Dialysis Access Center, LLC v. RMS Lifeline, Inc. No. 17-2014 (1st Cir. Aug. 1, 2019)
Appellant Dialysis Access Center, LLC (“DAC”), a Puerto Rico LLC, and Appellee RMS Lifeline, Inc. (“RMS”), a Delaware corporation, entered into an agreement in 2007 containing a choice of Puerto Rican law clause and an arbitration clause requiring submission to arbitration under the rules of the American Health Lawyers Association (“AHLA”).
The parties arbitrated a dispute that resulted in an award for RMS for approximately $2 million. DAC moved to vacate the arbitral award in the district court of Puerto Rico. The magistrate judge denied DAC’s motion under the Federal Arbitration Act (the “FAA”) because DAC failed to show any misconduct or manifest disregard of the law by the arbitrator, or that the arbitrator’s handling of the case exceeded his powers. The district court judge agreed with the magistrate judge and rejected DAC’s timely filed objections to the magistrate’s report and recommendation.
DAC appealed to the First Circuit, arguing that that the district judge committed legal error by analyzing the case under the FAA instead of under the Puerto Rico arbitration statute, 32 L.P.R.A. § 3201, et seq. (the “PRAA”), which would have permitted a “more searching” standard of review and greater scrutiny of the merits of the arbitration award. The First Circuit noted that the FAA applies to “a contract evidencing a transaction involving interstate commerce” unless the contracting parties explicitly contract to displace the application of the FAA “in favor of state arbitration law.”
DAC argued that the parties’ agreement expressly displaced the FAA in favor of the PRAA by including a choice-of-law provision that specifies that the agreement was to “be construed in accordance with the internal substantive laws of the Commonwealth of Puerto Rico.” The court disagreed, finding that DAC failed to show an explicit agreement to have the contract enforced under the PRAA and not the FAA, because “the mere inclusion of a generic choice-of-law clause within the arbitration agreement . . . is insufficient to support a finding that contracting parties intended to opt out of the FAA’s default regime for vacatur of arbitral awards.”
Turning to the substance of the appeal, the court rejected each of DAC’s arguments that the arbitrator had committed error or exceeded his authority, applying the principle that “as long as the arbitrator is even arguably construing or applying the contract and acting within the scope of his authority, that a court is convinced he committed serious error does not suffice to overturn his decision.”
DAC also argued that the arbitrator wrongfully awarded attorneys’ fees and prejudgment interest because, under the choice-of-law provision, Puerto Rico law does not authorize arbitrators (as opposed to judicial officers) to make such awards. RMS responded that both the agreement and the AHLA rules grant arbitrators authority to award attorneys’ fees and costs. The court affirmed the fees and costs award, finding that, while the choice-of-law provision covers the substantive rights and duties of the parties, the arbitration clause covers the arbitration, and that neither clause should “intrude upon the other.” Accordingly, the arbitration clause made the AHLA rules applicable, which in turn authorized the arbitrator to award attorneys’ fees and pre-award and post-award interest.
A version of this post originally appeared in the September 2019 edition of Baker McKenzie’s International Litigation & Arbitration Newsletter, which is edited by David Zaslowsky and Grant Hanessian.