Copyright 2014 American Arbitration Association

“Exceeded Powers”: Recent Trends in Cases Challenging Arbitrator Authority

March 20, 2014 – 2:00 p.m. – 3:30 p.m. (ET)

PROGRAM SUMMARY

Speakers: Thomas J. Brewer, Esq. and Lawrence R. Mills, Esq.

The most frequently asserted, and most frequently successful, statutory ground for vacatur of an arbitration award is that the arbitrators “exceeded their powers.” Building on their past statistical studies of the results of post-arbitration court cases in which the losing parties sought to vacate arbitration awards, the presenters’ most recent study of “exceeded powers” cases suggests certain recurring themes where challenges to awards were successful as well as when they were not. This program will identify risky actions to be avoided by arbitrators, conduct by litigators that may invite challenges to awards, and discuss award-drafting to protect the finality of the award.

AGENDA 2:00 p.m. Welcome and Introduction of Speakers (5 minutes) 2:10 p.m. Discussion (70 minutes)

• Summary of prior studies of “exceeded powers” cases. • The presenters’ most recent study – 47 “exceeded powers”

cases decided by federal and state courts between June 2011 and May 2012.

• Overview of the new study’s principal results. • Interesting themes revealed in these cases, both in the

cases where the challenge successfully resulted in vacatur of the award and in the larger group of cases where the challenge to the award was rejected by the courts.

• What these cases tell us about potentially risky areas for arbitrators, and for trial lawyers, interested in avoiding “exceeded powers” challenges.

• Some concluding thoughts about award-drafting to protect the finality of the award.

3:20 p.m. Conclusion and Questions (10 minutes) 3:30 p.m. Evaluation (5 minutes) 3:35 p.m. Adjourn

T H O M A S J. B R E W E R A R B I T R A T O R

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S E A T T L E , W A S H I N G T O N 9 8 1 0 4 E m a i l : t j b r e w e r @ t j b r e w e r . c o m

Website: www.tjbrewer.com

F A C S I M I L E ( 2 0 6 ) 6 2 3 - 5 6 7 0

R E S U M E

Profession: Full-time Arbitrator and Dispute Resolution Neutral Experience: Twenty-five years of experience (1975-2000) as a trial lawyer representing and counseling clients in business and commercial cases. Experience serving as an arbitrator, mediator and special master since 1985. Practice limited to providing arbitration, mediation and other ADR services since 2000. Arbitration caseload in recent years has been approximately 50% international arbitrations and 50% arbitrations of domestic commercial disputes. Served as a sole or panelist arbitrator in more than eight hundred cases involving a wide variety of parties and issues. Frequent service as chair of three-arbitrator panels. Experience serving as an arbitrator in cases administered by AAA, ICDR, JAMS, ICC, LCIA, under the UNCITRAL, CPR, SIAC, Society of Maritime Arbitrators and American Association of Railroads rules, and in numerous other non-administered cases. Member of the International Centre for Dispute Resolution’s (“ICDR”) International Roster of arbitrators and of its specialty Energy Arbitrators List. Member of the CPR Institute’s International/Cross-Border panel of arbitrators. Member of the American Arbitration Association’s Commercial, Large Complex Case, Construction, and Mediation Panels, and of the AAA’s specialty National Energy Panel of arbitrators, National Healthcare Roster of arbitrators and Employee Benefits/ERISA Panel of arbitrators. Member of the CPR Institute’s National Panel of Distinguished Neutrals and of its

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specialty Energy, Oil and Gas and Health Care & Life Science panels of neutrals. Member, London Court of International Arbitration North American User’s Council. Fellow, College of Commercial Arbitrators. Fellow, Chartered Institute of Arbitrators. Charter Member, National Academy of Distinguished Neutrals. Listed in Best Lawyers in America 2014 (for arbitration and mediation practice areas), Lawdragon 500 Leading Judges in America, Washington Super Lawyers, 2000-2013, Top Attorneys in Washington, SeattleMet Magazine 2013 and prior years, Bar Register of Preeminent Lawyers. International arbitrations and mediations have included Australian, Austrian, Belgian, Bermudan, Brazilian, British, Canadian, Cayman Islands, Chinese, Danish, Dubai, Dutch, French, German, Italian, Indian, Israeli, Japanese, Korean, Mexican, New Zealand, Peruvian, Saudi Arabian, Swedish, Swiss, Thai and U.S. parties. Examples of pending or prior arbitration experience in cases that went to hearing and award includes: • Panel Chair in a complex international ICDR arbitration between Indian and U.S.

parties related to licensing of a pharmaceutical product. • Panel Chair in an international ICDR arbitration between owners of an oil and gas

refinery and its associated oil and gas trading partnership relating to a corporate governance dispute, resulting exercise of one owner’s “put” rights, and valuation of the refinery. (Claims exceeded $1.5 billion.)

• Panel Chair in a domestic arbitration of a dispute between a U.S. State government and a major oil company involving claims for royalty income damages due to alleged lost or deferred production on account of oil spills, production shut-ins and corrosion-related curtailments and pipeline replacements in a major US oil field. (Nine-figure claims.)

• Neutral panelist in an international ICDR biotech arbitration between U.S. and Swiss parties related to alleged breaches of a licensing agreement covering certain genotypes sold for use in a test kit for human papillomavirus.

• Panel chair in a domestic AAA arbitration of a wind energy dispute between the owner of a 5,000+ acre wind power generation facility and a large public utility over alleged curtailment losses arising under a long-term power purchase agreement.

• Panel Chair in an international ICDR arbitration between U.S. and Chinese parties involving a licensing dispute related to a medical product.

• Sole arbitrator in an international ICDR arbitration of an antitrust dispute between a large U.S. retail chain and a Japanese manufacturer relating to alleged price-fixing on a component commonly used in consumer electronics products.

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• Sole arbitrator in an international ICDR arbitration between a US and a Canadian railroad to set fair-market rental car-hire rates for use of approximately 5,000 73-foot centerbeam flatcars.

