Standard Security Life Insuran v. FCE Benefit Administrators, In ( 2020 )

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 19-2336
STANDARD SECURITY LIFE INSURANCE COMPANY OF NEW YORK,
et al.,
Plaintiffs-Appellees,
v.
FCE BENEFIT ADMINISTRATORS, INC.,
Defendant-Appellant.
____________________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 19 CV 64 — Ronald A. Guzmán, Judge.
____________________
ARGUED MAY 28, 2020 — DECIDED JULY 28, 2020
____________________
Before MANION, KANNE, and WOOD, Circuit Judges.
WOOD, Circuit Judge. This case had its origins in an Admin-
istrative Services Agreement that Standard Security Life In-
surance Company of New York and Madison National Life
Insurance Company, Inc. (collectively, the “Insurers”) entered
into with FCE Benefit Administrators, Inc. (“FCE”). Under
that agreement, FCE administered health insurance policies
underwritten by the Insurers. After a few years, however, the
2 No. 19-2336
Insurers became dissatisfied with FCE’s performance, and so
they invoked the Agreement’s arbitration clause.
The arbitration proceeded in two phases. In Phase I, the
arbitrators awarded the Insurers damages of more than five
million dollars. The Insurers attempted to confirm this award
in the Northern District of Illinois, but the district court con-
cluded that this effort was premature because the case was not
yet ripe for adjudication. This was so because the arbitrators
had not yet resolved all matters that had been submitted to
them. In Phase II, the arbitrators denied the Insurers’ remain-
ing claim and FCE’s counterclaim. After the conclusion of
Phase II, the Insurers once again sought confirmation. This
time, the district court confirmed the arbitration results in
their entirety, meaning both the Phase I and Phase II awards.
FCE now appeals from the confirmation of the Phase I award.
Finding no reason to set aside the district court’s conclusion,
we affirm its judgment.
I
The parties entered into the initial agreement effective Jan-
uary 1, 2011; four years later, they amended it, but they made
no changes material to this case. The Agreement assigned to
FCE the job of serving as the third-party administrator for pol-
icies underwritten by the Insurers. Under Section 18 of the
Agreement, the parties promised to settle most disputes “by
arbitration in accordance with the rules for commercial arbi-
tration of the American Arbitration Association (or a similar
organization) in effect at the time such arbitration is initiated
… .” (There was an exception, which we discuss below, for
indemnity disputes.)
No. 19-2336 3
In May 2015, the Insurers, unhappy with FCE’s perfor-
mance, terminated the Agreement. Two years later, alleging
that FCE had breached many of its obligations under the
Agreement, the Insurers filed a formal arbitration demand
with FCE. They alleged that FCE had failed to remit premi-
ums, had failed to process healthcare claims in a timely and
proper manner, and had taken excessive and unearned fees.
The Insurers also alleged that FCE caused them to incur reg-
ulatory penalties and fines. FCE counterclaimed, asserting
that the Insurers wrongfully terminated the Agreement.
As required by the Agreement, an arbitral panel consisting
of two party-designated arbitrators and an umpire was as-
sembled. It scheduled a hearing for September 2018. In July
2018, FCE requested a continuance for discovery purposes,
and it sought permission to file an amended counterclaim.
The arbitrators issued an interim order on July 27, 2018, deny-
ing FCE’s request for a continuance but granting its motion
for leave to file an amended counterclaim. The order stated
that “[t]he counterclaims will be presented in a second phase
of the Hearing which will take place in November/December
of this year.” The parties and the arbitrators referred to this
bifurcated process as “Phase I” and “Phase II.”
The Phase I hearing was held on September 25−29 and Oc-
tober 25, 2018. A month later, on November 30, the arbitral
panel discussed the evidence at a post-hearing teleconference.
Afterwards, the panel asked the parties to submit their pro-
posed awards for Phase I. Each side did so, and on December
31, 2018, the panel issued a document entitled “Partial Final
Award – Phase I” (the “Phase I Award”), which read in perti-
nent part as follows:
4 No. 19-2336
The Panel in the above-captioned arbitration, duly ap-
pointed by mutual agreement of the parties, upon con-
sideration of all documents, arguments, and evidence
submitted by Petitioners [Standard] and [Madison]
(collectively “Petitioners”) and Respondent [FCE], and
after having held a full hearing of Phase I of this arbi-
tration from September 25 through September 29, Oc-
tober 25 and November 30, 2018 hereby renders its Par-
tial Final Award as follows:
1. Petitioners were within their rights to terminate the
amended Agreement for cause.
