Just as SCOTUS held its nose and confirmed an arbitration award it thought stunk in Sutter, the Supreme Court of Alabama has confirmed an arbitration award made after only the claimant presented evidence and grounded in a possible misunderstanding of Alabama law. Tucker v. Ernst & Young, __ So.3d__, 2014 WL 2619860 (Ala. June 13, 2014).
In Tucker, shareholders of HealthSouth Corporation (in the name of the company) asserted claims against HealthSouth’s accountants, Ernst & Young, alleging that E&Y should have discovered accounting fraud at HealthSouth. The shareholders’ case-in-chief took almost two years. They presented testimony from 14 live witnesses and 61 video witnesses over the course of 81 days, plus thousands of pages of exhibits. At least five months before the shareholders rested their case, E&Y sought and received permission to file a dispositive motion based on E&Y’s affirmative defenses at the end of the shareholders’ evidence. The panel allowed the shareholders to add any relevant evidence and witnesses they wanted to their case-in-chief to address the affirmative defenses.
After the shareholders rested, and the panel heard arguments on the motion, the panel granted E&Y’s motion, dismissing all claims. The gist of the motion was this: the fraud at HealthSouth was widespread and knowledge of it must be imputed to the company, therefore the company should not be allowed to blame others for its own misconduct. The panel cited Alabama common law (the Hinkle rule), as well as the doctrines of in pari delicto and contributory negligence to support the dismissal.
The shareholders moved to vacate the award under Section 10(a)(3) and 10(a)(4) of the Federal Arbitration Act. They argued the arbitrators committed misconduct in granting a motion for judgment as a matter of law and that the arbitrators exceeded their power by ignoring Alabama precedent. The Alabama courts disagreed and confirmed the award.
The Tucker court found no misconduct because the panel had authority to allow a dispositive motion and it allowed the shareholders every opportunity to present evidence relating to the affirmative defenses. The court also found the panel had not exceeded its authority in applying Alabama law. Citing extensively from Sutter, the court characterized the shareholders’ arguments as indistinguishable from “manifest disregard of the law,” a basis which Alabama has concluded is unavailable under the FAA. In any case, the court found the panel “arguably and in apparent good faith” applied Alabama law to resolve the dispute and therefore its award must stand. Finally, with respect to the shareholders’ argument that affirmative defenses were not within the scope of the parties’ arbitration agreement, the court found the shareholders had waived that basis for vacatur by not raising it to the panel (and by asserting the same affirmative defenses against E&Y’s counterclaims).
Although no justices dissented, one wrote a separate concurrence. After setting forth why the arbitrators mis-interpreted Alabama law about imputing conduct, the concurrence states “further reflection has caused me to question whether arbitrators who willfully ignore applicable state law are not, in fact, ‘exceeding their power’ or acting ‘beyond their authority’ within the contemplation of” Section 10(a)(4). He concurred, though, because that view is clearly precluded by SCOTUS’s interpretation of the FAA.
By Liz Kramer