Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca8-04-03602/USCOURTS-ca8-04-03602-0/pdf.json

Parties Involved:
First Albany Corporation
Appellant
Christopher C. McGrann
Appellee

Document Text:

1

The Honorable James M. Rosenbaum, Chief Judge, United States District

Court for the District of Minnesota.

 United States Court of Appeals

FOR THE EIGHTH CIRCUIT

___________

No. 04-3602

___________

Christopher C. McGrann, *

*

Appellee, *

* Appeal from the United States

 v. * District Court for the

* District of Minnesota.

First Albany Corporation, *

*

Appellant. *

___________

Submitted: June 21, 2005

Filed: September 14, 2005

___________

Before RILEY, BOWMAN, and BENTON, Circuit Judges.

___________

RILEY, Circuit Judge.

Christopher C. McGrann (McGrann) filed suit to enforce an arbitration award

in his favor in the amount of $840,165.99 against his former employer, First Albany

Corporation (FAC). FAC moved to vacate the arbitration award partially to

$340,165.99. The district court1

 confirmed the entire arbitration award, and entered

judgment in McGrann’s favor. We affirm.

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Wessels was later acquired by Dain Rauscher, which was then acquired by

Royal Bank of Canada. For convenience, we refer to McGrann’s employer as

Wessels.

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I. BACKGROUND

From 1995 to 2001, McGrann worked as a research analyst and institutional

salesperson for the investment bank of Wessels, Arnold and Henderson (Wessels)2

in Minneapolis, Minnesota. During his tenure at Wessels, McGrann’s sales territory

included Boston and New York. In 1999, McGrann earned $1,075,000; in 2000, he

earned $1,400,000.08. In his 1999 year-end performance review, McGrann was

characterized as professional, trusted, intelligent, and one of Wessels’s top

salespersons.

In the fall of 2000, FAC’s Senior Vice President and Director of Institutional

Equity Sales contacted McGrann and two other salespersons at Wessels to discuss

employment with FAC. During negotiations, McGrann estimated the revenues he

might generate if he joined FAC’s institutional equity sales division. In March 2001,

FAC offered employment to McGrann and the other two Wessels employees. In an

agreement dated March 30, 2001, FAC hired McGrann as Managing Director of

FAC’s Institutional Equity Sales Department under the following terms:

We have agreed to pay you a base salary at the rate of $150,000

per year for calendar years 2001 and 2002 to the extent you remain

employed by us. Generally, bonuses are based on your contribution, the

performance of the firm as a whole and other important factors within

our sole discretion. However, we have agreed to pay you a bonus of not

less than $500,000 for 2001 and $600,000 for 2002. Such bonuses will

be payable on February 15th of the following year or on such other date

as firm-wide bonuses are paid, and only if you remain employed by us

at such times.

. . . .

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We have agreed to give you a loan of $350,000 (the “Loan”)

[, which] . . . will be forgiven in two equal annual installments during

the Employment Period provided that you remain employed by us on

such dates.

We will also recommend to the Board [of Directors of FAC] that

you be granted such number of shares of restricted stock of the firm (the

“Restricted Stock”) valued at $500,000 . . . . The Restricted Stock shall

be subject to vesting over the first three years of your employment, onethird per year.

We will also make a contribution (the “Contribution”) on your

behalf to [FAC’s] Deferred Compensation Plan for Key Employees and

in accordance with the terms thereof in the amount of $500,000. Such

contribution shall be subject to vesting over the first three years of your

employment, one-third per year.

You will also be entitled to participate in the standard employee

benefit plans . . . .

If [FAC] terminates your employment for any reason other than

Cause (as defined below) prior to the second anniversary of your

employment you will (i) receive the balance of your unpaid base salary

and shall be vested in the Restricted Stock and the Contribution, in each

case as though you had been employed for two full years, (ii) be

forgiven the Loan in full and (iii) receive (or have already received) the

bonus for the year 2001. . . .

. . . .

This letter agreement shall be subject to, governed by and

construed in accordance with the laws of the State of New York without

regard to its choice of law principles . . . .

