Opinion ID: 746823
Heading Depth: 2
Heading Rank: 2

Heading: Application of FAA Grounds for Relief

Text: 52 Having determined that the FAA does govern Toys R Us's cross-motion to vacate, our application of the FAA's implied grounds for vacatur is swift. The Supreme Court has stated that courts of appeals should apply ordinary, not special, standards when reviewing district court decisions upholding arbitration awards. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 948, 115 S.Ct. 1920, 1926, 131 L.Ed.2d 985 (1995). We review the district court's findings of fact for clear error and its conclusions of law de novo. See id. 53 [T]he confirmation of an arbitration award is a summary proceeding that merely makes what is already a final arbitration award a judgment of the court. Florasynth, Inc. v. Pickholz, 750 F.2d 171, 176 (2d Cir.1984). The review of arbitration awards is very limited ... in order to avoid undermining the twin goals of arbitration, namely, settling disputes efficiently and avoiding long and expensive litigation. Folkways Music Publishers, Inc. v. Weiss, 989 F.2d 108, 111 (2d Cir.1993). Accordingly, the showing required to avoid summary confirmance is high. Ottley v. Schwartzberg, 819 F.2d 373, 376 (2d Cir.1987). 54 More particularly, [t]his court has generally refused to second guess an arbitrator's resolution of a contract dispute. John T. Brady & Co. v. Form-Eze Sys., Inc., 623 F.2d 261, 264 (2d Cir.1980). As we have explained: An arbitrator's decision is entitled to substantial deference, and the arbitrator need only explicate his reasoning under the contract 'in terms that offer even a barely colorable justification for the outcome reached' in order to withstand judicial scrutiny. In re Marine Pollution Serv., Inc., 857 F.2d 91, 94 (2d Cir.1988) (quoting Andros Compania, 579 F.2d at 704). 55 However, awards may be vacated, see 9 U.S.C. § 10, or modified, see id. § 11, in the limited circumstances where the arbitrator's award is in manifest disregard of the terms of the agreement, see Leed Architectural Prods., Inc. v. United Steelworkers, Local 6674, 916 F.2d 63, 65-66 (2d Cir.1990), or where the award is in manifest disregard of the law, Fahnestock & Co. v. Waltman, 935 F.2d 512, 515-16 (2d Cir.1991); Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Bobker, 808 F.2d 930, 933-34 (2d Cir.1986). We find that neither of these implied grounds is met in the present case.
56 Toys R Us argues that the arbitrator manifestly disregarded New York law on lost profits awards for breach of contract by returning a speculative award. This contention is without merit. [M]ere error in the law or failure on the part of the arbitrator[ ] to understand or apply the law is not sufficient to establish manifest disregard of the law. Fahnestock, 935 F.2d at 516 (quotations omitted). For an award to be in manifest disregard of the law, 57 [t]he error must have been obvious and capable of being readily and instantly perceived by the average person qualified to serve as an arbitrator. Moreover, the term disregard implies that the arbitrator appreciates the existence of a clearly governing legal principle but decides to ignore or pay no attention to it. 58 Merrill Lynch, 808 F.2d at 933. 59 In the instant case, the arbitrator was well aware of and carefully applied New York's law on lost profits. 4 The arbitrator specifically addressed Kenford Co. v. County of Erie, 67 N.Y.2d 257, 502 N.Y.S.2d 131, 493 N.E.2d 234 (1986), which contains New York's law on the subject and upon which Toys R Us relied in its arguments, 5 and concluded: 60 I do not think the Kenford case rules out damages in this case. Kenford disallowed damages based on future profits from concessions in a domed stadium that was never built.... In this case [Alghanim], which is forced into the estimating posture because of [Toys R Us's] breach, bases its damages not on its own experience but on [Toys R Us's]. [Toys R Us] has hundreds of toy stores worldwide. Since it has been found that the Agreements require [Toys R Us] to provide a wide variety of services, similar to what it provides its own toy stores, I find that [Alghanim's] method of estimating damages is reasonable and believable, and provides a sound basis on which to fashion the award. 61 (J.A. 557.) We find no manifest disregard of the law in this analysis. 62 Toys R Us also argues that the arbitrator manifestly disregarded the law of lost profits by ignoring the facts that (1) Alghanim's toy business had lost a total of $6.65 million over the course of its existence under the agreement, and (2) Alghanim itself offered to relinquish its rights for $2 million. Toys R Us further contends that the calculation of lost profits was irrational. We reject these contentions as well. 63 The fact that Alghanim lost $6.65 million over ten years does not make the arbitrator's award of future lost profits of $46 million completely irrational. Past losses do not necessarily negate any expectation of future profits. See, e.g., Lamborn v. Dittmer, 873 F.2d 522, 533 (2d Cir.1989) ([W]e reject outright the suggestion in Dittmer's papers that a business with no history of profits is necessarily valueless.). 