Kemper Corporate Services, Inc v. Computer Science ( 2020 )

Case: 18-11276 Document: 00515267634 Page: 1 Date Filed: 01/10/2020
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit
FILED
January 10, 2020
No. 18-11276 Lyle W. Cayce
Clerk
KEMPER CORPORATE SERVICES, INCORPORATED,
Plaintiff - Appellee
v.
COMPUTER SCIENCES CORPORATION; DXC TECHNOLOGY
COMPANY,
Defendants - Appellants
-----------------------------------
COMPUTER SCIENCES CORPORATION,
Plaintiff - Appellant
v.
KEMPER CORPORATE SERVICES, INCORPORATED;
Defendant - Appellee
Appeal from the United States District Court
for the Northern District of Texas
Before SOUTHWICK, WILLETT, and OLDHAM, Circuit Judges.
LESLIE H. SOUTHWICK, Circuit Judge:
This is an appeal of the district court’s confirmation of an arbitral award
over the objection that the arbitrator had exceeded his authority. We agree
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with the district court that no such defect in the arbitration exists.
AFFIRMED.
FACTUAL AND PROCEDURAL HISTORY
Kemper Corporate Services, Incorporated (“Kemper”), an insurance
company, hired Computer Sciences Corporation (“CSC”), a software developer
and technology-services company, to update its insurance software. The
parties entered into a multi-year software-services contract, known as the
“Exceed Agreement.” It contained provisions for arbitration. The Exceed
Agreement consisted of a Master Software License and Service Agreement
(“MSLSA”), Addendum No.1 (“Addendum”), two work orders, and a product
order. Before the parties executed the Exceed Agreement, CSC advised
Kemper that it planned to update CSC’s existing Exceed computer program
from COBOL language to a modern Java version.
The parties agreed that “all disputes arising out of or relating to [the
Exceed Agreement], or the breach thereof,” must be submitted to nonbinding
mediation. The MSLSA provided that if a dispute was not resolved by
mediation, the parties could submit to binding arbitration for a final
determination. Section 9.3(e) of the MSLSA specified:
With respect to any matter brought before the arbitrator, the
arbitrator shall make a decision having regard to the intentions of
the parties, the terms of this Agreement, and custom and usage of
the insurance and data processing industry. Such decisions shall
be in writing and shall state the findings of fact and conclusions of
law upon which the decision is based, provided that such decision
may not (i) award consequential, punitive, special, incidental or
exemplary damages or any amounts in excess of the limitations
delineated in Section 7 of this agreement . . . .
The limitations referenced in the above quotation from Section 9 of the MSLSA
were the following:
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7.2.2. Even if [Kemper’s] exclusive remedies fail of their essential
purposes, CSC shall never be liable under this agreement to
[Kemper] or others for any economic loss or consequential damages
(including lost profits or savings) indirect, incidental, special or
punitive damages arising out of this agreement . . . .
...
7.2.3. In no event shall [Kemper] be entitled to an award of
punitive, exemplary or multiplied damages for any breach of this
agreement by CSC.
(original in all capitals and boldface).
Further, in the Addendum executed by the parties and incorporated into
the MSLSA, the parties agreed that
if for reasons not caused by [Kemper], CSC fails to make the Java
version of the [Exceed] program generally available to its licensees
within [the contractually agreed upon time period, Kemper] may
declare CSC in breach of the Agreements and will be entitled to all
remedies set forth in this Addendum (including, without
limitation, all payments made by [Kemper] pursuant to the
Agreements but without any limitations based upon when such
payments were made) and to seek all additional proven direct
damages resulting from such breach.
(emphasis added).
In the years following the execution of the Exceed Agreement, there
were significant problems with the software CSC was developing. Nonbinding
mediation did not resolve the resulting disputes. As a result, Kemper filed a
demand for arbitration with the American Arbitration Association (“AAA”).
Among the claims in Kemper’s demand was that CSC breached its contractual
obligation to make the updated version of the Exceed program “generally
available to its licensees, including Kemper.” Kemper sought damages
including: “1) ‘all payments made by [Kemper] pursuant to the agreements’,
and 2) all additional direct damages, ‘including internal salaries and other
expenses [Kemper] had incurred on the project.’”