• Neutral panelist in a complex international ICDR arbitration between British, Israeli and U.S. investors in a large commercial real estate project related to alleged breaches of the parties’ development agreements, fiduciary duties and capital call obligations.

• Neutral panelist in an international ICDR arbitration of a dispute arising out of the alleged wrongful termination of a custom manufacturing agreement between U.S. and Brazilian parties and alleged breaches of the agreement’s non-competition and confidentiality covenants. (Neutral Panelist)

• Neutral panelist in an international LCIA arbitration relating to interpretation and enforcement of the royalty provision in a software licensing agreement permitting manufacture of a GPS navigational product sold to the commercial aviation industry.

• Neutral panelist in an international ICC arbitration between Israeli and Chinese parties relating to development and licensing of a technology product for the Shanghai and Beijing markets.

• Neutral panelist in an international ICDR arbitration of a trade secret, breach-of-contract and RICO dispute between competing manufacturers of an environmental remediation product used to remove mercury from the waste gas streams of coal-fired public utilities.

• Neutral panelist in an international M & A arbitration administered by the ICC between European and U.S. parties arising out of the sale of a software company in which the buyer alleged breaches of representations and warranties given by the sellers related to balance sheet and tax liabilities. (Neutral Panelist)

• Sole arbitrator in a domestic AAA arbitration of a consumer protection, business tort and breach of contract dispute between property owners and a company engaged in removing underground storage tanks and remediating petroleum-contaminated soils.

• Panel chair in a domestic AAA energy arbitration relating to interpretation and enforcement of a five-year option agreement to purchase electric power from a gas-fired generating plant.

• Panel chair in a domestic AAA energy arbitration between a state governmental entity and a private generator relating to alleged breaches of a long-term electric power supply contract.

• Neutral panelist in a domestic arbitration of a dispute between owners of an HMO over alleged related-party transactions and breaches of fiduciary duties by directors of a Medicaid managed care company.

• Neutral panelist in a domestic AAA energy arbitration of a dispute between a natural gas shipper and gatherer over alleged breaches of a natural gas gathering agreement.

• Several domestic AAA arbitrations of healthcare payor-provider reimbursement disputes. (Variously, Panel Chair, Neutral Panelist and Sole Arbitrator)

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• Panel chair in a domestic class action AAA arbitration between an alleged class of clinical pathology providers and a large managed care company operating in Tennessee arising out of reimbursement denials for certain services provided by the pathologists.

• Neutral panelist in a domestic AAA arbitration of a dispute between investors in certain oil and gas and commercial real estate properties located in Texas.

• Sole arbitrator in an international ICDR arbitration involving a dispute between parties engaged in the aviation industry.

• Panel chair in an international arbitration of a dispute between Saudi Arabian and U.S. software joint venture partners.

• Panel chair in an eight-figure arbitration between U.S., U.K. and Korean parties alleging breaches of long-term international supply contracts for zinc concentrates.

• Panel chair in a patent licensing dispute related to distribution in Brazil of certain agricultural seed products containing patented insect-resistant transgenically modified traits.

• Panel chair in an international ICDR arbitration between a U.S. manufacturer of business jets and a European customer involving breach of warranty claims.

• Panel chair in an international ICDR energy arbitration between Canadian parties involving alleged breaches of a long-term electric power purchase and sale agreement. (Nine-figure claims.)

• Panel chair in an international ICDR arbitration of a dispute involving small-parcel shipping charges incurred by a major Chinese-owned internet-based retailer.

• Neutral panelist in an international ICDR arbitration between Swedish and U.S. parties involving alleged breaches of a patent licensing agreement covering certain microprocessor technology used in cell phones.

• Neutral panelist in an ad hoc domestic arbitration between a major oil company and a state government to determine the value of the company’s Alaska North Slope crude oil production landed on the U.S. West Coast.

• Panel chair in a domestic AAA arbitration between a prominent professional athlete and a manufacturer of athletic clothing and footwear arising out of an international licensing and promotional agreement. (Nine-figure claims.)

• Neutral panelist in a domestic AAA arbitration involving a dispute between a software development firm and a company owning natural gas pipelines involving breach of contract and breach of warranty claims related to customization and development of a software product.

• Service as an Emergency Arbitrator pursuant to Article 37 of the ICDR’s International Arbitration Rules in a dispute between Bermudan and US parties related to enforcement of a promissory note.

Cases handled as a neutral have included many large disputes but have also included a wide variety of other matters, of varying size, involving corporations, privately-held companies, LLC’s, partnerships, governmental entities and individuals. Examples of

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other prior cases are posted at www.tjbrewer.com. Types of cases handled have included:

• commercial contract • intellectual property • international contract, technology and pharmaceutical licensing disputes • breach of contract/breach of warranty • unfair competition • energy (oil, gas, electric and wind) • construction • telecommunications • government contracting • business purchase and sale • copyright • trademark, trade secret and patent • international sales and joint ventures • health care and health insurance • biotechnology • software and other technology disputes • partnership, LLC and shareholder disputes • aviation • disputes involving professionals • commercial leasing and real estate • employment termination and discrimination • ERISA and employee benefits • insurance coverage • franchise • valuation • distribution • railroad industry disputes • employee non-competition and confidentiality covenants

Mediation Experience: Mediation experience has included numerous breach-of-contract and business tort disputes between parties in various industries; disputes arising out of the purchase and sale of businesses; intellectual property and patent disputes; various types of licensing disputes, including software and other technology-related matters; energy cases; international disputes; insurance coverage disputes; construction and government contracting disputes, including False Claims Act disputes; copyright, trademark infringement and dilution disputes; reorganization and debtor-creditor disputes; trade secret and unfair competition disputes in high technology and other industries; law firm dissolution and legal malpractice claims; disputes involving family members, family-

