Abbott v. Law Office of Mulligan , 440 F. App'x 612 ( 2011 )

FILED
United States Court of Appeals
UNITED STATES COURT OF APPEALS Tenth Circuit
TENTH CIRCUIT September 21, 2011
Elisabeth A. Shumaker
Clerk of Court
CHARLES F. ABBOTT, an individual;
CHARLES F. ABBOTT, P.C., A
professional Corporation,
Plaintiffs/Counter-Defendants -
Appellants,
v. No. 10-4113
(D. Utah)
LAW OFFICE OF PATRICK J. (D.C. No. 2:06-CV-00593-DB)
MULLIGAN, a professional corporation;
PATRICK J. MULLIGAN, an individual,
Defendants/Counter-Claimants -
Appellees.
ORDER AND JUDGMENT*
Before MURPHY, McKAY, and O'BRIEN, Circuit Judges.
Charles Abbott and Patrick Mulligan, both attorneys, entered into an agreement to
jointly handle litigation arising from the Fen-Phen national class action settlement.
Eventually a dispute arose over the terms of their contract when Mulligan discovered
*
This order and judgment is an unpublished decision, not binding precedent. 10th
Cir. R. 32.1(A). Citation to unpublished decisions is not prohibited. Fed. R. App. 32.1.
It is appropriate as it relates to law of the case, issue preclusion and claim preclusion.
Unpublished decisions may also be cited for their persuasive value. 10th Cir. R. 32.1(A).
Citation to an order and judgment must be accompanied by an appropriate parenthetical
notation B (unpublished). Id.
Abbott was keeping some cases for himself and referring others to a different attorney,
who agreed to pay him a greater share of any recoveries. A three-member arbitration
panel was convened under the Federal Arbitration Act (FAA) to resolve the dispute.
Both men were granted relief but the panel determined the contract was intended to be
exclusive, resulting in a substantial award to Mulligan based on the fees improperly kept
by Abbott or paid to the third attorney.1 Abbott appeals from the district court’s refusal
to vacate the damages award in favor of Mulligan.
Abbott claims the arbitration panel exceeded its authority in a manifest disregard
of Utah law by awarding Mulligan his gross, rather than net, profits. He also urges us to
vacate the award because an exclusive referral contract such as this one violates public
policy as evidenced by the American Bar Association’s Model Rules and the Utah Rules
of Professional Conduct. We AFFIRM.2
BACKGROUND
Fenfluramine, or Fen-Phen, a diet pill, was taken off the market on September 15,
1997, because it caused heart valve damage and a lung condition known as primary
pulmonary hypertension (PPH). Following national claims from persons injured by the
pill, a global settlement was reached through multi-district proceedings in Philadelphia.
Fen-Phen clients fall into three categories under the terms of the class action
settlement.3 “The settlement allowed claimants to ‘opt-in’ to the settlement, where, if
1
One member of the panel dissented and would have denied Mulligan relief.
2
Our jurisdiction derives from 9 U.S.C. § 16(a)(3) and 28 U.S.C. § 1291.
3
In December 1999, a jury awarded five Mississippi plaintiffs $150 million
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their claim passed audit, they would receive a settlement amount based on a ‘matrix’ grid.
Alternatively, claimants could ‘opt-out,’ meaning they could reject the matrix benefits,
and file an individual lawsuit against the manufacturer . . . .” (R. Vol. I at 91 n.2.) A
third subset of clients, the PPH subset, was not eligible for settlement proceeds and could
only pursue individual lawsuits. The opt-in cases were the easiest to complete and
presented the lowest risk to an attorney taking the case. The other two types of cases
required full litigation of claims.
Mulligan, a Texas plaintiffs’ attorney, and Abbott, a Utah plaintiffs’ attorney,
entered into an Attorney Association Agreement (the Agreement) in 2001 to “jointly
pursue obtaining Fen-Phen Clients who qualify for benefits under the [Settlement] and/or
who elect to opt out of said settlement.”4 (Id. at 28.) Abbott, designated as the
“Consulting Attorney,” was to “make all reasonable efforts” to retain as many qualified
clients as possible. (Id.) His responsibilities included advertising for prospective clients,
in damages arising from their use of American Home Products’s (“AHP”)
diet drugs . . . commonly known as Fen Phen. AHP entered into a
settlement agreement to pay $399 million to approximately 1500 claimants.
This settlement, known now as “Fen Phen I,” relied upon the claimants’
attorneys to gather proof that their clients had taken Fen Phen.
In December 2000, AHP entered into a second settlement, known as “Fen
Phen II,” in which it agreed to pay $350 million to an additional 1500
claimants. This settlement was processed in the same manner as the Fen
Phen I settlement, with the exception that AHP received copies of the proof
that each claimant had taken the drugs.