In November 2001, FAC tried to renegotiate the terms of the agreement, asking

McGrann “to rip up” his compensation guarantees. McGrann responded, “We all

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Despite FAC’s contention, McGrann was ranked fourth out of nineteen

salespersons at the time. 

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negotiated in good faith and all of a sudden [FAC] want[s] us to give these up six

months later? No. We’re not interested in that.” Within a week, FAC terminated the

employment of one of the three Wessels employees who had moved to FAC. The day

after that termination, FAC summoned McGrann to a meeting, informing him his

“account package is under review.” At the meeting, FAC changed McGrann’s

coverage territory. McGrann responded he was willing to make the change if he

could help the firm. FAC then sought concessions on McGrann’s guaranteed

compensation, saying, “You should do the honorable thing and offer to make

concessions to FAC.” McGrann responded, “We all negotiated in good faith.” FAC

replied, “Honorable men make honorable gestures.” Although McGrann refused to

concede his compensation guarantees, FAC nonetheless reassured McGrann that FAC

wished to retain him.

On April 30, 2002, FAC again approached McGrann about his compensation,

informing McGrann that FAC was “coming after” his contractual guarantees. FAC

asked McGrann, “Will you tear up your guarantee [on your cash bonus]. . . . if you

tear that up, you can keep the restricted stock and deferred comp, but just give back

the $600,000.” The next day, FAC bluntly said to McGrann, “We want to honor

[your employment] contract but your production has sucked.”3

 To the point, FAC

said, “If you don’t give up your guarantees, [FAC] can’t control what might happen.”

In response to FAC’s request to renegotiate, McGrann stated, “At this point I am not

willing to cut up my contract. I took a ton of risk coming here.” FAC answered,

“OK. That’s your–that’s your choice, but now it’s all about business. It’s not

personal.” 

On May 13, 2002, FAC sent McGrann a letter stating he had “not substantially

performed [his] duties” and his “production ha[d] been extremely disappointing.”

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The letter threatened a for cause termination of employment if McGrann did not cure

all of his performance deficiencies, which could only be accomplished if McGrann

generated $400,000 of revenue per month for three months. FAC’s top producer had

achieved only $300,000 of revenue in any given month. Despite the tall order,

McGrann increased the intensity of his work to meet FAC’s new demands.

On October 18, 2002, FAC terminated McGrann’s employment, contending the

termination was for cause because McGrann failed to perform his duties. FAC simply

determined “it was worth the risk to fire [McGrann] for cause.” When seeking

employment after the termination, McGrann informed potential employers FAC

terminated his employment for cause due to his inability to meet production

requirements. McGrann believes his duty to inform potential employers of his for

cause termination caused him to lose “leverage” in the employment process, as he

“was not able to negotiate . . . from a position of strength.”

Because the parties were associated with the National Association of Securities

Dealers, Inc. (NASD), McGrann sought arbitration before an NASD Dispute

Resolution panel. Over the course of eleven days, McGrann and FAC presented their

claims to an arbitration panel. The panel’s arbitration award provided the following

case summary:

[McGrann] asserted the following causes of action [against FAC]:

breach of contract, violation of Minnesota Stat. § 181.64, and violations

of NASD rules. The causes of action related to [McGrann]’s allegation

that FAC breached its employment contract with him after unilaterally

imposing additional performance obligations. [McGrann] further

alleged that FAC stated false and defamatory reasons for his departure

and has not honored the guaranteed bonuses and incentives as set forth

in the March 30, 2001 employment contract.

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McGrann initially sought unspecified damages. At the hearing, McGrann sought

$840,165.99 in compensatory damages, as well as costs, attorney fees, interest,

punitive damages and equitable relief. McGrann’s attorney presented the following

argument to the panel: “[FAC] breached the contract. They don’t get the benefit of

a contract that they didn’t adhere to. Mr. McGrann worked 5/6ths of the year. At a

minimum he is entitled to 5/6ths of his bonus. And we believe, but for this breach,

he would have finished the year and earned his entire $600,000.” 

FAC denied McGrann’s allegations, asserted a number of affirmative defenses,

and counterclaimed for breach of contract, fraud, misrepresentation, fraudulent

inducement, negligence, negligent misrepresentation and violation of NASD rules.

