United States District Court, N.D. Illinois, Eastern Division
September 27, 2004.
LAWRENCE Y. LEE, Plaintiff,
McDONALD SECURITIES INC., Defendant.
The opinion of the court was delivered by: JAMES MORAN, Senior District Judge
MEMORANDUM OPINION AND ORDER
Following an arbitration panel's decision in favor of defendant
McDonald Investments Inc., plaintiff Lawrence Lee filed a
complaint in Cook County Circuit Court to vacate the award.
Defendant removed the action to federal court on the basis of
diversity jurisdiction and then filed a counterclaim to confirm
the arbitration award. Both parties have filed memoranda in
support of their claims. We confirm the arbitration award.
This abbreviated statement of the facts is taken from the claim
and counterclaim. In January 2002, defendant, a registered
broker-dealer that maintains securities accounts for customers
throughout the United States, brought an arbitration action
against plaintiff, a registered securities representative and
defendant's former employee, for breach of a loan agreement. The
previous year, defendant hired plaintiff to work at a
newly-opened office in Chicago. As part of plaintiff's employment
agreement, defendant agreed to loan him $340,186, which was to be
repaid at a rate of 20 per cent annually. For each year that
plaintiff continued to work for defendant, 20 per cent of the
loan would be forgiven. If plaintiff worked at the company less
than one year, the whole amount was due. Plaintiff alleges that
the parties orally agreed that the loan only needed to be repaid
if he resigned or was terminated for cause before the end of the five-year term; defendant disputes this. The
signed promissory notes state that the debt becomes due upon
resignation or upon any other termination of plaintiff's
employment with defendant.
On October 15, 2001, nine months after hiring plaintiff,
defendant terminated him. Under the rules of the securities
industry's self-regulatory authorities, defendant was required to
file a termination notice for plaintiff. Though the original
termination notice stated plaintiff's termination was an
"involuntary resignation due to compliance issues for violation
of company policies," defendant later filed a clarification
stating plaintiff was terminated for "lack of production."
As a member and member's associate of the National Association
of Securities Dealers, Inc. (NASD), the parties were required to
arbitrate their dispute. NASD Code of Arbitration § 10101 (The
Code is "prescribed and adopted . . . for the arbitration of any
dispute, claim, or controversy . . . arising out of the
employment or termination of employment of associated person(s)
with any member"). After defendant filed its arbitration action
for payment of its loan, plaintiff filed a counterclaim for
breach of his employment agreement and defamation. During
discovery, each party filed motions to compel and the arbitrators
held a pre-hearing conference to address the parties' discovery
disputes. Following the resolution of some discovery issues,
plaintiff filed a second motion to compel, which the arbitrators
denied. The arbitration panel conducted a four-day hearing before
rendering an award on February 20, 2004, in favor of defendant
and against plaintiff for $340,186, the full amount of the loan.
Plaintiff was also denied relief on his counterclaims and
assessed $8,825 in forum fees.
Both the Supreme Court and the Seventh Circuit have emphasized
the narrow scope of judicial review of arbitration decisions. Major League Baseball
Players Association v. Garvey, 532 U.S. 504, 509 (2001);
Anheuser-Busch, Inc. v. Beer, Soft Drink Local Union No. 744,
280 F.3d 1133, 1137 (7th Cir. 2002). An arbitrator's error,
even if clear and serious, is not enough for a court to overturn
his decision. Anheuser-Busch, Inc., 280 F.3d at 1137; Hill v.
Norfolk and Western Railway Co., 814 F.2d 1192, 1195 (7th
Cir. 1987). This tightly limited review leads courts to vacate
arbitration awards "only in `very unusual circumstances.'"
Hasbro, Inc. v. Catalyst USA, Inc., 367 F.3d 689, 691 (7th
Cir. 2004) (quoting First Options of Chicago, Inc. v. Kaplan,
514 U.S. 938 (1995)). The Federal Arbitration Act (FAA),
9 U.S.C. § 1 et seq., applies to the parties' arbitration because their
dispute arises out of a contract that evidences a transaction
involving commerce. 9 U.S.C. § 2; IDS Life Insurance Co. v.
Royal Alliance Associates, Inc., 266 F.3d 645 (7th Cir.
2001) (applying the FAA to NASD arbitration of dispute involving
claims of tortious interference with contract); Cullen v. Paine,
Webber, Jackson & Curtis, Inc., 587 F.Supp. 1520 (D.C.Ga. 1984)
(applying the FAA to a dispute between a broker-dealer and its
employee over a promissory note that was executed at the time of
employment). The FAA lists the grounds on which plaintiff can
seek to vacate the arbitration award. IDS Life Insurance Co.,
266 F.3d at 650. An arbitration award may be vacated where (1) it
was procured through corruption, fraud, or undue means, (2) the
arbitrators were evidently partial or corrupt, (3) the
arbitrators were guilty of misconduct in refusing to postpone the
arbitration hearing or in refusing to hear pertinent and material
evidence, or (4) the arbitrators exceeded their powers.
