Arbitrating the Patent Case Part XXIII: Non-Statutory Attacks

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In earlier articles in this series we focused on arbitrating patent disputes.  We began with the advantages and disadvantages of arbitrating patent matters, arbitration clauses, pretrial matters, the hearing, confirming the award, and attacking the award under the Federal Arbitration Act (“FAA”), among other things.  We will now have a look at grounds for attacking an award that aren’t set out in the FAA.

Manifest disregard of the law

For awhile, one of the more popular non-statutory grounds for attacking awards was “manifest disregard of the law.”  It is not listed in the FAA, but some courts have used it to overturn arbitration awards.  Even more have been asked to.  This often sounds good to counsel wanting to attack an award because they think the arbitrator got the law wrong.  It almost sounds like the kind of review one gets of legal issues on appeal.

But the Supreme Court rained on that parade in Hall Street Associates L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008).  There it found that only the grounds listed in the FAA provide the basis for vacating an award under the FAA, summarizing its reasoning as follows:

Instead of fighting the text, it makes more sense to see the three provisions, §§ 9–11, as substantiating a national policy favoring arbitration with just the limited review needed to maintain arbitration’s essential virtue of resolving disputes straightaway. Any 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.”  [Citations omitted.]

It even suggested that other courts’ use of the phrase “manifest disregard” may have merely been shorthand for grounds already listed in the FAA.  The Court did, however, note there may be other non-FAA grounds for vacating an award in the right case, but that situation wasn’t before it.

After Hall Street was decided, a number of circuits found “manifest disregard” was no longer a basis for attacking an arbitration award.  See, e.g., Medicine Shoppe International, Inc. v. Turner Investments, Inc., 614 F.3d 485, 489 (8th Cir. 2010).

Curiously, other circuits have allowed arguments seeking to overturn the award on that basis.  For example in Wetzel’s Pretzels, LLC v. Johnson, No. 12-56716 (2014), the Ninth Circuit, in an unpublished decision, considered an attack on an award for manifest disregard without mentioning Hall Street.  Perhaps the parties and the court just missed it.    The same is true for an unpublished Second Circuit decision,  A&G Coal Corp. v. Integrity Coal Sales, Inc., No. 13-2411 (2014).

But I wouldn’t take too much solace in these decisions if I were planning to attack an award for manifest disregard of the law.  First, an opponent who is aware of Hall Street would bring that decision to the court’s attention, likely foreclosing use of this ground.

Second, proving this ground is tough going.  Wetzel’s Pretzels provides a good example.  After considering this ground, the court refused to vacate the award, noting that “[t]o vacate an arbitration award on this ground, it must be clear from the record that the arbitrators recognized the applicable law and then ignored it.”  It found nothing in the record to indicate that the arbitrator recognized law that would have made challenged provisions of a franchise agreement unenforceable but ignored it.

The Second Circuit’s approach in A&G was similar. There A&G argued the arbitrator has misapplied New York law in determining damages.  But the court rejected this argument, noting, “A&G points to no binding case law that the arbitrator intentionally disregarded in making this determination, let alone any evidence of the arbitrator’s intent willfully to flout such controlling law.”

Completely irrational

There are other non-FAA grounds for attacking awards that have been used over the years.  One is that the award was “completely irrational.”  Whether this survives Hall Street is doubtful.  This too is a hard ground to make out in any event, requiring that the award not be derived from the parties’ agreement and other indications of the parties’ intent.  It may well be that his is another way of getting at the fourth ground of attacking an award under Section 10 of the FAA, which is that “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.”

Fails to draw its essence from the contract

Another ground for attack has been that award fails to draw its “essence” from the parties’ contract. Again, this is a least related to – if not a restatement of – FAA section 10’s fourth ground for vacating an award.  It will not provide a basis for reviewing an arbitrator’s factual and legal findings as if on appeal.

The award violates public policy

The Supreme Court recognized this ground in Eastern Associated Coal Corp. v. United Mine Workers of America, Dist. 17, 531 U.S. 57 (2000).  But that was in the context of a collective bargaining agreement, not a general commercial contract.

One can imagine creative arguments based on the beneficial role of patents in encouraging innovation, or the importance of invalidating invalid patents to avoid unjust monopolies.  But this ground – if it applies at all in a patent case – is not too promising because it is very narrow.  Public policy must be ascertained “by reference to the laws and legal precedents and not from general considerations of supposed public interests.”  Thus, the decision is generally entrusted to the arbitrator.  Only where a party can establish the decision is contrary to “explicit,”  “well-defined,” and “dominant” public policy will this ground be a basis for attack.  An award in patent arbitration will generally involve the arbitrator’s application of facts and law in a particular situation and is unlikely to be amenable to a public policy attack.

Attacking awards in general

After Hall Street, the viability of various non-statutory grounds for attacking arbitration awards remains in doubt.  But there is something one can draw from the cases that is worth paying attention to.  Arbitrators are provided great discretion and authority to decide disputes.  The courts are reluctant to second guess them, lest arbitration simply becomes a prelude to a court battle over the award.  But where the arbitrator didn’t provide the parties a fair process or came to a decision that is completely out of bounds, the courts may step in to rectify things.

If, on the other hand, a party is simply disappointed with a decision and is seeking another bite at the apple, the courts are unlikely to be tolerant of the attack.  In fact, a few years ago the Seventh Circuit had this to say:

An appeal is frivolous “if the appellant merely restates arguments properly rejected by the district court that are unsupported by a reasoned colorable argument for altering the district court’s judgment.”  Although we have decided to deny [Appellee’s] motion [for an award of fees], this is largely because the fee-shifting clause in the contract already assures that [Appellee] will not bear the costs of this appeal. We note, however, that challenges to commercial arbitral awards bear a high risk of sanctions.  Attempts to obtain judicial review of an arbitrator’s decision undermine the integrity of the arbitral process. Because of [Appellant’s] appeal, [Appellee] has been deprived not only of the value of the distributorship it expected to have  . . . , but also part of the value of the arbitration to which both parties agreed.

Johnson Controls, Inc. v. Edman Controls, Inc., 712 F.3d 1021 (2012)(citations omitted.)

In other words, if the Appellee wasn’t already getting its attorney’s fees paid based on its contract, the Court likely would have awarded it fees.  So be careful out there.

Next up

Next, we’ll take up modification to the award under the FAA.