At the hearing, FAC sought $350,000 in compensatory damages, as well as interest,

attorney fees, punitive damages, costs and equitable relief. FAC presented the

arbitration panel an exhibit outlining FAC’s theory regarding “the alternate ‘for

cause’ and ‘no cause’ termination pay-out scenarios as of October 18, 2002, the

termination date.” According to FAC, if the arbitration panel found FAC terminated

McGrann’s employment for cause, then McGrann owed FAC $175,000 plus interest.

On the other hand, FAC contended, if the arbitration panel found FAC terminated

McGrann’s employment without cause, then the maximum FAC owed McGrann was

$340,165.99. According to FAC, the agreement limited McGrann’s damages for

termination without cause to $340,165.99, which included $66,875 in unpaid salary;

$136,673.99 in restricted stock; and $136,617 in deferred compensation.

On March 2, 2004, the arbitration panel issued its award. The arbitration panel

found in McGrann’s favor, and awarded him $840,165.99 in compensatory damages,

interest on that amount, $100,000 in attorney fees under Minnesota Statutes section

181.13, and $250 for filing fees. The arbitration panel also found no evidence

supported FAC’s fraud claim, and that claim “was made only for the purpose of

coercing” McGrann. 

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4

Although the district court cited an Eighth Circuit case for this general

statement of breach of contract remedies, New York law adheres to this same

principle. See Siegel v. Laric Entm’t Corp., 763 N.Y.S.2d 607, 608 (N.Y. App. Div.

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Seeking confirmation of the arbitration award, McGrann filed suit in Minnesota

state court, and FAC removed the case to federal court. FAC moved to vacate, in

part, the award based on the no cause termination provision. Claiming the arbitration

panel failed to follow the parties’ agreement, manifestly disregarded the law, and

acted irrationally in delivering its award, FAC asked the district court to reduce the

award to $340,165.99.

The district court confirmed the arbitration award, finding “there is no evidence

to support the claim that the arbitrators disregarded the law. . . . [T]he defendant also

fail[ed] to illustrate irrationality in the award such that this Court should disregard its

conclusions.” Rejecting FAC’s argument the agreement limited the damages the

arbitration panel could award, the district court concluded:

[T]here’s no evidence to support [FAC’s] argument that the

arbitrators were restricted simply to that [agreement] in returning their

awarded damages. The panel is not bound by FAC’s own self-serving

interpretation of its letter agreement. The agreement makes no provision

for any contractual damages. . . . [T]here was evidence from which [the

arbitration panel] could have found that [FAC] did breach the letter

agreement when they fired [McGrann] and falsely styled it as for cause.

In that case [the arbitration panel] could have awarded damages

resulting simply from the breach alone. 

Citing United Industrial Syndicate, Inc. v. Western Auto Supply Co., 686 F.2d 1312,

1316 (8th Cir. 1982), the district court noted the arbitration award could have been

based on the general proposition “that breach of [contract] damages are measured by

placing the nonbreaching party in the position it would have been but for that

breach.”4

 However, the district court quickly recognized, “It’s not for this Court to

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2003) (“It is well established that [breach of contract] damages are intended to return

the parties to the point when the breach arose and to place the non-breaching party

in as good a position as it would have been had the contract been performed.”).

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conjecture on the basis which the arbitral panel reached.” Finally, the district court

noted: 

[McGrann] also produced evidence that his termination did cause

damages beyond his lost compensation, and that might have included

damages for defamation . . . . The arbitrators may have considered

[McGrann’s] difficulty in securing new employment in their award.

Having then a number of possible bases, this Court cannot find that the

determination by the arbitral panel was either in disregard of the law or

irrational.

FAC appeals the district court’s confirmation of the entire arbitration award.

FAC contends the arbitration panel “exceeded their powers and foisted their

interpretation upon an unambiguous contract provision,” and also “crafted an

irrational award that failed to draw its essence from the plain language of the parties’

Agreement.” In essence, FAC argues its interpretation of the agreement’s

compensation guarantees, when analyzed under either the for cause or no cause

termination provisions, is the only reasonable interpretation of what FAC deems to

be an unambiguous agreement. Because the arbitration panel–and later the district

court–did not agree with FAC’s interpretation, FAC contends we must reverse the

district court, vacate the arbitration award, and remand with instructions to confirm

the arbitration award only in the amount of $340,165.99.

