By Richard T. Seymour
Copyright © 2010, Richard T. Seymour
Positive Software Solutions, Inc. v. New Century Mortgage Corp. et al. v. Camina
Decided: September 13, 2010
By: U.S. Court of Appeals for the Fifth Circuit (Louisiana, Mississippi, and Texas)
and 2010 WL 353001
Issue: When —
(a) a Federal court orders arbitration pursuant to an arbitration agreement,
(b) and not as part of a court-developed procedure under a local court’s Alternative Dispute Resolution procedures or a special order in the case,
(c) and counsel commit misconduct in the arbitration,
(d) and the arbitrator had authority to issue sanctions for that misconduct,
Does the Federal court have inherent authority to issue sanctions for the misconduct?
Answer: No. The district court’s sanction of $10,000 against attorney Camina, representing part of Positive Software’s attorneys’ fees, was reversed.
Limitations: The court’s holding is:
— Limited to misconduct occurring in the arbitration itself, not violation of a court order;
— Limited to arbitration under an arbitration agreement, and not as part of a court-annexed procedure; and
— Limited to misconduct occurring outside of discovery proceedings occurring outside the arbitration, and under the supervision of the court.
The court of appeals held that the district court did not have inherent authority to impose sanctions simply because of its order compelling arbitration. Quoting an earlier decision, the court stated: “Inherent authority ‘is not a broad reservoir of power, ready at an imperial hand, but a limited source; an implied power squeezed from the need to make the court function.'”
The appeals court rejected Positive Software’s argument that a court has broader supervisory powers over misconduct in arbitration proceedings when it orders arbitration than when the parties voluntarily proceed to arbitration, and held that such a perversely asymmetric approach cannot be justified.
The court of appeals also held that the sanctions order interfered with the authority given to the arbitrator under the arbitration agreement, as well as with the limited role of the courts under the Federal Arbitration Act.
“Finally, and perhaps most importantly, the sanctions order threatens unduly to inflate the judiciary’s role in arbitration. The FAA provides for minimal judicial involvement in resolving an arbitrable dispute; the court is limited to only a few narrowly defined, largely procedural tasks. But by using its power to sanction, a court could seize control over substantive aspects of arbitration. The court would, in effect, become a roving commission to supervise a private method of dispute resolution and exert authority that is reserved, by statute, caselaw, and longstanding practice, to the arbitrator. That supervision is inconsistent with the scope of inherent authority and with federal arbitration policy, which aims to prevent courts from delaying the resolution of disputes through alternative means.”
See p. 7 of the slip opinion.
Lessons and Questions for All:
1. Does the Arbitrator Have Authority to Impose Sanctions?
Some of the rules of arbitration services providers do not make any specific reference to the arbitrator’s having the authority to impose sanctions. However, some courts have held that broad arbitration clauses, such as a clause stating that any disputes between the parties shall be resolved by arbitration, give arbitrators the inherent authority to impose sanctions, in order to make the final award meaningful. E.g., ReliaStar Life Ins. Co. of N.Y. v. EMC Nat. Life Co., 564 F.3d 81 (2d Cir. 2009). The clause held in that case sufficient to support a multi-million dollar award for sanctions stated:
“In the event of any disputes or differences arising hereafter between the parties with reference to any transaction under or relating in any way to this Agreement as to which agreement between the parties hereto cannot be reached, the same shall be decided by arbitration.”
Construing this provision, the U.S. Court of Appeals for the Second Circuit (covering New York, Connecticut, and Rhode Island) stated at p. 86 in the ReliaStar Life Insurance case:
“Consistent with this principle, we here clarify that a broad arbitration clause, such as the one in this case, see Coinsurance Agreements § 10.1, confers inherent authority on arbitrators to sanction a party that participates in the arbitration in bad faith and that such a sanction may include an award of attorney’s or arbitrator’s fees.”
Not all courts may agree; there was one dissenter from this decision. Check your local law.
2. What About State Law?
New York law applies to State-law causes of action in that State, and New York forbids punitive awards in arbitration. The Second Circuit Court of Appeals held in the ReliaStar Life Insurance case that the sanctions award did not violate this provision, because the sanction only involved an award of fees and this was compensatory, not punitive.
3. Does the Type of Sanction Matter?
The type of sanction does matter. A compensatory sanctions award, shifting the injured party’s attorney’s fees or share of the arbitration fees to the misbehaving party, is easy for a court to uphold.
A sanction like civil contempt, such as a daily fine for noncompliance with an order, may be rejected by a court. For example, Certain Underwriters at Lloyd’s London v. Argonaut Ins. Co., 264 F.Supp.2d 926, 943-44 (N.D.Calif. 2003), rejected a $10,000-a-day fine against a party for failure to comply with an interim order.
4. Is it Wise to Have Disputes About Sanctions?
Since arbitration is a matter of contract, the parties can always agree to allow such authority explicitly, or to limit such authority, if they desire to do so. If the arbitration is over State-law causes of action, the parties should keep State-law requirements in mind.
The parties should keep in mind that, even in arbitration, litigation over sanctions can consume time and resources that might be better spent on the merits. In hard-fought cases in which one or both sides believe they have cause to question the other side’s integrity, it may make sense to provide for the authority of the arbitrator to impose sanctions where justified.
5. Suggestions for Drafting and Negotiating Arbitration Agreements
In drafting and negotiating arbitration agreements, the parties should think about whether they should make clear whether the arbitrator has the authority to issue sanctions. If so, the parties should discuss what type of sanctions the arbitrator can issue. They should also consider whether to provide a clear standard, such as by reference to Federal-court or State-court standards.
When the agreement is unclear and the parties or their counsel are extremely contentious, a party might raise the question in the initial case scheduling conference. Think about this ahead of time, and discuss the question with your adversary ahead of time.
If the misconduct is serious, and is not discovered until the arbitration is over, keep in mind that the injured party can petition the AAA or other arbitration services provider to re-open the proceedings so that sanctions can be requested.
- Copyright © 2010, Richard T. Seymour.
LAW OFFICE OF RICHARD T. SEYMOUR, P.L.L.C.
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Voice: 202-862-4320 Fax: 800-805-1065 Cell: 202-549-1454Listed on the Commercial Roster and the Employment Roster, American Arbitration Association. The views expressed herein are my own, and not those of the American Arbitration Association.Mr. Seymour arbitrates, mediates, and advocates. When he is advocating, he negotiates on behalf of individual clients and he litigates on behalf of individuals and class representatives in both collective actions and class actions. He represents primarily executives, professionals, and plaintiffs, but also represents the occasional unjustly-accused employer or individual. His web site is www.rickseymourlaw.com.