Employees and Employers

Following are two interesting and recent federal court rulings related to arbitration.

Future Disputes are beyond Arbitral Authority
Minnesota Nurses Association v. North Memorial Health Care

After completing 30 years of service, Nurse Lynette Drake asked to be relieved of the obligation to work weekends. When her supervisor required her to report under a “needed-nurses” exception, Drake filed a grievance.

The arbitrator concluded that the exception was properly invoked. However, in order to ensure that Drake not be treated unfairly in the future, the arbitral award required that “from the date of this award, if the Employer invokes the “exception” proviso to compel qualifying nurses to work on weekends, the number of required weekends shall be equally shared (divided) among those qualifying nurses.”

The district court vacated the portion of the arbitrator’s award requiring that weekend shifts filled by qualifying nurses be divided equally among them. North Memorial appealed.

The United States Court of Appeals for the Eighth Circuit affirmed. Finding that the arbitrator exceeded his authority, the Court wrote, “The CBA has not delegated the arbitrator authority to resolve disputes not presented to him by the parties, and the extent of the dispute the parties have referred to arbitration is determined by the submission, not the CBA.” As the parties only submitted a single dispute about a past act, the arbitrator had no authority to fashion a remedy for hypothetical future disputes.

Employer Waived Right to Arbitrate
Messina v. North Central Distributing

Richard Messina sued North Central Distributing for terminating his employment contract after six months. Messina argued that the contract was for two years.

NCD removed the case to federal court. After several months, the parties filed a report with the court that mentioned negotiation and mediation, but not arbitration. Several months later, NCD moved to transfer venue. The lawyers for the parties were in frequent contact and arbitration was never mentioned.

Eight months after the filing of the case, NCD moved to compel arbitration pursuant to a clause in Messina’s employment contract. The district court denied the motion and NCD appealed.

The United States Court of Appeals for the Eighth Circuit affirmed. It found that NCD knew of its right to arbitrate, had acted inconsistently with that right (“substantially invoking the litigation machinery by…removing the case to federal court, filing an answer, participating in a pretrial hearing, filing a scheduling report which recommended a trial date and discovery deadlines, and filing a motion to transfer venue.”), and that these actions had caused prejudice to Messina who “spent considerable time and money obtaining new counsel, partaking in pretrial hearings, and responding to the transfer motion.”

Fees & FINRA

Following are two interesting and recent federal court rulings related to arbitration.

Award of Attorney’s Fees Associated with Motion to Confirm Reversed on Appeal
Zurich American Insurance (as subrogee of Vinmar International) v. Team Tankers

Vinmar International chartered a ship from Team Tankers (TT). When the chemical shipped from Houston arrived in South Korea, it showed signs of yellowing, reducing its value.

Vinmar initiated arbitration pursuant to the charter agreement and the majority of the arbitration panel held that Vinmar was not entitled to relief. Vinmar moved to vacate the award on several grounds – manifest disregard of the relevant law and because the panel chairman had been diagnosed with a brain tumor prior to the initiation of arbitration, which he never disclosed and from which he died during the post-award proceedings.

The district court held that the panel had not manifestly disregarded the law, that the panel chair had not been guilty of “corruption or misbehavior” and that TT was entitled to “all costs of suit and attorneys’ fees incurred,” including the costs associated with moving to confirm. Vinmar appealed.

The United States Court of Appeals for the Second Circuit affirmed the district court’s confirmation of the award, concluding that Vinmar had failed to meet its “heavy burden” that the panel had manifestly disregarded the law. As to the failure to disclose the tumor, the Court wrote, “if an arbitrator’s failure to comply with arbitral rules, without more, could properly be considered ‘corruption’ or ‘misbehavior,’ the FAA’s grounds for vacatur would be precisely as varied and expansive as the rules private parties might choose to adopt.”

However, the Court found that the district court erred in awarding fees and costs incurred seeking to confirm the award. The Court found that the general rule that parties bear their own costs was not undone by the charter contract, because the contract authorized a fee award against a party that breached the charter as part of the non-breaching party’s damages. In this case, there was no finding or suggestion that Vinmar breached.

