Like court cases, arbitration proceedings can be bifurcated in any number of ways, most commonly separating liability and damages or deciding certain key liability issues first. The general rule is that arbitration awards must be final, i.e., they must dispose of all the issues submitted to arbitration, before courts can consider confirming or vacating them. When an arbitration panel issues a partial award that is “final” as to liability or some other important preliminary issue, can it be confirmed in federal court? More important, can it be vacated? The Federal Arbitration Act provides a much shorter time (three months) to vacate an award than to confirm it (one year), so a mistake in timing a motion to vacate could be fatal. A series of cases from 2019 illustrates the different approaches federal courts have taken to these issues.
A Trap for the Unwary
There can be good reasons for bifurcating an arbitration. For example: (1) The case has been unable to settle because the parties have such widely differing views as to their prospects on the merits that they cannot contemplate losing; (2) if they knew what the decision would be on the merits, they probably would be agreeable to settling the case; and (3) damages are potentially large and would take a lot of time and money to prove. However, the sample of recent cases discussed below illustrates the varying results when there is more than one award and a court has to consider whether to confirm the first award.
Seneca Nation of Indians v. State of New York (W.D.N.Y. 2019)
The pitfalls for practitioners in bifurcated cases are well illustrated in Seneca Nation of Indians v. State of New York, No. 19-CV-735S (W.D.N.Y. Nov. 8, 2019) (Skretny, J.). In Seneca Nation, the Nation and the State of New York entered into a compact pursuant to which the Nation had exclusive gaming rights in part of New York State in return for revenue sharing with the State. A dispute arose about whether the obligation to share revenue continued after the initial period of the compact expired and there was an automatic renewal for seven years. The Nation took the position that no revenue sharing was due because the renewal provision in the compact made no mention of it. New York took the position that the revenue-sharing percentage at the time of renewal was applicable. Per the compact, the matter went to arbitration.
The parties agreed to bifurcate the arbitration into liability and remedy phases. On January 7, 2019, by a 2–1 vote, the arbitration panel issued a “Partial Final Award” in favor of New York. A “Final Award” directing specific performance by the Nation was issued April 12, 2019, more than three months after the liability award. Damages assessed through the end of 2018 were agreed by the parties to be about $256 million. The Nation filed a motion to vacate the final award on June 6, 2019, and the State cross-petitioned to confirm both the partial final award and the final award on July 12, 2019.
The filing dates are important because section 9 of the Federal Arbitration Act (FAA), 9 U.S.C. § 9, provides that a motion to confirm may be filed by any party “at any time within one year after the award is made. . . .” By contrast, section 12 of the FAA, 9 U.S.C. § 12, requires that “[n]otice of a motion to vacate, modify, or correct an award must be served upon the adverse party or his attorney within three months after the award is filed or delivered.” If the partial final award of January 7, 2019, were considered to be an “award” for purposes of section 12, the Nation’s motion to vacate, filed June 6, 2019, was out of time. The State argued that the Nation’s motion was untimely, relying on Trade & Transport, Inc. v. Natural Petroleum Charterers, Inc., 931 F.2d 191 (2d Cir. 1991). It took the position that the essence of the Nation’s attack on the awards was a disagreement with the essence of the arbitrators’ liability holding in the partial final award and not the final award setting damages and requiring specific performance. The Nation argued that it could not contest the liability finding until the final award ordered specific performance.
Trade & Transport is a bit unusual. A dispute over an oil charter went to arbitration. Each party chose one arbitrator and they chose the umpire. On the same day as the first arbitration hearing, the claimant filed an action in federal court and attached the respondent’s assets. The judge suggested that the parties ask the arbitration panel to hold an immediate hearing on the contract issues. The parties agreed and did so. The panel immediately heard evidence and argument, and it rendered a “partial final award” that same day in favor of the claimant. The respondent subsequently asked the panel to rehear evidence on liability, claiming that the claimant had presented false evidence. The panel refused to reconsider its decision, holding that it was functus officio and could not act further on the liability issue. (Hedging its bets, the panel also found that the partial final award had not been based on false evidence.)
Before damages could be determined, the respondent’s arbitrator died. It appointed a new arbitrator and demanded that a new panel be formed to rehear the case in its entirety. The district court, the arbitration panel, and the Second Circuit all rejected this demand.
The respondent’s appeal to the Second Circuit was largely based on the general principle that an award is not final unless the arbitrators dispose of every issue submitted to them. While this is generally true, the Second Circuit held that because the parties had modified their submission of issues to the panel to request a final award on the contract issue, it disposed of all the issues in that submission. The court noted:
[I]f the parties agree that the panel is to make a final decision as to part of the dispute, the arbitrators have the authority and responsibility to do so. Second, once arbitrators have finally decided the submitted issues, they are, in common-law parlance, “functus officio,” meaning that their authority over those questions is ended.
The facts and issues in Trade & Transport thus were a good bit different from those in Seneca Nation and the district court found it inapposite. It found the Nation’s citation of Michaels v. Mariforum Shipping, S.A., 624 F.2d 411 (2d Cir. 1980), more persuasive. In Michaels, the Second Circuit held that an interim award was not final because it did not dispose of all the issues in the arbitration. The award was not intended by the panel to be a final award, with both liability and damages issues outstanding. The intent of the panel as to finality and the agreement of the parties to the panel’s issuing its award in multiple parts are recurring themes in the cases determining whether an award is ripe for judicial consideration.
