George Watts & Son Inc. v. Tiffany and Co.

• Decision Date: 18 April 2001
• Docket Number: No. 00-3231,DEFENDANT-APPELLEE,PLAINTIFF-APPELLANT,00-3231
• Citation: 248 F.3d 577
• Parties: (7th Cir. 2001) GEORGE WATTS & SON, INC.,, v. TIFFANY AND COMPANY,
• Court: U.S. Court of Appeals — Seventh Circuit

Page 577

248 F.3d 577 (7th Cir. 2001)

GEORGE WATTS & SON, INC., PLAINTIFF-APPELLANT, v. TIFFANY AND COMPANY, DEFENDANT-APPELLEE.

No. 00-3231

IN THE UNITED STATES COURT OF APPEALS FOR THE SEVENTH CIRCUIT

Argued January 12, 2001

April 16, 2001

As amended April 18, 2001.

Appeal from the United States District Court for the Eastern District of Wisconsin. No. 99-C-1217--Thomas J. Curran, Judge.

Daniel Janssen (argued), Quarles & Brady, Milwaukee, WI, for plaintiff-appellant.

K. Scott Wagner (argued), Hale & Wagner, Milwaukee, WI, for defendant-appellee.

Before Easterbrook, Diane P. Wood, and Williams, Circuit Judges.

Easterbrook, Circuit Judge

For many years George Watts & Son sold Tiffany's products in Wisconsin. After receiving a notice ending that arrangement, Watts filed suit, asserting that Tiffany had violated both the contract between the parties and the Wisconsin Fair Dealership Law, Wis. Stat. ch. 135. Before the case could be decided, Watts and Tiffany decided that they preferred arbitration to litigation. The parties received the principal benefit of that bargain: swift and inexpensive decision. But Watts decided in retrospect that its decision to arbitrate had been unwise, and it asked the district court to provide more relief than the arbitrator had afforded.

The arbitrator's award extended the time during which Watts could resell Tiffany's merchandise through Watts' bridal registry but permitted Tiffany to cease selling to Watts at the end of 2000; it also required Tiffany to repurchase at retail price all other Tiffany merchandise remaining in Watts' inventory. The arbitrator did not order Tiffany to pay Watts' attorneys' fees and costs. In this respect, according to Watts, the arbitrator departed from state law, requiring the court to repair the problem. An error of law is not a ground listed in 9 U.S.C. sec.sec. 10 and 11 for vacating or modifying an award, but in dictum the Supreme Court has suggested that an arbitrator's "manifest disregard" of legal rules justifies judicial intervention. Wilko v. Swan, 346 U.S. 427, 436-37 (1953), overruled on other grounds by Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477 (1989). Often "manifest disregard of the law" would be covered by sec.10(a)(4), which authorizes vacatur "Where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made." If the parties specify that their dispute is to be resolved under Wisconsin law, then an arbitrator's declaration that he prefers New York law, or no law at all, would violate the terms on which the dispute was given to him for resolution, and thus justify relief under sec.10(a)(4). But Watts does not contend that the arbitrator violated the arbitration agreement in such a fashion. This poses for us the question whether there is a broader, extra-statutory principle authorizing courts to review arbitrators' legal rulings, or the legal assumptions that influence their decisions even if not identified as conclusions of law.

What could it mean to say that an arbitrator manifestly disregarded the law? That the arbitrator made a legal error? This is Watts' view--that Wisconsin law entitles the prevailing party to attorneys' fees in every case under the WFDL, that it "prevailed" in the arbitration by obtaining an extension of its dealership plus exceptionally favorable terms for the repurchase of inventory, and that the law therefore required the arbitrator to award legal fees too. If "manifest disregard" means only a legal error, however, then arbitration cannot be final. Every arbitration could be followed by a suit, seeking review of legal errors, serving the same function as an appeal within a unitary judicial system. That would prevent the parties from achieving the principal objectives of arbitration: swift, inexpensive, and conclusive resolution of disputes. If "manifest disregard" means not just any legal error but rather a "clear" error (one about which there is, in Watts' language, "no reasonable debate"), again arbitration could not be final, and the post-arbitration litigation would be even more complex than a search for simple error--for how blatant a legal mistake must be to count as "clear" or "manifest" error lacks any straightforward answer. Cf. Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 399-405 (1990). In this case, for example, the parties dispute whether an award of fees under the WFDL is mandatory or only permissive (perhaps with a presumption in favor of an award); they dispute even whether the arbitrator's award was based on the WFDL as opposed to the contract. Running these matters to ground could be complex. Fortunately, we need not do so (and we therefore express no opinion on them).

