Editor’s note: The following column spells out and discusses a hypothetical situation.
“The bad news,” Bob told client Anne, “is that the arbitrator rejected my argument regarding the interpretation of your contract with John.” So started Bob’s odyssey — and Anne’s increasing legal fees — as Bob sought to have a court vacate the arbitration award in favor of John and against Anne in a rather routine contract dispute involving the calculation of a bonus that Anne paid to John, her former employee.
Bob did have decent legal arguments. The arbitrator did not get it right in applying the parol evidence rule under Pennsylvania law. Plus, the arbitrator ignored Anne’s slam-dunk argument that the contract gave John only 45 days to dispute his annual bonus award and that John’s failure to do so precludes him from seeking an award recalculation.
As Bob explained to Anne in the same conversation in which she complained about the “never-ending” legal fees: “The arbitrator got it wrong on the law.” There was one other motivation for Bob. He told himself that Anne was “entitled” to have a court review the arbitrator’s award. “Is there any risk in appealing the arbitration award?”
Because there was diversity of citizenship and because the amount in controversy in the arbitration easily exceeded $75,000, Bob filed a motion in federal court to vacate the award under the Federal Arbitration Act, 9 U.S.C. § 10.
It came as a surprise when the court denied the motion to vacate the arbitration award. Bob was peeved that the court did not even consider his carefully written and researched legal arguments. However, it came as a shock when the court, in part II of the opinion, concluded that Bob personally was liable to pay John’s attorney fees in connection with the motion to vacate the arbitration award. Ouch.
As Bob complained to his partners, who may be jointly responsible to pay the court-awarded attorney fees: “What happened to a litigant’s right to have a court consider its legal arguments? Does a court just look the other way when an arbitrator makes a mistake?”
What about Bob’s asserted “right” to an appeal? To begin with, 28 U.S.C. § 1927 states as follows:
“Any attorney or other party admitted to conduct cases in any court of the United States or any Territory thereof who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses and attorneys’ fees reasonably incurred because of such conduct.”
Where a case arises out of an arbitration award, Section 1927 takes on added significance because a court in reviewing an arbitration award is not only required to give extreme deference to the arbitrator’s factual and legal determinations; the court also will not vacate an award due to the arbitrator’s error in interpreting or applying the law — the very type of error that, according to Bob, tainted the arbitration award against Anne.
In granting a motion for attorney fees under Section 1927 against a party that made an “arbitrator got it wrong on the law argument,” the 10th U.S. Circuit Court of Appeals reiterated, in DMA International Inc. v. Qwest Communications International Inc., that arbitration “presents a narrow standard of review”; and, therefore, that one who “assumes a never-say-die attitude and drags the dispute through the court system without an objectively reasonable belief that it will prevail does so at the risk of being sanctioned.” This and numerous other decisions throw cold water on Bob’s theory that arbitrating parties have the right to appeal a legally erroneous award.
In choosing arbitration, the parties bargain away lots of rights and opportunities — including the right to appeal legal errors — in return for the promise of a result that may not be legally perfect, but that has a more immediate end. As the court in DMA International recognized: “If arbitration is to be a meaningful alternative to litigation, the parties must be able to trust that the arbitrator’s decision will be honored sooner instead of later.”
Bob went off the track in concluding that he needed only to convince the court to agree with his substantive legal arguments. In arbitration, the aggrieved party must show a lot more; “even a showing of clear error on the part of the arbitrator is not enough,” said the 10th Circuit in DMA International.
All of this means that a litigator in deciding whether to appeal from an arbitration award must consider whether the proposed appeal presents issues that merit overturning the arbitrator’s decision after taking into account the narrow standard of review and the deference that the court will give to the arbitrator. Otherwise, the litigator — like Bob — could wind up not only losing on appeal, but also being hit in the pocketbook for filing a frivolous appeal that may be right on the substantive law, but wrong on the standard of review.
Does this warning apply only in federal cases? Nope. Pennsylvania state courts have been equally protective of arbitration. In language strikingly similar to the 10th Circuit’s warning in DMA International , the Superior Court in Gargano v. Terminix Int’l Co. cautioned as follows:
“Additionally, the arguments set forth by Appellant indicate that this appeal was taken solely for delay. As arbitration proceedings were instituted to provide the parties with a quick and easy mode of obtaining justice, we decline to allow arbitrations to become an unnecessary step in the course of litigation, causing delay and expense, but settling nothing finally.” •
Charles F. Forer is a member in the Philadelphia office of Eckert Seamans Cherin & Mellott, where he practices all types of alternative dispute resolution. He is a former co-chairman of the Philadelphia Bar Association’s alternative dispute resolution committee and its fee disputes committee. He is a frequent lecturer and writer on the use of ADR in a variety of settings. He can be reached at 215-851-8406 and by e-mail at email@example.com.