ReliaStar Life Ins. Co. of N.Y. v. EMC Nat'l Life Co. ( 2009 )

07-0828-cv
ReliaStar Life Ins. Co. of N.Y. v. EMC Nat’l Life Co.
UNITED STATES COURT OF APPEALS
FOR THE S ECOND C IRCUIT
August Term, 2007
(Argued: July 7, 2008 Decided: April 9, 2009)
Docket No. 07-0828-cv
R ELIAS TAR L IFE INSURANCE C OMPANY OF N EW Y ORK,
Petitioner-Appellant,
—v.—
EMC N ATIONAL L IFE C OMPANY,
also known as National Travelers Life Company,
Respondent-Appellee.
Before:
P OOLER, R AGGI, Circuit Judges, and T RAGER, District Judge.1
Appeal from a judgment of the United States District Court for the Southern District
of New York (Kaplan, J.), vacating a portion of an arbitration award on the ground that the
arbitration panel exceeded its authority in awarding attorney’s and arbitrator’s fees as a
1
The Honorable David G. Trager of the United States District Court for the Eastern
District of New York, sitting by designation.
1
sanction for a party’s failure to arbitrate in good faith in light of a clause in the arbitration
agreement requiring each party to bear its own attorney’s and arbitrator’s fees.
R EVERSED IN PART AND R EMANDED.
Judge Pooler dissents in a separate opinion.
P IETER V AN T OL, Lovells, New York, New York (Gail M. Goering and John
M. O’Bryan, Lovells, Chicago, Illinois, on the brief), for Petitioner-
Appellant.
J OHN M. N ONNA, LeBoeuf, Lamb, Greene & MacRae, LLP, New York, New
York (Richard J. Cairns, LeBoeuf, Lamb, Greene & MacRae, LLP;
Denny M. Dennis, Todd A. Strother, and Michael L. Mock, Bradshaw,
Fowler, Proctor & Fairgrave, P.C., Des Moines, Iowa, on the brief), for
Respondent-Appellee.
R EENA R AGGI, Circuit Judge:
On this appeal, we consider whether parties’ inclusion in an arbitration agreement of
a general statement that each will bear the expenses of its own arbitrator and its own
attorneys deprives the arbitration panel of authority to award such expenses as a sanction
against a party whom the panel determines failed to arbitrate in good faith. We conclude that
it does not and, accordingly, reverse the judgment of the United States District Court for the
Southern District of New York (Lewis A. Kaplan, Judge), entered on February 14, 2007,
insofar as it vacated that part of an arbitration award requiring respondent EMC National
Life Company (“EMC”), successor in interest to National Travelers Life Company
2
(“National Travelers”), to pay such fees to petitioner ReliaStar Life Insurance Co. of New
York (“ReliaStar”). We remand the case so that the district court may enter a new judgment
confirming the arbitration award in all respects.
I. Factual Background
A. The Agreement to Arbitrate
In December 1997, National Travelers and ReliaStar entered into two separate but
related coinsurance agreements, one pertaining to certain ReliaStar insurance policies in
force as of January 1, 1998, and the other pertaining to certain ReliaStar policies to be issued
on or after that date. Because the agreements have identical terms and conditions, for
purposes of this appeal we refer to them collectively as the “Coinsurance Agreements.”
Article X of the Coinsurance Agreements governed the parties’ agreement to arbitrate.
It reads in relevant part as follows:
10.1 Appointment of Arbitrators. In the event of any disputes or differences
arising hereafter between the parties with reference to any transaction under
or relating in any way to this Agreement as to which agreement between the
parties hereto cannot be reached, the same shall be decided by arbitration.
Three arbitrators shall decide any dispute or difference . . . .
10.2 Decision. The arbitrators shall consider customary and standard practices
in the life or health reinsurance business, as applicable to the dispute. They
shall decide by a majority vote of the arbitrators. There shall be no appeal
from their written decision. Judgment may be entered on the decision of the
arbitrators by any court having jurisdiction.
10.3 Expenses of Arbitration. Each party shall bear the expense of its own
arbitrator (whether selected by that party, or by the other party pursuant to the
procedures set out in Section 10.1) and related outside attorneys’ fees, and
3
shall jointly and equally bear with the other party the expenses of the third
arbitrator.
10.4 Applicable Law. Any arbitration instituted pursuant to this Article shall
be held in New York, New York, or another site mutually agreed upon by the
parties and the laws of the State of New York and to the extent applicable, the
Federal Arbitration Act, shall govern the interpretation and application of this
Agreement.
The particular focus of this appeal is section 10.3.
B. The Arbitration Award
When various disputes arose between the co-insurers, National Travelers initiated
arbitration proceedings seeking (1) a declaration that the Coinsurance Agreements had been
terminated and (2) approval for a proposed terminal accounting. ReliaStar opposed both
National Travelers’ claim of termination and its proposed method for conducting a terminal
accounting.
