Seventh Circuit Is Sick Of Arbitration Appeals; Threatens “High Risk Of Sanctions”

by Stinson Leonard Street - Arbitration Nation
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http://arbitrationnation.com/wp-content/uploads/2013/03/PanamaHat-190x178.jpgIn an opinion released yesterday, the Seventh Circuit schooled appellant’s counsel first on the application of the New York Convention and Panama Convention, then on the high standard of review it applies to commercial arbitration awards, and finally expressed profound disappointment with the frequency of motions to vacate arbitration awards.  “Attempts to obtain judicial review of an arbitrator’s decision undermine the integrity of the arbitral process.”  Johnson Controls, Inc. v. Edman Controls, Inc., __ F.3d __, 2013 WL 1098411 (7th Cir. Mar. 18, 2013).  No doubt hoping to reduce that frequency, the court warned that ”challenges to commercial arbitral awards bear a high risk of sanctions.”

In this case, Johnson Controls contracted with an exclusive distributor in Panama.  The contract called for arbitration of any disputes and provided that the prevailing party was entitled to recover its attorneys’ fees and costs.  Johnson Controls started directly competing with the distributor in Panama, so the distributor demanded arbitration and won.  After finding for the distributor on claims of tortious interference and breach of good faith and fair dealing, the arbitrator awarded the distributor over $733,000 in damages, plus almost $300,000 in attorneys’ fees and costs.

Not kindly, the court noted “losers sometimes cannot resist the urge to try for a second bite at the apple.  That is what has happened here.”  Johnson Controls moved to vacate the arbitral award and its motion was denied by the district court.  Substantively, it made two primary arguments.  It argued that the arbitrator “exceeded its power” within the meaning of Section 10(a)(4) of the Federal Arbitration Act in two respects: 1) by awarding damages to the distributor, even though the distributor had planned to sell through two subsidiaries; and 2) by awarding attorneys’ fees in a contingent fee case without using the lodestar approach.  The district court and appellate court found the arbitrator acted within its power, because the distributor itself was injured by the breach (and the arbitrator properly refused to address separate claims by the subsidiaries), and because the lodestar method is not required in the Seventh Circuit when attorneys’ fees are shifted by contract.

The court also went out of its way to provide three kernels of wisdom to counsel in appeals from arbitrations.  First, it noted that the distributor is incorporated in the British Virgin Islands, and therefore any attack on the arbitration award “almost certainly falls under either the New York or the Panama Convention,” which have slightly different grounds for vacating awards.  (Counsel for both parties had argued under Chapter 1 of the FAA.)  Second, it emphasized that, at least in the Seventh Circuit, “even ‘manifest disregard of the law is not a ground on which a court may reject an arbitrator’s award.’”  (Not all circuits agree, see this summary post.)

Third and finally, the Seventh Circuit hinted that it will be liberal in its use of sanctions for parties who try to vacate arbitration awards without a strong basis.  It complained that “[b]ecause of Johnson’s appeal, [the distributor] 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.”  That sentence follows the explicit warning that, while the court did not award sanctions on this appeal because there was already a fee-shifting clause, “challenges to commercial arbitral awards bear a high risk of sanctions.”

Don’t say I didn’t warn you.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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