Sarah Hinkes sued her employer and two fellow employees, alleging discrimination in violation of federal statutes. The arbiter ruled for her employer, Sunera Technologies, Inc. (Sunera), and the District Court confirmed that decision. Ms. Hinkes appealed to the Seventh Circuit Court of Appeals. She asked the Court to vacate the arbitral award because the arbiter had considered hearsay evidence as well as evidence not disclosed in discovery.
The first part of Hinkes v. Sunera Technologies, Inc. is now easy. There was some question about whether the Seventh Circuit had jurisdiction over a case that had been stayed after the District Court granted a motion to compel arbitration. Seventh Circuit law said there was, and that position has now been embraced by the Supreme Court in Jules v. Andre Balazs Properties, which we discussed recently here. A court retains jurisdiction to confirm or vacate an arbitral decision after it has stayed the case.
The other issue was whether the award should be vacated under § 10(a)(3) of the Federal Arbitration Act (FAA). That section permits a court to vacate an award on the ground that the arbiter refused to hear “evidence pertinent and material to the controversy.” But Ms. Hinkes did not claim that the arbiter refused to hear evidence; she claimed that the arbiter admitted evidence that should have been excluded.
Still, Judge Easterbrook (above) pointed out that parties may choose arbitration in part to get around the strict rules that govern litigation. Sunera presented evidence that Ms. Hinkes was terminated because of “questionable conduct” during a Karaoke event. The evidence was not introduced by an actual witness to the event. That person did not testify and was not on the parties’ witness lists. Rather, it was introduced through two other witnesses called by Sunera. It was thus hearsay. The arbiter also considered documents not previously disclosed.
Judge Easterbrook said that § 10(a)(3) does not cover Ms. Hinkes’ objection, but that’s not quite right. That section allows a court to vacate an award based on “any other misbehavior [by an arbiter] by which the rights of any party have been prejudiced.” Ms. Hinkes claimed that the arbiter’s acts violated the spirit if not the letter of the procedural rules of the relevant arbitral body. Judge Easterbrook notes that federal judges should not set aside arbitral awards “for reasons of their own devising, rather than those specified by Congress.” Moreover, he notes, “Nothing in the Federal Arbitration Act requires arbitrators to execute their instructions perfectly.” He addresses the “misbehavior” prong of 10(a)(3) only in the opinion’s conclusory final sentence: “We do not see any ‘misconduct’ or ‘misbehavior’ in how the arbitrator handled this proceeding . . . .” It’s not a satisfying response to an allegation that the arbiter did not even follow the agreed-upon arbitral rules.
I don’t like Judge Easterbrook’s dismissive approach to the misbehavior prong of § 10(a)(3). He could have reached the same conclusion far more directly. He points out that the testimony in question may not have been hearsay at all, as it was not introduced for the purpose of establishing the facts of the matter. More importantly, the arbiter did not seem to rely on the challenged evidence, so Ms. Hinkes has not shown prejudice. The opinion could have turned on that lack of prejudice alone.
I push on this point because I’m still mad about the Eighth Circuit’s decision to vacate the $5 million arbitral award in Zeidman v. Lindell Management LLC, about which we blogged here. That case turned on FAA § 10(a)(4) rather than §10(a)(3), but Ms. Hinkes also raised a § 10(a)(4) argument, which Judge Easterbrook deemed too weak to address. Section 10(a)(4) allows a court to vacate an award where the arbiter exceeded their power. In Zeidman, the panel allegedly exceeded its power by deeming an agreement unambiguous despite having considered the rules of the contest at issue in the arbitration in order to determine its meaning. The District Court found that action to be legal error but also an act of contract interpretation that did not exceed the panel’s powers. The Eighth Circuit disagreed, finding that the panel manifestly disregarded the law and vacated the award.
Judge Easterbrook says that courts are not supposed to vacate awards “for reasons of their own devising.” He observes that “[n]othing in the Federal Arbitration Act requires arbitrators to execute their instructions perfectly.” How should those two mottos apply to Zeidman? By the way, the Supreme Court denied Mr. Zeidman’s petition for certiorari. According to that petition, lower courts are “deeply divided” on a pretty basic question: “Whether the Federal Arbitration Act allows a court to vacate an arbitration decision on the ground that the decision was based on a manifest disregard of the law.”
If Ms. Hinkes petitions for certiorari in her case, I hope she will ask the Court to address whether “What happens at Karaoke stays at Karaoke” should be an implied procedural rule of all arbitral bodies.
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