Following discovery, in May 2006, an arbitration panel conducted a two-week
hearing. On August 4, 2006, the panel entered an interim award, finding that the
Coinsurance Agreements remained in force between the parties and directing National
Travelers to pay Reliastar more than $21 million past due under that agreement. The panel
directed the parties to meet to resolve issues related to the resumption of their relationship
under the Coinsurance Agreements. Further, in paragraph 6 of the award, a majority of the
panel, without explanation, awarded ReliaStar attorney’s and arbitrator’s fees and costs.
The parties complied with all aspects of the award, except for that part granting
4
ReliaStar fees and costs, which they agreed National Travelers could submit for
reconsideration to the panel and, if necessary, challenge in court. After further briefing on
the issue of fees and costs, the arbitration panel entered a final award on October 20, 2006.
A majority of the panel awarded ReliaStar fees for its attorneys and arbitrator in the amount
of $3,169,496, costs of $691,903.75, as well as interest, explaining that it viewed the conduct
of National Travelers in the arbitration “as lacking good faith.”
C. The District Court Proceedings
On October 20, 2006, ReliaStar petitioned the district court to confirm the final
arbitration award, and on November 2, 2006, National Travelers filed a counter-petition to
vacate the award to the extent it granted ReliaStar fees and costs. National Travelers argued
that the arbitration panel had exceeded its authority in awarding fees and costs in light of
section 10.3 of the Coinsurance Agreements, which obligates each party to “bear the expense
of its own arbitrator . . . and related outside attorneys’ fees.” The district court agreed and,
accordingly, vacated that part of the final award requiring National Travelers to pay
Reliastar’s attorney’s and arbitrator’s fees before confirming it in all other respects.
ReliaStar appeals the vacatur.
II. Discussion
A. Standard of Review
In considering a challenge to a district court’s decision to vacate a portion of an
arbitration award, we review its legal rulings de novo and its findings of fact for clear error.
5
See Banco de Seguros del Estado v. Mut. Marine Office, Inc., 344 F.3d 255, 260 (2d Cir.
2003).
The law is clear that because arbitration is “a matter of contract[,] . . . a party cannot
be required to submit to arbitration any dispute which he has not agreed to so submit.”
PayneWebber Inc. v. Bybyk, 81 F.3d 1193, 1198 (2d Cir. 1996). The scope of an arbitrator’s
authority thus “generally depends on the intention of the parties to an arbitration, and is
determined by the agreement or submission.” Synergy Gas Co. v. Sasso, 853 F.2d 59, 63-64
(2d Cir. 1988) (internal quotation marks omitted). Section 10(a)(4) of the Federal Arbitration
Act allows courts to vacate an arbitral award “where the arbitrators exceeded their powers.”
9 U.S.C. § 10(a)(4). We have, however, “consistently accorded the narrowest of readings”
to this provision of law, Banco de Seguros del Estado v. Mut. Marine Office, Inc., 344 F.3d
at 262 (internal quotation marks omitted), in order to facilitate the purpose underlying
arbitration: to provide parties with efficient dispute resolution, thereby obviating the need for
protracted litigation, see, e.g., Amicizia Societa Navegazione v. Chilean Nitrate & Iodine
Sales Corp., 274 F.2d 805, 808 (2d Cir. 1960) (“[T]he court’s function in confirming or
vacating an arbitration award is severely limited. If it were otherwise, the ostensible purpose
for resort to arbitration, i.e., avoidance of litigation, would be frustrated.”).
Thus, in considering a section 10(b)(4) challenge, “[t]he principal question for the
reviewing court is whether the arbitrator’s award draws its essence” from the agreement to
arbitrate, “since the arbitrator is not free merely to dispense his own brand of industrial
6
justice.” 187 Concourse Assocs. v. Fishman, 399 F.3d 524, 527 (2d Cir. 2005) (internal
quotation marks omitted). If the answer to this question is yes, however, the scope of the
court’s review of the award itself is limited. Notably, we do not consider “whether the
arbitrators correctly decided [the] issue.” Banco de Seguros del Estado v. Mut. Marine
Office, Inc., 344 F.3d at 262 (internal quotation marks omitted). If the parties agreed to
submit an issue for arbitration, we will uphold a challenged award as long as the arbitrator
offers “a barely colorable justification for the outcome reached.” Id. at 260 (internal
quotation marks omitted). In other words, “as long as the arbitrator is even arguably
construing or applying the contract and acting within the scope of his authority,” a court’s
conviction that the arbitrator has “committed serious error” in resolving the disputed issue
“does not suffice to overturn his decision.” United Paperworkers Int’l Union AFL-CIO v.
Misco, Inc., 484 U.S. 29, 38 (1987); accord 187 Concourse Assocs. v. Fishman, 399 F.3d at
526.
Applying these principles to this case, we consider only whether, in light of the
parties’ agreement to arbitrate, the arbitrators were authorized to sanction bad faith conduct
by awarding attorney’s and arbitrator’s fees. We do not – nor does respondent ask us to –
consider whether the arbitrators correctly identified bad faith conduct or whether the amount
of fees awarded was an appropriate sanction for that conduct.
