Vacated Award is Final Decision for Purposes of Challenge to Authority to Arbitrate Rather than Litigate
Guest Contributor: John Allgood
The parties in this action entered into agreement for the sale of two UPS Store franchises. SCSJ Enterprises and Shandton Williams [“SCSJ”] purchased the franchises from Hansen & Hansen Enterprises, Inc and Juden Enterprises Inc. [“Hansen”]. The parties executed a sales agreement, two promissory notes and Williams executed a personal guaranty for each note. The Sales Agreement included an arbitration clause that stated that if there were no final decision within thirty days of the hearing, the arbitration could be terminated and the parties could then proceed to litigation.
A series of disputes arose. SCSJ filed a claim against Hansen asserting fraud in the value of the two stores. Hansen counterclaimed for enforcement of each promissory notes and guaranty. The matter was arbitrated and the arbitrator found for Hansen. SCSJ filed a motion to vacate the Award. The trial court in the first instance granted the motion. On appeal the trial court’s decision was affirmed in part and reversed and remanded in part. The Appellate Court ruled the arbitrator had properly applied the Georgia law related to fraud and that the trial court had improperly decided there was manifest disregard of the law. Further the Appellate Court ruled that the arbitrator had not overstepped his authority by awarding attorney fees. Finally the Appellate Court agreed with the trial court that the arbitrator had failed to consider the counterclaim and remanded the case directing that there be a rehearing before the same arbitrator on the counterclaim.
On remand, however, the trial court confirmed the arbitrator’s award on SCSJ’s claim but vacated the portion of the award dismissing Hansen’s counterclaim. SCSJ appealed and the Court of Appeals again reversed. The Appellate Court said the issue was whether the trial court properly vacated a portion of the arbitrator’s award. The Appellate Court ruled it had not. “We found that the trial court erred because an arbitration award may only be vacated in its entirety.” The Appellate Court went on, however, to rule that under OCGA §9-9-13 (e) the rehearing could be limited to the specific issue necessitating the vacatur. The case was remanded with the direction the arbitrator consider Hansen’s counterclaim.
The arbitrator issued a new award finding for Hansen on the promissory notes claim and also finding Williams liable under the personal guaranties and finally requiring SCSJ and Williams to pay Hansen for fees and expenses of arbitration. The trial court confirmed the award against SCSJ “jointly and severally.” SCSJ appealed. SCSJ Enters. Inc. v. Hansen & Hansen Enters. Inc. A12A1185 (11/13/2012)
The appeal raised several errors: (1) Based on the vactur of the award, there was no final decision within 30 days and SCSJ had a right to terminate the arbitration under the language of the sales agreement and therefore the trial court should not have remanded the case to arbitration; (2) the award should not have been confirmed since the arbitrator exceeded his authority by awarding against a non-party, Williams; issuing an award the deviated from the liquidated damages language in the promissory note; and misinterpreting default provisions; (3) failure to consider SCSJ’s defenses on failure of consideration and/or recoupment were manifest disregard of the law; (4) the trial court order did not conform to the arbitrator’s language in the award.
The Court of Appeals affirmed the decision of the trial court and rejected each of SCSJ’s assertions of error.
Under the contract language there was a provision that if a final arbitration decision was not rendered within 30 days of the conclusion of the arbitration hearing then either party could terminate the arbitration and proceed to litigation. SCSJ claimed that since the award had been vacated, there was no final decision and it had the right then to litigate. To this claim the appellate court ruled:
Here it is undisputed that the arbitrator rendered a final decision…[T]he mere fact that an award is vacated is not synonymous with the award never having been made…Accordingly, this argument lacks merit.
On the claims that the arbitrator’s award was in excess of his authority when the arbitrator found against Williams under the guaranty, because the guaranty contained no arbitration agreement, the appellate court also rejected this reasoning:
A court may not vacate an arbitrator’s award on the basis of overstepping authority unless the arbitrator determines matters beyond the scope of the case and addresses issues not before him.
Here, Williams signed two guaranties, which obligated him to repay specific notes. The notes …were made “subject to the terms and conditions of [the] Memorandum of Sale,” which included an arbitration clause… Under these circumstances, equitable estoppel may be applied to require Williams participation in arbitration…
Similarly, the appellate court rejected claims that the arbitration award did not conform to the language in the promissory notes and that there was insufficient evidence to support the arbitrator’s decision:
Pretermitting whether the arbitrator departed from the terms of the underlying agreement, SCSJ has presented no basis for this Court to reverse the trial court’s judgment.