United States v. Arledge, 553 F.3d 881, 886 (5th Cir. 2008).
4
Although the Agreement was not memorialized in a document until April 2002,
the arbitration panel found the parties had entered into the Agreement in February 2001.
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preliminary screening of clients and arranging medical tests for qualified clients,
including echocardiograms. He would then refer the clients to Mulligan, designated
“Lead Trial Counsel,” to work the cases. (Id.) Abbott’s share of the fees varied
depending on whether he or Mulligan paid the initial costs of advertising and an initial
echocardiogram. Abbott was to receive 1/3 of Mulligan’s total fee when he paid those
costs and only 1/4 of the total fee when Mulligan paid the expenses.
The Agreement contained an arbitration clause directing all disputes to be resolved
“at the election of any party . . . by binding arbitration pursuant to the Federal Arbitration
[A]ct” under the American Arbitration Association’s rules for commercial arbitration.
(Id. at 30.) The arbitration clause specified it was enforceable “pursuant to the
substantive federal laws established by the Federal Arbitration Act.” (Id.) The choice of
law provision designated Utah law as the operative substantive law.
From February 2001 to November 2001, Abbott referred all Fen-Phen clients
exclusively to Mulligan. In November, Abbott began retaining some opt-in clients5 and
referring some of the opt-out clients to another attorney. In 2006, Mulligan, after
inquiring about a specific case, discovered Abbott’s self-dealing and started withholding
Abbott’s portion of fees earned under the Agreement. Abbott sued to recover his portion
of the fees. Mulligan counterclaimed, arguing the Agreement was exclusive and Abbott
had breached it by “cherry picking” Fen-Phen clients for himself. (Supp. Appx. at 666.)
5
Although Abbott claims he did this based on the clients’ best interests, it appears
his discriminating evaluation of client needs was to merely alternate days, keeping clients
on “Abbott days” and on the other days referring them to Mulligan.
-4-
After just under a year of litigation, Abbott moved the district court to compel arbitration.
The court granted the motion.
Between June 23 and June 27, 2008, a panel of three arbitrators conducted
evidentiary hearings. The primary issue was whether the contract required Abbott to
refer all of his Fen-Phen clients to Mulligan. According to Abbott, the Agreement was
not an exclusive referral contract and, if it was, it would violate the Utah Rules of
Professional Conduct and must be declared void. Mulligan, quite predictably, maintained
the agreement was exclusive and did not violate ethical rules. Abbott also claimed
Mulligan had presented insufficient evidence of his damages because he had not shown
his net, rather than his gross, losses (as required by Utah law).
Following post-hearing briefing on the issue of damages, the arbitration panel
issued an Interim Award. It determined Mulligan withheld just over one million dollars
in fees properly due to Abbott and ordered Mulligan to pay them. The panel, however,
found the Agreement was intended to be exclusive and presented no ethical problems
“because either party could terminate the Agreement.” (Id. at 136.) It concluded Abbott
should have referred all relevant clients to Mulligan but did not. It ordered Abbott to pay
Mulligan just under seven million dollars in fees for the clients Abbott either retained or
referred to another lawyer. The panel “decline[d] to compel either party to reduce the
amount claimed by the amount of expenses that may have been saved.” (R. Vol. I at
137.) Adjusted for interest and offsets, the final award required Abbott to pay Mulligan
$8,198,208.11 as well as Mulligan’s portion of the arbitration fees.
Abbott moved to vacate the arbitration award under 9 U.S.C. § 10. He argued the
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arbitration panel “manifestly disregard[ed]” controlling Utah law by awarding gross
rather than net damages and the award was “irrational.” (R. Vol. I at 105.) Mulligan
requested confirmation of the award under 9 U.S.C. § 9. The district court denied
Abbott’s motion to vacate and granted Mulligan’s motion to confirm, concluding the
arbitration panel’s ruling evidenced, at most, a misunderstanding or misapplication of the
law.6 After resolving other pending claims, it issued a final order and judgment.
Abbott filed a Rule 59(e) motion requesting reconsideration. In it, he argued for
the first time to the district court that the Agreement, as interpreted by the arbitration
panel majority, was void as against public policy because it required Abbott to violate the
rules of ethics prohibiting exclusive referral agreements. He contended an exclusive
referral agreement is void because it interferes with an attorney’s ability to exercise
independent judgment and illegally restrains the attorney’s ability to practice law and the
client’s ability to choose an attorney. The district court concluded the argument was
untimely and, in the alternative, denied the motion on the merits.
On appeal, Abbott claims the arbitration award to Mulligan should be vacated for
three reasons: (1) it resulted from a manifest disregard of the law; (2) the arbitration panel
“lacked any rational basis” for the award; and (3) the contract, as interpreted by the panel,
violates public policy. (Appellant’s Opening Br. at 39.)
