Lagstein v. Certain Underwriters at Lloyd’s, London
(9th Cir. (Nev.) June 10, 2010)
The Ninth Circuit reversed a district court’s vacatur of an arbitration award totaling more than $6 million, finding that vacatur was unwarranted under § 10(a) of the Federal Arbitration Act. That section permits a court to vacate an arbitration award only where the award was procured by corruption or fraud, where there was evident partiality in the arbitrators, where the arbitrators were guilty of misconduct which prejudiced the rights of a party, or where the arbitrators exceeded their powers.
The plaintiff physician sued the defendant disability insurer after he received no benefits or decision with respect to a disability claim he submitted nearly two years earlier. The lawsuit was stayed pending binding arbitration required by the plaintiff’s disability policy. The arbitrators concluded that the defendant insurer breached the insurance contract and acted unreasonably. The arbitrators awarded the plaintiff the full value of his policy ($900,000) and $1.5 million for emotional distress. Two months later, the arbitrators awarded the plaintiff $4 million in punitive damages.
The defendant insurer filed a motion in district court to vacate the arbitration award on several grounds, including that two of the arbitrators failed to disclose a prior ethics controversy and that the arbitrators exceeded their jurisdiction by holding a separate punitive damages hearing after the initial arbitration award. The district court granted the motion to vacate, concluding that the size of the awards was excessive and in manifest disregard of the law, and that the punitive damages award contravened public policy and exceeded the panel’s jurisdiction.
On appeal, the Ninth Circuit reversed the district court’s vacatur. Specifically, the Ninth Circuit noted that the district court erred by vacating the arbitration award simply because it disagreed with its size. The court also held that the arbitrators did not exceed their power by “manifestly disregarding the law.” To vacate an arbitration award on that ground, it must be clear that the arbitrators recognized the applicable law and then ignored it. The Ninth Circuit held that the district court’s vacatur on that ground should be reversed because the district court failed to cite any applicable law that the panel recognized and ignored.
The Ninth Circuit also held that the punitive damages award should not have been vacated on the ground that the arbitration panel no longer had jurisdiction over the dispute after issuing the initial arbitration award. Examining the arbitration agreement and its governing rules, the Ninth Circuit held that the arbitration panel plausibly interpreted them as permitting an additional hearing for punitive damages. Finally, the court held that the defendant insurer failed to demonstrate evident partiality by the arbitrators requiring vacatur of the award. In this regard, the Ninth Circuit found that although two of the arbitrators were involved in an ethics controversy, the alleged misconduct occurred more than a decade before the arbitration award was issued and concerned neither of the parties to the arbitration.
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By Carrie Appler and Jeff Kingsley
case provided courtesy of Lexis.