Reliastar Life Ins. Co., N.Y. v. Emc Nat. Life Co.

564 F.3d 81

RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK, Petitioner-Appellant, v. EMC NATIONAL LIFE COMPANY, also known as National Travelers Life Company, Respondent-Appellee.

Docket No. 07-0828-cv.

United States Court of Appeals, Second Circuit.

Argued: July 7, 2008.

Decided: April 9, 2009.

Pieter Van Tol, Lovells, New York, NY, (Gail M. Goering and John M. O'Bryan, Lovells, Chicago, IL, on the brief), for Petitioner-Appellant.

John M. Nonna, LeBoeuf, Lamb, Greene & MacRae, LLP, New York, NY, (Richard J. Cairns, LeBoeuf, Lamb, Greene & MacRae, LLP; Denny M. Dennis, Todd A. Strother, and Michael L. Mock, Bradshaw, Fowler, Proctor & Fairgrave, P.C., Des Moines, IA, on the brief), for Respondent-Appellee.

Before: POOLER, RAGGI, Circuit Judges, and TRAGER, District Judge.¹

REENA RAGGI, Circuit Judge:

On this appeal, we consider whether parties' inclusion in an arbitration agreement of a general statement that each will bear the expenses of its own arbitrator and its own attorneys deprives the arbitration panel of authority to award such expenses as a sanction against a party whom the panel determines failed to arbitrate in good faith. We conclude that it does not and, accordingly, reverse the judgment of the United States District Court for the Southern District of New York (Lewis A. Kaplan, Judge), entered on February 14, 2007, insofar as it vacated that part of an arbitration award requiring respondent EMC National Life Company ("EMC"), successor in interest to National Travelers Life Company ("National Travelers"), to pay such fees to petitioner ReliaStar Life Insurance Co. of New York ("ReliaStar"). We remand the case so that the district court may enter a new judgment confirming the arbitration award in all respects.

I. Factual Background

A. The Agreement to Arbitrate

In December 1997, National Travelers and ReliaStar entered into two separate but related coinsurance agreements, one pertaining to certain ReliaStar insurance policies in force as of January 1, 1998, and the other pertaining to certain ReliaStar policies to be issued on or after that date. Because the agreements have identical terms and conditions, for purposes of this appeal we refer to them collectively as the "Coinsurance Agreements."

Article X of the Coinsurance Agreements governed the parties' agreement to arbitrate. It reads in relevant part as follows:

10.1 Appointment of Arbitrators. In the event of any disputes or differences arising hereafter between the parties with reference to any transaction under or relating in any way to this Agreement as to which agreement between the parties hereto cannot be reached, the same shall be decided by arbitration. Three arbitrators shall decide any dispute or difference....

10.2 Decision. The arbitrators shall consider customary and standard practices in the life or health reinsurance business, as applicable to the dispute. They shall decide by a majority vote of the arbitrators. There shall be no appeal from their written decision. Judgment may be entered on the decision of the arbitrators by any court having jurisdiction.

10.3 Expenses of Arbitration. Each party shall bear the expense of its own arbitrator (whether selected by that party, or by the other party pursuant to the procedures set out in Section 10.1) and related outside attorneys' fees, and shall jointly and equally bear with the other party the expenses of the third arbitrator.

10.4 Applicable Law. Any arbitration instituted pursuant to this Article shall be held in New York, New York, or another site mutually agreed upon by the parties and the laws of the State of New York and to the extent applicable, the Federal Arbitration Act, shall govern the interpretation and application of this Agreement.

The particular focus of this appeal is section 10.3.

B. The Arbitration Award

When various disputes arose between the co-insurers, National Travelers initiated arbitration proceedings seeking (1) a declaration that the Coinsurance Agreements had been terminated and (2) approval for a proposed terminal accounting. ReliaStar opposed both National Travelers' claim of termination and its proposed method for conducting a terminal accounting.

Following discovery, in May 2006, an arbitration panel conducted a two-week hearing. On August 4, 2006, the panel entered an interim award, finding that the Coinsurance Agreements remained in force between the parties and directing National Travelers to pay ReliaStar more than $21 million past due under that agreement. The panel directed the parties to meet to resolve issues related to the resumption of their relationship under the Coinsurance Agreements. Further, in paragraph 6 of the award, a majority of the panel, without explanation, awarded ReliaStar attorney's and arbitrator's fees and costs.