9 U.S.C. § 10(a); see Flexible Manufacturing Systems Pty. Ltd., v.
Super Products Corp., 86 F.3d 96, 99 (7th Cir. 1996). The
Seventh Circuit also vacates arbitration awards on the
non-statutory ground of "manifest disregard of the law" in very
limited situations. IDS Life Insurance Co., 266 F.3d at 650. Plaintiff maintains that the arbitration award cannot stand
even in light of the court's strictly tailored review. He
presents a number of arguments to support his assertion that the
arbitrators exceeded their powers and demonstrated a manifest
disregard of the law. First, he claims his termination was
arbitrary and an arbitrary termination cannot provide the basis
for defendant's right to repayment of the promissory loan.
Second, he argues that terms requiring him to repay the loan
following his termination are not enforceable because they were
not supported by consideration. Finally, plaintiff contends the
arbitration panel refused to consider pertinent and material
evidence to his defense.
None of these arguments supports plaintiff's assertion that the
arbitration panel exceeded its powers or manifestly disregarded
the law. When determining whether an arbitrator exceeded his
powers, the court does not consider whether he made a mistake of
law or fact when interpreting the relevant contract, but rather,
whether he "went beyond, or outside, the bounds of interpreting
the contract before him while fashioning his award."
Anheuser-Busch, Inc., 280 F.3d at 1137. As plaintiff
acknowledges, for an arbitrator to manifest disregard of the law
under Seventh Circuit precedent, he must direct a party to
violate the law. See George Watts & Son, Inc. v. Tiffany and
Co., 248 F.3d 577 (7th Cir. 2001). Neither plaintiff's
argument regarding his arbitrary termination nor his argument
regarding the lack of consideration for the new loan term relates
to the arbitration panel exceeding its powers or directing a
party to violate the law. These arguments are nothing more than
claims that the panel wrongly decided the facts or improperly
applied the law. We need not rehash whether plaintiff was or was
not terminated arbitrarily, nor whether the parties discussed the
conditions under which plaintiff would be required to repay the
promissory loan before signing the loan agreement and promissory
notes. Analyzing the arbitration decision for factual or legal
errors would require us to disregard clear precedent, and would
transform arbitration from a "useful alternative method of
dispute resolution into a burdensome additional step on the march
through the court system." Flexible Manufacturing Systems Pty.
Ltd., 86 F.3d at 100.
Plaintiff's final argument, that the arbitration panel refused
to hear evidence relevant to his defense, also fails to support
his contention that the panel manifested a disregard of the law
or exceeded its powers. However, it does relate to § 10(a)'s
third ground for vacation of an arbitration award misconduct by
refusing to hear pertinent and material evidence. Plaintiff
argues that the panel's denial of his motion to compel evidence
regarding the productivity of his co-workers, impeded his ability
to prove that he was fired arbitrarily.
Not all failures to receive relevant evidence constitute
misconduct, requiring a court to vacate an arbitration award.
Newark Stereotypers' Union No. 18 v. Newark Morning Ledger Co.,
397 F.2d 594, 599 (3d Cir. 1968) (stating that in order to vacate
an arbitration award on the basis of an error in excluding
evidence, the error must "so affect the rights of a party that
it may be said that he was deprived of a fair hearing.");
Flender Corp. v. Techna-Quip Co., 953 F.2d 273, 280 (7th
Cir. 1992). Such misconduct occurs when an arbitration panel
fails to employ "basic notions of fairness and due process" and
"grossly and totally block[s]" a party's right to be heard.
Plumbers' Pension Fund, Local 130, U.A. v. A-Best Plumbing &
Sewer, Inc., 1991 WL 10006 at *3 (N.D.Ill. 1991) (citing Lebda
v. Charles Schwab & Co., Inc., 1990 WL 43531 at *5 (N.D.Ill.
1990)). The evidence that plaintiff was not allowed to compel
during discovery related to his argument that co-workers, who
were not fired, were less productive than he and, therefore,
defendant's reason for his termination was pretextual. Even if
the arbitration panel had wholly refused to hear evidence on this
issue, we could not find that it so affected plaintiff's rights
as to deprive him of a fair hearing because defendant argued
during the arbitration hearing that plaintiff's termination was not only due to lower
than expected production, but also due to compliance issues and a
customer complaint. More importantly, as plaintiff admits, his
right to be heard on this issue was not grossly and totally
blocked. He presented this argument and the panel admitted into
evidence, over defendant's objection, a document evidencing the
productivity of employees in defendant's Chicago office. The
panel did not violate tenets of fairness nor completely block
plaintiff's right to be heard and, thus, the denial of his motion
to compel is not proper grounds to vacate the arbitration award.
For the foregoing reasons the arbitration award is confirmed.
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