Roadway Package System v. Kayser

• Decision Date: 07 June 2001
• Docket Number: No. 99-1907,99-1907
• Citation: 257 F.3d 287
• Parties: (3rd Cir. 2001) ROADWAY PACKAGE SYSTEM, INC. v. SCOTT KAYSER d/b/a QUALITY EXPRESS; Scott Kayser, Appellant
• Court: U.S. Court of Appeals — Third Circuit

Page 287

257 F.3d 287 (3rd Cir. 2001)

ROADWAY PACKAGE SYSTEM, INC. v. SCOTT KAYSER d/b/a QUALITY EXPRESS; Scott Kayser, Appellant

No. 99-1907

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

Argued September 13, 2000

Filed June 7, 2001

LAURENCE I. TOMAR, ESQUIRE (ARGUED), Ballow & Tomar, Fairless Hills, PA, Counsel for Appellant.

FRANK C. BOTTA, ESQUIRE, ELLEN P. MILCIC, ESQUIRE (ARGUED), Thorp, Reed & Armstrong, LLP, Pittsburgh, PA, Counsel for Appellee.

Before: BECKER, Chief Judge, NYGAARD and AMBRO, Circuit Judges. AMBRO, Circuit Judge, Concurring

OPINION OF THE COURT

BECKER, Chief Judge.

This is an appeal from an order of the District Court vacating an arbitrator's award. Plaintiff Roadway Package System, Inc. (RPS) ships small packages for corporate clients. "Independent linehaul contractors," such as Defendant Scott Kayser, assist in its operations. RPS terminated Kayser's contract in 1998, alleging that he had failed to fulfill his obligations under the Linehaul Contractor Operating Agreement (LCOA), which governed their association. Kayser exercised his contractual right to demand arbitration and was awarded substantial damages. RPS then brought suit in the District Court for the Eastern District of Pennsylvania, asking the court to vacate the award. Applying the vacatur standards set forth in the Federal Arbitration Act (FAA), the District Court granted the motion on the grounds that the arbitrator exceeded the scope of his authority. We will affirm.

Kayser's appeal requires us to decide two questions of considerable significance for the law governing arbitration, both of which are currently the subject of circuit-splits. The first question is whether contracting parties may opt out of the FAA's default vacatur standards and fashion their own. Because the LCOA is a "contract evidencing a transaction involving commerce," 9 U.S.C. 2, the FAA governs this case. Resolving a question previously reserved by this Court, we first hold that the FAA permits parties to contract for vacatur standards other than the ones provided in the FAA. The FAA sets out "a substantive rule applicable instate as well as federal courts," Southland Corp. v. Keating, 465 U.S. 1, 16, 79 L. Ed. 2d 1, 104 S. Ct. 852 (1984), but its rule is simply that courts must enforce the terms of private arbitration agreements.

The second question we must decide involves the conceptually complex issue of how courts should determine whether parties have contracted out of the FAA's default rules. The LCOA contains a generic choice-of-law clause, stating that it "shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania." Kayser submits that we should read this clause as expressing a desire to opt out of the FAA's default regime and to incorporate arbitration rules borrowed from Pennsylvania law. We disagree.

We first explain why the choice-of-law clause sheds little, if any, light on the parties' actual intent. The issue before us is simply a matter of contract construction rather than one of choice-of-law. Because choice-of-law clauses are designed to deal with a different issue from the one with which we are currently faced, and because few federal statutes other than the FAA permit parties to contract out of their requirements, we do not read the LCOA's choice-of-law clause as evidencing a clear intent to displace the FAA's default regime. Our conclusion is consistent with Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 131 L. Ed. 2d 76, 115 S. Ct. 1212 (1995), and though Volt Information Sciences, Inc., v. Board of Trustees of Leland Stanford Junior University, 489 U.S. 468, 103 L. Ed. 2d 488, 109 S. Ct. 1248 (1989), may appear to the contrary, our review of that opinion, the Supreme Court's subsequent decision in Mastrobuono, and the unanimous holdings of six other Courts of Appeals convince us that Volt is distinguishable.

Because the presence of a generic choice-of-law clause tells us little (if anything) about whether contracting parties intended to opt out of the FAA's default standards and incorporate ones borrowed from state law, we must announce and apply a default rule. We hold that a generic choice-of-law clause, standing alone, is insufficient to support a finding that contracting parties intended to opt out of the FAA's default regime. This rule will: (1) ensure that parties who have never thought about the issue will not be found to have elected out of the FAA's default regime; (2) be comparatively simple for arbitrators and district courts to apply; and (3) preserve the ability of sophisticated parties to opt out. Applying our rule to this case, we conclude that the District Court was correct to apply the FAA's vacatur standards.

