Binding Means Binding (Most of the Time Anyway)

By David Tayman

Businesspeople ask for binding arbitration provisions to be worked into their contracts in the belief that arbitration is preferable to traditional litigation in terms of speed, cost, and efficiency of dispute resolution.  Whether or not that belief proves true is usually a function of the facts and circumstances of the particular situation.  However, as Judge Royce C. Lamberth of the U.S. District Court for the District of Columbia reminds us in his recent opinion, FBR Capital Markets & Co. v. Hans, — F.Supp.2d —- (D.D.C. 2013), certain things about arbitration are fairly predictable.  In particular, arbitrations conducted pursuant to binding arbitrations will result, in most instances, in arbitral awards that will be binding on the parties to the arbitration.

The case before Judge Lamberth was initiated under the Federal Arbitration Act (the “Act”) (9 U.S.C., § 1, et al.) following the award of a Financial Industry Regulatory Authority (“FINRA”) arbitration panel.  The Act is a body of federal law that provides a vehicle for the facilitation of arbitration, and for the recognition of the decisions resulting from private arbitrations.  Below the federal level, many states have enacted arbitration laws that are similar to the Act.  These state laws are often so similar that many states’ judiciaries look to federal caselaw for assistance in interpreting the state statutes.

FINRA is an independent, Congressionally-authorized, nonprofit organization that regulates the financial services industry.  In addition to promulgating rules to regulate the conduct of member organizations and their associated brokers and financial advisors, and enforcing those rules, FINRA provides an arbitration forum for the resolution of certain disputes.  Unless there is a written agreement requiring arbitration, FINRA arbitration of disputes between investors/customers and FINRA-member firms and/or their associated brokers and financial advisors is optional.  FINRA arbitration is mandatory for disputes between FINRA-member firms or between FINRA-member firms and “associated persons,” such as FINRA-registered brokers employed by or otherwise associated with a FINRA-member firm, when the dispute arises out of the non-insurance business of the FINRA-member firm or associated person.  The dispute at issue in FBR v. Hans stemmed from allegations by Hans that FBR, an investment bank and brokerage house based in Arlington, Virginia, failed to pay Hans brokerage commissions due under Hans’ agreement with FBR Capital Markets & Co. (“FBR”).

FBR initiated the case before Judge Lamberth by filing a petition under the Act to vacate the arbitration award entered by FINRA against FBR and in favor of the counterparty, a former broker for FBR.  The dispute at issue in the underlying arbitration was whether FBR had an obligation to pay its broker a commission on a transaction.  Judge Lamberth began his opinion by noting that judicial review of the findings of an arbitration panel is sharply limited by the Act and that Sections 10 and 11 of the Act provide the only grounds by which a federal court may vacate an arbitration award.  Only egregious departures from the parties’ agreed-upon arbitration are subject to judicial review:  corruption, fraud, evident partiality, misconduct, misbehavior, exceeding powers, evident material miscalculation, evident material mistake, and awards based upon a matter not submitted.  The only ground with any softer focus is imperfections, and a judge may review those only if they go to a matter of form not affecting the merits.  Because in promulgating the Act Congress clearly expressed an intentional national policy favoring arbitration as a dispute resolution venue, to vacate an arbitration order a petitioner must clear a high hurdle.

In its challenge to the arbitration decision, FBR argued that the FINRA panel manifestly disregarded the law.  Judge Lamberth disagreed and found that the FINRA arbitration panel had not manifestly disregarded the law but, on the contrary, had hear the arguments of both sides on the issues and made the legal decisions that the panel saw fit given those arguments.  Judge Lamberth then cited to D.C. Circuit precedent holding that courts reviewing arbitration decisions must confirm an arbitration award if a justifiable ground for the arbitration decision can be inferred from the facts of the case.  Finding that there were justifiable grounds for the FINRA arbitration panel to have reached its decision, Judge Lamberth then concluded that FBR had failed to meet its heavy burden and further admonished the petitioner that it should not continue to use the courts to re-litigate disputes it has settled, albeit not in its favor, through arbitration.

Judge Lamberth’s opinion in FBR Capital Markets & Co. v. Hans should serve as a reminder to everyone that, at least in the arbitration context, binding almost always means binding, and that one must meet a very high bar to vacate the decision of an arbitration panel that does its job properly.  Before businesses rush to put binding arbitration provisions in their commercial agreements the decision-makers should spend some time considering the kind of disputes that may spring from the transaction at issue.  Before opting to include binding arbitration provisions in commercial agreements, businesses should understand that, at a minimum, the parties must overcome a very high bar to overturn, seek higher review of, or otherwise “appeal” the result of a contractually binding arbitration.