6
The district court’s order was not final and appealable because claims not subject
to arbitration remained for resolution. The district court issued a final order and
judgment December 10, 2009, after resolving those claims. Although he had to wait for
final judgment in order to appeal, Abbott’s appeal deals only with the district court’s
refusal to vacate the arbitration award under any of his theories.
-6-
DISCUSSION
“Congress enacted the FAA to replace judicial indisposition to arbitration with a
national policy favoring it and placing arbitration agreements on equal footing with all
other contracts.” Hall Street Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576, 581 (2008)
(quotations omitted). “In consenting to arbitration, a party trades the procedures and
opportunity for review of the courtroom for the simplicity, informality, and expedition of
arbitration.” Bowen v. Amoco Pipeline Co., 254 F.3d 925, 932 (10th Cir. 2001)
(quotations omitted). “An application [to vacate an arbitration award] will get
streamlined treatment as a motion, obviating the separate contract action that would
usually be necessary to enforce or tinker with an arbitral award in court.” Hall Street
Assocs., 552 U.S. at 582.
Under the FAA:
If the parties in their agreement have agreed that a judgment of the court
shall be entered upon the award made pursuant to the arbitration, and shall
specify the court, then at any time within one year after the award is made
any party to the arbitration may apply to the court so specified for an order
confirming the award, and thereupon the court must grant such an order
unless the award is vacated, modified, or corrected as prescribed in
sections 10 and 11 of this title.
9 U.S.C. § 9 (emphasis added). Section 10 provides:
(a) In any of the following cases the United States court in and for the
district wherein the award was made may make an order vacating the award
upon the application of any party to the arbitration--
(1) where the award was procured by corruption, fraud, or undue means;
(2) where there was evident partiality or corruption in the arbitrators, or
either of them;
(3) where the arbitrators were guilty of misconduct in refusing to postpone
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the hearing, upon sufficient cause shown, or in refusing to hear evidence
pertinent and material to the controversy; or of any other misbehavior by
which the rights of any party have been prejudiced; or
(4) where the arbitrators exceeded their powers, or so imperfectly executed
them that a mutual, final, and definite award upon the subject matter
submitted was not made.
9 U.S.C. § 10.7“Our review of the arbitration panel’s decision under the FAA is strictly limited;
this highly deferential standard has been described as ‘among the narrowest known to the
law.’” Bowen, 254 F.3d at 932 (quoting ARW Exploration Corp. v. Aguierre, 45 F.3d
1455, 1462 (10th Cir. 1995)). Section 10 “provide[s] the FAA’s exclusive grounds for
expedited vacatur” of an arbitration award. Hall Street, 552 U.S. at 584.
A. Manifest disregard of the law
Abbott claims the arbitration panel exceeded its powers under 9 U.S.C. § 10(a)(4)
when it determined Mulligan did not have to prove his net losses as required by Utah law.
He asserts Utah law is clear and unequivocal – contract damages must be reduced by the
costs of performance. Since the panel “declined” to apply Utah law to the case, Abbott
says it acted in manifest disregard of Utah case law. Mulligan counters that the “manifest
disregard of the law” standard no longer applies to our review of arbitration awards after
Hall Street.
The question at issue in Hall Street was whether the parties could, by contractual
agreement, expand the grounds upon which an arbitration award could be reviewed. 552
U.S. at 578. Hall Street contended the Court’s decision in Wilko v. Swan, 346 U.S. 4277
Modification of an arbitration award under 9 U.S.C. § 11 is not at issue.
-8-
(1953), creating a judicial ground for vacating arbitration awards in addition to the
grounds provided in 9 U.S.C. § 10, paved the way for contracting parties to do the same.
Id. at 584-85. The Wilko decision noted “the interpretations of the law by the arbitrators
in contrast to manifest disregard are not subject, in the federal courts, to judicial review
for error in interpretation.” 346 U.S. at 436-37 (emphasis added). The Hall Street
decision rejected the notion that Wilko opened the door for parties to contractually
expand the scope of court review of arbitration decisions but declined to address whether
those grounds could be expanded judicially. Id. at 584-85. The Court said:
Hall Street reads [the Wilko language] as recognizing ‘manifest disregard of
the law’ as a further ground for vacatur on top of those listed in § 10, and
some Circuits have read it the same way. Hall Street sees this supposed
addition to § 10 as the camel’s nose: if judges can add grounds to vacate (or
modify), so can contracting parties.
But this is too much for Wilko to bear. Quite apart from its leap from a
supposed judicial expansion by interpretation to a private expansion by
contract, Hall Street overlooks the fact that the statement it relies on
expressly rejects just what Hall Street asks for here, general review for an
arbitrator’s legal errors. Then there is the vagueness of Wilko’s phrasing.
