Can Arbitration Award Be Vacated for Improper Pleading?

 By Leslie King O’Neal

 

The Royal Merchant Litigation

Ferraro started as an Ohio dispute between Royal Merchant and Traeger Pellet Grills LLC (“Traeger”) for breach of contract related to credit card processing. The Ferraro firm represented Royal Merchant (“RM”) in the Ohio litigation with Traeger. This litigation did not go well. Ultimately, the case was dismissed with prejudice for discovery violations by the Ferraro firm. There were other problems with Ferraro’s representation, including not advising RM its case was dismissed until after the appeal time had run. RM filed for arbitration seeking damages for legal malpractice against the Ferraro firm pursuant to its retainer agreement terms.[ii] The retainer agreement had an Ohio choice of law provision.

The Ferraro Malpractice Arbitration

The Ferraro arbitration, held in Miami, FL, consumed two years of pre-hearing process and 22 hearing days spaced over 18 months. In November 2020 the sole arbitrator entered lengthy findings of fact and conclusions of law and awarded RM $1.5 million in compensatory damages, punitive damages, interest and costs against the Ferraro firm and James Ferraro individually. On Ferraro’s motion, the arbitrator amended the award, deleting the punitive damages and the award against James Ferraro personally.

Post-Arbitration Litigation

This began three years of litigation as the parties filed motions to confirm and to vacate the award, resulting in two conflicting orders: (1) an order vacating the award and (2) (upon reconsideration by a different judge) an order confirming the award. The two orders took opposite views on whether the parties agreed to strict pleading requirements in the arbitration[iii] and whether Ferraro was prejudiced by the arbitrator’s allowing RM to pursue an “unpled” claim. [iv]

Third DCA Appeal

On appeal, the Florida 3d DCA upheld the order vacating the award, finding arbitrator misconduct under § 682.13(1)(b)3., Fla. Stat.,[v] because the award was based on an issue (advice regarding an assignment) that was not properly pled.[vi] The 3d DCA found the hearing was “fundamentally unfair” to Ferraro.

FAA vs. FAC—Which Law Applies?

Surprisingly, the court relied on the Florida Arbitration Code (“FAC”) rather than on the Federal Arbitration Act (“FAA”)[viii] although “[t]he parties agree[d] that the Federal Arbitration Act governs the arbitration. . . .”[ix] Even absent agreement, the FAA applies to any contract “within the flow of interstate commerce.”[x] There is a significant difference in the two statutes regarding vacating an award. The FAC states that on a party’s motion, the court shall vacate an award if one of the stated grounds is proven, while the FAA states that the court may vacate the award if one of the grounds is proven.

FAA Preemption

The 3d DCA cited numerous Florida cases regarding trial court pleading requirements as support for its ruling, perhaps not realizing the FAA is substantive law applicable in state and federal courts. As the U.S. Supreme Court stated in Southland Corp. v. Keating, “the Arbitration Act ‘creates a body of federal substantive law’ and . . . the substantive law the Act created was applicable in state and federal courts.”[xi] The FAA preempts all conflicting state court rules, policies and provisions.[xii]

Does “Pleading” Apply in Arbitration?

         “Pleading” is a term of art in law, referring to filings setting out the parties’ claims and defenses. The Federal Rules of Civil Procedure and state procedural rules define the types of pleadings allowed and their requirements.[xiii]  Federal or state procedural rules don’t usually apply to arbitrations. “Arbitrators enjoy wide latitude in conducting an arbitration hearing and they are not constrained by formal rules of procedure or evidence.”[xiv]  If administered by an organization such as AAA or JAMS,[xv] its rules govern the arbitration, unless the arbitration agreement states otherwise.[xvi] Parties can agree to apply specific procedural rules to their arbitration.

 “Pleading” and Notice in Arbitration

The FAA does not address notice of arbitration or claims. Neither AAA nor JAMS rules require “pleadings” as defined in federal or state rules.[xvii] However, JAMS Rule 9(a) states, “No claim, remedy, counterclaim or affirmative defense will be considered by the Arbitrator in the absence of . . . prior notice to the other Parties.” Due process in arbitration requires notice and an opportunity to be heard, but the rules do not specify the type or form of notice.

FAA and Fundamental Fairness

While arbitration is more informal than litigation, arbitrators are obligated to provide parties a fundamentally fair hearing. A “fundamentally fair hearing” meets minimal fairness requirements—notice, a hearing on the evidence and an impartial decision.[xviii] “Arbitration proceedings ‘need not follow all the ‘niceties’ of the federal courts.””[xix] “The Federal Arbitration Act allows arbitration to proceed with only a summary hearing and with restricted inquiry into factual issues.”[xx] A motion to vacate under FAA §10(a)(3) is reserved for cases where a party can show the arbitrator’s handling of a matter “was in bad faith or so gross as to amount to affirmative misconduct.”[xxi]

Takeaways

• Unless the parties agree otherwise, formal pleading rules do not apply in arbitration proceedings. Any agreement to apply litigation rules in arbitration should be clearly stated in a stipulation or order.
• Parties hoping to use “failure to plead” as grounds to vacate an award must have a complete record of the arbitration proceeding[xxii] and make timely objections.
• The FAA is substantive law and applies to all arbitration agreements “affecting interstate commerce,” whether FAA is mentioned in an arbitration clause or not. It preempts contractual choice of law provisions.[xxiii]

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[i] Case No: 3D22-1851, (Fla. 3d DCA June 12, 2024) https://casetext.com/case/the-ferraro-law-firm-pa-v-royal-merch-holdings ; Florida Eleventh Circuit Court, Case No: 2021-3987-CA-01. https://www2.miamidadeclerk.gov/ocs/Search.aspx A petition for discretionary review to the Florida Supreme Court is pending. (SC2024-1369)

[ii] The available records from the trial court and the appellate court do not show this arbitration was administered by any organization (e.g. AAA or JAMS). The retainer agreement stated Ohio law governed the professional malpractice claims.