B. The Parties’ Broad Agreement to Arbitrate Conferred on the Arbitrators the
Equitable Authority to Sanction a Party’s Bad Faith Conduct
7
Where an arbitration clause is broad, arbitrators have the discretion to order such
remedies as they deem appropriate. See Banco de Seguros del Estado v. Mut. Marine Office,
Inc., 344 F.3d at 262. This is because it is “not the role of the courts to undermine the
comprehensive grant of authority to arbitrators by prohibiting” them from fashioning awards
or remedies to “ensure[ ] a meaningful final award.” Id. (concluding that arbitrators did not
exceed their authority by requiring foreign reinsurer to post pre-hearing security); see also
1 Martin Domke, Domke on Commercial Arbitration § 35:1 (3d ed. 2008) (“Limited only by
the broad concepts of equity and justice, the arbitrator has a plethora of remedies, both legal
and equitable, to choose from in structuring a remedy.”).
Consistent with this principle, we here clarify that a broad arbitration clause, such as
the one in this case, see Coinsurance Agreements § 10.1, confers inherent authority on
arbitrators to sanction a party that participates in the arbitration in bad faith and that such a
sanction may include an award of attorney’s or arbitrator’s fees.2 This conclusion finds
support in Synergy Gas Co. v. Sasso, 853 F.2d 59, wherein this Court ruled that, after an
arbitrator ordered the reinstatement of a discharged employee with backpay, the arbitrator
did not exceed his authority in further awarding the employee’s union attorney’s fees. In so
2
Our dissenting colleague takes issue with the principle we articulate here,
pointing out that “inherent authority is authority which is not conferred.” Post at [ ]. But this
misunderstands our point: We mean simply that the authority to sanction inheres in the
comprehensive arbitral authority. As we discuss herein, the inherent authority of arbitrators
to impose sanctions in such circumstances has been recognized by our own court and by
sister circuits.
8
holding, we noted that “[a]rbitrators have . . . occasionally awarded attorney’s fees” in
circumstances where one party had acted in bad faith and that such fees fairly compensated
the party for costs incurred as a result of such actions. Id. at 65. In that case, we specifically
observed that “if Synergy had not acted in bad faith, then [the employee] Brown would have
been reinstated more than six years ago and the attorney’s fees would not have been
incurred.” Id. at 66. Accordingly, we concluded that such an award of attorney’s fees did
not contravene New York’s public policy against punitive arbitration awards because the fees
were compensatory, not penal, in nature and, thus, an appropriate form of damages granted
to the aggrieved party.3 See id.The Ninth Circuit has also rejected a challenge to an arbitration award of attorney’s
fees, recognizing a bad faith exception to the general “American Rule” that each party bears
its own attorney’s fees. See Todd Shipyards Corp. v. Cunard Line, Ltd., 943 F.2d 1056, 1064
(9th Cir. 1991). The court explained: “Federal law takes an expansive view of arbitrator
authority to decide disputes and fashion remedies . . . . In light of the broad power of
arbitrators to fashion appropriate remedies and the accepted ‘bad faith conduct’ exception
to the American Rule, we hold that it was within the power of the arbitration panel in this
case to award attorneys’ fees.” Id.; see also Marshall & Co. v. Duke, 114 F.3d 188, 190
3
Because National Travelers has not challenged the fee award on the ground that
it was punitive, rather than compensatory, we have no occasion to consider an arbitrator’s
authority to award attorney’s fees in excess of the amount necessary to compensate for the
losses and expenses attributable to a party’s arbitrating in bad faith.
9
(11th Cir. 1997) (noting that parties raised no jurisdictional challenge to attorney’s fee award,
but observing that, “[i]n any event, the arbitrators have the power to award attorney’s fees
pursuant to the ‘bad faith’ exception to the American Rule that each party bears its own
attorney’s fees”).
EMC submits that this case is distinguishable because the agreement at issue in Todd
Shipyards Corp. v. Cunard Line, Ltd. specifically integrated Rule 43 of the Commercial
Rules of the American Arbitration Association, which states that “‘[t]he arbitrator may grant
any remedy or relief which the Arbitrator deems just and equitable within the scope of the
agreement of the parties.’” 943 F.2d at 1062-63 (quoting Rule 43). We do not, however,
consider a reference to Rule 43 to be essential where, as in this case, the parties’ arbitration
clause applies broadly to every dispute arising under their agreement, see Coinsurance
Agreements § 10.1, and where the arbitrators find that a party did not arbitrate in good faith,
see Domke on Commercial Arbitration § 35:8 (“As a general rule, each party to an arbitration
must bear its own attorney fees associated with an arbitration action or the enforcement of
an arbitration award. Nevertheless, [the Federal Arbitration Act] . . . grant[s] wide authority
to the arbitrator to determine entitlement to attorney fees. . . . Under some circumstances, the
prevailing party may recover attorney fees if the parties provide for the remedy of attorney
fees in their arbitration agreement or if authorized by a statute, or if justified by
circumstances in which the losing party acted in bad faith.” (emphasis added)). Indeed, the
underlying purposes of arbitration, i.e., efficient and swift resolution of disputes without
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protracted litigation, could not be achieved but for good faith arbitration by the parties.
