In a July 15, 2011 Order in Dunn et al. v. Citigroup Global Markets, Inc., No. 10-81469-CIV-MARRA/JOHNSON, the Southern District of Florida, relying on B.L. Harbert Int’l, LLC v. Hercules Steel Co., 441 F.3d 905 (11th Cir. 2006), granted Defendant’s Motion for the Imposition of Sanctions based on a finding that Plaintiffs’ Motion to Vacate a FINRA arbitration award was without any “real legal basis.” In moving to vacate, the Plaintiffs in Dunn had initially relied solely on overruled Eleventh Circuit law. Plaintiffs later placed blame for having cited overruled law on an inaccuracy of West’s KeyCite system, but continued to press for vacatur by making a late-stage, unsupported conflict of laws argument, urging the court to apply the law of a different jurisdiction. While the circumstances of Dunn were extreme, the Order serves as a warning to parties that courts in the Eleventh Circuit will be critical of motions to vacate that have no valid legal basis.
In Dunn, the Plaintiffs sought to vacate a FINRA arbitration award denying their employment related claims against Defendant, Citigroup Global Markets, Inc. (CGMI) on the sole ground that the arbitrators had manifestly disregarded the law. In their Motion to Vacate, Plaintiffs cited to only one case in support of their manifest disregard argument — Ierna et. al. v. Arthur Murray International Inc., 833 F.2d 1472, 1476-1477 (11th Cir. 1987) — a case that the Westlaw KeyCite notation system had failed to red flag. While the “manifest disregard” standard for vacatur is still viable in a number of jurisdictions, in 2010 the Eleventh Circuit invalidated the standard pursuant to the Supreme Court’s decision in Hall Street LLC v. Mattel, Inc., 552 U.S. 576 (2008). See Frazier v. CitiFinancial Corp., 604 F.3d 1313, 1324 (11th Cir. 2010) (holding all non-statutory bases for vacating an award, including manifest disregard of the law, are invalid in the Eleventh Circuit).
In response to Plaintiff’s Motion to Vacate, CGMI, represented by Tracy L. Gerber of Greenberg Traurig, argued that the Eleventh Circuit no longer recognized Plaintiffs’ sole theory of relief, and that absent any viable ground for vacatur, Plaintiff’s baseless motion warranted sanctions pursuant to B.L. Harbert Int’l, LLC v. Hercules Steel Co., 441 F.3d 905 (11th Cir. 2006). In Harbert, the Eleventh Circuit put losing parties to an arbitration on notice that:
[T]his Court is exasperated by those who attempt to salvage arbitration losses through litigation that has no sound basis in the law applicable to arbitration awards. The warning this opinion provides is that in order to further the purposes of the [Federal Arbitration Act] and to protect arbitration as a remedy we are ready, willing and able to consider imposing sanctions in appropriate cases.
Id. at 913-14. Thus, Harbert provides courts in the Eleventh Circuit with the ability to award sanctions when faced with motions to vacate arbitration awards that lack “any real legal basis.” Id.
In their reply brief, Plaintiffs tried to back-pedal away from the position taken in their initial motion. Specifically, Plaintiffs argued for the first time and without citing to any legal authority that the law of the Second Circuit, which continues to recognize the manifest disregard standard, should apply to the vacatur proceedings pursuant to some conflict of laws principle. The court rejected Plaintiffs’ argument and concluded that under Eleventh Circuit law, Plaintiffs failed to demonstrate any legal ground for vacating the FINRA arbitration award.
On March 10, 2011, the court confirmed the FINRA arbitration award and requested the parties to submit supplemental briefing so it could consider CGMI’s request for sanctions pursuant to Harbert. In particular, the court directed the parties to brief “whether Plaintiffs’ late-stage conflict-of-laws argument is a good-faith credible effort to vacate the arbitration award or an after-the-fact rationalization for Plaintiffs’ failure to research and follow the clear and binding Eleventh Circuit precedent that forecloses the only asserted basis for Plaintiffs’ motion to vacate.” The court issued its Order sanctioning Plaintiffs pursuant to Harbert on July 15, 2011.
In its July 15, 2011 Order, the court held that Plaintiffs’ vacatur action was “precisely the type of action admonished by the Eleventh Circuit in Harbert.” The court found that Plaintiffs had proceeded in federal court “without any real legal basis” for seeking vacatur and “lacked an objectively reasonable belief they would prevail.” The court further concluded that Plaintiffs’ argument that Second Circuit law should apply to the proceeding was merely “an after-the-fact rationalization for Plaintiffs’ failure to abide by clear Eleventh Circuit precedent.”
The court also addressed Plaintiffs’ failure to inquire into the state of Eleventh Circuit vacatur law. On this point, Plaintiffs contended that sanctions were not warranted because the one legal authority to which they cited did not reflect an “overruled” flag by Westlaw’s KeyCite notation system. With respect to Plaintiff’s KeyCite argument, the court stated in dicta that:
Westlaw’s case-history system, while a helpful starting point, does not absolve Plaintiffs’ counsel of his professional responsibility to thoroughly research the applicable law before filing a motion in court. A simple search for “manifest disregard” in Westlaw’s Eleventh Circuit database would have revealed that this standard is no longer recognized in this Circuit.
Pursuant to Harbert, the court found that requiring Plaintiffs to reimburse CGMI for its costs and attorney’s fees associated with the vacatur proceedings was an appropriate sanction. Only three other reported cases in the Eleventh Circuit have specifically awarded sanctions against a party for filing a motion to vacate in violation of the warning set forth in Harbert, demonstrating the rarity of such an award.
Despite the gravity of an award of monetary sanctions, the court’s Order in Dunn should not be read as outright prohibiting the filing of motions to vacate in the Eleventh Circuit. Indeed, parties in the Eleventh Circuit still have the ability to challenge an arbitration award under the limited grounds for vacatur set forth in section 10 of the Federal Arbitration Act. See, e.g., De Beers Centenary AG v. Hasson, 751 F. Supp. 2d 1297 (S.D. Fla. 2010) (granting motion to vacate brought under FAA section 10 ground, “arbitrators exceeded their powers”). The Dunn Order of sanctions, however, bolsters the warning in Harbert that a party on the short end of an arbitration award in the Eleventh Circuit must be able to articulate a sound basis for vacatur pursuant to statutory guidelines and cannot ignore binding precedent.