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owned businesses, and estates; real estate-related disputes; franchise disputes; securities cases; and disputes relating to enforcement of employee non-competition and confidentiality covenants. Specific examples of prior mediation engagements are posted at www.tjbrewer.com. Special Master Experience: Served as court-appointed special master responsible for resolving all discovery issues regarding electronically stored information in UCC Ueshima Coffee Company, Ltd. v. Tully’s Coffee Corporation, No. C06-1604 RSL (W.D.Wash.), an international licensing, trademark and market development dispute between Japanese and U.S. parties. Served as a court-appointed special master for all discovery matters in Whatley v. Nike, Inc., No. CV98-063-MO, U.S.D.C., Or., a patent case. Served a court-appointed special master to verify and report to the respective state and federal courts concerning a class action defendant’s performance of certain settlement obligations in West, et al. v. Group Health Cooperative of Puget Sound, et al., No. C01-716P (W.D. Wash.) and Stone v. Group Health Group Health Cooperative of Puget Sound, et al., King County Sup. Ct. No. 01-2-14261-5 SEA. Served as a court-appointed special master for discovery matters in Amazon.com Commerce Services, Inc. v. Expedia, Inc. (King County Sup. Ct. No. 02-2-25747-0SEA), a breach of contract and antitrust action. Served as the court-appointed special master to arbitrate the amount of class action damages in James E. Hoffman and Dale Snow v. REGENCE BLUESHIELD, No. C98-1078P (W.D. Wash.) and Steven R. Holman v. REGENCE BLUESHIELD, No. 00-2-02033-3SEA (King County Superior Court). Education: Dartmouth College (B.A., Government, magna cum laude, 1968); Oxford University (B.A., Jurisprudence, First Class Honours, Wronker and Jurisprudence Prizes, Rhodes Scholar, 1973); Harvard Law School (J.D., magna cum laude, law review, 1975). Employment History: 2000-present: Self-employed ADR neutral; practice limited to providing arbitration, mediation and special master services. 1985-2000: Substantial, but not full-time, experience serving as a neutral arbitrator and mediator. 1975-2000: Trial lawyer representing and counseling clients in business and commercial cases. Partner, Wickwire, Greene, Crosby, Brewer & Seward (Seattle), 1994-00; Partner (1981-94)/Associate (1975-81), Heller Ehrman White & McAuliffe (and predecessor firm acquired by merger), 1975-94. Publications and Speaking Engagements: Co-Author, ‘Exceeded Powers:’ Exploring Recent Trends in Cases Challenging Tribunal Authority, CPR ALTERNATIVES, Vol. 31, No. 8 September 2013; Author, Arbitrator

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Boundaries: What Are the Limits on Arbitrator Authority? 2012 AAA YEARBOOK ON ARBITRATION AND THE LAW; Speaker, Arbitrator Boundaries: What Are the Limits of Arbitrator Authority?, AAA Webinar, 2011; Co-author, E-Discovery in Arbitration, CPR ALTERNATIVES, September-October, 2009; speaker, The Process and Practice of International Arbitration, ICDR Seminar, 2009; co-author, When Arbitrators “Exceed Their Powers” – A New Study of Vacated Arbitration Awards, DISPUTE RESOL. J., Vol. 64, no. 1, February-April 2009; speaker, “Arbitrator Update,” AAA National Neutrals’ Retreat, San Diego, 2/09; speaker, E-Discovery in Arbitration, College of Commercial Arbitrators Annual Meeting, 10/08; speaker, “Mediation of Intellectual Property Disputes,” ICDR International Arbitration and Mediation Symposium, Philadelphia, 11/06; contributing author, THE COLLEGE OF COMMERCIAL ARBITRATORS GUIDE TO BEST PRACTICES IN COMMERCIAL ARBITRATION, JurisNet 2010; speaker, “Arbitration of Intellectual Property Disputes,” ICC International Dispute Resolution Seminar, La Jolla, 10/05; co-author, “A Courtroom Lawyer’s Guide to Arbitration,” LITIGATION, vol. 31 no. 3, Spring 2005 (partial listing).

LAWRENCE R. MILLS is an experienced mediator and arbitrator who serves on the JAMS panel of neutrals in Seattle and northern California. Mr. Mills has over 25 years experience as a neutral during which he has handled hundreds of cases in a wide variety of contexts, including business, commercial, real estate, employment, construction, environmental, professional liability, insurance, and health care disputes. His previous law practice at the Seattle law firm Mills Meyers Swartling emphasized business and commercial transactions and commercial litigation. Mr. Mills is a former Chair of the American Bar Association Section of Dispute Resolution and the Washington State Bar Association Alternative Dispute Resolution Section. He is a Distinguished Fellow of the International Academy of Mediators, a Fellow of the College of Commercial Arbitrators, and a member of the National Academy of Distinguished Neutrals. He may be contacted at lmills@jamsadr.com. For information regarding Mr. Mills’ dispute resolution practice, visit www.jamsadr.com/mills.

Logo: ARBITRATION ‘Exceeded Powers’: Exploring Recent Trends In Cases Challenging Tribunal Authority BY LAWRENCE R. MILLS AND THOMAS J. BREWER Mills is an arbitrator serving on the JAMS panel of neutrals in Seattle and northern California. Brewer is an experienced arbitrator of international and domestic disputes based in Seattle. The authors would like to acknowledge and thank Zainab Hussain, a student at Seattle University School of Law, who provided research and analytical support for this article. The authors write, “Any errors are ours, not hers.”

Although most arbitration awards are followed by voluntary compliance, or by pro forma judicial

confirmation and prompt enforcement, post-award litigation occurs hundreds of times each year

as the losing party in arbitration attempts to vacate the award.

As practicing arbitrators, we have taken a perhaps perverse interest in the reported cases

where losing parties have sought to vacate adverse arbitration awards. In particular, we have

canvassed reported court opinions in cases where vacatur was sought during an eight-month

sample period in 2004 (see L. Mills and T. Brewer, et al., “Vacating Arbitration Awards: A Real

World View of the Case Law,” Dispute Resolution Magazine (Summer 2005)), a nine-month

period in 2008 (see T. Brewer and L. Mills, “When Arbitrators Exceed Their Powers,” Dispute

Resolution Journal (February-April 2009), and, most recently, a 12-month period ending in mid-

2012.

