IDS Life Insur Co v. Sunamerica Inc

In the
United States Court of Appeals
For the Seventh Circuit
No. 00-2009
IDS Life Insurance Company and American
Express Financial Advisors, Inc.,
Plaintiffs-Appellants,
v.
Royal Alliance Associates, Inc., et al.,
Defendants-Appellees.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
Nos. 95 C 1204, 95 C 1212--Wayne R. Andersen, Judge.
Argued January 23, 2001--Decided September 12, 2001
Before Posner, Easterbrook, and Ripple,
Circuit Judges.
Posner, Circuit Judge. The plaintiffs
appeal from an order confirming a
decision by an arbitration panel that
denied the plaintiffs all the relief they
had sought. The plaintiffs are a
securities broker-dealer and a life
insurance company, both owned by American
Express and both members of the National
Association of Securities Dealers (the
insurance company sells variable
annuities, which are considered
securities). The defendants are broker-
dealers that compete with the plaintiffs.
They also belong to the NASD and are
affiliated with insurance companies that
sell variable annuities and compete with
the plaintiff insurance company, IDS. The
plaintiffs charge that beginning in 1992
the defendants tortiously interfered with
the plaintiffs’ contracts with their
broker employees, for example by falsely
representing to the brokers that the one-
year covenants not to compete that the
brokers had agreed to in their contracts
with the plaintiffs were unenforceable.
In 1995 the plaintiffs brought this suit
against the defendants (and other
parties, not before us on this appeal)
for tortious interference with contract,
basing federal jurisdiction on diversity
of citizenship. The defendants demanded
arbitration, citing rules of the NASD
that require members to arbitrate "any
dispute . . . arising out of the
employment . . . with any member, with
the exception of disputes involving the
insurance business of any member which is
also an insurance company."
At the defendants’ behest, the district
court stayed the suit while the parties
arbitrated. After preliminary skirmishes
discussed in our opinions in IDS Life
Ins. Co. v. SunAmerica, Inc., 103 F.3d
524, 525-26 (7th Cir. 1996), and 136 F.3d
537, 539-41 (7th Cir. 1998), and in
several unpublished orders, the
arbitration was conducted in 154 sessions
over a period of 14 months beginning in
January of 1997, resulting in an award so
incomprehensible that three years later
the judges and the parties are still
trying to figure it out.
The plaintiffs sought from the
arbitrators an injunction against the
defendants’ "raiding" the plaintiffs’
brokers, and damages for loss of business
caused by the previous raids. The
defendants sought a declaration that the
covenants not to compete in the
plaintiffs’ contracts with their brokers
were unenforceable. In May of 1998 the
arbitrators rendered their decision. They
denied all the requests of the parties
for relief but stated that "where the
Respondents [the plaintiffs in the
district court, the two American Express
companies] are concerned, all actions of
the panel . . . pertain only to [the
broker-dealer firm]. No contentions
pertaining specifically to IDS Life
Insurance Company were presented to the
panel."
The plaintiffs asked the district court
to vacate the panel’s award on the ground
that the arbitrators had "so imperfectly
executed [their powers] that a mutual,
final, and definite award upon the
subject matter submitted was not made."
This is one of the grounds on which the
Federal Arbitration Act, which is
applicable to this arbitration because
the parties’ dispute arises out of a
contract that evidences a transaction
involving commerce, see 9 U.S.C. sec. 2;
Southland Corp. v. Keating, 465 U.S. 1,
10-11 (1984), authorizes the vacation of
an arbitral decision. 9 U.S.C. sec.
10(a)(4); Commonwealth Coatings Corp. v.
Continental Casualty Co., 393 U.S. 145,
147 (1968); Flender Corp. v. Techna-Quip
Co., 953 F.2d 273, 279 (7th Cir. 1992);
Eljer Mfg., Inc. v. Kowin Development
Corp., 14 F.3d 1250, 1253 (7th Cir.