A search for either simple or clear legal error cannot be proper. Courts often say, with respect to arbitrators' role in interpreting contracts, that error is not a ground of judicial review. "[T]he question for decision by a federal court asked to set aside an arbitration award... is not whether the arbitrator or arbitrators erred in interpreting the contract; it is not whether they clearly erred in interpreting the contract; it is not whether they grossly erred in interpreting the contract; it is whether they interpreted the contract." Hill v. Norfolk & Western Ry., 814 F.2d 1192, 1194-95 (7th Cir. 1987); see, e.g., United Steelworkers v. Enterprise Wheel & Car Corp., 363 U.S. 593, 599 (1960). Yet in litigation the meaning of a contract is treated as an issue of law, when the text is clear and extrinsic evidence is either unavailable or precluded by the parol evidence rule. If manifest legal errors justified upsetting an arbitrator's decision, then the relation between judges and arbitrators established by the Steelworkers' Trilogy and reiterated by many later opinions would break down.

Our cases trying to apply the Wilko dictum demonstrate some of the difficulties. At least two decisions say that an award may be vacated when an arbitrator "disregards" the law in the sense of treating it as an obstacle to reaching a result preferred on other grounds. See National Wrecking Co. v. Teamsters, 990 F.2d 957 (7th Cir. 1993); Health Services Management Corp. v. Hughes, 975 F.2d 1253 (7th Cir. 1992). But other panels of this court have held the opposite, that arbitrators need not cite or apply rules of law outside the parties' agreement. Baravati v. Josephthal, Lyon & Ross, 28 F.3d 704 (1994); Flender Corp. v. Techna-Quip Co., 953 F.2d 273 (7th Cir. 1992); Chameleon Dental Products, Inc. v. Jackson, 925 F.2d 223 (7th Cir. 1991). These conflicting lines of precedent do not cite each other, except for Baravati, which concluded that the statutory list of reasons for setting aside an award is exclusive, that Wilko has after all been overruled, and that as a result "manifest disregard" of the law is not an independent reason to set aside an award. 28 F.3d at 706. But the next year First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 942 (1995), repeated the Wilko dictum, and in 1999 another panel of this court stated in dictum (without citing Baravati) that the statutory list is not exclusive and that "manifest disregard of the law" is one non-statutory ground for setting aside an award. Koveleskie v. SBC Capital Markets, Inc., 167 F.3d 361, 366 (7th Cir. 1999). The law in other circuits is similarly confused, doubtless because the Supreme Court has been opaque. The dictum in Wilko and First Options was unexplained and unilluminated by any concrete application. Dictum in Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 32 n.4 (1991), is similarly unhelpful.

There is, however, a way to understand "manifest disregard of the law" that preserves the established relation between court and arbitrator and resolves the tension in the competing lines of cases. It is this: an arbitrator may not direct the parties to violate the law. In the main, an arbitrator acts as the parties' agent and as their delegate may do anything the parties may do directly. See Eastern Associated Coal Corp. v. United Mine Workers, 121 S. Ct. 462, 467 (2000) ("we must treat the arbitrator's award as if it represented an agreement between" the parties themselves). Eastern Associated Coal may at last clear up the confusion, having dealt with a related line of cases in which courts wrestled with the question whether violation of "public policy" (a form of disregard of legal constraints) justifies setting aside an award. The Court concluded that the judiciary may step in when the arbitrator has commanded the parties to violate legal norms (principally, but not exclusively, those in positive law) but that judges may not deprive arbitrators of authority to reach compromise outcomes that legal norms leave within the discretion of the parties to the arbitration agreement.

Suppose Watts and Tiffany had sat down to resolve their differences and had agreed on an extension through the end of 2000, a repurchase of remaining items at retail price, and each side bearing its own fees and costs. Could there be any legal objection? Surely not; it is a kind of settlement businesses reach all the time, each receiving part of what it wanted. Cf. Evans v. Jeff D., 475 U.S. 717 (1986) (parties may reach a settlement foregoing attorneys' fees under 42 U.S.C. sec.1988). If Watts and Tiffany may resolve their differences without fees changing hands, why can't an arbitrator, as their agent, prescribe the same outcome? In Eastern Associated Coal an employer contended that an arbitrator exceeded his powers by ordering the reinstatement of a truck driver who had twice tested positive for marijuana. The Supreme Court held that reinstatement was within the arbitrator's power, because it was within the employer's power, and the arbitrator exercised authority delegated by the employer. If a federal statute, a federal rule, or some equivalently definite...