Hyatt Franchising LLC v. Shen Zhen New World I, LLC, No. 17-2071 (7th Cir. Nov. 28, 2017) [click for opinion]

In September 2012, Hyatt Franchising, LLC ("Hyatt") and Shen Zhen New World I ("Shen Zhen") entered into an agreement under which Shen Zhen committed to renovate a Los Angeles hotel and operate the hotel using Hyatt's business methods and trademarks. The agreement contained an arbitration clause and, when Hyatt claimed breach against Shen Zhen two years later, the parties submitted the dispute to a single arbitrator. The arbitrator ultimately held Shen Zhen liable to Hyatt for about $7.7 million in damages, in addition to about $1.3 million in attorneys' fees and costs. Hyatt successfully moved the United States District Court for the Northern District of Illinois to enforce the arbitral award in full. Shen Zhen then appealed to the Seventh Circuit Court of Appeals.

Shen Zhen's primary argument for reversal was under 9 U.S.C. § 10(a)(3), which states that an award may be set aside "where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, 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." Shen Zhen argued that the arbitrator erroneously refused to issue a deposition subpoena to the attorney who represented Shen Zhen in the contract negotiations two years prior to the dispute.

The Seventh Circuit concluded that "[l]ike the district court, we do not see how either branch of Shen Zhen's argument comes within this language." The court observed that the statutory phrase "refusing to hear evidence" concerns the conduct of the hearing, not the conduct of discovery. In the court's words, "nothing in the Federal Arbitration Act requires an arbitrator to allow any discovery. Avoiding the expense of discovery under the Federal Rules of Civil Procedure and their state-law equivalents is among the principal reasons why people agree to arbitrate." The court further pointed to the integration clause in the agreement "that forecloses resort to the negotiating history as an interpretative tool," which would have rendered the attorneys' testimony irrelevant on the issue of contract breach in the first instance. This, along with the fact that the arbitrator permitted "plenty of discovery" to begin with, reinforced the court's decision to affirm enforcement of the award.

Shen Zhen also argued that the arbitrator erred in refusing to disqualify Hyatt's law firm, which the former Shen Zhen attorney joined three years after the agreement was signed. The court noted that the Federal Arbitration Act does not provide for substantive review of an arbitrator's decisions. Although the statute provides for judicial intervention when an arbitrator commits "misbehavior," an error differs in kind from misbehavior. Without directly commenting on whether the arbitrator committed any "error" in refusing to disqualify Hyatt's law firm due to the former Shen Zhen attorney now working there, the court determined that the arbitrator was free of any plausible charge of misbehavior.

Finally, the Seventh Circuit affirmed Hyatt's entitlement to attorneys' fees. The Court of Appeals reaffirmed its long-held proposition that "commercial parties that have agreed to final resolution by an arbitrator, yet go right on litigating, must pay their adversaries' attorneys' fees." Although the "American Rule" ordinarily requires each side to bear its legal fees, the court said that applied to the initial round. But an "entity that insists on multiplying the litigation must make the other side whole for rounds after the first."

For all the above reasons, the Seventh Circuit affirmed the district court's enforcement of the arbitral award and warded attorneys' fees.