Fourth Circuit asks only if arbitrators did their job – not if they did it well

By Brad McCullough

The Fourth Circuit recently reminded us that “[t]he scope of judicial review of an arbitration award ‘is among the narrowest known at law.’” UBS Fin. Servs., Inc. v. Padussis, slip op. at 6, No. 15-2148 (4th Cir. Nov. 22, 2016) (citation omitted). When reviewing arbitrators’ decisions, reviewing courts ask only “whether the arbitrators did the job they were told to do – not whether they did it well, or correctly, or reasonably, but simply whether they did it.” Id. (internal quotation marks omitted) (citation omitted). A disgruntled UBS Financial Services likely wanted to borrow a phrase from Johnny Paycheck and tell the arbitrators to “take this job and shove it,” but its attempt to obtain relief from the arbitration decision fell on deaf judicial ears.[1]

Gary Padussis was a financial adviser with UBS Financial Services. His initial compensation included a $2.7 million loan. If Padussis left UBSFS, the outstanding balance of that loan would become immediately due.

Agreements between Padussis and UBSFS provided that any dispute between them would be resolved by arbitration before the Financial Industry Regulatory Authority. A few years after joining UBSFS, Padussis resigned, “complaining that UBSFS had ruined his team of financial advisers and cost him valuable clients.” Id. at 3. Padussis owed about $1.6 million on his loan and UBSFS initiated arbitration to collect that debt. Padussis submitted counterclaims, “alleging that UBSFS’s interference with his team was both tortious and a breach of contractual duties.” Id.

FINRA’s arbitration procedures direct the Director of FINRA Dispute Resolution to mail each party a list of potential arbitrators for each of the three positions on the arbitration panel. Each party may strike no more than four candidates from the list and rank the remaining members. “The parties must return their preferences within twenty days of the lists being sent, and the Director then combines the rankings sent by the parties to select the arbitration panel.” Id. If a party fails to return its lists in that time frame, the Director forges ahead as if the party has no preferences. The Director may extend any deadline for good cause and has discretion to make decisions that facilitate appointment of arbitrators.

UBSFS failed to return its lists by the September 10 deadline, later claiming it never received them. On September 11, it received a letter, dated September 3, reminding it of the September 10 deadline. Now aware it had missed the deadline, UBSFS moved to extend it, but its request was denied. “The Director ruled that good cause to extend the deadline did not exist because FINRA had timely mailed the initial lists of arbitrators as well as a courtesy reminder, and had not received any mail returned as undeliverable.” Id. at 4-5.

FINRA appointed the three-member arbitration panel based on the preferences submitted by Padussis. At the first hearing, “UBSFS challenged the composition of the panel based on UBSFS’s lack of participation in the selection of the arbitrators,” but the panel denied the challenge and proceeded with the arbitration. Id. at 5. The panel ultimately awarded UBSFS $1,683,262 and Padussis $932,887 and denied any relief not specifically addressed by the award. Consistent with FINRA’s procedures, the panel did not explain its reasoning.

UBSFS was not happy. “Padussis insisted that due to a statutory lien and the prospect of bankruptcy, he would be financially unable to pay the balance of the note, which left UBSFS in the position of owing him over $900,000 for the damage he claimed it had done to his business.” Id. at 5. UBSFS sued in the U.S. District Court for the District of Maryland, seeking to vacate the award, claiming “the arbitrators were not selected in accordance with the parties’ agreement because UBSFS had not provided its preferences to FINRA.” Id. Alternatively, UBSFS asked the district court to offset the two awards, “citing Padussis’s admission that he was unlikely to be able to pay his portion of the judgment.” Id. at 5-6. UBSFS’s efforts failed in the district court and they fared no better on appeal.

The Fourth Circuit discussed the limited role courts play in reviewing arbitration awards, explaining that while courts “will decide whether parties agreed to arbitrate a particular dispute” or “whether arbitrators were appointed according to the parties’ agreement,” they “defer to the arbitral panel both on the merits of the final decision and on procedural questions that ‘grow out of the dispute,’ even where those questions ‘bear on its final disposition.’” Id. at 6-7 (citations omitted).[2] This judicial deference recognizes that parties choose arbitration “to avoid the time and expense of litigation” and thus “avoid exactly what happened here, which is a protracted set of judicial proceedings that have sacrificed the very advantages inhering in the arbitral forum.” Id. at 7, 8.

