Court Opinion

ID: 3032096
Source: CourtListenerOpinion
Date Created: 2015-10-13 22:47:12.705863+00
Date Added: 2024-06-11T09:01:15.068944
License: Public Domain

United States Court of Appeals
                            FOR THE EIGHTH CIRCUIT
                                     ___________

                                     No. 02-2323
                                     ___________

Bob Schultz Motors, Inc., a          *
Missouri corporation,                *
                                     *
            Appellee,                *
                                     * Appeal from the United States
      v.                             * District Court for the
                                     * Eastern District of Missouri.
Kawasaki Motors Corporation, U.S.A., *
a Delaware corporation,              *
                                     *
            Appellant.               *
                               ___________

                              Submitted: December 11, 2002

                                   Filed: July 1, 2003
                                    ___________

Before BOWMAN, MORRIS SHEPPARD ARNOLD, and RILEY, Circuit Judges.
                         ___________

BOWMAN, Circuit Judge.

        This dispute between a motorcycle dealer, Bob Schultz Motors (Schultz), and
its distributor, Kawasaki, was submitted to arbitration pursuant to the "Dealer Sales
and Service Agreement" that governed the parties' relationship. The arbitrator ruled
in favor of Kawasaki on all counts. However, following a hearing on costs and
attorney fees allowed under the arbitration provision, the arbitrator ruled that the last
sentence in the arbitration provision, which awarded costs and fees to the prevailing
party, was unconscionable, was a contract of adhesion, and was therefore
unenforceable. The District Court1 confirmed the arbitrator's ruling in its entirety and
Kawasaki appealed. We have jurisdiction pursuant to 9 U.S.C. § 16(a)(1)(d) (2000)
and affirm.

                                           I.

       This decade-long dispute involves an attempt by Bob Schultz Motors and its
owner, William Wefel, to acquire a third Kawasaki motorcycle dealership in the
St. Louis region. Schultz brought suit in Missouri state court and alleged, inter alia,
that Kawasaki wrongfully refused to consent to its purchase of West County
Kawasaki from John and Betty Catanzaro in 1992. Kawasaki removed the action to
federal court based on diversity jurisdiction and moved to have the suit dismissed or,
in the alternative, to have the matter referred to arbitration pursuant to 9 U.S.C. § 4.
Kawasaki based this motion on the parties' "Dealer Sales and Service Agreement,"
¶32 of which provided:

      32. DISPUTE RESOLUTION.
      All controversies, claims and disputes arising in connection with this
      Agreement, except any controversies, claims and disputes relating to
      amounts due and unpaid to DISTRIBUTOR [Kawasaki], relating to
      DISTRIBUTOR'S rights to retake possession of any Product or relating
      to third party personal injury, shall be settled by mutual consultation
      between the parties in good faith as promptly as possible, but failing an
      amicable settlement shall be settled finally by arbitration in accordance
      with the provisions of this Section 32. Such arbitration shall be
      conducted in Los Angeles, California, in accordance with the
      Commercial Arbitration Rules of the American Arbitration Association,
      and the parties hereto agree that such arbitration shall be the sole and
      exclusive method of resolving any and all such controversies, claims or
      disputes, except those expressly excluded above. Judgement upon such

      1
        The Honorable Charles A. Shaw, United States District Judge for the Eastern
District of Missouri.

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      award may be entered in the Superior Court of the State of California for
      the County of Orange, if the award is rendered against DISTRIBUTOR,
      or in any court which has jurisdiction over DEALER [Schultz], if the
      award is rendered against DEALER. The prevailing party shall be
      entitled to recover from the nonprevailing party all costs and expenses
      of the arbitration, including without limitation, attorneys' fees.

The District Court dismissed two counts of Schultz's complaint and issued an order
compelling arbitration on the remaining counts. Importantly, the District Court also
rejected Schultz's claim that the distribution agreement was a contract of adhesion,
violated public policy, and was unconscionable. The District Court concluded that
"no legal constraints exist which foreclose arbitration of the disputes" and "Schultz
Motors has failed to show that Kawasaki's arbitration clause is unconscionable or
inherently unfair." Memorandum and Order at 13, 8 (March 30, 1994). The District
Court did not make a finding as to Schultz's claim of economic duress, which was
later dropped, but did note that "[i]f this issue were a matter for the Court's
determination, the Court would conclude Schultz Motors has failed to show it entered
into the franchise agreements under economic duress of the kind which requires a
court to intervene." Id. at 8.