1994). Persuaded that the arbitral award
was incomplete, the district judge in
February of 1999 remanded the case to the
arbitrators, who in June of that year
responded that the second sentence that
we quoted from the award ("No contentions
pertaining specifically to IDS Life
Insurance Company were presented to the
panel") was intended to have been the
basis of the first sentence (about the
panel’s actions pertaining only to the
broker-dealer affiliate). They added:
"The panel gave full consideration to all
issues and claims presented to it. When
read in its entirety, our Award
encompasses all of the parties to this
action as filed"--and the list that
follows includes IDS Life Insurance
Company.
The plaintiffs again asked the district
court to vacate the arbitrators’ award as
incomplete. They pointed out that the
award says nothing about IDS’s damages
claims, and in addition they argued that
the award is internally inconsistent
because it denies relief to the
plaintiffs while refusing to hold that
the covenants not to compete, on which
the plaintiffs’ claim of tortious
interference is based, are unenforceable.
If they were unenforceable, soliciting
the plaintiffs’ employees to break them
would not be tortious interference with
contract; there would be nothing to
break. The plaintiffs also argued that
IDS’s claims were not arbitrable, because
it is an insurance company and its claims
involve the insurance business. The
district court rejected these arguments
and confirmed the award, precipitating
this appeal by the plaintiffs, who also
appeal from the denial of their motion
for sanctions, an issue we defer to the
end of this opinion.
We sympathize with the plaintiffs’
dissatisfaction with the arbitrators’
response to the direction to clarify
their award. The response is unclear, and
its lack of clarity is of a piece with
their response to previous requests for
clarification. See 136 F.3d at 539-40.
The plaintiffs point us to portions of
the arbitration record which suggest that
the arbitrators lacked the professional
competence required to resolve the
parties’ disputes. The length of the
arbitration hearing (154 separate
sessions over a period of 14 months that
followed two years of prehearing
preparation), a recent overhaul by the
NASD of its arbitration procedures, and
the inarticulateness and unresponsiveness
of the arbitrators, give color and
substance to the plaintiffs’ criticisms.
But the grounds for challenging an
arbitration award are narrowly limited,
reflecting the voluntary contractual
nature of commercial arbitration. Within
exceedingly broad limits, the parties to
an arbitration agreement choose their
method of dispute resolution and are
bound by it however bad their choice
appears to be either ex ante or ex post.
Baravati v. Josephthal, Lyon & Ross,
Inc., 28 F.3d 704, 709 (7th Cir. 1995);
Chicago Typographical Union No. 16 v.
Chicago Sun-Times, Inc., 935 F.2d 1501,
1505 (7th Cir. 1991); Merit Ins. Co. v.
Leatherby Ins. Co., 714 F.2d 673, 679
(7th Cir. 1983); UHC Management Co. v.
Computer Sciences Corp., 148 F.3d 992,
997 (8th Cir. 1998); Ford v. Nylcare
Health Plans, 141 F.3d 243, 247-48 (5th
Cir. 1998); Davis v. Prudential
Securities, Inc., 59 F.3d 1186, 1193
(11th Cir. 1995). The plaintiffs did not
have to join the NASD (though they could
not become broker-dealers without doing
so); by choosing to do so they became
contractually bound by the association’s
rules governing the resolution of
employment disputes. Austin v. American
Association of Neurological Surgeons, 253
F.3d 967, 968 (7th Cir. 2001). They point
to nothing in the rules that gave them a
contractual right to insist on
arbitrators abler, swifter, or more
articulate than the ones they got. They
point to nothing that entitles us to
scour the record for signs of arbitral
incompetence. The grounds on which the
plaintiffs can attack the award are
limited to those set forth in the Federal
Arbitration Act. (The plaintiffs wisely
do not invoke the controversial
nonstatutory ground, "manifest disregard
of the law," which we have limited to the
situation in which the arbitral award
directs the parties to violate the law.