The court first considered and rejected UBFS’s challenge to the selection of the arbitrators, concluding that FINRA had adhered to its procedures for the selection process. But UBSFS argued that those procedures were intended to ensure each party’s participation in the selection process and that FINRA’s decision undermined that intent. The court framed the issue: “This case, then, does not involve the question of whether FINRA failed to follow the rules for appointing an arbitrator. FINRA did. Instead, this is a question of whether FINRA properly applied those rules.” Id. at 10. In short, UBSFS thought that FINRA’s Director erred in not finding good cause to extend the deadline for UBSFS to submit its preferences for the arbitration panel and not exercising his discretion to make sure that UBSFS had input toward the selection of that panel. As the court explained, however, those types of procedural questions are left to arbitrators, not judges, to decide:

We will not second-guess FINRA’s decision that there was not good cause to extend the deadline. The parties agreed to arbitrate their disputes according to rules that clearly gave the Director the authority to make that decision. To usurp the Director’s authority would be to open courts to legions of questions about whether arbitral bodies properly applied one rule or another. This would deprive parties of the very benefits they sought by agreeing to arbitration – relatively prompt and inexpensive dispute resolution.

Id. at 12 (footnote omitted).

The court was equally unimpressed with the second issue urged by UBSFS, i.e., whether the arbitration panel should have offset the $932,000 it directed UBSFS to pay Padussis against the $1,683,262 it directed Padussis to pay UBSFS. The “arbitration award expressly denied ‘[a]ny and all relief not specifically addressed’ by the award, and the award did not mention an offset.” Id. at 13 (citation omitted). Thus, “applying an offset to this award would be a modification of the award.” Id. The court refused to do that. The Federal Arbitration Act authorizes judicial modification in only “specific, narrow circumstances,” including when “the award is imperfect in matter of form not affecting the merits of the controversy,” and the modification furthers the intent behind the award and promotes “justice between the parties.” Id. (internal quotation marks omitted) (quoting 9 U.S.C. §11).

Yet even if applying an offset were considered a matter of form, the court refused to provide that relief. “The award itself is silent on the question of an offset, and there is no evidence in the record that would enable us to say that the arbitrators intended for the award to include one.” Id. at 13-14. As the court went on to say, the decision to provide an offset was one to be made by the arbitration panel:

We cannot know what the arbitration panel in this case would have ruled if UBSFS had asked it to provide an offset. That decision, though, was for the arbitration panel, and UBSFS should have asked the panel to make it. For whatever reason, it did not do so, and the question is simply not one for the courts to answer.

Id. at 14 (emphasis added). And the court declined UBSFS’s entreaty to “recognize a presumption favoring an offset,” stressing again that the decision to impose an offset falls squarely within the province of the arbitrators. Id. at 14-15.

In the concluding paragraph of its opinion, the court nicely summarized the message being conveyed to the parties, their counsel, and to the bar at large:

When all is said and done, UBSFS plainly agreed to a process and then declined to abide by the result of that process. It agreed to arbitration; the dispute was within the scope of that agreement; and the rules by which the arbitration would proceed were openly declared and followed. The arbitration here spanned eighteen hearing sessions over nine separate days. We can find no basis for overturning the arbitral decision.

Id. at 15.

In short, when parties submit their disputes to arbitration, they should not expect courts to second-guess procedural decisions rendered by the arbitrators. While courts will make sure that the arbitrators’ decisions concerned issues properly presented to the arbitrators, courts will not review the wisdom, fairness, or correctness of those decisions.   

 

[1] “Take This Job and Shove It” was a 1977 country music song written by David Allan Coe and performed and popularized by Johnny Paycheck.

[2] Judge J. Harvie Wilkinson III authored the opinion and was joined on the panel by Judges Robert B. King and Pamela A. Harris.

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