Brook v. Peak International, Ltd. , 294 F.3d 668 ( 2002 )

UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 01-50339
RICHARD BROOK,
Plaintiff-Appellee,
v.
PEAK INTERNATIONAL, LTD.,
Defendant-Appellant.
Appeal from the United States District Court
for the Western District of Texas
Austin Division
June 13, 2002
Before JONES, WIENER and PARKER, Circuit Judges.
EDITH H. JONES, Circuit Judge:
Brook and Peak International, Ltd., Brook’s former
employer, arbitrated their contractual dispute before an arbitrator
selected by the American Arbitration Association (“AAA”). The
arbitrator’s award favored Peak. Brook filed a motion to vacate
the arbitration award in the district court. The district court
held that the arbitrator selected by the AAA was without power to
decide the dispute because the AAA did not follow the selection
procedure outlined in Brook’s Employment Agreement. The district
court vacated the arbitration award pursuant to 9 U.S.C. §
10(a)(4). Brook has appealed. Although we agree that AAA
seriously erred by deviating from the parties’ contractual
selection process, we conclude that Brook never timely objected to
the selection process on the ground he now espouses, hence, the
objection was waived. The award must be reinstated.
BACKGROUND
On January 1, 1998, Richard Brook entered into an
employment agreement (the “Employment Agreement”) with Peak
International to become its president and chief operating officer.
Less than a year later, he was terminated. A dispute arose
regarding Brook’s severance benefits. On May 7, 1999, pursuant to
the terms of the Agreement, Brook filed a demand for arbitration
with the AAA alleging breach of his Employment Agreement.1
1
The dispute resolution clause of the Employment Agreement provided
as follows:
4. Resolution of Disputes; Arbitration. Should a dispute
arise concerning this Agreement, its interpretation or termination,
either party may request a conference with the other party to this
Agreement and the parties shall meet to attempt to resolve the
dispute. Failing such resolution within thirty (30) days of either
party’s request for conference, the Company and the Employee shall
endeavor to select an arbitrator who shall hear the dispute. In the
event the parties are unable to agree on an arbitrator, the Employee
and the Company shall request the American Arbitration Association
to submit a list of nine (9) names of persons who could serve as an
arbitrator. The Company and Employee shall alternately remove names
from this list (beginning with the party which wins a flip of a
coin) until one person remains and this person shall serve as the
impartial arbitrator. The decision of the arbitrator is final and
binding on both parties. Each party shall bear equally all the
costs of the arbitrator.
2
This appeal concerns the arbitrator selection process.
The process began on May 18, 1999, when the AAA submitted a list of
nine prospective arbitrators and instructed the parties to follow
the procedure outlined in the Employment Agreement to select the
arbitrator. On May 28, Brook struck one individual from the list.
Brook’s counsel also stated:
[Peak’s] counsel [] has agreed to Austin as the site of
the arbitration hearing and hence it strikes us that
perhaps an arbitrator from Austin would be more efficient
and economical for all concerned. To that end, [Peak’s
counsel] and I will try to come up with a mutually
acceptable Austin-based arbitrator from your AAA-Austin
list, if this is acceptable to the association.
Peak, citing its understanding that a new list of arbitrators from
Austin was to be provided by the AAA, did not submit a strike to
the AAA’s first list of arbitrators.
On June 9, the AAA informed the parties that “there were
no mutual choices [from the previously provided list of
arbitrators] who were able to accept the appointment.” The AAA
then advised: “[the AAA is] enclosing a second list of names from
our panel. We ask that this list be considered supplemental to the
list previously provided and every consideration be given to
releasing names struck from that list.” The AAA’s June 9 letter
did not refer to Brook’s May 28 letter or Brook’s request for
selection of an arbitrator from the AAA’s Austin list, and it did
not direct the parties to employ the selection process outlined in
the Employment Agreement. Rather, the letter instructed the
3
parties to strike the names of unacceptable arbitrators and
indicate their order of preference by number. The letter also
provided that “[i]f this list is not received by the [AAA] on or
before Monday, June 21, 1999, or if there are no mutual choices,
the appointment will be made per Section 12 of the [AAA] Rules.”
