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The Seventh Circuit Refuses To Examine Potentially Illegal or Irregular Arbitration Awards

The Seventh Circuit Refuses To Examine Potentially Illegal or Irregular Arbitration Awards: Related Tips For Practitioners

In Baxter International, Inc. v. Abbott Laboratories, 315 F.3d 829 (7th Cir. 2003), and Sirotzky v. New York Stock Exchange & Sanford C. Bernstein & Co., Inc., 347 F.3d 985 (7th Cir. Oct. 29, 2003), the Seventh Circuit refused to even consider setting aside arbitration awards despite the losing parties' claims of extreme irregularity. Practitioners should read and understand these decisions when they are drafting arbitration clauses or participating in arbitration in order to protect their client's interests.

In Baxter, the Seventh Circuit refused to examine an arbitration award that arguably created an illegal restraint of trade.

According to Baxter, there is a difference between arbitrating an antitrust issue.... and creating one -- which it accuses these arbitrators of doing.... Baxter relies on the observation.... that arbitrators are not allowed to command the parties to violate rules of positive law. That's true enough, but whether the tribunal's construction of the Baxter-Maruishi agreement has that effect was a question put to, and resolved by, the arbitrators. They answered no, and as between Baxter and Abbott their answer is conclusive. . . Ensuring this is as far as our review legitimately goes.

Not all the Seventh Circuit Judges viewed the issue in such straightforward terms. Judge Ripple, dissenting from a decision to deny a petition for re-hearing en banc, wrote that the opinion may properly be read as granting the "arbitrators... unreviewable authority to decide for themselves whether they are commanding the parties to violate the law - the role of the courts to interpret and uphold the law should not be dismissed casually." Baxter at 955.

Using similar reasoning, in Sirotsky, the Seventh Circuit rejected a claim that an arbitration award should be set aside because the attorney representing the prevailing party was not admitted in the jurisdiction, Illinois, where the arbitration was held. The Seventh Circuit first noted the unremarkable: that the arbitrator had the power to admit attorneys pro hac vice but went further. The losing litigants had argued that the attorney representing the Defendants had violated Illinois ethical rules and thus the arbitration procedure was flawed because the tribunal did not enforce those local ethical rules, as a Court would have. The Seventh Circuit rejected this argument.

. . .the cases are divided on whether a judgment is reversible merely because one's opponent was not represented by a licensed lawyer. . . Sirotzky's gripe is that at the arbitration hearing Bernstein's New York lawyer was permitted to engage in tactics that an Illinois lawyer would be forbidden by the rules of ethics governing members of the Illinois bar to engage in, and if this is right it does suggest a way in which a litigant can be harmed by the unlicensed status of his opponent's lawyer. However, the procedures and evidentiary rules in arbitration are matters for the arbitrators and the arbitration contract to determine. . (citations omitted)

In other words, in both decisions, the parties' consent to arbitration constituted an abandonment of the judicial decision-making process.

These two decisions, and others like them, represent the latest in a long line of decisions glorifying consent as the conceptual foundation for conducting arbitration proceedings. See Montez v. Prudential Securities, Inc., 260 F.3d 980 (8th Cir. 2001) (arbitrator not biased even though it had done significant business with former employer's law firm and attorney). Congress passed the Federal Arbitration Act in 1925 in order to overcome Courts' traditional hostility to arbitration. In 1967, the Supreme Court ruled that even claims of fraud in the inducement were referable to arbitration. Prima Paint Corp. v. Flood & Conklin Manufacturing Co., 388 U.S. 395, 18 L.Ed.2d 1270, 87 S. Ct. 1801 (1967). In 1996, in a critical but oddly little known decision Doctors Associates v. Casarotto, 517 U.S. 681, 134 L.Ed.2d 902, 116 S. Ct. 1652 (1996), the Supreme Court ruled that state laws that impeded an arbitration contract were pre-empted by the FAA. The Supreme Court has also ruled that the parties can grant the arbitrator power to award remedies above and beyond those within the Court's power. Mastrobuono v. Shearson Lehman Hutton, Inc., 514 US 52, 131 L.Ed.2d 76, 115 S. Ct. 1212 (1995) (allowing the arbitration to award punitive damages). Given that the reach of interstate commerce is broad, e.g., In the Matter of the Application of RD Management Corp., 2003 WL 21669727 (N.Y. Supp. 2003) (court finds that investments in real estate affect interstate commerce, invokes the FAA in state court, and allows arbitrator to determine scope of his own jurisdiction), these decisions will control virtually all significant arbitrations. Baxter is a direct descendent of Mastrobuono, concluding that the arbitrators' power may be greater than that of a Court. Sirotsky is a descendant Casarotto as it overrides state law restrictions on arbitration proceedings governed by the FAA.

Why are these decisions important? Both Baxter and Sirotsky extend the concept of consent beyond its ordinary meaning, even the ordinary legal meaning. Participants in arbitration rarely consent as that term is commonly used at law. The people signing a contract containing an arbitration clause do not often read the arbitration rules incorporated by reference in the face of fraud and arbitration clause is induced by fraud, the arbitration clause is still valid. See Prima Paint, supra. However, even if the participant read the rules and was not induced by fraud, it is doubtful that they consciously agreed to an outcome involving unethical attorney conduct or an arbitration mandate to violate positive law. By contrast, if a litigant consents to proceed in state and federal court in Illinois, they are not "consenting" to the entry of an illegal award or to attorneys that fail to follow applicable ethical procedures.

These cases also help explain some of the dissatisfaction with the arbitration process. It is common litigation wisdom that arbitrators' results are non-reviewable and that, consequently, "bad" arbitration decisions are a risk of opting out of the Court system. However, these two recent decisions suggest that arbitrators' decisions are sometimes "bad" not only because arbitrators are careless, or poor thinkers, or admit unreliable evidence (characteristics which professional arbitrators will strongly dispute), but because arbitrators have powers and discretion not granted to a Court. Consent to an arbitration tribunal therefore includes not only consent to a virtually unreviewable fact-finder, but also to general powers broader than those of a Court directed by attorneys' unconstrained - and perhaps unethical - advocacy.

To prevent such outcomes, an attorney can and should act on two fronts. First, in drafting arbitration clauses (and litigators should be involved in that process), the attorney can provide that the arbitrator's jurisdiction is limited and does not extend to the issuance of unlawful awards, that the state ethical rules apply to the proceedings, as well as other important protections. The full scope of these drafting issues is beyond the scope of this note, but under the consent framework driving arbitration law, Courts will likely honor well drafted limitations. Second, if a litigator is assisting a client with a dispute governed by an existing broad clause, special attention should be paid to the first meeting with the arbitrator. At that first meeting, before feelings have hardened, it is usually possible to further set the framework for the upcoming proceedings. For example, at that first meeting, it is possible to propose stipulations for the upcoming arbitration, such as that the arbitrator will not issue an award that violates positive law or that the attorneys will govern themselves by applicable ethical rules.