A Tenth Circuit Court of Appeals panel in April came down on the side of limiting scrutiny of an arbitration award’s alleged material miscalculation of figures to what is evident “on the face of the award.” It thereby joined the Fourth, Sixth, and Eleventh Circuits in adhering to that standard for analysis of Federal Arbitration Act (“FAA”) section 11(a) motions to modify arbitration awards, and stood in opposition to the Fifth and Seventh Circuits, which have opined that courts scrutinizing arbitration awards for such errors can or should look at the arbitration record. The Tenth Circuit panel also provided guidance on a few more nitty-gritty issues such as calculation of post-award interest.
In Mid Atlantic Capital Corp. v. Bien, 956 F.3d 1182, there did not seem to be any serious dispute that the Financial Industry Regulatory Authority (“FINRA”) arbitration panel’s damages award included both net-out-of-pocket losses and market adjusted damages, even though claimants’ expert witness had presented those as alternative measures of claimants’ losses and had testified that his market adjusted damages number included the net-out-of-pocket damages. As a result, the district court ruling on Mid Atlantic’s petition to vacate or modify the award found, the “disturbing” award provided claimants with a double recovery. 2018 WL 10322876, at *4-5. As the district court also noted, determining the extent of the double recovery would require taking into account the award’s mandate that claimants reassign to Mid Atlantic ownership of the two investments at issue, that is, the double counting could not be corrected by simply subtracting the net-out-of-pocket damages from the market adjusted damages. However, the district court incorrectly surmised that “[a]ny correction of the panel’s damages award would require some hearing to determine [the present] value [of those investments].” However, the claimants’ damages expert must have come up with such values as part of his calculation of both net-out-of-pocket damages and market adjusted damages, and Mid Atlantic had not offered any alternative damages evidence in the arbitration hearing—so no such further hearing would in fact have been necessary.
An indication that the arbitration panel may have been confused, misunderstood, and/or had a failure of memory about the damages evidence is found in the text of the award: “At the close of the hearing, Claimants requested initial investment losses [the net-out-of-pocket damages] and provided the Panel with several theories of appropriate compensatory damages that should be awarded [the market adjusted damages, as to which Claimant’s expert presented a range of numbers]” (emphasis supplied).
In the district court, Mid Atlantic sought to have the award vacated pursuant to FAA section 10(a)(4) (9 U.S.C. § 10(a)(4); “the arbitrators exceeded their powers”) and because the arbitrators manifestly disregarded the law, and in the alternative to have the award modified pursuant to FAA section 11(a) (9 U.S.C. § 11(a); “an evident material miscalculation of figures”). In its appeal to the Tenth Circuit after the district court rejected all those grounds and confirmed the award, Mid Atlantic pressed only the latter ground. Deciding an issue of first impression for the Tenth Circuit, the panel held that section 11(a) “allows district courts to correct only those evident material miscalculations of figures that appear on the face of the arbitration award. District courts may not look beyond the face of the award [such as to the arbitration record] when determining whether such an error exists.” Since the miscalculation resulting in the double recovery, although material and manifest from a relatively cursory review of the arbitration record, was not “evident” from the text of the award, the panel affirmed the district court’s denial of Mid Atlantic’s motion to modify the award.
In so concluding, the panel joined the Fourth, Sixth, and Eleventh Circuits. See Apex Plumbing Supply, Inc. v. U.S. Supply Co., 142 F.3d 188, 194 (4th Cir. 1998); Grain v. Trinity Health, Mercy Health Services, Inc., 551 F.3d 374, 378 (6th Cir. 2008); AIG Baker Sterling Heights LLC v. American Multi-Cinema, Inc., 508 F.3d 995 (11th Cir. 2007). A line of cases in the Southern District of New York also adheres to the face-of-the-award test. E.g., Dolan v. ARC Mechanical Corp., 2012 WL 4928908 (2012). The Fifth and Seventh Circuits permit consideration of the arbitration record when deciding section 11(a) petitions. Prestige Ford v. Ford Dealer Computer Services., Inc., 324 F.3d 391, 396-97 (5th Cir. 2003), overruled in part on other grounds by Hall St. Assocs., LLC v. Mattel, Inc., 552 U.S. 576 (2008); Eljer Mfg., Inc. v. Kowin Devel. Corp., 14 F.3d 1250, 1254 (7th Cir. 1994) (award granting double recovery modified).