II. DISCUSSION

A. Standard of Review

When reviewing a district court’s order confirming an arbitration award, we

review de novo questions of law, but we accept the district court’s factual findings

unless clearly erroneous. Schoch v. InfoUSA, Inc., 341 F.3d 785, 788 (8th Cir.

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2003). Although we review de novo the district court’s legal conclusions, we provide

“an extraordinary level of deference” to the underlying arbitration award. Id. (citation

omitted). Courts have absolutely no authority to reconsider the merits of an

arbitration award, even when the parties allege the award rests on factual errors or on

a misinterpretation of the underlying contract. Id.; see also Inter-City Gas Corp. v.

Boise Cascade Corp., 845 F.2d 184, 187 (8th Cir. 1988) (acknowledging “contract

interpretation is left to the arbitrator”). Even though an “arbitrator may interpret

ambiguous language” in a contract without fear of judicial intervention, “the

arbitrator may not disregard or modify unambiguous contract provisions.” Inter-City

Gas Corp., 845 F.2d at 187. The bottom line is “[w]e will confirm the arbitrator’s

award even if we are convinced that the arbitrator committed serious error, so long

as the arbitrator is even arguably construing or applying the contract and acting

within the scope of his authority.” Schoch, 341 F.3d at 788 (citations and quotations

omitted). 

Although arbitrators have broad authority, their decisions are subject to limited

judicial review. Id. The Federal Arbitration Act (FAA) sets forth specific reasons for

vacating an arbitration award. See 9 U.S.C. § 10(a) (including corruption, fraud, or

undue means in the procurement of the award, or evident partiality or corruption,

misconduct, or ultra vires acts by the arbitrators). For instance, a district court may

vacate an arbitrator’s award if the arbitrator exceeded his or her powers. 9 U.S.C.

§ 10(a)(4). The reasons for vacating an arbitration award are not limited to the

reasons listed in the FAA, however.

In addition to the FAA’s expressed reasons for vacating arbitration awards, our

court has recognized two additional, but “extremely narrow,” reasons for vacating

arbitration awards. Schoch, 341 F.3d at 788 (citation omitted). First, a court can

vacate an arbitration award if it is “completely irrational,” which means “it fails to

draw its essence from the agreement.” Id. (citation omitted). An arbitration award

draws its essence from the agreement if the award is derived from the agreement,

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Actually, the no cause termination provision does not require McGrann to be

employed on February 15, 2003, to receive his 2002 bonus. Instead, the no cause

termination provision simply states what McGrann is entitled to receive should his

employment be terminated “for any reason other than Cause . . . prior to the second

anniversary of [his] employment.” As the district court rightly noted, the arbitration

panel was not required to adhere to FAC’s self-serving interpretation of the

agreement, especially when FAC’s arguments distort the agreement’s plain language.

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viewed in light of the agreement’s language and context, as well as other indications

of the parties’ intention. Id. Second, a court can vacate an arbitration award if it

“evidence[s] a manifest disregard for the law.” Id. (alteration in original) (citation

omitted). An award manifests disregard for the law when an arbitrator clearly

identifies the applicable, governing law, but then ignores it. Id.

B. No Grounds to Vacate Arbitration Award

FAC contends “the plain language of the [no cause termination] provision . . .

provide[s McGrann] could not receive his 2002 bonus unless employed by [FAC] on

February 15, 2003.”5

 FAC specifically argues, “No provision [of the agreement]

allows [FAC] to pay or McGrann to receive a pro-rata share of his 2002 bonus.

According to the plain language of the Agreement, the 2002 bonus would not be paid

unless [FAC] employed McGrann on February 15, 2003.” FAC certainly tried to

persuade the arbitration panel with this argument, but the arbitration panel rejected

it. FAC then reprised its views onto the district court, which rejected FAC’s

contention only FAC possessed the proper interpretation of the agreement. We, too,

reject FAC’s argument, concluding the arbitration panel was not bound by FAC’s

contract interpretation argument.

