Arbitration: Idaho Supreme Court Holds Contract Supercedes Statute in Awarding Attorney (Web)
July 27, 2005
Idaho: Supreme Court Holds Contract Supercedes Statute in Awarding Attorney’s Fees and Determining Applicable Law.
In Moore and Mednat Inc. v. OmniCare Inc., Docket No. 30244/30245
(Idaho Supreme Court July 22, 2005)(available at http://www.isc.idaho.gov/opinions/moore.pdf), Moore, Mednat, and Omnicare appealed from a state district court decision confirming in part and vacating in part an arbitration panel decision pertaining to an asset purchase agreement and an employment agreement between the parties. Both sides sought attorney’s fees on appeal. Chief Justice Gerald F. Schroeder wrote the opinion, reversing in part and affirming in part the decisions of the district court, which is the state’s trial court.
Pharmaceutical company Omnicare, which is based in Covington, Ken., purchased Mednat, an Idaho pharmaceutical and health care equipment supply company, owned by Moore and a partner, in 1997. The asset purchase agreement controlling this transaction included an “Earnings Holdback” clause providing that Omnicare would pay Mednat an additional amount, provided that the company earned a certain profit over a four-month period. The agreement also contained an arbitration clause requiring binding “baseball arbitration,” where both parties would submit their proposed awards and the arbitrator would choose among them, rather than creating a compromise award.
Separate agreement provisions required that
?“Fees and expenses of the arbitration shall be paid by the parties against whom the arbitrator rules. ...” and
?“Each party in any arbitration proceeding commenced hereunder shall bear such party's own costs and expenses (including expert witness and attorneys' fees) of investigating, preparing and pursuing such arbitration claim.”
The agreement also provided that Idaho law would control any dispute. In a separate, but similar, employment agreement, Omnicare agreed to pay Moore $110,000 annual base compensation for five years, to continue as Mednat's chief operating officer.
In 2000, Omnicare representatives informed Moore they were closing Mednat and terminating his employment. They did not give Moore written notice, so he moved to arbitrate under the employment agreement as improperly terminated without cause.
Omnicare counterclaimed for indemnification for damages resulting from Medicare payments made on Moore's behalf, and for breach of contract in Moore's alleged failure to use “best efforts” in his Mednat duties. Moore then amended his claim, adding Mednat as a party and including a new claim for damages under the asset purchase agreement’s Earnings Holdback provision.
The arbitration panel granted Moore summary judgment on the employment agreement issue, awarding Moore $247,500 in damages, in January 2003. At the same time, it awarded Mednat $400,000 in damages on the earnings holdback claim.
On April 3, 2003, the panel made its final award, granting prejudgment interest in the amount of $205,282, costs of $26,688, and $130,000 in attorney fees, in connection with the earnings holdback claim.
Additionally, the panel confirmed its January 2003, interim award of prejudgment interest to Moore on the employment agreement claim. The panel denied Moore's treble-damages request, and attorney fees, on the employment agreement claim. Moore filed a petition for an order to confirm and modify the arbitration award in district court, alleging that the arbitration panel had improperly failed to award treble damages, costs and attorney fees as mandated by Idaho Code §§ 45-615(2), 12-120(3) and 12-121 on the employment agreement claim.
Omnicare paid the employment agreement claim award, including prejudgment interest, and the $400,000 principal due on the earnings holdback claim. But it filed a petition to vacate and confirm the Mednat arbitration award on the basis that the panel had exceeded its scope of authority in awarding prejudgment interest, costs and attorney fees on the earnings holdback claim.
The district court granted Omnicare's petition to vacate the panel's award of attorney fees related to the earnings holdback claim, finding the award exceeded the scope of the panel's authority. The district court denied all of the claims in Moore's petition.
Both parties appealed, both seeking attorney’s fees, and the Idaho Supreme Court accepted the case in order to resolve the issues of whether the Idaho Uniform Arbitration Act or the Federal Arbitration Act governed the parties' contract in arbitration, and whether the arbitrators exceeded their authority in any part of the award or denial of requested relief by the parties.
According to the opinion, under the Idaho UAA, a district court may vacate an arbitrator's award only where: (1) the award was procured by corruption, fraud or other undue means; (2) there was evident partiality by an arbitrator; (3) the arbitrators exceeded their powers; (4) the arbitrators refused to postpone the hearing to the prejudice of a party; or (5) there was no arbitration agreement and the party did not participate in the hearing without objecting. The Supreme Court applied this strict standard of review.
Wrote Chief Justice Schroeder, “where parties have expressly agreed that Idaho law will govern arbitration, the Idaho UAA, not the FAA, applies as the substantive law in arbitration,” consistent with the U.S. Supreme Court's holding that the FAA's "pro-arbitration policy does not operate without regard to wishes of contracting parties," Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 57-58 (1995)(citations omitted) and that " 'just as [parties] may limit by contract issues which they will arbitrate, so too may they specify by contract the rules under which that arbitration will be conducted.’” [Citation omitted.]
Moore argued that Idaho Code § 7-901 prevents application of the Idaho UAA to contracts between employers and employees. However, this interpretation of I.C. § 7- 901 ignores a clear exception, the Court noted, where the parties have agreed Idaho law will govern their employment agreement. Since Section 10.8 of the asset purchase agreement stated that it would be "governed by and construed and enforced in accordance with, the laws of the State of Idaho," the UAA is the governing law, rather than the FAA.
The Supreme Court concluded that the district court properly vacated the arbitration panel's award of attorney fees on the basis that the award exceeded the arbitration panel's scope of authority. An arbitrator's powers stem from the parties' agreement, and Section 10.9(b) of the agreement required that the parties bear their own arbitration costs and fees, including specifically attorney fees.
