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applying manifest disregard standard
Summary of this case from Ergobilt, Inc. v. Neutral Posture Ergonomics, Inc.Opinion
No. 3:97-CV-0690-H.
September 11, 2000.
MEMORANDUM OPINION AND ORDER
Before the Court are Plaintiff Blanchard and Company, Inc.'s Motion to Confirm Arbitration Award, filed May 9, 2000, and all responses and replies thereto; and Defendant Heritage Capital Corporation's Motion to Vacate, Modify or Correct Arbitration Award, filed May 31, 2000, and all responses and replies thereto. Additionally before the Court is a second set of briefs: Blanchard's Supplement to its Motion to Confirm Arbitration Award, filed July 21, 2000, and all responses and replies thereto. Upon review of the arguments and authorities of the parties, and for the reasons stated below, the Court GRANTS Plaintiffs motion to confirm the arbitration award, and DENIES Defendant's motion to vacate, modify or correct the arbitration award.
I. BACKGROUND
Plaintiff Blanchard and Company, Inc. ("Blanchard"), a national retailer of generic and rare coins in the United States, filed this suit against its primary supplier of coins, Heritage Capital Corporation ("Heritage"). This suit concerns a requirements contract entered into by Blanchard and Heritage in which Blanchard agreed to purchase coins from Heritage at a certain price determined by the contract. The primary allegations asserted by Plaintiff in its initial Complaint were that Heritage has failed to afford Plaintiff a right of inspection prior to its purchase of coins from Heritage, that Heritage has overcharged Plaintiff for coins, and that Heritage has failed to honor its coin buyback obligations.
After some proceedings in this Court, this Court entered an Order on October 15, 1998, agreed to by the parties, referring this case to arbitration administered by the American Arbitration Association ("AAA"), retaining jurisdiction "to aid in the . . . confirmation and enforcement of any award by the Panel."
The AAA Panel held 19 days of hearings over four weeks beginning August 23, 1999, and considered live testimony, depositions, affidavits, and nearly 2000 documents. After receipt of post-hearing briefs, the Panel issued an Interim Award on March 21, 2000 consisting of 26 pages of factual findings and legal conclusions. The Interim Award held Heritage liable for overcharging Blanchard, determined an amount of damages, and stated that it "shall be final, binding, and conclusive, and Judgment may enter thereon."
The Panel reserved on the issues of prejudgment interest, attorney's fees, and administrative expenses; the arbitrators requested additional briefing on these three issues. After briefing, in an Order dated June 1, 2000, the Panel issued a separate ruling on prejudgment interest, fees and expenses. Finally, on July 5, 2000, the Panel issued its Final Award, which was largely unchanged from the Interim Award regarding findings of fact, and further incorporated the Panel's June 1 Order on interest, fees, and expenses.
The Panel added one additional finding of fact, ¶ 39A, in an Order dated May 5, 2000 after a Petition to Modify or Clarify the Panel's Interim Award, submitted by the Defendant. This finding of fact was not included in the interim Award, but was included in the Final Award.
The Panel's opinion found, on the principal issue, that Heritage had overcharged Blanchard for generic coins. The Panel determined, pursuant to the First Amendment to the Supplier Agreement, that the parties had agreed that Heritage would limit the wholesale prices of its generic coins to 7% over a single "baseline" price. Final Award ¶ 28-29. The baseline was "based on a number of market considerations . . including current market conditions; prices paid for Coins from electronic trading networks, and prices paid for Coins acquired at coin shows and telephonically . . ." Final Award ¶ 22. The baseline price was capped — it could "never be higher than the higher of the most recent electronic trading network bid price or the most recent HCC [Heritage Capital Corporation] acquisition cost of similar coins purchased for Blanchard." Final Award ¶ 22. The Panel found that Heritage rarely calculated a baseline as required by contract, and that the price Heritage charged Blanchard often exceeded 107% of the price cap. Final Award ¶¶ 33, 36. The Panel found that Blanchard suffered damages of $14,593,329 from these generic coin overcharges, and awarded Blanchard that amount as damages. Final Award ¶ 42.
Heritage now contends that the arbitration award was in manifest disregard of Texas law, for failure to require causation of damages.