Consequently, sanctions, including attorney’s fees, are appropriately viewed as a remedy
within an arbitrator’s authority to effect the goals of arbitration.
C. Section 10.3 of the Parties’ Agreement Did Not Limit the Arbitrators’
Authority to Award Attorney’s and Arbitrator’s Fees as a Sanction for Bad
Faith Conduct
While a broad arbitration clause affords arbitrators considerable discretion to award
such remedies as they deem appropriate, they may not “exceed the power granted to them by
the contract itself.” Banco de Seguros del Estado v. Mut. Marine Office, Inc., 344 F.3d at
262. EMC does not contend that section 10.1 of the agreement to arbitrate is not sufficiently
broad to authorize the arbitrators to sanction bad faith conduct. Rather, its position has
consistently been that section 10.3 limits that sanction authority to exclude awards of
attorney’s or arbitrator’s fees. We conclude that this is not a proper construction of section
10.3.
In interpreting a contract under New York law, “words and phrases . . . should be
given their plain meaning.” LaSalle Bank Nat’l Ass’n v. Nomura Asset Capital Corp., 424
F.3d 195, 206 (2d Cir. 2005) (internal quotation marks omitted). Section 10.3 simply states
the general American Rule that each party will bear its own attorney’s fees and extends the
principle to apply also to the fee of the arbitrator selected by each party. Thus, section 10.3
is fairly understood to reflect the parties’ agreement as to how fees are to be borne,
regardless of the arbitration’s outcome, in the expected context of good faith dealings. See
11
Thyroff v. Nationwide Mut. Ins. Co., 460 F.3d 400, 407 (2d Cir. 2006) (holding that, under
New York law, “a covenant of good faith and fair dealing” is implicit in every contract).
Nothing in the section, however, signals the parties’ intent to limit the arbitrators’ inherent
authority to sanction bad faith participation in the arbitration. Certainly, nothing in Article
X generally, or section 10.3 specifically, references bad faith or sanction remedies.
Accordingly, we have no basis for thinking that the parties to this agreement ever considered
the question of whether to limit the arbitrators’ authority to sanction bad faith conduct. In
contrast, they did expressly confer comprehensive arbitral authority in section 10.1. In light
of that conferral, we conclude that section 10.3 is properly construed to reflect the parties’
agreement that the arbitrators may not factor attorney’s or arbitrator’s fees into awards that
result from the parties’ expected good faith arbitration of a dispute. The section does not
signal the parties’ intent to limit the conferral of comprehensive authority by precluding an
award of attorney’s or arbitrator’s fees when a party’s bad faith dealings create a recognized
exception to the American Rule.
EMC asserts that such a reading of section 10.3 is contrary to New York principles
of contract interpretation. It submits that, because the American Rule would apply by default
even in the absence of section 10.3, reading the section as a simple articulation of the
American Rule would render it superfluous. See Galli v. Metz, 973 F.2d 145, 149 (2d Cir.
1992) (noting that “[u]nder New York law, an interpretation of a contract that has the effect
of rendering at least one clause superfluous or meaningless . . . is not preferred and will be
12
avoided if possible” (internal quotation marks omitted)). We are not persuaded. Parties to
commercial arbitration agreements may choose explicitly to reference the American Rule for
any number of reasons unrelated to the scope of the arbitrators’ sanction authority. For
example, some arbitrators may not be attorneys and, thus, may be unfamiliar with the
American Rule. Still other arbitrators may come from jurisdictions that employ the “English
Rule” where the prevailing party’s fees are routinely paid by an unsuccessful opponent.
Precisely because the agreement in this case conferred broad authority on the
arbitrators, because inherent in such authority is the power to sanction bad faith conduct, and
because bad faith is a well-recognized exception to the American Rule for attorney’s fees,
we conclude that the simple statement of that Rule in section 10.3 is insufficient by itself to
swallow the exception.4 As sophisticated commercial entities, the parties were certainly
4
The dissent cites InterChem Asia 2000 Pte. Ltd. v. Oceana Petrochemicals AG,
373 F. Supp. 2d 340 (S.D.N.Y. 2005), for the proposition that only courts, not arbitrators,
have the authority to impose attorney’s fees pursuant to the bad faith exception to the
American Rule. See post at [ ]. In InterChem, however, the district court confirmed part of
the arbitrator’s award of attorney’s fees for bad faith. In upholding the arbitral award, the
district court recognized that “[a]ttorney’s fees are normally not shifted onto a party under
the ‘American Rule’ . . . . However, despite the ‘American Rule,’ under some circumstances,
the losing party can be assessed attorney fees where that party ‘acted in bad faith,
vexatiously, wantonly, or for oppressive reasons.’” Id. at 355 (internal citations omitted).
In reaching that conclusion, the court relied on Todd Shipyards Corp. v. Cunard Line, Ltd.,
943 F.2d 1056, which we have also cited in support of our conclusion that arbitrators have
inherent authority to sanction bad faith as an exception to the American Rule.
