Puerto Rico Telephone v. U.S. Phone Mfg. Corp.

• Decision Date: 14 October 2005
• Docket Number: No. 04-2602.,No. 04-2601.,04-2601.,04-2602.
• Citation: 427 F.3d 21
• Parties: PUERTO RICO TELEPHONE COMPANY, INC., as Liquidator on behalf of Reliance Insurance Co. (in liquidation), Plaintiff, Appellant/Cross-Appellee, v. U.S. PHONE MANUFACTURING CORPORATION, Defendant, Appellee/Cross-Appellant.
• Court: U.S. Court of Appeals — First Circuit

427 F.3d 21

PUERTO RICO TELEPHONE COMPANY, INC., as Liquidator on behalf of Reliance Insurance Co. (in liquidation), Plaintiff, Appellant/Cross-Appellee, v. U.S. PHONE MANUFACTURING CORPORATION, Defendant, Appellee/Cross-Appellant.

No. 04-2601.

No. 04-2602.

United States Court of Appeals, First Circuit.

Heard August 5, 2005.

Decided October 14, 2005.

Jesús E. Cuza, with whom Elliot H. Scherker, Pamela A. DeBooth, and Greenberg Traurig, P.A., were on brief, for appellant/cross-appellee Puerto Rico Telephone Company.

Pedro Jiménez Rodriguez, with whom Adsuar Muñiz Goyco & Besosa, P.S.C., was on brief, for appellee/cross-appellant U.S. Phone Manufacturing Corporation.

Before TORRUELLA, DYK^*, and HOWARD, Circuit Judges.

DYK, Circuit Judge.

Puerto Rico Telephone Company, Inc. ("PRTC") appeals from the district court's denial of its motion to vacate and entry of judgment confirming an arbitral award. The award granted $2.5 million in damages to U.S. Phone Manufacturing Corp. ("USPhone") for breach of contract. At issue is whether and how parties can contract for standards of judicial review of arbitration awards other than those set forth in the Federal Arbitration Act ("FAA" or "Act"). 9 U.S.C. §§ 10, 11 (2000).

We hold that the judicial review provisions of the FAA can be displaced only by explicit contractual language evincing the parties' clear intent to subject the arbitration award to a different standard of review. Here, no such clear statement was contained in the contract. Under the proper review standard set forth in the FAA there were no grounds for vacating the award. We accordingly affirm the district court. On the cross-appeal by USPhone, we also affirm the district court's decision to deny an award of attorneys' fees to USPhone.

I.

The present dispute had its genesis in 1987, when PRTC solicited bids to procure telephones for its residential customers over a five-year period. USPhone was awarded the bid, jointly with two other companies, on February 10, 1988. On December 2, 1988, PRTC and USPhone executed a requirements contract under which USPhone agreed to supply PRTC's five-year requirements of residential memory telephones, estimated at 25,000 per year ("the contract"). The contract was drafted by PRTC. Clause 4 of the contract, titled "Language and Law," contained a provision stating that "[t]his Contract shall be governed by and interpreted in accordance with the laws of the Commonwealth of Puerto Rico."¹ Clause 17, titled "Arbitration", stated, in pertinent part:

17.2 Arbitration Panel

If an attempt at settlement has failed, the disputes shall be finally settled under the Rules of Conciliation and Arbitration of the American Arbitration Association.

Each Party shall appoint a member to a three-person panel. The two members so appointed shall within twenty (20) days agree upon a third member who shall be a jurist and chair the panel. If the two members fail to appoint the third member within thirty (30) days, he will be appointed by the President of the American Arbitration Association. The panel shall meet in Puerto Rico and apply the law of the Commonwealth of Puerto Rico.

17.3 Judgment

The arbitral award shall be substantiated in writing and the findings shall be final and binding for both parties. This arbitration procedure shall be a condition precedent to any right of legal action. The panel shall decide on the matter of costs of the arbitration.

During the course of performance, various disputes arose between the parties, which they were unable to resolve. The contract was eventually terminated by PRTC, pursuant to the contract's termination clause, effective January 2, 1993. On September 13, 1993, USPhone commenced arbitration against PRTC, before the American Arbitration Association ("AAA"). Three years later, following various procedural skirmishes regarding the choice of a neutral arbitrator, the United States District Court for the District of Puerto Rico ordered the parties to proceed to arbitration. U.S. Phone Mfg. Corp. v. P.R. Tel. Co., Civ. No. 96-1265CCC, slip op. at 5 (D.P.R. Sept. 30, 1996).

