Procedural History of the Case
The case arose out of a lending dispute between the plaintiffs and the defendant. The parties arbitrated the dispute in accordance with the terms of their contract. The arbitrator found that the defendant violated the Truth in Lending Act and awarded the plaintiffs monetary relief, as well as costs and attorney fees. The defendant filed a motion to vacate the award on the grounds that the award of attorney fees was a manifest disregard for the law.
Standard for Vacating an Arbitration Award
The Federal Arbitration Act (FAA) provides that an arbitration award will be vacated only under one of the four circumstances listed in section 10 of the act: (1) where the award was procured by corruption, fraud, or undue means; (2) where there was evident partiality or corruption on the part of the arbitrators; (3) where the award involved arbitrator 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 on the subject matter was not made. The Supreme Court, in Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008), held that this language “unequivocally tells courts to grant confirmation in all cases, except when one of the prescribed exceptions applies.”
Prior to Hall Street, courts recognized three non-statutory bases for vacating an arbitration award: (1) if it is arbitrary and capricious, (2) if its enforcement is contrary to public policy, or (3) if it shows a manifest disregard for the law. In Hall Street, the Supreme Court opined that the text of the FAA gives courts “no business to expand the statutory grounds” and that the limited review substantiates a national policy favoring arbitration. It held that this limited review is “needed to maintain arbitration’s essential virtue of resolving disputes straightaway” and that “[a]ny other reading opens the door to the full-bore legal and evidentiary appeals that can render informal arbitration merely a prelude to a more cumbersome and time-consuming judicial review process.” Based on Hall Street, the Eleventh Circuit held in Frazier v. CitiFinancial Corp., 604 F.3d 1313 (11th Cir. 2010), that the “judicially-created bases for vacatur are no longer valid.”
Reason for Sanctions
The defendants in Hill asked the court to vacate the award, arguing that the arbitrator’s award of attorney fees showed a manifest disregard of the law. The court held that the argument was based on older case law prior to Hall Street and that none of the bases for vacating the award under the FAA applied. It noted that the Eleventh Circuit had provided “notice and warning” in its 2006 decision in Harbert International, LLC v. Hercules Steel Co., 441 F.3d 905 (11th Cir. 2006), that sanctions may result from unfounded challenges to arbitration awards. In Hercules Steel, the court had clarified that it was “exasperated by those who attempt to salvage arbitration losses through litigation that has no sound basis in the law applicable to arbitration awards.” The court had also noted that the sanctions are grounded in “the purposes of the FAA and to protect arbitration as a remedy.”
The Hill court noted that the defendant’s motion to vacate was without any basis because it relied on old case law that has been expressly overruled. The court exercised its discretion and awarded sanctions “to protect arbitration as a remedy.” It considered this remedy appropriate because the defendant’s motion cited no controlling authority, it failed to respond to the plaintiffs’ request for sanctions, and the plaintiffs had the “notice and warning” from the Hercules Steel opinion.
The Hill court’s decision to impose sanctions on an unfounded motion to vacate is not an anomaly. Other courts have followed similar reasoning. The Tenth Circuit, in DMA International, Inc. v. Qwest Communications International, Inc., 585 F.3d 1341 (10th Cir. 2009), reached a similar decision, stating sanctions are warranted to preserve the “national policy favoring arbitration,” because the alternative, “to allow parties who lose in arbitration to freely relitigate their cases in court,” will result in congestion in the judicial system and slower and more costly dispute resolution. It noted that “if arbitration is to be a meaningful alternative to litigation, the parties must be able to trust that the arbitrator’s decision will be honored sooner instead of later.” The Seventh Circuit, in Johnson Controls, Inc. v. Edman Controls Inc., 712 F.3d 1021 (7th Cir. 2013), has also noted that challenges to commercial arbitral awards bear a high risk of sanctions because such challenges undermine the integrity of the arbitral process. In Flexible Manufacturing Systems v. Super Products Corp., 86 F.3d 96 (7th Cir. 1996), the Seventh Circuit also warned that “[t]he promise of arbitration is spoiled if parties disappointed by its results can delay the conclusion of the proceeding by groundless litigation in the district court followed by groundless appeal to this court; we have said repeatedly that we would punish such tactics and we mean it.”
Conclusion
There is a real probability of sanctions on motions to vacate arbitration awards if the motion is not grounded in one of the four circumstances listed in section 10 of the FAA.
