Getting from Award to Judgment Where to Confirm or Vacate Arbitration Awards, 0718 SCBJ, SC Lawyer, July 2018, #26

• Author: By Wm. Grayson Lambert
• Position: Vol. 30 Issue 1 Pg. 26

Getting from Award to Judgment Where to Confirm or Vacate Arbitration Awards

No. Vol. 30 Issue 1 Pg. 26

South Carolina BAR Journal

July, 2018

By Wm. Grayson Lambert

Every day people across the country mindlessly click "Accept" for the terms and conditions on phones, computers and tablets for services as varied as social media, music and finance. They are incorporated in the fine print of many, if not most, consumer documents that are signed as a matter of routine. These terms and conditions to which we—even lawyers—all so often unconsciously agree often include an arbitration agreement. In other words, without really thinking about it, people agree to settle a potential dispute out of court, using a private decisionmaker, rather , than in a courtroom with a judge > and a jury.

' At the same time, arbitration j agreements are also prevalent in I negotiated contracts between individuals, as in partnership agreements; between corporations and ; individuals, such as employment : agreements; and between corpora-tions. In many contexts, arbitration agreements have become more the rule than the exception. For example, in the construction industry, it's now unusual for the parties not to choose arbitration.

The popularity of arbitration agreements is unsurprising. It helps keep disputes off the front page of a newspaper or the top of a website, and it is designed to be a faster and cheaper way to resolve disputes.¹ Moreover, the U.S. Supreme Court has repeatedly endorsed and protected arbitration agreements, ensuring that they will generally be enforced.²

Judicial review of arbitration awards

The award in an arbitration proceeding, however, is rarely the end of the dispute. Far from it. To collect money if the losing party is not simply willing to write a check, a prevailing party must ask a court t o confirm the award and enter judgment in its favor.³ That judgment, unlike an arbitration award, can then be enforced against the losing party.

Alternatively, if the losing party believes the arbitrator's decision is flawed, it can challenge the arbitration award. If this party prevails, the court would vacate the award.^[4] The case could then return to arbitration, not unlike a case being remanded to a trial court for a new trial after an appeal.

No matter whether a party seeks to have a court confirm or vacate an arbitration award, the court's review of that award is "severely circumscribed" and "among the narrowest in law."⁵ As the Fourth Circuit once put it, "[a] court sits to 'determine only whether the arbitrator did his job—not whether he did it well, correctly, or reasonably, but simply whether he did it.'"⁶ An award may be vacated only on one of the four bases set forth in 9 U.S.C. § 10 or if the arbitrator manifestly disregards clear legal precedent.⁷ If these limited circumstances are not met, then the award "must" be confirmed.⁸ (These rules under the Federal Arbitration Act (FAA)⁹ apply to most arbitration agreements because the FAA applies to any contract impacting interstate commerce.¹⁰ Even when the FAA does not apply, this narrow judicial review and the grounds for vacating an award are similar under the South Carolina Uniform Arbitration Act.¹¹ ) But in what court should you seek to confirm or vacate an arbitration award? In South Carolina, it's not clear.

Subject-matter jurisdiction over arbitration awards

South Carolina's circuit courts are courts of general jurisdiction.¹² Thus, a party can bring any claim— including one to confirm or vacate an arbitration award—in circuit court, assuming the claim isn't subject to exclusive jurisdiction somewhere else¹³ and the defendant is subject to personal jurisdiction in South Carolina.¹⁴ In other words, a state court is always an option for confirming or vacating an arbitration award, and subject-matter jurisdiction is not an issue.

Federal courts are, on the other hand, courts of limited jurisdiction.¹⁵ The FAA, while providing a framework for the relationship between arbitration proceedings and courts, lacks any provision conferring subject-matter jurisdiction on federal courts.¹⁶ Thus, to confirm or vacate an arbitration award in federal court, a party must find a jurisdictional hook outside of the FAA.

