Sanctions: Eleventh Circuit Warns Against Baseless Claims to Vacate Arbitration Awards (Web)

In B.L. Harbert Int'l LLC v. Hercules Steel Co., 2006 WL 462368 (11th Cir. (Ala.) Feb. 28, 2006)(available at www.ca11.uscourts.gov/opinions/ops/200511153.pdf), the Eleventh U.S. Circuit Court of Appeals affirmed the lower court's order denying Birmingham, Ala.-based general contractor B.L. Harbert's motion to vacate an arbitration award.

The Eleventh Circuit noted that the Federal Arbitration Act’s goals will be achieved only if the courts "ensure arbitration is an alternative to litigation, not an additional layer in a protracted contest."

In the case, the court capitalized on "an opportunity to discuss a potential solution" to what it termed "the poor loser problem" in arbitrated disputes. In affirming strong support for arbitration processes, the unanimous panel, in an opinion written by Circuit Judge Ed Carnes, warned “that in order to further the purposes of the FAA and to protect arbitration as a remedy we are ready, willing, and able to consider imposing sanctions in appropriate cases.”

After receiving an arbitration decision against it, Harbert filed a motion to vacate the award in district court, alleging that the arbitrators' rationale reflected a manifest disregard of the applicable law.

Hercules, a Fayetteville, N.C., steelmaker, filed an opposing motion to confirm the award. The district court entered judgment enforcing the arbitration award, finding no evidence of manifest disregard. Unsatisfied with the district court's affirmation of the arbitrators' decision, Harbert filed a notice of appeal and a motion for stay of the judgment pending appeal, which the district court granted.

In deciding the appeal, the Eleventh Circuit emphasized that Montes v. Shearson Lehman Bros. Inc., 128 F.3d 1456, 1461 (11th Cir.1997), is the only case in which the circuit had found that the "arbitration loser" successfully established manifest disregard of the law.

In Montes, the attorney for one of the parties explicitly urged the arbitration panel to disregard the law, and the arbitrator complied with this request. The court distinguished the case, finding no evidence that Hercules' attorney urged the arbitrator to disregard the applicable law, noting that Harbert did not even allude to it.

The panel found that Harbert's argument that the arbitration award "clearly contradicts” an express contract term was nothing more than an alternative articulation of the clear error standard, "and even a showing of a clear error on the part of the arbitrator is not enough" to establish manifest disregard for the law.

The opinion states that the loser in an arbitration proceeding must establish more than clear error to have the award set aside--the arbitrator must actually recognize a clear rule of law and deliberately chose to ignore it. The court then stated:
 
The only manifest disregard of the law evident in this case is Harbert's refusal to accept the law of this circuit which narrowly circumscribes judicial review of arbitration awards. By attacking the arbitration award in this case Harbert has shown at best an indifference to the law of our circuit governing the subject. Harbert's refusal to accept that there is no basis in the law for attacking the award has come at a cost to the party with whom Harbert entered into the arbitration agreement and to the judicial system.
 
In litigating this case without good basis through the district court and now through this Court, Harbert has deprived Hercules and the judicial system itself of the principal benefits of arbitration. Instead of costing less, the resolution of this dispute has cost more than it would have had there been no arbitration agreement. Instead of being decided sooner, it has taken longer than it would have to decide the matter without arbitration.

The Eleventh Circuit panel expressed grave concern that the arbitration process is undermined when a "party who loses an arbitration award assumes a never-say-die attitude and drags the dispute through the court system without an objectively reasonable belief it will prevail. . . ."

The Eleventh Circuit cautioned future litigants that the court "can and should insist that if a party on the short end of an arbitration award attacks that award in court without any real legal basis for doing so, that party should pay sanctions." The court announced this threat of sanctions to discourage frivolous litigation contesting sound arbitration awards.

The court considered ordering Harbert and its counsel to show cause why it should not be subject to sanctions, but declined to do so, noting that this was the first instance in which the Eleventh Circuit announced the prospect of sanctions in this context.

The Court also noted that Hercules did not move for sanctions against Harbert, and although courts have the power to "raise and consider the issue of sanctions on [their] own, after giving the parties notice and an opportunity to be heard, the lack of interest in sanctions shown by the party to whom any monetary sanctions would be paid is a factor to consider."

Finally, the Eleventh Circuit cautioned future litigants that the case provides notice and warning "that this Court is exasperated by those who attempt to salvage arbitration losses through litigation that has no sound basis in the law applicable to arbitration awards." It states that in order to preserve arbitration as an efficient alternative to litigation, the Court is "ready, willing, and able to consider imposing sanctions in appropriate cases."

–Julie Shaw, CPR Intern