But an appellate court will not consider the sufficiency of the evidence underlying the arbitrator’s award.
Similarly the appellate court rejected the claim the arbitrator had misinterpreted the default provisions of the agreement.
The appellate court again rejected SCSJ’s claim of the arbitrator’s manifest disregard of the law.
We first consider whether the governing law alleged to have been ignored by the arbitrator was well defined, explicit and clearly applicable. We then look to the knowledge actually possessed by the arbitrator. The arbitrator must appreciate the existence of a clearly governing legal principle but decide to ignore or pay no attention to it. Both of these prongs must be met…. The fact that the arbitrator rejected SCSJ’s legal argument does not mean he ignored the arguments.
The challenge to the form of judgment was similarly rejected.
[W]e fail to see how the trial court’s order improperly assumes an indivisible character… [G]iven the fact that Williams’ individual liability arises solely from his role as a guarantor, it cannot reasonably be argued that his obligations would be in addition to the obligations of the principal… To the extent the arbitrator’s award was vague or confusing, the trial court clarified in its judgment that Williams’ liability was joint and several with SCSJ.
The court also noted that the form and content of the trial court’s order did not have to tract the exact language of the arbitrator’s ruling, and in fact the trial court could modify the language in its order so long as it was substantively supported in the arbitration award.
As long as a trial court’s judgment does not affects the merits of the arbitrator’s ruling, reversal is not required… Further more, a trial court may interpret and enforce an ambiguous arbitration award as long as the ambiguity can be resolved from the record.
CONCLUSION FOR GEORGIA ARBITRATORS: In addition to the finding that courts are not going to review arbitral awards that are based on challenges to sufficiency of evidence or interpretation of contract terms, this decision reinforces several key points related to finality of arbitration awards.
First, the appellate court found that the arbitrator’s award, while later vacated, was nonetheless a final award for purposes of enforcing the parties’ agreement to arbitrate. Arbitrators can look to similar Georgia decisions where the parties by their conduct have waived litigation options. Here the participation in a full blown arbitration process and award was consistent with the contract language by the parties electing arbitration rather than litigation as the means for dispute resolution.
Second, the court reconfirms the high standards required in order to vacate an award based on the manifest disregard of the law standard. The grounds for supporting the statute for vacating based on manifest disregard of the law requires proof of the two prongs set out by the court in this decision – the arbitrator must appreciate the clear and controlling aspect of the law and the arbitrator must ignore the law.
Finally, the decision points to the fact that court orders do not have to literally track the language of the arbitrator’s award but will be enforced so long as the order does not affect the merits of the arbitrator’s award and the court in its order may resolve any ambiguity between the award and the order issued where supported by the record.
Well folks, it looks as though Travolta’s perils on the high seas have come to an end. Just one day after we reported on Travolta’s failed motion to compel arbitration with the cruise attendant who accused him of sexual assault, that same cruise attendant mysteriously dropped his case against Travolta. At the risk of sounding repetitive, did somebody say settlement negotiations??
Hat tip to The Hollywood Reporter for breaking the story.
In case any of us were still caught in the dopey residual throes of the holiday season-induced food coma, a California case is here to remind us that, when it comes to arbitration, neutrality is paramount – and maybe give us some new food for thought in the New Year, too.
Gray v. Chiu, 2013 WL 222279 (Cal. Ct. App. Jan. 22, 2013), a medical malpractice case, was sent to arbitration in July 2009. Shortly thereafter, the defense’s lead trial attorney, William Ginsburg, announced he was retiring from litigation to become an arbitrator. In October of that year, Ginsburg sent an email stating that he was working for ADR Services, Inc. – the dispute resolution provider (“DRPO”) that was set to administer the Gray v. Chiu case. Ginsburg was subsequently retained by the defendant as his personal counsel in the arbitration hearing, and per the parties’ “Physician–Patient Arbitration Agreement,” each side selected a party-appointed arbitrator, who in turn selected a third neutral arbitrator. In November 2009, Judge Alan Haber was chosen to fill that role.
In January and April 2010, Judge Haber sent the parties two disclosure statements, both of which listed the names of several participants for whom a conflict check was performed. However, “[o]n each occasion, Judge Haber stated that he had no significant personal relationship or other professional relationship with any party, or lawyer for a party.” Ginsburg – who was, you will recall, by his own then-recent written admission working for ADR Services, Inc. – was not named on either disclosure statement, and was not the subject of a conflict check in the case.
