St. John's Mercy v. Dr. John Delfino ( 2005 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 04-1672
No. 04-1745
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St. John’s Mercy Medical Center, *
*
Plaintiff - Appellee/ *
Cross Appellant, *
* Appeals from the United States
v. * District Court for the
* Eastern District of Missouri.
John Delfino, M.D., *
*
Defendant - Appellant/ *
Cross Appellee. *
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Submitted: January 12, 2005
Filed: July 12, 2005
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Before LOKEN, Chief Judge, HANSEN and MURPHY, Circuit Judges.
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LOKEN, Chief Judge.
Oral surgeon John Delfino appeals the portion of a judgment that partially
vacates a favorable arbitration award. St. John’s Mercy Medical Center (“St. John’s”)
cross-appeals the portion that confirms the remainder of the award. The issue in both
appeals is whether the arbitrator’s decision evidences manifest disregard for law.
Applying the deferential standard of review mandated by the Federal Arbitration Act,
9 U.S.C. § 10, we confirm the arbitrator’s award in its entirety.
I.
An employment agreement between St. John’s and Delfino provided that St.
John’s would indemnify Delfino for “defense costs . . . arising out of . . . professional
services and obligations . . . described in this Agreement.” Another St. John’s
physician, Arthur Misischia, served as Delfino’s assistant director. Delfino and
Misischia entered into a separate agreement relating to their private practice. In 1993,
St. John’s terminated Misischia, and Delfino terminated the separate agreement.
Misischia sued St. John’s, Delfino, and Delfino’s personal corporation, Delfino, P.C.,
alleging various tort claims, including a claim of fraud against Delfino and Delfino,
P.C. relating to the separate agreement.
In October 1995, St. John’s General Counsel wrote a letter “to reflect the
understandings” reached at a meeting between St. John’s and Delfino: St. John’s
accepted Delfino’s tender of his defense; St. John’s agreed to indemnify Delfino (but
not Delfino, P.C.) for all of Misischia’s claims except the fraud claim; St. John’s
would control the defense and retain counsel to represent Delfino; and Delfino would
cooperate in the defense. St. John’s retained a law firm to represent Delfino; Delfino
retained the law firm of Lewis, Rice & Fingersh, L.C. (“Lewis, Rice”) to separately
represent Delfino and Delfino, P.C. on the unindemnified claims. Two years later,
when Delfino and St. John’s parted company, they entered into an Employment
Separation and Release Agreement providing that St. John’s would defend and
indemnify Delfino in the pending Misischia case in accordance with the General
Counsel’s letter. The Agreement provided that it was governed by Missouri law and
that all disputes “shall be settled exclusively by binding arbitration” under the
arbitration rules of the American Health Lawyers Association.
The state trial court dismissed all of Misischia’s claims against St. John’s on
the eve of trial. St. John’s informed Delfino that it would not pay Delfino’s legal
expenses in defending the remaining claims because he was now “unindemnified.”
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Delfino retained Lewis, Rice to defend Delfino and Delfino, P.C. at trial. The jury
found in favor of Misischia on the fraud claim. Delfino demanded that St. John’s pay
nearly $1,500,000 in sundry fees and expenses, including all of Lewis, Rice’s fees for
its defense of Delfino and Delfino P.C. St. John’s refused to pay, and the matter
proceeded to arbitration. The arbitrator concluded that St. John’s breached its duty
to defend by refusing to reimburse Delfino for defense costs incurred after St. John’s
was dismissed one month before trial. The arbitrator awarded Delfino $215,480.82
for fees paid to Lewis, Rice for services prior to the breach, and $359,861.55 for fees
paid for Lewis, Rice services after the breach. The latter amount reflected a 25%
discount to account for post-breach work performed exclusively on the unindemnified
fraud claim. Thus, the total award was $575,342.37.
St. John’s urged the arbitrator to reduce the award by $215,480.82, arguing that
reimbursing Delfino for legal services prior to St. John’s breach was inconsistent with
the arbitrator’s ruling that Delfino was not entitled to reimbursement for his defense
of unindemnified claims. The arbitrator refused to modify the award, explaining:
[St. John’s] makes an excellent point . . . . [St. John’s] must take
responsibility, however, for its termination of its indemnification
approximately one month before the scheduled trial date. . . . Had
Lewis, Rice not been engaged and involved in the litigation previously,
it would have been necessary for that firm to go back and relearn all of
the events which had transpired previously in the lawsuit.
St. John’s then petitioned the district court to vacate the award under the
Federal Arbitration Act. Delfino moved to confirm. St. John’s argued that the
arbitrator manifestly disregarded the law by awarding damages for expenses incurred
prior to the breach. Applying Missouri law, the district court agreed, concluding that
the arbitrator had violated “one of the most bedrock principles of contract law,”
namely, that the purpose of contract damages “is to restore the plaintiff to the position
he would have enjoyed had the defendant not breached the contract.” Therefore, the
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district court vacated that portion of the award. However, the court rejected St.
