Courts cannot prevent parties from filing baseless challenges to arbitration awards, but they can try to discourage them. The Eleventh Circuit recently gave fair warning that a party who loses at arbitration and then drags the dispute through the court system without "an objectively reasonable belief it will prevail" may be required to pay sanctions. Perhaps a "realistic threat of sanctions" will help temper the "never-say-die attitude" that leads some parties to view the arbitrator as just "a first stop along the way" rather than the final decision maker, the Court stated. See B.L. Harbert International, LLC v. Hercules Steel Co., 2006 WL 462368 (11th Cir. 2006).
The Court’s warning came in a case in which the party on the short end of an arbitration award in a construction contract dispute filed a motion to vacate the award, contending that the arbitrator had shown a manifest disregard of the law. The Eleventh Circuit declined to recognize "manifest disregard of the law" as an appropriate reason to vacate an award until 1997, when it joined all but the Fifth Circuit in allowing review on that ground. See Montes v. Shearson Lehman Brothers, Inc., 128 F. 3d 1456 (11th Cir. 1997). If Harbert is any indication, at least one member of the Montes panel may now regret that decision. Judge Carnes, who authored the Harbert opinion and also sat on the Montes panel, wrote a separate concurring opinion in Montes to emphasize that the decision in that case was very narrow and turned on "the unusual facts presented." The party who prevailed at the arbitration in Montes had conceded that the law did not support its position and had expressly urged the panel to disregard the law, a fact that was explicitly noted in the arbitrators’ award. Nothing in the record suggested that the arbitrators had rejected the request to disregard the law, and the evidence to support the award was marginal at best.
In Harbert, the facts were "not even within shouting distance of the Montes exception," Judge Carnes wrote. 2006 WL 462368 at *6. At most, clear legal error was shown, and that was simply not enough. Before an arbitrator’s decision may be overturned based on the manifest disregard ground, there must be a showing that "the arbitrator actually recognized a clear rule of law and deliberately chose to ignore it." Id. Although that showing had not been made in Harbert, the Court decided not to impose sanctions in this case, primarily because the parties had not had the benefit of the notice and warning that the Harbert opinion provides. In the future, however, the Court is "ready, willing and able to consider imposing sanctions in appropriate cases." Id. at *9.
Another reason that sanctions were not imposed in Harbert was that the other side had not asked for them in either the district court or the Court of Appeals. Although a court can raise the issue on its own initiative, sanctions are more likely to be awarded in an appropriate case if the party who is defending the arbitration award files a motion for sanctions. At the district court level, Rule 11 of the Federal Rules of Civil Procedure and 28 U.S.C. § 1927 are available; at the appellate level, Rule 38 of the Rules of Appellate Procedure provides an additional avenue when a frivolous appeal is filed.
Courts in other circuits have imposed sanctions when arbitration awards have been challenged without adequate grounds. For example, in Dominion Video Satellite, Inc. v. EchoStar Satellite L.L.C., 430 F. 3d 1269 (10th Cir. 2005), EchoStar opposed confirmation of the award and moved to vacate even though there was no evidence that the arbitrators had exhibited a "willful inattentiveness to the governing law." Moreover, EchoStar’s attorneys insisted on filing lengthy briefs at every stage of the arbitration and court proceedings, making the same meritless arguments over and over again, while insisting that they were simply preserving their arguments for appeal. Sanctions were deemed appropriate under 28 U.S.C. § 1927 because the behavior of EchoStar’s attorneys was both "unreasonable and vexatious," and under FRAP Rule 38 because EchoStar’s appeal of the confirmation of the award had been frivolous. See also Executone Information Systems, Inc. v. Davis, 26 F. 3d 1314 (5th Cir. 1994) (recognizing propriety of awarding attorneys’ fees and costs where challenge to award is frivolous or without legal justification; standard not met in this case); Ball-Foster Glass Container Co. v. American Flint Glass Workers Union, 354 F. Supp. 2d 839 (N.D. Ind. 2002) (attorneys’ fees may be awarded when challenge to arbitration award is frivolous or has no merit).
In Harbert, the Eleventh Circuit has sent a clear signal that it intends to do what it can to support the pro-arbitration policy of the Federal Arbitration Act. If that means imposing sanctions on those who treat arbitration as just one more layer in a protracted legal battle, the Court is prepared to take that step. The lower courts in Georgia, Florida and Alabama can be expected to follow suit.
© 2006 Sutherland Asbill & Brennan LLP. All Rights Reserved.
This article is for informational purposes and is not intended to constitute legal advice.