The arbitration hearing took place over nine days, with Ginsburg attending all hearings. Judge Haber subsequently issued a binding arbitration award for the defendant. Gray then filed a petition to vacate the arbitration award, contending that Judge Haber’s failure to disclose Ginsburg’s membership in ADR Services, Inc. violated the disclosure provisions of two state-specific rules governing arbitrator disclosure. Justice Steven Perren of the California Court of Appeal for the Second District agreed, and reversed and remanded for vacatur.
Although the duty of an arbitrator to disclose circumstances that may affect his or her neutrality is a standard rule in arbitration, nondisclosure is not in and of itself a ground for vacatur. However, nondisclosure can implicate problems of partiality, which is one of the few statutory grounds for vacatur. For example, a Georgia court will vacate an arbitration award if it finds “partiality of an arbitrator appointed as a neutral”; similarly, a federal court will vacate an award “where there was evident partiality or corruption in the arbitrators.”
There are also reasonable limits to the arbitrator’s duty to disclose, which adds another hurdle to the track between nondisclosure and vacatur. Those limits, while not specifically enumerated, have been somewhat clarified by the Supreme Court: an arbitrator should disclose “any dealing that might create an impression of possible bias” in order to avoid vacatur. Ahh, I can practically see the gray areas leaching out of that sentence.
But California’s legislature had already set out to shed light on that gray area, first passing the California Arbitration Act (“Act”), which provides judicial recourse for “serious problems” involving “fairness” in arbitration. In terms of the standard for disclosure, § 1281.9(a) requires disclosure of “all matters that could cause a person aware of the facts to reasonably entertain a doubt that the proposed neutral arbitrator would be able to be impartial.” But California went further still, and pursuant to § 1281.85 (“Ethical Standards Applicable to Neutral Arbitrators”) of the Act, the Judicial Council adopted a set of ethics standards for neutral arbitrators, known as the California Ethics Standards for Neutral Arbitrators in Contractual Arbitrations (“Ethics Standards”).
Of particular relevance here – and this is where the case gets interesting – is Ethics Standard 8, which provides, in relevant part:
“[I]n a consumer arbitration … in which a [DRPO] is coordinating, administering, or providing the arbitration services, a person who is nominated or appointed as an arbitrator . . . must disclose …: (1) Relationships between the [DRPO ]and party or lawyer in the arbitration [emphasis court’s] . . . Any significant past, present, or currently expected financial or professional relationship or affiliation between the administering [DRPO] and a party or lawyer in the arbitration. Information that must be disclosed under this standard includes: (A) A party, a lawyer in the arbitration, or a law firm with which a lawyer in the arbitration is currently associated is a member of the [DRPO].”
In other words, even if a person aware of the facts wouldn’t necessarily reasonably doubt the arbitrator’s ability to be impartial, under the additional requirements of Ethics Standard 8, Judge Haber had a per se obligation to disclose Ginsburg’s relationship with ADR Services, Inc., irrespective of any other standard (such as that set forth in § 1281.9(a) of the Act).
The questions this heightened standard gives rise to perhaps create more gray area than we had before California attempted to refine the disclosure obligation. The instant case is somewhat vague on precisely what “knowledge,” if any, Judge Haber had of Ginsburg’s membership in or involvement with ADR Services, Inc. So under California’s Ethics Rule 8, does a neutral arbitrator simply bear the burden of acquiring this information? It is admittedly conceivable that, in some smaller organizations, personal affiliations are apparent – but what of an organization like the AAA, which consists of thousands of arbitrators? The DRPO in question here, ADR Services, Inc., falls somewhere in between, with about 150 members practicing throughout California and Nevada. Is that the line? Is there a line? And should it be the responsibility of the DPRO to keep track of where it sends its arbitrators, and notify them of a potential conflict?
The court here concluded that “The plain language of Ethics Standard 8 compels the arbitrator to disclose that a lawyer in the arbitration is a member of the administering DRPO.” Although the case arguably leaves open the possibility that Judge Haber was genuinely unaware of Ginsburg’s affiliation with ADR Services, Inc., one thing is certain: Ginsburg knew about it. Although he defended himself by downplaying his role in the organization—and perhaps he really did believe it was of no import—I’m standing with the appellate court on this one. Because, at the very least, a forthcoming Ginsburg might have avoided the issue altogether. In any case, the moral of the story is, as any law student with the bar exam on the brain will probably tell you – err on the side of disclosure.
