Arbitration in the Courts

July 2021 | Vol. 6
Where Advocacy Meets Business

Eleventh Circuit Affirms Dismissal of Motion to Vacate Arbitral Award as Untimely.

Serving motion to vacate by email does not constitute proper service within three months, as required by FAA, § 12, absent receiving party’s express consent to email service.

O’Neal Constructors, LLC v. DRT America, LLC, 991 F.3d 1376, 1378 (11th Cir. 2021).

The Federal Arbitration Act (FAA) imposes strict procedural requirements on motions to vacate an arbitral award.  Among them is the requirement in 9 U.S.C. § 12 that a motion to vacate “must be served upon the adverse party or his attorney within three months after the award is filed or delivered.”  O’Neal is a reminder that failure to adhere strictly to the FAA’s service requirements is fatal to a motion to vacate.

In 2019, an arbitration panel constituted under the American Arbitration Association (AAA) Construction Rules issued an award ordering DRT to pay O’Neal $765,102.62 in damages and $650,090.49 in attorney’s fees.  Although DRT voluntarily paid the damages awarded, it refused to pay the attorney’s fees, prompting O’Neal file an action to confirm and enforce the award in Georgia state court.  DRT later removed that case to the United States District Court for the Northern District of Georgia.

With the three-month limitations period in § 12 of the FAA set to expire on April 8, DRT filed a motion to vacate the attorney’s fees portion of the award in federal court on April 5, 2019.  Importantly, DRT did not formally serve the motion to vacate on April 5.  Rather, DRT’s counsel emailed O’Neal’s counsel a “courtesy copy” of DRT’s memorandum in support of the motion to vacate, but did not provide a copy of the motion itself.  On April 30, DRT formally served its motion to vacate on O’Neal through the United States Marshals Service.

With O’Neal’s motion to confirm also pending before the Northern District of Georgia, the two cases were consolidated.  The court denied DRT’s motion to vacate and confirmed the award.  In denying the motion to vacate, the court held that DRT had failed to serve the motion within three months of the issuance of the award, as required by FAA, § 12.  The Eleventh Circuit Court of Appeals, which has jurisdiction over appeals from federal courts sitting in Georgia, affirmed the dismissal of the motion to vacate.

The Eleventh Circuit first noted that Section 12 requires a motion to vacate to be served “as prescribed by law for service of a notice of motion in an action in the same court.”  Federal Rule of Civil Procedure 5 therefore provides the relevant service requirements.  Because DRT’s April 30 service via the U.S. Marshall’s service was untimely, the question was whether DRT’s email of a courtesy copy of its brief on O’Neal’s counsel satisfied the requirements of Rule 5.  The court held it did not.

Rule 5(b)(2)(E) does permit service “by other electronic means that the person consented to in writing.”  But that consent must be express.  Because O’Neal did not expressly consent to service by email, DRT’s emailing of a “courtesy copy” did not comply with Rule 5.  Accordingly, DRT failed to effect service within three months, as required by FAA, § 12.

Importantly, the Court rejected DRT’s argument that O’Neal had consented to service by email by agreeing to arbitrate under the AAA Construction Rules.  The Court assumed, without deciding, that “the arbitration agreement can and does make the AAA Construction Rules applicable to post-arbitration proceedings like a motion to vacate.”  Nevertheless, the Court found that DRT faced an “insurmountable problem:”  AAA Construction Rule 44(b) permits service by email for “the notices required by these rules,” but “notice of the filing of a motion to vacate is not required by the AAA Construction Rules.  It is, instead, required by § 12 of the Federal Arbitration Act.”

Read the court’s full decision here.


Ninth Circuit Compels Arbitration with Non-Signatory When Claims Were “Intertwined” with Contract Containing Arbitration Clause.

Nurse’s statutory claims against non-signatory hospital were intertwined with her contracts with staffing agency.

Franklin v. Cmty. Reg’l Med. Ctr., No. 19-17570, 2021 WL 2024516 (9th Cir. May 21, 2021).

Arbitration agreements generally only bind their signatories.  But Franklin is a reminder that there are exceptions to this rule, and a signatory to an arbitration agreement may be bound to arbitrate claims against a non-signatory “under the FAA if the relevant state contract law allows the [non-signatory] to enforce the agreement.”