H. STANDARD OF REVIEW
"Judicial review of an arbitration award is extraordinarily narrow and this Court should defer to the arbitrator's decision when possible." Antwine v. Prudential Bache Securities, 899 F.2d 410, 413 (5th Cir 1990). The Federal Arbitration Act ("FAA") provides that a district court may vacate an award only for the following reasons: (1) where the award was procured by corruption, fraud or undue means; (2) where there was evident partiality or corruption in the arbitrators; (3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing or refusing to hear pertinent or material evidence, (4) 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. See 9 U.S.C. § 10(a).
Heritage did not initially seek to vacate the damage award based on one of the statutory bases; rather, Heritage argued that the arbitrator's award was issued in "manifest disregard for the law." As recently as 1993, the Fifth Circuit rejected the "manifest disregard for the law" standard of review of arbitration awards in FAA cases involving commercial contract disputes, holding that the five statutory grounds in 9 U.S.C. § 10(a) provided the only basis for vacatur. See McIlroy v. Paine Webber, 989 F.2d 817, 820 (5th Cir. 1993); see also R.M Perez Associates, Inc. v. Welch, 960 F.2d 534, 539 (5th Cir. 1992). However, since that time, the Supreme Court decided First Options; Inc., v. Kaplan, 514 U.S. 938 (1995) in which it stated that "parties are bound by an arbitrator's decision that is not in manifest disregard of the law." First Options, 514 U.S. at 942 (citing Wilko v. Swan, 346 U.S. 427, 436-37 (1953)). All other circuits have recognized the "manifest disregard of the law" standard in some form. See Monies v. Shearson Lehman Bros., Inc., 128 F.3d 1456, 1460 (11th Cir. 1997) (collecting cases).
Further, the Fifth Circuit has recently held that the manifest disregard standard applied to federal employment law cases in arbitration. See Williams v. Cigna Financial Advisors, Inc., 197 F.3d 752 (5th Cir. 1999). The Circuit has not, however, held that the manifest disregard standard can be used to vacate an arbitration award over a commercial contract dispute. it is by no means clear that the Circuit will adopt this standard in all arbitration cases, given the distinction drawn by the Supreme Court and Fifth Circuit between commercial and employment arbitration. See e.g. Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 33-35 (1991) (distinguishing between contract-based claims and federal statutory rights in arbitration context); Williams v. Cigna Financial, 197 F.3d 752, 761 (5th Cir. 1999) ("federal district courts [must] ensure that arbitrators comply with their duties and the requirements of federal employment discrimination statutes"). For the purposes of this case, the Court assumes that an arbitration award in a commercial contract dispute issued in manifest disregard of the law may be vacated, regardless of whether a statutory basis for vacatur is present.
In Williams, the Fifth Circuit adopted as "helpful" a two-part test for applying the manifest disregard standard (1) was it manifest that the arbitrators acted contrary to the applicable law, and (2) where the arbitrators did act contrary to the applicable law, the award should be upheld unless it would result in significant injustice, taking into account all the circumstances of the case. See Williams, 197 F.3d at 762 (quoting IAN R. MacNEIL, ET AL., 2 FEDERAL ARBITRATION LAW § 40.7.2.6, at 40:95). Manifest disregard implies that the arbitrator understood the existence of a governing legal principle but decided to ignore it, See Williams, 197 F.3d at 762 n. 2 (reviewing cases).
111. MANIFEST DISREGARD ANALYSIS
Heritage first complains of the procedure by which the Panel conducted the arbitration, For example, Heritage complains that the Panel extended the discovery period, delayed a year before conducting the arbitration hearing, allowed in a "new damage theory" in the rebuttal portion of the arbitration proceeding, and refused to exclude evidence of damages as untimely. Such complaints regarding the procedure of the arbitration are certainly not within the limited power of review that this court exercises. See United Steelworkers of America v. Ideal Cement Co., Div. of Ideal Basic Industries, Inc., 762 F.2d 837, 841 (10th Cir. 1985) (federal courts are to give great deference to arbitrator's decisions on matters of procedure). Because an arbitration proceeding is much less formal than a trial in court, "[i]n handling evidence an arbitrator need not follow all the niceties observed by the federal courts. He need only grant the parties a fundamentally fair hearing." Totem Marine Tug Barge, Inc. v. North American Towing, Inc., 607 F.2d 649, 651 (5th Cir, 1979). This Court finds that the procedures of the Panel regarding discovery and evidence were fundamentally fair.