The dissent’s lengthy quote from InterChem is taken from the district court’s
discussion of an arbitrator’s authority to award attorney’s fees against the attorney who
represented a party in the course of arbitration and who was not himself a party to the
arbitration agreement. See id. at 355. We need not address the issue of such an award here
13
capable of stating clearly any intent to exclude attorney’s and arbitrator’s fees from the broad
range of sanctions generally available to arbitrators upon an identification of bad faith. Thus,
our holding today should not be understood to preclude parties who wish to limit the scope
of an arbitrator’s sanction authority to exclude attorney’s fees or arbitrator’s awards from
doing so. We require only that they explicitly and clearly state that intent as part of their
agreement to arbitrate.
IV. Conclusion
To summarize, we conclude
(1) that the parties’ agreement to arbitrate in this case was sufficiently broad to confer
equitable authority on the arbitrators to sanction a party’s bad faith participation in the
arbitration;
(2) that an arbitrator’s identification of bad faith gives rise to an exception to the
generally applicable American Rule that each party bears its own attorney’s fees; and
(3) that the statement of the American Rule in section 10.3 of the parties’ agreement
is properly construed to limit the arbitrators’ authority to award attorney’s and arbitrator’s
fees only where the parties participate in the arbitration in good faith; a more explicit
statement would be necessary to manifest any intent to override the bad-faith exception to
the American Rule and to preclude the arbitrators from awarding attorney’s and arbitrator’s
because the challenged attorney’s fees were awarded only against National Travelers, a party
in the arbitration proceedings.
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fees as a sanction for bad faith conduct.
Accordingly, the judgment of the district court is R EVERSED IN PART insofar as it
vacates the award of attorney’s and arbitrator’s fees and the case is R EMANDED with
directions that the district court enter judgment confirming the arbitration award in all
respects.
15
POOLER, Circuit Judge, dissenting:
This Court has apparently never decided a case raising the precisely identical issue presented
by the instant appeal. Nevertheless, the general principle which I believe should govern our decision
here is pellucid: “[V]acatur [of an arbitral award] is appropriate only if the arbitral award contradicts
an express and unambiguous term of the contract [between the parties] or if the award so far departs
from the terms of the agreement that it is not even arguably derived from the contract.” Westerbeke
Corp. v. Daihatsu Motor Co., 304 F.3d 200, 222 (2d Cir. 2002).
I believe that the majority has disregarded this principle and in so doing fails to acknowledge
that the arbitral award at issue here plainly contradicts an express and unambiguous term of the
contract entered into by Reliastar and EMC. Specifically, the arbitral award could not properly
include an award of attorney’s fees to Reliastar, even if that award was based upon the arbitral
panel’s reasonable conclusion that EMC should be sanctioned for bad faith conduct during the
arbitration proceedings, because the contract between Reliastar and EMC divested the arbitral panel
of any authority to make an award of attorney’s fees. Thus, I believe that this portion of the award
was in excess of the arbitrator’s authority and should be vacated pursuant to Section 10(a)(4) of the
Federal Arbitration Act (“FAA”), 9 U.S.C. § 10(a)(4). I must therefore respectfully dissent.
Arbitration is of course a matter of contract and, as the Supreme Court has recently
reaffirmed, parties are free to design “many features of arbitration by contract, including the way
arbitrators are chosen, what their qualifications should be, which issues are arbitrable, along with
procedure and choice of substantive law.” Hall St. Assocs., LLC v. Mattel, Inc., __ U.S. __, 128 S.
16
Ct. 1396, 1404 (2008).5 Thus, “[t]here is no federal policy favoring arbitration under a certain set
of procedural rules; the federal policy is simply to ensure the enforceability, according to their terms,
of agreements to arbitrate.” Volt Info. Sciences, Inc. v. Bd. of Trustees of Leland Stanford Junior
Univ., 489 U.S. 468, 476 (1989).
The parties here chose to arbitrate under a set of procedural rules, including the following
rule set forth in Section 10.3 of the reinsurance contract: “Each party shall bear the expense of its
own arbitrator . . . and related outside attorneys’ fees, and shall jointly and equally bear with the
other party the expenses of the third arbitrator.” The majority terms this “a general statement.”
Opinion at 2. This characterization implies that Section 10.3 admits of certain exceptions. It does
not; it is unqualified. The majority also speaks of “the proper construction” of Section 10.3.
Opinion at 11. But Section 10.3 is no more susceptible to construction than is Article II, Section I
of the U.S. Constitution which provides that no person shall be eligible to be President “who shall
not have attained to the Age of thirty five years.”6 I therefore think that the district court was merely
5
In Hall Street Assocs., the Supreme Court held that the judicial review provisions of the
FAA are exclusive and that parties are therefore not free to draft an arbitration provision which
purports to give federal courts a broader scope for review of arbitration awards than that set forth
in the Act. (Specifically, the arbitration agreement at issue allowed a district judge to vacate an
arbitral award upon a finding that it was not supported by substantial evidence or that the
arbitrator’s conclusions of law were erroneous. 128 S. Ct. at 1400.) Although the decision
therefore announces a limit on the ability of parties to draft arbitration agreements as they
choose, it has no relevance to the instant appeal because the FAA certainly does not preclude
parties from choosing to bear their own arbitration fees and costs.
