George Watts & Son v. Tiffany and Company ( 2001 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 00-3231
George Watts & Son, Inc.,
Plaintiff-Appellant,
v.
Tiffany and Company,
Defendant-Appellee.
Appeal from the United States District Court
for the Eastern District of Wisconsin.
No. 99-C-1217--Thomas J. Curran, Judge.
Argued January 12, 2001--Decided April 16, 2001
Before Easterbrook, Diane P. Wood, and Williams, Circuit
Judges.
Easterbrook, Circuit Judge. For many years George
Watts & Son sold Tiffany’s products in Wisconsin.
After receiving a notice ending that arrangement,
Watts filed suit, asserting that Tiffany had
violated both the contract between the parties
and the Wisconsin Fair Dealership Law, Wis. Stat.
ch. 135. Before the case could be decided, Watts
and Tiffany decided that they preferred
arbitration to litigation. The parties received
the principal benefit of that bargain: swift and
inexpensive decision. But Watts decided in
retrospect that its decision to arbitrate had
been unwise, and it asked the district court to
provide more relief than the arbitrator had
afforded.
The arbitrator’s award extended the time during
which Watts could resell Tiffany’s merchandise
through Watts’ bridal registry but permitted
Tiffany to cease selling to Watts at the end of
2000; it also required Tiffany to repurchase at
retail price all other Tiffany merchandise
remaining in Watts’ inventory. The arbitrator did
not order Tiffany to pay Watts’ attorneys’ fees
and costs. In this respect, according to Watts,
the arbitrator departed from state law, requiring
the court to repair the problem. An error of law
is not a ground listed in 9 U.S.C. sec.sec. 10
and 11 for vacating or modifying an award, but in
dictum the Supreme Court has suggested that an
arbitrator’s "manifest disregard" of legal rules
justifies judicial intervention. Wilko v. Swan,
346 U.S. 427, 436-37 (1953), overruled on other
grounds by Rodriguez de Quijas v.
Shearson/American Express, Inc., 490 U.S. 477(1989). Often "manifest disregard of the law"
would be covered by sec.10(a)(4), which
authorizes vacatur "Where the arbitrators
exceeded their powers, or so imperfectly executed
them that a mutual, final, and definite award
upon the subject matter submitted was not made."
If the parties specify that their dispute is to
be resolved under Wisconsin law, then an
arbitrator’s declaration that he prefers New York
law, or no law at all, would violate the terms on
which the dispute was given to him for
resolution, and thus justify relief under
sec.10(a)(4). But Watts does not contend that the
arbitrator violated the arbitration agreement in
such a fashion. This poses for us the question
whether there is a broader, extra-statutory
principle authorizing courts to review
arbitrators’ legal rulings, or the legal
assumptions that influence their decisions even
if not identified as conclusions of law.
What could it mean to say that an arbitrator
manifestly disregarded the law? That the
arbitrator made a legal error? This is Watts’
view--that Wisconsin law entitles the prevailing
party to attorneys’ fees in every case under the
WFDL, that it "prevailed" in the arbitration by
obtaining an extension of its dealership plus
exceptionally favorable terms for the repurchase
of inventory, and that the law therefore required
the arbitrator to award legal fees too. If
"manifest disregard" means only a legal error,
however, then arbitration cannot be final. Every
arbitration could be followed by a suit, seeking
review of legal errors, serving the same function
as an appeal within a unitary judicial system.
That would prevent the parties from achieving the
principal objectives of arbitration: swift,
inexpensive, and conclusive resolution of
disputes. If "manifest disregard" means not just
any legal error but rather a "clear" error (one
about which there is, in Watts’ language, "no
reasonable debate"), again arbitration could not
be final, and the post-arbitration litigation
would be even more complex than a search for
simple error--for how blatant a legal mistake
must be to count as "clear" or "manifest" error
lacks any straightforward answer. Cf. Cooter &
Gell v. Hartmarx Corp., 496 U.S. 384, 399-405
(1990). In this case, for example, the parties
dispute whether an award of fees under the WFDL is
mandatory or only permissive (perhaps with a
presumption in favor of an award); they dispute
even whether the arbitrator’s award was based on
the WFDL as opposed to the contract. Running these
matters to ground could be complex. Fortunately,
we need not do so (and we therefore express no
opinion on them).