Id. (citations omitted).
Hall Street did not attempt to interpret the language in Wilko. Rather, it proposed:
Maybe the term “manifest disregard” was meant to name a new ground for
review, but maybe it merely referred to the § 10 grounds collectively, rather
than adding to them. Or, as some courts have thought, “manifest disregard”
may have been shorthand for § 10(a)(3) or § 10(a)(4), the paragraphs
authorizing vacatur when the arbitrators were “guilty of misconduct” or
“exceeded their powers.”
Id. at 585 (citations omitted). In the end, however, the Court explicitly stated: “[T]he
FAA confines its expedited judicial review to the grounds listed in 9 U.S.C. §§ 10 and 11
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. . . .” Id. at 592.
In 2010, the Supreme Court declined an opportunity to clarify Hall Street and the
fate of “manifest disregard” as a basis for vacatur under the FAA. In Stolt-Nielsen S.A. v.
AnimalFeeds Int’l Corp., -- U.S. --, 130 S. Ct. 1758 (2010), the Court concluded an
arbitration panel exceeded its authority under § 10 when it imposed class arbitration on
the parties under an arbitration agreement that was silent on the issue. Although the
district court had vacated the award, the Second Circuit reversed because it determined
the arbitration panel did not act in manifest disregard of the law. Id. at 1766-67. Without
reaching the ultimate issue,8 the Supreme Court decided the arbitration panel had
exceeded its power under § 10(d) because it had simply “impose[d] its own view of
sound policy regarding class arbitration,” even though an arbitrator’s role is limited to
interpreting and enforcing a contract. Id. at 1767-68 & n.3.
In the wake of Hall Street, the circuits have split as to whether manifest disregard
of the law is still a viable ground on which to overturn an arbitration award. According
to the Second, Sixth (in an unpublished decision) and Ninth Circuits, manifest disregard
8
In a footnote the Court said:
We do not decide whether manifest disregard survives our decision in Hall
Street . . ., as an independent ground for review or as a judicial gloss on the
enumerated grounds for vacatur set forth at 9 U.S.C. § 10. AnimalFeeds
characterizes that standard as requiring a showing that the arbitrators knew
of the relevant legal principle, appreciated that this principle controlled the
outcome of the disputed issue, and nonetheless willfully flouted the
governing law by refusing to apply it . . . . Assuming, arguendo, that such
a standard applies, we find it satisfied for the reasons that follow.
130 S. Ct. at 1768 n.3 (quotations omitted).
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remains a viable standard because an arbitrator who manifestly disregards the law
exceeds his powers under 9 U.S.C. § 10(a)(4). See Comedy Club, Inc. v. Improv W.
Assocs., 553 F.3d 1277, 1290 (9th Cir. 2009) (“We have already determined that the
manifest disregard ground for vacatur is shorthand for a statutory ground under the FAA,
specifically 9 U.S.C. § 10(a)(4), which states that the court may vacate ‘where the
arbitrators exceeded their powers . . . .’”); Stolt-Nielsen SA, 548 F.3d at 95 (“[The
Supreme Court in Hall Street] did not, we think, abrogate the “manifest disregard”
doctrine altogether . . . . [P]arties do not agree in advance to submit to arbitration that is
carried out in manifest disregard of the law. Put another way, the arbitrators have thereby
‘exceeded their powers, or so imperfectly executed them that a mutual, final, and definite
award upon the subject matter submitted was not made.’ 9 U.S.C. § 10(a)(4).”),
overruled on other grounds, -- U.S. --, 130 S. Ct. 1758 (2010); see also Coffee Beanery,
Ltd. v. WW, L.L.C., 300 Fed. Appx. 415, 419 (6th Cir. 2008) (unpublished) (“In light of
the Supreme Court’s hesitation to reject the ‘manifest disregard’ doctrine in all
circumstances, we believe it would be imprudent to cease employing such a universally
recognized principle. Accordingly, this Court will follow its well-established precedent
here and continue to employ the ‘manifest disregard’ standard.”).