Because a federal question in the underlying arbitration is insufficient to invoke federal jurisdiction,^[17] the typical hook is diversity jurisdiction under 28 U.S.C. § 1332. Establishing diversity jurisdiction requires (1) complete diversity and (2) at least $75,000 in controversy¹⁸ This much is simple.

The complication comes when determining the amount in controversy. Is it the original amount demanded or the amount of the ultimate award? Courts have developed two (or three, depending how one counts) different ways to decide how much is in dispute to determine whether a court has subject-matter jurisdiction over an action to confirm or vacate an arbitration award.

Approaches to the amount-in-con-troversy requirement for federal subject-matter jurisdiction

Some courts, most prominently the Fifth and D.C. Circuits, have adopted what has become known as the "demand approach."¹⁹ In this approach, the amount in controversy is determined exclusively by the amount that was sought in the arbitration, regardless of the ultimate award. Courts have given multiple justifications for adopting this approach. Some have reasoned that it best supports the congressional policy favoring arbitration.^[20] Others have worried that adopting a different rule would promote gamesmanship. For example, to avoid a court not having jurisdiction as a result of an award for less than $75,000, a party could file a case in federal court and then seek to stay the case pending arbitration. After the arbitration, the party could ask the court to review the arbitrator's award, which would be possible regardless of the amount of any award because the case would already be pending in that court.²¹ A third justification for this rule is that it ensures that a court still has jurisdiction to review an arbitration award after it had compelled the parties to arbitrate, thereby avoiding piecemeal litigation.²²

Other courts, including the Sixth and 11th Circuits, have adopted the "award approach."²³ This approach looks to the amount of the arbitration award to determine the amount in controversy. Courts embracing this approach have typically relied on the "legal certainty" principle (the rule that a plaintiff's claim of damages can be used to satisfy the $75,000 threshold for subject-matter jurisdiction unless it is certain that the plaintiff cannot recover that amount²⁴ ) to support their decision. These courts have focused on "the posture in which [an] action arrived" on the court's docket.²⁵ In other words, from this perspective, the parties have already litigated the merits of the underlying dispute before the arbitrator, and their new dispute is merely the "result of that arbitration."²⁶ This approach is also the easiest to apply, given that all the court must do is look at the face of the award.

A third approach, known as the "remand approach," is best considered a corollary of the award approach, which explains why the 11th Circuit has also applied this rule. Here, courts generally look to the award of the arbitration, but if the party seeking to vacate the award also wants to reopen the arbitration (or presumably try to avoid arbitration and litigate the case in a courtroom instead), the court will instead look to the amount demanded in that new proceeding.²⁷ Courts look to the amount demanded in the reopened proceeding "because the petitioner does not accept the arbitrator's award as final, [and instead] he seeks reopening of the arbitration p roceedings which could once again expose the defendant to liability for the relief sought in the arbitration demand."^[28] Essentially, the idea is that the controversy between the parties remains the amount of the underlying dispute because the party seeking to vacate the award wants to reopen the arbitration, not simply to litigate the award itself.

No answer in South Carolina

Unfortunately for litigants in the Palmetto State, courts have offered no guidance on how to determine the amount in controversy for a proceeding to confirm or vacate an arbitration award.

The Fourth Circuit is clearly aware of the divide, as it discussed the circuit split in Choice Hotels International, Inc. v. Shiu Hospitality, L.L.C.²⁹ In that case, the court did not have to decide which approach to adopt because the case was originally filed in federal court and then was stayed while the parties arbitrated, which meant that the district court still had subject-matter jurisdiction when the parties moved to reopen the case after the arbitration.^[30] Federal courts in this circuit have lamented the lack of guidance from the Fourth Circuit.³¹

Moreover, no South Carolina court—whether a federal district court or a state court (which would be an admittedly unusual circumstance)—has addressed, much less decided, this question.