If the parties failed to submit their strikes by June 21, the
letter warned, “all names submitted may be deemed acceptable.”
Complying with the June 9 letter, Brook submitted his
strike list and ranked the remaining arbitrators in order of
preference.2 Peak did not submit a list of strikes before June 21.
On July 14, Peak’s counsel informed the AAA that he was
withdrawing and that Peak intended to substitute John McCamish as
counsel. Peak also advised the AAA of ongoing discussions with
Brook’s counsel regarding the possible mutual selection of Judge
Joe Hart as arbitrator. On July 16, Mr. McCamish requested a
seven-day extension of time from Brook’s counsel to review the file
before advising whether his client would agree to the selection of
Judge Joe Hart. Brook’s counsel rejected the request for extension
of time.
On July 26, the AAA notified the parties that Professor
David Sokolow had been selected as arbitrator. Peak immediately
protested the appointment of Professor Sokolow, citing concerns
2
Although Brook now challenges the selection of Judge Miller as
arbitrator, he did not strike Judge Miller from the AAA’s second list.
4
regarding Professor Sokolow’s potential conflicts with counsel and
his inexperience with employment-related disputes. Peak also
submitted its strikes to the list of arbitrators. On August 5,
Peak sent a second letter of objection to the AAA, arguing that
“the entire appointment process violates the parties’ written
agreement.” Peak requested that the AAA comply with the terms of
the Employment Agreement by providing a list of nine, rather than
seven, potential arbitrators and by allowing the parties to
alternately remove names from the list until only one remained.
Brook filed no objection to the selection of Professor Sokolow or
the process used by the AAA and did not respond to Peak’s
objections.
On August 11, the AAA withdrew the appointment of
Professor Sokolow and appointed Judge Chuck Miller as arbitrator.
The AAA’s letter appointing Judge Miller refers neither to Peak’s
objections to the selection process nor to its demand for
compliance with the selection process outlined in the Employment
Agreement.
On August 13, Brook registered “his protest to the
process used by the [AAA] in the selection of the arbitrator.” In
a letter to the AAA and opposing counsel, Brook objected to the
appointment of Judge Miller “because the appointment [was] not made
in compliance with AAA rules and procedures.” Brook also requested
that the AAA reinstate “the properly appointed individual,
5
Professor David Sokolow,” as arbitrator. However, Brook’s August
13 letter does not mention the Employment Agreement or the AAA’s
failure to follow the contractual selection process.
On August 26, Peak notified the AAA that it was “willing
to forego its complaints of procedural irregularities that have
occurred and proceed forward if Brook agrees to Mr. Miller as
arbitrator.” Peak also stated that “if Brook is unwilling to agree
to [the appointment of Judge Miller] . . . then Peak would continue
to assert its complaint, outlined in [its] letter of August 4,
1999, that the entire appointment process to date has violated the
terms of Brook’s employment agreement . . . .” The record contains
no response from Brook, and no further objection by Brook to the
appointment of Judge Miller. The parties proceeded to arbitrate
their dispute before Judge Miller.
After months of discovery and related disputes, the
parties participated in an eight-day arbitration hearing before
Judge Miller. In his opening remarks to the parties on the first
day of arbitration, Judge Miller stated: “I have executed the oath
of arbitrator . . . [s]o unless there are any other objections,
we’ll go ahead and convene the arbitration.” Brook raised no
objections, and the arbitration convened. After considerable
6
expense to the parties and a lengthy arbitration process,3 Judge
Miller entered an arbitration award favorable to Peak.
Brook filed a federal lawsuit in which he moved to vacate
the arbitration award, arguing that (1) the arbitration award was
arbitrary and capricious and/or based on a manifest disregard for
the law, (2) the arbitrator exceeded his authority by addressing
issues not raised by the parties, and (3) “the arbitrators were
guilty of misconduct . . . or other misbehavior” that warranted
vacatur pursuant to 9 U.S.C. § 10(a)(3) because the AAA violated
its own arbitrator selection rules. Brook’s motion to vacate does
not refer to the Employment Agreement, does not raise the AAA’s
failure to follow the selection process outlined in the Employment
Agreement as grounds for vacatur, and does not cite 9 U.S.C. §
10(a)(4).