In contrast, the Fifth, Eighth and Eleventh Circuits have concluded Hall Street left
no room for the judicially created doctrine. Frazier v. CitiFinancial Corp., 604 F.3d
1313, 1324 (11th Cir. 2010) (“We hold that our judicially-created bases for vacatur are no
longer valid in light of Hall Street. In so holding, we agree with the Fifth Circuit that the
categorical language of Hall Street compels such a conclusion.”); Citigroup Global
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Mkts., Inc. v. Bacon, 562 F.3d 349, 355 (5th Cir. 2009) (“Hall Street unequivocally held
that the statutory grounds are the exclusive means for vacatur under the FAA. Our case
law defines manifest disregard of the law as a nonstatutory ground for vacatur. Thus, to
the extent that manifest disregard of the law constitutes a nonstatutory ground for vacatur,
it is no longer a basis for vacating awards under the FAA.”) (citation omitted); Medicine
Shoppe Int’l, Inc. v. Turner, 614 F.3d 485, 489 (8th Cir. 2010) (“Appellants’ claims,
including the claim that the arbitrator disregarded the law, are not included among those
specifically enumerated in § 10 and are therefore not cognizable.”).9
Prior to Hall Street, we (somewhat equivocally), but like a number of other
circuits, interpreted the Supreme Court’s decision in Wilko as creating a judicial ground
for vacating arbitration awards in addition to the grounds provided in 9 U.S.C. § 10. See
Jenkins v. Prudential-Bache Secs., Inc., 847 F.2d 631, 633-34 (10th Cir. 1988)
(“[F]ederal courts have never limited their scope of review to a strict reading of this
statute . . . .”). We permitted vacatur of awards in which the arbitrators had manifestly
disregarded the law, without regard to whether such decisions could be stricken under
any provision of § 10 of the FAA. See MACTEC, Inc. v. Gorelick, 427 F.3d 821, 827
(10th Cir. 2005) (“In addition [to the grounds provided in § 10], the Supreme Court has
held that vacatur is also appropriate when the arbitrator demonstrates a ‘manifest
9
The First and Third Circuits so far have declined to reach the issue. See Kashner
Davidson Sec. Corp. v. Mscisz, 601 F.3d 19, 22-23 (1st Cir. 2010) (“The continued
vitality of the manifest disregard doctrine in FAA proceedings is a difficult and important
issue that the courts have only begun to resolve.”); Paul Green Sch. of Rock Music
Franchising, L.L.C. v. Smith, 389 Fed. Appx. 172, 177 (3d Cir. 2010) (unpublished).
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disregard’ for the law.”).
Abbott urges us to follow the Second and Ninth Circuits and modify our
precedent10 to conclude an arbitrator who manifestly disregards the law exceeds his
powers under § 10. Mulligan, of course, urges us to expressly abandon “manifest
disregard” as did the Fifth, Eighth and Eleventh Circuits. But in the absence of firm
guidance from the Supreme Court, we decline to decide whether the manifest disregard
standard should be entirely jettisoned. And it is not necessary to do so because this case
does not present exceedingly narrow circumstances supporting a vacatur based on
manifest disregard of the law.11
“Manifest disregard of the law clearly means more than error or misunderstanding
with respect to the law.” ARW Exploration Co., 45 F.3d at 1463. “It is not enough . . . to
show that the panel committed an error -- or even a serious error.” Stolt-Neilson, 130 S.
Ct. at 1767. It requires a party to establish the arbitrator’s “willful inattentiveness to the
governing law.” Id.10
In Jenkins we quoted with approval a Second Circuit case, Merrill Lynch,
Pierce, Fenner & Smith, Inc. v. Bobker, 808 F.2d 930, 933 (2d Cir. 1986), which treated
manifest disregard as an extra-statutory ground for judicial review -- one not explicitly or
implicitly contained in the FAA. See Jenkins, 847 F.2d at 634. However, we did not
expressly adopt that approach. Since Hall Street, the Second Circuit has
“reconceptualized” manifest disregard “as a judicial gloss on the specific grounds for
vacatur enumerated in section 10 of the FAA,” rather than a stand-alone doctrine. Stolt-
Neilson, 548 F.3d at 94. Abbott invites us to do the same. As it is not necessary to do so
to resolve his claims, we decline his invitation.
11
We note that in Hall Street, the Supreme Court observed “the old rule of
ejusdem generis has an implicit lesson to teach here. Under that rule, when a statute sets
out a series of specific items ending with a general term, that general term is confined to
covering subjects comparable to the specifics it follows.” 552 U.S. at 586.
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Abbott’s interpretation of Utah law is not without substance. He correctly
contends that, in the majority of cases, Utah law requires calculation of damages to be
based on net, rather than gross, profits. Sawyers v. FMA Leasing Co., 722 P.2d 773, 774
(Utah 1986) (“A party is entitled to recover only lost net profits. [P]roof of lost gross
profits does not afford courts a proper basis for a damage award, where there is no
evidentiary basis on which to calculate net profits with reasonable certainty.”) (citing
Penelko, Inc. v. John Price Assoc., Inc., 642 P.2d 1229 (Utah 1982) and First Security
Bank of Utah, N.A. v. J.B.J. Feedyards, Inc., 653 P.2d 591 (Utah 1982)). It is also true
that the arbitration panel, without explanation, “decline[d] to compel either party to
reduce the amount claimed by the amount of expenses that may have been saved.” (R.