In brief, our prior work persuaded us that, although “evident partiality,” “arbitrator

misconduct,” and “manifest disregard” all continue to get a good deal of ink, the vacatur ground

that is invoked most often–and succeeds most often–in the real world is that “the arbitrators

exceeded their powers.”

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The earlier studies also persuaded us that, although arbitrators often fret about whether

particular case-management actions they might consider taking pose possible risks of a later

vacatur, in the real world managerial arbitrators who take firm steps to promote the efficiency

and expedition of their cases rarely, if ever, have their awards vacated later for such decision-

making.

Rather, the earlier studies indicated that arbitrators are on solid ground, from a possible

vacatur perspective, when exercising the case-management discretion granted to them by the

parties to manage procedural matters such as pre-hearing exchanges of information, motions,

case scheduling, hearing procedures, and the like.

Statistically speaking, the risks of a possible vacatur grow, however, when arbitrators

make decisions resolving substantive issues or granting relief that arguably go beyond the

matters submitted to them by the parties.

This article departs from our earlier statistical tabulations. It instead addresses some

interesting themes that appear to be emerging in recent exceeded powers cases.

In particular, we review three themes that seem to recur in recent cases where the

exceeded powers challenge successfully resulted in vacatur of an award.

Conversely, we also take a look at three recurring themes evident in recent cases where

the exceeded powers challenge to an award was rejected by the courts. Along the way, this

article points out practical considerations that may be useful to parties, advocates, and arbitrators

seeking to protect the finality of awards challenged on the exceeded powers ground.

REAL WORLD DIFFICULTY

There are limited statutory grounds on which a court may vacate an arbitration award. Litigators

and arbitrators are well aware that the Federal Arbitration Act authorizes vacatur only where

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(1) “the award was procured by corruption, fraud or undue means;” (2) where “there was evident

partiality or corruption in the arbitrators;” (3) where “the arbitrators were guilty of misconduct,”

e.g., by refusing to postpone the hearing for good cause shown or by refusing to consider

material and pertinent evidence; or (4) where “the arbitrators exceeded their powers, or so

imperfectly executed them that a . . . final and definite award upon the subject matter submitted

was not made.” 9 U.S.C. § 10(a)(available at http://bit.ly/120BmfV). Most state arbitration

statutes mirror these statutory vacatur grounds. In addition, courts in some jurisdictions also

permit vacatur if the arbitrator’s award exhibits “manifest disregard of the law” or is “contrary to

public policy,” “irrational,” or “arbitrary and capricious.”

In general, our earlier reviews of the cases confirmed how difficult it is in the real world

for a party to vacate an arbitration award. For example, in our 2004 study of 184 reported court

decisions in which a party sought to vacate an arbitration award, we found that motions to vacate

based on manifest disregard succeeded only about 4% of the time. Motions based on evident

partiality succeeded in only about 12% of the cases where the argument was made.

Our earlier studies determined that the most frequently asserted and most successful of all

the statutory and other grounds advanced by parties seeking vacatur was the contention that the

arbitrators had exceeded their powers. When asserted, this ground succeeded about 20% of the

time. Thus, even in the exceeded powers cases, a party seeking to upset an arbitration award was

likely to be successful only one out of every five times.

EMERGING THEMES

Our most recent review focused on 47 exceeded powers cases decided by federal and state courts

between June 2011 and May 2012. As with the earlier studies, in this sample of “exceeded

powers” challenges, vacatur occurred about 20% of the time--in nine cases out of a total of 47.

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The courts’ decisions in these cases reveal some interesting themes, both in the nine cases

where the challenge resulted in vacatur and in the 38 cases where the challenge was rejected and

the award was confirmed.

The cases in which the exceeded powers argument seemed to work best involved

situations where (1) the challenged award granted relief concerning a nonsignatory to the

arbitration agreement; (2) the award involved a fairly blatant disregard for, or rewriting of, the

parties’ underlying contract; or (3) the award was impermissibly vague.

Conversely, the cases in which the courts rejected the exceeded powers challenge often

involved fact patterns where (1) the arbitrators were accused of misconstruing the agreement

between the parties or the applicable law; (2) the losing party complained that the arbitrator did

not adequately explain the reasons for the award; or (3) the arbitrators allegedly fashioned relief

that was not specifically requested or was particularly draconian, e.g. punitive damages or

complete dismissal of a claim.

The discussion that follows addresses these themes in greater detail. It concludes with

some practical thoughts we hope may be useful to parties, advocates, and arbitrators interested in

protecting the finality of arbitration awards facing “exceeded powers” challenges.

RISKY BUSINESS

The nine cases in our recent sample where an exceeded powers challenge succeeded in the courts

involved three main fact patterns.

1. AWARD FOR OR AGAINST NONSIGNATORIES TO ARBITRATION AGREEMENT.

Three of these nine cases involved determinations by the reviewing courts that the

arbitrator had impermissibly awarded relief for or against a party that had never agreed to

arbitrate.

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In Brown v. Styles, 2011 WL 3655158 (Tenn. Ct. App. 2011)(available at

http://bit.ly/198sPhf) in a dispute between a homeowner and a contractor regarding the

installation of a gutter system for a home, the arbitrator entered an award in favor of the

homeowner for nearly $64,000. The award was made against both the defunct gutter installation

company and the individual who was the principal owner of the gutter company.

On a motion to vacate the award, the court found the homeowner had entered into a

contract with the gutter company, and not with the owner of the gutter company individually.

Because the owner did not sign the contract containing the arbitration agreement and was not

named as an arbitration party, the Court of Appeals held that the trial court lacked jurisdiction to

confirm the arbitration award against the individual owner. Accordingly, the arbitration award

was confirmed as to the gutter company and vacated as to the owner.

Another case in which an arbitration award was vacated because the arbitrator awarded

relief in favor of nonparties was Morgan Keegan & Co. v. Garrett, 816 F. Supp. 2d 439

(S.D. Tex. 2011)(available at http://1.usa.gov/120BGvc). In the case, a group of investors

claimed a financial advisory firm misled them to invest in certain bonds. An arbitration panel

awarded the investors more than $9 million in compensatory damages, costs, and attorneys’ fees.

