The Fifth Circuit un-vacated an arbitration award last week, holding the district court had wrongly concluded that the court was the proper decision-maker on contract formation. Although courts are presumptively authorized to decide whether an arbitration agreement exists, the Fifth Circuit found the parties altered that presumption by “submitting, briefing, and generally disputing that issue throughout the arbitration proceedings.” OMG, L.P. v. Heritage Auctions, Inc., 2015 WL 2151779 (5th Cir. May 8, 2015). [Or, as I like to think of the case: “OMG! I gave arb TMI and lost my appeal. WTF”]
The dispute related to OMG’s claim that it was owed more commissions than the auction house had paid it for firearm sales. The parties disputed how to interpret the term “merchandise” in the contract. Heritage demanded arbitration. The two relevant agreements between OMG and Heritage provided for binding arbitration of “any dispute” “in any way related” to the agreements. In arbitration, the auction house argued there was no meeting of the minds regarding the meaning of “merchandise,” so the contract was unenforceable. The arbitrator agreed and rescinded the contract.
OMG asked the federal district court to vacate the arbitration award, arguing that the arbitrator exceeded his authority by ruling on the issue of contract formation. The district court agreed, finding “a court was the proper decision-maker as to contract formation issues in this case, not the arbitrator.”
The Fifth Circuit reversed. Critically, it found that “by their actions, the parties may agree to arbitrate disputes that they were not otherwise contractually bound to arbitrate.” It cited Fifth Circuit precedent from 1980 (Piggly Wiggly, I am not kidding with the names here) and from 1994 (Executone Info. Sys.) to support that proposition. Because the auction house had disputed whether there had been a meeting of the minds throughout the arbitration, and OMG “never contested the arbitrator’s authority to resolve” that issue, “the parties agreed to arbitrate contract formation.” The court found that OMG could have refused to arbitrate the formation issue. But it could not “simply  wait until it receives a decision with which it disagrees before challenging the arbitrator’s authority.”
I find the analysis here very interesting. The Fifth Circuit chose not to base the arbitrator’s authority to rescind the contract in the parties’ agreement to arbitrate any dispute, or any other language in the (now rescinded) agreement. Instead, it looked to the parties’ conduct to authorize the award. And in describing that conduct, it did not use a concept like waiver (OMG could have waived its right to argue the arbitrator exceeded his power by not raising that in the arbitration), but instead described the conduct as forming a separate agreement to arbitrate. In any case, the public policy behind the decision is very clear and reminds me of the “invited error” doctrine: parties cannot ask the arbitrator to exercise power, or accede to that exercise of power, and later complain that the arbitrator exercised that power.
This is an important issue for advocates in arbitration. Every issue that is presented to the arbitrator — by either party– should be carefully analyzed to determine whether it is validly within the scope of the parties’ arbitration agreement. If an issue is outside the scope, and the party wants to preserve an objection to its submission to the arbitrator, it must “forcefully” object (see First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995)). Otherwise, the party will be deemed to have agreed to arbitrate the issue, and the arbitrator’s decision will be subject to the highly deferential review of the Federal Arbitration Act.
By Liz Kramer