On January 17, 2001, a magistrate judge heard oral
argument regarding Brook’s motion to vacate and raised, sua sponte,
the AAA’s failure to follow the selection process outlined in the
Employment Agreement as a possible ground for vacating the
arbitration award. Several days later, Brook filed his “Supplement
to Motion to Vacate Arbitration Award,” asserting for the first
time that the AAA’s failure to select the arbitrator in the manner
3
The record before us indicates that the parties spent over $650,000
in fees and costs related to the arbitration of their dispute before Judge
Miller.
7
provided by the Employment Agreement rendered Judge Miller
powerless to arbitrate the dispute. Based on this argument, the
magistrate judge recommended that the district court vacate the
arbitration award pursuant to 9 U.S.C. § 10(a)(4). The district
court agreed with the magistrate judge’s recommendation, vacated
the award, and precipitated Peak’s appeal.
DISCUSSION
A.
In light of the strong federal policy favoring
arbitration, “[j]udicial review of an arbitration award is
extraordinarily narrow.” Gulf Coast Indus. Worker’s Union v. Exxon
Co., 70 F.3d 847, 850 (5th Cir. 1995). This court reviews an order
vacating an arbitration award de novo, a standard that is “intended
to reinforce the strong deference due an arbitrative tribunal.”
McIlroy v. Painewebber, Inc., 989 F.2d 817, 820 (5th Cir. 1993).
Section 10 of the Federal Arbitration Act, 9 U.S.C. §§ 1-
16 (“FAA”), provides “the only grounds upon which a reviewing court
may vacate an arbitrative award.” McIlroy, 989 F.2d at 820(citation omitted). Section 10 allows vacatur, inter alia,
“[w]here the arbitrators exceeded their powers . . . .” 9 U.S.C.
§ 10 (a)(4). A reviewing court examining whether arbitrators
exceeded their powers must resolve all doubts in favor of
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arbitration. Executone Information Sys., Inc. v. Davis, 26 F.3d
1314, 1320-21 (5th Cir. 1994).
B.
Arbitration is a matter of contract. AT&T Tech., Inc. v.
Communication Workers of America, 475 U.S. 643, 648, 106 S.Ct. 1415(1986). Thus, “[t]he power and authority of arbitrators in an
arbitration proceeding is dependent on the provisions under which
the arbitrators were appointed.” Szuts v. Dean Witter Reynolds,
Inc., 931 F.2d 830, 831 (11th Cir. 1991). Parties to an
arbitration agreement may determine by contract the method for
appointment of arbitrators. The FAA expressly provides that where
a method for appointment is set out in the arbitration agreement,
the agreed upon method of appointment “shall be followed.” 9
U.S.C. § 5.
Several courts, relying on § 5, have determined that
“[a]rbitration awards made by arbitrators not appointed under the
method provided in the parties’ contract must be vacated.” Cargill
Rice, Inc. v. Empresa Nicaraguense Dealimentos Basicos, 25 F.3d
223, 226 (4th Cir. 1994); see also, Avis Rent-A-Car Sys., Inc. v.
Garage Emp. Union, Local 272, 791 F.2d 22, 25 (2d Cir. 1986)
(“Courts generally enforce [selection clauses] strictly, vacating
awards entered by arbitrators whose qualifications or method of
appointment fail to conform to arbitration clauses.”); R.J. O’Brien
& Assoc., Inc. v. Pipkin, 64 F.3d 257, 263 (7th Cir. 1995) (“[I]n
9
order to enforce an arbitration award, the arbitrator must be
chosen in conformance with the procedure specified in the parties’
agreement to arbitrate.”). However, “a ‘trivial departure’ from
the parties’ agreement [] may not bar enforcement of an award.”
R.J. O’Brien, 64 F.3d at 263. Brook relies on these cases and
argues that the arbitration award must be vacated because Judge
Miller was not appointed according to the process outlined in the
Employment Agreement.
To state that the AAA failed to follow the simple
selection procedure outlined in Brook’s Employment Agreement is
insufficient: the AAA flouted the prescribed procedures and ignored
complaints from both sides about the irregular selection process.
