What Are Your Options When You Think That Your Arbitrator Has Gone Out Of Control?

You don't have many options when you think that the arbitrator who you agreed to hear your case has delivered a plainly wrong arbitration award.  In fact, you probably have none at all.

The Defendants in the NC Business Court's recent decision in Trilogy Capital Partners,, LLC v. Killian, 2015 NCBC 103 were left stuck with a $4 million plus Award against them, despite their argument that the Arbitrator had exceeded his authority in making that Award.

The North Carolina Revised Uniform Arbitration Act

These parties had been arbitrating pursuant to the North Carolina Revised Uniform Arbitration Act, which provides only narrow grounds for vacating an arbitration Award.  The reasons include that the arbitrator ""exceeded the arbitrator's powers." The entire list is contained in Section 1-569.23 of the General Statutes.

It's Not Enough That The Arbitrator Just "Got It Wrong"

The Defendants argued that the Arbitrator awarded greater damages than those permitted under the North Carolina Limited Liability Company Act.

Judge McGuire disagreed that this was a basis for vacating the Award and held that:

even if the Arbitrator awarded damages outside of those available under the statute, such an award amounts to no more than an error of law insufficient to vacate the Award.

Op. ¶34.

Arbitrators Do Not Have To Follow The Law

But even if North Carolina law had limited the Arbitrator in the amount he was permitted to award, that made no difference.

Judge McGuire held that arbitrators:

'are not bound to decide according to law when acting within the scope of their authority, being the chosen judges of the parties and a law unto themselves, but may award according to their notion of justice and without assigning any reason.'

Op. ¶33 (quoting Bryson v. Higdon, 222 N.C. 17, 19-20 (1942)).

This Deference To The Decisions Of Arbitrators Is Not A Recent Development

This hands-off approach to the decisions of arbitrators -- even if they don't follow the law and are completely wrong -- is nothing new.

In 1895 (that's right. 120 years ago!), the NC Supreme Court held that:

[i]f an arbitrator makes a mistake, either as to law or fact, it is the misfortune of the party, and there is no help for it.  There is no right of appeal, and the Court has no power to revise the decisions of judges who are of the parties own choosing.

Patton v. Garrett, 116 N.C. 497, 504 (1895)(quoted in Op. ¶34)(emphasis added).

The Federal Arbitration Act

Do you have a greater chance of averting the effect of a wrongly decided arbitration Award under the Federal Arbitration Act?

Probably not.  The grounds for vacating an Award per the FAA are contained in 9 U.S.C. §10.  They are pretty congruent with the grounds enumerated in the state statute.

Federal courts used to recognize "manifest disregard of the law" as an additional common law basis for vacatur, but that ground for challenging an Award was cast into doubt by the United States Supreme Court in Hall Street Associates, LLC v. Mattel, Inc., 552 U.S. 576 (2008) in which the Court said that the grounds set forth in the statute are exclusive.

There is an additional basis in the federal statute for "modification or correction of an award."  Section 11 of the FAA says that a Court may do so if "there was an evident material miscalculation of figures."  10 U.S.C. §11(a).

The Plaintiff in the case before Judge McGuire might have taken a run at a "material miscalculation of figures" argument if the FAA were applicable.  But that argument would likely not have succeeded, given that the argument was more that the award of damages wasn't warranted under the law as opposed to a "miscalculation."

 

NC Business Court Turns 100

The Business Court turned out its one hundredth published (numbered) opinion of 2015 at the end of last week.  It came in the form of a tax case, in Home Depot U.S.A., Inc. v. North Carolina Dept. of Revenue, 2015 NCBC 100.

How much of a milestone ruling is this?  It marks the first time that the Business Court has delivered one hundred opinions in a year.  That's way more than the opinions issued by the Court in its early years (like in 1996, the Court's second year: 2 opinions, 1997: 5 opinions, 1998: 4 opinions).  Its most productive year before this year was 2014: 73 opinions.