2. FCE shall pay to Petitioners the principal amounts
due with respect to each Category of Damages as
set forth in the chart annexed as Exhibit A hereto,
together with interest calculated thereon at the rate
of 5% per annum, as set forth therein. Such pay-
ment shall occur within twenty (20) business days
of the date of this Partial Final Award. After such
time, interest shall run at 9% per annum.
3. Each party shall bear its own costs, including the
costs of its party-appointed arbitrator. The parties
shall split equally the costs of the Umpire and the
catering expenses associated with the Hearing.
4. The Panel members shall be paid within thirty (30)
days of the date hereof.
5. All other claims for relief by the parties are denied.
A chart attached as Exhibit A, “Damages Owed to Petition-
ers,” provides for an award of $5,348,352.81 to the Insurers.
No. 19-2336 5
Three days later, on January 3, 2019, the Insurers filed a
motion to confirm the Phase I Award under the Federal Arbi-
tration Act, 9 U.S.C. § 9, in the district court for the Northern
District of Illinois. FCE responded that the motion was prem-
ature because the arbitration had not concluded. Alterna-
tively, FCE moved to vacate portions of the Phase I Award
under 9 U.S.C. § 10.
While the motions were pending in the district court,
Phase II of the arbitration proceeded. On January 18, 2019,
FCE requested that the arbitrators reconsider the Phase I
Award. The panel held the Phase II hearing on February
11−15, 2019, and then denied FCE’s request to reconsider the
Phase I Award on February 28.
Meanwhile, on March 13 the district court entered an
opinion and order dismissing the Insurers’ action without
prejudice. The court determined that the matter was not ripe
for adjudication because the panel had not finished the arbi-
tration. This was actually mistaken: at the time the court en-
tered its opinion and order, it was unaware (because the par-
ties had not informed it) that two days before, on March 11,
the arbitral panel entered this “Final Phase II Award” (the
“Phase II Award”):
The Panel in the above-captioned arbitration, duly ap-
pointed by mutual agreement of the parties, upon con-
sideration of all documents, arguments, and evidence
submitted by Petitioners [Standard] and [Madison]
(collectively “Petitioners”) and Respondent [FCE], and
after having held a full hearing of the newly asserted
claims in Phase II of this arbitration from February 11
through February 15, 2019, hereby renders its Final
Phase II Award as follows:
6 No. 19-2336
1. FCE’s claim for lost profits damages is denied.
2. Petitioners’ claim for reimbursement of excessive
administrative fees taken by FCE on limited medi-
cal benefits plans in the amount of $477,810.00 is de-
nied.
3. Each party shall bear its own costs, including the
costs of its party-appointed arbitrator. The parties
shall split equally the costs of the Umpire and the
catering expenses associated with the Hearing.
4. All other claims for relief by the parties are denied.
5. The Panel members shall be paid within thirty (30)
days of the date hereof.
After the district court issued its opinion, the Insurers filed
a motion for leave to reinstate the case and to file a second
amended petition to confirm both the Phase I and Phase II
Awards. The court granted the motion and ultimately af-
firmed both the Phase I Award, over FCE’s objections, and the
Phase II Award.
II
“Judicial review of arbitration awards is tightly limited.”
Baravati v. Josephthal, Lyon & Ross, Inc., 28 F.3d 704, 706 (7th
Cir. 1994). Confirmation is “usually routine or summary,”
Hasbro, Inc. v. Catalyst USA, Inc., 367 F.3d 689, 691−92 (7th Cir.
2004), and a court will set aside an arbitration award “only in
very unusual circumstances,” First Options of Chicago, Inc. v.
Kaplan, 514 U.S. 938, 942 (1995). “With few exceptions, as long
as the arbitrator does not exceed [her] delegated authority,
her award will be enforced. This is true even if the arbitrator’s
award contains a serious error of law or fact.” Butler Mfg. Co.
