08.07Arbitral Award Final Despite Reserved Power to Reconsider, Seventh Circuit Holds
This opinion by Seventh Circuit Chief Judge Frank Easterbrook skips rather lightly over some important distinctions between judicial and arbitral power. A closer look at the premises of the decision therefore seems appropriate.
A few distinctive features of the case put it in context. First, the arbitrator was a non-lawyer — a specialist in valuation of intellectual property rights, here patents on chemical formulas licensed for use in a cancer drug. Second, the license agreement provided for arbitration if the licensor believed the royalty rate was unduly low because the licensee was selling the drug in related-party deals rather than at arm’s length. Thus, the license provided for a serial arbitrations on the same issue, based on changed circumstances over time. Third, the arbitration evidently was not conducted under AAA or other rules, or under relevant state arbitration law, any of which might have addressed the ability of parties to request, or the arbitrator to grant, reconsideration.
Judge Easterbrook equates the arbitrator’s reservation of a right to reconsider based on new evidence with the right to such relief in a judicial proceeding conferred in Rule 60(b) of the Federal Rules of Civil Procedure. He suggests that the arbitrator may make such a reservation (where applicable arbitration rules, law, or the agreement of the parties don’t forbid it), without thereby rendering the decision non-final, subject to the 90-day limit FAA Section 12 for a motion in federal court under FAA Section 11 to modify or correct an award. And he cast aside the parties’ submissions regarding the “functus officio” doctrine as technical arcana of no use in deciding the case.
This approach takes some needless liberties with the FAA and arbitral common law principles. Before this case, we have understood Section 12 of the FAA to concern only a petition to a federal district court, not to an arbitrator, to modify (or correct) an award. And while it is correct to say that the passage of the 90 days without asking the arbitrator to modify the award means the award stands because a court must then confirm it without change, it is wrong to imply, as the decision does, that Section 12 directly permits a request to the arbitrator to modify or correct an award within 90 days after issuance. The FAA does not address that, and it disconcerting that a federal court of appeals would suggest that it does.
Second, the only permitted grounds for a federal judge to grant a petition to modify an award are those stated in FAA Section 11 — e.g., a material miscalculation of figures, or a material misdescription of a person, thing, or property in the award. FAA Section 11 does not provide for changing an award based on new evidence.
Third, federal appellate courts including the Seventh Circuit have recognized the “functus officio” doctrine as a federal common law principle that is read into the FAA as a limit on arbitral power. Thus, it is well-settled that an arbitrator is without power to act once she issues a final award, except to correct a mistake that clearly appears on the face of the award. A different sort of change — i.e. merits reconsideration — unless allowed by agreement, exceeds the arbitrator’s powers, and the purported amended award is be subject to vacatur under FAA Section 10(a)(5).
In this case, a non-lawyer arbitrator presumably not immersed in these nuances of arbitration law issued a decision that was contradictory — “final” and yet subject to revision based on new evidence, and with no stated time limit for presenting new evidence. The question the Court should have addressed was whether this was an award or an interlocutory order. If there was ambiguity about that, ample authority permitted remand to the arbitrator for clarification. The Seventh Circuit concluded that it was an award – or that it became an award 90 days after issuance — by superimposing on the purported arbitral reservation of power to reconsider the 90-day temporal limit of FAA Section 12. But this was an erroneous extension of FAA Section 12 beyond its judicial domain. Two possible approaches would have been more satisfactory. One would have been to remand to the arbitrator with directions to resolve the ambiguity. The other would have been to construe the arbitrator’s reservation of power simply as a recognition that under this license agreement, an award concerning the royalty rate was “final,” for the time being, but that the parties could re-open the issue, in a new arbitration whose outcome would have only prospective effect, based on changed circumstances in the future.
Not all readers of Arbitration Commentaries outside the United States will be aware that Chief Judge Easterbrook is widely regarded as one of the country’s most brilliant jurists. But as the opinion in this case illustrates, even the most brilling legal minds can produce troublesome applications of federal arbitration law when distinctions between judicial and arbitral power, reflected in the FAA and in evolved case law, are subordinated to reasoning that applies statutes and rules loosely and by analogy to advance what the court believes to be a sensible outcome.