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As judicial tolerance for appeals wanes litigants are risking sanctions when seeking to vacate awards.

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VOL. 25 NO. 3 MARCH 2007
ALTERNATIVES 51
As Judicial Tolerance for Appeals Wanes, Litigants
Are Risking Sanctions When Seeking to Vacate Awards
BY MARISA MARINELLI &
CHRISTELETTE HOEY
Calling it a “good example of the poor loser,” the Eleventh U.S. Circuit Court of Appeals has provided notice that it is “exasperated” by parties who attempt to salvage or
reverse arbitration losses through litigation
in the absence of a sound legal basis for doing so.
The remedy for deterring future, baseless appeals of arbitration decisions and protecting arbitration as a viable, efficient, and
economic dispute resolution mechanism, is,
at least in the Eleventh Circuit, the imposition of sanctions in appropriate cases.
One district court in the circuit recently indicated its willingness to do so. Rather
than risk sanctions, parties who want
scrutiny of arbitral awards beyond the limited grounds provided by law may need to
consider using nonjudicial forms of review—a suggestion of the Ninth Circuit
and others.
In B.L. Harbert International LLC v.
Hercules Steel Co., 441 F.3d 905 (11th Cir.
2006), a dispute arose between the parties—contractor Harbert, and its subcontractor, Hercules—regarding the subcontractor’s work completion dates and timeliness. At issue were two different progress
schedules containing different completion
dates, a “2000” schedule, and a “3000”
schedule containing later, more lenient
dates for completion of the work.
Harbert stopped making payments to
subcontractor Hercules, and demanded delay damages when Hercules did not meet
the earlier 2000 schedule deadlines. Hercules, which completed its work within the
more lenient 3000 schedule deadlines, demanded arbitration, seeking to recover the
balance it was owed under the subcontract,
as well as other damages. Harbert counterclaimed for delay damages, acceleration
costs, back charges, and other damages.
Marinelli is a New York-based partner in the
Litigation Section of Holland & Knight LLP, focusing primarily on commercial litigation and arbitration. Hoey is an associate in the firm’s New
York Litigation SectionPractice Group, also based
in New York.
Hearings were held over seven days in
February and May 2004. Hercules argued
that it was obligated to comply with the
more lenient 3000 schedule because, among
other things, Harbert had not defined the
schedules within the subcontract, and had
abandoned the 2000 schedule, thereby creating ambiguity as to which schedule Hercules was bound by under the contract.
Harbert took the position that the subcontract unambiguously authorized Harbert to set a unilateral schedule, meaning
Hercules was bound by the 2000 schedule.
ARBITRATION
In interpreting the subcontract on the
schedules’ applicability, an arbitrator decided Hercules was bound to the more lenient 3000 schedule, and awarded Hercules the balance owed under the subcontract and interest.
Unhappy with the arbitrator’s decision,
Harbert moved to vacate the arbitration
award. It thereafter appealed the district
court’s denial of its motion to vacate,
claiming the arbitrator’s rationale in reaching his decision reflected a manifest disregard of the applicable law.
NO BASIS TO VACATE
The Eleventh Circuit found no basis for
the manifest disregard claim, stating there
was no evidence that the arbitrator decided
the dispute “on the basis of anything other
than his best judgment—whether right or
wrong—of how the law applies to the facts
of the case.” 441 F.3d at 913.
Even if the arbitrator arguably erred
with respect to interpreting the subcontract,
this, without more, was insufficient to vacate the arbitrator’s decision. Id. at 912-13.
The only “manifest disregard of the law”
that the Eleventh Circuit found was Harbert’s “refusal to accept the law of the circuit
which narrowly circumscribes judicial review of arbitration awards.” Id. at 913.
The Court further stated that the
“laudatory goals of the FAA will be
achieved only to the extent that courts ensure arbitration is an alternative to litigation, not an additional layer in a protracted contest.” Id. at 907. (emphasis added).
The invitation to impose sanctions on
baseless motions to vacate arbitral awards
was subsequently accepted by the U.S. District Court in Florida’s Middle District.
Citing extensively to Harbert, the magistrate in SII Investments Inc. v. Jenks, 2006
WL 2092639 (M.D. Fla. July 27, 2006),
found that the plaintiff, investment broker
SII Investments, failed to meet the
Eleventh Circuit’s “exacting standards” for
vacating an arbitration award. It found that
the broker failed to heed the Eleventh Circuit’s clear warnings that courts should impose sanctions for seeking vacatur without
any real basis.