Next, Heritage appears to ask the Court to review the Panels' factual finding that Blanchard did not have a right of refusal of the coins it purchased from Heritage — that is, that Blanchard had to purchase its coins "sight-unseen." Heritage argues that the damage award should be based on a comparison to "sight-seen" prices. The sight-unseen damages calculation of which Heritage complains is based on the Panel's finding that the preponderance of evidence establishes that Blanchard did not have a right of refusal. Final Award ¶ 39A. The Court clearly cannot second-guess a factual finding of the arbitration panel within its limited power of review; even a clear factual error does not authorize the Court to annul an arbitration award. Gingiss Intern., Inc. v. Bormet, 58 F.3d 328, 333 (7th Cir 1995). A court "may not reconsider an award based on alleged errors of fact or law or misinterpretation of the contract." Nauru Phosphate Royalties, Inc. v. Drago Daic Interests, Inc., 138 F.3d 160, 164-165 (5th Cir. 1998). "A question as to the sufficiency of the evidence before the arbitrator simply does not trigger the review powers of [the] court." See Eljer Mfg., Inc. v. Kowin Development Corp., 14 F.3d 1250, 1256 (7th Cir. 1994). This Court find that the Panel's determination that a damages award may be based on a "sight-unseen" bid is not a manifest error of law.
Heritage's only argument that doesn't question a factual determination, but actually addresses the "manifest disregard" standard, regards the causation of Blanchard's damages. Heritage argues that the panel ignored the principle of Texas law that a party must prove that it suffered "actual damages." Heritage argues that Blanchard did not prove it sustained damages because Blanchard "passed-on" any overcharges to its clients when it sold its coins on a "cost-plus" basis (the cost charged by Heritage plus a profit). Therefore, Heritage contends, Blanchard could not have suffered any "actual damages" as required by Texas law.
Besides citing general Texas cases about expectation damages, Heritage gives little explanation as to how the arbitration panel actually disregarded Texas law. In determining the damages incurred by Blanchard, the Panel carefully considered the various damages studies conducted by the parties. Final Award ¶¶ 36-39. The Panel noted that the study conducted by Heritage, covering only one day a week, and using "an artificially high baseline," found powerful evidence of overcharging by Heritage. Final Award ¶ 38. For example, one coin, on one day, was priced $500 more than the 107% of the baseline cap, according to Heritage's study. Final Award ¶ 38. Therefore, the Panel held, Heritage's study alone proved that its breach caused damages to Blanchard. Final Award ¶ 38. The Panel credited most the study conducted by Blanchard, which compared the price of every coin purchased by Blanchard from Heritage to 107% of the most recent bid as permitted by the parties contract. Final Award ¶ 37. Heritage does not make clear how, in this analysis, the Panel ignored causation of damages.
Although Heritage insists that it is not "repackaging" its argument that Blanchard "passed-on" damages it sustained to its customers, Heritage does reiterate that same argument. The Panel explicitly found that whether Blanchard passed on any overcharges to its customers was irrelevant. Final Award at 26, ¶ 12. Heritage presents no authority for the proposition that in an overcharging case, actual damages should exclude any costs passed onto customers of the maligned party. Indeed, the Panel cited authority for the opposite tenet: that it would be error to consider the passed-on costs. Final Award at 26, ¶ 12 (citing cases). The Court finds that the Panel did not act contrary to Texas law regarding damages in finding that Blanchard had incurred over fourteen million dollars in damages from Heritage's overpricing. The Court need not reach the second step of the Williams test: whether the award should be upheld unless it would result in significant injustice.
III. TIMELINESS OF AWARD
In the second set of briefing submitted by the parties, Heritage asserts for the first time that the arbitration award was untimely and thus should be vacated under 9 U.S.C. § 10(a)(4) because the arbitrators exceeded their powers. The Court finds Heritage's objections without merit, and thus they are denied.