A search for either simple or clear legal error
cannot be proper. Courts often say, with respect
to arbitrators’ role in interpreting contracts,
that error is not a ground of judicial review.
"[T]he question for decision by a federal court
asked to set aside an arbitration award . . . is
not whether the arbitrator or arbitrators erred
in interpreting the contract; it is not whether
they clearly erred in interpreting the contract;
it is not whether they grossly erred in
interpreting the contract; it is whether they
interpreted the contract." Hill v. Norfolk &
Western Ry., 814 F.2d 1192, 1194-95 (7th Cir.
1987); see, e.g., United Steelworkers v.
Enterprise Wheel & Car Corp., 363 U.S. 593, 599
(1960). Yet in litigation the meaning of a
contract is treated as an issue of law, when the
text is clear and extrinsic evidence is either
unavailable or precluded by the parol evidence
rule. If manifest legal errors justified
upsetting an arbitrator’s decision, then the
relation between judges and arbitrators
established by the Steelworkers’ Trilogy and
reiterated by many later opinions would break
down.
Our cases trying to apply the Wilko dictum
demonstrate some of the difficulties. At least
two decisions say that an award may be vacated
when an arbitrator "disregards" the law in the
sense of treating it as an obstacle to reaching
a result preferred on other grounds. See National
Wrecking Co. v. Teamsters, 990 F.2d 957 (7th Cir.
1993); Health Services Management Corp. v.
Hughes, 975 F.2d 1253 (7th Cir. 1992). But other
panels of this court have held the opposite, that
arbitrators need not cite or apply rules of law
outside the parties’ agreement. Baravati v.
Josephthal, Lyon & Ross, 28 F.3d 704 (1994);
Flender Corp. v. Techna-Quip Co., 953 F.2d 273(7th Cir. 1992); Chameleon Dental Products, Inc.
v. Jackson, 925 F.2d 223 (7th Cir. 1991). These
conflicting lines of precedent do not cite each
other, except for Baravati, which concluded that
the statutory list of reasons for setting aside
an award is exclusive, that Wilko has after all
been overruled, and that as a result "manifest
disregard" of the law is not an independent
reason to set aside an award. 28 F.3d at 706. But
the next year First Options of Chicago, Inc. v.
Kaplan, 514 U.S. 938, 942 (1995), repeated the
Wilko dictum, and in 1999 another panel of this
court stated in dictum (without citing Baravati)
that the statutory list is not exclusive and that
"manifest disregard of the law" is one non-
statutory ground for setting aside an award.
Koveleskie v. SBC Capital Markets, Inc., 167 F.3d
361, 366 (7th Cir. 1999). The law in other
circuits is similarly confused, doubtless because
the Supreme Court has been opaque. The dictum in
Wilko and First Options was unexplained and
unilluminated by any concrete application. Dictum
in Gilmer v. Interstate/Johnson Lane Corp., 500
U.S. 20, 32 n.4 (1991), is similarly unhelpful.
There is, however, a way to understand
"manifest disregard of the law" that preserves
the established relation between court and
arbitrator and resolves the tension in the
competing lines of cases. It is this: an
arbitrator may not direct the parties to violate
the law. In the main, an arbitrator acts as the
parties’ agent and as their delegate may do
anything the parties may do directly. See Eastern
Associated Coal Corp. v. United Mine Workers, 121
S. Ct. 462, 467 (2000) ("we must treat the
arbitrator’s award as if it represented an
agreement between" the parties themselves).