No. 19-2336 7
v. United Steelworkers of Am., AFL-CIO-CLC, 336 F.3d 629, 632
(7th Cir. 2003). We review “a district court’s decision confirm-
ing an arbitration award under ordinary standards: accepting
findings of fact that are not clearly erroneous and deciding
questions of law de novo.” Slaney v. Int’l Amateur Athletic Fed’n,
244 F.3d 580, 592 (7th Cir. 2001).
FCE offers three reasons why the district court should not
have confirmed the Phase I Award. First, it argues that the
Phase II Award supersedes the Phase I Award such that the
district court could confirm only the Phase II Award. Second,
FCE contends that part of the Phase I Award must be vacated
because the arbitrators exceeded their authority by hearing
and deciding the Insurers’ indemnification claims. Third, it
asserts that it was reversible error for the district court to con-
firm the portion of the Phase I Award labeled as damages for
“embezzlement.”
A
We begin with FCE’s assertion that the Phase II Award en-
compassed the entire dispute between the parties and thus
superseded the Phase I Award. FCE argues that the Phase II
Award somehow erased the Phase I Award, rather like the
idea that claims “merge” into a final judgment. It relies heav-
ily on the fact that the Phase II Award states that “[a]ll other
claims for relief by the parties are denied.” This language,
FCE contends, indicates that the Phase II Award was the only
final award and therefore the only award that could be con-
firmed. FCE relies primarily on two cases for support: Ander-
son v. Norfolk & W. Ry. Co., 773 F.2d 880 (7th Cir. 1985) and AO
Techsnabexport v. Globe Nuclear Servs. & Supply GNSS, Ltd., 404
F. App’x 793 (4th Cir. 2010).
8 No. 19-2336
These cases, however, are easily distinguishable. In Ander-
son, we considered two arbitration awards that addressed the
same claims. We ultimately decided the case on standing, but
the opinion also commented on the merits. The Anderson ar-
bitrator’s first award ruled on two of the three issues submit-
ted to him, but he determined that the parties “had not ex-
hausted their efforts to negotiate a complete implementing
agreement.” 773 F.2d at 881. This prompted him to “sen[d] the
parties back to the bargaining table” to resume negotiations
of a “final and complete disposition of all issues.” Id. Having
“expressly reserved arbitral jurisdiction of the matter” in his
first award, the arbitrator later approved the parties’ success-
fully negotiated commercial resolution as his “final binding
award.” Id. We observed that because the arbitrator’s first
award “expressly stated that he was resubmitting the matter
to [the parties] for further negotiations in the hope that they
could reach a complete resolution of all issues,” the arbitrator
did not intend his first award to be final. Id. at 883.
Unlike in Anderson, the record here indicates that the arbi-
tral panel deliberately bifurcated the arbitration to decide dis-
crete claims in each phase. The panel plainly intended the
Phase I Award to be final for all of the Phase I claims. Why
else would it have entitled the Phase I Award “Partial Final
Award - Phase I”? Both the word “partial” and the word “fi-
nal” eliminate any possible doubt on the matter. In addition,
before the panel issued its Phase II Award, FCE asked it to
reconsider the Phase I Award, but the panel denied that re-
quest. This again indicates the finality of the Phase I Award.
And, although the Phase II Award states that “[a]ll other
claims for relief by the parties are denied,” in context that
phrase makes sense only if it refers to the claims that were
under submission during Phase II—the “newly asserted
No. 19-2336 9
claims in Phase II of this arbitration … .” Only in that sense
did the arbitral panel deny “[a]ll other claims for relief” that
remained in Phase II. It already had told the parties that it was
not re-opening the previously decided Phase I claims.
FCE also relies on AO Techsnabexport, but it is no help ei-
ther. In that case the Fourth Circuit declined to confirm the
arbitrators’ initial award because they had not disposed of
certain issues. The arbitral tribunal had held trifurcated hear-
ings on a breach-of-contract claim. The Fourth Circuit ex-
plained that the partial award after the first phase did not “de-
finitively dispose of any severable claim or constitute a final
determination of the issues presented by the parties” and thus
“was rendered moot by the tribunal’s conclusion in the final
award that the contract was not enforceable.” AO Techsnabex-
port, 404 F. App’x at 800. As in Anderson, the AO Techsnabexport
arbitrators did not decide discrete claims in each phase. In
contrast, the panel in this case bifurcated the claims and is-
sued a final award after each phase for those specific claims.
