By Leslie King O’Neal

      

The Sullivan case involved four arbitration awards from four arbitrations between the same parties. The awards contradicted each other, and each confirmed award reflected a different amount awarded to the Claimants.  The case involved two doctors and several related business entities who contracted with a lawyer and his firm and other parties to form captive insurers for third party insurance and reinsurance. The doctor group claimed the lawyer group breached their fiduciary duties, committed malpractice and converted the doctors’ funds. The parties’ agreement was an “Engagement Letter” with an attached “Capstone Services Agreement.”

Non-Administered Arbitration with Four Months to Complete

         The Engagement Letter had a broad arbitration agreement, calling for arbitration under Texas Law and the American Arbitration Association Rules. However, AAA did not administer the arbitration. Arbitration was the sole and exclusive forum for resolving disputes between the parties. The single arbitrator had authority to rule on all aspects of his or her appointment and on the issue of arbitrability or challenges to the agreement. The arbitration proceeding was to be concluded within four months. If this didn’t happen, any party could file another arbitration demand with another arbitrator; the prior arbitrator’s jurisdiction ended immediately.

The Bleak House of Arbitration[iii]

         The parties filed eight separate arbitrations before eight different arbitrators. Only four arbitrations were completed. The district court consolidated the cases and enjoined the parties from initiating further arbitration or other proceedings.

         Four arbitrators presided over a shared evidentiary hearing where the same evidence and witnesses were presented. The hearing was held at a five-star resort, resulting in room fees of over $300,000. The arbitrators entered conflicting evidentiary rulings and disagreed with each other vocally from the bench.

Four Different Damages Amounts

         All four awards were issued after the four-month deadline. The arbitrators issued a joint order finding the deadline was unenforceable as unconscionable and inconsistent with due process. The amounts of the awards ranged from $1,471,949.21 to $88,684,519.20.  One of the arbitrators permitted class arbitration, but the others did not.

Awards Confirmed in “Their Riotously Varying Glory”

The parties filed motions to vacate and confirm the awards. The district court confirmed all four awards and entered a partial final judgment based on the largest award totaling $94,542,659.80[iv]. The lawyer group appealed.

Court’s Limited Scope of Review of Arbitration Awards

The lawyer group challenged the arbitrators’ rulings on class arbitrability, the four-month deadline and whether simultaneous arbitrations were permissible. They also argued that the inconsistent awards should be vacated. The Fifth Circuit, noting the deferential standard federal courts must give to arbitration awards, rejected these arguments.

Incorporating AAA Rules Give Arbitrator Authority on Arbitrability Questions

         Based on prior cases, the Fifth Circuit “reluctantly” found that “mere incorporation of the AAA Commercial Arbitration Rules” was sufficiently clear and unmistakable evidence that the parties intended to delegate questions of class arbitrability to the arbitrator. The Court noted, “agreement to the AAA’s Commercial Rules also constitutes consent to the Supplementary Rules.” (citations omitted). One of the Supplementary Rules give the arbitrator authority to determine whether the arbitration clause allows class arbitration.

Arbitrators Correctly Decided Four-Month Deadline Enforceability

AAA Rule 7(a) gives arbitrators the power to rule on their own jurisdiction. The Court found this rule was unambiguously incorporated into the agreement. Because the Engagement Letter provided that the four-month deadline is “jurisdictional,” the arbitrator had the power to decide its enforceability. In reviewing the arbitrators’ contract interpretation, the sole question for the court is whether the arbitrators interpreted the parties’ contract, not whether they got it right.[v]

Allowing Multiple, Simultaneous Arbitrations was for Arbitrators to Decide

Similarly, the Fifth Circuit held whether it was permissible to have multiple, simultaneous arbitrations was a contract interpretation question for the arbitrators.

Inconsistent Awards Not Grounds for Vacatur

The Federal Arbitration Act lists only four grounds for vacating an arbitration award.[vi] Inconsistency among awards is not among the grounds listed for vacatur. The Fifth Circuit stated, “We resist the urge to second-guess the merits of the various awards.” However, the appellate court vacated the district court’s order staying further arbitrations between the parties, stating: “For the sake of sanity, judicial efficiency, and litigation economics, this court hopes their disagreements will be finally resolved.”

Takeaways

• The Devil is in the Details: Arbitration agreements require careful drafting. Unfortunately, they are often left to the end of contract negotiations. Poorly drafted arbitration clauses can result in judges stating that the parties made “this mess but agreed that arbitration would resolve their disputes no matter how messy. This court will not step in to clean it up and risk making it worse.”[vii]
• Understand Rules Before Incorporating Them: As Sullivan illustrates, incorporating AAA and JAMS Rules may provide the arbitrators broad powers. Drafter should understand what the rules (and supplementary rules) provide before incorporating them into the arbitration agreement.
• Rules Delegate Arbitrability Questions to Arbitrators: Both AAA and JAMS Rules provide that arbitrators decide questions of arbitrability and rule on their own jurisdiction. See post Conflicting Arbitration Clauses: Who Decides Priority? Conflicting ADR Clauses: Who Decides Priority? – The Construction ADR Toolbox
• Consider the Consequences of “Going Bare:” Ad hoc or non-administered arbitrations can save money but consider what can happen without an administrator. A future post will discuss this in detail.

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[i] Alaska is twice as big as Texas.

[ii] Case: 23-20140  (March 11, 2025) Sullivan v. Feldman, No. 23-20140 (5th Cir. 2025) :: Justia

[iii] The district court called the case the Bleak House of arbitration, after the famous Dickens novel satirizing the inefficient and convoluted Victorian Court of Chancery.

[iv] The judgment accrues post-judgment interest of nearly $13,000 per day.

[v] Oxford Health Plans v. Sutter, 569 U.S. 564 at 569 (2013) Oxford Health Plans LLC v. Sutter | 569 U.S. 564 (2013) | Justia U.S. Supreme Court Center

[vi] 9 U.S.C §10.

[vii] Sullivan Dist. Ct. Op.