As to TT’s argument that the award was justified by bad faith during litigation, the court wrote “[p]erhaps something in the record could support a fee award under [the federal bad faith standards, 28 U.S.C. sec. 1927], but we have not found it, and the respondent carrier has made no effort to identify it. Accordingly, we must reverse the District Court’s award of attorney’s fees and costs.”

Non-FINRA Arbitrators Allowed if Specified in Pre-Dispute Employment Agreement
Credit Suisse Securities v. Tracy

John Tracy and other Los Angeles-based financial advisors entered into employment agreements with Credit Suisse. Those agreements contained provisions requiring an internal grievance procedure followed by mediation, followed by binding arbitration in the event none of the other non-binding processes produced a settlement.

A dispute arose regarding amounts owed under a compensation hedge program and when the internal grievance process and mediation didn’t produce a result, Credit Suisse filed a demand for arbitration with an outside provider. Meanwhile, Tracy and his peers filed a demand with FINRA. Credit Suisse commenced an action to stay or dismiss the FINRA arbitration. Tracy argued that FINRA rules require arbitration with one of its own panels, but the district court granted Credit Suisse’s petition and Tracy appealed.

The United States Court of Appeals for the Second Circuit affirmed. It looked to FINRA rule 13200, which states, “Except as otherwise provided in the Code, a dispute must be arbitrated under the Code if the dispute arises out of the business activities of a member or an associated person and is between or among … Members and Associated Persons.”

After finding a conflict between the employment agreement and the FINRA rules, the Court turned to the question of whether the requirement of application of FINRA rules, including that the arbitration be conducted in a FINRA forum, could be waived by a pre-dispute agreement. The Court reviewed prior cases related to waiver of other FINRA rules, other arbitration provisions inside and outside the context of employment and concluded “Our case law leads to the conclusion that a pre-dispute private agreement to arbitrate before a non-FINRA arbitral forum is enforceable.”

Federal Arbitration Case Update | The Powers that Be

Following are two interesting and recent federal court rulings related to arbitration.

Arbitrator Has Authority to Rule on Whether He Can Change His Mind
United Brotherhood of Carpenters and Joiners v. Tappan Zee Constructors

Richard Birke

Richard Birke

When the general contractor for the rebuilding of the Tappan Zee Bridge gave a portion of the job to the carpenters (at $70/hr.) rather than the dock builders (at $94/hr.), a jurisdictional dispute arose between two unions. The two unions agreed that the dock builders would get the work, but the GC disagreed and brought the case to arbitration pursuant to the plan agreement covering the project.

In his interim award, the arbitrator stated that he planned to apply the “local standards” test in the plan agreement and that the outcome would favor the dock builders. However, in his final award, nine days later, the arbitrator stated that there were no local standards and that the GC was free to employ the lower-wage carpenters. The district court confirmed the award and the carpenters appealed.

The United States Court of Appeals for the Second Circuit affirmed. The contract governing the arbitration required an interim award and a later final award. By definition, the interim award was not a final award and the arbitrator was free to change his mind based on newly heard evidence or reconsideration of the matter. Moreover, the contract’s language was sufficiently ambiguous to allow the arbitrator to determine the circumstances that would give rise to a permissible re-visitation of his interim award. “It was because he concluded that he had initially failed to consider certain evidence under the Section 8 criteria that he rendered a written decision different from his short-form decision.”

The Court concluded, “Because we must defer to the arbitrator’s interpretation of the rules by which the parties agreed the arbitration would be conducted, and because the arbitrator interpreted the rules as allowing him to fashion the second decision as he saw fit, the order of the District Court confirming the May 13th Award and vacating the May 4th Award is affirmed.”

Arbitrator Who Held He Had Exceeded His Powers in Prior Award Exceeded Them Again in Issuing Second Award
IBEW Local 824 v. Verizon Florida

The CBA between Verizon Florida and its union had a provision that allowed members with one-year seniority to bump existing workers with certain exceptions. When bumps were denied to certain workers, the union sought arbitration.

The theory presented by the union was based on a clause that required a bump be given if the worker needed only “minimal additional training.” The company maintained that was in controversy.

The arbitrator interpreted the “minimal additional training” requirement to mean four weeks or less. As many of the would-be bumpers in the case in arbitration required more, the award was in favor of the company.

