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Arbitrators' Decisions Stand, "Good, Bad, or Ugly"

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Posted Aug 5, 2013

The United States Supreme Court and the Minnesota Court of Appeals recently decided cases that re-affirmed the broad authority of arbitrators and the limited opportunities available to challenge an arbitrator’s decision. The decisions offer a good opportunity to consider the use of arbitration clauses in contracts.

In Seagate Technology v. Western Digital, the parties participated in an arbitration involving a claim for theft of trade secrets. Seagate claimed that a departing employee improperly took valuable trade secrets to its competitor, Western Digital.

The arbitrator found that the employee had fabricated evidence to be used in the arbitration. As a sanction, the arbitrator granted an award in favor of Seagate on three important trade secret issues that were connected to the employee’s fabrication of evidence. This portion of the award amounted to approximately $530,000,000 in damages in favor of Seagate.

After the arbitration, Seagate went before the Hennepin County District Court to convert the arbitration award to a civil judgment. Western Digital sought to vacate the arbitrator’s award on the basis that the arbitrator exceeded his authority in granting sanctions.

The Hennepin County District Court vacated the arbitration award and ordered a new arbitration, finding that the arbitrator had exceeded his authority in awarding sanctions. Seagate brought the case to the Minnesota Court of Appeals.

The Minnesota Court of Appeals found that the district court committed error in overturning the arbitrator’s decision. The Court of Appeals stated that arbitrators have inherent authority to sanction parties that participate in an arbitration in bad faith. The Court of Appeals repeated another fundamental point in arbitration law, which is that a court may not overturn an arbitrator’s award simply because the court disagrees with the arbitrator’s decision.

In another very important case, the United States Supreme Court supported the concept that arbitrators’ decisions cannot be challenged as long as the arbitrator is interpreting the dispute brought to the arbitrator by the parties.

In Oxford Health Plans vs. Sutter, a physician had provided medical services to members of Oxford Health Plan’s network. The physician started a lawsuit on behalf of himself and proposed class members claiming that Oxford had failed to make full and prompt payment to the physicians under contract with Oxford. Sutter’s contract with Oxford contained a broad arbitration clause that mandated arbitration of any dispute arising out of the physician’s agreement with Oxford.

Oxford made a motion to compel the arbitration of Sutter’s claims. The arbitrator reviewed the arbitration clause and decided that Sutter’s case could include class action claims. Disagreeing with the arbitrator, Oxford began a case in federal court, arguing that the arbitrator had exceeded his authority in allowing Sutter’s class action claims to move forward in arbitration. After several stages of appeals, the United States Supreme Court took on this case.

In an instantly classic opinion authored by Justice Elena Kagan, the Supreme Court restated federal law that an arbitrator’s decision may not be overruled by a court if the decision “even arguably construes or applies the contract, regardless of the Court’s view of the (de)merits of the decision.” The Supreme Court found that the arbitrator in Oxford Health did exactly what the parties had requested: that the arbitrator consider the parties’ contract and decide whether it reflected an agreement to permit class claims in the arbitration. The Court found that the Federal Arbitration Act permits courts to overturn an arbitrator’s decision “only when the arbitrator strayed from his delegated task of interpreting a contract, not when he performed the task poorly.”

The Oxford Health opinion concluded that it is the arbitrator’s construction of the contract that was bargained for by the parties and, as long as the arbitrator’s decision concerns his interpretation of the contract, the courts have no business overruling the arbitrator because their interpretation of the contract is different. As Judge Kagan memorably stated: “the arbitrator’s construction holds, however good, bad, or ugly.”

These important cases emphasize a fundamental concept of arbitrations. The arbitrator’s decision is not subject to court challenge as long as the arbitrator rules on the dispute defined by the arbitration clause. Courts are not permitted to interfere with an arbitrator’s decision even if the courts disagree with the arbitrator’s decision with respect to either facts or the law. However, courts can challenge an arbitrator’s decision based on fraud, corruption, or if an arbitrator rules on a question not covered by an arbitration clause.

The lesson to be taken from these cases is that arbitration clauses are contractual agreements between the parties to submit disputes to an arbitrator. An arbitrator’s decision will be final and binding regardless of issues pertaining to the arbitrator’s findings of fact or the law. As the Supreme Court said in Oxford Health Plans, “In sum, Oxford chose arbitration, and it must now live with that choice.”

 Contact the Business Litigation lawyers at Messerli & Kramer if you have questions about including an arbitration clause in a contract, or if you are involved in a dispute that may be covered by arbitration.

Case cites

Seagate Technology LLC v. Western Digital, 834 N.W.2d 555 (Minn. Ct. App. 2013)
Oxford Health Plans v. Sutter, 133 S. Ct. 2064 (2013)

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