A federal judge has sanctioned Harris Beach attorneys for challenging an arbitration award in court, ruling the petition caused the parties “to incur unnecessary expense and delay” and the firm’s representation of undisputed facts and selective quoting of the record were “disingenuous at best.”

Harris Beach attorneys Paul Yesawich III, David Edwards and Teresa Bair represented DigiTelCom, which was a minority shareholder in two Russian telecommunications companies. DigiTelCom asked the Southern District to vacate an arbitration award that had dismissed all of its claims in a dispute against a large telecommunications operator in Sweden, Tele2 Sverige AB.

Judge Richard Sullivan (See Profile), in a July 25 ruling in DigiTelCom v. Tele2 Sverige, 1:12-cv-03082, confirmed the award, finding the tribunal acted within its scope of authority. He imposed sanctions on Harris Beach, ruling that it should pay the defense’s attorney fees.

“Plaintiff’s challenge to the Award amounts to little more than an assault on the Tribunal’s factfinding and contractual interpretation rather than on its actual authority,” he wrote. “This kind of petition serves only to cause the parties to incur unnecessary expense and delay the implementation of the Award.”

John Fellas, a partner of Hughes Hubbard & Reed who represented the defense, predicted that recent court decisions imposing sanctions, such as last week’s order, for challenging arbitration awards would make an impression.

“We are going to see parties discouraged from making frivolous motions challenging an award and I think we’re going to see some parties be more willing to apply for sanctions because they’ve seen courts impose them,” he said.

Yesawich, a special counsel at Harris Beach, said he believes the ruling will produce a “chilling effect.”

“The sanctions award is, in our view, entirely unjustified; moreover, if sustained it is the type of decision that we believe will have a chilling effect on the advocacy process,” he wrote in statement. “Lawyers may be unwilling to represent their clients as aggressively as they should be represented if the penalty for guessing wrong about the merits of an argument is a sanctions award.”

The litigation was prompted by a dispute between DigiTelCom and Tele2 over how a telecommunications company should expand wireless phone service in Russia. The parties made a series of agreements to resolve the dispute, but arbitration arose when DigiTelCom claimed Tele2 breached these agreements.

The arbitration was before the International Centre for Dispute Resolution, part of the American Arbitration Association. In September 2011, the tribunal issued an award dismissing all of DigiTelCom’s claims and awarded attorney fees and costs to Tele2.

DigiTelCom, along with three other claimants that fought Tele2 in the arbitration, filed a motion in the Southern District last December to vacate or modify the award.

See the motion to vacate the award, the memorandum in oppositionDigiTelCom’s reply, and Tele2′s reply.

“The Tribunal rewrote portions of the Agreements, disregarded the undisputed evidence on critical issues, abandoned settled New York law on contract interpretation and produced an opinion so riddled with obvious inaccuracies—indeed the opinion reads as if the hearing never occurred—that it is irrational and suggests the presence of partiality or bias,” Harris Beach lawyers argued.

In response, Tele2 contended DigiTelCom and the other plaintiffs mischaracterized the record, made “baseless and unsubstantiated attacks on the integrity of the Tribunal,” and falsely claimed that disputed facts were supposedly undisputed.

Tele2 argued the plaintiffs offered nothing to demonstrate the “existence of the type of egregious circumstances required to meet their ‘heavy burden’ to vacate an arbitration award.”

Tele2 requested the court impose legal fees, citing 28 U.S.C §1927. That statute says: “Any attorney or other person 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.”

Tele2 argued that several courts, including the Southern District, have relied on §1927 to “sanction meritless motions to vacate arbitration awards.” Tele2 argued there is sufficient support for a finding of bad faith as “Plaintiff’s brief is replete with misrepresentations of the facts” and a “cherry-picked selection of the record.”

Tele2 also accused DigiTelCom of contemplating “judge-shopping in the illusory hope that somehow, somewhere in the Southern District of New York, a judge could be found who was favorable.”

Harris Beach lawyers replied there was no basis for Tele2′s accusations of misconduct.

Contract Interpretation

Sullivan found that although the plaintiffs accuse the tribunal of rewriting the contracts, “in reality the Tribunal merely interpreted them in terms that were unfavorable to plaintiffs.”

The judge also found that DigiTelCom did not cite a particular principle of law that the tribunal is supposed to have ignored and its disagreement with the award didn’t establish a manifest disregard of the law, “particularly where the 117-page Award is replete with citations to the record and is supported by what appear to be colorable interpretations of the agreements at issue.”

To impose sanctions, Sullivan wrote that a court must find clear evidence that the offending party’s claims were entirely meritless and the party acted for improper purposes. Both conclusions must be supported by specific factual findings, he wrote.

Sullivan noted that sanctions must not be imposed lightly and courts should be careful not to chill parties’ good-faith challenges to awards when there are serious questions. But “litigants must be discouraged from defeating the purpose of arbitration by bringing such petitions based on nothing more than dissatisfaction with the tribunal’s conclusions.”

The judge also noted that “Plaintiff’s representations of what facts were undisputed and, particularly, its selected quoting of the agreement in question, are disingenuous at best.”

In granting the defense’ motion for sanctions, the court ordered the parties to file motions on reasonable attorney fees and costs within the month.

Fellas could not provide an estimate of his client’s legal fees. He noted the Hughes Hubbard team also included two associates, and he had to occasionally work with a Swedish law firm involved in the underlying arbitration, Mannheimer Swartling, to understand that case.

Fellas observed that more litigants have lately begun to seek sanctions for “frivolous” challenges to arbitration awards.

In particular, his brief seeking sanctions cited Prospect Capital v. Enmon, 08 Civ. 3721, 2010 WL 907956 (S.D.N.Y. March 9, 2010), and Merrill Lynch, Pierce, Fenner & Smith v. Whitney, 419 Fed. App’x 826 (10th Cir. 2011).

“I would say in the last three years, we have seen more and more courts willing to” impose sanctions, he said, adding that it means “there’s another weapon in the arsenal here when you’re faced with the frivolous challenge of an award.”

The journal Global Arbitration Review first reported on the ruling.