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The parties agreed to conduct an arbitration hearing in Dallas, Texas,
where the arbitrator would adhere to the AAA’s rules for large and complex
cases and apply New York substantive law. The arbitration proceeding
included extensive fact and expert discovery, pre-hearing briefing, a ten-day
hearing, post-hearing briefing, supplemental post-hearing briefing, and closing
arguments. In dispute throughout the proceedings was whether certain
damages sought by Kemper were recoverable under the Exceed Agreement.
After reviewing the parties’ post-hearing briefs, the arbitrator requested
additional briefing on multiple issues including whether Kemper’s requested
damages were direct or consequential.
In the arbitrator’s Final Award, the arbitrator found that CSC breached
the Exceed Agreement. He then concluded that Kemper was entitled to the
following damages:
• payments Kemper made to CSC under the Exceed Agreement;
• internal expenses of Kemper that were the natural and probable cause
of CSC’s breach of the Exceed Agreement;
• costs and expenses incurred by Kemper in relation to the arbitration;
and
• pre-judgment interest at a rate of nine percent per annum until the
award was paid or confirmed by judgment of a court.
Kemper moved to confirm the Final Award in the United States District
Court for the Northern District of Texas. CSC moved in the Southern District
of New York to vacate the Final Award, as the Exceed Agreement stated that
the arbitration was to occur in New York and that state’s law would apply.
The two proceedings were consolidated in the district court in Texas. The
magistrate judge to whom the case was referred recommended that the award
be confirmed. CSC filed objections, but the district court adopted the
magistrate judge’s report and recommendations as the district court’s findings
and conclusions. CSC timely appealed.
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DISCUSSION
Appellate review of an order confirming or vacating an arbitration award
is de novo. PoolRe Ins. Corp. v. Org. Strategies, Inc., 783 F.3d 256, 262 (5th
Cir. 2015). Our review of the arbitration award itself is said to be “very
deferential.” Id. (quotation marks omitted). Deference ends, though, if “the
arbitrator exceeds the express limitations of his contractual mandate.” Id.(quotation marks omitted). Thus, “[w]hether an arbitrator has exceeded his
powers is tied closely to the applicable standard of review.” Timegate Studios,
Inc. v. Southpeak Interactive, L.L.C., 713 F.3d 797, 802 (5th Cir. 2013). This
court “must sustain an arbitration award even if we disagree with the
arbitrator’s interpretation of the underlying contract as long as the arbitrator’s
decision draws its essence from the contract.” Id. (quotation marks omitted).
Therefore, “the sole question for us is whether the arbitrator (even arguably)
interpreted the parties’ contract, not whether he got its meaning right or
wrong.” Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 569 (2013).
Under the Federal Arbitration Act (“FAA”), a court may vacate an
arbitral award only under limited circumstances, including where the
arbitrator exceeded his powers. 9 U.S.C. § 10(a)(4). Section 10(a)(4) has been
interpreted narrowly and allows vacatur of an award “[o]nly if the arbitrator
acts outside the scope of his contractually delegated authority—issuing an
award that simply reflects his own notions of economic justice rather than
drawing its essence from the contract.” Oxford, 569 U.S. at 569 (quotation
marks and alterations omitted). A party seeking vacatur of an arbitral award
under Section 10(a)(4) “bears a heavy burden.” Id.
CSC, the party seeking vacatur, advances two principal contentions on
appeal. First, the district court should have decided the vacatur motion
without deference to the arbitral award because the arbitrator exceeded his
powers. Second, the damages awarded are consequential under New York law.
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I. Scope of arbitrator’s authority
An arbitrator exceeds his authority when he acts “contrary to express
contractual provisions.” Beaird Indus., Inc. v. Local 2297, Int’l Union, 404 F.3d
942, 946 (5th Cir. 2005). Of principal relevance to the issue of the arbitrator’s
authority is the language of the arbitration agreement. See Glover v. IBP, Inc.,
334 F.3d 471, 474 (5th Cir. 2003). If the “agreement gives an arbitrator
authority to interpret and apply a contract, the arbitrator’s construction of that
contract must be enforced so long as it is ‘rationally inferable from the letter or
purpose of the underlying agreement.’” Id. (quoting Executone Info. Sys., Inc.
v. Davis, 26 F.3d 1314, 1320 (5th Cir. 1994)).