[iii] Doc. 59, Order Vacating Arbitration Award: “The Arbitrator issued scheduling orders expressly imposing deadlines and requirements for amending pleadings.” Doc. 102, Order Granting Reconsideration at Page 12:“The Arbitrator specifically rejected the contention that her scheduling order adopted rules of procedure and established record support for that conclusion. See FFCL at 43-44,”

[iv] Document 59, Order Vacating Award: “During the trial, RM pursued a brand new, unpleaded theory regarding wholly different conduct concerning the assignment notifications that occurred prior to the Ohio litigation.” Document 102, Order Granting Motion for Reconsideration, p. 10: “In the course of the eighteen months [of the hearing], Ferraro did not seek a definitive ruling on its objection, a continuance, seek additional discovery, or assert any additional defenses that might arise because of what it characterized as an unpled claim.”

[v]  See Note 1.

[vi] The issue was an assignment proposal Ferraro advised RM to reject. The 3d DCA stated RM raised this issue as an “avoidance to an affirmative defense” rather than as an affirmative claim, thus prejudicing Ferraro’s defense.

[vii] Fed. R. Civ. Proc. 8(c)(2) provides, “If a party mistakenly designates a defense as a counterclaim or a counterclaim as a defense, the court must, if justice requires, treat the pleading as though it were correctly designated, and may impose terms for doing so.” Rule 1.110(d), Fla. R. Civ. Proc. contains the same language.

[viii] 9 U.S.C. Ch.1

[ix] Document 102, Order Granting Reconsideration, footnote 2. Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52 (1995) (FAA does not have to be mentioned in the contract or arbitration provision to apply and preempt state law). The FAA

[x] Allied-Bruce Terminex Cos. v. Dobson, 513 U.S. 265 (1995),

[xi] 465 U.S. 1 (1984), citations omitted.

[xii] AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011); Kindred Nursing Centers L. P. v. Clark, 137 S. Ct 1421 (2017).(FAA preempts conflicting state laws).

[xiii] Fed. R. Civ. Proc. 7(a) lists the pleadings allowed: complaint; answers to a complaint, a cross-claim or a counterclaim; third party complaint; answer to a third party complaint. A reply to an answer is allowed if a court orders it. Comment 2 notes that some state procedural rules require a reply to an affirmative defense (e.g. Fla. R. Civ. Proc. 1.100(a) states, “If an answer or third-party answer contains an affirmative defense and the opposing party seeks to avoid it, the opposing party must file a reply containing the avoidance.”)

[xiv] Rosensweig v. Morgan Stanley & Co., Inc., 494 F.3d 1328 (11th Cir. 2007).

[xv] Non-administered or ad hoc arbitrations may specify that AAA or JAMS (or other providers) rules apply.

[xvi] Some arbitration clauses provide that the Fed. R. Civ. Proc. or state procedural rules apply, but this is rare. In the author’s opinion, adding these rules to arbitration defeats arbitration’s goal to provide a streamlined and efficient dispute resolution process.

[xvii] See Rule R-4 AAA Construction Industry Arbitration Rules and Mediation Procedures Construction Industry Arbitration Rules and Mediation Procedures Oct 2009 Jun 2010.pdf and www.jamsadr.com

[xviii] Generica Ltd. v. Pharmaceutical Basics, Inc., 125 F.3d 1123, 1130 (7^th Cir. 1997).

[xix] Indus. Risk Insurers v. M.N. Guethoffnungshutte GmbH, 141 F.3d, 1434, 1443 (11^th Cir.  1998).

[xx] Booth v. Hume Pub., 902 F.2d 925, 932 (11^th Cir. 1990).

[xxi] Battles v. Am. Van Lines, Inc. (Case No: 15-cv-62247-BLOOM/Valle)(U. S. Dist. Ct. S.D. Fla. March 2016)

[xxii] See CL Costa, Inc. v. Adcock Development, LLC, (No: 04-23-00475-CV Ct. App of Texas, 4^th District, San Antonio, July 31, 2024). https://casetext.com/case/cl-costa-inc-v-adcock-dev-1

[xxiii] Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52 (1995) (FAA does not have to be mentioned in the contract or arbitration provision to apply and preempt state law).The FAA preempts state statutes, rules, constitutional provisions or policies not generally applicable to contracts. The FAA also preempts contractual choice-of-law clauses and applies to arbitrations arising out of or related to the agreement. Terry L. Tantina, What Law Applies to an Agreement to Arbitrate? Dispute Resolution Magazine (Fall 2015) at 29. What Law Applies to an Agreement to Arbitrate?