You might be wondering how those 100 opinions compare to the production of the Delaware Court of Chancery.  That Court has already rendered more than twice the number of opinions of the Business Court, 237.  Well, there are five Judges (Chancellors) on that Court and only three active Judges on the Business Court.

And don''t forget that the Court of Chancery is way older (founded in 1792) than the Business Court (founded in 1995).

The Case Was About A Sales Tax Refund Based On The "Bad Debt Deduction"

Home Depot was seeking a refund of some of the sales tax which it had paid to the Department of Revenue (DOR). It said that it was entitled to a bad debt deduction against its gross sales, the amount on which sales tax is calculated.  The requested bad debt deduction for 2004-07 was nearly $2 million.  Op. ¶7.

The applicable statute says that a retailer can deduct from its gross sales "[a]ccounts of purchasers, representing taxable sales, on which the tax imposed by this Article has been paid, that are found to be worthless and actually charged off for income tax purposes."  N.C. Gen. Stat. §105-164.13(15).

Private Label Credit Cards

The bad debts which Home Depot was seeking to deduct were unpaid amounts on Home Depot's Private Label Credit Cards (PLLCs)(credit cards branded with Home Depot's colors and logo, usable only at Home Depot).

If a Home Depot customer does not pay his or her PLLC bill, doesn't Home Depot suffer a bad debt which it should be allowed to deduct from its gross sales?

You would think the answer should be "yes," but first you need to get into the business of PLLCs.  Home Depot doesn't actually extend the credit which its customers enjoy on their cards.  Home Depot, like many other companies that issue PLLCs, farms out the administration of its PLLC program to third party lenders.  In Home Depot's case, the lenders were General Electric Capital Financial, Inc., and Monogram Credit Card Bank of Georgia,  Op. ¶20(5).

The third party banks owned the PLLC accounts.  The banks settled up with Home Depot at the end of each day, paying Home Depot the amount charged by the customer less a service fee.  Op. ¶20(16-17).  The bank, not Home Depot, bore the risk of non-payment.

This case represents one of a number of cases where Home Depot has sought a state sales tax refund based on a bad debt deduction.  Home Depot has apparently not won a single one of these cases. The states where Home Depot has made the same arguments as in North Carolina and lost include: Alabama (Magee v.. Home Depot U.S.A., Inc., 230 So.3d 781 (Ala. App. 2011); Arizona (Home Depot U.S.A., Inc. v. Arizona Dept. of Revenue); Indiana (Home Depot U.S.A., Inc. v. Indiana Dept. of State Revenue, 891 N.E.2d 187 (Ind. Tax 2008);  New Jersey (Home Depot, U.S.A., Inc. v. Director, Division of Taxation); New York (In re Home Depot USA, Inc. v. Tax Appeals Tribunal);Ohio (Home Depot U.S.A., Inc. v. Levin, 905 N.E.2d 630 (Ohio 2009); Oklahoma (In re Sales Tax Claim for Refund of Home Depot, 198 P.3d 902 (Okla. App. 2008); and Washington (Home Depot, U.S.A., Inc. v. State Dept. of Revenue); 

Home Depot can now add North Carolina to its list of losses.  This was an appeal to the Business Court, from a final Agency Decision of the DOR, which had affirmed a grant of summary judgment against Home Depot by an Administrative Law Judge.  Home Depot didn't get traction in the Business Court with any of its arguments.


 

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You CAN Get A Ruling From A Superior Court Judge After Your Case Is Designated To The Business Court

I wrote yesterday about the arbitration aspects of Gaylor, Inc. v. Vizor, LLC, 2015 NCBC 98.

But there is a significant aspect of Business Court procedure addressed in that case which deserved its own post.

It concerns the authority of a non-Business Court Judge (i.e. a regular Superior Court Judge) to make a ruling in a case after the case is designated to the Business Court.