The Exceed Agreement provided that “all disputes arising out of or
relating to this Agreement” must first be submitted to nonbinding mediation.
If mediation proved unsuccessful, then the matter could be submitted to
binding arbitration. If arbitration was pursued, the arbitrator was to “make a
decision having regard to the intentions of the parties, the terms of th[e]
Agreement, and custom and usage of the insurance and data processing
industry.” The arbitrator was to “render an award” within 20 days “after the
completion of the arbitration.” The Exceed Agreement expressly authorized
the arbitrator to award direct damages resulting from a breach, but it
prohibited the arbitrator from awarding consequential damages.
We do not accept CSC’s argument that the arbitrator lacked the
authority to “categorize damages as consequential or direct.” For the
arbitrator to resolve the dispute between CSC and Kemper, which could
include awarding damages, he had to categorize the potential damages into the
permitted and the prohibited categories. We conclude that the authority to
carry out such categorization is conferred by the Exceed Agreement because it
is essential to the arbitrator’s task. In the Final Award, the arbitrator directly
addressed, then rejected, CSC’s argument that the damages sought by Kemper
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were unrecoverable consequential damages. The Exceed Agreement expressly
authorized the arbitrator to decide “all disputes arising out of or related to” the
Exceed Agreement, “make a decision having regard to the intentions of the
parties,” and “render an award.”
As we resolve “all doubts in favor of arbitration,” the arbitrator did not
exceed the scope of his contractual authority by classifying and awarding
damages to Kemper. Brook v. Peak Int’l, Ltd., 294 F.3d 668, 672 (5th Cir.
2002). As a result, the Final Award is subject to a very deferential review. See
BNSF Ry. Co. v. Alstom Transp., Inc., 777 F.3d 785, 787 (5th Cir. 2015).
II. Highly deferential review of arbitrator’s award
We have concluded that the arbitrator acted within the scope of his
authority. Consequently, the award will be upheld if the arbitrator “even
arguably interpreted the parties’ contract.” Oxford, 569 U.S. at 569
(punctuation omitted). We have held that in deciding whether an arbitrator
has interpreted the contract, we are to “consult the arbitrator’s award itself”
because “[t]he award will often suggest on its face that the arbitrator was
arguably interpreting the contract.” BNSF, 777 F.3d at 788. In consulting the
award, we consider the following as relevant evidence: “(1) whether the
arbitrator identifies [his] task as interpreting the contract; (2) whether [he]
cites and analyzes the text of the contract; and (3) whether [his] conclusions
are framed in terms of the contract’s meaning.” Id. at 788.
The Final Award in this case facially supports that the arbitrator was
interpreting the Exceed Agreement. First, the arbitrator identified his task as
interpreting the contract in accordance with AAA and New York laws. Second,
the arbitrator consistently referenced the Exceed Agreement and analyzed its
provisions throughout his 54-page Final Award. The arbitrator adhered to the
parties’ contract when he applied New York law and interpreted the Exceed
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Agreement using canons of construction recognized in New York. Third, in
terms of whether the arbitrator’s conclusions were “framed in terms of the
contract’s meaning,” the arbitrator directly addressed whether the damages
sought by Kemper were recoverable direct damages. After he “reviewed the
evidence and legal authority cited by both Parties in their pre- and post-
hearing briefs” the arbitrator concluded “that the internal expenses claimed
are properly recoverable as direct damages.”
For these reasons, we hold that the arbitrator did arguably construe the
parties’ contract, and the arbitral award must stand.
The remainder of CSC’s argument goes beyond arbitral authority and
addresses the merits of the Final Award, including the accuracy of the
arbitrator’s interpretation of New York law. CSC urges us to go beyond our
mandate. At this point in our review, though, our “sole question is whether
the arbitrator[] even arguably interpreted the Agreement in reaching [the]
award; it is not whether [his] interpretations of the Agreement or the
governing law were correct.” BNSF, 777 F.3d at 789. We have no authority to
review the merits of the Final Award. See Oxford, 569 U.S. at 572. “It is the
arbitrator’s construction of the contract which was bargained for; and so far as
the arbitrator’s decision concerns construction of the contract, the courts have
no business overruling him because their interpretation of the contract is
different from his.” Id. at 573 (quotation marks and alteration omitted).
AFFIRMED.
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