By now we’ve all heard of John Travolta’s latest scandal involving a Royal Caribbean cruise line attendant, a neck massage, and some unwelcome frontal exposure. If you haven’t, you really ought to reevaluate how much pop-culture news you read, and catch yourself up on the details here. For those in a hurry, here are the Cliff’s Notes: the Royal Caribbean attendant, Fabian Zanzi, alleges that Travolta requested a neck massage, that he began to give Travolta the neck massage, and that Travolta then exposed himself and “forcefully embraced” Zanzi, causing him “pain, shock, embarrassment, distress, and fear.” (Compl. ¶ 12).
The cruise line attendant has filed a lawsuit against Travolta for assault and battery, and negligent and intentional infliction of emotional distress. In an interesting twist on the run-of-the-mill cruise line arbitration cases we see year after year, however, Travolta and his attorney, Marty Singer, recently attempted to compel arbitration of Zanzi’s claims.
Travolta’s theories supporting his motion to compel were based on two separate arbitration agreements: the one between passenger and cruise line contained on the ticket itself, and the one between cruise line and employee contained in the employment agreement. Impressively, despite the fact that no arbitration agreement existed between Travolta and Zanzi, Travolta attempted to bootstrap the other two arbitration clauses through non-signatory principles, including agency and equitable estoppel. The Court, however, found Travolta’s legal arguments adrift, at sea, off course, or whatever other nautical metaphor you can muster.
As to Travolta’s arguments that his cruise ticket mandated arbitration, the Court rejected that Zanzi was an agent of Royal Caribbean, such that Zanzi could be bound as a non-signatory to arbitrate under the agreement between Royal and Travolta. Although Zanzi may be an agent of Royal Caribbean under traditional principles of agency, the Court goes further in examining whether Zanzi is an agent for purposes of being bound as a non-signatory to an arbitration agreement. In its analysis, the Court noted that the agency theory in the arbitration context requires more than a mere association; in order for a non-signatory agent to be bound to arbitrate, the principal must have signed the agreement with the authority to bind the non-signatory employee in his individual capacity. The Court found no such authority here, thus finding Zanzi’s claim to fall outside of the scope of the arbitration agreement between Travolta and Royal Caribbean. This holding is consistent with the principle that if an agent is assaulted while he is conducting the affairs of the principal, or because of the agency relation, the “resulting cause of action belongs to him and to him only,” and “this right is free from interference by the principal.” See Restatement (Second) of Agency § 374(1) cmt 1.
The Court also rejected Travolta’s “third party beneficiary” argument out of hand, noting that the agreement between Travolta and Royal Caribbean is intended to protect Royal from liability, not to protect Travolta from liability for torts he commits against Royal’s employees. The Court notes that any indirect benefit of the cruise ticket contract to Zanzi, such as receiving tips by virtue of Travolta’s purchase of the ticket and subsequent boarding of the ship, does not provide a basis to compel Zanzi to arbitrate his claims.
Travolta’s next argument was an attempt to piggyback off of Zanzi’s separate claim against Royal Caribbean for false imprisonment, in which Zanzi alleges he was confined for five days after reporting the incident, only being released after Travolta had exited the ship. As is common practice, Royal Caribbean and Zanzi are bound by an arbitration agreement contained in the employment contract. Travolta argued that because Zanzi’s arbitration claim against Royal was “factually interwoven” with Zanzi’s claim against Travolta, that Zanzi was equitably estopped from pursuing litigation against Travolta. The Court also rejected this argument, finding that there was no evidence that Travolta’s act (assault and battery) and Royal’s act (false imprisonment) were substantially interdependent or concerted. The actions, though related in a narrative sense, were not related in the manner necessary to enable Travolta to compel arbitration with Zanzi for his actions that were different in time and nature from Royal Caribbean’s.
What this all means for Travolta is that he will not be able to face his accuser in private arbitral proceedings and that his dirty laundry will be left to hang in a California District Court. Did somebody say settlement negotiations??
Eighth Circuit Confirms Arbitration of FLSA Claims and Discounts NLRB Interpretation Barring Application of Class Action Waiver Based on NLRB View of the Scope of the NLRA
Guest contributor: John Allgood of Ford & Harrison, LLP
The operator of a health care facility for elderly residents hired an administrator for its operation in Missouri. The parties executed a Mandatory Arbitration Agreement [“MAA”] to resolve inter alia employee “… claims or controversies for which a federal or state court or other dispute resolving body otherwise would be authorized to grant relief … against the company. The MAA contained an express reference to “claims for wages or other compensation” under the Fair Labor Standards Act. In addition there was an express waiver from arbitrating claims on behalf of a class.