6
See John Hart Ely, Democracy and Distrust: A Theory of Judicial Review 13 (1980)
(“Constitutional provisions exist on a spectrum ranging from the relatively specific to the
extremely open-textured. At one extreme – for example the requirement that the President ‘have
attained to the Age of thirty five years – the language is so clear that a conscious reference to
purpose seems unnecessary.”). Similarly, the language of Section 10.3 is so clear that, as will be
17
declaring the obvious in stating that Section 10.3 “is clear as a bell.” Reliastar Life Ins. Co. of N.Y.
v. EMC Nat’l Life Ins. Co., 473 F. Supp. 2d 607, 609 (S.D.N.Y. 2007).
Given the clarity of the meaning of Section 10.3, the proper disposition of the instant appeal
seems to me to be close to self-evident. As recently stated by a district court of our Circuit in a labor
arbitration case, an arbitral panel’s authority to fashion relief is bounded by the intent of the parties
whose contract created the arbitral panel:
“An arbitrator’s authority to settle disputes under a collective
bargaining agreement is contractual in nature, and is limited to the
powers that the agreement confers.” Leed Architectural Prods., Inc.
v. United Steelworkers of Am., Local 6674, 916 F.2d 63, 65 (2d Cir.
1990). The arbitrator “‘may not impose a remedy which directly
contradicts the express language of the collective bargaining
agreement.’” Id. (quoting Bruno’s, Inc. v. United Food and
Commercial Workers Int’l Union, Local 1657, 858 F.2d 1529, 1531
(11th Cir. 1998)).
Beth Israel Med. Ctr. v. 1199/S.E.I.U. United Healthcare Workers East, 530 F. Supp. 2d 610, 614
(S.D.N.Y. 2008). In other words, as the majority itself recognizes, Opinion at 11, this Court has
made it clear that “arbitrators have the discretion to order remedies they determine appropriate, so
long as they do not exceed the power granted to them by the contract itself.” Banco de Seguros Del
Estado v. Mut. Marine Office, Inc., 344 F.3d 255, 262 (2d Cir. 2003) (emphasis added).
“Thus, just as a private agreement may vest decision-making authority in an arbitrator, so
may it deprive an arbitrator of that authority.” Hoeft v. MVL Group, Inc., 343 F.3d 57, 66 (2d Cir.
2003), overruled on other grounds by Hall Street Assocs., 128 S.Ct. at 1403-04. We have therefore
repeatedly held that arbitrators cannot award forms of relief which are plainly in contradiction with
discussed below, the majority’s attempt to divine its purpose is unwarranted.
18
the authority afforded them under the contract between the parties, even when the relief appears to
be in furtherance of the arbitrator’s reasonable notion of what fairness or good sense requires. See,
e.g., Porzig v. Dresdner, Kleinwort, Benson, North America, LLC, 497 F.3d 133, 140-41 (2d Cir.
2007) (arbitration panel had no authority to fashion award of attorney’s fees which required attorney
to reimburse his client because attorney was not a party to arbitration agreement); 187 Concourse
Assocs. v. Fishman, 399 F.3d 524, 527 (2d Cir. 2005) (where arbitration agreement clearly provided
that employee could be terminated for just cause, arbitrator had “no authority . . . to fashion an
alternative remedy” which directed that employee be reinstated for probationary period); Katz v.
Feinberg, 290 F.3d 95, 98 (2d Cir. 2002) (per curiam) (in case involving sale of firm, arbitral panel
erred in computing firm’s value where parties’ sale agreement explicitly afforded firm’s accountants
with sole and final authority to assess its value); United States v. Am. Soc’y of Composers, Authors
and Publishers, 32 F.3d 727, 732-33 (2d Cir. 1994) (arbitral panel could not set new rate of payment
to composers of advertising jingles because “nothing in [the parties’ contract] gives an arbitration
panel authority to modify any rule or regulation . . . . If a rule is found by an arbitration panel to be
arbitrary, it may declare such rule void. . . . Thus, the panel’s authority was exhausted after it
declared the three-percent rule void.”); Harry Hoffman Printing, Inc. v. Graphic Communications
Int’l Union, Local 261, 950 F.2d 95, 99 (2d Cir. 1991) (arbitral panel erred in relying upon “the
concept of ‘elementary due process’” in holding that workers must be afforded notice before
dismissal because “[n]either Section 4.2 nor 39.1 [of the parties’ contract], the only provisions
discussed by the Panel in concluding that notice was necessary, provide for such a broad concept as
‘due process’”); Marine Pollution Serv., Inc. v. Local 282, Int’l Bhd. of Teamsters, Chauffeurs,
19
Warehousemen and Helpers of America, 857 F.2d 91, 95 (2d Cir. 1988) (“In the instant case, the
arbitrator breached his responsibility to the parties by importing his notions of equity into the
arbitration proceeding. His award was not drawn from the contract but from his concern that Transit
Mix drivers be allowed some opportunity for employment while their own employer restructured its
operations.”); see also Missouri River Servs., Inc. v. Omaha Tribe of Nebraska, 267 F.3d 848, 857
(8th Cir. 2001) (arbitration panel exceeded its authority by ordering that its award be satisfied out
of profits of Indian tribe’s Iowa casino because arbitration agreement specifically provided that any
award would be satisfied out of profits from tribe’s Nebraska casino); Swift Indus., Inc. v. Botany
Indus., Inc., 466 F.2d 1125, 1127-28 (3rd Cir. 1972) (arbitrator erred in awarding large cash bond
to protect a party from possible future tax liability when contract only allowed for cash remedies for
liabilities already “incurred or suffered”); J.P. Greathouse Steel Erectors, Inc. v. Blount Bros.
