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November 02, 2013

Judicial Attention to the Powers of Emergency Arbitrators

Is emergency arbitral relief granted by an emergency arbitrator inherently provisional, and therefore not final, and therefore beyond the powers of the emergency arbitrator insofar as the relief ordered would require a party to do something with irreversible consequences, and, finally, not capable of judicial recognition as an Award because of its necessarily provisional nature, being subject to modification by the regular arbitral tribunal in due course? This week’s answers are no, no, no, and no. (Yahoo!, Inc. v. Microsoft Corp., 2013 WL 5708604 (S.D.N.Y. Oct. 21, 2013)).  But tune in again next week. The case will be argued in the U.S. Second Circuit Court of Appeals on November 6.

Yahoo and Microsoft made a deal, to combine search engines and migrate Yahoo’s search engine advertising business to Microsoft’s Bing, all in the interest of competing more effectively with Google.  The parties agreed to arbitrate and opted into the AAA’s then-optional Emergency Arbitration rules (now incorporated into the AAA Commercial Arbitration Rules, and binding with regard to disputes arising from arbitration agreements made after October 1, 2013). In their arbitration clause, the parties agreed “that the [emergency] arbitrator is authorized to compel and award interim injunctive or emergency relief,” and further provided that “the [emergency] arbitrator… may compel and award specific performance.”

Yahoo after substantially performing the migration in most markets paused the migration effort in two important Asian markets and Microsoft, concerned that Yahoo was repudiating the unperformed remainder of the deal, commenced Emergency Arbitration.   A renowned arbitrator was appointed by the AAA; volumes of evidence and written argument were presented; two days of intensive oral hearings were conducted; and the following week the Emergency Arbitrator made an Award. He found that there was urgency, amounting to “emergency” as that term was used in the agreement of the parties, for Yahoo to complete the migration. His Award directed Yahoo to complete the migration, promptly.

In this decision the district court denied Yahoo’s motion to vacate, and rejected Yahoo’s argument that the contract phrase “interim injunctive or emergency relief” confined the emergency arbitrator’s powers to relief that was temporary in nature. One can perhaps see the argument that “emergency relief” was intended to be a narrower subset of “interim injunctive relief.” One can also perhaps see the argument that the term “interim” in the grammatical structure of the phrase modified both “injunctive” relief and “emergency relief.”  But the Emergency Arbitrator did not accept these arguments, especially in the context of an agreement that, in the next sentence, granted the Emergency Arbitrator power to order specific performance. The Emergency Arbitrator made a not nonsensical construction of the arbitration agreement.  That was sufficient for this district judge to conclude that, under governing Second Circuit law, the Emergency Arbitrator acted with his powers.

Is there something special here that might motivate the Second Circuit to see a need to clarify or modify existing law, or even reverse the judgment of the District Court?  In the Arbitration Commentaries crystal ball, this is not foreseen. Be prepared for a disposition by Summary Order affirming the judgment. (Caveat: The record on appeal is under seal. Your commentator cannot study it).

But if the mood does strike this Second Circuit panel, it might be tempted to nibble at the heels of one of its often-cited cases on deference to arbitral decisions about the scope of arbitral power: T. Co. Metals v. Dempsey Pipe & Supply, Inc., 592 F.3d 329 (2d Cir. 2010).  In that case the arbitrator was asked to correct a “clerical error” in his Final Award under the AAA International Rule allowing such corrections. But the error involved was not clerical; rather the arbitrator had misinterpreted data in certain exhibits, and concluded that he could invoke the clerical error rule to revisit a subjective judgment affecting damages that initially had been based not only on the mis-interpreted data but also on several other items of evidence that the arbitrator had correctly understood. Might the Second Circuit, after Stolt-Nielsen, ­have Second Thoughts about this aspect of Dempsey Pipe­ and conclude that when an arbitrator does not interpret an AAA Rule but revises it (in this instance, to allow correction of non-clerical judgmental errors) he or she applies his or her own notions of good arbitration practice rather than the terms of the parties’ agreement, and thereby exceeds his or her powers? ­

[The author of Arbitration Commentaries, a dedicated full-discloser, discloses that he was counsel for the defeated appellee in Dempsey Pipe, and still seeks vindication.]