What this lack of clarity means

Generally, uncertainty in the law is a bad thing.³² It prevents people from planning as effectively and leaves questions unresolved.³³ From the lawyer's perspective, however, it seems to have some benefit, at least for the litigation strategy of those seeking to confirm or vacate an award. This uncertainty about how courts in this state view the amount-in-controversy requirement gives litigants leeway to "forum shop" for the more favorable court in a way that shouldn't attract as much judicial disdain for that practice.³⁴ The split among federal courts provides litigants a good-faith basis to move to confirm or vacate an arbitration award in either federal or state court.³⁵ A litigant may simply urge a particular court to adopt the approach that fits with the litigant's jurisdictional wishes in that case.

Of course, the lack of clarity isn't all good news for either party. Presumably, if the party not initiating the action decides that the court in which the action was filed is not the more advantageous playing field, that party will seek to change the forum, whether through removing the case, moving to remand the case, or moving to dismiss the case. Thus, the parties will have to litigate a jurisdictional issue before getting to the merits of the arbitration award. That costs time and money.

This is almost certain to happen. Indeed, this very situation gave the Fifth Circuit the chance to decide this question. There, a group of investors had purchased certificates of deposit from Allen Stanford's Antiguan-based bank, but they lost their money when Stanford's Ponzi scheme was uncovered. After the receiver was unable to recover many assets for them, they brought an arbitration claim against Pershing LLC, the clearing broker for Stanford's U.S.-based broker-dealer, for aiding and abetting the Ponzi scheme. Pershing prevailed in the arbitration, and it asked the U.S. District Court for the Eastern District of Louisiana to confirm the arbitrators' award. The investors asked a Louisiana state court to vacate the award and moved to dismiss the federal court action, claiming that subject-matter jurisdiction was lacking.

The district court adopted the demand approach and denied the motion to dismiss, while certifying the case for interlocutory appeal under 28 U.S.C. § 1292(b).³⁶ The Fifth Circuit agreed that the demand approach was best and affirmed the district court's conclusion that it had subject-matter jurisdiction over Pershing's claim to confirm the award.³⁷

This same jurisdictional question will likely come to a South Carolina court soon. In that case, the parties will litigate this open question, and the court will have to decide whether the demand approach or the award approach is the better rule. The parties will then move on to the merits of their case (maybe in that same court, maybe in a different one), and the rest of us will finally know with certainty which courthouse is an option for confirming or vacating our next arbitration award.

Wm. Grayson Lambert is an associate with McNair Law Firm in Columbia.

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Notes:

[1] See Allied-Bruce Terminix Cos., Inc. v. Dobson, 513 U.S. 265, 280 (1995).

[2] See, e.g., Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 56 (1995).

[3] See 9 U.S.C. § 9 (2018); S.C. Code Ann. § 15-48-120 (2005).

[4] See 9 U.S.C. § 10 (2018); S.C. Code Ann. § 15-48-130 (2005).

[5] Apex Plumbing Supply, Inc. v. U.S. Supply Co., Inc., 142 F.3d 188, 193 (4th Cir. 1998).

[6] U.S. Postal Seru v. Am. Postal Worfeers Union, AFL-CIO, 204 F.3d 523, 527 (4th Cir. 2000) (quoting Mountaineer Gas Co. v. Oil, Chem. & Atomic Worfeers Int'l Union, 76 F3d 606, 608 (4th Cir. 1996)). .

[7] See Wachouia Sec, L.L.C. v. Brand, 671 F3d 472, 480-83 (4th Cir. 2012).

[8] Hall St. Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576, 582 (2008).

[9] 9 U.S.C §§ 1-16 (2018).

[10] See Citizens Banfe v. Alafabco, Inc., 539 U.S. 52, 56 (2003).

[11] See S.C. Code Ann. §§ 15-48-10 to -240 (2005); Crouch Constr. Co. v. Causey, 405 S.C. 155, 163, 747 S.E.2d 482, 486 (2013).