The union then sent a letter to the arbitrator asking for a “clarification.” The union argued that two additional would-be bumpers whose bumps were denied fell into the exact categories as the two workers whose bumps were allowed. The company argued that the award be rewritten to exclude consideration of the “previously held” aspects of the case.

The arbitrator then issued a substitute award in which he stated that he had exceeded his powers in the original award and he struck out the portions of the award dealing with the “previously held” clause. The union moved to vacate and when that motion was denied, it appealed.

The company argued that the arbitrator was free to change the opinion, functus officio didn’t apply in a labor context and that the union invited the substitute opinion. However, the U.S. Court of Appeals for the Eleventh Circuit found that the union asked a narrow question that assumed that the award was valid, e.g., if the first two got it, why not the second two? The Court found that the company responded with a full frontal attack on the award itself.

The Court determined that the award was proper in the first instance, and that the arbitrator exceeded his powers by issuing the substitute award.

The company argued that the award be rewritten to exclude consideration of the “previously held” aspects of the case.

The arbitrator then issued a substitute award in which he stated that he had exceeded his powers in the original award and he struck out the portions of the award dealing with the “previously held” clause. The union moved to vacate and when that motion was denied, it appealed.

The company argued that the arbitrator was free to change the opinion, functus officio didn’t apply in a labor context and that the union invited the substitute opinion. However, the U.S. Court of Appeals for the Eleventh Circuit found that the union asked a narrow question that assumed that the award was valid, e.g., if the first two got it, why not the second two? The Court found that the company responded with a full frontal attack on the award itself.

The Court determined that the award was proper in the first instance, and that the arbitrator exceeded his powers by issuing the substitute award.

 

How Likely Am I to Win? Risk, Uncertainty & the Turkey Illusion

Richard Birke

Richard Birke

By Rich Birke

When parties are faced with an attractive settlement offer, they frequently wish to compare the offer to what they might get at trial, which is the product of the odds of winning times the value of the verdict or award.   Naturally, they ask their lawyer “how likely am I to win?”

What kind of answer is called for? Answers to questions like this come in two flavors.  Flavor one – you know the odds – is called decision-making under conditions of RISK.  Flavor two – you don’t know the odds – is called decision-making under conditions of UNCERTAINTY.  The two aren’t at all alike!  The first is more like a slot machine or a lottery.  The second is more like picking stocks, predicting earthquakes and making most business decisions.  Confusing the one for the other can be a disaster.

In his brilliant book Risk Savvy, How to Make Good Decisions, prolific author and scientist Gerd Gigerenzer describes the dangers of confusing one kind of decision with the other.  He says risks can be calculated when there is (1) low uncertainty – a predictable and stable situation (2) few alternatives – not too many factors to estimate (3) a high amount of data available to make these estimations.

However, since at least the 1700s, we’ve known that people prefer risky decisions to uncertain decisions – so much so that they will turn uncertain decisions into risky decisions in their minds, even when reality is different.  An example of this is the “turkey illusion.”

If you want to figure out what is likely to happen tomorrow, you can look at what’s happened in prior days.  If you are in the Gobi Desert and you want to know whether it will rain tomorrow, you can look at the prior day and the day before that, and that data will help you determine tomorrow’s weather.  This “rule of succession” means the past is predictive of the present.

But not for a turkey.  If every day the farmer feeds and pets the turkey, the turkey could calculate the odds starting with the fourth Friday in November and conclude “I’ve been fed and petted 159 days in a row – the odds of being fed and petted on the 160th day are 160/161 or 99+%.”  And that logic will hold true all the way to 364/365…and then Thanksgiving will come and the poor turkey will have logically concluded that morning that it has nothing to fear – because a savvy risk-taker would deem the odds of death as vanishingly small.

Gigerenzer attacks this topic from many vantage points. He analyzes leadership decisions and the work of CEOs (ch. 6), medical decisions and the ploys used by and on doctors (ch. 9), consumer decision-making and the effects of misleading ads (ch. 5) and more.  Each time, there are simple tips and rules of thumb to help navigate through these sometimes murky waters.

Can a lawyer predict with accuracy the outcome of a potential case? Let’s analyze that question further, together, in the days to come.  For now, I strongly recommend you go out, buy and read Risk Savvy.  It might just save your neck come Thanksgiving.

Risk Savvy: How to Make Good Decisions is available from Viking Press and was published in hardback in 2014.