Courts to Lawyers: We Mean It. Stop Making Baseless Attacks on Commercial Arbitration Awards.

Arbitration is designed to be faster and less expensive than court. It can be both those things because the procedure is limited. The parties have contracted to have their dispute decided by a single arbitrator or panel of arbitrators and to abide by the decision. Unless they have contracted for an arbitral appeal, the post-hearing attacks on decisions by courts that trial lawyers are used to aren’t available for arbitration awards.

Vacating an award

It is possible to overturn – or in arbitration parlance “vacate” – an arbitration award. But that is basically for some unfairness or problem with the proceeding such as a clearly biased arbitrator or an arbitrator deciding something the parties didn’t give the arbitrator the power to decide. Awards are not overturned by courts simply based on an arbitrator’s claimed mistake in fact finding or the law.

While lack of appeal is critical to the speed and lower cost of arbitration, this often proves frustrating to the losing party and its counsel. Persistence is often considered a virtue. So, persist some lawyers do, all the way to an appellate court if they must.

A warning

Appellate courts have failed to see the virtue of blind persistence when it comes to arbitration awards. For example, as I mention in my recent ABA book (available at shopaba.org if you are interested), the Seventh Circuit gave a warning on this topic in Johnson Controls, Inc. v. Edman Controls, Inc., 712 F.3d 1021 (2013). There the Court said that “challenges to commercial arbitral awards bear a high risk of sanctions. Attempts to obtain judicial review an arbitrator’s decision undermine the integrity of the arbitral process.” In this case, the appellant deprived the appellee of “part of the value of the arbitration to which both parties agreed.” The Courts said it would have awarded fees against the appellant if the contract did not already have a loser pays provision.

An earlier warning

The Eleventh Circuit earlier made a similar warning in B.L. Harbert International, LLC v. Hercules Steel Co., 441 F.3d 905 (11th Cir. 2006). It noted that the attack on the award was without good basis and that therefore the appellant deprived both the court and the appellee of the benefits of arbitration. The case cost more and took longer because the appellant dragged the matter through two courts after the arbitration. The Court then issued its warning: “[I]n order to further the purposes of the FAA and to protect arbitration as a remedy we are ready, willing, and able to consider imposing sanctions in appropriate cases.”

Trying to avoid arbitration

Lawyers have also tried to avoid arbitration altogether. To be sure, if a party has not agreed to submit a dispute to arbitration, it should not have to arbitrate it. But simply ignoring the arbitration clause and making baseless arguments is a bad idea.
That’s what happened in James Hunt v. Moore Brothers, Inc., No. 16-2055 (7th Cir. 2017). Despite the presence of an arbitration clause, the plaintiff, an independent contractor truck driver, filed a case in district court against the owner of a small trucking company. The court dismissed the case and ordered arbitration. Eventually, it sanctioned plaintiff’s counsel.

But counsel persisted. She appealed to the Seventh Circuit, again arguing among other things, that appellant should not have to arbitrate because the employer had breached the contract. Like the district court, the Seventh Circuit rejected that argument, noting that if a breach of the underlying contract excused a party from arbitration, there would never be any arbitration. And the Seventh Circuit upheld the district court’s award of sanctions against plaintiff’s counsel, noting that she had blown up a simple commercial dispute “beyond all rational proportion.” Counsel not only made baseless arguments to avoid arbitration, but also asserted baseless causes of action including seeking to enforce criminal laws against peonage, and antitrust and RICO violations.

The lesson from this case is simple. Don’t challenge an arbitration clause in court without a reasonable legal basis. And if you do, don’t compound a meritless refusal to arbitrate with other meritless claims.

Lawyers persist

The Seventh Circuit’s patience was again tried in Hyatt Franchising, LLC v. Shen Zhen New World I, LLC, No. 17-2071 (Nov. 7, 2017 7th Cir.). There Shen Zhen contracted to renovate and operate a hotel for Hyatt. Hyatt claimed Shen Zhen breached the contract. The parties arbitrated, and Hyatt prevailed, enjoying an award of $7.7 million in damages and $1.3 million in fees and costs. Hyatt asked the district court to confirm the award, which it did.
Shen Zhen appealed, attacking the award because the arbitrator had refused to issue a subpoena to a lawyer who had represented Shen Zhen in negotiating the Hyatt contract. The arbitrator found she had no knowledge of the current dispute since she had stopped working for Shen Zhen years before the dispute arose and the contract was an integrated document. Shen Zhen also sought to vacate the award because the arbitrator had declined to disqualify Hyatt’s law firm for which the lawyer had gone to work three years after the contract was signed. The law firm had put an ethical screen in place.
The Court found the arbitrator was not guilty of refusing to hear evidence. It also rejected an argument that the arbitrator exceeded his powers because the award disregarded state and federal franchise laws, that is to say, didn’t buy Shen Zhen’s defense. The Court observed that the FAA “does not make legal errors a ground on which a judge may refuse to enforce an award.”

The Court finally stated that “[m]ore More than 25 years ago, this court held that commercial parties that have agreed to final resolution by an arbitrator, yet go right on litigating, must pay their adversaries’ attorneys’ fees.” It noted that there was already a fee-shifting clause, but further invited Hyatt to apply for an order “if the parties cannot agree on how much Shen Zhen owes for pointlessly extending this dispute through the district court and the court of appeals . . .”

What does it all mean today?

Arbitration has been under attack lately. Most recently, requirements that employment disputes – including harassment claims – be resolved confidentially by arbitration and that disputes about confidentiality agreements be resolved in “secret” arbitrations” are said to be unfair and to cover up issues important to society. Use of arbitration clauses to foreclose class actions in consumer matters remains, at best, controversial. In the context of employment disputes and consumer disputes, then, arbitration is often portrayed in a negative light.

Could this negative portrayal spill over to courts and provide some cover for lawyers who want to vacate awards or avoid arbitration? I can’t say in the employment or consumer context, although it is more likely changes there could come through legislation, some of which has already been proposed.

But I am fairly certain that the present controversies about arbitration will not suddenly cause courts to rethink their position that business people who have negotiated contracts that include arbitration clauses must abide by their agreement to arbitrate. And courts are still likely to continue to find, as the Seventh Circuit has said, that “commercial parties that have agreed to final resolution by an arbitrator, yet go right on litigating, must pay their adversaries’ attorneys’ fees.”