       Thereafter, in 1995, as arbitration was about to commence, Schultz added
counts to its arbitration complaint that alleged Kawasaki wrongfully refused to allow
Schultz to relocate one or both of its existing dealerships to within a few blocks of a
another recently-established Kawasaki dealership. In 2000, the arbitrator issued a
"Ruling on Liability Issues" that found in favor of Kawasaki on all counts and ruled
that, pursuant to the parties' arbitration agreement, Kawasaki was a prevailing party
and was entitled to costs and attorney fees. However, in 2001, following a hearing
on the amount of arbitration costs and attorney fees to be assessed against Schultz
(some $1.7 million according to Kawasaki), the arbitrator issued a "Final Award" in
which he found that the franchise agreement was a contract of adhesion and "that the
arbitration agreements were unconscionable at the time they were made and [the

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arbitrator] refuses to enforce the provision in ¶32 which gives the prevailing party the
right to recover all costs and expenses of the arbitration, including without limitation,
attorneys' fees." Final Award of Arbitrator at 8 (January 31, 2001).

       Neither party was satisfied with the outcome of the arbitration proceedings and
both parties returned to the District Court where Kawasaki filed a Motion to Confirm
the Arbitration Award as to Liability and Vacate and/or Modify the Arbitration
Award as it Pertains to Attorney's Fees. For its part, Schultz Motors sought to vacate
the entire award. In its March 2002 ruling, the District Court confirmed the
arbitrator's award in its entirety and concluded that the arbitrator was correct when
it determined that the District Court's 1994 ruling, which held that ¶32 was a valid
arbitration provision under 9 U.S.C. § 4, had not addressed the validity of the last
sentence of ¶32. We agree.

                                           II.

       We are to 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 (1995). Thus, we review a district court's findings of fact for clear
error and conclusions of law de novo. Id. at 947–48.

       The purpose of the Federal Arbitration Act was to establish "a liberal federal
policy favoring arbitration agreements." Moses H. Cone Mem. Hosp. v. Mercury
Constr. Corp., 460 U.S. 1, 24 (1983). A court asked to confirm, modify, or vacate an
arbitrator's award owes the arbitrator's decision great deference. See, e.g., Osceola
County Rural Water Sys. v. Subsurfco, Inc., 914 F.2d 1072, 1075 (8th Cir. 1990).
Thus, the Federal Arbitration Act provides that a district court can vacate an
arbitration award only in limited circumstances:

      (1) Where the award was procured by corruption, fraud, or undue means.

                                          -4-
      (2) Where there was evident partiality or corruption in the arbitrators, or
      either of them.
      (3) Where the arbitrators were guilty of misconduct in refusing to
      postpone the hearing, upon sufficient cause shown, or in refusing to hear
      evidence pertinent and material to the controversy; or of any other
      misbehavior by which the rights of any party have been prejudiced.
      (4) Where the arbitrators exceeded their powers, or so imperfectly
      executed them that a mutual, final, and definite award upon the subject
      matter submitted was not made.

9 U.S.C. § 10(a).2 In addition to § 10's grounds for vacating an arbitrator's award,
§ 11 provides for three grounds upon which a reviewing court may modify the
arbitrator's award:

      (a) Where there was an evident material miscalculation of figures or an
      evident material mistake in the description of any person, thing, or
      property referred to in the award.
      (b) Where the arbitrators have awarded upon a matter not submitted to
      them, unless it is a matter not affecting the merits of the decision upon
      the matter submitted.

      2
        In addition, the Supreme Court has recognized a narrow public policy
exception that permits the reviewing court to decline to enforce an arbitration award
that contravenes "explicit public policy." W.R. Grace & Co. v. Local Union 759, Int'l
Union of the United Rubber Workers, 461 U.S. 757, 766 (1983). The "public policy,
however, must be well defined and dominant, and is to be ascertained 'by reference
to the laws and legal precedents and not from general considerations of supposed
public interests.'" Id. (quoting Muschany v. United States, 324 U.S. 49, 66 (1945)).
Thus, in Iowa Electric Light & Power Co. v. Local Union 204, 834 F.2d 1424 (8th
Cir. 1987), we declined to enforce an arbitration award that would have reinstated a
union member in his job at a nuclear power plant after he was dismissed for violating
safety regulations designed to contain radiation in the event of a disaster. In that case,
we had little trouble concluding that the federal regulations requiring the safety
measures that the employee had violated amounted to a "strong public policy" that
required us to refuse to enforce the arbitration award. Id. at 1427–28.

