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Federal Courts on Frivolous Motions to Vacate Arbitration Awards:
“I’m as Mad as Hell and I’m Not Going to Take this Anymore!”

            The other night, I stumbled upon the classic movie, “Network,” starring Faye Dunaway and Peter Finch.  At a pivotal juncture in the movie, the increasingly unhinged Finch urges viewers to open their windows and shout out: “I’m mad as Hell, and I’m not going to take this anymore!”  It then occurred to me that the courts, especially federal circuit courts, have in recent years been delivering the same message to parties and counsel who bring frivolous challenges to arbitration awards.

Finality and Limited Judicial Review 

            A key benefit of arbitration is that the arbitrator’s decision is final and binding, subject to very limited judicial review.  This is embodied by section 10 of the Federal Arbitration Act (“FAA”) which sets forth four major grounds for challenging arbitration decisions:  fraud, arbitrator bias, arbitrator misconduct, and where the arbitrator exceeded his or her authority.  Over the years, reviewing courts created additional grounds for attacking arbitration awards, such as “manifest disregard of the law” or even the facts.  In 2006, the Supreme Court in Hall Street Associates v. Mattel seemed to scale back this creeping expansion of court review of arbitration awards under the FAA.  There, the Court held that the sole grounds for moving to vacate arbitration decisions were those in the FAA.

Threats of Sanctions

            With the bases for attacking arbitration awards under the FAA made clear by Mattel, the courts have in recent years added “…and your challenge to the award had better not be frivolous or you will face sanctions!”  The Eleventh Circuit in 2006 essentially served notice that this type of behavior in the future would be met with sanctions.  In B.L. Harbert, International, LLC v.  Hercules Steel Co., 441 F.3d 905 (11th Cir., 2006), the court, while finding Harbert’s behavior to be sanctionable, declined to impose sanctions primarily because Harbert and its counsel were not on notice:“Third, and most importantly, when Harbert took its arbitration loss into the district court and then pursued this appeal, it did not have the benefit of the notice and warning this opinion provides. The notice it provides, hopefully to even the least astute reader, is that this 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 FAA and to protect arbitration as a remedy we are ready, willing, and able to consider imposing sanctions in appropriate cases. While Harbert and its counsel did not have the benefit of this notice and warning, those who pursue similar litigation positions in the future will.”

The most recent example is the Seventh Circuit’s March decision in Johnson Controls, Inc. v. Edman Controls, Inc., nos. 12-2308 & 12-2623 (7th Cir., 3/18/2013), a case dealing with a motion to vacate based on the “exceeding authority” ground. Note that the court did not actually impose sanctions on counsel, but only because the arbitration winner already had a remedy:

“Although we have decided to deny Edman’s motion [for sanctions], this is largely because the fee-shifting clause in the contract already assures that Edman will not bear the costs of this appeal.  We note, however, that challenges to commercial arbitral awards bear a high risk of sanctions… Attempts to obtain judicial review of an arbitrator’s decision undermine the integrity of the arbitral process.  Because of Johnson’s appeal, Edman has been deprived not only of the value of the distributorship it expected to have for Panama, but also part of the value of the arbitration to which both parties agreed” [citation omitted].

Imposition of Sanctions 

            While it seems clear the courts have clearly notified parties and counsel that frivolous arbitration challenges will be sanctionable, have any courts actually imposed sanctions?  The short answer is “yes.”  For example, in Digitelcom, Ltd. v. Tele2 Sverige AB, 12 Civ. 3082 (S.D.N.Y. Jul. 25, 2012), the court, after disposing of the challenger’s multi-pronged attack on the arbitration award, unloaded:

“As discussed above, Plaintiffs’ representation of what facts were undisputed and, particularly, its selective quoting of the agreement in question, are disingenuous at best. Plaintiffs challenge the Tribunal’s factfinding and contractual interpretation, repeatedly characterizing facts as ‘undisputed’ and ‘essentially stipulated’ … though it appears that all of the issues that Plaintiffs represent as undisputed were, and are, plainly disputed by Defendant. … Moreover, as noted above, Plaintiffs do not cite any particular principle of law that the Tribunal is supposed to have ignored or any reason beyond pure speculation to conclude that the Tribunal was not fair and impartial… Citing virtually no relevant authority, Plaintiffs merely identify the standard for vacating an arbitration award at the outset of their papers and then proceed to attack the Tribunal’s findings, as well as its integrity, by suggesting that it was biased … without providing any basis whatsoever for such an accusation. This kind of petition serves only to cause the parties to incur unnecessary expense and delay the implementation of the Award” [citations omitted].

What if the attack on arbitration award is appellate in nature?  In other words, if the lower court denied a motion to vacate an arbitration award, and then the challenger appeals, has a court ever imposed sanctions for an appeal deemed frivolous?  Again, the answer is yes.  This is precisely what happened in DMA International, Inc., v. Qwest Communications International Inc., 585 F.3d 1341 (10th Cir. 2009).  In fact, the Tenth Circuit directed counsel to pay personally the attorney’s fees of the arbitration winner. Mad as Hell, indeed.

Summing Up

            While judges tend not to shout their decisions from open windows, the current state of the law can best be summed by this part of DMA International:

“We fully appreciate the financial burden this decision will impose upon DMA’s counsel. But only by imposing sanctions in cases like this can we give breath to the ‘national policy favoring arbitration.’ Hall St. Assocs., 128 S.Ct. at 1405. If we permit parties who lose in arbitration to freely relitigate their cases in court, arbitration will do nothing to reduce congestion in the judicial system; dispute resolution will be slower instead of faster; and reaching a final decision will cost more instead of less.”