Heritage moved on August 28, 2000 for leave to file a surreply to Blanchard's reply. The Court finds that the issues have been more than adequately briefed, and thus DENIES Heritage's motion to file a surreply.
The chronology of the arbitration is largely undisputed. The Panel issued its Interim Award on March 21, 2000, which resolved the substantive issues of the arbitration, and stated that the award was "final, binding and conclusive" and that "[j]udgment may enter thereon." The Interim Award determined a measure of damages, but reserved on the issues of attorney's fees, administrative costs, and interest on the award. These three collateral issues were briefed by May 31, 2000. On June 1, 2000, the Panel resolved those three issues in the "Order Regarding Prejudgment Interest, Attorneys' Fees, Costs and AAA Administrative Expenses." The Order on fees, costs and interest was not transmitted to the AAA until June 10, and it was not received by the parties until July 10, 2000.
Meanwhile, the Panel was also considering further motions filed by Heritage. Shortly after the Interim Award was issued, on March 27, 2000, Heritage filed a Motion to Modify or Clarify the Interim Award. This motion was fully briefed by June 9, 2000. Although the AAA rules were silent on whether the Panel could entertain such a motion, the arbitrators concluded they could. The Panel issued its Order on Heritage's Motion to modify June 15, merely six days after the reply brief was received, which modified the Interim Award by adding Finding of Fact ¶ 39A.
Finally, the Panel issued its Final Award, which incorporated the substantive findings from Interim Award of March 21, 2000; the new finding (¶ 39A) from the Order on Heritage's Motion to Modify on June 9, 2000; and the findings' on attorneys fees, interest and costs from the Order dated June 1, 2000. This Final Award was issued July 5, 2000.
Heritage argues that the Final Award was untimely. Heritage argues that, pursuant to AAA Rule 41, the Panel should have issued its Final Award no later than June 30, 2000 — that is, 30 days after the final brief on fees, costs, and expenses was received. Heritage argues that the arbitrators exceeded their power by issuing the award five days later, because Heritage had made an objection to the untimeliness on July 3, 2000.
The Court finds that the Final Award issued by the Panel was timely, when taken into consideration that Heritage filed two motions to modify or clarify the Interim Award. Although these motions are not expressly permitted by the AAA rules, the Panel generously entertained them, and included their findings from the briefing in those motions in their Final Award. It is fatuous for Heritage to criticize an award as untimely when the Panel was obliged to consider Heritage's two motions to modify before it could reach the Final Award. Cf. Glass Workers Int'l Union v. Excelsior Foundry Co., ( 56 F.3d 844, 848 (7th Cir. 1995) (Posner, J.) (doctrine of functus officio permitted arbitrators to modify or clarify award up to 85 days after rendition of initial award).
Heritage suggests some misconduct on the part of the AAA or the panel in backdating documents, and requests discovery into the actions of the arbitrators and the AAA. There is no reason to doubt the dating of the AAA orders, and the delay in receipt of the orders appears to be an administrative glitch. Heritage's request for discovery into the workings of the AAA and the panel to prove its claim of the untimeliness of the award is without merit, and thus the Court denies the request.
Heritage cites as authority Lodge 725, International Association of Machinsts v. Mooney Aircraft, Inc. 410 F.2d 681 (5th Cir. 1969). This case does not stand for the proposition Heritage espouses: that an objection to untimeliness, alone, is sufficient to cause a violation of 9 U.S.C. § 10(a)(4). In Mooney Aircraft, the Fifth Circuit specifically said that "it would be loath to penalize the beneficiary of the award because of the lapse of time over which he had no possible control" and that "it is unthinkable that such an award would be set aside because of a loss of jurisdiction to act one day later than the time mentioned in the contract." Mooney Aircraft, 410 F.2d at 683. The statements suggest that the minor delay in the Panel's award, even given Heritage's objection, would not justify annulment of the award. There is no binding authority in this Circuit, as there is in the Fourth Circuit, that Heritage's objection to the untimely award should result in its vacatur even if there is no prejudice in the delay. See Huntington Alloys, Inc. v. United Steel Workers of America, 623 F.2d 335 (4th Cir. 1980). Heritage has alleged nor proven prejudice in the delay.