George Watts & Sons, Inc. v. Tiffany &
Co., 248 F.3d 577, 580-81 (7th Cir.
2001).) Unless there is a specific ground
for vacating an award, it must be
confirmed. Menke v. Monchecourt, 17 F.3d
1007, 1009 (7th Cir. 1994); Smiga v. Dean
Witter Reynolds, Inc., 766 F.2d 698, 708
(2d Cir. 1985); Taylor v. Nelson, 788
F.2d 220, 225 (4th Cir. 1986).
The only ground pertinent to this case
is the one we quoted earlier, that the
arbitrators "so imperfectly executed
[their powers] that a mutual, final, and
definite award upon the subject matter
submitted was not made." We take "mutual"
and "final" to mean that the arbitrators
must have resolved the entire dispute (to
the extent arbitrable) that had been
submitted to them, Dreis & Krump Mfg. Co.
v. International Ass’n of Machinists &
Aerospace Workers, 802 F.2d 247, 250-51
(7th Cir. 1986); Fradella v. Petricca,
183 F.3d 17, 19 (1st Cir. 1999), and
"definite" to mean (much as in the case
of injunctions, Fed. R. Civ. P. 65(d))
that the award is sufficiently clear and
specific to be enforced should it be
confirmed by the district court and thus
made judicially enforceable. Flender
Corp. v. Techna-Quip Co., supra, 953 F.2d
at 279-80; Diapulse Corp. of America v.
Carba, Ltd., 626 F.2d 1108, 1111 (2d Cir.
1980). We note parenthetically that some
cases deem an arbitral award final if it
finally resolves a separate claim, or the
liability of a particular party, even if
other claims or other parties remain
before the arbitrators. Publicis
Communication v. True North
Communications, Inc., 206 F.3d 725, 729
(7th Cir. 2000); Hart Surgical, Inc. v.
Ultracision, Inc., 244 F.3d 231, 233-34
(1st Cir. 2001). These cases create a
regime that is similar to the one that
Fed. R. Civ. P. 54(b) creates for federal
litigation, yet is in tension with the
absence from the Federal Arbitration Act
of any counterpart to that rule. But it
is not a tension that need be resolved in
this case.
The requirements of finality and
definiteness are ones more of form than
of substance. They must not be confused
with whether the arbitrators’ award was
correct or even reasonable, since neither
error nor clear error nor even gross
error is a ground for vacating an award.
Major League Baseball Players Ass’n v.
Garvey, 121 S. Ct. 1724, 1728 (2001);
United Paperworkers Int’l Union v. Misco,
Inc., 484 U.S. 29, 38 (1987); George
Watts & Sons, Inc. v. Tiffany & Co.,
supra, 248 F.3d at 579; Flexible Mfg.
Systems Pty. Ltd. v. Super Products
Corp., 86 F.3d 96, 100 (7th Cir. 1996).
Maybe if the arbitrators said "We’d
rather play golf today, so rather than
consider the parties’ claims we’re simply
denying all of them," the resulting award
would not be considered a "mutual, final,
and definite award," or, perhaps, any
award at all; though a more comfortable
home for that conclusion might be 9
U.S.C. sec. 10(a)(3), which allows an
award to be vacated if the arbitrators
were "guilty of misconduct . . . in
refusing to hear evidence pertinent and
material to the controversy; or any other
misbehavior by which the rights of any
party have been prejudiced." But that is
not argued, and need not be pursued; and
putting the golf hypothetical to one
side, therefore, if the district judge is
satisfied that the arbitrators resolved
the entire dispute and can figure out
what that resolution is, he must confirm
the award.