The financial advisory firm moved to vacate the award. The U.S. District Court for the

Southern District of Texas vacated the entire award on the ground that the panel exceeded its

powers by hearing derivative claims and claims of non-customers. Moreover, the court observed

that even if the panel had the power to hear those claims, the award still would have been

vacated because claimants’ expert admitted--in other testimony months after the hearing--he

realized while testifying in the arbitration that his calculations were wrong and his conclusions

were false.

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Thus, the court reasoned, the arbitration award would have been subject to vacatur

because the award was procured by fraud as well as on the exceeded powers ground.

Finally, in another case in which an arbitration award was partially vacated because it

granted relief against a nonparty, Lumber Liquidators, Inc. v Sullivan, 2011 WL 5884252

(D. Mass. 2011)(available at http://bit.ly/178FALD), an arbitrator entered an award against a

former employee who violated a two-year noncompetition agreement by incorporating a

competing Nevada corporation and opening three competing stores in California.

The arbitration award ordered the former employee to wind down, close, and liquidate

the competing Nevada corporation and its operations, and to pay the former employer nearly

$360,000 in damages.

On a motion to vacate the arbitration award, the former employee argued the arbitrator

exceeded her powers by enjoining the Nevada corporation, which was not a party to the original

arbitration agreement, and ordering the dissolution of the Nevada corporation. The court agreed.

The court confirmed the arbitration award of damages against the former employee, and vacated

the portion of the award relating to the nonparty Nevada corporation.

2. AWARD DISREGARDING OR REWRITING THE PARTIES’ CONTRACT.

The second category of cases in our recent sample where awards were vacated involved

determinations by the reviewing courts that the arbitrators had exceeded their powers by

disregarding, or rewriting, the parties’ underlying contract. Four of the nine cases in our sample

where vacatur was ordered involved such analyses by the reviewing courts.

A good example of the courts’ ambivalence toward arbitration awards granting relief

beyond the parties’ underlying contract is the case of Timegate Studios Inc. v. Southpeak

Interactive LLC, 860 F. Supp. 2d 350 (S.D. Tex. 2012)(available at http://1.usa.gov/14wJ49o).

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This case involved a dispute between a video game developer and a video game publisher

regarding an agreement to invest funds in a game in exchange for revenue from the marketing

and distribution of the game through a series of payments over a limited duration license.

The game was a flop, and the parties submitted their claims to arbitration. The arbitrator

awarded the publisher more than $7.3 million in damages, plus the expenses of arbitration and

the arbitrator’s fees. In the award, the arbitrator also amended the publishing agreement by

granting the publisher a perpetual license and providing that no royalties need be paid to the

game developer.

The district court found that the creation of a perpetual license was directly contrary to

the parties’ agreement and the provision for nonpayment of royalties extended far beyond the

intended contractual duration of payments. Moreover, the parties had not asked the arbitrator to

void their contract but simply to interpret it.

Therefore, because the arbitrator failed “to anchor his award in any recognized law,” the

court held he exceeded his powers. The court concluded it could not modify the award while

still preserving its intent and acting consistently with the essence of the parties’ agreement. The

award was vacated.

Although we counted this case as involving the vacatur of an arbitration award on the

“exceeded powers” ground, on appeal, the Fifth Circuit reversed the district court and reinstated

the arbitrator’s award holding that the perpetual license “was a permissible exercise of the

arbitrator’s creative remedial powers” and “rationally rooted in the Agreement’s essence”--even

if it was not wholly consistent with the parties’ contract. 2013 WL 1437710 (5th Cir. 2013).

In Muskegon Central Dispatch 911 v. Tiburon Inc., 462 Fed. Appx. 517 (6th Cir.

2012)(unpublished)(available at http://bit.ly/12tR8Ga), an arbitrator’s award also was vacated

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essentially because the reviewing court concluded that the arbitrator’s award disregarded the

underlying contract. The case involved a dispute under an agreement to implement an integrated

public safety computer system.

The arbitrator determined the liability issues and awarded the supplier of public safety

software more than $450,000 in damages for breach of the contract by a consortium of police,

fire, and emergency medical service agencies.

On review of the award, the court found the arbitrator exceeded his powers by concluding

the consortium had failed to complete the contractual dispute resolution process when, in fact,

the software supplier had itself truncated the process by prematurely commencing arbitration.

In effect, the arbitrator’s decision resulted in the consortium losing entirely on all its

claims, and the software supplier winning entirely, without any finding as to whether the

supplier’s conduct satisfied, or materially breached, the operative substantive terms of the parties’

contract. Accordingly, the arbitrator’s award was vacated and the court decided that the

supplier’s contract claim should be remanded to a new arbitrator in the interest of fairness.

Another case involving an arbitrator’s failure to analyze the underlying contracts was

Sonic Automotive Inc. v. Price, 2011 WL 3564884 (W.D.N.C. 2011)(available at

http://bit.ly/15419pF). The case featured an arbitration commenced by individual purchasers

of automobiles and associated service contracts packaged with a product called ETCH, which

consisted of a small number stenciled to one or more vehicle windows and marketed as an

automobile theft deterrent system. The ETCH product was purchased from different auto

dealers; each of the buyers signed some form of arbitration agreement at the time of purchase.

The arbitrator entered a “Partial Final Award on Class Certification,” a 59-page

memorandum and order conditionally certifying certain customers as a class. Pursuant to

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American Arbitration Association rules, the arbitrator properly stayed the award to allow for

judicial review.

On review, the court granted the petition to vacate the class certification award primarily

because there were differing arbitration clauses in the dealer-customer contracts, and some of the

clauses contained a ban on proceeding as a class. Since the arbitrator did not perform any

analysis to determine the applicability of individual agreements to arbitrate or make any

determinations about whether the agreements permitted or precluded class actions, the court

found the arbitrator exceeded his powers.