The Plaintiff, an administrative employee of the Defendant, brought an action in 2011 on behalf of herself and similarly situated current and former employees for misclassification. The Plaintiff claimed that she had been classified improperly as an exempt employee for overtime purposes and not properly compensated for time worked in excess of forty hours per week. The Company filed a Motion to Compel arbitration under the MAA which was denied by the district court. On appeal the Eighth Circuit granted the request to arbitrate the dispute. Owen v. Bristol Care, Inc., 213 U.S. App. LEXIS 355 (2012).
The district court had denied the Motion to Compel by distinguishing the Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, 363 U.S. ____ (2011) saying it was an consumer case and not controlling precedent in employment situations. The district court in part cited as support for its decision the National Labor Relations Board decision In re D.R. Horton, Inc., 357 NLRB No. 184 (Jan. 3, 2012). The Horton decision relies on the Boards authority to protect organizing, Section 7, rights and has held that arbitration agreements waiving class actions can violate the NLRA. The Plaintiff asserted the statutory rights contained in the FLSA prohibited the waiver of class action in arbitration agreements. The Eighth circuit denied enforcement saying the NLRB decision carried little persuasive authority.
“[T]he MAA does not preclude an employee from filing a complaint with an administrative agency such as the Department of Labor… The Equal Employment Opportunity Commission, the NLRB, or any similar administrative body. Cf. Gilmer, 500 U.S. at 28… Further, nothing in the MAA precludes any of these agencies from investigating and, if necessary, filing suit on behalf of a class of employees… The Board’s construction of the [NLRA] ‘is entitled to considerable deference and must be upheld if it is reasonable and consistent with the policies of the Act,’… the Board has no special competence or experience in interpreting the Federal Arbitration Act… This Court is ‘not obligated’ to defer to [the Board’s] interpretation of Supreme Court precedent….” Id. at 3.
The Court went on to list a number of other district court decisions which similarly have declined to follow the NLRB’s interpretation prohibiting class action waivers in arbitration agreements as well as similar decisions of other courts of appeal that had considered the issue. Finally the Court directed the arbitration agreement be enforced including the class action waiver, noting the Supreme Court’s affirmation of class action waiver in other statutory rights cases approved for arbitration. Yet, the Court in Gilmer upheld a similar class action waiver in an employment contract brought under the Age Discrimination in Employment Act… Thus the Court’s conclusion in Gilmer forecloses the argument that Supreme Court precedent upholding the enforceability of class waivers is limited to the consumer context. Id at 4.
CONCLUSION: The Eighth Circuit’s decision expressly rejects the argument that the NLRB interpretation of the NLRA prevents class action waivers in arbitration agreements and confirms that the FAA is to be considered in light of the federal policy favoring arbitration. The FAA requirement for enforcement under Section 2 of arbitration agreements does not permit the intervention of federal agencies into the contractual agreement for arbitration absent express Congressional authority granting such right to the agency. At the same time in this MAA the employee had an independent right to file with the appropriate federal agency claims for violations of statutory rights which the arbitration agreement recognized and did not prohibit.
Back in early October, we reported on an unprecedented case in which the Delaware Chancery Court had, pursuant to an amendment to §349 of the Delaware state code, allowed sitting judges to conduct private arbitration procedures between corporations with civil disputes involving over $1 million. Hooray! A way to milk the legal system for state revenue! But the revelry was short-lived. The Chancery Court heard only six cases under §349 before the Delaware Coalition for Open Government (“DelCOG”), a nonprofit corporation that promotes government transparency, swooped in and cried constitutional corruption. And, as previously reported, on August 30, 2012, U.S. District Judge Mary McLaughlin ultimately sided with DelCOG, holding that the Chancery Court proceeding essentially functioned as a non-jury civil trial and was therefore subject to the First Amendment right of access.
After the ruling, Lawrence Hamermesh, a professor of law at Widener University who had helped in the case, issued a written statement on behalf of the Defendants stating that they would appeal the decision. On October 1, 2012, attorneys for the Chancery Court filed a one-page notice of appeal in the Third Circuit, but did not elaborate on the reasons for appeal.
Then, last Tuesday, December 11, 2012, a 69-page appellate brief was filed in the United States Court of Appeals for the Third Circuit on behalf of the Chancery Court judges, also defendants. The original Defendants’ Reply Brief, filed in the District Court in response to DelCOG’s complaint, had asked the court to apply the “experience and logic” test to the case at bar. “Basically, the test says that if a proceeding like arbitration is traditionally closed to the public – that’s the experience part – and if maintaining that logically promotes a better proceeding, it need not be public.”