Pursuing the analogy to Rule 65(d) of
the civil rules, we hold that the
question for the district court and for
us is not whether the arbitrators’
reasoning is incomplete in the sense that
a syllogism would be incomplete if it
lacked its major or its minor premise but
whether the award itself, in the sense of
judgment, order, bottom line, is
incomplete in the sense of having left
unresolved a portion of the parties’
dispute. Inconsistency, therefore, with
which the plaintiffs tax the arbitrators
(probably wrongly, since a tortious-
interference claim can fail even if the
contracts alleged to be tortiously
interfered with are enforceable), is
relevant only if it renders the award
incomplete or indefinite. The alleged
inconsistency here (the arbitrators’
having on the one hand refused to grant
the plaintiffs any relief and on the
other hand refused to declare the
contracts they’re alleged to have
interfered with enforceable) does not
render the award incomplete--to deny
relief to both sides on inconsistent
grounds is still to deny relief--or
unclear: denial is denial.
There is, however, one disquieting note
in the district judge’s treatment of this
issue. He stated that in "rejecting the
[defendants’] equally broad request for
exoneration for every instance that they
retained the services of plaintiffs’
agents, the arbitrators simply recognize
that there may be individual cases in
which plaintiffs may show wrongful
conduct, but that those are left to
another day and forum to decide." If this
means that the arbitrators severed the
plaintiffs’ specific claims of wrongful
conduct and so failed to resolve the
entire dispute that had been referred to
arbitration in accordance with the NASD’s
rules, then they failed to make a mutual,
final, and definite award, unless it is
indeed true that courts may graft Rule
54(b) onto the Federal Arbitration Act
though not authorized by Congress to do
so. The judge went on to say, however,
that "the arbitrators fully decided all
matters before them." In light of this
statement we interpret the award to mean
only that while the arbitrators indeed
resolved the entire dispute that had been
referred to them, they did not wish to
preclude arbitration of future disputes
between the parties that somehow are not
precluded by their decision, and so they
refused to issue a blanket pass to the
defendants. Fair enough. But we emphasize
that any claims arising out of the
dispute giving rising to this litigation,
the dispute the arbitrators were asked to
resolve and we think did resolve, are
closed to further litigation by the
principles of res judicata and collateral
estoppel. Closed to litigation; not
necessarily to arbitration. Although res
judicata and collateral estoppel usually
attach to arbitration awards, Pryner v.
Tractor Supply Co., 109 F.3d 354, 361
(7th Cir. 1997); Rudell v. Comprehensive
Accounting Corp, 802 F.2d 926, 929-30
(7th Cir. 1986); Benjamin v. Traffic
Executive Ass’n Eastern Railroads, 869
F.2d 107, 110-11 (2d Cir. 1989), they do
so (if they do so) as a matter of
contract rather than as a matter of law.
The preclusive effect of the award is as
much a creature of the arbitration
contract as any other aspect of the
legal-dispute machinery established by
such a contract. W.R. Grace & Co. v.
United Rubber Works, 461 U.S. 757, 765
(1983); Brotherhood of Maintenance of Way
Employees v. Burlington Northern R.R., 24
F.3d 937, 940 (7th Cir. 1994).
Arbitration is customized, not off-the-
rack, dispute resolution. But plaintiffs
are out of court anyway, because this
litigation has covered the waterfront.
Whether or not they could ask the NASD to
reopen the question is up to the NASD;
they can’t ask the courts to reopen the
judgment already entered (and about to be
affirmed). That judgment has preclusive
effect as a matter of law.
More serious is the plaintiffs’
contention that the Delphic terms in
which the arbitrators responded to the
district court’s question about the
disposition of IDS’s claims should be
interpreted as a refusal by the
arbitrators to resolve those claims, thus
rendering the award incomplete. Why they
didn’t just say they had decided to deny
IDS’s claims eludes us; but it seems to
us that this must have been what they
meant when they said: "When read in its
entirety, our Award encompasses all of
the parties to this action." If they
didn’t realize that IDS had claims--if
they simply forgot that IDS had submitted
claims for damages--then in issuing an
award denying all relief to IDS the
arbitrators might not only have been
committing a grievous error, but have
failed to render a final, in the sense of
a complete, award. Charity in
interpretation entitles us to adopt the
alternative assumption that the
arbitrators did not think IDS was making
any distinct claim worth discussing. Cf.