Eastern Associated Coal may at last clear up the
confusion, having dealt with a related line of
cases in which courts wrestled with the question
whether violation of "public policy" (a form of
disregard of legal constraints) justifies setting
aside an award. The Court concluded that the
judiciary may step in when the arbitrator has
commanded the parties to violate legal norms
(principally, but not exclusively, those in
positive law) but that judges may not deprive
arbitrators of authority to reach compromise
outcomes that legal norms leave within the
discretion of the parties to the arbitration
agreement.
Suppose Watts and Tiffany had sat down to
resolve their differences and had agreed on an
extension through the end of 2000, a repurchase
of remaining items at retail price, and each side
bearing its own fees and costs. Could there be
any legal objection? Surely not; it is a kind of
settlement businesses reach all the time, each
receiving part of what it wanted. Cf. Evans v.
Jeff D., 475 U.S. 717 (1986) (parties may reach
a settlement foregoing attorneys’ fees under 42
U.S.C. sec.1988). If Watts and Tiffany may
resolve their differences without fees changing
hands, why can’t an arbitrator, as their agent,
prescribe the same outcome? In Eastern Associated
Coal an employer contended that an arbitrator
exceeded his powers by ordering the reinstatement
of a truck driver who had twice tested positive
for marijuana. The Supreme Court held that
reinstatement was within the arbitrator’s power,
because it was within the employer’s power, and
the arbitrator exercised authority delegated by
the employer. If a federal statute, a federal
rule, or some equivalently definite federal
policy prohibited employment of a drug-using
truck driver, then the employer and arbitrator
alike would be bound to respect it; the
arbitrator could not order the employer to depart
from the federal decision. Similarly an
arbitrator may not require a firm to put in the
cab someone whose driver’s license has been
revoked for driving under the influence of drugs.
But because neither a statute nor a federal
agency with authority over transportation has
banned repeat drug users from the road, the Court
held, the arbitrator’s award could not be
condemned as an excess of power. Cf. Paperworkers
v. Misco, Inc., 484 U.S. 29 (1987).
After Eastern Associated Coal the "manifest
disregard" principle is limited to two
possibilities: an arbitral order requiring the
parties to violate the law (as by employing
unlicensed truck drivers), and an arbitral order
that does not adhere to the legal principles
specified by contract, and hence unenforceable
under sec.10(a)(4). Neither of these approaches
helps Watts.
No rule of Wisconsin law prevents parties to a
dealership agreement from agreeing to bear their
own legal expenses when resolving their
differences. The arbitrator’s award thus did not
require either Tiffany or Watts to violate state
law, even if the WFDL has the meaning Watts sees
in it. Our case is fundamentally the same as
Eastern Associated Coal: what the parties may do,
the arbitrator as their mutual agent may do.
People who want their arbitrators to have fewer
powers need only provide this by contract. Watts
and Tiffany could have agreed to arbitrate under
provisions forbidding the arbitrator to split the
difference, requiring the prevailing side to
receive 100% of its legal entitlements. An
arbitrator’s disregard of such a command would be
reviewable under 9 U.S.C. sec.10(a)(4). But when
the parties agree to arbitrate without specifying
a rule of decision, as Watts and Tiffany did,
then the arbitrator has considerable leeway so
long as he respects the limits the parties’
contract and public law place on his discretion.
This arbitrator did not disregard the parties’
contract, did not direct them to violate the law,
and did not otherwise overstep the terms of his
engagement. The district court therefore properly
enforced the award as written.
Affirmed
Williams, Circuit Judge, concurring in the
judgment. The question of the continuing
justification for and the proper interpretation
of the manifest disregard of the law doctrine is
not squarely before this court. Indeed, with
little effort we may dispose of Watts’s claim
under the manifest disregard doctrine as it
presently exists. I would therefore reserve for
another day--when the question is more
definitively placed before this court--whether we
need to make any substantial change in the
manifest disregard doctrine. Accordingly, I
concur only in the judgment.