                                           -5-
      (c) Where the award is imperfect in matter of form not affecting the
      merits of the controversy.

9 U.S.C. § 11. In sum, Congressionally-mandated deference to arbitration
proceedings means that a "district court must take the award as it finds it and either
vacate the entire award using section 10 or modify the award using section 11."
Legion Ins. Co. v. VCW, Inc., 198 F.3d 718, 721 (8th Cir. 1999). Still, the deference
owed to arbitrators "is not the equivalent of a grant of limitless power." Leed
Architectural Prods., Inc. v. United Steelworkers of Am., Local 6674, 916 F.2d 63,
65 (2d Cir. 1990). And "the courts are neither entitled nor encouraged simply to
'rubber stamp' the interpretations and decisions of arbitrators." Matteson v. Ryder
Sys. Inc., 99 F.3d 108, 113 (3d Cir. 1996). With this in mind, we turn to the merits
of Kawasaki's appeal.

        Faced with these statutory limitations on a court's ability to review arbitration
awards, Kawasaki urges that the District Court erred in one of two ways. First, it
claims that the arbitrator's decision should be modified under § 11(b) because the
District Court addressed the validity of ¶32 (the arbitration provision) in its 1994
Order. Therefore, Kawasaki argues, the arbitrator "awarded upon a matter not
submitted to [it]" when it determined that the fee provision was unconscionable.
Second, Kawasaki argues that, in the event that § 11(b) is inapplicable, the arbitrator
essentially issued two separate rulings. Thus, as the logic goes, the arbitrator's
second, independent, award on fees should be vacated under § 10(a)(4) because the
District Court addressed the validity of ¶32 (the arbitration provision) in its March
1994 Order. Hence, Kawasaki urges that the arbitrator "exceeded [its] powers" when
it ruled that the fee provision was unconscionable. We disagree and conclude that the
District Court did not err when it affirmed the arbitrator's ruling in its entirety.

                                          -6-
       Whether or not the arbitrator issued one ruling or two, we would not set aside
the District Court's decision as erroneous. Rather, the Federal Arbitration Act and
existing case law require that we reach the opposite conclusion.

       The Supreme Court has repeatedly noted that the Federal Arbitration Act was
designed to combat longstanding hostility to arbitration by establishing "a liberal
federal policy favoring arbitration agreements." Moses H. Cone Mem. Hosp., 460
U.S. at 24; see also Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 220 n.6 (1985).
The Act instructs district courts to enforce the parties' decision to remove their
controversy from the judicial realm and have it decided by arbitration. Byrd, 470
U.S. at 218. Thus, the Act requires that when a party petitions for an order to compel
arbitration, "[t]he court shall hear the parties, and upon being satisfied that the
making of the agreement for arbitration or the failure to comply therewith is not in
issue, the court shall make an order directing the parties to proceed to arbitration in
accordance with the terms of the agreement." 9 U.S.C. § 4. Although § 4 imbues the
federal courts with only limited powers in the context of a party's motion to compel
arbitration, it is clear that the validity of the arbitration clause and its applicability to
the dispute at hand are questions for the district court to decide. Prima Paint Corp.
v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403–04 (1967); Houlihan v. Offerman
& Co., 31 F.3d 692, 694–95 (8th Cir. 1994) ("under the Federal Arbitration Act, the
district court must engage in a limited inquiry to determine whether a valid agreement
to arbitrate exists between the parties and whether the specific dispute falls within the
scope of that agreement"). However, this determination as to whether the parties
agreed to arbitrate their dispute is also the end of a district court's powers. See Prima
Paint, 388 U.S. at 403–04. If the parties have agreed to arbitrate their dispute, other
claims are for the arbitrator to decide. See id. at 404. Prima Paint makes it clear that
under the Federal Arbitration Act, the parties are limited to presenting claims to the
court that the arbitration agreement is invalid or does not apply by its terms to the
present dispute. If the parties have agreed to arbitration, the Act requires that a

                                            -7-
district court order them to proceed to that forum, where they must address all other
claims to the arbitrator.

