(Ahem, South Dakota, Ohio)

In an example of “What Not to Vacate,” the South Dakota Supreme Court just vacated an arbitration award because the arbitrator dared to apply a South Dakota statute allowing attorneys’ fees to the claimant. A week earlier, the Ohio Supreme Court also vacated an arbitration award for granting a remedy that the court found exceeded the panel’s contractual power.

In the South Dakota case, the arbitrator awarded the claimant attorneys’ fees and costs under South Dakota’s Uniform Limited Liability Company Act. Black Hills Surgical Physicians, LLC v. Setliff, __ N.W.2d __, 2014 WL 4815715 (S.D. Sept. 24, 2014). The state supreme court vacated those fees and costs, finding they exceeded the arbitrator’s power because the contract stated that the parties “agree . . . that each shall pay their own attorneys’ fees.” Citing mostly to labor law cases from the 1960s-1980s, the court concluded that because the arbitrator based her award on law outside the contract (i.e. the applicable statute), she exceeded her power.

Similarly, the Supreme Court of Ohio vacated a portion of an arbitration award reinstating a high level employee to his previous position because it found the arbitration panel exceeded its power. Cedar Fair, L.P. v. Falfas, __ N.E.3d__, 2014 WL 4649951 (Ohio Sept. 18, 2014). Again citing liberally from decades-old labor law cases, the court found that the contract limited the panel’s authority on remedies by stating the panel had authority “to award any remedy or relief that [a state] or federal court in Ohio could grant.” Because the “general rule” in Ohio is that specific performance is not an available remedy for breach of an employment contract, the court found the arbitrators exceeded their power and vacated the reinstatement award. (Instead, the court awarded the employee his base salary for the remainder of his employment term.)

These cases gave me an idea. Instead of reviewing limited cases on an individual basis, SCOTUS should issue a list of guidelines for state courts deciding arbitration disputes. (Can’t you just see it? MEMO TO: All state courts. RE: Your Opinions Are Screwing Up Our Arbitration Jurisprudence. FROM: SCOTUS.)

For example, the subset of guidelines for state courts considering whether to vacate an award could include these five pearls of wisdom:

  • Consider whether the Federal Arbitration Act applies to the dispute (ask the parties to brief that issue if they did not already).
  • Do not rely on any cases before 2000. The law in this area has been evolving rapidly. [This could have changed the outcome of both Black Hills and Cedar Fair.]
  • Do not use standards or language from labor law cases when considering whether to vacate cases that do not involve a collective bargaining agreement. The standards are different. See Associated Elec. Coop., Inc. v. Int’l Bhd. of Elec. Workers, Local No. 53, __ F.3d __, No. 12-3712, 2014 WL 1910604, at *6 (8th Cir. May 14, 2014). [This also could have changed the outcome of both Black Hills and Cedar Fair.]
  • Consider the impact of the arbitral rules on the dispute (ask the parties to brief that issue if they did not already). For example, if AAA rules are mentioned in the arbitration agreement, the arbitrator has the powers outlined in those rules. [This could have changed the outcome of both Black Hills and Cedar Fair, but the opinion does not show whether any set of rules was incorporated.]
  • Read Sutter. And Hall Street.

Any others I should add to the list??!

By the way, the Supreme Court of Florida deserves a gold star on this topic. In Visiting Nurse Assoc. of Fl. v. Jupiter Medical Ctr., Inc., __ So.3d__, 2014 WL 3360314 (Fl. July 10, 2014), it provides a good example of how to analyze a claim for vacatur. The losing party in arbitration claimed the award “impermissibly construed the parties’ contract in a manner that violated multiple federal laws” and the arbitration panel “exceeded its powers by contravening the express contractual limitations.” The court first conducted a sua sponte analysis to determine that the FAA controlled, then agreed with federal circuits finding the four bases for vacatur in Section 10 are exclusive, so that “illegality of the award” is not recognized. It then applied the analysis in Sutter to conclude that the argument about exceeding power was essentially an argument that the losing party “simply disagrees with the panel’s construction of the contract.”

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By Liz Kramer

TAGGED: * Case Studies

Liz Kramer is a shareholder at Leonard, Street and Deinard, one of the largest law firms in Minnesota, where she litigates complex business and construction disputes. Liz graduated from Yale Law School and is deeply knowledgeable on arbitration law. Website: www.arbitrationnation.com