Finally, Heritage argues that the Panel issued an indefinite award because it declined to comment on the issues of quarterly fee payments and the status of the Doyles' guaranties, requiring vacatur under 9 U.S.C. § 10(a)(4). The Panel held that there was "no sufficient record nor authority" for it to act on those issues, as they were not properly before them. The arbitrators' refusal to rule on issues not properly before them does not render their exercise of power so imperfect that this Court should vacate the award. In sum, the Court finds that Heritage fails to establish a violation of 9 U.S.C. § 10(a)(4) in either the timeliness or comprehensiveness of the Final Award.
V. PREJUDGMENT INTEREST
Heritage argues that the Panel's award of prejudgment interest from the date Blanchard initially demanded arbitration (November 7, 1995) is fundamentally unfair. Heritage contends that prejudgment interest should not accrue before the overcharges occurred, pointing to the Blanchard damage model that calculated overcharges per year from 1992 to 1998. The arbitrators calculated interest from the date of Blanchard's first arbitration demand based on Texas common law, which holds that prejudgment interest should be calculated at 10% accruing from the earlier of "the date the lawsuit is filed" or "180 days after notice of the claim is received." See Johnson Higgins of Texas v. Kenneco Energy, Inc., 962 S.W.2d 507, 531 (Tex. 1998). The Panel determined that Blanchard's initial arbitration demand in November of 1998 was "the date the lawsuit was filed."
Although it may seem illogical that a party may be awarded prejudgment interest on damages that have not yet accrued, Texas law permits just that on damages for wrongful death, personal injury and property damages cases. See (CH Nationwide, Inc. v. Thompson, 903 S.W.2d 315, 324-26 (Tex. 1994). No Texas courts have yet expanded this principle to include commercial or economic damages, but such an interpretation of Texas law by the Panel is not fundamentally unfair or a manifest disregard of the law. Although allowing prejudgment interest on prospective economic damages may be an error of law, an arbitrator's erroneous interpretation or application of law does not allow this Court to annul an award. Nauru Phosphate Royalties, Inc. v. Drago Daic Interests, Inc., 138 F.3d 160, 164-165 (5th Cir. 1998). Heritage's argument that Blanchard did not demand damages until March 1997 is inapposite; the common law holds that interest accrues on the earlier date: when suit was filed (in this case, November 1995), or 180 days after a claim — defined as a demand for payment — is received (in 1997, according to Heritage). See Johnson Higgins of Texas v. Kenneco Energy, Inc., 962 S.W.2d 507, 531 (Tex. 1998). Finally, the Court notes that the practical effect of calculating interest yearly, as requested by Heritage, may result in higher interest than the Panel calculated, since over $8 million of the damages accrued before 1995, while only $6.6 million accrued after 1995.
A "fundamentally fair" arbitration is one in which the parties receive notice, an opportunity to be heard and to present relevant and material evidence and argument before the decision makers, and where the decision makers are not infected with bias. See Bowles Fin. Group v. Stifel, Nicolans Co., Inc., 22 F.3d 1010, 1013 (10th Cir. 1994) (citing cases). Heritage had notice of the arbitrator's intent to levy prejudgment interest, the opportunity to brief the issue to the arbitrators, and there is no evidence of bias. Heritage admits that an error in the prejudgment interest award is not sufficient to alone justify vacatur of the award. Even given the alleged "list of flaws in the award and the process," Heritage fails to meet its burden of showing the arbitration was fundamentally unfair, violated a statutory basis for vacatur, or was in manifest disregard of the law.
VI CONCLUSION
Heritage has failed to show that the arbitrators, in issuing an award for Blanchard, exceeded the scope of their powers, violated the statutory basis for vacatur, or acted in manifest disregard of the applicable law. Therefore, the Court GRANTS Blanchard's motion to confirm the arbitration award, and DENIES Heritage's motion to vacate. Judgment will enter on the arbitration award Plaintiff will promptly submit a proposed judgment.
SO ORDERED