US Dist Ct Upholds Summary Disposition in Arbitration

Kantor Photo (8-2012)By Mark Kantor

Arbitrators and counsel often wonder whether summary disposition of an arbitral dispute is consistent with the requirements of applicable arbitration law and rules.  In Weirton Medical Center, Inc. v. Community Health Systems, Inc., N.D. West Virginia (Civ. Action No. 5:15CV132, Dec. 12, 2017) (available here – https://scholar.google.com/scholar_case?case=4968969295311804275&hl=en&lr=lang_en&as_sdt=20003&as_vis=1&oi=scholaralrt), Judge Frederick Stamp of the US District Court for the Northern District of West Virginia upheld last week an arbitration award on summary disposition issued under the 2009 AAA Commercial Arbitration Rules against an attack on grounds that summary disposition of the dispute without discovery and an evidentiary hearing was improper.  The District Court instead concluded that “that the arbitrator’s procedural determination that summary disposition was appropriate has a reasonable basis in the parties’ agreements. Accordingly, the arbitrator did not exceed his powers in disposing of the arbitration on summary disposition.”

Judge Stamp’s opinion involves a number of interesting issues, including collateral estoppel.  But for purposes of this post I focus only on the authority of the arbitrator to make a summary disposition.  The situation was complicated by the fact that there were two arbitration agreements.  Each contract referred to the then-current version of the AAA Commercial Arbitration Rules (i.e., the 2009 Rules).  But one also referred to the “substantive and procedural laws of the State of Tennessee applicable to contracts made and to be performed therein” and the other referred to the “substantive and procedural laws of the State of West Virginia applicable to contracts made and to be performed therein” (footnotes and many citations omitted below).

The Interim CFO agreement invokes the “substantive and procedural laws of the State of Tennessee applicable to contracts made and to be performed therein,” … the Turnaround Agreement invokes the “substantive and procedural laws of the State of West Virginia applicable to contracts made and to be performed therein,” … and both agreements invoke the “arbitration rules of the American Arbitration Association (“AAA”) in effect on the date of” the agreements.

The claimant in the arbitration, Weirton, found its claim summarily dismissed in arbitration on statute of limitation grounds.   Weirton argued both before the arbitrator and later in the District Court that the procedural laws of Tennessee and West Virginia prohibited summary dispositions in the circumstances.  By operation of the arbitration agreements, thus asserted Weirton, the arbitrator was bound to follow those laws and deny summary disposition.  The arbitrator concluded, however, that the arbitration agreements were subject for procedural issues to the AAA Commercial Arbitration Rules and that summary disposition was proper.  The arbitrator then dismissed Weirton’s claims “as a matter of law” as time-barred by the applicable statute of limitation.  Weirton thereafter sought to vacate that award on grounds that the arbitrator exceeded his powers and manifestly disregarded applicable law in so ruling.

Weirton argues that the arbitrator exceeded his powers by granting summary disposition rather than permitting discovery and holding a hearing. It argues that the arbitration agreements, the AAA Rules, and West Virginia and Tennessee’s Rules of Civil Procedure did not permit summary disposition. Further, Weirton argues that summary disposition was premature because no discovery had been conducted and factual disputes were evident.

Weirton made these same arguments before the arbitrator, and he rejected them. The arbitrator expressly concluded that the 2009 AAA rules provided him “discretion to hear and grant motions for summary disposition.” …. He concluded that summary disposition was not premature and that Weirton was not entitled to discovery because “the asserted claims fail as a matter of law.” …. The arbitrator also implicitly determined that this matter was governed by the AAA rules and not the Rules of Civil Procedure of Tennessee or West Virginia.

The District Court began its analysis of this issue by observing that US courts will not question an arbitrator’s decision on procedural issues “so long as it has some reasonable basis in the parties’ agreement.”

It is well settled that an arbitrator has jurisdiction to “adopt such procedures as are necessary to give effect to the parties’ agreement” and that “`procedural’ questions which grow out of the dispute and bear on its final disposition are presumptively. . . for an arbitrator[] to decide.” . Thus, an arbitrator is empowered to make a determination on procedural issues, and courts will not question that determination so long as it has some reasonable basis in the parties’ agreement.

The arbitration agreements provided for a situs in those jurisdictions, thereby (said Weirton) importing the procedural rules of those locales in any event.  According to the petitioner, the procedural laws of the two States “require full discovery and a full evidentiary hearing.”  Weirton also contended that the references in the contracts to the procedural law of Tennessee and West Virginia, respectively, imported the civil procedure rules of those States.  However, according to the Court, “[t]he arbitrator implicitly concluded that the AAA rules rather than West Virginia or Tennessee’s Rules of Civil Procedure applied to determine whether summary disposition was proper.”  That conclusion, said the Judge, had “a reasonable basis in the parties’ agreements.”  Therefore, the arbitrator’s conclusion was proper.

To that end, Weirton argues that the arbitration agreements do not provide authority to dispose of the case on summary disposition. Both arbitration agreements contain substantially identical language. Each provides for binding arbitration of any dispute arising out of or relating to the Interim CFO Agreement or the Turnaround Agreement, both invoke the 2009 AAA rules, both require a written and reasoned award, and both contain choice of law provisions. The Interim CFO Agreement provides for arbitration in Brentwood, Tennessee and for the application of Tennessee law. The Turnaround Agreement provides for arbitration in Pittsburgh, Pennsylvania and for the application of West Virginia law.