The first reason to reject FAC’s argument is the arbitration panel was not

bound by FAC’s interpretation of the agreement, because the agreement was not so

simplistically drawn to be free from ambiguity. Although FAC’s proposed

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interpretation–that McGrann was entitled to his 2002 bonus only if he was employed

by FAC on February 15, 2003–is reasonable, it is not the only plausible interpretation.

The agreement specifically referenced FAC’s discretion when it came to

awarding bonuses to employees: “Generally, bonuses are based on your contribution,

the performance of the firm as a whole and other important factors within our sole

discretion.” FAC did not have unbridled discretion, however, when it came to

McGrann’s bonuses. Instead, the agreement guaranteed McGrann’s bonuses to the

following extent: “we have agreed to pay you a bonus of not less than $500,000 for

2001 and $600,000 for 2002. Such bonuses will be payable on February 15th of the

following year or on such other date as firm-wide bonuses are paid, and only if you

remain employed by us at such times.”

There is no doubt the agreement guaranteed the payment of the 2002 bonus in

full if McGrann was employed on February 15, 2003. However, the agreement

arguably is ambiguous as to payment if McGrann were not employed on February 15.

A plausible interpretation is the agreement’s payment date provision, which follows

the bonus guarantee, simply referred to when payment would occur. For example, if

McGrann were not employed on the payment date (whether that be February 15 or on

the dates bonuses were paid firm-wide), then his guaranteed bonus would be paid on

some other date, i.e., McGrann would not have to wait until February 15 (or another

date) to receive his 2002 bonus if his employment ended earlier.

FAC responds that the combination of the bonus provision and the no cause

termination provision compels a conclusion that McGrann would not be entitled to

any bonus if his employment were terminated without cause before February 15,

2003. We do not read the agreement as requiring such an interpretation, because

ambiguities exist. These ambiguities arise mostly out of the agreement’s silence on

related issues, which cast doubt on the parties’ intent on the bonus issue at the heart

of the arbitration and this appeal. For example, if McGrann’s employment had ended

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by death or resignation (as opposed to being terminated) on February 14 after having

the strongest year of any FAC salesperson, did the contract’s bonus provision mean

his bonus was not payable? For the reasons stated above, another interpretation

exists. Of course, the no cause termination provision would not apply to these

situations, so only the bonus provision would control. Because a plausible

interpretation of the agreement in those situations might compel FAC to pay

McGrann his 2002 bonus, that interpretation could likewise apply in this case. FAC

cites no legal authority requiring the arbitration panel to interpret the agreement as

FAC interprets it. 

The second reason to reject FAC’s proposed interpretation of the agreement

involves FAC’s implicit promise of good faith and fair dealing. Under New York

law, every contract necessarily includes a covenant of good faith and fair dealing.

State Street Bank & Trust Co. v. Inversiones Errazuriz Limitada, 374 F.3d 158, 169

(2d Cir. 2004). Under the covenant of good faith and fair dealing, each party to a

contract is prohibited from doing “anything which will have the effect of destroying

or injuring the right of the other party to receive the fruits of the contract.” Id.

(citation omitted). If a contract authorizes a party to exercise discretion, that party

impliedly promises “not to act arbitrarily or irrationally in exercising that discretion.”

Id. (citation omitted). However, the implied covenant of good faith and fair dealing

has limits, such that no promise “can be implied that would be inconsistent with other

terms of the contractual relationship.” Id. at 170 (citation omitted).

McGrann took a huge risk leaving his multi-million dollar job at Wessels to

work for FAC. To induce McGrann, FAC made a number of compensation

guarantees, including bonuses for 2001 and 2002. Within months of luring McGrann

away from Wessels, FAC tried to slash McGrann’s compensation and renegotiate the

agreement. When McGrann refused to budge, FAC devised a scheme to terminate

McGrann’s employment and label the termination for cause to avoid any payment to

McGrann. Indeed, FAC sought payment from McGrann.