Instances of courts modifying awards providing for double recoveries are rare. E.g., Asturiana de Zinc Mktg., Inc. v. LaSalle Rolling Mills, Inc., 20 F.Supp.2d 670, 673 (S.D.N.Y.1998) (“These errors are also apparent to the Court on the face of [petitioner's] exhibit setting forth its method of calculating contango charges. Since the arbitrator's award otherwise matches the flawed amount to the dollar, it must be modified”); Melun Indus., Inc. v. Strange, 898 F.Supp. 995, 1003 (S.D.N.Y.1992) (“If [plaintiff] were to retain the $26,914 it already received . . . , as well as $26,914 for the same item as part of the Second Award, it would reap an unjustified double recovery on the same adjustment.”).
Post-Award Interest Calculations. The Tenth Circuit panel dealt in its Mid Atlantic decision with two issues claimants had with the district court’s calculation of post-award interest:
- The claimants were not entitled to post-award interest on their attorney’s fees and costs because the award only specified that interest was payable on the damages awarded and was silent as to interest on attorney’s fees and costs, which the panel found consistent with Code of Arbitration Procedure Rule 12904(j)’s directive that “[a]n award shall bear interest . . . [a]s specified by the panel in the award.”
- The federal postjudgement rate of interest set forth in 28 U.S.C. § 1961 (2.1%) applies for calculation of interest for the period after a district court enters judgment confirming an award, unless the parties or the arbitration award clearly, unambiguously, and unequivocally provides for a different rate. Since the award at issue, although it provided for 8% interest (the Colorado statutory rate) “until . . . [the award is] paid in full,” did not explicitly provide for “postjudgement” interest, and since Code of Arbitration Procedure Rule 12904(j), although it provides for interest “at the legal rate, if any, then prevailing in the state where the award was rendered,” does not explicitly provide for “postjudgment” interest either, the federal rate applied postjudgement. Accord, Tricon Energy Ltd. v. Vinmar Int’l, Ltd., 718 F.3d 448, 459 (5th Cir. 2013); Fidelity Federal Bank, FSB v. Durga Ma Corp., 387 F.3d 1021, 1024 (9th Cir. 2004); PremiereTrade Forex, LLC v. FXDirectDealer, LLC, 2013 WL 2111286, at *8 (S.D.N.Y. 2013) (“The Court’s confirmation of the award will include post-award interest at a rate of 9% specified in the [American Arbitration Association] arbitrators’ opinion . . . to the date of entry of judgment. From the date of entry of judgment, interest will run pursuant to 28 U.S.C. § 1961”).
Assignment of Subject Investments. As noted above, the award directed the claimants to assign to Mid Atlantic their ownership interests in the investments at issue. After the award the claimants received liquidating distributions from both investments; they had not yet assigned those investments to Mid Atlantic. The Tenth Circuit panel affirmed the district court’s direction that claimants pay those distributions to Mid Atlantic, along with interest earned thereon.
The Tenth Circuit panel took its time formulating its conclusions: the case had been argued over a year before, in January 2019. On May 8 Mid Atlantic’s petition for rehearing or for an en banc hearing was denied.