Our sample also included a case decided by the Minnesota Court of Appeals, Garlyn Inc.

v. Auto-Owners Ins. Co., 814 N.W.2d 709 (Minn. App. 2012)(available at

http://bit.ly/18GPLHE). The court held that, although the arbitrator did not exceed his authority

by finding a breach of contracts for repair and replacement of auto glass, the arbitrator’s award

would be partially vacated where the arbitrator exceeded his authority by including pre-award

interest on claims of less than $7,500 in violation of a Minnesota statute.

3. AWARD THAT IS IMPERMISSIBLY VAGUE.

The third category of cases in which arbitrators were held to have exceeded their powers

involved determinations by the reviewing courts that the challenged awards were impermissibly

vague.

For example, in Asia Pacific Hotel Guam Inc. v. Dongbu Ins. Co. Ltd., 2011

WL 5037184 (Sup. Ct. Guam 2011)(available at http://bit.ly/12LseTX), a dispute arose between

a construction contractor’s bonding company and the owner of a hotel property regarding

multiple construction deficiencies in the renovation of a resort hotel.

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After emphasizing the strong public policy favoring confirmation of arbitration awards,

the reviewing court vacated the entire “conditional award” because it left open whether the

construction work had been substantially completed and whether the hotel owner had provided

reasonable documentation of the work actually done. The court remanded the case to the

original arbitration panel to settle the unresolved issues and to render a final and definite award,

which could then be reviewed by the court.

Another case involving the arbitration panel’s failure to make a sufficiently definite

award is the fascinating, one-of-a-kind arbitration case that came to the attention of the Kings

County, N.Y., Supreme Court in Matter of Wydra (Brach), 938 N.Y.S. 2d 231 (N.Y. Sup. 2011)

(the Supreme Court is the trial-level court in New York state).

This case was a complex multiparty arbitration extending over 14 months that was heard

by a tribunal consisting of three rabbis, who issued an arbitration award designated “Decision of

the Bais Din.”

The arbitration petitioners were two individuals, at least 10 limited liability companies,

and one corporation; the respondents were two individuals, together with 19 limited liability

companies, and two corporations.

Although the Decision of the Bais Din contained no description of the disputes among the

parties, it appears the disputes related to a number of valuable parcels of real property located in

and around New York City. The arbitration award included a monetary award of more than

$15.8 million.

The reviewing court struggled with determining the scope of the arbitration agreement;

the parties who agreed to arbitrate, and the meaning and effect of the award. Among the award’s

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ambiguities was that it did not disclose the formula or method used by the panel to arrive at the

amount.

Although the grounds for the court’s decision are many, the court vacated the arbitration

award and remitted the entire matter to the rabbinical panel for rehearing of the issues. It appears

the primary ground for the court’s vacatur of the award was that the arbitrators exceeded their

powers by failing to make a definite and comprehensible award on the subject matter submitted.

SAFER GROUND

Turning to the 38 cases in our sample where the courts rejected the exceeded powers challenge

and confirmed the award, here, too, we observed several recurring themes that were addressed by

the reviewing courts, but ultimately resulted in the arbitration awards being confirmed.

[The sample of cases in which the exceeded powers challenge failed and the award was

confirmed included Petrobras America Inc. v. Astra Oil Trading N.V., 2012 WL 1068311 (Tex.

App.–Houston (1 Dist.) 2012). One of the authors served as the tribunal chair in this matter. We

think it best to avoid post-award comment on the case by one of its former arbitrators, so that

case will not be discussed further here.]

Examples of arbitrators’ actions that were challenged are described below. The courts

eventually--although not always initially--rejected the losing party’s exceeded powers challenges

to the awards issued in all of the cases listed. Nevertheless, the list of challenged conduct makes

for interesting reading for those of us who often serve as arbitrators.

1. Arbitrators allegedly misconstrued the agreement between the parties or the

applicable law. Several of these cases involved unsuccessful allegations by the losing party that

the arbitrators

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violated a provision in the arbitration clause providing the arbitrator could

not “add to, subtract from or otherwise modify” the provisions of the underlying Hospital

Services Agreement. Baylor Health Care System v. Equitable Plan Services Inc., 2012 WL

895941 (N.D. Tex 2012)(available at

http://scholar.google.com/scholar_case?case=14870534794481462215&hl=en&as_sdt=2&as_vi

s=1&oi=scholarr ).

misinterpreted and misapplied the indemnification and waiver provisions

in the underlying contract for snow and ice removal at a Home Depot store. Total Landscaping

Care LLC v. Tower Cleaning Systems Inc., 2012 WL 676981 (E.D. Pa. 2012)(available at

http://1.usa.gov/11laqIW), and

disregarded a Sixth Circuit determination of the meaning of the key

contractual provision at issue in the parties’ dispute. Urban Associates Inc. v. Standex

Electronics Inc., 2012 WL 1079720 (E.D. Mich. 2012)(available at (http://bit.ly/11eArNE).

2. Arbitrators allegedly did not adequately explain the reasons for the award. In

addition, a number of these cases involved claims, ultimately denied by reviewing courts, that

the arbitrators

attempted to correct a substantive error in the award--failure to follow a

“baseball” requirement--by later deleting certain sentences from the award on the grounds that

these were “clerical errors,” and then reissuing the award without the deleted sentences. See Rain

CII Carbon LLC v. ConocoPhillips Co., 674 F.3d 469 (5th Cir. 2012)(available at

http://1.usa.gov/10iw9pC).

issued a “Supplemental Decision” following issuance of the original

award, in response to a court order remanding the earlier award to the tribunal to clarify certain

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aspects of the original award. W&J Harlan Farms Inc. v. Cargill Inc., 2012 WL 729329 (S.D.

Ind. 2012), and

failed to comply with a requirement in the arbitration clause that the award

“must contain findings of fact and conclusions of law.” DT-Trak Consulting Inc. v. Prue, 814

N.W.2d 804 (S.D. 2012)(available at http://bit.ly/ZPfVCb).

3. Arbitrators allegedly fashioned relief that was not specifically requested or was

particularly draconian. The cases in our sample that resulted in confirmation of the awards also

included a number of challenges to the relief granted by the arbitrators, including that the

arbitrators allegedly improperly

issued an award requiring prepayment of 75% of disputed claims, relief

not specifically requested by any party. Harper Ins. Ltd. v. Century Indemnity Co., 819 F. Supp.