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It is plausible to interpret the agreement, when read with the implicit good faith

and fair dealing provision, to mean FAC could not invoke the for cause termination

provision in bad faith to deprive McGrann of the fruits of his agreement, including

the guaranteed 2002 bonus. Although FAC generally pays bonuses based on its sole

discretion, FAC guaranteed McGrann bonuses for 2001 and 2002 so he would leave

his lucrative position at Wessels. We believe New York’s good faith and fair dealing

requirement frowns on FAC’s conduct in trying to void the bonus guarantee within

months of McGrann’s arrival. Even the no cause termination provision, when read

alongside the bonus provision and the good faith and fair dealing requirement, does

not contemplate FAC terminating McGrann’s employment under the guise of cause,

intending to deprive McGrann of his 2002 bonus. The amounts payable under the no

cause termination provision can be read to mean what McGrann would be owed if

FAC terminated his employment without cause, but still acted in good faith. This did

not happen here.

The arbitration panel heard testimony and viewed evidence suggesting that,

almost from the beginning of the employment relationship, FAC wanted to avoid

paying bonuses to McGrann. A plausible interpretation of the agreement could have

led the arbitration panel to conclude FAC’s breach of its duty of good faith and fair

dealing required FAC to pay McGrann $500,000 of the $600,000 guaranteed bonus.

Although FAC’s conduct could be considered egregious, it could have been

worse. For instance, FAC could have decided in early 2002 to terminate McGrann’s

employment to avoid paying the 2002 bonus, but strung McGrann along to profit

from his efforts. After wringing every bit of effort out of McGrann, FAC could have

waited until a second before February 15, 2003, to terminate McGrann’s employment.

FAC’s interpretation of the agreement would authorize this type of conduct without

a bonus coming due. We disagree.

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The final reason to reject FAC’s arguments is based on an interesting–but

reasonable–interpretation of the agreement. This interpretation somewhat tracks the

good faith and fair dealing analysis. Arguably, the agreement contemplated FAC

would discharge McGrann either for cause or without cause, but that FAC would not

attempt a for cause termination to avoid paying a bonus when sufficient cause for

termination does not exist. Under this interpretation, the no cause termination

provision would only apply when FAC intended to terminate McGrann’s employment

without cause. If FAC terminated McGrann’s employment under the for cause

provision without justification, the no cause termination provision would not be

implicated. Instead, McGrann would be entitled to breach of contract damages.

Under this theory, McGrann’s damages would include whatever it would take to put

him in the position he would have enjoyed had FAC not terminated his employment

and styled it for cause. Siegel, 763 N.Y.S.2d at 608. Interestingly, this amount could

have included the entire $600,000 for the 2002 bonus.

Addressing the breach of contract remedies available to McGrann, FAC

contends the no cause termination provision was meant to act as a liquidated damages

provision or a limitation of liability provision. However, we would expect

sophisticated parties like FAC and McGrann to be able to state clearly this intent.

The agreement does not do so. The no cause termination provision does not even

mention the possibility it might apply to a breach of contract claim. 

FAC had two choices to ensure the agreement was interpreted the way FAC

wished it to be. First, FAC could have drafted an unambiguous agreement. Second,

FAC could have retained the right to litigate any issues arising out of the agreement

in a court as opposed to arbitration. It did not, and the arbitration panel was not

required under the facts of this case to interpret the agreement at FAC’s urging.

Although a court might have interpreted the agreement differently, the parties

did not submit their claims to a court. Instead, they chose arbitration. Because the

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6

Our limited review of the arbitration award assures us no grounds require us

to vacate the award. Thus, we do not consider whether the award was justified under

other theories, such as defamation or violations of the NASD rules or Minnesota law.

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arbitration panel did not exceed its authority and its award was not completely

irrational, the district court correctly confirmed the arbitration award. See Schoch,

341 F.3d at 790 (“Although we may disagree with the arbitrator’s factual findings or

legal analysis, our limited review does not authorize us to substitute our judgment for

that of an arbitrator hired by the parties.”).6

III. CONCLUSION

For the foregoing reasons, we affirm the district court’s judgment in

McGrann’s favor confirming the arbitration award.

______________________________

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