The panel's award of attorney fees on the earnings holdback claim contravened this express language and therefore was beyond the scope of the arbitrator's authority. “It is beyond the scope of an arbitrator's authority to award attorney fees unless there is a contractual agreement for such an award.” I.C. § 7- 910(2004).
Furthermore, the Supreme Court had the authority to hear claims on this issue because the district court held that "an award of attorney fees was not within the panel's power to award absent a contractual provision" and that "there was a contractual provision and it provided just the opposite." By invoking the language of I.C. § 7- 910, the district court made the issue one that could be considered by the Supreme Court.
Having dismissed the FAA as governing authority--although not before pointing out that the FAA would also require supporting the contractual ban on awarding attorney’s fees—Chief Justice Schroeder moved on to the argument under the rules of the American Arbitration Association, which were implicated in the asset purchase agreement and the employment agreement. “AAA Rule 43 allows an arbitrator to award attorney fees where the parties have either (1) requested such an award or (2) the award is authorized by law or agreement.”
Idaho code would allow for the grant of attorney’s fees. However, the asset purchase agreement clearly states that AAA rules govern procedural rather than substantive issues. Idaho law, which includes the UAA, applied to interpretation of the parties' contract terms under § 10.7 of the agreement. Thus, application of AAA Rule 43 to this case is inappropriate, and the contractual limitation on attorney’s fees stands.
Furthermore, even if the Court applied AAA Rules to the substantive issues, AAA Rule 2 requires arbitrators to enforce the parties' agreed contract terms. Ultimately, Moore and Mednat failed in their attempts to “use the parties' baseball arbitration provision as a means to circumvent the contract terms.”
Although § 10.9(a) required the arbitrators to choose one or the other of the proposed forms of relief, the arbitrators also had the inherent power to strike portions of the proposed awards which were impermissible under the parties' contract. The panel struck Moore's request for attorney fees and treble damages in the final award on the employment agreement claim; it should have similarly struck Mednat's request for attorney fees on the earnings holdback claim as this relief clearly contradicted the asset purchase agreements’ sections 10.9(a)-(b). The Court upheld the district court’s decision to vacate the panel's award of attorney fees on the earnings holdback claim.
The Supreme Court did not agree with the trial court’s affirmation of the panel's award of costs on the earnings holdback claim, however, pointing out, “Section 10.9(b) of the Asset Purchase Agreement required the parties to bear their own fees and costs of arbitration. The panel's decision to award costs directly contradicts this express language and was beyond the scope of the arbitrator's authority under I.C. § 7-912(a)(3).”
Interpreting the arbitration award with the proper standard of deference and examining the contract, the Court noted, “Section 10.9(c) stated that the arbitration panel may award only the ‘amount due’ as calculated by the arbitrator in any dispute involving the Earnings Holdback provision. Unlike § 10.9(b), which specifically prohibited an award of costs and/or attorney fees, § 10.9(c) did not preclude the panel from making an award of prejudgment interest. If the panel determined that the "amount due" to Mednat on the Earnings Holdback claim included any interest owing on the claim, this interpretation would be consistent with the express language of § 10.9(c),” making it a reasonable conclusion that the arbitration panel had the authority to award prejudgment interest on the earnings holdback claim.
The Court held that the arbitration panel properly determined the trebling issue, and supported the district court in affirming its decision not to award treble damages and attorney fees on Moore’s employment claim.
The Court also pointed out that because the FAA “does not apply to this case this Court does not need to consider the [rigorous] ‘manifest disregard’ standard of review of the panel's decision to deny a request for treble damages.” The damages that Moore seeks were part of the Employment Agreement’s liquidated damages clause, not unpaid wages. Moore's damages most closely resemble a claim for "future wages", which the Court of Appeals has previously determined do not fall within the purview of I.C. § 45-615, which would require the trebling of any wage claim where there is a violation of the Idaho Wage and Hour laws. Since Moore’s “wage claim” does not constitute unpaid but already earned wages, the district court properly affirmed the panel's denial of treble damages on Moore's Employment Agreement claim.
The Court awarded Omnicare attorney’s fees for its defense of Moore’s appeal only, explaining, “The Court has interpreted I.C. § 12-121 to allow for the award of reasonable attorney fees where an appeal has been pursued and/or defended frivolously, unreasonably or without foundation,” and “Moore has done little more than ask this Court to re-evaluate the well-reasoned opinion of the district court,” a request sufficiently frivolous to mandate the compensation of Omnicare for their attorney’s fees in defending it. No other attorney’s fees were awarded to either side, however, either on Omnicare’s cross-appeal or Moore and Mednat’s Asset Purchase appeal.
The Court concluded that “[t]he Idaho UAA and not the FAA applied to the substantive law of the parties' contract. With respect to the Judgment to vacate the arbitration panel's award of attorney fees on Mednat's Earnings Holdback claim the judgment is affirmed. With respect to the decision to confirm the arbitration panel's award of costs and prejudgment interest the decision to confirm costs is reversed since this award was outside the scope of the panel's authority. The decision to confirm the award of prejudgment interest is affirmed. The district court's decision to affirm the panel's decision to deny treble damages and attorney fees on Moore's Employment Agreement Claim is affirmed. Omnicare is awarded costs in defense of Moore's appeal.”
Justice Daniel T. Eismann wrote a concurring opinion pointing out that the AAA rules to which Moore appealed “authorize an arbitrator to award attorney fees if ‘the award is authorized by law.’” The law to which Moore would appeal is valid only in the case of an actual civil action, commenced by filing a complaint with the court. It is not valid in the case of the decision of a board of commissioners, of an administrative hearing, or of an arbitration, Eismann wrote.