In Franklin, the Ninth Circuit Court of Appeals applied California principles of equitable estoppel to permit a hospital to compel arbitration of a nurse’s wage and hour claims, even though the hospital was not a signatory to the arbitration agreement between the nurse and the staffing agency that actually employed her.  This was a case, the court said, “where a party to an arbitration agreement attempts to avoid that agreement by suing a ‘related party with which it has no arbitration agreement, in the hope that the claim against the other party will be adjudicated first and have preclusive effect in the arbitration.’” It concluded, “[s]uch a maneuver should not be allowed to succeed ….’”

The plaintiff nurse, Isabelle Franklin, was employed by a staffing agency (USSI), with whom she had signed an agreement to arbitrate “all disputes that may arise out of or be related to [her] employment, including but not limited to the termination of [her] employment and [her] compensation.”  In 2017, the staffing agency assigned Franklin to work at the Community Regional Medical Center hospital in California.  As noted, the hospital was not a signatory to the arbitration agreement between Franklin and USSI.  In fact, the hospital had no direct contractual relationship with Franklin at all.

Franklin brought a class and collective action against the hospital, alleging that the hospital made nurses work during meal breaks and off the clock without pay, and failed to provide accurate wage statements or reimburse for travel expenses, in violation of the federal Fair Labor Standards Act and California labor laws.  Her complaint made no mention of the staffing agency.

In December 2019, the district court compelled Franklin to arbitrate with the hospital, finding her claims against the hospital were intertwined with her staffing agency contract, which provided for the resolution of disputes by arbitration.  Franklin appealed.

Under U.S. Supreme Court precedent, a non-signatory to an arbitration agreement may compel arbitration if allowed under applicable state contract law.  Under California law, a signatory to an arbitration agreement is equitably estopped from avoiding arbitration where: (1) its claims are “intimately founded in and intertwined with the underlying contract obligations;” and (2) the claims fall within the scope of the contract’s arbitration clause.  Here, the Ninth Circuit held both elements were met.  First, Franklin’s claim for unpaid wages was “intertwined with the employment relationship with the staffing agency,” and “Franklin cannot avoid arbitration simply because she has sued only the hospital and not [the staffing agency].”  The staffing agency was responsible for compensating Franklin for missed breaks and making her available for the time she alleged was off the clock, and it was the staffing agency, not the hospital, that was responsible for paying Franklin and setting her regular and overtime pay rates.  Second, the arbitration agreement was broadly worded to encompass “all disputes,” including those “based on … statute.”  Accordingly, Franklin was estopped from avoiding arbitration of her claims against the hospital, notwithstanding that the hospital was not a signatory to the arbitration agreement.

Read the court’s full decision here.

Tenth Circuit Holds That Grounds to Vacate Under Section 10 of the Federal Arbitration Act Apply To Nondomestic U.S.-Seated Arbitration.

But court affirms confirmation because Mexican court was not “competent authority” to set aside award for purposes of non-recognition under Article 5(1)(e) of the Panama Convention where arbitration was seated in Denver and governed by U.S. arbitration law.

Goldgroup Resources, Inc. v. DynaResource de Mexico, S.A. de C.V., 2021 WL 1432953 (10th Cir. Apr. 16, 2021).

In Goldgroup, the Tenth Circuit joined the Second, Third, Fifth and Sixth Circuits in holding that the grounds for vacatur under Section 10 of the FAA applied to international arbitration awards rendered in the United States or under U.S. arbitration law.  However, as explained below, the Court nevertheless held that the respondent failed to establish any of the narrow grounds for vacatur, and confirmed the award.

In 2006, Goldgroup and DynaResource, both non-US companies, entered into an option agreement, under which Goldgroup had the right to acquire a 50% equity interest in Mexican mining company, DynaMexico (the Option Agreement).  The Option Agreement contained a broad arbitration clause providing for the arbitration of “[a]ll questions or matters in dispute under this Agreement” under the rules of the American Arbitration Association (AAA) in Denver, Colorado.  The Option Agreement further provided that venue and jurisdiction for any dispute thereunder would be in Denver, although Mexican law applied “in respect to the shares of DynaMexico and the acquisition thereof.”

After Goldgroup exercised its option, the parties’ relationship quickly soured, and litigation in various fora, including Texas, Colorado and Mexico ensued.  As relevant here, in 2013, after DynaResource convened a secret shareholders’ meeting to issue additional shares in DynaMexico to itself, Goldgroup commenced an action in Mexico to invalidate that share issuance.

