In earlier articles in this series we followed arbitration involving patent matters from drafting the arbitration clause through the award, motions to “reconsider” the award and, finally a motion to confirm the award. We now arrive at attacks on the award.
The standard that applies to review of an arbitration award is much more rigorous than appellate review of a trial court judgment. The whole point of arbitration is to have a quick, relatively inexpensive, final determination of the parties’ dispute. The Federal Arbitration Act (“FAA”) and most state arbitration acts recognize that. Because the FAA typically pre-empts state arbitration acts for transactions in interstate commerce – which will almost certainly include your patent arbitration – we will focus on the FAA.
Before we do, however, note that under the rules of most arbitral bodies, you can build in an arbitration appeal. The newer AAA commercial rules, for example, allow the parties to agree to review of an award by a panel of arbitrators, acting much like an appellate court. But, as a practical matter, you must build that into your arbitration clause if you want an appeal. Nobody is ever going to agree to an appeal after they have won. We’ll take a look at arbitration appeals in a later article.
Let’s begin with a timing issue. You will recall from the last article that a party has one year to seek confirmation of an award. 9 U.S.C. § 9. A motion to vacate, modify or correct an award must be brought within three months after the award is filed or delivered. § 12. So what happens if a party moves to immediately confirm the award? Does the party wanting to vacate or change the award still get three months, so a confirmed award can later be undone and a judgment on it vacated?
I haven’t seen this be much of a problem as a practical matter. The party seeking to vacate the award usually does so in response to an application to confirm it, so the issue doesn’t arise. I did once have a state court, applying rules almost identical to the FAA, postpone the hearing on a motion to confirm the award until over 90 days after the award to make sure the other party had a chance to move to vacate the award before it was confirmed.
Grounds for vacating awards
The FAA has only a few specific grounds for vacating the award. They are:
(1) where the award was procured by corruption, fraud, or undue means;
(2) where there was evident partiality or corruption in the arbitrators, or either of them;
(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or
(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.
9 U.S. C. § 10. Note first that none of these grounds are that the arbitrator improperly applied the law or that the findings of fact have no support. To quote the Eighth Circuit, so long as “the arbitrator is even arguably construing or applying the contract and acting within the scope of his authority,” the award must be confirmed. Gas Aggregation Svcs., Inc. v. Howard Avista Energy, LLC, 319 F.3d 1060 (8th Cir. 2003).
“Evident partiality” can be a ground for attacking an award in the right case. For example, in a Second Circuit case, an award was vacated under the evident partiality standard where an arbitrator had reason to believe a conflict of interest might exist, but chose to ignore it and instead erected a “Chinese wall” in his company. If he had investigated, he would have learned that his company had a significant contract in place with one of the parties. But he disclosed neither that he had decided not to investigate further nor that he had erected the wall. The award was vacated. Applied Industrial Materials Corp. v. Ovalar Makine Ticaret Ve Sanayi, A.S., 492 F.3d 132 (2d Cir. 2007).
The cases tend to be quite fact specific, so a party considering this ground will need to review all applicable cases in the jurisdiction and the specific facts of the case.
Of course, there is always the danger that a party will learn of a failure to disclose a relationship and keep it under wraps until they see whether or not they won. Courts don’t like that type of gamesmanship. The Fifth Circuit held that a party seeking to vacate an arbitration award based on an arbitrator’s evident partiality must object during the arbitration proceedings. Failure to do so results in waiver of its right to object. Dealer Computer Services, Inc. v. Michael Motor Co., Inc., 11-20053, 2012 WL 3317809 (5th Cir. Aug. 14, 2012).
The district court found that rule that an objection must be made during the proceedings “paradoxical [because] if the arbitrator completely failed to disclose a potential conflict, the objecting party could not know about it in order to object.” But the Fifth Circuit noted that the arbitrator had at least generally disclosed that she had been in an earlier arbitration involving one of the parties. That was found to be sufficient to provide notice to the objecting party. The Fifth Circuit upheld the award.
Because many courts are willing to define “evident partiality” to include unrevealed relationships with a party, this is one of the more promising grounds for vacating an award. That law – and the ethical rules – keep diligent arbitrators making disclosures of just about anything that could cause their neutrality to be questioned.
Refusal to hear evidence
This ground seems to be at the heart of some arbitrators’ apparently limitless patience in hearing evidence of dubious value. Arbitrators often simply take evidence “for whatever relevance it may have, if any,” to be determined later so as not to be accused of refusing to hear evidence. Still, this ground is not as promising for getting an award overturned as one might suppose.
First, a party would have to show the evidence is “pertinent or material” not just that the arbitrator refused to consider all the evidence proffered. Second, in AAA Commercial arbitrations, for example, the parties have agreed to the AAA rules which specifically give the arbitrator the power to “determine the admissibility, relevance, and materiality of the evidence offered and may exclude evidence deemed by the arbitrator to be cumulative or irrelevant.” Rule 34(b). Given that the parties typically will have agreed to these rules, the arbitrator would have to have fairly blatantly abused this authority for it to become a real issue.
But his ground has recently been applied in a fairly high profile case to vacate an award. In National Football League Management Council v. National Football League Players Association, No. 15 Civ. 5916 (S.D.N.Y. Sept. 3, 2015), the district court vacated the arbitration award of the NFL Commissioner suspending quarterback Tom Brady for four games over the “inflategate” controversy. In so doing, he noted that Brady’s counsel had sought to call for examination Jeff Pash, an announced co-lead investigator of the allegations against Brady. Instead, the Commissioner, serving as arbitrator, refused to compel his examination, finding it would be cumulative of other evidence already submitted.
The court found denial of an opportunity the examine Mr. Pash was fundamentally unfair and violated the FAA. While recognizing an arbitrator has authority to exclude cumulative evidence, the court found he could not simply do so ipse dixit without indicating “in what respects it would be cumulative.” The decision is on appeal.
Another ground that could be promising in the right case would be an arbitrator exceeding authority. The arbitrator derives all power from the parties’ contract, so only issues the parties have given the arbitrator power to arbitrate may be decided. Of course, the parties may expand this authority by actually arbitrating issues before the arbitrator beyond these agreed. And note that, if the parties’ contract incorporates AAA or other rules, the arbitrator’s power will include those given in the rules unless the parties contract otherwise.
As pointed out earlier in this series, parties will not want to get too elaborate about what is or is not to be arbitrated so that the arbitrator’s authority is unclear. Otherwise the award will be subject to attack on this ground.
This ground may also be raised to attack a late award. Many rules or arbitration clauses require that an award be made within a certain amount of time, often 90 days. Some late awards have been vacated because the arbitrator was without power after the time for issuing the award had run.
There is room for gamesmanship here, with parties complaining about a late award only after it is issued and they lost. Some state arbitration statutes specifically require that an attack on a late award be made before it is issued. The FAA does not, but that doesn’t mean the award will be vacated automatically if it is late. Still, it is best to avoid all this by getting the award issued on time.
Other statutory grounds
The FAA’s other grounds for vacation are fairly esoteric and will not come up very often. Hopefully, you have vetted your arbitrator or arbitrators during the selection process so they are unlikely to engage in misconduct or write incomprehensible awards.
There are other grounds for attacking awards that have been raised and considered over the years, which we will take up in the next article.