But a rather strong (and comparatively convincing) brief submitted by Plaintiff DelCOG evidently convinced Judge McLaughlin that the experience and logic test was not the, erm, logical candidate for the case. Instead, McLaughlin took more of a common sense approach, concluding that, while the Chancery Court procedure admittedly resembles arbitration, at its core it is merely a civil trial.
And it is upon this point appellants intend to seize: “If the district court had applied the experience and logic test,” the appeal stated, “it could have reached only one conclusion – there is no First Amendment access right to the arbitration proceedings themselves.” They’ve since hired a new lawyer, Andrew Pincus of D.C.-based Mayer Brown, who won last year’s landmark arbitration Supreme Court case, Concepcion.
DelCOG’s reply brief is due in approximately 21 days. Looks like things could get interesting in 2013, and we’re looking forward to it.
 Tom Hals, “Delaware’s Business Court Presses for Secret Arbitration,” Thomson Reuters (Dec. 12, 2012) available at http://newsandinsight.thomsonreuters.com/Legal/News/2012/12_-_December/Delaware_s_business_court_presses_for_secret_arbitration/.
 AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 179 L. Ed. 2d 742 (2011).
Guest contributor: John Allgood of Ford & Harrison, LLP
In a recent case the Georgia Court of Appeals interprets the authority of a superior court, in this case the Fulton County Superior Court, to interpret an arbitrator’s award that it find ambiguous. The Court in this situation was reviewing an arbitration award that had been vacated and remanded to the arbitrator consistent with court instructions. On the second review after a second award, the Court held the trial court could interpret an ambiguous arbitration award so long as there is a record on which the trial court may rely and further that the trial court’s interpretation does not affect the merits of the arbitrator’s Award. SCSJ Enters. Inc. v. Hansen & Hansen Enters. Inc., A12A1185 (11/13/2012)
This was a collection case involving several documents. The parties had entered into a purchase contract that contained an arbitration agreement. The plaintiff filed an action for fraudulently misrepresentation on two UPS franchise stores it had purchased from the defendant. As part of the purchase the Plaintiff had executed two promissory notes to the defendant for $250,000 each.. There was also a personal guaranty for each note. The complaint alleged that the defendant had misrepresented the value of the two stores.
The defendant filed a counter claim against the plaintiff for nonpayment of the promissory notes. The dispute was submitted to arbitration under the clause in the purchase agreement.
In the initial case the arbitrator issued an award in favor of defendant/respondent. The respondent moved to confirm the award and the claimant moved to vacate the award in part based on a claim the arbitrator manifestly disregarded the law on fraud.
In the first consideration of the case, the Court of Appeals confirmed that the arbitrator had properly applied the Georgia law on fraud and denied the claim that the arbitrator had manifestly disregarded the law. Further the Court of Appeals ruled the arbitrator had not overstepped his authority by awarding attorney fees as trail court had incorrectly ruled. See Hansen &Hansen Enterprises v. SCSJ Enterprises, Inc. 299 Ga. App. 469 (682 SE 2d 652) 2009. Because the arbitrator had failed to consider the counterclaims on the promissory notes, however, the appellate Court remanded the case for arbitration of these claims:
Although the promissory notes did not contain an arbitration clause, the notes
expressly incorporated the sales agreement, which required arbitration of “any and all disputes.” This Court remanded the case to the trial court with direction to “vacate the arbitrator’s award consistent with this opinion and order a rehearing before the same arbitrator on Hansen’s counterclaim on.”
Thus this case presents one of those rare remand situations on which both the FAA and the GAC fail to provide much statutory guidance to courts or arbitrators. The Court of Appeals properly provided some guidance to the parties on how the remand should be handled. First, there was no issue of due process or bias so the remand was to the original arbitrator. The instruction, however, was to arbitrate the counterclaim consistent with the arbitration clause incorporated by reference into the Promissory Notes.
When the trial court only partially vacated the award, the plaintiff once again appealed. The Court of appeals confirmed that the entire arbitration award is to be vacated. But then the
We nonetheless noted that vacatur of the entire award did not render the prior proceeding a nullity because under OCGA § 9-9-13(e), rehearing before the arbitrator could be limited to the specific issue necessitating the vacatur. .. Therefore, we remanded the case and the arbitrator’s entire award and to direct the arbitrator to consider Hansen’s counterclaims.
The Defendant next filed a motion to dismiss the arbitration because the award had been vacated and under the language of the arbitration clause the Plaintiff could terminate arbitration proceedings. The language provided in pertinent part that if the arbitration did not promptly proceed to a hearing and determination and
[I]f a final decision has not been rendered within thirty (30) days after the conclusion of the [arbitration] hearing then any party may terminate the arbitration and proceed to litigation.