First, Weirton argues that, because the arbitration agreements provide for binding arbitration at particular locations, the parties intended to require full discovery and a full evidentiary hearing. It also argues that the arbitration agreements invoke the AAA rules and the procedural laws of Tennessee and West Virginia, none of which allow for summary disposition without an opportunity for discovery.

Second, Weirton argues that the arbitrator was obligated to apply West Virginia and Tennessee’s Rules of Civil Procedure, which, Weirton argues, would not have permitted summary disposition without adequate discovery. The arbitrator implicitly concluded that the AAA rules rather than West Virginia or Tennessee’s Rules of Civil Procedure applied to determine whether summary disposition was proper. This Court finds the arbitrator’s conclusion to have a reasonable basis in the parties’ agreements.

Reasoning in a manner that gave effect to the arbitrator’s authority to resolve ambiguities and to to respect the function of arbitration, rather than a textual analysis of the contracts, the Court held that these agreements made clear that “the AAA rules governed procedural matters in the arbitration … [and] application of those States’ Rules of Civil Procedure in an arbitration proceeding would be wrong….”

Read as a whole, these agreements make clear that the AAA rules governed procedural matters in the arbitration, while Tennessee and West Virginia law governed the substantive legal issues. Although the choice of law provisions provide that the states’ procedural law applicable to contracts was to be applied, application of those States’ Rules of Civil Procedure in an arbitration proceeding would be wrong, especially in light of the express invocations of the AAA rules.  At best, these choice of law and procedural rules provisions create ambiguity as to what procedural law applied, a determination well within the arbitrator’s jurisdiction. The arbitrator’s decision to apply the AAA rules rather than the States’ Rules of Civil Procedure has a reasonable basis in the parties’ agreements. Thus, the arbitrator’s determination that summary disposition was procedurally proper is entitled to deference.

Judge Stamp also rejected the notion that designating a location for the arbitration had the effect of importing that locales’ judicial procedure rules.

Weirton argues that the arbitration agreements required discovery and full evidentiary hearings because they specified the locations for such hearings. However, these designations of sites for arbitration hearings are not equivalent to express requirements that the parties conduct discovery and participate in a full evidentiary hearing on claims that fail as a matter of law.

Interestingly, the Court found authority for arbitral summary judgment in Rule L-4 of the Large, Complex Commercial Case Procedures of the AAA Commercial Arbitration Rules.  Rule L-4 only states generally that arbitrators may “take such steps as they may deem necessary or desirable to avoid delay and to achieve a just, speedy and cost-effective resolution of Large, Complex Commercial Cases.”  Notably, the 2009 AAA Commercial Arbitration Rules did not include a provision expressly referring to summary dispositions, unlike Rule R-33 of the current 2013 version of those Rules which does conditionally authorize dispositive motions (“R-33.  Dispositive Motions.  The arbitrator may allow the filing of and make rulings upon a dispositive motion only if the arbitrator determines that the moving party has shown that the motion is likely to succeed and dispose of or narrow the issues in the case.”).

While the arbitration agreements do not expressly permit summary disposition, they do not expressly prohibit it either. The agreements invoke the 2009 AAA rules, which provide a set of procedural rules including requiring arbitrators to “take such steps as they may deem necessary or desirable to avoid delay and to achieve a just, speedy and cost-effective resolution of Large, Complex Commercial Cases.” Rule L-4, AAA Commercial Arbitration Rules and Mediation Procedures (2009 ed.).

Perhaps sensing that he was relying only general authority under the Rules, Judge Stamp also buttressed his conclusion by asserting that result was consistent in any event with the civil procedure rules of the two states (“Further, the Rules of Civil Procedure of Tennessee and West Virginia allow for the dismissal of or summary judgment on legally insufficient claims.”).  At bottom, though, the District Court applied a deferential standard of review to the arbitrator’s decision that he had authority under the 2009 AAA Commercial Arbitration Rules to grant summary disposition.

As discussed above, the arbitrator implicitly concluded that the AAA rules rather than the States’ Rules of Civil Procedure applied to the arbitration. This was a procedural matter to be determined by the arbitrator, and this Court will defer to that ruling because it has some reasonable basis in the parties’ agreements. …. Thus, because Tennessee and West Virginia’s Rules of Civil Procedure did not apply to the issue of whether summary disposition was proper, the arbitrator did not manifestly disregard those laws.

The Weirton case therefore stands for the propositions that (1) an arbitrator’s decision to apply arbitration rules rather than a local civil procedure code will prevail even if the underlying agreements refer to local procedural law, so long as the arbitrator reasonably found ambiguity in that contractual language, and (2) authority for dispositive motions in arbitration can be found in general language of the AAA Commercial Arbitration Rules, even in the absence of specific reference to summary dispositions in the applicable Rules (“While the arbitration agreements do not expressly permit summary disposition, they do not expressly prohibit it either.”).

We will have to see if this ruling is appealed to the US Circuit Court of Appeals in due course.

Mark Kantor is a CPR Distinguished Neutral and a regular contributor to CPR Speaks. Until he retired from Milbank, Tweed, Hadley & McCloy, Mark was a partner in the Corporate and Project Finance Groups of the Firm. He currently serves as an arbitrator and mediator. He teaches as an Adjunct Professor at the Georgetown University Law Center (Recipient, Fahy Award for Outstanding Adjunct Professor). Additionally, Mr. Kantor is Editor-in-Chief of the online journal Transnational Dispute Management.

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