In recommending the arbitration
award’s confirmation and a sanctions award,
the magistrate first found no basis for vacating the award based on manifest disregard of
the law, the only grounds asserted. Second,
the magistrate took pains to point out that,
even after Jenks moved for sanctions in the
wake of the Eleventh Circuit’s Harbert decision, SII Investments did not look to Rule
11’s safe harbor, but rather responded with a
“never-say-die tack,” ignoring the stern
warnings given to litigants to avoid unwarranted judicial review of arbitral awards. See
also Rueter v. Merrill Lynch, Pierce, Fenner &
Smith, 440 F. Supp.2d 1256 (N.D. Ala.
2006)(citing Harbert and awarding sanctions under a Rule 11 analysis based on the
plaintiffs’ frivolous motion to vacate an arbitration award).
A BRIEF LOOK BACK AT SANCTIONS
Harbert and its recent progeny are not as
groundbreaking or novel as may appear at
first blush. A decision from the Seventh
Circuit from more than over 20 years ago,
which awarded sanctions for a frivolous appeal of an arbitration award under an
Published online in Wiley InterScience (www.interscience.wiley.com).
Alternatives DOI: 10.1002/alt
(continued on next page)
52 ALTERNATIVES
VOL. 25 NO. 3 MARCH 2007
(continued from previous page)
F.R.C.P. Rule 11 analysis, contained a
warning eerily similar to that issued by the
Harbert court.
In Dreis & Krump Mfg. Co. v. Int’l. Assoc. of Machinists, 802 F.2d 247, 254-56
(7th Cir. 1986.), an employer sought to vacate an arbitration award that ordered it to
cancel the subcontracting of an employee–union member’s welding work, and to
recall the employee. In finding that the arguments seeking to set aside the award
were frivolous, the Seventh Circuit stated:
It is human nature to crave vindication
of a passionately held position even if
the position lacks an objectively reasonable basis in the law. But the amended
Rule 11 makes clear that he who seeks
vindication in such circumstances and
fails to get it must pay his opponent’s
reasonable attorney’s fees. A company
dissatisfied with the decisions of labor
arbitrators need not include an arbitration clause in its collective bargaining
contracts, but having agreed to include
such a clause it will not be permitted to
nullify the advantages to the union by
spinning out the arbitral process unconscionably through the filing of meritless suits and appeals. For such conduct the law authorizes sanctions that
this court will not hesitate to impose.
***
Lawyers practicing in the Seventh Circuit, take heed!
NARROW GROUNDS
The grounds upon which an arbitration
award may be vacated by a federal court
are narrow, and the trend is to construe
those grounds rather strictly. See, e.g.,
Wallace v. Buttar, 378 F.3d 182, 191-93
(2d Cir. 2004)(clarifying that the Second
Circuit’s Halligan v. Piper Jaffray Inc., 148
F.3d 197 (2d Cir. 1998), did not expand
the grounds upon which an arbitration
award can be vacated to include “manifest
disregard of the evidence,” stating that a
federal court “may look upon the evidentiary record of an arbitration proceeding
[if ] at all, . . . only for the purpose of discerning whether a colorable basis exists for
the panel’s award so as to assure that the
award cannot be said to be the result of the
panel’s manifest disregard of the law. A
federal court may not conduct a reassessment of the evidentiary record. . . .”)(emphasis in original).
A question that arises is whether the
parties may spell out in their agreement to
arbitrate additional or alternative grounds
upon which an award may be vacated.
Some circuits, including most recently, the
Ninth Circuit, have found contractual provisions purporting to expand the bases upon which a court may vacate an arbitration
award to be unenforceable.
In Kyocera Corp. v. Prudential-Bache
Trade Services Inc., 341 F.3d 987 (9th Cir.
2003), cert. dismissed, 540 U.S. 1098
(2004), the parties—a licensor, LaPine,
purchaser/reseller Prudential, and manufacturer Kyocera—disputed the terms of
their final agreement with respect to their
production and marketing of computer
disk drives. LaPine licensed its proprietary
drive design to Kyocera for manufacturing.
Prudential financed LaPine’s inventory and
accounts receivable and initially purchased
the drives from Kyocera, reselling them on
credit to LaPine. LaPine then marketed the
drives to its customers.
The final agreement between the parties
arguably limited Prudential’s role, requiring
Kyocera to sell the drives directly to LaPine.
