Question: What’s the difference between an arbitration ruling based on an interpretation of contract that is merely wrong, and one that is irrational?
The answer in Hayday Farms, Inc. v. FeedX Holdings, Inc., No. 21-55650 (9th Cir. Dec. 19, 2022), an appeal from an arbitration award, is about $7 million.
This is yet another cautionary tale that arbitration severely constrains the litigants’ appellate rights. The 9th Circuit panel agreed that the appellant’s interpretation of the contract was the right one, but that was not enough: the arbitration award was not “irrational” or “some form of vigilante justice,” so it stands.
The arbitration panel awarded the plaintiffs $21 million on the contract dispute, but when the plaintiffs moved the district court to confirm the award, the defendants argued that $21 million was excessive. The large award was more than the plaintiffs stood to receive had the contract been performed, and so under California Civil Code section 3358, the award was excessive.
The district court agreed the arbitration award was excessive, and reduced it by $7 million.
On appeal, the Ninth Circuit addressed a question of first impression in its own circuit: whether the standards for vacatur in the Federal Arbitration Act applied for awards governed by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, when the Convention did not specifically say so. Agreeing with other circuits, the Ninth Circuit held that the FAA standards did apply. And the standard, expressed in different ways, is exceedingly tough.
Here is how Marc Alexander, proprietor of the California Attorney Fee Blog and the California Mediation Blog, described the court’s analysis:
“A plausible interpretation of the contract cannot be overturned. An award that is manifestly irrational and completely disregards the law can be overturned under FAA standards. The "irrationality standard 'is extremely narrow and is satisfied only where the arbitration decision fails to draw its essence from the agreement.'" Does the decision fail to draw its essence from the agreement? Have we entered the realm of the metaphysical?”
The Ninth Circuit held that the original $21 million arbitral award was not irrational. And so it had to be affirmed. That meant that the district court’s order reducing the award by $7 million had to be reversed.
The importance here is that the 9th Circuit reversed the district court and reinstated the aribtral award, even though the panel agreed with the district court that the award was excessive. As Judge Milan wrote, the defendant "probably offers the best interpretation of the parties’ agreements,” and the panel expressed "concern about a seemingly unfair damages award that likely violates § 3358.”
But as long as the arbitral award "was not some form of vigilante justice,” it has to be affirmed.
The “irrationality standard” strikes me as itself irrational. An interpretation is either right or wrong. There is almost always a “rational” way of arguing any position. The HayDay court’s standard for challenging an unlawful arbitration award is, in effect, “do not bother arguing any infirmity in the arbitrator’s decision, for the only ground for reversal is infirmity of the arbitrator’s mind.” The upshot of this standard is that only a vote of no-confidence in the arbitrator’s cognitive or ethical constitution can warrant a reversal.