I
Because the majority has effectively rejected
the manifest disregard doctrine, I will briefly
express my concern with that holding. It should
be noted that the doctrine of manifest disregard
has been substantively uniform in the federal
courts, requiring that (1) the arbitrator knew of
a governing legal principle yet refused to apply
it or ignored it altogether, and (2) the law
ignored by the arbitrator was well-defined,
explicit and clearly applicable to the case.
E.g., Greenberg v. Bear, Stearns & Co., 220 F.3d
22, 28 (2d Cir. 2000), cert. denied, 121 S. Ct.
770 (2001); Health Servs. Mgmt. Corp. v. Hughes,
975 F.2d 1253, 1267 (7th Cir. 1992). Every court
of appeals, including our own, has held that a
court may review the decision of an arbitrator
for "manifest disregard of the law," and has
adopted, in substance, that very definition./1
Moreover, the words in the doctrine itself are
more in accord with such an interpretation. See
Montes v. Shearson Lehman Bros., Inc., 128 F.3d
1456, 1461-62 (11th Cir. 1997) (defining the
words of the doctrine). The majority’s holding
conflicts with that precedent, and leaves the
doctrine internally inconsistent and effectively
impotent.
The reasons the majority offer for rejecting
manifest disregard do not appear to me so
compelling as to require such a significant
change in the law. They hold that manifest
disregard should mean only that "an arbitrator
may not direct the parties to violate the law,"
ante, at 5, which the arbitrator could not do
anyway, see Hill v. Norfolk & W. Ry. Co., 814
F.2d 1192, 1195 (7th Cir. 1987). In so holding,
the majority ostensibly rests its interpretation
on Eastern Associated Coal Corp. v. United Mine
Workers of America, District 17, 121 S. Ct. 462(2000). But Eastern Associated Coal is not a
manifest disregard case, and its holding, or its
dicta, does not support the majority’s new
interpretation of the manifest disregard
doctrine. In that case, the arbitrator
interpreted a collective bargaining agreement in
accord with the authority actually granted to him
by the parties, and provided an award under the
agreement. Id. at 466-67. The Court therefore
treated the arbitral award "as if it represented
an agreement between Eastern and the union," for
purposes of determining whether enforcement of
that contract (like any other) violated public
policy. Id. at 467 (citing W.R. Grace & Co. v.
Rubber Workers, 461 U.S. 757, 766 (1983)).
Defining the public policy exception, the Court
reiterated that review under the doctrine applies
to violations of public norms (but not
exclusively positive law), which is what "public
policy" means. Id. at 467.
Eastern Associated Coal does not support the
broad proposition that "an arbitrator acts as the
parties’ agent and as their delegate may do
anything the parties may do directly," as the
majority appears to contend. Ante, at 5. Rather,
Eastern Associated Coal holds that because the
parties authorized the arbitrator to interpret
the contract and the arbitrator acted within the
scope of his authority in interpreting the
contract, see id. at 466 (emphasis added), we
must treat the contract as one between the
parties. Id. at 467. That rationale stands
contrary to the conclusion of the majority,
because when an arbitrator acts in manifest
disregard of the law, he acts outside the scope
of his authority. When an arbitrator is
interpreting statutory law, she is bound to
follow the law in the absence of a valid and
legal agreement not to do so. See Montes, 128
F.3d at 1459. And if not interpreting the
parties’ contract, the arbitrator is bound by the
clear and explicit commands of the law, unless
the parties indicate otherwise.
To review, the question before us in an
arbitral contract interpretation case is not
"whether the arbitrator or arbitrators erred in
interpreting the contract; it is not whether they
clearly erred in interpreting the contract; it is
not whether they grossly erred in interpreting
the contract; it is whether they interpreted the
contract." Hill, 814 F.2d at 1194-95. And, when
an arbitrator interprets statutory law, we
require "something beyond and different from mere
error in law or failure on the part of the
arbitrators to understand or apply the law."
