Employment: Eighth Circuit Rejects Challenges to Arbitrator Appointment and Stock (Web)

The Eighth U.S. Circuit Court of Appeals has affirmed a district court decision confirming an arbitration award where a company claimed that an arbitrator’s lack of qualifications meant that the parties’ tribunal selections procedures were invalid under the Federal Arbitration Act. 

In Crawford Group, Inc. v. Holekamp, No. 07-3454, 2008 WL 4455550 (Oct. 6, 2008 [corrected Oct. 15] 8th Cir. Mo.)(available using the search function at www.ca8.uscourts.gov/opns/opFrame.html), the appellate court held that a stock valuation formula deployed by the arbitration panel left it with enough power to exercise its authority appropriately, and upheld the confirmation of its valuation award.

The Crawford Group, parent of the Enterprise car rental company, employed William F. Holekamp from 1976 until he retired to act as a consultant at the end of 2000.  The former executive vice president signed a Stock Award and Shareholder Agreement the year he left.

The agreement provided that the stock value would be determined by Arthur Andersen LLP, and disputes would be resolved by arbitration under the American Arbitration Association’s Commercial Arbitration Rules, or rules designated by the arbitrators.

In June 2004, Crawford decided to repurchase Holekamp's stock by tendering $11.4 million, based on an appraisal of $25.32 per share by Deloitte & Touche.  Holekamp, however, filed a demand for arbitration, arguing that Crawford's request and appraisal breached the agreement. 

In response, Crawford asked for and was granted a Missouri state court's order for specific performance of the repurchase provisions.  Nevertheless, the court found that there was a legitimate issue on stock price and, following the agreement, ordered the dispute over the stock value to arbitration.  The Missouri Court of Appeals affirmed.

Crawford and Holekamp were each entitled to appoint one arbitrator under the agreement, and then the two arbitrators would appoint a third neutral arbitrator.  Holekamp selected Harry V. Ruffalo, but because Ruffalo's resume failed to indicate any arbitration experience, Crawford requested confirmation from the AAA that the choice possessed the skills called for by the agreement.

After repeated affirmations by the AAA and dissent by Crawford, the case was sent to arbitration, with Ruffalo as Holekamp's selection.  Following a three-day hearing, Ruffalo and another arbitrator were part of a majority that decided Holekamp's purchase price was $45.90 a share; one arbitrator dissented.

Crawford subsequently sought to vacate the award in federal court.  The company’s contended that Arbitrator Ruffalo’s selection and appointment breached the agreement, and  as a result the arbitration panel exceeded its authority in issuing the award, thereby violating the Federal Arbitration Act.  The district court agreed with Holekamp and confirmed the award.  Crawford appealed.

The Eighth Circuit acknowledged that awards could be vacated in limited circumstances, which includes where the arbitrator appointment method was not followed.  The parties in this case, however, had designated the AAA’s commercial arbitration rules for governing the arbitration.  Based on the facts provided, the  appeals court could not find the AAA's determination of Ruffalo's appointment as an unreasonable interpretation of the agreement's arbitrator selection provisions, even though Crawford’s objection was over Ruffalo’s qualifications, not the selection method.

Accordingly, the court found the AAA rules concerning arbitrator selection, as well as resolution of the disputed appointment, were followed.

Crawford also argued that the agreement neglected to provide the arbitrators with the power to determine the purchase price of Holekamp's shares, so that the arbitrators' decision exceeded their scope of authority. 

In its reconsideration of the issue, the Eighth Circuit again recognized a narrow review standard.  In fact, in this situation, it could set aside an award only if the contract itself was not vulnerable to the arbitrator's predisposed construction. 

Here, the agreement required the administrator to apply the same valuation principles as those used for the award on the award date.  In support of his original claim, Holekamp submitted evidence showing that the valuation principles applied by Deloitte & Touche, in 2004, differed from those used by Arthur Andersen in February 2000, the award date and company the parties had agreed to use in the agreement. 

Crawford presented evidence illustrating that the principles applied were the same.  After reviewing evidence from both sides, the majority of the three arbitrators decided in favor of Holekamp, finding that administrator Deloitte & Touche had failed to fulfill the agreement's contractual obligations to value Holekamp's shares in substantially the same way it was valued in February 2000.

The appeals panel acknowledged the inconsistent testimony, but confirmed that “[i]t was for the arbitrators to accept those portions of the testimony which they found more persuasive.”  2008 WL 4455550 at 5.  Having initially agreed to settle the matter with arbitration, the arbitrators were given full power to construe the agreement; it was not for the court to set aside the award merely because it would have interpreted the agreement differently.

Thus, the court found the award did not violate the FAA by exceeding its scope of submission.  The arbitration award was affirmed. 

--Jean Loh, CPR Intern