Constr. Co,, 374 F.2d 324, 325 (D.C. Cir. 1967) (“arbitrators exceeded their authority” when they
“required Greathouse to pay all the expense of the arbitration, although the subcontract provided that
‘Each party shall pay one-half the expense’” of the arbitration proceeding).
The majority makes three attempts to invest the arbitral panel with the authority which
Section 10.3 plainly denies it. First, it relies upon two cases in which arbitrators awarded attorney’s
fees to a party as a sanction for its adversary’s bad faith conduct during the arbitration proceeding.
Opinion at 8-9 (discussing Synergy Gas Co. v. Sasso, 853 F.2d 59 (2d Cir. 1988) and Todd Shipyard
Corp. v. Cunard Line, Ltd., 943 F.2d 1056 (9th Cir. 1991)). But this reliance is misplaced because
there is no indication in either of these opinions that the arbitral award of attorney’s fees was in
conflict with any contractual provision setting forth the parties’ intent with respect to attorney’s
20
fees.7
Second, the majority asserts that Section 10.3 sets forth “the American Rule” to the effect
that each party is responsible for its own attorney’s fees and that “bad faith is a well-recognized
exception to the American Rule.” Opinion at 13. This is uncontroversial. But the majority provides
no authority for the proposition that an exception which is properly recognized by a court is equally
recognizable by an arbitrator. Indeed, District Judge Marrero of our Circuit has rejected the
argument that the judicial authority to sanction bad faith conduct inheres in arbitrators:
The Court cannot identify, nor did the Arbitrator provide, any
authority that supports an arbitrator’s ability to award attorney’s fees
against an attorney appearing before him. While a court clearly can
award attorney’s fees against an attorney as a sanction in certain
circumstances, there is no authority supporting the Arbitrator’s
decision to sanction [the respondent’s attorney] in this case.
InterChem Asia 2000 Pte. Ltd. v. Oceana Petrochemicals AG, 373 F. Supp. 2d 340, 355-56
(S.D.N.Y. 2005). Judge Marrero’s position strikes me as perfectly correct.8 As applied to the
7
In Synergy Gas Co., in light of the arbitrator’s lack of authority under New York law to
award punitive damages, it is not clear that this Court even considered the award of attorney’s
fees as the imposition of a sanction: “Rather, the award can be considered compensatory because
if Synergy has not acted in bad faith, then Brown would have been reinstated more than six years
ago and the attorney’s fees would not have been incurred.” 853 F.2d at 66. There is nothing in
the arbitral award in the instant case which suggests that the arbitrators viewed the award of
attorney’s fees as compensatory. On the contrary, as the majority recognizes, the award was
made “without explanation.” Opinion at 4.
8
In contrast, Judge Marrero upheld the arbitrator’s sanction of attorney’s fees as to the
respondent itself. But this was not because of the arbitrator’s authority to sanction, but because
the parties’ arbitration agreement provided for the application of the rules of the American
Arbitration Association, which themselves provide for the awarding of attorney’s fees if the
parties request them. 373 F. Supp. 2d at 354. The award was therefore upheld in spite of the
arbitrator’s lack of authority to impose sanctions: “The Arbitrator’s reference in one part of the
Arbitration Award to his award of attorney’s fees as an imposition of sanctions does not change
21
instant case, I cannot see any justification for holding that an arbitrator has the authority to apply an
exception to the American Rule, even if it is a well-recognized one, in disregard of the contract
between the parties which provides without exception that the American Rule should apply.
Finally, the majority relies upon the scope of the general arbitration clause in the agreement
between the parties, Section 10.1, which is correctly characterized as “appl[ying] broadly to every
dispute arising under their agreement.” Opinion at 10. The majority concludes that an arbitration
clause of this breadth “confers inherent authority on arbitrators to sanction a party that participates
in the arbitration in bad faith and that such a sanction may include an award of attorney’s or
arbitrator’s fees.” Opinion at 8. I am troubled by this statement first of all because it is a flat
contradiction in terms. That is, inherent authority is authority which is not conferred; inherent
authority is possessed regardless of the intentions of those who have the power to confer authority.