Rather than submitting a list of nine names and instructing the
parties alternately to strike names from the list until only one
remained, the AAA submitted two lists containing the names of
fifteen potential arbitrators. The AAA instructed the parties to
strike all unacceptable arbitrators and rank the remaining
candidates in order of preference. The AAA’s departure from the
selection procedure outlined in the Employment Agreement was
utterly unwarranted. Because arbitration is a creature of
contract, the AAA’s departure from the contractual selection
process fundamentally contradicts its role in voluntary dispute
resolution. The AAA must follow the selection procedures outlined
in the arbitration agreement. 9 U.S.C. § 5.
10
Nevertheless, despite its asserted efficiencies over
judicial proceedings, arbitration remains an adversarial event, and
parties must insist upon the enforcement of their contractual
rights before the arbitrators as they do in court. This is
especially true if any case is to be made, under the exceedingly
narrow statutory standards, for a later judicial review of the
arbitration.
In the cases cited above, where federal courts vacated
arbitration awards because of irregularities in the process for
selecting arbitrators, the complaining party preserved its
objection during the arbitration proceeding. Here, however, Brook
never objected to the AAA’s failure to follow the selection process
in the Employment Agreement (until prompted by the federal
magistrate judge long after the arbitration had run its course).
It is true that Brook filed a written objection to the AAA’s
failure to follow its own selection rules,4 but he also condoned
the AAA’s ignoring the Employment Agreement when he urged the AAA
to reinstate the “properly appointed” arbitrator, Professor
Sokolow, although Sokolow had not been appointed according to the
terms of the Employment Agreement. The failure to file a clear
written objection to a defect in the selection process constitutes
4
Brook argues in the alternative that the AAA’s failure to follow its
own selection rules entitles him to vacatur of the arbitration award. This makes
no sense, as there was no agreement by Peak to modify the Employment Agreement
by adopting the AAA selection method.
11
waiver. See, e.g., Health Services Management Corp. v. Hughes,
975 F.2d 1253, 1263-64 (7th Cir. 1992) (citations omitted).5
Brook compounded his inaction by failing to object to the
error in the selection process before Judge Miller during the
arbitration proceedings. In particular, at the outset of the
arbitration hearing, Judge Miller invited the parties to state
their objections to the arbitration on the record, and Brook did
nothing. This court has previously held that objections to the
composition of arbitration panels must be raised “at the time of
the hearing.” Bernstein Seawell & Kove v. Bosarge, 813 F.2d 726,
732 (5th Cir. 1987). Brook’s failure to object at the hearing
constitutes waiver. Id.Alternatively, before proceeding to arbitration, Brook
could have sought an order from the district court compelling
arbitration before a properly selected arbitrator pursuant to
sections 4 and 5 of the FAA. But Brook did not timely go to court.
In sum, Brook did not state clearly his objection to the AAA’s
failure to follow the Employment Agreement when an arbitrator was
selected; Brook made no effort to preserve his objection to
arbitrating while the dispute was pending before Judge Miller; and
Brook finally raised the crucial objection after the magistrate
5
Peak objected several times to AAA’s violation of the selection terms
of the Employment Agreement, but it ultimately acquiesced in Judge Miller’s
appointment. Peak’s objection cannot support Brook’s vacatur motion.
12
judge conceived it. “It is well settled that a party may not sit
idle through an arbitration procedure and then collaterally attack
the procedure on grounds not raised before the arbitrators when the
result turns out to be adverse.” Marino v. Writers Guild of
America, East, Inc., 992 F.2d 1480, 1484 (9th Cir. 1993).
We do not hold that Brook had to exhaust all of the
described avenues of objecting to the arbitrator selection process,
but as was done in the cases on which he relies, he had to make
plain and timely his exact objection so that a responsible party –
whether the AAA or the arbitrator or a federal court – could have
enforced the Employment Agreement.
CONCLUSION
For the reasons stated above, we REVERSE the judgment of
the district court and REMAND entry of a judgment enforcing the
arbitration award.
REVERSED and REMANDED.
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