Two federal Circuit Courts recently rejected motions to vacate arbitration awards under the Federal Arbitration Act (FAA). In Johnson Controls, Inc. v. Edman Controls, Inc., the Seventh Circuit held that the arbitrator had not “exceeded [his] powers” by considering claims that allegedly belonged to a party’s subsidiaries. The opinion notes the threat of sanctions where a party repeats in court arguments that were previously rejected by the arbitrator. In Freeman v. Pittsburgh Glass Works, LLC, the Third Circuit held that an arbitrator was not “evident[ly] partial” who had received and not disclosed political donations from one party, where the opposing party’s attorneys had donated far more to her campaign. The Third Circuit becomes one of five circuits to apply a heightened “have to conclude” standard for evident partiality.
The FAA sets forth four grounds for vacatur of an arbitration award: (i) “where the award was procured by corruption, fraud, or undue means;” (ii) “where there was evident partiality or corruption in the arbitrators . . .;” (iii) “where the arbitrators were guilty of misconduct in refusing to postpone the hearing, . . . or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced;” and (iv) “where 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.” 9 U.S.C. § 10.
The fourth ground, “where the arbitrators exceeded their powers,” was at issue in Johnson Controls, 2013 WL 1098411 (7th Cir. Mar. 18, 2013). The arbitration arose from a contract in which Edman Controls (Edman) agreed to distribute, through its “Pinnacle” subsidiary corporations, products of Johnson Controls (Johnson). Johnson argued that Edman improperly pursued claims belonging to Pinnacle. The arbitrator agreed in part and dismissed one claim, but allowed Edman’s other claims, and awarded Edman damages.
Johnson sought vacatur, arguing that the arbitrator “exceeded [his] powers” by considering claims that properly belonged to Pinnacle. This was the same argument Johnson had made to the arbitrator. The Seventh Circuit found “two incurable shortcomings to Johnson’s argument.” First, the arbitrator had in fact refused to consider claims belonging to Pinnacle, as demonstrated by his dismissal of one claim on that basis. Second, the arbitrator’s decision “can be understood as consistent with” governing law. “The arbitrator properly looked at [the] evidence . . . and came to a conclusion. This was precisely what he was authorized to do, and even if some might question his conclusions, that is no reason to set aside the award.” The court did not award sanctions, but pointedly noted the “high risk of sanctions” for Johnson’s arguments.
The Seventh Circuit’s decision in Johnson Controls is similar to the Eleventh Circuit’s decision in B.L. Harbert International, LLC v. Hercules Steel Co., 441 F.3d 905 (11th Cir. 2006). There, the court rejected a challenge to an arbitration award, stating, “There are arguments to be made on both sides . . . , and they were made to the arbitrator before being made to the district court and then to us. Even if we were convinced that we would have decided . . . differently, that would not be nearly enough to set aside the award.” The court in B.L. Harbert also threatened sanctions without awarding them. Johnson Controls illustrates the difficulty in asserting post-award challenges to the scope of an arbitrator’s authority. Reviewing courts are likely to find either that such arguments have already been made and rejected (if raised during arbitration), or that the arguments have been waived (if not raised). If possible, the best time to raise such arguments may be in a pre-arbitration motion to enjoin arbitration.
In the Third Circuit case, Freeman, 709 F.3d 240 (3d Cir. 2013), the “evident partiality” vacatur ground of the FAA was at issue. The arbitrator had not disclosed that she had received $4,500 in donations from the winning party during her campaign for the Pennsylvania Supreme Court. The court rejected the losing party’s claim that her non-disclosure of the donations required vacatur of the award. The court considered particularly relevant that the law firm for the party seeking vacatur had also donated approximately $26,000 to the campaign. “This undercuts [the losing party’s] ‘evident partiality’ claim because our standard requires evidence that [the arbitrator] was partial to [the winning party] in particular.” The court also noted that under Pennsylvania law the arbitrator could not have directly solicited funds during her campaign, that the donations were a matter of public record accessible with “a five-minute internet search,” and that “campaign contributions are a way of life in many state judicial systems.”
Furthermore, in addressing the question of the proper standard to apply when determining “evident partiality,” the court clarified that in the Third Circuit the party seeking vacatur must show that “a reasonable person would have to conclude that the arbitrator was partial to the other party.” (Emphasis added.) The Third Circuit becomes one of five circuits (the First, Second, Third, Fourth, and Sixth) to adopt the “have to conclude” language, first used in Morelite Const. Corp. v. New York City Dist. Council Carpenters Benefit Funds, 748 F.2d 79 (2d Cir. 1984). Other circuits are either undecided on the question (see Montez v. Prudential Securities, Inc., 260 F.3d 980 (8th Cir. 2001)), have not squarely addressed it (Tenth Circuit), or apply somewhat less exacting standards (see Positive Software Solutions v. New Century Mortg. Corp., 476 F.3d 278 (5th Cir. 2007); Merit Ins. Co. v. Leatherby Ins. Co., 714 F.2d 673 (7th Cir. 1983); Schmitz v. Zilveti, 20 F.3d 1043 (9th Cir. 1994); Lifecare Int’l, Inc. v. CD Medical, Inc., 68 F.3d 429 (11th Cir. 1995)). Furthermore, the Third Circuit rejected the argument that the “have to conclude” standard only applies to actual bias cases, reasoning that the FAA “does not distinguish between actual bias and nondisclosure cases” and seeing “no reason to adopt a different standard for each type of case.” For parties seeking to vacate an arbitration award, a forum outside the Third Circuit may be a better choice.