[12] See S.C. Const, art. V, § 11; Ex parte Ware Furniture Co., 49 S.C. 20, 27 S.E. 9 (1897).

[13] See Gen. Inu Co. v. Lafee Shore & M.S. Ry. Co., 260 U.S. 261, 286-88 (1922).

[14] See Cocferel! v. Hillerich & Bradsby Co., 363 S.C. 485, 492-93, 611 S.E.2d 505, 508 (2005).

[15] Kofefeonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994).

[16] Hall St. Assocs.,, 552 U.S. at 581-82.

[17] See, e.g., Magruder v. Fid. Brokerage Serus. L.L.C, 818 F.3d 285, 288 (7th Cir. 2016); Carter v. Health Net of Cal., Inc., 374 F.3d 830, 834 (9th Cir. 2004).

[18] 28 U.S.C § 1332(a)(1) (2018).

[19] See Pershing L.L.C. v. Kiebach, 819 F.3d 179 (5th Cir. 2016); Karsner v. Lothian, 532 F.3d 876 (D.C. Cir. 2008); see also Benhenni v. Bayesian Effcient Strategic Trading, LLC, 692 F. App'x 94, 95 n.l (3d Cir. 2017); Theis Research, Inc. v. Broom & Bain, 400 F3d 659, 664-65 (9th Cir. 2005); Bull HN Info. Sys., Inc. v. Hutson, 229 F.3d 321, 328-30 (1st Cir. 2000).

[20] See, e.g., Karsner, 532 F.3d at 883; Smith v. Tele-Toiun Hall, L.L.C, 798 F Supp. 2d 748, 755 (E.D.Va. 2011).

[21] See, e.g., Pershing, 819 F.3d at 182-83.

[22] See, e.g., Karsner, 532 F.3d at 883-84.

[23] See Baltin v. Alaron Trading Corp., 128 F3d 1466, 1472 (11th Cir. 1997); Ford v. Hamilton Inus., Inc., 29 F.3d 255, 260 (6th Cir. 1994); see also Fernicola v. Toyota Motor Corp., 313 F App'x 408, 409 (2d Cir. 2009).

[24] SeeJTHTax, Inc. v. Frashier, 624 F.3d 635, 638 (4th Cir. 2010).

[25] Dyrdal v. Enbridge (U.S.), Inc., 738 F Supp. 2d 927, 931 (D. Minn. 2010).

[26] Id.

[27] See, e.g., Peebles v. Merrill Lynch, Pierce, Tenner & Smith Inc., 431 F.3d 1320, 1325 (11th Cir. 2005).

[28] Wise v. Marriott Int'l, Inc., No. 06CIV.11439(LAP), 2007 WL 2200704, at *4 (S.D.N.Y. July 30, 2007).

[29] 491 F.3d 171, 175-76 (4th Cir. 2007).

[30] Id.

[31] See, e.g., Griff n v. U-Haul Int'l, Inc., No. 3:13-CV-346-GCM, 2013 WL 5937322, at *3 (W.D.N.C. Nov. 4, 2013).

[32] Cf Arizona v. Roberson, 486 U.S. 675, 681 (1988); Henson ex rel. Hunt v. Int'l Paper Co., 374 S.C 375, 386, 650 S.E.2d 74, 80 (2007).

[33] See Wm. Grayson Lambert, Focusing on Fulfilling the Goals: Rethinking Hoiu Choice-of-Laiu Regimes Approach Statutes of Limitations, 65 Syracuse L. Rev. 491, 531 (2015).

[34] See, e.g., Uanna v. Plumer, 380 U.S. 460, 467 (1965).

[35] See Fed. R. Civ P. 11; Rule 11, SCRCP.

[36] See Pershing L.L.C. v. Kiebach, 101 F Supp. 3d 568 (E.D. La. 2015).

[37] See Pershing, L.L.C. v. Kiebach, 819 F.3d 179 (5th Cir. 2016).

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