Remmey v. PaineWebber, Inc., 32 F.3d 143,
150-51 (4th Cir. 1994).
All this assumes, of course, that IDS
was contractually bound to arbitrate its
disputes with the defendants (or
consented to do so, even if not
obligated). It did not agree to arbitrate
disputes "involving the insurance
business of any member which is also an
insurance company," and while it is a
member of the NASD it is also an
insurance company. The purposes of the
exclusion are to keep arbitrators away
from issues that are peculiar to
insurance, such as reserves, reinsurance,
actuarial calculations, rates, coverage,
and mandatory terms, and to prevent
arbitrators from being swamped with
insurance claims, which are apt to be
more numerous than securities claims. In
re Prudential Ins. Co. of America Sales
Practice Litigation All Agent Actions,
133 F.3d 225, 232-34 (3d Cir. 1997). No
technical insurance issue is involved in
the alleged tortious interference by the
defendants with the plaintiffs’
employees, however; nor is the allegation
at all typical of claims against
insurance companies.
The plaintiffs do charge that the
defendants engaged in "twisting" (also
known as "flipping," "churning," and "re
placement"), which means trying to
persuade an insured to replace his
existing insurance policy (and in this
case it would usually be a variable
annuity--a security) with a new policy in
order to eliminate the residual income
that the existing insurer derives from
its policy, or, in the case of health
insurance (not involved here), in order
to curtail the insured’s coverage by
requiring him to execute a new
preexisting-condition clause. United
States v. Forzese, 756 F.2d 217, 219 (1st
Cir. 1985). The plaintiffs claim that the
defendants, not content with obtaining
new business through the brokers whom it
"stole" from the plaintiffs, "twisted"
the brokers’ existing customers so that
the brokers’ old business would be
switched from the plaintiffs to the
defendants. Since the brokers would
obtain commissions on the new policies,
twisting was one of the inducements that
the defendants dangled before the
plaintiffs’ brokers to get them to
defect. But the fact that twisting might
be at once a motive or method for the
defendants’ tortious activity (or both),
a reason for the plaintiffs’ one-year
covenant not to compete, and a cause of
the plaintiffs’ injury does not mean that
the arbitrators would have to know
anything about the insurance business in
order to be able to arbitrate the
plaintiffs’ claims competently. They
wouldn’t have to know anything more than
we know, which is the opening sentences
in this paragraph. No technical issue of
insurance law or of the economics,
regulation, or business customs of
insurance was thrust upon the arbitrators
(and this was apparent, moreover, when
the demand for arbitration was made), and
the twisted insurance policies were also
securities, so this is not a case of an
arbitration program designed for the
securities industry being yanked into a
class of disputes that do not involve
securities.
We come last to the issue of sanctions.
In June 1998, a month after the
arbitrators’ first award (the one the
district court in February of the
following year remanded to the
arbitrators for clarification), the
defendants scampered off to a New York
state court and asked it to confirm the
arbitrators’ award. The choice of forum
was curious, since it was the federal
district court in Chicago that at the
defendants’ urging had stayed the suit
filed by the plaintiffs so that the
matter could be referred to arbitration.
But stranger than the choice of forum was
the reason given for the choice, that the
district court in Chicago did not have
jurisdiction to confirm the award--which
is ridiculous. Baltimore & Ohio Chicago
Terminal R.R. v. Wisconsin Central Ltd.,
154 F.3d 404, 407 (7th Cir. 1998); In re
VMS Securities Litigation, 21 F.3d 139,
145 (7th Cir. 1994); LaPrade v. Kidder
Peabody & Co., 146 F.3d 899, 902-03 (D.C.
Cir. 1998). It was the court in which the
suit had originally been filed and
arbitration ordered years before the
defendants filed suit in another state to
enforce the arbitration award that they
had obtained.