The trial court denied this motion and vacated the arbitration award and remanded to the arbitrator to consider the claim of nonpayment under the Promissory Note.
After a hearing the arbitrator issued a new award finding in favor of the defendant on the Promissory Note claim in the amount of $394,931.59. The arbitrator also found against the named individual based on the personal guaranty he had provided on the Promissory Notes. Finally the arbitrator award the defendant fees and expenses of the arbitration.
The trial court confirmed this award. Upon appeal by the plaintiff the Court of Appeals confirmed. The plaintiff first challenged the arbitration as improper asserting its right to terminate the arbitration based on the language cited above and the fact that there was no final decision within the time frame specified. The Court of Appeals found no merit to this challenge.
Here it is undisputed that the arbitrator rendered a final decision…[T]he mere fact that an award is vacated is not synonymous with the award never having been made…Indeed , if we were to interpret the contract in [this] manner…we would render the arbitration provision largely meaningless.
Claimant’s second challenge was that the arbitrator exceed the scope of his authority because the personal guarantor was not a party to the arbitration agreement and misinterpreting the contract. The Court stated the statutory grounds to vacate an award in OCGA § 9-9-13 are strictly construed. Noting that Williams had signed two guarantees on the notes and that the notes were expressly subject to the Memorandum of Sale that contained the arbitration agreement, and further that Williams had initiated the arbitration, the Court confirmed that Williams was bound by the arbitration agreement based on Equitable Estoppel:
“Nevertheless, under both the [Georgia Arbitration Code] and federal law, in certain
circumstances the theory of equitable estoppel provides a means of bring a nonsignatory
within the terms of an arbitration agreement.” (Citations omitted)
On claims about the lack of sufficiency of evidence underlying the arbitrator’s award the Court stated “an appellate court will not consider the sufficiency of the evidence underlying the arbitrator’s award.” The same principle was applied to deny claims the arbitrator misinterpreted the default provisions of the documents.
Finally, the claimant argued manifest disregard of the law by the arbitrator as a basis to challenge the award. Manifest disregard of the law does appear in the Georgia statute as a grounds to vacate an arbitration award. [It is not found in the FAA. In the federal system most circuits, other than the Second Circuit, have abandoned the application of manifest disregard of the law as a judicially created grounds for vacatur.]
The Court recited the tests for application of this challenge:
[W]e must first consider whether the governing law alleged to have been ignored by the arbitrator was well defined, explicit, and clearly applicable. We then look to the knowledge actually possessed by the arbitrator. The arbitrator must appreciate the existence of a clearly governing legal principle but decide to ignore or pay no attention to it. Both of these prongs must be met before a court may find that there has been manifest disregard of law. An error in interpreting the applicable law does not constitute “manifest disregard.” [Emphasis mine]
The Court found the plaintiff had not shown deliberate disregard by the arbitrator.
The fact that the arbitrator rejected SCSJ’s legal argument does not mean he ignored the arguments. This is true even where the arbitrator misconstrues the law… Accordingly, this argument present no basis for reversal.
Finally the court looked at the order issued by the trial court. In its judgment in favor of the defendant the court mostly tracked but modified some of the language contained in the arbitrator’s award. Plaintiff challenged these modifications as not following the arbitration award. The Court found that the trial court’s order was proper:
We agree that the arbitrator was somewhat inartful in drafting the award without specifying that the amount owed by Williams under the guaranties was joint and several with SCSJ. But, given the fact that Williams’ individual liability arises solely from this role as guarantor, it cannot reasonably be argued that his obligation would be in addition to the obligations of the principal… To the extent that the arbitrator’s award was vague or confusing, the trial court clarified in its judgment that Williams liability was joint and several with SCSJ. [Emphasis mine.]
[W]e did not hold, however that the trial court’s judgment must track the exact language of the arbitration award. As long as a trail court’s judgment does not affect the merits of the arbitrator’s ruling, reversal is not required…Furthermore, a trail court may interpret and enforce an ambiguous arbitration award as long as the ambiguity can be resolved from the record. .. Here the trial court’s judgment does not undermine the merits of the arbitration award. If anything, the judgment simply clarified an ambiguity.
