Court Opinion

ID: 27797
Source: CourtListenerOpinion
Date Created: 2010-04-25 09:14:49+00
Date Added: 2024-06-11T09:38:01.842952
License: Public Domain

UNITED STATES COURT OF APPEALS
                       FOR THE FIFTH CIRCUIT

                                No. 01-50339

                             RICHARD BROOK,

                                                     Plaintiff-Appellee,

                                     v.

                        PEAK INTERNATIONAL, LTD.,

                                                    Defendant-Appellant.

          Appeal from the United States District Court
                for the Western District of Texas
                         Austin Division

                                June 13, 2002

Before JONES, WIENER and PARKER, Circuit Judges.

EDITH H. JONES, Circuit Judge:

          Brook   and    Peak    International,   Ltd.,   Brook’s   former

employer, arbitrated their contractual dispute before an arbitrator

selected by the American Arbitration Association (“AAA”).             The

arbitrator’s award favored Peak.          Brook filed a motion to vacate

the arbitration award in the district court.          The district court

held that the arbitrator selected by the AAA was without power to

decide the dispute because the AAA did not follow the selection

procedure outlined in Brook’s Employment Agreement.         The district
court    vacated      the       arbitration        award    pursuant    to   9    U.S.C.    §

10(a)(4).          Brook    has    appealed.          Although    we    agree     that    AAA

seriously      erred       by    deviating         from    the   parties’    contractual

selection process, we conclude that Brook never timely objected to

the selection process on the ground he now espouses, hence, the

objection was waived.             The award must be reinstated.

                                         BACKGROUND

              On    January       1,   1998,       Richard    Brook    entered     into    an

employment         agreement      (the    “Employment         Agreement”)        with    Peak

International to become its president and chief operating officer.

Less than a year later, he was terminated.                             A dispute arose

regarding Brook’s severance benefits.                      On May 7, 1999, pursuant to

the terms of the Agreement, Brook filed a demand for arbitration

with the AAA alleging breach of his Employment Agreement.1

     1
              The dispute resolution clause of the Employment Agreement provided
as follows:

           4. Resolution of Disputes; Arbitration. Should a dispute
     arise concerning this Agreement, its interpretation or termination,
     either party may request a conference with the other party to this
     Agreement and the parties shall meet to attempt to resolve the
     dispute. Failing such resolution within thirty (30) days of either
     party’s request for conference, the Company and the Employee shall
     endeavor to select an arbitrator who shall hear the dispute. In the
     event the parties are unable to agree on an arbitrator, the Employee
     and the Company shall request the American Arbitration Association
     to submit a list of nine (9) names of persons who could serve as an
     arbitrator. The Company and Employee shall alternately remove names
     from this list (beginning with the party which wins a flip of a
     coin) until one person remains and this person shall serve as the
     impartial arbitrator. The decision of the arbitrator is final and
     binding on both parties. Each party shall bear equally all the
     costs of the arbitrator.

                                               2
             This appeal concerns the arbitrator selection process.

The process began on May 18, 1999, when the AAA submitted a list of

nine prospective arbitrators and instructed the parties to follow

the procedure outlined in the Employment Agreement to select the

arbitrator.    On May 28, Brook struck one individual from the list.

Brook’s counsel also stated:

     [Peak’s] counsel [] has agreed to Austin as the site of
     the arbitration hearing and hence it strikes us that
     perhaps an arbitrator from Austin would be more efficient
     and economical for all concerned. To that end, [Peak’s
     counsel] and I will try to come up with a mutually
     acceptable Austin-based arbitrator from your AAA-Austin
     list, if this is acceptable to the association.

Peak, citing its understanding that a new list of arbitrators from

Austin was to be provided by the AAA, did not submit a strike to

the AAA’s first list of arbitrators.

