Court rulings vacating arbitration awards are few and far between. Arbitration appeals are usually uphill battles, and the standard applied by courts to arbitrators’ rulings are among the most deferential in the law. Against this backdrop, Raymond James v. Bishop , a Feb. 22 decision by the 4th U.S. Circuit Court of Appeals, presents some rare support for parties seeking vacatur of an arbitration ruling.
According to the opinion, Thomas Bishop, Steven Hamant and Timothy Scanlon were financial advisers in Raymond James’ Richmond, Va., branch office. After complaints were received, they were told they would be terminated, but they voluntarily resigned before Raymond James terminated their employment.
Prior to the three financial advisers’ resignations, a Raymond James’ in-house attorney represented them in arbitrations brought against them by customers, which continued after they no longer worked at Raymond James, the opinion said. The proceedings against two of the three financial advisers concluded shortly after their resignations; the proceeding against Bishop was still pending almost six months later. The in-house Raymond James attorney then withdrew from that representation, citing an incipient conflict of interest, and the case went on to settle a few days later with no financial contribution by Bishop.
The three later initiated an arbitration against Raymond James, seeking damages “on the basis of the following legal theories: (1) wrongful discharge; (2) breach of contract; (3) tortious interference with contract; (4) common law and statutory conspiracy; (5) violation of the Virginia Retail Franchising Act; and (6) violation of ‘just and equitable principles of trade.’” The arbitrators found for the financial advisers and awarded them almost $300,000, the opinion said. Significantly, the panel included not merely an award but a reasoned decision. The arbitrators found Raymond James liable for (1) employing its counsel to advise and represent the financial advisers after they had been fired, which the panel found to constitute the unauthorized practice of law; (2) failing to warn the financial advisers, prior to their termination, that they were under heightened scrutiny after complaints against them had been lodged; and (3) having the Raymond James attorney withdraw from the ongoing arbitration against Bishop, which the panel found had prejudiced the financial adviser.
Raymond James appealed. The district court found the arbitrators’ reasoning to have a “lack of clarity,” noting the “peculiar manner” in which the claims of the financial advisers had been treated, and finding itself unable to “discern some coherence in the award,” and sent the matter back to the panel for clarification. Following two supplemental letter opinions from the arbitrators, which didn’t clarify much of anything, according to the court, the district court concluded that vacatur was warranted under the Federal Arbitration Act, or FAA.
“This conclusion was grounded in the court’s determination that the arbitrators [had] clearly based their award of … damages to the [financial advisers] on Raymond James’ alleged ‘breach of fiduciary and legal duties’” in connection with its representation of the advisers following the termination of their affiliation with Raymond James, the opinion said. Such a determination was not within the panel’s powers under NASD Rule 10101, the rule that formed the basis for the arbitration, which provided for arbitration only for employment-related matters.
The 4th Circuit affirmed. The appellate court found that, despite the financial advisers’ claim to the contrary, “the award in this case cannot be understood as based on anything other than the arbitrators’ finding that Raymond James committed a breach of ‘fiduciary and legal duties’” in representing the financial advisers following their resignations. This led to vacatur, the 4th Circuit held, because the basis for arbitration was NASD Rule 10101, which provided only “for the arbitration of any dispute, claim or controversy … arising out of the employment or termination of employment of” financial advisers.
Such an arbitration provision was not broad enough to encompass what the court found to be the basis for the ultimate finding of liability against Raymond James, which related not to the financial advisers’ wrongful termination but instead to Raymond James’ putative unauthorized practice of law and concomitant breach of fiduciary and other duties. The problem, according to the Bishop court, was that the arbitration panel found for the financial advisers by “adjudicat[ing] a tort claim that fell outside of the … ‘arising out of employment’” language that was the basis for arbitration in the first place. This amounted to a ruling by the arbitration panel that “exceeded [its] powers,” requiring vacatur under the FAA.
Does Bishop merely stand for the unexceptional proposition that arbitrators cannot exceed their powers under the FAA, and that where they rule on claims outside the scope of the arbitration, vacatur is required? No. There are many cases — never mind the language of the FAA itself — that say just that. What is interesting about Bishop is how the court addressed the award before it, its surprising lack of deference to that award, and what this may portend for future arbitration decisions.