Vol. I at 137.) Abbott argues “[n]one of Mulligan’s briefing to the arbitration panel
refuted, contested, or offered any alternative interpretation or clarification of the
requirements of Utah law for proving lost profits.” (Appellant’s Opening Br. at 36.)
From that, Abbott claims, the only conclusion to be drawn is that the panel chose to
ignore the law in awarding Mulligan’s damages. Our role is only to decide whether it
manifestly disregarded the law, something substantially different from a
misunderstanding or misapplication of the law. The panel’s possible adoption of a
flawed argument is merely error, not manifest disregard of the law, and is not grounds for
reversal under the FAA. See ARW Exploration Corp., 45 F.3d at 1463 (“Manifest
disregard of the law clearly means more than error or misunderstanding with respect to
the law.”) (quotations omitted).
While Abbott is right in stating Mulligan did not address his cited authority,
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Abbott fails to recognize Mulligan’s alternative arguments that his gross damages were
appropriate under Utah law.12 First, Mulligan argued that any expenses he would have
incurred from the opt-in cases were de minimus because under the Agreement Abbott
was required to do the initial screening and medical testing, leaving Mulligan the task of
merely applying the client’s facts to the settlement damages grid.13 Mulligan also
presented evidence to the panel showing he had arranged for sufficient staff and
infrastructure to absorb all Abbott’s referrals without additional costs. In other words, as
to Abbott’s referrals, Mulligan maintained his gross profits were equivalent to his net
profits. In the alternative, he argued his gross fees were permitted under the Agreement
12
One of Mulligan’s arguments was patently wrong. He claims a Colorado case
“suggests” Abbott had the burden to prove any offset for expenses. (R. Vol. I at 190.)
But Colorado law is irrelevant. Utah law is clear:
[The party seeking damages], of course, has the burden to produce a
sufficient evidentiary basis to establish the fact of damages and to permit
the trier of fact to determine with reasonable certainty the amount of lost
net profits.
Plaintiffs here presented evidence on gross profit losses only. Their failure
to place before the court financial summaries, monthly sales volume
breakdowns, costs of sales expenses, or any other overhead expenses from
which the trial court could reasonably have calculated plaintiff's lost net
profit is fatal to their claim.
Sawyers, 722 P.2d at 774-75 (citations omitted).
13
Abbott described the work he did under the Agreement as follows:
As outlined in Paragraph 3 of the Agreement, Abbott placed advertising,
accepted incoming calls, obtained pharmacy records, arranged for screening
and full study echocardiograms (“echos”) and a cardiologist’s opinion,
arranged for right heart catheterizations (for PPH cases), and obtained
retainer agreements before turning cases over to Mulligan.
(Appellant’s Opening Br. at 8.)
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as it provided for joint representation of the clients. The only provision referencing a
connection between costs and fees was the provision allowing Abbott to choose to pay
the advertising and echocardiogram costs for a 1/3 share, rather than a 1/4 share, of the
total fee. Mulligan claimed the costs of services were otherwise irrelevant to the fee
split.14
Abbott does not directly confront these arguments with specific Utah law or cases
denying relief under these circumstances. Instead, he cites to portions of the arbitration
transcript15 to show that the evidence established that there were substantial additional
expenses for opt-in cases16 after referral to Mulligan and even more expenditures on the
opt-out cases referred to the third attorney. He also points to the panel’s reference (in its
Interim Award) to “expenses that perhaps may have been avoided” and “expenses that
may have been saved,” (R. Vol. I at 137 (emphasis added)), as the panel’s recognition it
was allowing gross damages in contravention of Utah law. But conflicting assertions of
14
Mulligan’s arguments are not particularly compelling. Under Utah law, even
though the Agreement itself did not provide for any fee reduction due to expenses not
recovered from clients, these costs are still relevant to a calculation of damages. See
TruGreen Cos., L.L.C. v. Mower Bros., Inc., 199 P.3d 929, 931 (Utah 2008) (“Under
Utah law it is well established that the injured party in a breach of contract action has a
right to damages based upon his expectation interest as measured by (a) the loss in the
value to him of the other party’s performance caused by its failure or deficiency, plus (b)
any other loss, including incidental or consequential loss, caused by the breach, less (c)
any cost or other loss that he has avoided by not having to perform.”) (quotations
omitted).
15
The transcript is not in the record on appeal.
16
However, those expenses would most likely be recovered from clients. Indeed,
the Agreement provided: “RECOVERY OF COSTS: LEAD TRIAL COUNSEL and
CONSULTING ATTORNEY shall be entitled to recover costs from the clients out of the
clients’ portions of settlements.” (Appellant’s Supp. Appx. at 684.)
