not allowing a second postponement of the hearing and not considering evidence that they had put forth prior to the arbitration hearing. The court found the AWCRA’s explanation for their inability to attend the hearing “due to financial constraints” unpersuasive and noted that they provided no “evidence to support this claim of financial hardship” but “simply informed the arbitrator that they would no longer participate in the arbitration.” The court concluded that “where a party participated in an arbitration proceeding only to withdraw a week before the hearing with little explanation and no request for extension, vacatur is inappropriate.” The court also noted that the appellees had not identified specific evidence that the arbitrator had purportedly failed to consider and did not demonstrate how this evidence was pertinent and material to the case. 

The Standard for Arbitrator Exceeded Powers
Under its third argument for vacatur, the ACWRA claimed that the arbitrator exceeded his powers (1) by erroneously ruling that DAI had attempted to negotiate the terms of arbitration in good faith and (2) by granting DAI an exorbitant award. The Eleventh Circuit applied the precedent articulated in Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064, 2068 (2013), and noted that “it is not enough to show that the arbitrator committed an error—or even a serious error.” The pertinent question and the sole question “is whether an arbitrator (even arguably) interpreted the parties’ contract, not whether he got its meaning right or wrong.” Applying this standard, the court concluded that the arbitrator clearly construed the contract’s arbitration provision and also applied the liquidated damages provision contained in the contract to calculate the arbitral award. The award was derived from the contractual provisions; therefore, the arbitrator did not exceed the scope of his powers. The court noted that “mere disagreement with an arbitrator’s legal or factual determinations does not justify vacatur under §10(a)(4).” 

The first takeaway from this poorly argued case suggests that challenging an award on grounds of repeat selection of the same arbitrator or using the same arbitral institution is in itself insufficient proof to demonstrate bias and evident partiality to justify vacatur. The standard for review articulated by the court is (1) whether there was a direct conflict or (2) whether the undisclosed facts create a reasonable impression of partiality.  

Second, to prevail in such challenges, litigants must back up their arguments with specific facts to make a successful showing that vacatur is justified under the four limited provisions of FAA section 10(a). Mere statements unsupported by a specific showing of facts to prove that evident partiality exists, that the arbitrator failed to consider evidence material and pertinent to the case, or that the arbitrator exceeded his or her powers will only result in a denial for vacatur.  

Third, if counsel invokes section 10(a)(4)—the “arbitrator exceeded his powers” provision—close attention should be paid to how the arbitrator deviated from the parties’ intent as enshrined in the contract. A review of litigated cases for vacatur shows that this element is the most commonly invoked standard for challenging an arbitral award and also the most likely grounds under which a litigant can prevail. Some 20 percent of vacatur cases litigated on this ground successfully overturned the arbitrator’s decision, while in the remaining 80 percent of cases, the awards were upheld. See Lawrence R. Mills et al., “Vacating Arbitral Awards,” 9 Disp. Resol. Mag. 23 (Summer 2005).  

Despite the low success rate of vacaturs, counsel considering an appeal should pay close attention to how the Eleventh Circuit applied the FAA’s standards so that at least there is a fighting chance for them to prevail.  

History has demonstrated that courts generally are deferential to the fundamental principle that the FAA ensures enforcement of the terms of the parties’ agreement to arbitrate and will generally vacate arbitral awards only on narrow grounds such as where the arbitral panel failed to interpret and enforce the parties’ contract by creating and imposing the panel’s own idea of public policy (StoltNielsen S.A. v. AnimalFeeds International Corp., 130 S. Ct. 1758 (2010)),where the arbitrator exceeded his authority by awarding a remedy not authorized by the parties contract (Gen. Mills, Inc. v. BCTGM Local 316G, 2014 WL 5100650 (N.D. Ill 2014)), where the arbitrators’ decision addressed issues not submitted for arbitration (Roadway Package Sys. Inc. v. Kayser, 257 F.3d 287, 300–301 (3d Cir. 2001)), where the decision involved parties or transactions outside the scope of the arbitration clause (Eljer Mfg., Inc. v. Kowin Dev. Corp., 14 F.3d at 1256–57 (1994)), or where the arbitrator awarded remedies barred by the arbitration agreement (Coast Trading Co. Inc. v. Pac. Molasses Co., 681 F.2d 1195, 1198 (9th Cir. 1982)).  

Johnson v. Directory Assistants Inc. follows the line of reasoning enumerated in the cases above and reinforces the fact that there are great risks associated with challenging an arbitral award not to mention the time and expense involved in mounting such a challenge. So, to have a successful second bite of the proverbial apple, especially in the Eleventh Circuit Court’s jurisdiction, counsel should carefully review the court’s ruling to get insights on the pitfalls they should avoid.  

Keywords: litigation, ADR, vacatur, enforcement, challenge, arbitration award 

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