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April 02, 2015

Bifurcated Arbitration and Interlocutory Review: Once More to the Well

Dear Readers, if you turned to these pages to learn about recent decisions in big, impactful international investment disputes over (lawful) expropriation of maritime assets in Venezuela or (alleged) denial of justice to American energy titans in Ecuador, you may be disappointed. (But see “Nice Try Venezuela”, below). This post is inspired by a gritty quotidian domestic dispute, between a Miami limousine service and one of its drivers — the cherubic talkative type who might ferry an eminent international arbitrator to Miami International Airport for an early morning flight to Washington.

But seriously. We need to talk — about the eligibility of interlocutory awards for confirmation or vacatur under the Federal Arbitration Act. Perhaps there will be readers on the U.S. Court of Appeals for the Eleventh Circuit, whose three-judge panel decided Schatt v. Avventura Limousine & Transp. Service, Inc., 2015 WL 1134910 (11th Cir. Mar. 16, 2015).

The Avventura arbitration, under AAA Commercial Rules, involved claims under the Fair Labor Standards Act (FLSA) asserting that the Claimant was an employee protected by the FLSA and had been compensated less fairly than the Act requires. The position of Respondent (the  putative employer) was that Claimant was not an employee but only an independent contractor to whom the FLSA did not apply. This liability issue, i.e. whether the FLSA applied at all, was bifurcated, evidently by agreement of the parties and with consent of the arbitrator. In an “Interim Award on Liability,” the arbitrator decided that Claimant was an employee, and she set in motion a damages phase of the case. Thereafter, the U.S. District Court in Miami granted a motion to disqualify Claimant’s counsel based on improper contacts with Respondent during the arbitration, contacts found to have been calculated to undermine the effectiveness of Respondent’s counsel. The District Court also received Respondent’s motion to vacate the Interim Award on Liability, and ruled that (1) the award was sufficiently final to be subject to review under the FAA, and (2) based on the same circumstances that warranted disqualification of counsel, the award had been “procured by fraud, corruption, or undue means” (FAA § 10 (a) (1)) and therefore should be vacated. In Avventura, the Eleventh Circuit reversed on the basis that the Interim Award was non-final and therefore the District Court lacked power to apply the FAA grounds for vacatur.

At least in part because Respondent did not submit a brief, the Eleventh Circuit in Avventura did not consider case law from other Circuits that permits FAA review of arbitration awards that do not end the arbitration in at least three circumstances:

1) an award of provisional relief, where judicial enforcement of the award is necessary for the provisional measures to be effective,

2) an award that fully resolves a separate and independent claim within the arbitration,

3) an award that finally determines liability, where the parties have agreed to the bifurcation of the arbitration into liability and damages phases.

The Avventura award appears to have qualified for FAA review under Category 3.  But the Court did not evidently find that  case law in its own research, and adopted what we may call the Anti-Schubert Rule: no Unfinished Symphonies.  The Court treated “final[ity]” in the FAA as a literal concept, and held that an award is not final when “the arbitrator’s work [is] not complete.”

The Eleventh Circuit will undo its Anti-Schubert Rule in due course, we may reasonably predict. My concern is, more broadly, with Category 3, concerning bifurcated arbitrations, and why it is (or is not) necessary for there to be an express agreement of the parties to bifurcate, made during the arbitration, as a precondition of FAA review of a partial award on liability.

The reason given by courts for assigning importance to the parties’ agreement to bifurcate (as originally stated by the Second Circuit in the Trade & Transport case in 1991, and repeated by the First Circuit in the Hart Surgical case in 2001) was that such agreement provided assurance to the courts that the parties and arbitrators understood during the arbitration that the award on the bifurcated issue (usually liability) would be final and binding and that the arbitrator would be functus officio with respect thereto. But if the rules of arbitration adopted by the parties provide for partial and interim as well as final awards, and provide that all such awards shall be final and binding on the parties, and provide that awards may only be modified by arbitrators to correct clerical errors, isn’t is fair to say that the power of the arbitrator to make a partial award that has sufficient finality to be judicially reviewable is built into the agreement to arbitrate? (The final and binding status of any award the tribunal might issue is clear in, for example, the arbitration rules of the ICDR, ICC, and UNCITRAL, and in the 2010 JAMS Comprehensive Arbitration Rules; the AAA Commercial Rules are less clear but the same conclusion is inferrable). Arguably, the existence or not of an explicit bifurcation agreement made during the arbitration should only matter if the rules governing the arbitration leave uncertainty about the ability of the arbitrator to reconsider, and reverse or modify substantively, an interlocutory decision called an “award.”

In the future courts may wish to consider whether an agreement of the parties to bifurcate liability and damages, or to bifurcate the arbitration in some other fashion that entails multiple awards, ought to be the necessary predicate for a court to decide that a partial or interim award is reviewable.  “Finality” under the FAA is not defined precisely, and so it should be determined pragmatically. Absent other indications of what the parties intended, or expected, core principles underlying the FAA would suggest that the finality of an award that leaves some issues still open should be determined according to (1) the arbitrator’s indicated intention that the decision resolves a matter permanently and irreversibly, not temporarily or provisionally, (2) the importance of immediate review to the effectiveness of the arbitral decision, and (3) whether review is more likely to advance the completion of the arbitration or, at the opposite pole, disrupt the case with piecemeal review.

If the parties did not agree to bifurcation, but instead had bifurcation imposed by the arbitrator(s), the absence of agreement should not necessarily determine that a partial award on liability lacks jurisdictional eligibility to be confirmed or vacated. This circumstance instead requires courts to make record- and context- specific pragmatic judgments about the virtue or vice of interlocutory review.  Suppose the arbitration is conducted under a provider’s rules that permit (as nearly all do) partial and interim awards and contain no limits on arbitrator discretion to bifurcate. Bifurcation of liability and damages is sought by Claimant, opposed by Respondent, and granted by the arbitrators in an early procedural order that states expressly the Tribunal’s intention that the liability phase will culminate in a partial award on liability that finally determines liability and leaves the Tribunal functus officio as to liability, and will be, as far as the Tribunal is concerned, subject to judicial review. Suppose further that the prospective virtue or vice of interlocutory review was clearly argued to the Tribunal in the motion to bifurcate. If the Tribunal after hearing the liability phase of the case follows through with a partial award on liability, the Tribunal’s judgment that interlocutory review provides more virtue than vice should be respected by the court absent some compelling countervailing consideration relating to the arbitral process.