The Minnesota Supreme Court today unanimously confirmed an arbitration award of over $600 million in punitive sanctions. Seagate Technology, LLC v. Western Digital Corp., (Minn. Oct. 8, 2014). Although the appellant argued the arbitrator exceeded his authority by severely sanctioning appellant for fabricating evidence, the court concluded that the parties’ agreement gave the arbitrator power to impose the sanctions. In contrast to the two recent state court decisions vacating arbitration awards, this decision deserves a gold star. (Of course it does. In Minnesota, the women are strong, the men are good looking, and the judges are all above average.)
The parties’ arbitration agreement provided that arbitration would proceed “in accordance with the rules then in effect of the American Arbitration Association. The arbitrator may grant injunctions or other relief in such dispute or controversy.” The relevant AAA rules in turn empowered the arbitrator to “grant any remedy or relief that would have been available to the parties had the matter been heard in court.” The court found that both the language of the agreement and the incorporated rule were broad enough to allow the arbitrator to issue sanctions, even big sanctions, against a party who fabricated evidence.
The court found the sanctions were “injunctions or other relief” within the meaning of the agreement, and a “remedy or relief” contemplated in the AAA rules. The court therefore held the arbitrator did not exceed his power and the award could not be vacated. (The court also disagreed with the opinion below by finding that arbitrators do not automatically have power to sanction parties, it must come from the language of the parties’ agreement or any incorporated arbitral rules. The court refused to get into the merits of whether punitive sanctions was an appropriate remedy given the specific facts of this case, noting that the parties chose arbitration and with that choice comes “very limited review of the final award.” )
The court also found the arbitrator did not “refuse to hear evidence” within the meaning of the statute allowing vacatur. Because the arbitrator conducted a full evidentiary hearing before issuing his sanctions award, the court construed the appellant’s challenge as centering on how the arbitrator used or weighed evidence, which is not a basis for vacatur.
The most surprising thing about this case is that the parties do not appear to have argued for application of the FAA. In fact, the court analyzed the case under Minnesota’s Uniform Arbitration Act (which has since been replaced by the Revised Uniform Arbitration Act). Given that both of these parties engage in interstate commerce every day, never mind the sheer dollars at issue in this dispute, the FAA definitely applies. Although the award would be confirmed under both state and federal arbitration statutes, I would have loved to see the Minnesota Supreme Court use this case as an opportunity to help educate the Minnesota bar about the broad application of the federal act.