The district court in February of 1999
ordered the defendants to dismiss their
New York suit; they did so; and they make
no argument that their jurisdictional
theory, the ostensible though obviously
not the true reason for their flight to
New York, was reasonable, let alone that
it was correct. Nevertheless the district
court without any discussion of the
reasonableness of the theory denied the
plaintiffs’ motion for sanctions under 28
U.S.C. sec. 1927.
That statute authorizes sanctions
against a lawyer who vexatiously (which
is to say gratuitously and injuriously)
multiplies proceedings, an excellent
description of the defendants’ action in
seeking confirmation of the award in a
different court from the one in which the
suit giving rise to the arbitration had
been pending for three years. It was the
defendants, remember, who had wanted
arbitration in the first place. They
could back in 1995 have moved under 9
U.S.C. sec. 4 for an order to arbitrate
in any court (state or federal, see
Allied-Bruce Terminix Cos. v. Dobson, 513
U.S. 265, 271-73 (1995)) in which they
could obtain jurisdiction over the
plaintiffs and they could later have
sought confirmation of a favorable award
in that court. Instead they waited three
years until, doubtless worried by some
critical comments in our previous
decisions, 103 F.3d at 529; 136 F.3d at
542-43, they decided to seek a friendlier
forum than the one in which till then
they had contentedly acquiesced in
litigating.
In ordering the defendants to dismiss
their New York suit, the district judge
noted that they had ignored relevant
authority, "bas[ing] their dubious and
disingenuous view to the contrary on
inapposite authority." He also said that
they had acted in "blatant disregard" of
his order staying litigation pending
completion of the arbitration, and
expressed "doubts" that jurisdictional
anxieties were the "real motive" behind
the New York suit. Yet in denying the
motion for sanctions he made no reference
to these earlier statements of dismay
with the defendants’ conduct.
What he did say was that--
(1) He had a strong inclination to deny
the motion for sanctions because of his
"own philosophy," which is skeptical of
sanctions;
(2) He thought the expense incurred by
the plaintiffs in defending against the
defendants’ suit in New York, $100,000,
was not large enough to warrant a
sanction, as it was not "hugely
disproportionate to the whole amount" of
lawyers’ fees incurred in the overall
litigation;
(3) The defendants had obeyed his order
to drop the New York suit;
(4) After reading the defendants’
explanation for why they thought he might
not have jurisdiction to confirm the
arbitration award, he thought that maybe
the New York suit wasn’t so unreasonable
after all;
(5) It was a tough, scrappy litigation
with no holds barred; presumably the
plaintiffs’ lawyers, had they been in the
position of the defendants’ lawyers,
would have done the same thing, that is,
institute a frivolous lawsuit.
These are not grounds for a denial of
sanctions. If they were, a district
judge’s discretion to award or refuse to
award sanctions would be wholly
unconfined, and in consequence the
standard of appellate review (abuse of
discretion, Chambers v. NASCO, Inc., 501
U.S. 32, 35 (1991); Ross v. City of
Waukegan, 5 F.3d 1084, 1089 n. 6 (7th
Cir. 1993); Harrison v. Dean Witter
Reynolds, Inc., 974 F.2d 873, 886 (7th
Cir. 1992)) would be not just
deferential, but empty. So clear is it
that the defendants filed a frivolous
suit in a New York court in order to
complicate this already far too
complicated and absurdly protracted
litigation, to the cost of the
plaintiffs, that the district judge
committed an abuse of discretion in
refusing to sanction the defendants’
counsel under section 1927. The
defendants’ choice of forum, the ground,
and the timing prove their bad faith.
"[W]hen an attorney recklessly creates
needless costs the other side is entitled
to relief." In re TCI Ltd., 769 F.2d 441,
446 (7th Cir. 1985). That’s this case.
The judgment confirming the arbitration
award is affirmed, but the denial of the
motion for sanctions is reversed and the
plaintiffs are directed within 14 days to
submit a statement of the legal fees and
other expenses that they incurred in
defending against the New York suit.