The parties complied with all aspects of the award, except for that part granting ReliaStar fees and costs, which they agreed National Travelers could submit for reconsideration to the panel and, if necessary, challenge in court. After further briefing on the issue of fees and costs, the arbitration panel entered a final award on October 20, 2006. A majority of the panel awarded ReliaStar fees for its attorneys and arbitrator in the amount of $3,169,496, costs of $691,903.75, as well as interest, explaining that it viewed the conduct of National Travelers in the arbitration "as lacking good faith."

C. The District Court Proceedings

On October 20, 2006, ReliaStar petitioned the district court to confirm the final arbitration award, and on November 2, 2006, National Travelers filed a counter-petition to vacate the award to the extent it granted ReliaStar fees and costs. National Travelers argued that the arbitration panel had exceeded its authority in awarding fees and costs in light of section 10.3 of the Coinsurance Agreements, which obligates each party to "bear the expense of its own arbitrator ... and related outside attorneys' fees." The district court agreed and, accordingly, vacated that part of the final award requiring National Travelers to pay ReliaStar's attorney's and arbitrator's fees before confirming it in all other respects.

ReliaStar appeals the vacatur.

II. Discussion

A. Standard of Review

In considering a challenge to a district court's decision to vacate a portion of an arbitration award, we review its legal rulings de novo and its findings of fact for clear error. See Banco de Seguros del Estado v. Mut. Marine Office, Inc., 344 F.3d 255, 260 (2d Cir.2003).

The law is clear that because arbitration is "a matter of contract[,] ... a party cannot be required to submit to arbitration any dispute which he has not agreed to so submit." PaineWebber Inc. v. Bybyk, 81 F.3d 1193, 1198 (2d Cir.1996). The scope of an arbitrator's authority thus "generally depends on the intention of the parties to an arbitration, and is determined by the agreement or submission." Synergy Gas Co. v. Sasso, 853 F.2d 59, 63-64 (2d Cir.1988) (internal quotation marks omitted). Section 10(a)(4) of the Federal Arbitration Act allows courts to vacate an arbitral award "where the arbitrators exceeded their powers." 9 U.S.C. § 10(a)(4). We have, however, "consistently accorded the narrowest of readings" to this provision of law, Banco de Seguros del Estado v. Mut. Marine Office, Inc., 344 F.3d at 262 (internal quotation marks omitted), in order to facilitate the purpose underlying arbitration: to provide parties with efficient dispute resolution, thereby obviating the need for protracted litigation, see, e.g., Amicizia Societa Navegazione v. Chilean Nitrate & Iodine Sales Corp., 274 F.2d 805, 808 (2d Cir.1960) ("[T]he court's function in confirming or vacating an arbitration award is severely limited. If it were otherwise, the ostensible purpose for resort to arbitration, i.e., avoidance of litigation, would be frustrated.").

Thus, in considering a section 10(b)(4) challenge, "[t]he principal question for the reviewing court is whether the arbitrator's award draws its essence" from the agreement to arbitrate, "since the arbitrator is not free merely to dispense his own brand of industrial justice." 187 Concourse Assocs. v. Fishman, 399 F.3d 524, 527 (2d Cir.2005) (internal quotation marks omitted). If the answer to this question is yes, however, the scope of the court's review of the award itself is limited. Notably, we do not consider "whether the arbitrators correctly decided [the] issue." Banco de Seguros del Estado v. Mut. Marine Office, Inc., 344 F.3d at 262 (internal quotation marks omitted). If the parties agreed to submit an issue for arbitration, we will uphold a challenged award as long as the arbitrator offers "a barely colorable justification for the outcome reached." Id. at 260 (internal quotation marks omitted). In other words, "as long as the arbitrator is even arguably construing or applying the contract and acting within the scope of his authority," a court's conviction that the arbitrator has "committed serious error" in resolving the disputed issue "does not suffice to overturn his decision." United Paperworkers Int'l Union AFL-CIO v. Misco, Inc., 484 U.S. 29, 38, 108 S.Ct. 364, 98 L.Ed.2d 286 (1987); accord 187 Concourse Assocs. v. Fishman, 399 F.3d at 526.

Applying these principles to this case, we consider only whether, in light of the parties' agreement to arbitrate, the arbitrators were authorized to sanction bad faith conduct by awarding attorney's and arbitrator's fees. We do not—nor does respondent ask us to—consider whether the arbitrators correctly identified bad faith conduct or whether the amount of fees awarded was an appropriate sanction for that conduct.

B. The Parties' Broad Agreement to Arbitrate Conferred on the Arbitrators the Equitable Authority to Sanction a Party's Bad Faith Conduct

Where an arbitration clause is broad, arbitrators have the discretion to order such remedies as they deem appropriate. See Banco de Seguros del Estado v. Mut. Marine Office,...