FCE also argues that the Phase II Award must supersede
the Phase I Award because otherwise the district court’s deci-
sion is at odds with its first order in this action. Recall that the
Insurers attempted to confirm the Phase I Award immediately
after the conclusion of Phase I of the arbitration, and that the
district court dismissed the action without prejudice as un-
ripe. FCE contends that the district court’s dismissal proves
that the Phase I Award was incomplete and unconfirmable.
FCE is mixing apples and oranges here. The arbitrators did
not face a stark choice of either issuing a complete final order,
disposing of all claims of all parties, or remaining silent. They
had the option of a middle ground, resolving one set of claims
first and then another. This is common for first-instance
10 No. 19-2336
tribunals. District courts regularly do the same thing, and
their interim decisions are not appealable unless the criteria
for a final judgment under Federal Rule of Civil Procedure
54(b) are satisfied. The arbitrators were equally entitled, for
purposes of organizing their own work, to take up some
claims before others. But that does not mean that the case was
ready for the district court before it was fully resolved. These
were two different tribunals, playing different roles in the
process, and they were bound by different rules of finality.
See Olson v. Wexford Clearing Servs. Corp., 397 F.3d 488, 491
(7th Cir. 2005) (“In determining the finality of an arbitration
award, [courts] consider whether ‘the award itself, in the
sense of judgment, order, bottom line, is incomplete in the
sense of having left unresolved a portion of the parties’ dis-
pute.’”). There was no conflict between the district court’s two
decisions.
B
Next, FCE argues that even if the Phase I Award was con-
firmable, a portion of it must be set aside because the arbitra-
tors exceeded their authority under 9 U.S.C. § 10(a)(4) by
hearing and deciding the Insurers’ indemnification claims. It
is particularly concerned about the panel’s Phase I award of
damages for “Fines & Penalties” imposed by the Texas De-
partment of Insurance (TDI), and “Legal Fees & Costs” in-
curred by the Insurers in defending against the TDI action
and against a separate U.S. Department of Labor action. FCE
contends that the panel should not have awarded these dam-
ages under Section 17 of the Agreement because Section 18(a)
of the Agreement expressly carves out such claims from the
arbitration process.
No. 19-2336 11
Section 17 of the Agreement provides for mutual indem-
nification. The arbitration clause refers to Section 17 in the fol-
lowing way:
(a) In the event of any dispute between the parties
which arises under this Agreement, except for a dispute
arising under Section 17, such dispute shall be settled by
arbitration in accordance with the rules for commercial
arbitration of the American Arbitration Association (or
a similar organization) in effect at the time such arbi-
tration is initiated, in the manner set forth below.
Should a dispute arise under Section 17, either party may
elect to invoke Section 19 below.
Section 18(a) (emphasis added). Section 19, titled “Submission
to Jurisdiction,” says in pertinent part:
(a) Any legal suit, action or proceeding arising out of
or relating to Section 17 of this Agreement or the trans-
actions contemplated hereby, when invoked by either
party, shall be instituted in the federal courts of the
United States of America or the courts of the State of
Texas, in each case located in Dallas County, and each
party irrevocably submits to the exclusive jurisdiction
of such courts in any such suit, action or proceeding.
FCE argues that under the plain wording of Section 18, all
disputes arising under Section 17 are removed from the scope
of the parties’ arbitration agreement. Any other interpreta-
tion, it contends, renders the language of Section 19, vesting
“exclusive jurisdiction” for such claims in the federal and
state courts of Texas, superfluous. Moreover, FCE argues, in
this case the onus was on the Insurers, not FCE, to pursue the
12 No. 19-2336
indemnity disputes in court. FCE concludes that the Insurers’
failure to do so does not make those claims arbitrable.
The district court interpreted these provisions differently.
It concluded that the “only reasonable reading” of Sections 18
and 19 as a whole is that “the parties agreed to arbitrate such
disputes, unless one of the parties elected to invoke its right to
litigate them in federal or state court.” This makes sense to us.