In March 2014, Goldgroup demanded arbitration and asserted several contract and tort claims under the Option Agreement against DynaResource.  DynaResource then commenced an action in Mexico City against Goldgroup and the AAA seeking an injunction on the basis that Goldgroup had waived its right to arbitrate by commencing the prior Mexican action concerning the share issuance.  The Mexico City court agreed and ruled that Goldberg had waived its right to arbitrate and the arbitration agreement was unenforceable.

Although the arbitrator rejected DynaResource’s application to terminate the arbitration based on the Mexico City court’s decision, DynaResource nonetheless ceased its participation. The arbitrator then issued a default award in which he ruled that: (i) the arbitration agreement was valid and enforceable; (ii) Goldgroup had not waived its right to arbitrate; and (iii) DynaResource had breached the Option Agreement.

Goldgroup moved to confirm the award in federal district court in Colorado.  DynaResource, in turn, sought to vacate the award under Section 10 of the Federal Arbitration Act (FAA), on the ground that the arbitrator had exceeded the scope of his authority by ruling on whether Goldgroup had waived is right to arbitrate.  Alternatively, DynaResource sought non-recognition of the award under Section 5(1)(e) of the Panama Convention (identical to Section V(1)(e) of the New York Convention).  Section 5(1)(e) permits an enforcing court to deny recognition to an award that “has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made.”  Relying on the Mexican choice of law provision, DynaResource argued that, the Mexico City court’s ruling that Goldgroup had waived its right to arbitrate prospectively annulled the subsequent award.  The district court rejected DynaResource’s motions for non-recognition or vacatur and confirmed the award and the Tenth Circuit Court of Appeals affirmed.

The Tenth Circuit first addressed Goldgroup’s threshold argument that, because this was a “nondomestic” arbitration, the grounds for vacatur under the FAA Section 10(a)(4) did not apply, and that the Panama Convention provided the exclusive grounds for refusing enforcement.  The court rejected this argument.

It concluded that through Article 5(1)(e), the Panama Convention “expressly contemplates that U.S. courts may apply U.S. arbitral law to awards rendered in or under the law of the United States.”  Because the arbitration was seated in Denver, DynaResource could seek vacatur under Section 10 of the FAA.

On the merits, however, the Court held that the arbitrator had not exceeded his authority under FAA, §10(a)(4).  By incorporating the AAA rules into their arbitration agreement, the parties “clearly and unmistakably” agreed to arbitrate arbitrability issues, which included waiver.

The court next rejected DynaResources’s argument under Article 5(1)(e) of the Panama Convention that the Mexico City court’s decision finding the arbitration agreement unenforceable effectively annulled the subsequent award.  The court held that the Mexico City court was not a “competent authority” to annul the award, because the arbitration was seated in Denver, Colorado and governed by U.S. arbitral law.  Relatedly, the court held, even if the Mexico City court was competent to annul the award, it applied the wrong law.  Article 5(1)(e) requires application of the law of the state in which the award was made, which means “the regimen or scheme of arbitral procedural law under which the arbitration was conducted, and not the substantive law of contract which was applied to the case.”  Here, that was U.S. law because the arbitration was seated in Denver.

Read the court’s full decision here.

Illinois Federal Court Upholds $54 Million Default Award Against Party who Abandoned Arbitration on Eve of Evidentiary Hearing. 

Party who voluntarily abandons arbitration is not denied fair hearing when tribunal proceeds in his absence. 

Bartlit Beck LLP v. Okada, No. 19-CV-08508, 2021 WL 949980 (N.D. Ill. Mar. 12, 2021).

This case is a reminder that parties that refuse to participate in properly noticed arbitration hearings before duly constituted tribunals do so at their own peril.

Japanese billionaire Kazuo Okada had retained Bartlit Beck in 2017 to represent him and his gaming company, Universal Entertainment Company, in a dispute with Wynn Resorts Ltd., a developer and operator of hotels and casinos.  Under the terms of the engagement letter, Okada would pay Bartlit Beck a success fee bonus of one-third of any recovery, up to $50 million.  The parties agreed that any fee disputes would be resolved in arbitration under the International Institute for Conflict Prevention and Resolution Rules for Administered Arbitration (the CPR Rules).  In 2018, Okada settled with Wynn Resorts for $700 million, thereby triggering the success bonus.  Okada failed to pay, and Bartlit Beck initiated arbitration proceedings.