2d 270 (S.D.N.Y. 2011).

issued an award that included $17 million in punitive damages and

$3 million in attorneys’ fees pursuant to a statute not referenced in claimants’ statement of claim.

Hosier v. Citigroup Global Markets Inc., 835 F. Supp. 2d 1098 (D. Colo. 2011)(available at

http://bit.ly/163nea7), and

granted a pre-hearing motion to dismiss on the ground that claims were

barred by a prior settlement agreement. Spungin v. Genspring Family Offices LLC, 883 F. Supp.

2d 1193 (S.D. Fla. 2012)(available at http://bit.ly/14B7E6y).

Almost all of these opinions begin their analyses of the exceeded powers issue by

reminding us how difficult it is to obtain vacatur of arbitration awards generally: Arbitration

awards are “subject to very limited review in order to avoid undermining the twin goals of

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arbitration, namely settling disputes efficiently and avoiding long and expensive litigation.”

L’Objet LLC v. Limited, 2011 WL 4528297 (S.D.N.Y. 2011).

Courts should vacate awards only in “exceedingly narrow” circumstances and must apply

an “extremely deferential” standard of review. J.D. Shehadi LLC v. US Maintenance Inc., 2011

WL 4632187 (E.D. Pa. 2011)(available at http://bit.ly/11lgMZ1). Once an award is issued, the

finality of arbitration weighs heavily in its favor and cannot be upset “except under exceptional

circumstances”; accordingly, the standard of review of arbitral awards “is among the narrowest

known to law.” Gilmore v. Brandt, 2011 WL 5240421 (D. Colo. 2011)(available at

http://bit.ly/1abGSEf).

Maximum deference is owed to the arbitrators for this reason: a strong presumption exists

requiring “all doubts concerning whether a matter is within the arbitrators’ powers to be resolved

in favor of arbitrability.” Id.

As a result, awards are shown “great deference”; the courts will enforce the award unless

the arbitrators lacked a “barely colorable justification” for the outcome reached. Agility Public

Warehousing Co. K.S.C. v. Supreme Foodservice GmbH, 840 F. Supp. 2d 703 (S.D.N.Y.

2011)(available at http://bit.ly/144xsWp). Judicial review is “extraordinarily narrow” and

“exceedingly deferential.” See Rain CII Carbon LLC, 674 F.3d 469, supra.

PRAGMATIC OBSERVATIONS

Most would agree that the goal of an arbitral proceeding should be a just award rendered in a fair,

efficient, and final proceeding.

But vacatur litigation inevitably compromises at least some of these goals by adding an

expensive and potentially protracted judicial “second round” to the process, whether the motion

to vacate ultimately succeeds or not.

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In cases where the award is vacated, the consequences to the parties can be severe,

especially in cases where they may be ordered to arbitrate again, and thus will have wasted much

or all of the time and expense invested in the vacated arbitral proceedings.

We believe the cases in our most recent sample again confirm the importance for

arbitrators of ensuring that their awards confine the relief awarded to parties bound by the

arbitration agreement. Applicable case law permits nonsignatories to be bound under certain

circumstances. See, e.g., Ragone v. Atlantic Video at Manhattan Center, 595 F.3d 115 (2nd Cir.

2010)(available at http://bit.ly/11B81c3); Enterprises Int’l Inc. v. Pasaban S.A., No. 11-05919

(USDC W.D. Wash. Feb. 11, 2013)(available here: http://bit.ly/14B8zns). We believe our

sample confirms, however, that such decisions may be a lightning rod for possible challenges

and, accordingly, should be approached by arbitrators with care.

We also believe the cases in our most recent sample confirm the importance for

arbitrators of ensuring that the issues submitted for decision be addressed consistently with the

terms of the parties’ contractual commitments, and that the awards resolve such issues in a clear

and definite manner.

We also have had a concern--particularly since the U.S. Supreme Court’s decision in

Stolt-Nielsen S.A. v. Animalfeeds Int’l Corp., 559 U.S. 662 (2010)(available at

http://1.usa.gov/cf9ol4)--that determinations as to whether an award “follows the contract” may

prove to be a slippery slope on which to base “exceeded powers” analyses. See T. Brewer,

“Arbitrator Boundaries: What Are the Limits on Arbitrator Authority?” 2012 AAA Yearbook on

Arbitration and the Law, 24th ed. at 471, 480-85 (Juris 2012).

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The recent cases in our sample, in general, included some important reassurance on that

point, as does the U.S. Supreme Court’s recent decision in Oxford Health Plans LLC v. Sutter,

No. 135 (available at http://www.supremecourt.gov/opinions/12pdf/12-135_e1p3.pdf).

Several of the cases in our sample teach that the focus of inquiry in exceeded powers

challenges to an award under Federal Arbitration Act Section 10(a)(4) should be on “whether the

arbitrators had the power, based on the parties’ submissions or the arbitration agreement, to reach

a certain issue, not whether the arbitrators correctly decided that issue. . . .”

In other words, as long as the arbitrator is even arguably construing or applying the

contract and acting within the scope of his authority, a court’s conviction that the arbitrator has

committed serious error in resolving the disputed issue does not suffice to overturn his decision.

Jock v. Sterling Jewelers Inc., 646 F.3d 113, 122 (2d Cir. 2012)(available at

http://bit.ly/13GUuE6).

Limits on an arbitrator’s authority must be “plain and unambiguous. . . . A reviewing

court examining whether arbitrators exceeded their powers must resolve all doubts in favor of

arbitration.” See Rain CII Carbon LLC, 674 F.3d 469, supra.