Kyocera claimed it never approved a limitation and refused to execute the final agreement. LaPine filed suit against Kyocera in
federal court for breach of contract, seeking
damages and an injunction compelling Kyocera to supply drives directly to LaPine
under the contract.
Kyocera moved to compel arbitration,
and a panel of three arbitrators was convened. The arbitration panel proceeded in
two phases, determining under California
law that (1) Kyocera had entered into the
final agreement accepting LaPine and Prudential’s version, which required Kyocera
to sell drives directly to LaPine, and (2) Kyocera had breached the contract, causing
LaPine’s harm.
In its final decision, the panel unanimously awarded LaPine and Prudential
about $243 million in damages and prejudgment interest against Kyocera.
Kyocera contended that the arbitration
panel’s decision was based on numerous legal
errors and unsupported evidence. Kyocera
moved to vacate, modify, or correct the arbitral award on the grounds that the arbitrators
“exceeded their powers” under the parties’
contractual arbitration provision, which provided that an arbitration award could be vacated, modified, or corrected by the court on
the grounds specified in the Federal Arbitration Act, and on two additional grounds:
(1) where the arbitrators’ findings of fact
are not supported by substantial evidence, or
(2) where the arbitrators’ conclusions of
law are erroneous.
The Ninth Circuit found the latter portion of this provision to be unenforceable. It
concluded that private parties have no power to alter or expand the grounds upon
which federal courts may review arbitral decisions as proscribed by Congress. It held
that any contractual provision purporting to
do so was unenforceable. 341 F.3d at 1000.
KEEPING ADR PRIVATE
Acknowledging that the grounds for review
of an arbitral award are “extremely limited,”
the court explained that this limitation is
“designed to preserve due process but not to
permit unnecessary public intrusion into
private arbitration procedures.” Id. at 998.
See also Bowen v. Amoco Pipeline Co., 254
F.3d 925, 936 (10th Cir. 2001)(finding that
expanded judicial review would threaten the
independence of arbitrators and weaken the
distinction between arbitration and adjudication); Chicago Typographical Union No. 16
v. Chicago Sun-Times Inc., 935 F.2d 1501
(7th Cir. 1991)(construing the Taft-Hartley
Act, but looking to the Federal Arbitration
Act for guidance); and UHC Mgmt. Co. v.
Computer Sciences Corp., 148 F.3d 992 (8th
Cir. 1998)(strongly suggesting that parties
may not contract for expanded judicial review of an arbitration award, but resolving
the matter at hand on other grounds). But
see Roadway Package Sys. Inc. v. Kayser, 257
F.3d 287, 292 (3d Cir.), cert. denied, 534
U.S. 1020 (2001), and Gateway Techs. Inc. v.
MCI Telecomms. Corp., 64 F.3d 993 (5th
Cir. 1995)(finding support for upholding
the parties’ contractual choice of grounds
for review).
The Ninth Circuit in Kyocera went on
to say that, notwithstanding the parties’ inability to alter the statutorily imposed limits governing the federal courts’ review of
arbitration decisions, parties are not pre-
Published online in Wiley InterScience (www.interscience.wiley.com).
Alternatives DOI: 10.1002/alt
VOL. 25 NO. 3 MARCH 2007
ALTERNATIVES 53
vented from contractually modifying the
arbitration process. Thus, contracting parties are free to design whatever procedures
or systems are best-suited to their needs,
including review of arbitral decisions by
one or more appellate arbitration panels.
341 F.3d at 1000. Cf. Tamari v. Bache
Halsey Stuart Inc., 619 F.2d 1196, 1202
(7th Cir.), cert. denied, 449 U.S. 873
(1980)(affirming the dismissal of a motion
to set aside an arbitration award on
grounds that the appeals procedure provided under the Chicago Board of Trade’s Arbitration Committee, which governed the
arbitration at issue, did not accept written
briefs or oral argument; the Court found
that the appeal to the arbitral review board
was in accordance with the parties’ agreement and the CBOT rules). But cf. Cofinco Inc. v. Bakrie & Bros. N.V., 395 F. Supp.
613, 615-16 (S.D. N.Y. 1975)(vacating in
part an arbitration award, finding that arbitrators on appeal “exceeded their powers”
where evidence on some of the issues raised
on appeal had not been heard by the panel
below, and the arbitration appellate panel—which reversed the panel below—was
barred from hearing it under its rules).
This freedom, however, must be exercised at the contract drafting stage, since
once an arbitral decision reaches a federal
court for confirmation or vacatur, the narrow federal standards of review will apply.
or erroneous findings of fact, or other
grounds selected by the parties.
