The Federal Arbitration Act (FAA) reflects U.S. Congressional approval of the finality of arbitration. Indeed, the FAA and interpretive case law provide for the vacatur of arbitration awards on grounds so limiting that it is very rare to obtain a satisfactory appellate result. And for those who believe they have a valid basis to vacate an arbitration award – such as a claim of fraud or arbitrator corruption – Section 12 of the FAA requires that any motion to vacate be served within three months after the award is filed or delivered.
Thus, once the three months has passed and no proceedings have been instituted, should a prevailing party rest easily knowing that the award will remain undisturbed? Perhaps not.
Ninth Circuit Decision
The Ninth Circuit recently issued a decision that allowed a party to seek vacatur of an arbitration award four years after its issuance. In Move, Inc. v. Citigroup Global Markets, Inc.,[i] the Court, for the first time, held that equitable estoppel can toll the Section 12 three-month limitations period. Factually, the case is highly unusual, and the complaining party clearly had the more sympathetic position.
Move had an investment account with Citigroup, pursuant to which the parties agreed to arbitrate any disputes before a Financial Industry Regulatory Authority (FINRA) panel. Move instituted a FINRA arbitration against Citigroup for mismanagement of its account. As per FINRA rules, the parties were provided with a list of ten proposed arbitrators from their chairperson roster. Because of the complexities of the securities issues, Move wanted a chairperson who was an experienced attorney. They ranked James H. Frank first based upon his legal resume, and he was designated as the chairperson of the three-person panel. That panel, in December 2009, unanimously denied all of Move’s claims.
Four years later, in March 2014, Move learned, through a news article, that Mr. Frank was never a licensed attorney. Instead, he had assumed the identity of a retired California attorney. Upon learning this information, FINRA permanently disqualified Mr. Frank from appearing as an arbitrator.
In June 2014, Move filed a motion to vacate the award, arguing that the three-month limitations period should be equitably tolled.
Court’s Analysis and Holding
The Ninth Circuit premised its ruling on Supreme Court decisions that held that limitations periods are subject to equitable tolling unless the text or purpose of the statute is inconsistent therewith.[ii] The Court found that the text of the three-month limitations period was neither “unusually emphatic,” “unusually generous,” “highly detailed,” nor reiterated elsewhere in the FAA. The Court further found that the structure of the FAA was not incompatible with equitable tolling, and that equitable tolling would not undermine the basic purpose of the FAA. With regard to the latter, the Court noted that a court cannot justify deference to arbitration outcomes if the forum itself is unfair. Accordingly, “permitting equitable tolling will enhance both the accuracy and fairness of the arbitral outcomes.”
Unsurprisingly, the Court then went on to find equitable tolling was applicable to the facts at hand, thereby finding the motion to vacate timely and also finding vacatur warranted due to the fundamental unfairness of the hearing.
Conflicting Fifth Circuit Decision and Indecisiveness of Other Circuits
The Ninth Circuit decision is in direct conflict with an (unpublished) Fifth Circuit decision, Cigna Ins. Co. v. Huddleston, which specifically rejected a “discovery rule” or “equitable tolling” exception to the Section 12 three-month deadline.[iii] In that case, the prevailing party had moved to confirm an arbitration award within the year-long authorized period for doing so, and the opposing party (Huddleston) asserted, as an affirmative defense, various grounds for vacatur. The Fifth Circuit held that, because Huddleston had not moved to vacate within three months after issuance of the award, his claims were barred and the institution of a motion to confirm the award did not reinstate his claims.
Of the remaining Circuits to address the question of whether equitable tolling applies to Section 12 of the FAA, the First and Sixth Circuits have declined to do so, the Fourth Circuit has “assumed for the sake of argument” that equitable tolling applies, and the Tenth Circuit rejected an equitable tolling argument based on a factual analysis, without specifically addressing whether it should be applied more generally.[iv]
The unusual fact pattern of the Move case likely helped to bolster its policy argument in favor of equitable tolling. Nevertheless, in light of the uncertainty in the Circuit Courts regarding this issue, Supreme Court intervention may well be needed. As a practical matter, even if equitable tolling is ultimately found to apply to Section 12 motions, the likelihood of a substantial number of arbitration decisions being reopened is very slim.
[i] No. 14-56650, 2016 U.S. App. LEXIS 19930 (9th Cir. Nov. 4, 2016).
[ii] Young v. United States, 535 U.S. 43, 49 (2001); Irvin v. Dep’t of Veterans Affairs, 498 U.S. 89, 95-96 (1990); John R. Sand & Gravel Co. v. Untied States, 552 U.S. 130, 138 (2008).
[iii] No. 92-1252, 1993 U.S. App. LEXIS 40575, at *34-35 (5th Cir. Feb. 16, 1993).
[iv] Fradella v. Petricca, 183 F.3d 17, 21 (1st Cir. 1999); Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Berry, 92 Fed. Appx. 243, 247 (6th Cir. 2004); Choice Hotels Int’l, Inc. v. Shiv Hospitality, L.L.C., 491 F.3d 171, 177-178 (4th Cir. 2007); Pfannenstiel v. Merrill Lynch, Pierce, Fenner & Smith, 477 F.3d 1155, 1158 (10th Cir. 2007).