If the arbitrator was even arguably construing or applying the contract, judicial review

should be limited to whether the arbitrator’s decision was “rationally inferable from the

contract”; even an error in interpretation would not require setting aside the award “unless it

amounted to bad faith or affirmative misconduct by the arbitrator.” Central West Virginia

Energy Inc. v. Bayer Cropscience LP, 645 F.3d 267, 276 (4th Cir. 2011)(available at

http://1.usa.gov/13GUZhf). If the arbitrator was arguably applying the contract, his decision

should not be vacated unless it was “completely irrational.” Blanco v. Trump Ruffin Tower I

LLC, 2011 WL 3841207 (D. Nev. 2011)(available at http://bit.ly/17Mt9V3).

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“This standard is met only if there is no support in the record justifying the arbitrator’s

decision.” See J.D. Shehadi LLC, supra.

The Supreme Court's recent Oxford Health Plans decision is emphatically to the same

effect:

Here, Oxford invokes §10(a)(4) of the Act, which authorizes a federal court to set aside an arbitral award "where the arbitrator[] exceeded [his] powers." A party seeking relief under that provision bears a heavy burden. "It is not enough . . . to show that the [arbitrator] committed an error-or even a serious error." Stolt-Nielsen, 559 U.S., at 671. Because the parties "bargained for the arbitrator's construction of their agreement," an arbitral decision "even arguably construing or applying the contract" must stand, regardless of a court's view of its (de)merits. . . Only if "the arbitrator act[s] outside the scope of his contractually delegated authority"--issuing an award that "simply reflect[s] [his] own notions of [economic] justice" rather than "draw[ing] its essence from the contract"--may a court overturn his determination. So the sole question for us is whether the arbitrator (even arguably) interpreted the parties' contract, not whether he got its meaning right or wrong.

See Oxford Health Plans, supra.

The cases in our sample also seem to show signs of an intriguing doctrinal development -

continuing temptations, in some forums, to blur the lines between “manifest disregard of the law”

and “exceeded powers” challenges to alleged errors by arbitrators.

Ever since Hall Street Associates L.L.C. v. Mattel Inc., 552 U.S. 576 (2008)(available at

http://1.usa.gov/144AQAT), the courts have been debating whether judicially created grounds

for vacatur, including especially the manifest disregard doctrine, survive that decision or whether

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the grounds for vacatur are now exclusively the statutory grounds enumerated in the Federal

Arbitration Act, including Section 10(a)(4)’s provision concerning exceeded powers.

Our sample of cases denying exceeded powers challenges included several cases where

courts or parties apparently turned to the manifest disregard standard--that the arbitrators knew

of a well-defined, clearly applicable legal principle and yet refused to apply it or ignored it

altogether--to help decide whether an alleged error of law made by the arbitrator was sufficiently

extreme to warrant vacatur on the exceeded powers ground.

In Collins v. Chicago Investment Group LLC, 2012 WL 938725 (D. Nev. 2012)

(available at http://bit.ly/10iz1mA), for example, the court seemed to apply both the “completely

irrational” and the “manifest disregard” standards as functional equivalents of one another in

rejecting an “exceeded powers” challenge.

In several other cases in our sample, the reviewing courts expressly invoked the manifest

disregard standard to help explain their findings that an arbitrator’s alleged error of law did not

merit vacatur under the exceeded powers ground. Moreover, in Jock, 646 F.3d 113, supra,

members of an appellate panel chided one another as to whether reference to the manifest

disregard standard is appropriate in an exceeded powers analysis.

Taken together, these cases seem to suggest that, even after Hall Street, the manifest

disregard doctrine will not be going away quietly and, indeed, may live again as a tool for

interpreting FAA Section 10(a)(4) in exceeded powers cases challenging alleged errors of law.

ENCOURAGEMENT FOR

MANAGERIAL ARBITRATORS

Finally, and perhaps most importantly, the cases in our most recent study, taken together, further

establish the proposition that, although arbitrators certainly should not be cavalier about

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ascertaining the sources of their authority to act, arbitrators should not hesitate to use their

authority to promote a fair and efficient process, or to reach substantive decisions that seem best

based on the evidence and arguments presented.

As with our earlier studies, the cases in this latest sample again confirm that managerial

arbitrators who use their case-management discretion, and administer their arbitrations in an

efficient and expeditious manner, face little real-world risk of having their awards vacated later.

Rather, the recurrent theme in the 38 cases in our sample in which the courts rejected

exceeding powers challenges to awards is, once again, that the courts will do their part to help

protect the finality and efficiency of arbitral proceedings.

In the cases we canvassed there are excellent examples of reviewing courts confirming

decisions made by arbitral tribunals to improve the efficiency or effectiveness of the arbitral

process. In Hotels Nevada v. L.A. Pacific Center Inc., 203 Cal. App. 4th 336 (2012)(available at

http://bit.ly/14BaOY2), for example, the tribunal chose to implement somewhat unusual hearing

procedures in order to save the process when confronted by an unexpected medical emergency

involving one of the panel members.

Similarly, in Agility Public Warehousing Co. K.S.C, 840 F. Supp. 2d 703, supra, the

tribunal had to make a difficult procedural decision about how to respond to key witnesses

asserting their Fifth Amendment privileges.

In Spungin, 883 F. Supp. 2d 1193, supra, the tribunal concluded that preliminary

injunctive relief was necessary to vindicate the arbitration process’s efficacy.

The reviewing courts confirmed all of these arbitral decisions. The lesson here is that

fear of an award’s possible future vacatur is not a good or sufficient basis for arbitrators to avoid

managerial decisions that promote the efficiency, fairness, or efficacy of the arbitration process.

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In particular, we saw nothing in this most recent sample of cases suggesting that

arbitrators create vacatur risks by acting with a firm hand to manage discovery, motion practice,

or how the hearing is conducted, or by insisting on a reasonable and efficient overall case

schedule.

This latest research sample again confirms that arbitrators shouldn’t hesitate to take such

steps out of concerns, not substantiated in the case law, that running a case efficiently risks an

award vacatur later.

Compared to the risks posed by awarding relief to or against nonsignatories, disregarding

or attempting to rewrite the parties’ underlying contract, or by failing to make a definite and

comprehensible award on the subject matter submitted, arbitrators taking firm steps to manage

their cases to promote an efficient process do not face or create comparable vacatur risks.

This is, after all, the job we are hired to do.

[END]

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