64 As to the purported $2 million buyout offer, no witness has testified that the $2 million figure was an estimate of the value of Alghanim's toy business. Kadrie, the primary Alghanim officer involved with the toy business, testified that, in his understanding, settlement with Toys R Us would serve to provide Alghanim some relief on the cost of liquidating [its] inventory. (J.A. 405-06.) Accordingly, Alghanim argues that $2 million was the value Alghanim placed on its inventory at the time. Furthermore, according to a Toys R Us executive, Kadrie, in making this offer, expressly stated that the $2 million was to recoup losses Alghanim had incurred in trying to develop the business. Therefore, there is no proof that this figure was Alghanim's, or anyone else's, estimation of the value of the business. Thus, the arbitrator did not manifestly disregard lost profits law in refusing to treat the $2 million figure as a buyout offer. 65 We also reject Toys R Us's contention that the arbitrator's calculation of lost profits was in manifest disregard of the law. Toys R Us contends that the actual operating results of the Toys R Us stores in the territory since the breach of the agreement have been lower than the arbitrator's valuation would suggest. The arbitrator explicitly addressed this issue, reasoning that[Alghanim's] damages are to be calculated as of September 2, 1992 and are based on what its rights were worth at that time. More importantly, since the start of this case in late 1993 it has been clear that large stakes are involved and that [Toys R Us's] actual results of operations in the Middle East could have a bearing on this case. The record does not provide a sufficient basis to disentangle [Toys R Us's] actual results ... from what might have been the business results of [Toys R Us's] Mid-East venture if this case had never existed. 66 (J.A. 558.) There is no manifest disregard in the arbitrator's refusal to credit actual operating results for the period following the breach in calculating the value of the business at the time of the breach. 67 Toys R Us also argues that the arbitrator was wholly irrational in calculating the value of the Saudi Arabian rights as the $15 million ATA initially offered for those rights, when ultimately ATA only paid $7.5 million. However, the fact that a disinterested third party valued the Saudi Arabian rights at $15 million near the time of the breach provides a rational basis for accepting that valuation. Therefore, we see no manifest disregard in the arbitrator's use in his calculations of the bid price, rather than the actual closing price, for the sale to ATA. Thus, we see no merit in Toys R Us's contentions of manifest disregard of the law.
68 Toys R Us also argues that the district court erred in refusing to vacate the award because the arbitrator manifestly disregarded the terms of the agreement. In particular, Toys R Us disputes the arbitrator's interpretation of four contract terms: (1) the termination provision; (2) the conforming stores provision; (3) the non-assignment provision; and (4) the deletion provision. We find no error. 69 Interpretation of these contract terms is within the province of the arbitrator and will not be overruled simply because we disagree with that interpretation. See United Steelworkers v. Enterprise Wheel & Car Corp., 363 U.S. 593, 599, 80 S.Ct. 1358, 1362, 4 L.Ed.2d 1424 (1960). We will overturn an award where the arbitrator merely mak[es] the right noises--noises of contract interpretation-- while ignoring the clear meaning of contract terms. In re Marine Pollution, 857 F.2d at 94 (quotation omitted). We apply a notion of manifest disregard to the terms of the agreement analogous to that employed in the context of manifest disregard of the law. 70 As to each of these contract provisions, Toys R Us merely takes issue with the arbitrator's well-reasoned interpretations of those provisions, and simply offers its own contrary interpretations. Toys R Us does not advance a convincing argument that the arbitrator manifestly disregarded the agreement. We will not overturn the arbitrator's award merely because we do not concur with the arbitrator's reading of the agreement. For the reasons stated by the district court, we find the arbitrator's interpretation of the contractual provisions supportable. 71 We have carefully considered Toys R Us's remaining contentions and find them all to be without merit.