Business Court Rule 15.1 seems to preclude that kind of ruling. It says that:

[a]fter a case has been assigned or designated to the Business Court . . . parties shall seek rulings on all motions in the case from this Court, and not from Superior Court Judges or Clerks in the counties where cases originate."

I''ve written before about getting a ruling from a Superior Court Judge after designation to the Business Court, but that post was based on emails from two of the Business Court Judges' law clerks and the Business Court TCA (for the many otolaryngologists* who read this blog and who may not know what a TCA is, it is a "Trial Court Administrator," who is charged with managing civil cases as they move through the judicial system).  I cautioned then against relying too heavily on the statements of persons who were not Judges.

But now you've got the Business Court's interpretation of its Rules straight from a Judge.  Here's what Judge Bledsoe said In the Vizor decision:

[w]here, as here, a Notice of Designation requesting designation of a matter as a complex business  case has been filed after a motion has been calendared for hearing before the presiding Superior Court Judge of the county in which the action is pending, the policy of the Business Court has been that the judge before whom the matter was calendared may, in his or her discretion, elect to rule on the motion or defer resolution of the motion to the Business Court judge assigned to the case.

Op. ¶12 & n.4 (emphasis added).

If this practice now bears Business Court approval, it still won't be an easy trick to pull off.  Even if you can get a motion calendared for hearing in Superior Court before the designation of the case to the Business Court, my guess is that most Superior Court Judges probably will decide not to rule in a case that is headed to the Business Court.

_______________

*Well, there really is at least one.  And if you don't know what an otolaryngologist is, it is an ear, nose, and throat doctor.

 

 

NC Business Court On Arbitrability: Clear And Unmistakable

You may have pondered over the question whether a Judge or an Arbitrator decides if a particular dispute is subject to an agreement to arbitrate.

If you have wondered who makes that sort of decision, it's actually not an open question.  The U.S. Supreme Court held twenty years ago that:

[u]nless the parties clearly and unmistakably provide otherwise, the question of whether the parties agreed to arbitrate is to be decided by the court, not the arbitrator.

AT&T Techs. v. Commun. Workers of America, 476 U.S. 643, 649 (1986)(emphasis added).

The Business Court addressed what can be "clear and unmistakable" at the end of last week in Gaylor, Inc. v. Vizor, LLC, 2015 NCBC 98.  Plaintiff, a subcontractor on a construction project, was suing the general contractor on the project, Vizor.

The issue before Judge Bledsoe was whether the arbitration should include the resolution of Plaintiff's unfair and deceptive practices claim.  In other words, the question was the "arbitrability" of that claim --whether it should be decided in the Business Court or by the arbitrator.

The subcontract said nothing specifically about the scope of the arbitrator's authority.  It provided that all claims rising out of, or relating to this Agreement or the breach thereof. . . shall be subject to arbitration."  But it also said that "[s]uch arbitration shall be conducted in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association then in effect." Op. ¶19.

Rule 9(a) of the Construction Industry Arbitration Rules seems to decide the question.  It says that "[t]he arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement."

This case was decided under the Federal Arbitration Act.  The Fourth Circuit, however, has never ruled on whether the incorporation of the AAA's Construction Industry Rules meets the "clear and unmistakable" standard laid down by the Supreme Court.

Judge Bledsoe neverthelesss boldly went ahead and ruled that the incorporation of the AAA Rules met the "clear and unmistakable" standard.  Actually, it's not so bold of a ruling, because seven federal Circuit Courts had already reached the same conclusion.  See United States ex rel. Beauchamp v. Academi Training Ctr., 2013  U.S.. Dist. LEXIS 46433, at *15-16 (E.D. Va. 2013).

You might be thinking that you don't care much about this decision because you don't handle  construction arbitrations.  But you would be wrong.  The AAA's Commercial Arbitration Rules contain a very similar provision.  It's Rule 7, which says that:

The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim.

So if you have a question of the arbitrability of a claim. and the arbitration agreement incorporates the AAA Rules, arbitrability is likely to be resolved by the arbitrator.