Seneca Nation is on appeal in the Second Circuit, and briefing is expected to be completed this summer.
Jolen, Inc. v Kundan Rice Mills, Ltd. (S.D.N.Y. 2019)
In Jolen, Inc. v Kundan Rice Mills, Ltd., No. 19-cv-1296 (S.D.N.Y. Apr. 10, 2019) (Castel, J.), the district court held that a “Partial Final Award” was final for purposes of confirmation. There were no timing issues in the case, given that the petition to confirm was filed timely and the losing parties did not file a motion to vacate and did not dispute the arbitrator’s characterization of the partial award as final. The court found that the arbitrator had decided every issue submitted to him for the first phase of the proceedings.
Practice tip: As the court noted in Jolen, a motion to confirm cannot be granted due to default. “The movant must submit evidence that entitles it to judgment as a matter of law, and must satisfy this burden even if the motion is unopposed.” Jolen, slip op. at 2. Also, note that American Arbitration Association Commercial Rule 31 provides that the arbitration itself cannot go by default. The party seeking an award must present evidence to support it. JAMS Comprehensive Rule 22 contains a similar provision.
It is a bit difficult to distinguish Seneca Nation and Jolen on the merits. Procedurally, they are different because the losing parties in Jolen were two Indian companies that, instead of filing a motion to vacate, brought an action in the courts of India to vacate the award. This action resulted in an anti-suit injunction from the district court and ultimately a finding of contempt. We cannot know whether the fact that confirming the partial final award in Seneca Nation would have eliminated the Nation’s right to contest the award of hundreds of millions of dollars was a factor in the Judge Skretny’s thinking. Note that in the Mitchell case discussed below, the court explicitly cited its empathy for the moving party as a factor in its decision.
Standard Security Life Insurance Co. of New York v. FCE Benefit Administrators, Inc. (N.D. Ill. 2019)
In Standard Security Life Insurance Co. of New York v. FCE Benefit Administrators, Inc., No. 19 CV 64 (N.D. Ill. Mar. 13, 2019) (Guzman, J.), a motion to confirm the partial final award was held to be premature. This case was a dispute between two health insurers and a third-party administrator (TPA) that was supposed to administer their claims. The insurers accused the TPA of malfeasance, terminated the contract, and initiated an arbitration against it. Not long before the hearing was to take place, the TPA requested a continuance, alleging discovery issues. It also asked permission to file an amended counterclaim. The panel declined to continue the hearing but allowed the filing of the amended counterclaim, deciding to split the hearing into two “phases” with Phase II to consider the counterclaims after the hearing on the initial claims. After the Phase I hearing, the panel requested that the parties submit proposed awards. Both parties labeled their submissions “Partial Final Award.” The panel issued what it termed “Partial Final Award—Phase I” in favor of the insurers. The insurers moved to confirm that award, but the district court held that it did not have jurisdiction at that point because the award was not final. The arbitration panel still had work to do—deciding the counterclaims. (After the panel found in the insurers’ favor on the counterclaims, the court granted their renewed motion to confirm. Standard Sec. Life Ins. Co. of N.Y. v. FCE Benefit Adm’rs, Inc., No. 19 CV 64 (N.D. Ill. June 6, 2019) (Guzman, J.)).
Mitchell v. Franchise Services of North America, Inc. (S.D. Miss. 2019)
Another potential factor in whether a partial award can be confirmed can be the equities of the situation. In Mitchell v. Franchise Services of North America, Inc., No. 3:18-CV-723 (S.D. Miss. Nov. 19, 2019) (Wingate, J.), an employment termination dispute was bifurcated with the consent of the parties. The arbitrator reserved the issue of attorney fees, costs, and expenses. For reasons not clear, it took four years to complete the liability portion of the arbitration and issue an award determining that the claimant employee was entitled to significant money damages. The arbitrator stated that, although the substantial issue of attorney fees remained, the partial award was final and the claimant should proceed to court to enforce it. There was “no just reason for delay” in enforcement in light of the four-year delay. The district court agreed and summed up its reasoning:
This court finds it dispositive that FNSA agreed to a bifurcated arbitration proceeding: liability; and attorney fees. The parties have already disputed this matter on liability in the arbitrator’s proceeding for four (4) years—an unusual length of time. These two factors mandate a speedy resolution on the instant arbitration confirmation before this court. Accordingly, this court finds that, while it would normally stay these proceedings for a ruling by the arbitrator on the attorney fees, this court must deny FNSA’s Motion to Dismiss and/or Stay [and grant judgment to plaintiff].
Mitchell, slip op. at 11–12.
Even if there are very good reasons to bifurcate, in the bifurcation agreement, counsel need to deal with how the confirmation process will be handled and be sure that the arbitration panel is in agreement with them on whether the partial award is “final.” The cases suggest that intent will be part of the court’s calculus. The bifurcation question will often come up in a conference with the arbitrators and not in written submissions. When this happens, it is important to reduce the agreement to writing and have it acknowledged by the panel so that there is no misunderstanding. In that way, any court facing a motion to confirm a “partial final award” has in front of it exactly what the parties and panel decided before there was a losing party.
Sheila J. Carpenter is the managing member of Carpenter ADR, LLC, in Purcellville, Virginia.
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