Analyzing the issue under those standards, we hold that the District Court correctly determined that the arbitrator exceeded the scope of his authority. Though our cases caution against exploiting an ambiguity in an arbitrator's award to support an inference that he or she exceeded his or her powers, they also establish that a reviewing court is not precluded from examining an arbitrator's statement of reasons. In this case, the arbitrator's written opinion makes crystal clear that his decision was based on the fact that he thought that RPS's procedures for notifying Kayser of its dissatisfaction with his performance were unfair. Yet the intrinsic fairness of RPS's procedures was not before the arbitrator--he was empowered to decide only whether the termination was within the terms of the LCOA. Accordingly, we conclude that the District Court was correct in vacating the award, and will, therefore, affirm its order.

I.

A.

RPS and Kayser entered into the LCOA in 1996. It required Kayser to conform to specified service and safety standards, and permitted early termination if he did not meet them. RPS terminated the LCOA in mid-1998, alleging that Kayser had repeatedly failed to fulfill his obligations under the contract.

The LCOA is forty-one pages long and is divided into sixteen sections. This appeal implicates Sections 9 and 16. Section 9.3 binds the parties to arbitrate disputes and outlines the procedures for doing so. Its introductory sentence provides:

In the event that RPS acts to terminate this Agreement . . . and [Kayser] disagrees with such termination . . . then each such disagreement (but no others) shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association . . . .

Section 9.3(e) states:

The arbitrator shall have the authority only to conclude whether the termination of [Kayser] was within the terms of this Agreement, to determine damages if required to do so under this subparagraph, and to provide for the division of the expenses of the arbitration between the parties. . . . If the arbitrator concludes that the termination was not within the terms of this Agreement, then, at the option of RPS . . . (2) [Kayser] shall nevertheless be terminated, and . . . shall be entitled to damages equal to the arbitrator's determination of what [Kayser's] net earnings . . . would have been during the period between the date of termination to the last day of the term of this Agreement, (without any renewals). [Kayser] shall have no claim for damages in any other amount, and the arbitrator shall have no power to award punitive or any other damages.

Finally, Section 9.3(f) specifies:

The arbitrator shall have no authority to alter, amend or modify any of the terms and conditions of this Agreement (including by application of estoppel, waiver, or ratification), and further, the arbitrator may not enter any award which alters, amends or modifies the terms or conditions of this Agreement in any form or manner (including by application of estoppel, waiver, or ratification).

Section 16 contains a generic choice-of-law provision, stating that the LCOA "shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania."

B.

Following RPS's termination of the LCOA, Kayser demanded arbitration, which was conducted before William Mechmann. Kayser sought $ 141,961.40 in total damages: $ 129,930.00 for projected lost profits plus $ 12,031.40 for expenses incurred in purchasing a tractor-trailer at RPS's request. Arbitrator Mechmann ruled for Kayser and awarded $ 174,431.15 in damages--$ 32,469.75 more than Kayser originally requested.

Mechmann's written decision consists of twelve short paragraphs. The first is irrelevant to this appeal. The second paragraph acknowledges that "the arbitrator's authority is set forth in Section 9.3(e) [of the LCOA]." The third characterizes the "the main question" before Mechmann as whether RPS's termination of the LCOA was "wrongful or proper." The fourth, fifth, sixth, and seventh paragraphs of the opinion focus on RPS's procedures for notifying independent contractors when it is dissatisfied with their performance and discuss the manner in which those procedures played out in Kayser's case. They read as follows:

The RPS procedure for dealing with performance by its contractors is commendable. [sic] Documentation of breaches by the contractors are written up by Local Managers. This is only verbalized to the contractor . . . .

[Kayser] bought larger equipment at the behest of RPS and took on that financial responsibility, but when his performance was unsatisfactory, he only received verbal warnings until the point of termination which of course, is written. He is aggressive with warehouse people in several locations to get in and out to serve other . . . customers. When his own driver employees were remiss, he replaced them once RPS brought a problem to his attention. He was an aggressive business man in a very competitive environment. Verbal warnings did not persuade him of RPS's serious concerns.

Based on many years of dealing with industrial relations jurisprudence in American business, I find the...