More importantly, the majority’s conclusion contradicts this Court’s recognition “of the dominance
of specific over general arbitration provisions.” Katz v. Feinberg, 290 F.3d at 96. In Katz, a case
involving the sale of a firm, we held that a broad arbitration clause did not give arbitrators to the
authority to compute the value of the firm where the agreement also contained a specific provision
assigning that task to the firms accountants:
The parties’ Purchase Agreement includes both a specific provision,
§ 2(b), assigning determination of the Final Share Price to the
Company Accountants, and a generally worded arbitration provision,
§ 14(g), assigning all claims arising from the agreement to an
arbitrator. Under existing law, we find that the more specific
assignment should govern.
the fact that such an award was within the scope of the Arbitrator’s authority.” Id.
22
Id. at 98. The application of this principle to the instant case is beyond dispute. The specific
provision, Section 10.3, providing that the parties shall bear their own attorney’s fees, precludes any
reliance upon the general arbitration provision, Section 10.1, as a source of an award of attorney’s
fees to EMC.
In addition, I must note my unease with concept of what the majority terms “the arbitrators’
inherent authority to sanction bad faith participation in the arbitration.” Opinion at 12. Beyond the
fact that the majority has made little effort to define the scope and limits of this authority, the notion
of authority inhering in an arbitral panel, whose authority is derived from the agreement of the
parties before it, is problematic. I would again point to the sound reasoning of Judge Marrero:
[F]inding that the Arbitrator had inherent authority to sanction [the
respondent’s attorney] would directly contradict the principle that an
arbitrator’s authority is circumscribed by the agreement of the parties.
That principle flows from the basic understanding that arbitration is
a consensual arrangement meant to reflect a mutual agreement to
resolve disputes outside of the courtroom. See First Options of
Chicago, Inc. v. Kaplan, 514 U.S. 938, 943 (1985) (“[A]rbitration is
simply a matter of contract between the parties; it is a way to resolve
those disputes – but only those disputes – that the parties have agreed
to submit to arbitration.”) . . . .
InterChem Asia 2000 Pte. Ltd., 373 F. Supp. 2d at 358.
I must also express my disagreement with the majority’s attempt to dismiss Section 10.3 as
mere boilerplate:
Parties to commercial arbitration agreements may choose explicity to
reference the American Rule for any number of reasons unrelated to
the scope of the arbitrators’ sanction authority. For example, some
arbitrators may not be attorneys and, thus, may be unfamiliar with the
American Rule. Still other arbitrators may come from jurisdictions
that employ the “English Rule” where prevailing party’s fees are
routinely paid by an unsuccessful opponent.
23
Opinion at 13.
But the limitation of Section 10.3 to these anodyne purposes must be rejected as pure
surmise. On the contrary, it is easily imaginable that the explicit provision for the American Rule
in an arbitration agreement might be a consideration in a party’s strategic approach to an arbitration
proceeding. For example, a party may believe that its position in the dispute to be arbitrated is
unlikely to prevail and knowing that it will bear its own attorney’s fees, might inform its attorneys
to refrain from exerting undue efforts on the case. In any event, this Court has no basis upon which
to conclude that the parties’ inclusion of Section 10.3 in their agreement was a matter of little
consequence to them.
In conclusion, I certainly do not wish my disagreement with the majority to be construed as
in any way condoning or excusing bad faith conduct in arbitration proceedings.9 It is an interesting
question as to whether or not the arbitral panel might have awarded a sanction against EMC other
than the award of attorney’s fees to Reliastar. I tend to think it could because “while an arbitrator
may not award relief expressly forbidden by the agreement of the parties, an arbitrator may award
relief not sought by either party, so long as the relief lies within the broad discretion conferred by
9
On the other hand, it should not be forgotten that a major feature of arbitration is that it
is a less rule-governed proceeding than is litigation in a judicial forum and that, as a result, it is
likely to have something of a rough and tumble character. But the relatively unstructured nature
of arbitration should certainly not serve as a basis for a federal court’s post-bellum application of
the standards of a litigation proceeding upon an arbitration which may have fallen short of those
standards. On the contrary, “the recognition that arbitration procedures are more streamlined
than federal litigation is not a basis for finding the forum somehow inadequate; the relative
informality of arbitration is one of the chief reasons that parties select arbitration. Parties ‘trad[e]
the procedures and opportunity for review of the courtroom for the simplicity, informality, and
expedition of arbitration.’” 14 Penn Plaza, LLC v. Pyett, __ U.S. __, 2009 WL 838159 at *13
(Apr. 1, 2009) (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614,
634 (1985)).
24
the FAA.” Telenor Mobile Communications AS v. Storm LLC, 524 F. Supp. 2d 332, 359 (S.D.N.Y.
2007). In any event, the source of such an award would not be the “inherent authority” of the
arbitrator, a concept not recognized by the FAA. But the arbitral panel here clearly awarded relief
expressly forbidden by the agreement of the parties. I must therefore respectfully dissent.
25