As an initial matter, there is something strange about the conflicting descriptions employed by the 4th Circuit as to arbitration rulings in general and the arbitration award before it specifically. As to the former, the court notes that its “standard of review [is] ‘among the narrowest known at law,’” it observes three separate times how “rare” vacatur of an arbitration award should be, and it remains “mindful of the potential danger” in even remanding to an arbitration panel for further clarification. With respect to the award before it, however, there seems little by way of deference and much by way of derogation. The award had a “lack of clarity,” it was “peculiar,” it lacked “coherence,” it was “not really very clear,” it was “inscrutable,” there was “evident incoherence” and it was “exceedingly obscure, to say the least.” Harsh words for the arbitrators, no doubt, but the stuff of vacatur? This looks to be a court that does nothing but look askance and with suspicion at the award before it.
The extent to which the court goes out of its way to read the award in a way that warrants vacatur is also remarkable. The Bishop court described its ruling as vacating the award by deciding what it “must have been based on,” not what it was based on. This is especially striking where the district court admitted that “[t]he arbitration panel’s award … inappropriately seemed to compensate the [financial advisors] for termination of the employment,” a decision with respect to which the arbitration panel did in fact have jurisdiction. It is also worthy of note that the arbitrators informed the district court that what was said therein “was among other factors considered by the panel,” suggesting that there were other bases not discussed in the award on which liability could have been premised. The district court and court of appeals focused not on this potential basis to affirm, however, but instead on the arbitrators’ statement that all claims not expressly addressed in the award — which would include the financial advisers’ wrongful termination claims — had been denied.
Simply, where the panel “seemed” to compensate the financial advisers for wrongful termination, where the financial advisers themselves insisted at every turn that their claims were for wrongful termination, where the arbitrators had jurisdiction to review and rule on a claim of wrongful termination, and where the arbitrators provided non-elucidated grounds — which could have included wrongful termination — on which the courts could have affirmed, it was unusual for the court to look for other grounds on which the award “must have been based” and to vacate on that ground. This does not look like the narrowest standard of review known at law. It looks instead like a court scrutinizing the arbitration ruling before it to find some basis for vacatur. That is quite an unusual turn.
Why did the district and appellate courts jump through all those hoops just to vacate an award that conceivably could have been affirmed? After all, there is no question that “a mistake of law or a clear error in fact finding” is not enough to warrant vacatur. (See, e.g., the 2nd Circuit’s 2002 ruling in Goldman v. Architectural Iron Co .) There was no “corruption, fraud, or undue means,” no claim of “partiality,” no “misconduct” or “misbehavior” and resulting “prejudice.” That is, there was no hint that any of three of the four grounds for vacatur under the FAA were implicated.
Perhaps while error alone is insufficient, cumulative error at some point becomes enough to satisfy the FAA’s demanding standard. In other words, this is a case in which the arbitrators, in choosing to provide the rationale for their ruling, didn’t just err, they got it wrong so entirely that vacatur was called for. And the arbitration panel’s award truly made little sense: The unauthorized practice of law? Failure to warn of complaints? Attorney withdrawal causing prejudice where no liability was imposed? It is very difficult to connect the dots in such a decision.
Bishop thus suggests that even where more easily identifiable grounds for vacatur are absent, at a certain point an arbitration award’s lack of coherence will not be tolerated by the federal courts. That may be just what Congress intended when it included in the grounds for vacatur under the FAA “arbitrators exceed[ing]” or “ so imperfectly execut[ing]” “ their powers.” While there can be disagreement as to whether the arbitrators in fact exceeded their powers under the facts of Bishop — as found by the 4th Circuit — there can be no question but that the arbitrators “imperfectly executed” their powers to an uncommon degree.
But none of what the federal courts did with respect to the arbitrators’ award would have been possible if the arbitrators had followed the more usual course and found for the advisers without setting forth their reasoning and rationale. This is a take-home message unlikely to be lost on arbitrators in the future, who may see Bishop as a warning that providing a reasoned decision along with their award can provide courts with a basis to vacate that would otherwise be unavailable.
Conversely, respondents seeking to hedge their bets may be well-served by seeking agreement from all parties to request a reasoned decision from arbitrators to provide reviewing courts with more from which an arbitration award can be scrutinized. (FINRA Rule 13904(g) in fact allows parties to arbitrations to jointly request a reasoned decision.) For Raymond James, it was a fortuity that the panel had provided a written opinion that allowed the court to vacate. This may be a path that fewer arbitrators elect to take in the future for just that reason. •
Neal Troum, a senior associate in Stradley Ronon Stevens & Young’s litigation practice group, represents clients in a wide array of practice areas. His legal practice focuses on insurance law, appellate practice, products liability, banking and other complex litigation matters. He can be contacted at firstname.lastname@example.org