Health Servs., 975 F.2d at 1267. We ask whether
she affirmatively disregarded what she knew to be
the law. Id. The rules that govern review of
arbitral contract interpretation and review of
arbitral statutory interpretation do not create
tension in the law. The standards are nearly
identical, and they complement each other rather
well.
The apparent conflict the majority finds in
this circuit’s precedent, see ante, at 4, is not
really conflict at all, as much as it is two
separate lines of cases that together illustrate
the difficultly for parties seeking to challenge
an arbitral award under the manifest disregard
doctrine. It is a difficulty recognized by other
circuits, see, e.g., Dawahare, 210 F.3d at 669
("Arbitrators are not required to explain their
decisions. If they choose not to do so, it is all
but impossible to determine whether they acted
with manifest disregard for the law."), but that
difficulty has not always precluded a finding
that an arbitrator manifestly disregarded the
law, see Halligan v. Piper Jaffray Cos., Inc.,
148 F.3d 197, 204 (2d Cir. 1998) ("We merely
observe that where a reviewing court is inclined
to find that arbitrators manifestly disregarded
the law or the evidence and that an explanation,
if given, would have strained credulity, the
absence of explanation may reinforce the
reviewing court’s confidence that the arbitrators
engaged in manifest disregard."), and no courts
have taken the step of discarding the entire
doctrine because of this difficulty.
As a final note, mandatory arbitration clauses
are prevalent in a broad collection of contracts,
forcing parties to accept the arbitral rather
than judicial forum to adjudicate their rights.
Recognizing this concern, the Supreme Court has
admonished that "[b]y agreeing to arbitrate a
statutory claim, a party does not forgo the
substantive rights afforded by the statute; it
only submits to their resolution in an arbitral,
rather than a judicial, forum." Mitsubishi Motors
Co. v. Soler Chrysler-Plymouth, Inc., 473 U.S.
614, 628 (1985). Even if we were to adopt the
agency model advanced by the majority, no one
expects that the parties intended to vest in that
agent the power to ignore statutory law willy-
nilly and decide the fate of the parties at her
whim or caprice. Indeed, we do not accept an
arbitrator’s decision to ignore completely a
contract, although under the agency model
arguably we should, because the parties could
rescind their contract entirely and fashion a
completely new agreement. But the agency fiction
falls apart. The arbitrator is not the parties,
and, in truth, she is not their agent; therefore
when the arbitrator acts in manifest disregard of
statutory law, there is no compelling reason that
we should not intervene and protect the statutory
rights of the parties--otherwise the parties
would be better off flipping a coin. With all
deference to the majority, I would preserve this
important question for a case in which it truly
matters.
II
Turning then to the case before us, Watts has
failed to demonstrate that the arbitrator
manifestly disregarded the law. Watts cannot
establish, as it must, that the Wisconsin Fair
Dealership Law ("WFDL"), or Wisconsin case law,
is "well-defined" and "explicit" in requiring a
mandatory award of attorney fees to every
successful litigant under the statute./2 The
statute states that "[i]f any grantor violates
this chapter, a dealer may bring an action
against such grantor in any court of competent
jurisdiction for damages sustained by the dealer
as a consequence of the grantor’s violation,
together with the actual costs of the action,
including reasonable actual attorney fees." Wis.
Stat. sec. 135.06. The plain language of this
statute clearly allows for the recovery of
attorney fees, but it does not go so far as to
state that such recovery is mandatory.
Perhaps recognizing the weakness of an appeal
to statutory language, Watts also relies upon
several cases in support of its theory that
attorney fees are mandatory. The best case cited
by Watts, Siegel v. Leer, Inc., 457 N.W.2d 533(Wis. Ct. App. 1990), characterized the attorney
fees provision as an "express statutory right of
a dealer to recover for a grantor’s violation of
the WFDL," stating in addition that the "failure
to protect and enforce such a right would fly in
the face of the statutory purpose." Id. at 537.