For eight months, Okada fully participated in the arbitration, during which the parties exchanged extensive briefing and discovery.  In February 2019, the tribunal scheduled a seven-day evidentiary hearing set to begin on October 22, 2019.  At no point up until the eve of the hearing did Okada object to the arbitral process.

On the Friday evening before the Monday on which the evidentiary hearing was scheduled to begin, Okada’s counsel wrote to the panel, explaining that its client “recently informed me [counsel] that he is not attending the scheduled arbitration,” and requesting instructions from the panel on how it wished to proceed.  The panel responded that it would “certainly go forward on Monday with or without” Okada, and that his “failure to show up for a duly and long noticed hearing [was] material[ ] and may result in the Panel finding him in default.”  The panel also noted that CPR Rule 16 provided that, in the event Okada refused to participate, the “Tribunal may impose a remedy it deems just, including an award on default.”

Okada then responded by email that the agreement with Bartlit Beck was “invalid and therefore unenforceable.”  He also claimed that he had “become ill” and, “even if I were to agree to participate in the proposed arbitration, I am unable to do so due to my health.”  On Saturday morning, the panel asked the parties to prepare for argument as to the “appropriate remedy” for Okada’s nonattendance.  Okada’s counsel responded that Okada did not authorize them to attend that argument “because he rejects the validity of the engagement agreement and objects to the proceeding.”

The tribunal therefore refused to accept any new papers from Okada, finding he had forfeited his right to present any defenses, and stated that it would base its award on whether Bartlit Beck had met its burden of proof.  After the panel agreed to accept written submissions in lieu of a live hearing, Bartlit Beck submitted its final brief on Friday, November 1.  On Monday November 4, Okada’s counsel emailed the tribunal, requesting that the tribunal reschedule the hearing in the event counsel could convince Okada to commit to a date certain for a rescheduled hearing.  The tribunal rejected the request, finding “no good cause to do so,” given that Okada withdrew from the proceeding.  The tribunal subsequently issued a 59-page award, which considered Okada’s previously submitted defenses, and awarded Bartlit Beck $54 million in principal and interest.  The award also found that Okada’s “health is a transparently false excuse,” and his instruction to counsel not to attend “even before the Panel had decided whether they could present his defense in his absence, proves he had no intention of participating.”

Bartlit Beck moved to confirm the award in the United States District Court for the Northern District of Illinois.  Okada cross-moved to vacate, arguing that the arbitration panel had denied him a fair hearing under Article V(1)(b) of the New York Convention and Section 10(a)(3) of the Federal Arbitration Act (FAA) by (1) refusing to postpone the hearing despite Okada’s disclosure of a medical condition; and (2) refusing to hear Okada’s defenses as part of its written submission process.

As a preliminary matter, the court declined to consider whether a party may invoke Section 10 of the FAA to vacate an award governed by the New York Convention, because the outcome would be the same in both systems.  On the merits, the court denied Okada’s motion and confirmed the award.  First, the court found that Okada was not denied a fair hearing.  It noted that to vacate an award under either the New York Convention or the FAA, the movant must demonstrate that misconduct by the tribunal “amounted to a denial of a fair hearing,” and that the “court will not intervene in the Panel’s decision to proceed with the hearing if any reasonable basis for it exists.”  The court concluded that “the Panel responded reasonably when faced with Respondent’s last-minute antics.”

Nor did the tribunal’s refusal to consider Okada’s new evidence render the default award fundamentally unfair.  Rather, the tribunal’s decision was consistent with the CPR Rules, which provided for a default in the event the tribunal finds a party fails to comply with its orders “in a manner deemed material by the Tribunal.”  Here, the tribunal “reasonably concluded that Respondent voluntarily refused to participate in the arbitration and that Respondent’s proffered excuse was pretextual.”  Therefore, “because Respondent voluntarily walked away from the arbitration, he was not deprived of a fundamentally fair hearing when the Panel then resolved the case without Respondent’s input.”

The case is currently on appeal before the U.S. Court of Appeals for the Seventh Circuit.

Read the court’s full decision here.

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