John’s contention that the arbitrator manifestly disregarded the law by awarding
Delfino damages for post-breach expenses paid by Delfino, P.C. and confirmed the
award of $359,861.55 for Lewis, Rice’s post-breach services. Both parties appeal.
II.
Our review of an arbitration award under the Federal Arbitration Act is
exceedingly limited and deferential. Section 10(a) of the Act provides four statutory
grounds for vacating an award, none of which is at issue in this case. In addition,
drawing on dicta in two Supreme Court cases, this court and most other circuits have
said that an award may be vacated if it “evidences manifest disregard for law.”
Kiernan v. Piper Jaffray Cos., 137 F.3d 588, 594 (8th Cir. 1998) (quotation omitted).
However, while we have frequently referred to this doctrine, we have emphasized that
it is “extremely narrow.” Hoffman v. Cargill, Inc., 236 F.3d 458, 461 (8th Cir. 2001).
In the only reported decision where we granted relief on this ground, we held that,
“[w]here an arbitration panel cites relevant law, then proceeds to ignore it, it is said
to evidence a manifest disregard for the law.” Gas Aggregation Servs., Inc. v.
Howard Avista Energy, LLC, 319 F.3d 1060, 1069 (8th Cir. 2003). That holding
states the limits of the doctrine in this circuit. Thus, St. John’s “bears the burden of
proving that the arbitrators were fully aware of the existence of a clearly defined
governing legal principle, but refused to apply it, in effect, ignoring it.” Stark v.
Sandberg, Phoenix & Von Gontard, 381 F.3d 793, 802 (8th Cir. 2004).1
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Other circuits have likewise emphasized that manifest disregard is “a doctrine
of last resort” reserved for “those exceedingly rare instances where some egregious
impropriety on the part of the arbitrators is apparent, but where none of the provisions
of the FAA apply.” Wallace v. Buttar, 378 F.3d 182, 189 (2d Cir. 2004). For a useful
debate over whether the doctrine should be further restricted or abandoned entirely,
see the two opinions in George Watts & Son, Inc. v. Tiffany and Co., 248 F.3d 577
(7th Cir. 2001).
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St. John’s argues, and the district court agreed, that the arbitrator’s award
evidences manifest disregard for the “controlling legal principle” that “only those
costs and expenses that occur because of a breach can be recovered as damages for
a breach.” We emphatically disagree. In the first place, the arbitrator did not cite this
relevant law and then ignore it, so the manifest disregard doctrine as defined by this
court does not apply. St. John’s argues that we should expand the doctrine to include
an award that violates a legal principles that is “so obvious and readily identifiable
that a lawyer of twenty years experience should know it without having to be told.”
We refuse to do so, mindful of the strong federal policy favoring certainty and finality
in arbitration.
Moreover, even if the arbitrator’s decision had noted this principle of contract
law, his award does not reflect its manifest disregard. The arbitrator found that the
timing of St. John’s breach -- one month before trial -- increased the damages caused
by the breach. St. John’s does not, and could not, challenge that logical finding. The
arbitrator then measured this incremental damage by the fees charged by Lewis, Rice
prior to the breach, finding this to be a reasonable estimate of the fees a new lawyer
hired after the breach would have charged to become sufficiently familiar with the
protracted Misischia litigation to effectively try the case. The arbitrator’s task was
to resolve a dispute over St. John’s contractual duty to reimburse Delfino for all
“costs,” as broadly defined in the Separation Agreement, arising out of “the Misischia
Matter.” It was clearly within his remedial authority to estimate in this manner the
incremental damages caused by the untimely nature of the breach. See Rule 6.06 of
the American Health Lawyers Association arbitration rules (“arbitrator may grant any
remedy or relief that the arbitrator deems just and equitable and within the scope of
the arbitration agreement of the parties”). As the Supreme Court emphasized in a
related context:
where it is contemplated that the arbitrator will determine remedies for
contract violations he finds, courts have no authority to disagree with his
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honest judgment in that respect . . . . [A]s long as the arbitrator is even
arguably acting within the scope of his authority, that a court is
convinced he committed serious error does not suffice to overturn his
decision.
United Paperworkers Int’l Union v. Misco, Inc., 484 U.S. 29, 38 (1987). The district
court erred in substituting its remedial judgment for that of the arbitrator.
In the cross appeal, St. John’s argues that the entire award must be vacated
because it evidences manifest disregard for the principle of Missouri corporate law
that a shareholder has no “standing” to recover damages suffered solely by the
corporation. This argument is, in a word, frivolous -- so contrary to arbitration law,
corporate law, contract law, the governing agreements, and common sense that it
warrants no further discussion.
For the foregoing reasons, the judgment of the district court is reversed in part
and the case is remanded with directions to enter an order confirming the arbitrator’s
award in its entirety.
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