Tenth Circuit Decides Manifest Disregard of the Law Case and Imposes Sanctions Under 28 U.S.C. § 1927 for ‘Frivolous’ Attempt to Vacate Arbitration Award

[Hat tip to our blog contributor Peter S. Vogel]

The United States Court of Appeals for the Tenth Circuit held that an arbitrator did not act with manifest disregard of the law when he turned to extrinsic evidence to determine the parties’ intent. The court also granted sanctions to compensate the company for unnecessary legal fees incurred when the other party appealed the arbitral award.

I. Background

In DMA Int’l, Inc. v. Qwest Communications Int’l, Inc., No. 08-1392 (10th Cir. Nov. 4, 2009), DMA International, Inc. (DMA) contracted to provide database research services to Qwest Communications International, Inc. (Qwest) in April 2004. Their contract contains the following fee provision:

[F]ees for Services rendered hereunder are as follows:
Twenty-five dollars and twenty cents ($25.20) per circuit satisfactorily completed. (Fee is based on an hourly rate of forty-five dollars ($45) with 1.8 circuits completed per hour).

Eight months later, when the contract expired, DMA billed Qwest for $5.4 million, which included a $1.6 million deduction representing fees already paid by Qwest. Qwest refused to pay the final balance claiming that the $1.6 million paid to DMA was enough to satisfy its obligations under their contract. DMA submitted the dispute to arbitration and the arbitrator ruled against DMA. Then, DMA filed a motion to vacate the award in district court. The district court held that DMA had no basis for vacatur and confirmed the arbitral award. DMA now appeals.

DMA claims that the amount due under the contract should be based on the number of circuits completed. At $25.20 per circuit, for 285,000 circuits resulting on a final balance due of $5.4 million. On the other hand, Qwest insists that the parties intended the services to be paid per hour, at the rate stated in parenthesis. That is, $45 per hour at a rate of 1.8 circuits per hour yields a final price of $1.7 million.

II. Manifest Disregard of the Law

The Tenth Circuit first addressed DMA’s main argument that the arbitrator manifestly disregarded the law. The court highlighted the standard stating that “[T]he record must show the arbitrator knew the law and explicitly disregarded it.” The court explained that the arbitrator found the contract provision ambiguous and appropriately considered extrinsic evidence, in accord with Colorado contract law. The evidence included an eleven-day arbitration hearing in which 16 witnesses testified and 140 exhibits were admitted. At the end, the arbitrator concluded that the parties intended for DMA to be paid at the rate of $45 per hour. Therefore, the court agreed with the district court that the arbitrator “correctly stated the law governing contract interpretation and applied it to the fees provision.”

Interestingly, the court also noted on footnote 2 that:

Qwest contends that this argument is foreclosed by Hall Street Associates v. Mattel, Inc., 128 S. Ct. 1396 (2008), in which the Supreme Court held that 9 U.S.C. § 10 provides the exclusive grounds for expedited vacatur of an arbitration award. 128 S. Ct. at 1403. Whether manifest disregard for the law remains a valid ground for vacatur is an interesting issue, but as the district court noted, one not central to the resolution of this case. As described below, the arbitrator did not act with manifest disregard of the law or in any other way that would justify vacatur. (emphasis added)

III. Attorney Fees

Next, the court turned to Qwest’s motion for attorney fees under 28 U.S.C. § 1927 (Counsel Liability for Excessive Costs). The court noted that the Federal Rule of Appellate Procedure 38 (Damages and Costs for Frivolous Appeal) also authorizes the court to “award just damages and single or double costs to the appellee if [the court] determine[s] that an appeal is frivolous.”

Then, citing Lewis v. Circuit City Stores, Inc., 500 F.3d 1140, 1153 (10th Cir. 2007), the court said that “[b]ecause arbitration presents such a ‘narrow standard of review,’ Section 1927 sanctions are warranted if the arguments presented are ‘completely meritless.’” The court distinguished Lewis and found that the facts of present case are more similar to B.L. Harbert International LLC v. Hercules Steel Co., 441 F.3d 905 (11th Cir. 2006). The court warned that “protracted attempts to vacate arbitration awards destroy the ‘promise of arbitration’ and will not be tolerated.”

Finally, the court reasoned that DMA’s argument amounts to say that the arbitrator clearly erred in interpreting the contract provision, and that even a showing of clear error is not enough to vacate an arbitral award. Accordingly, the court held that DMA’s appeal of the arbitral award met both of the standards (28 U.S.C. § 1927 and Rule 38) and remanded the case for the district to determine the attorney fees and costs.

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