An AAA panel was convened in June 1997 and spent over two years considering the matter. More than a decade after the initial request for arbitration, on March 4, 2003, a unanimous panel awarded USPhone $2,552,123.99 in damages basing its decision on a record including "approximately 10 days of testimony. . . 1900 pages of transcripts, and approximately 175 exhibits, including physical evidence, as well as documents comprising approximately 1700 pages." As is common in arbitration awards, the arbitrators' decision contained no discussion of the arbitrators' reasoning. See, e.g., Raytheon Co. v. Automated Bus. Systems, Inc., 882 F.2d 6, 8 (1st Cir.1989).

On June 2, 2003, PRTC filed a motion to vacate the arbitration award in the United States District Court for the district of Puerto Rico. The motion did not challenge the arbitrability of any aspect of the controversy. However, PRTC claimed that the limited FAA standard of judicial review of awards was inapplicable and that the contract provided for judicial review of all errors of law in the arbitration award. The motion alleged "various errors in the structure of the arbitration, the procedures of the arbitration, and the ultimate findings of the arbitration." P.R. Tel. Co. v. U.S. Phone Mfg. Corp., Nos. 03-1593, 03-1815, slip op. at 1 (D.P.R. Mar. 9, 2004). The case was consolidated with an earlier action brought by USPhone in the Southern District of New York for confirmation of the award pursuant to the FAA.

The district court denied PRTC's motion to vacate, holding that the FAA review standards applied. The district court concluded that under the FAA standard, judicial review of arbitral awards is "only allowed in cases of corruption, serious error, misconduct, and miscalculation," and that "district courts do not have the luxury `to hear claims of factual or legal error by an arbitrator as an appellate court does in reviewing decisions of lower courts.'" Id., slip op. at 2 (quoting United Paperworkers Int'l Union v. Misco, Inc., 484 U.S. 29, 38, 108 S.Ct. 364, 98 L.Ed.2d 286 (1987)).

The district court found that PRTC's challenge to the award did "not rise to anywhere near the level required under the Federal Arbitration Act in order to allow court review ... [and] that PRTC's objections to the arbitration are essentially disagreements with the arbitrators' conclusions." Id., slip op. at 3. In denying PRTC's motion, the court further observed that "[t]he mere filing of this motion controverts the purpose of the Federal Arbitration Act and is a waste of the time and resources of this Court." Id., slip op. at 4. Subsequently, the court granted USPhone's motion to amend the judgment, nunc pro tunc, to reflect confirmation of the award. In this same order, the court denied U.S. Phone's request for attorneys' fees but granted pre-judgment and post-judgment interest on the award. P.R. Tel. Co. v. U.S. Phone Mfg. Corp., Nos. 03-1593 03-1815, slip op. at 2-3 (D.P.R. Oct. 6, 2004).

PRTC appeals the denial of its motion to vacate and the judgment confirming the award. USPhone cross-appeals the denial of attorneys' fees. We have jurisdiction pursuant to 28 U.S.C. § 1291. We review the district court decision upholding the arbitration award under "ordinary, not special, standards." First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 948, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995).²

II. The Appropriate Standard of Judicial Review

On appeal, the parties agree that this contract is governed by the FAA. They also agree that the FAA provides for very limited review of an arbitration award. Section 10 permits courts to vacate an award only:

(1) Where the award was procured by corruption, fraud, or undue means.

(2) Where there was evident partiality or corruption in the arbitrators, or either of them.

(3) Where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced.

(4) 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.

9 U.S.C. § 10 (2000).³ Thus, the statute "carefully limits judicial intervention to instances where the arbitration has been tainted in certain specific ways ... [and] contains no express ground upon which an award can be overturned because it rests on garden-variety factual or legal [errors]." Advest, Inc. v. McCarthy, 914 F.2d 6, 8 (1st Cir.1990). Under the FAA, an award may be vacated for legal error only when in "manifest disregard of the law." Wonderland Greyhound Park, Inc. v. Autotote Sys., Inc., 274 F.3d 34, 35-36 (1st Cir.2001).

However, PRTC contends that the parties contracted for more rigorous review of arbitration awards than that provided for by the FAA. In particular, PRTC asserts that the contract, by adopting Puerto Rican law and by providing that the "contract shall be governed by and interpreted in accordance with the laws of the Commonwealth of Puerto Rico" (language which they claim, under Puerto Rican law, requires review of the award for legal errors), demonstrates that the parties agreed to judicial review of the award for errors of law. Resolution of this question requires examination of the FAA and case law interpreting it.

A. Background and Purpose of the FAA

The FAA was enacted in 1925, 43 Stat. 883, and then reenacted and codified in 1947 as Title 9 of the United States Code. The Act's "purpose was to reverse the longstanding judicial hostility to arbitration agreements that had existed at English common law and had been adopted by American courts, and to place arbitration agreements upon the same footing as other contracts." Gilmer v. Interstate/Johnson...