March 18, 2013

March 18, 2013:
Seventh Circuit cautions: "[C]hallenges to commercial arbitration awards bear a high risk of sanctions."  Johnson Controls, Inc. v. Edman Controls, Inc., 712 F.3d 1021 (7th Cir. 2013).

Edman filed an arbitration claim against Johnson alleging breach of a distributorship agreement.  The arbitrator found that Johnson breached the agreement and awarded Edman damages.  Johnson filed suit in federal disrict court to vacate or modify the award, contending that the arbitrator had "exceeded [his] powers," and Edman moved to confirm the award.  The district court denied the motion to vacate or modify and confirmed the award.  Johnson appealed, and the Seventh Circuit affirmed confirmation of the award, noting that "we do not regard this as a close case."  712 F.3d at 1025.

Edman asked the Seventh Circuit for sanctions under Federal Rule of Appellate Procedure 38, which authorizes sanctions for frivolous appeals.  The appellate court denied that request "largely because [a] fee-shifting clause in the contract already assures that Edman will not bear the costs of this appeal," id. at 1028, but warned that future frivolous challenges to arbitration awards might be met with sanctions.

The Seventh Circuit noted that the FAA allows for only "the narrowest exceptions for court intervention" with an arbitration proceeding.  Id. at 1022.  "'Serious error'" or an "'incorrect or even whacky'" result are insufficient grounds to vacate an award.  Id. at 1025.  An award must be upheld if "'an arbitrator is even arguably construing or applying the contract and acting within the scope of [his] authority.'"  Id. (emphasis in original).  Despite these high hurdles, "losers [in arbitration] sometimes cannot resist the urge to try for a second bite at the apple."  Id. at 1022.  But frivolous challenges to an arbitration award "undermine the integrity of the arbitral process" and deprive parties of "part of the value of the arbitration to which both parties agreed."  Id. at 1028.  Hence the court's cautionary comment for parties considering a judicial effort to vacate an arbitration award:  "[C]hallenges to commercial arbitration awards bear a high risk of sanctions."  Id.

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