Two other grounds for vacatur or modification of the award in addition to section 11(a) were made by Mid Atlantic in the district court, but not pursued in the Tenth Circuit appeal:
Manifest Disregard of the Law. The “manifest disregard of the law” ground for vacating an award is recognized in some circuits, the Supreme Court in Stolt Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 672 n.3 (2010), having declined to decide whether “’manifest disregard’ survives our decision in Hall Street Assocs., L.L.C. v. Mattell, Inc., 552 U.S. 576, 585 . . . (2008), as an independent ground for review or as a judicial gloss on the enumerated grounds for vacatur set forth at 9 U.S.C. § 10.” See, e.g., Weiss v. Sallie Mae, Inc., 939 F.3d 105, 109 (2d Cir. 2019); Wachovia Sec., LLC v. Brand, 671 F.3d 472, 480 (4th Cir. 2012); Comedy Club, Inc. v. Improv W. Assocs., 553 F.3d 1277, 1290 (9th Cir. 2009) (“the manifest disregard ground for vacatur is shorthand for [FAA] § 10(a)(4)”); Dominion Video Satellite, Inc. v. Echostar Satellite L.L.C., 430 F.3d 1269, 1275 (10th Cir. 2005). The Fifth Circuit has declined to decide if the manifest disregard ground survives as a judicial gloss on FAA section 10(a)(4). McCool Smith, P.C. v. Curtis Int’l, Ltd., 650 Fed. Appx. 208, 212-13 (2016). The Eleventh Circuit does not recognize this ground for vacating an award. Robbins v. Day, 954 F.2d 679, 684 (11th Cir. 1992).
There is a high bar to success based on this ground. “[T]here must be something beyond and different from mere error in law or failure on the part of the arbitrators to understand or apply the law; it must be demonstrated that the majority of arbitrators deliberately disregarded what they knew to be the law in order to reach the result they did.” Health Services Mgement Corp. v. Hughes, 975 F.2d 1253, 1267 (7th Cir. 1992). See also, e.g., Jock v. Sterling Jewelers Inc., 646 F.3d 122 (2d Cir. 2011) (to justify vacatur of an award a court must find “the governing law alleged to have been ignored by the arbitrators was well defined, explicit, and clearly applicable,” and “the arbitrator[s] knew about the existence of a clearly governing legal principle but decided to ignore it or pay no attention to it”); Duferco Int’l Steel Trading Co. v. T. Klavenness Shipping A/S, 333 F.3d 383, 389 (2d Cir. 2003) (party seeking to have award vacated bears the burden of “proving that the arbitrators were fully aware of the existence of a clearly defined governing principle, but refused to apply it”; “[o]ur reluctance over the years to find manifest disregard is a reflection of the fact that it is a doctrine of last resort—its use is limited only to those exceedingly rare instances where some egregious impropriety on the part of the arbitrators is apparent, but where none of the provisions of the FAA apply”); the district court decision in the Mid Atlantic case, finding the arbitration record did not “reflect that the panel knew and explicitly disregarded the governing damages law.” 2018 WL 10322876 at *4. So, to lay the groundwork for a possible petition to vacate or modify a double-recovery award on the basis of manifest disregard, the panel should be provided, perhaps in a prehearing brief, with statements of and citations to applicable law proscribing multiple recovery of the same damages.
For examples of rare instances in which the manifest disregard of the law standard has been applied to vacate an award based on issues with the damages awarded, see New York Telephone Co. v. Communication Workers of America, 256 F.3d 89, 92–93 (2d Cir. 2001) (per curiam) (vacating the portion of an award ordering payments found to be illegal and contrary to public policy under circuit precedent), and Fahnestock & Co. v. Waltman, 935 F.2d 512, 519 (2d Cir. 1991) (vacating the portion of an award mandating punitive damages as contrary to New York law prohibiting arbitrators from ordering punitive damages). Compounding the difficulty of overcoming a court’s general reluctance to disturb an arbitration award will be the problem of convincing the court that the arbitrators disregarded the law as opposed to simply being innumerate and/or inattentive, as appears may have been what happened in the Mid Atlantic arbitration.
Arbitrators Exceeded Their Powers. Another ground for vacating a double-recovery award tried by Mid Atlantic in the district court was FAA section 10(a)(4)--“the arbitrators exceeded their powers.” The idea being that no arbitration panel is empowered to award a double recovery (in the absence of, e.g., a valid, proven claim under a statute providing for multiple or punitive damages). See, e.g., National Post Office v. United State Postal Service, 751 F.2d 834, 843 (6th Cir. 1985) (“where the record that was before the arbitrator demonstrates an unambiguous and undisputed mistake of fact and the record demonstrates strong reliance on that mistake by the arbitrator in making his award, it can fairly be said that the arbitrator ‘exceeded [his] powers’”). Here again the bar is high: “It is not enough for petitioners to show that the panel committed an error—or even a serious error. . . . It is only when an arbitrator strays from interpretation and application of the agreement and effectively dispenses his own brand of industrial justice that his decision may be unenforceable.” Stolt-Nielsen, 559 U.S. at 671 (internal quotation marks and citations omitted).