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what the evidence established and how the law should be applied to those facts only
substantiates the district court’s conclusion:
Here, the evidence shows only that the panel was presented with two
opposing views of the law, one by Mr. Abbott and one by Mr. Mulligan,
and that it adopted one of those two views. Based on this, at best, all Mr.
Abbott has shown is that the majority panel misapplied or misinterpreted
Utah law. This provides no basis for a finding of misconduct under § 10 of
the FAA.
(R. Vol. II at 415-16.) While the arbitration panel may have “got the law wrong,” and
perhaps even “really wrong,” there is no evidence that it engaged in any type of
egregious or intentional misconduct as is required under the FAA. (Id. at 416.) It did not
manifestly disregard the law.
B. Irrationality
Abbott argues the arbitration panel “lacked any rational basis”17 for the award and
therefore exceeded its authority under 9 U.S.C. § 10(d). (Appellant’s Opening Br. at 39.)
He claims:
[T]he panel majority’s damage award to Mulligan lacks any rational basis
for two related reasons. First, by awarding Mulligan his lost gross profits,
rather than lost net profits, the panel majority put Mulligan in a better
position than he would have been in if Abbott had performed the
17
Particularly with regard to the irrationality argument, both parties cite to federal
cases interpreting the Utah Arbitration Act in conjunction with the FAA. Although the
Federal and Utah Arbitration Acts are similar in many respects, see Youngs v. Am.
Nutrition, Inc., 537 F.3d 1135, 1140 (10th Cir. 2008), the states are not bound to adopt
the Supreme Court’s interpretation of the FAA as controlling their own statutes.
Moreover, these cases are even less helpful in light of Hall Street. 552 U.S. at 590 (“The
FAA is not the only way into court for parties wanting review of arbitration awards: they
may contemplate enforcement under state statutory or common law, for example, where
judicial review of different scope is arguable. But here we speak only to the scope of the
expeditious judicial review under §§ 9, 10, and 11, deciding nothing about other possible
avenues for judicial enforcement of arbitration awards.”).
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Agreement. Second, the panel majority’s award of gross profits to
Mulligan does not draw its essence from the Agreement, which clearly
contemplated that Mulligan would be required to incur costs and do
substantial work.
(Appellant’s Opening Br. at 41.)
We recognized an irrationality basis for vacatur in Jenkins, and there concluded
the distinction between “irrationality” and “manifest disregard” seems to lie in whether
the arbitrators disregarded the terms of the contract as opposed to the rule of law. 847
F.2d at 634. “[T]he role of the courts in reviewing arbitral awards is limited to the
determination of whether the arbitrator’s award draws its essence from the contract of the
parties.” Id. at 634-35 (quotations omitted). If an “arbitrator is even arguably construing
or applying the contract and acting within the scope of his authority, the fact that a court
is convinced he committed serious error does not suffice to overturn his decision.” E.
Assoc. Coal Corp. v. United Mine Workers, 531 U.S. 57, 62 (2000) (quotations omitted).
The rational basis test is “to ensure that the arbitrator’s decision relies on his
interpretation of the contract as contrasted with his own beliefs of fairness and justice.”18
Jenkins, 847 F.2d at 634; see also Stolt-Nielsen, 130 S. Ct. at 1767 (“[A]n arbitration
decision may be vacated under § 10(a)(4) of the FAA on the ground that the arbitrator
‘exceeded [his] powers,’ for the task of an arbitrator is to interpret and enforce a contract,
not to make public policy.”).
Abbott again fails to recognize our limited role on review. His first argument is
18
Strict adherence to this standard is necessary to remain within the statutory
grounds for vacating an arbitration award under Hall Street. “Irrationality” is confined to
an arbitration panel’s complete departure from the terms of the agreement subject to
arbitration. Only then will the arbitrators have exceeded their authority under § 10.
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merely a complaint that Mulligan was awarded more than Abbott thinks fair. He cites no
provision of the Agreement precluding the arbitration panel’s award. As discussed
above, Mulligan’s damages arguments were based on the contract. As we pointed out
earlier, the only contract provision allocating costs were those relating to Abbott’s share
of the fees (1/3 if he paid the initial expenses, otherwise 1/4). The arbitration panel
awarded Mulligan only 2/3 of the fees, the amount he would have received if Abbott paid
all of the initial expenses in all of the cases. Whether we agree with the award is
irrelevant. There was a contractual basis on which the arbitration panel based its
conclusion. Its decision is, as a practical matter, immune from judicial oversight.