        We applied the foregoing principles in Larry's United Super, Inc. v. Werries,
253 F.3d 1083 (8th Cir. 2001). The issue in Werries was whether the public policy
underlying the availability of punitive damages under the Racketeer Influenced and
Corrupt Organizations Act might prevent a district court from ordering arbitration of
a dispute where the parties' arbitration agreement waived punitive damages and other
relief. Id. at 1084–85. We held that the district court's duty was limited to
determining whether the parties had agreed to arbitrate and whether that agreement
was valid. Thus, the party seeking to void the provisions waiving punitive damages
and other relief had to address those arguments to the arbitrator. Id. at 1085–86. We
think the same logic applies in this case and note that at least two other courts of
appeal have held that it is for the arbitrator to consider challenges to attorney-fee
provisions or other limits on remedies in arbitration provisions. See Thompson v.
Irwin Home Equity Corp., 300 F.3d 88, 92 (1st Cir. 2002) ("Arbitration is the correct
initial forum for the Thompsons to air their objection to the attorney's fees provision
in the arbitration agreement."); Great W. Mortgage Corp. v. Peacock, 110 F.3d 222,
230–31 (3d Cir.), cert. denied, 522 U.S. 915 (1997); cf. Metro E. Ctr. v. Qwest
Communications, Inc., 294 F.3d 924, 929 (7th Cir.) ("If the provision in the tariff
calling for use of the American Rule is unlawful under the Communications Act, then
the right forum for complaint is the Federal Communications Commission—though
it is conceivable that the arbitrator may play a role too."), cert. denied, 123 S. Ct. 707
(2002).

      Schultz's claim that the last sentence of ¶32, which provides that "[t]he
prevailing party shall be entitled to recover from the nonprevailing party all costs and
expenses of the arbitration, including without limitation, attorneys' fees," is
unconscionable is based upon the public policy underlying California's
unconscionability jurisprudence and is of the same ilk as the claim we considered in

                                           -8-
Werries.3 Therefore, the claim was properly presented to the arbitrator and not the
District Court. It follows that the District Court properly concluded that its March
1994 Order compelling arbitration dealt only with "the issue of arbitrability, i.e.,
whether the arbitration provision between the parties should be enforced to require
their dispute to be arbitrated. Memorandum and Order at 10 (March 26, 2002). The
Court did not address the attorney fee provision, which was not mentioned in any of
the parties' pleadings at the time." Id. Indeed, had the District Court concluded
otherwise, its ruling would have addressed matters other than whether the parties
agreed to arbitrate their dispute (and whether that agreement was valid). As such, the
decision would have thwarted Congress's intent to allow parties that contract to have
their conflicts settled outside the judicial realm to have these contracts enforced and
would be inconsistent with the Supreme Court's decision in Prima Paint and our
decision in Werries.

       Our decision in Gannon v. Circuit City Stores, Inc., 262 F.3d 677 (8th Cir.
2001), also lends support to our conclusion. In that case, Circuit City appealed a
decision by the district court that denied its motion to compel arbitration because a
provision in the parties' arbitration agreement violated Missouri public policy by
limiting the amount of punitive damages available under Missouri's Human Rights
Act. The sole issue on appeal was whether the district court erred by not severing the

      3
        We have no occasion to review the merits of the arbitrator's ruling on the
validity of this provision. See United Paperworkers Int'l. Union v. Misco, Inc., 484
U.S. 29, 38 (1987) (observing that courts "do not sit to hear claims of factual or legal
error by an arbitrator as an appellate court does in reviewing decisions of lower
courts. . . . 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"); but see First
Options, 514 U.S. at 942 (noting that "parties [are] bound by arbitrator's decision not
in 'manifest disregard' of the law") (quoting Wilko v. Swan, 346 U.S. 427, 436–37
(1953), overruled on other grounds by Rodriguez de Quijas v. Shearson/American
Express, Inc., 490 U.S. 477 (1989)).

                                          -9-
invalid provision (based on the severability clause in the contract and Missouri
common law) and ordering the parties to proceed to arbitration on the remaining valid
provisions. Id. at 680. Crucial to understanding the outcome in Gannon is the fact
that the parties did not challenge the district court's determination that the provision
was invalid. Id. at 680–81. Further, we acknowledged in Gannon that the fact that
the district court resolved this issue at all was in tension with our earlier decision in
Werries, which we noted stood for the proposition that such matters were "for
arbitrators, not the courts, to decide in the first instance." Id. at 681 n.6. Thus, the
rule in the Eighth Circuit, as established by Werries and recognized in Gannon, is that
in the context of a motion to compel arbitration under the Federal Arbitration Act, the
district court is limited to considering the parties' claims that the arbitration
agreement is invalid or that it does not apply to the dispute with respect to which
arbitration is sought. Thereafter, once the parties have proceeded to arbitration, they
must address their claims to the arbitrator.

                                          IV.

      For the reasons stated above, we affirm the decision of the District Court
confirming the arbitrator's award in its entirety.

      A true copy.

             Attest:

                 CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.

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