How an appellate arbitrator or appellate panel is to be constituted, and the procedures to be used, also should be spelled
out in the parties’ contract. The International Institute for Conflict Prevention &
Resolution, which publishes Alternatives,
has adopted the Arbitration Appeals Procedure, which can be used in appropriate cases. Appeals are heard by former U.S. federal judges. [See the link to Clauses, Rules,
Codes & Procedures at www.cpradr.org.]
Under International Chamber of Commerce rules, the Court of the ICC must approve all awards as to their form, and, according to the ICC’s Web site, the “Court
may lay down modifications as to the form
of the Award and, without affecting the Arbitral Tribunal’s liberty of decision, may also draw its attention to points of substance.” The ICC Rules of Arbitration can
be found at www.iccwbo.org/court/arbitration/id4093/index.html. This scrutiny, although not a formal appeals mechanism, is
another layer of scrutiny in any arbitral
process subject to the ICC rules.
The caveat is that parties should not go
into an arbitration with the idea that they
may rely on a subsequent challenge made
to a court in order to “fix” an unsatisfactory award. The Eleventh Circuit most recently , at least, has demonstrated that pursuing such appeals without a basis in law
likely will result in sanctions.
Harbert and Kyocera point to the simple
fact that, when agreeing to arbitration,
contractual parties should not assume that
they will get more than one bite of the
proverbial apple. While litigation affords
parties opportunities to seek reconsideration and appellate review, arbitration, with
its oft-stated goals of providing parties with
a less expensive and more expeditious
mechanism for resolving disputes, mandates that parties get it right the first time.
Clear and concise agreements, including the arbitration provision, must be
drafted from the outset. Challenges–for example, to arbitrator impartiality or bias—
must be raised immediately, or they may be
waived. See, e.g., Lucent Technologies Inc. v.
Tatung Co., 379 F.3d 24 (2d Cir. 2004)(refusing to vacate arbitration award, where a
party seeking to vacate an award based on
arbitrator bias chose to remain ignorant of
a challenged arbitrator’s disclosures, knew
of arbitral institution’s rules of disclosure,
and did not seek out a disclosure form
when it wasn’t received, but instead waited
to challenge bias after a two-year arbitration concluded).
Evidence must be pursued and presented, a record made of the proceedings, and
all arguments, legal and factual, should be
set out in briefs or, if argued orally, in a
recorded transcript.
For more complex matters, and as
added assurance, agreements may include
arbitration provisions that require a nonjudicial, appellate arbitration panel, or an appellate arbitrator, to review arbitral decisions and reverse such decisions, if necessary, on the basis of legal misinterpretation
Management Mediation
voking external agents into arbitrator-like
roles.
atively unconscious and automatic. See
Dolly Chugh, “Societal and Managerial
Implications of Implicit Social Cognition:
Why Milliseconds Matter,” 17(2) Social
Justice Research 203 (June 2004).
Types of organizational conflict have
been identified to include bargaining conflict among the parties to an intergroup relationship; bureaucratic conflict between
parties to a superior-subordinate relationship, and systems conflict among parties to
a lateral working relationship. Louis R.
Pondy, “Organizational Conflict: Concepts
and Models,” 12(2) Administrative Science
Quarterly 296 (September 1967).
In addition, some authors have de-
ONE BITE
(continued from front page)
role, and an external mediator’s orientation.
The authors hope that the NSR Management Mediation Grid will become the
inherent base process for persons within an
organizational construct on how to think
and act in an ambiguous situation. We
hope to prevent protracted conflict, deadlocks, escalation, and other destructive outcomes. The NSR Management Mediation
grid’s applicability and processes run to
both the manager’s role as a mediator, and
the role of parties’ self-mediation. The bottom line is that self-selected resolution has
been observed to be more effective than in-
THE NEED FOR
CONFLICT CONSISTENCY
It has been proposed that there are psychological constraints on real-time decision
making, with ethical and practical consequences due to the conditions that characterize managerial work—messy decisionmaking, fragmented attention, and pressured stakes.
It has been argued that managerial
work is vulnerable to unintended bias and
social justice violations, highlighting the
prevalence of mental processes that are rel-
DOI 10.1002/alt.20170
(For bulk reprints of this article,
please call (201) 748-8789.)
Published online in Wiley InterScience (www.interscience.wiley.com).
Alternatives DOI: 10.1002/alt
(continued on next page)
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