C. Waiver of Public Policy Argument
Abbott did not make his public policy argument to the district court prior to its
ruling. The court heard the argument for the first time in Abbott’s Rule 59(e) motion to
reconsider. He claimed an exclusive referral Agreement violates the professional ethical
rules and must be declared void. The court concluded Abbott waived the argument by
failing to raise it prior to his motion to reconsider. In the alternative, it determined the
argument lacked merit. Despite his failure to raise the argument earlier (which he
concedes), Abbott argues the courts have a duty to address public policy arguments sua
sponte and such arguments cannot be waived or forfeited19 because they involve the
19
Recently, in Richison v. Ernest Group, Inc., we discussed the difference
between waiver and forfeiture in civil cases. 634 F.3d 1123 (10th Cir. 2011). “If the
theory was intentionally relinquished or abandoned in the district court, we usually deem
it waived and refuse to consider it.” Id. at 1127. “By contrast, if the theory simply
wasn’t raised before the district court, we usually hold it forfeited.” Id. at 1128. “Unlike
waived theories, we will entertain forfeited theories on appeal, but we will reverse a
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interests of the public, not merely those of the parties.
The cases Abbott cites in support of his argument involve courts’ refusal to
enforce illegal contracts. See, e.g., Kaiser Steel Corp. v. Mullins, 455 U.S. 72, 77 (1982)
(“There is no statutory code of federal contract law, but our cases leave no doubt that
illegal promises will not be enforced in cases controlled by the federal law.”); Warner
Bros. Theatres, Inc. v. Cooper Found., 189 F.2d 825, 828-29 (10th Cir. 1951) (“The
agreement . . . created a monopolistic condition . . . and was illegal and void on its
face.”). Those cases certainly suggest that contending parties are not reliable guardians
of the public interest. Seymour v. Blue Cross/Blue Shield, 988 F.2d 1020, 1023 (10th Cir.
1993) (“The public policy exception is rooted in the common law doctrine of a court’s
power to refuse to enforce a contract that violates public policy or law. It derives
legitimacy from the public’s interest in having its views represented in matters to which it
is not a party but which could harm the public interest.”). But that does not resolve the
waiver problem.20
district court’s judgment on the basis of a forfeited theory only if failing to do so would
entrench a plainly erroneous result.” Id. The public policy issue was presented to the
arbitration panel but was not presented to the district court prior to its ruling. The issue
was waived.
20
Hall Street, insofar as it calls into question any judicially created grounds for
vacating an arbitrator’s award, necessarily calls the public policy basis for doing so into
question. See Hicks v. Cadle Co., 355 Fed. Appx. 186, 196-97 (10th Cir. 2009)
(unpublished), cert. denied, 131 S. Ct. 160 (2010).
Were we to consider the public policy issue, we would be mindful that when an
arbitrator could “reasonably construe[] the facts of the case to eliminate . . . a conflict
with established law, then the public policy exception does not apply.” Lewis v. Circuit
City Stores, Inc., 500 F.3d 1140, 1151 (10th Cir. 2007). The arbitration panel determined
the Agreement established a joint representation, not merely an exclusive referral
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There is no Supreme Court or Tenth Circuit precedent insulating a public policy
argument from waiver. To the contrary, in Wilburn v. Mid-South Health Development,
Inc., we determined the plaintiffs waived their public policy argument because they failed
to assert it in the district court. 343 F.3d 1274, 1280-81 (10th Cir. 2003); see also United
States Postal Serv. v. Nat’l Ass’n of Letter Carriers, 330 F.3d 747, 752 n.4 (6th Cir.
2003) (“Although not the basis of our decision, there appears to be merit to the argument
that the Postal Service waived its public policy challenge to the arbitration award by
failing to raise it during arbitration.”); Reliance Nat’l Health Ins. Co. v. Imber, 182 F.3d
922, No. 98-3565, 98-3568, 1999 WL 510752, at *1 n.2 (7th Cir. 1999) (unpublished)
(“Defendants also argue in their reply brief that the provision is void because it violates
public policy, but they have waived this argument by failing to raise it in their opening
brief.”).
“We typically find waiver in cases where a party . . . attempts to reassert an
argument that it previously raised and abandoned below.” United States v. Zubia-Torres,
550 F.3d 1202, 1205 (10th Cir. 2008). Abbott argued his public policy concerns to the
arbitration panel, but he did not mention the issue to the district court until after it had
ruled. The issue was waived.
agreement, and the parties’ agreement could have been terminated by either of them at
any time. Moreover, Abbott could have turned away clients he felt the associated duo
could not properly represent.
It is telling that Abbott’s concern for the most effective service for his clients did
not manifest itself in an open and timely conversation with Mulligan. Instead, it came
out as a post hoc justification for his self-dealing. We can conclude the arbitration
panel’s reasonable construction of the contract avoided the alleged ethical problem.
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AFFIRMED.
Entered by the Court:
Terrence L. O’Brien
United States Circuit Judge
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