Note to Georgia Arbitrators: Deciding or “redeciding” cases that have been remanded by the court require the arbitrator to closely discern the directions of the court. Neither the GAC nor the FAA provide helpful statutory guidance about remand situations. [Provider rules are also limited in providing guidance] Only general statutory statements exist about the rehearing or remand process. See OCGA §9-9-13 (e) Court directives then become critical to the task of the arbitrator on remand – who is the same arbitrator as in the original case [or who have been appointed by the court]– and who has not been replaced based on circumstances of corruption, misconduct or partiality. See OCGA § 9-9-13 (b) In this case, the Court of Appeals has provided some additional structure for handling remand cases. These include the effect of the remand on parts of the arbitration award that are acceptable and not open to rehearing, when the court may intervene in the remand to correct ambiguities in the arbitration award in remand, the binding effect of the original arbitration agreement in subsequent proceedings.
This week, the Supreme Court of the United States agreed to hear an American Express appeal of a ruling that allows retailers to pursue a class action claim against the credit card giant by alleging antitrust violations.
The decision on appeal, issued by the 2nd U.S. Circuit Court of Appeals, held that despite arbitration agreements barring class claims, the retailers would be allowed to pursue a class action claim because the retailers’ federal rights under the Sherman Act could not be vindicated on an individual basis in the arbitral forum.
In Amex’s petition for certiorari, the question presented is, “[w]hether the Federal Arbitration Act permits courts, invoking the ‘federal substantive law of arbitrability,’ to invalidate arbitration agreements on the ground that they do not permit class arbitration of a federal law claim.”
With so many cases in the last several years touching on this exact question, everyone should be watching to see just how the Supremes come down on this issue. After CompuCredit Corp. v. Greenwood, 10-948, 2012 WL 43514 (U.S. Jan. 10, 2012), the Court made clear that a “right to sue” under a federal statute did not foreclose the arbitrability of a claim under that statute, namely the Credit Repair Organization Act. What is less clear, however, is whether a federal claim that can arguably only be pursued in a class is subject to individual arbitration. Speaking directly to this issue is the Goldman Sachs employment discrimination suit with a former executive, Lisa Parisi, seeking to join a pattern or practice claim under Title VII despite having signed an agreement to arbitrate all claims individually. Interestingly, this case is also pending in the 2nd Circuit, which is likely to rule in favor of allowing Ms. Parisi to pursue her Title VII claim in a class alleging a pattern or practice of discrimination. Goldman’s brief can be found here.
The Supreme Court is likely to carve out an exception for Sherman Act claims for policy reasons, including the importance of safeguarding the procedure for bringing such claims. However, because of the Court’s recent pro-business decisions, not the least of which being Concepcion, we may see another decision reinforcing the strong federal policy in favor of enforcing arbitration agreements by their terms.
The case is American Express v. Italian Colors Restaurant, and the petition for cert. can be found here. Employers and businesses alike should be watching this one closely, because it will likely clarify the viability of class claims permitted under federal statutes in the face of the Federal Arbitration Act.
In a procedurally fascinating case brought in the U.S. District Court for the District of Connecticut, an Association of 170 independent franchisees brought a declaratory judgment action against Edible Arrangements (“EA”), alleging that EA violated their franchise agreements in a number of ways, including unfair selection of franchises for special treatment, and failure to disclose circumstances that had direct bearing on the franchisees, among other claims. The specific claims at issue, however, are not what make this case savory; rather, the fact that the franchisees were all bound by individual arbitration agreements and the court still allowed the Association’s claim to proceed is a tasty morsel for those following the federal courts’ treatment of class waivers in arbitration agreements.
The issue presented to the District Court in its denial of EA’s motion to dismiss (interestingly, not a motion to compel arbitration) was whether the Association had associational standing to sue. Under the associational standing doctrine, an association may only bring a claim if the relief sought does not require determination of damages on an individual basis. The Association of franchisees asserted to the Court that it would demonstrate EA’s violation of the general franchise agreement solely through EA’s own internal documents and expert testimony, thus avoiding the potential standing landmine and surviving the motion to dismiss.
The specific arbitration clause at issue undoubtedly precludes the individual franchisees from pursing claims in court; however, the clause contains a carve-out specifically for claims for injunctive relief, and it does not bind the Association itself. Notably, the arbitration clause does not include a carve-out for declaratory relief, nor for equitable relief in general. Did the District Court err in overlooking the specific terms of the arbitration clause in the franchise agreements? Possibly. For now, though, the Association of franchisees will be permitted to pursue its suit for declaratory relief in what appears to be a well-crafted run on the scope of EA’s arbitration clause.
The case is EA Independent Franchise Association LLC v. Edible Arrangements Int’l, Inc., et al., Case No. 3:10-cw1489(WWE), 2011 U.S. Dist. LEXIS 78008 (2011). Stay tuned for updates!