So, as with a section 11(a) material miscalculation argument, the odds are very long on a successful challenge to an arbitration award under either of these standards. Court “review of arbitral awards is among the narrowest known to law.” THI of New Mexico at Vida Encantada, LLC v. Lovato, 864 F.3d 1080, 1083 (10th Cir. 2017). But under both theories—manifest disregard of the law and exceeding powers--you may have a hook to get the court at least to look at the arbitration record, and in particular to seek to focus the court on the inequity of the award’s result as revealed in that record.
So what’s a respondent in a FINRA arbitration to do to head off a double recovery award when arbitrating in a jurisdiction within the Fourth, Sixth or Tenth Circuits, where such an award may not be disturbed under section 11(a) unless the double recovery is apparent on the face of the award? There’s no high-percentage silver bullet, but here are a couple ideas:
Explained Award. If the claimant is or can be convinced they are just as much at risk of being harmed by a panel’s mathematical error or misconception, the parties could request an explained award, pursuant to FINRA Code of Arbitration Procedure Rule 12904(g) (at a cost of an additional $400). However, you are unlikely to be successful in including a “show your work” requirement for any damages calculation because Rule 12904(g)(2) states that “[i]nclusion of . . . damage calculations is not required” in an explained award. In any event, placing such a mandate on the panel may not necessarily be an unalloyed benefit: a panel inclined to shave damages in proportion to what it views as the relative strength/weakness of claimant’s case as compared to respondent’s case, or other mitigating factors, might be less inclined to do so if it has to come up with a legitimate and objective-sounding and mathematically sound explanation of how it arrived at its reduced damages-awarded number.
Or perhaps respondents should do nothing. Perhaps the occasional off-the-rails award is just collateral damage to be endured in exchange for the myriad benefits of arbitration (expedition, cost, etc.), as courts are fond of noting. See, e.g., Duferco Int’l Steel Trading Co. v. T. Klavenness Shipping A/S, 333 F.3d 383, 389 (2d Cir. 2003) (“It should be remembered that arbitrators are hired by parties to reach a result that conforms to industry norms and to the arbitrator's notions of fairness.”); Kyocera Corp. v. Prudential-Bache Trade Services, Inc., 341 F.3d 987, 1003 (9th Cir. 2003) (en banc) (“The risk that arbitrators . . . may make errors with respect to the evidence on which they base their rulings, is a risk that every party to arbitration assumes”); Raiford v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 903 F.2d 1410, 1413 (11th Cir. 1990) (“When the parties agreed to arbitration, they also agreed to accept whatever reasonable uncertainties might arise from the process.”). It’s conceivable the likelihood of such errors redounding to the detriment of respondent firms and representatives is roughly the same as the likelihood of their redounding to the detriment of claimant customers. A respondent may not be happy with playing those odds, and it’s small solace, of course, for the respondent that ends up at the short of the stick of such a "disturbing" award.
Rule 12905(a)(2) Motion. The Tenth Circuit Mid Atlantic panel found it unnecessary to decide the claimants’ contention that Mid Atlantic had failed to preserve its double-recovery argument by not making a post-award submission pursuant to FINRA Code of Arbitration Procedure Rule 12905(a)(2) seeking correction of “typographical or computational errors” in the award. Although it may be that a panel could come up with a face-saving, pretextual reason to support its flawed award number, in most cases there will be little down side to submitting such a motion in appropriate circumstances, and there may be a down side to not making such a motion, in the form of a waiver argument such as that made by the claimants in Mid Atlantic. There is a short fuse on such submissions: they must be filed within ten days of service of the award or notice that the arbitration has been closed.
Note: This bulletin is for general use and should not be construed to provide legal advice as to particular factual situations.