The Agreement specifies that if a dispute arises under Section
17, either party may elect to invoke Section 19. In other words,
Section 19 is permissive and not mandatory. Section 19 con-
firms this reading by stating that a suit arising from Section
17 will be instituted in the federal or state courts when invoked
by either party. See Kochert v. Adagen Med. Int’l, Inc., 491 F.3d
674, 679 n.2 (7th Cir. 2007) (“Contractual jurisdiction, venue,
and forum clauses can be mandatory (exclusive) or permis-
sive (nonexclusive).”).
Here, neither party invoked Section 19, and so the arbitra-
tors acted within their authority in deciding the Insurers’ in-
demnification claims. And if that were not enough, there is
also a waiver problem here. Although FCE eventually ob-
jected to the arbitrability of the Insurers’ indemnification
claims multiple times, it did so only after the panel issued the
Phase I Award. FCE asserts that this was not too late, because
Section 31 of the Agreement, “Waiver,” provides that there
can be no “waiver of any … right or remedy unless in writing
and signed by each of the parties.” But it is not clear that this
language extends to the obligation to arbitrate once a dispute
is underway and the parties have exchanged numerous writ-
ten documents. We have held that “[i]f a party willingly and
without reservation allows an issue to be submitted to arbi-
tration, he cannot await the outcome and then later argue that
No. 19-2336 13
the arbitrator lacked authority to decide the matter.” AGCO
Corp. v. Anglin, 216 F.3d 589, 593 (7th Cir. 2000). Moreover,
this arbitration was to be settled under the commercial rules
of the American Arbitration Association. Under AAA Rule 7,
a “party must object to the jurisdiction of the arbitrator or to
the arbitrability of a claim or counterclaim no later than the
filing of the answering statement to the claim or counterclaim
that gives rise to the objection.” FCE did not do so. For all
these reasons, therefore, we conclude that the arbitrators
acted within their authority in deciding the indemnification
claims.
C
FCE finally contends that the district court erred in con-
firming the Phase I Award because the arbitration panel ex-
ceeded its authority under 9 U.S.C. § 10(a)(4) by awarding
damages for “Embezzlement.” Under the Agreement, FCE
was to receive as an administrative fee a percentage of gross
collected premiums. FCE took a 5.55% administrative fee, but
the Insurers claimed that the agreed percentage was 4.3%. The
arbitral panel agreed with the Insurers. It calculated the dif-
ference between the fee FCE took and the fee to which it was
entitled and awarded the Insurers $550,000. On Exhibit A, the
panel labeled this award “Embezzlement.”
FCE argues that the panel did not have the authority to
make this decision. The panel’s authority, FCE emphasizes,
extended only to disputes “which arise[] under this Agree-
ment.” FCE contends that embezzlement—a crime—does not
arise under the Agreement and is therefore not a claim upon
which the arbitrators were authorized to award damages.
14 No. 19-2336
Although the panel used the term “embezzlement,” it was
nothing more than purple prose. The panel did not (and could
not) make a conclusive finding about a crime; it merely deter-
mined the proper administrative fee. Thus, the claim arose
under the Agreement and the arbitrators acted within their
authority. See Hill v. Norfolk & W. Ry. Co., 814 F.2d 1192, 1194–
95 (7th Cir. 1987) (“[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 con-
tract; it is whether they interpreted the contract.”).
FCE also asserts that the award for “embezzlement” vio-
lated its due process rights. It rests this argument on the fact
that the Insurers never pleaded a claim for embezzlement,
and so no such claim was litigated in the arbitration. It was
not until the Insurers’ closing argument, FCE contends, that
the Insurers argued that they were pursuing the claim as one
for “embezzlement.”
Despite the dramatic label, the “embezzlement” claim was
the garden-variety assertion that FCE took excessive and un-
earned administrative fees from the Insurers. FCE had notice
of and attempted to defend against this assertion in Phase I of
the arbitration. Although the Insurers admit to using the
word “embezzlement” in their closing argument, they em-
phasize that the underlying claim did not change; they were
simply using the term because an arbitrator had used it.
None of FCE’s arguments persuades us that the district
court should have set aside either part of the arbitral awards,
and so we AFFIRM its judgment.