But Watts fails to put this quote in context. The
court in that case distinguished the award of
attorney fees from another case in which a court-
initiated fine, under analogous factual
circumstances, was found to violate public
policy. It was in that context, distinguishing
the case upon which the defendant argued that
attorney fees could violate public policy, that
the court stated that the right to attorney fees
was expressly provided by statute. It did not
hold, however, that attorney fees are mandatory.
See id. The other cases that characterize
attorney fees as an "entitlement" under the
statute, see, e.g., Esch v. Yazoo Mfg. Co., Inc.,
510 F. Supp. 53, 58 (E.D. Wis. 1981), are in
themselves equally ambiguous.
Tiffany, on the other hand, relies upon a
commentary reviewing Wisconsin law on the WFDL
that concludes, "[t]he issue of whether an award
is mandatory or discretionary is still open."
Andrew O. Riteris & Susan R. Robertson, The Fair
Dealership Law: Good Cause For Review, Wis. B.
Bull., Mar. 1986, at 10. In the end, the WFDL may
one day be interpreted to require mandatory award
of attorney fees, but that is not for this court
to decide today.
Because I cannot find that mandatory award of
attorney fees under the WFDL is well-defined and
explicit under the law, as required by the
manifest disregard of the law doctrine, I must
find that Watts has failed to make the requisite
showing under that doctrine. I therefore concur
in the judgment.
/1 See Greenberg v. Bear, Stearns & Co., 220 F.3d 22(2d Cir. 2000), cert. denied, 121 S. Ct. 770(2001); Brown v. ITT Consumer Fin. Corp., 211
F.3d 1217 (11th Cir. 2000); Dawahare v. Spencer,
210 F.3d 666 (6th Cir.), cert. denied, 121 S. Ct.
187 (2000); Williams v. Cigna Fin. Advisors Inc.,
197 F.3d 752 (5th Cir. 1999), cert. denied, 529
U.S. 1099 (2000); Koveleskie v. SBC Capital
Mkts., Inc., 167 F.3d 361 (7th Cir. 1999), cert.
denied, 528 U.S. 811 (1999); Kiernan v. Piper
Jaffray Cos., Inc., 137 F.3d 588 (8th Cir. 1998);
Barnes v. Logan, 122 F.3d 820 (9th Cir. 1997),
cert. denied, 523 U.S. 1059 (1998); Cole v. Burns
Int’l Security Servs., 105 F.3d 1465 (D.C. Cir.
1997); Kaplan v. First Options of Chicago, Inc.,
19 F.3d 1503 (3d Cir. 1994), aff’d, First Options
of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995);
ARW Exploration Corp. v. Aguirre, 45 F.3d 1455(10th Cir. 1995), cert. denied, Armenis v.
Aguirre, 525 U.S. 822 (1995); Remmey v.
PaineWebber, Inc., 32 F.3d 143 (4th Cir. 1994),
cert. denied, 513 U.S. 1112 (1995); Advest, Inc.
v. McCarthy, 914 F.2d 6 (1st Cir. 1990); see also
Flex-Foot, Inc. v. CRP, Inc., 238 F.3d 1362 (Fed.
Cir. 2001).
/2 Tiffany argues as an initial matter that it is
unclear whether the arbitrator decided the case
under the WFDL. I find this position
unpersuasive. This court need not strain
credulity to support an arbitral award, simply
because the arbitrator did not explicitly state
the grounds for her decision. See Halligan, 148
F.3d at 204. There is ample evidence in the
record showing that Watts abandoned its other
contract claims, and that the only remaining
basis under which the arbitrator could have
decided this case was the WFDL. That the
arbitrator may not have correctly applied the
statute will not frustrate a court’s review for
manifest disregard of the law.