             On June 9, the AAA informed the parties that “there were

no   mutual    choices   [from   the       previously   provided   list   of

arbitrators] who were able to accept the appointment.”              The AAA

then advised: “[the AAA is] enclosing a second list of names from

our panel.    We ask that this list be considered supplemental to the

list previously provided and every consideration be given to

releasing names struck from that list.”           The AAA’s June 9 letter

did not refer to Brook’s May 28 letter or Brook’s request for

selection of an arbitrator from the AAA’s Austin list, and it did

not direct the parties to employ the selection process outlined in

the Employment Agreement.        Rather, the letter instructed the

                                       3
parties    to   strike   the   names   of   unacceptable   arbitrators   and

indicate their order of preference by number.              The letter also

provided that “[i]f this list is not received by the [AAA] on or

before Monday, June 21, 1999, or if there are no mutual choices,

the appointment will be made per Section 12 of the [AAA] Rules.”

If the parties failed to submit their strikes by June 21, the

letter warned, “all names submitted may be deemed acceptable.”

            Complying with the June 9 letter, Brook submitted his

strike list and ranked the remaining arbitrators in order of

preference.2    Peak did not submit a list of strikes before June 21.

            On July 14, Peak’s counsel informed the AAA that he was

withdrawing and that Peak intended to substitute John McCamish as

counsel.    Peak also advised the AAA of ongoing discussions with

Brook’s counsel regarding the possible mutual selection of Judge

Joe Hart as arbitrator.         On July 16, Mr. McCamish requested a

seven-day extension of time from Brook’s counsel to review the file

before advising whether his client would agree to the selection of

Judge Joe Hart. Brook’s counsel rejected the request for extension

of time.

            On July 26, the AAA notified the parties that Professor

David Sokolow had been selected as arbitrator.             Peak immediately

protested the appointment of Professor Sokolow, citing concerns

     2
            Although Brook now challenges the selection of Judge Miller as
arbitrator, he did not strike Judge Miller from the AAA’s second list.

                                       4
regarding Professor Sokolow’s potential conflicts with counsel and

his inexperience with employment-related disputes.                                 Peak also

submitted its strikes to the list of arbitrators.                                On August 5,

Peak sent a second letter of objection to the AAA, arguing that

“the entire appointment process violates the parties’ written

agreement.”        Peak requested that the AAA comply with the terms of

the Employment Agreement by providing a list of nine, rather than

seven,    potential       arbitrators          and    by   allowing        the    parties   to

alternately remove names from the list until only one remained.

Brook filed no objection to the selection of Professor Sokolow or

the    process     used     by    the    AAA    and    did     not    respond      to   Peak’s

objections.

              On   August        11,    the    AAA    withdrew       the    appointment     of

Professor Sokolow and appointed Judge Chuck Miller as arbitrator.

The AAA’s letter appointing Judge Miller refers neither to Peak’s

objections       to   the    selection         process       nor     to    its    demand    for

compliance with the selection process outlined in the Employment

Agreement.

              On August 13, Brook registered “his protest to the

process used by the [AAA] in the selection of the arbitrator.”                               In

a letter to the AAA and opposing counsel, Brook objected to the

appointment of Judge Miller “because the appointment [was] not made

in compliance with AAA rules and procedures.” Brook also requested

that    the    AAA    reinstate         “the        properly    appointed         individual,

                                                5
Professor David Sokolow,” as arbitrator.   However, Brook’s August

13 letter does not mention the Employment Agreement or the AAA’s

failure to follow the contractual selection process.

          On August 26, Peak notified the AAA that it was “willing

to forego its complaints of procedural irregularities that have

occurred and proceed forward if Brook agrees to Mr. Miller as

arbitrator.” Peak also stated that “if Brook is unwilling to agree

to [the appointment of Judge Miller] . . . then Peak would continue

to assert its complaint, outlined in [its] letter of August 4,

1999, that the entire appointment process to date has violated the

terms of Brook’s employment agreement . . . .”   The record contains

no response from Brook, and no further objection by Brook to the

appointment of Judge Miller.   The parties proceeded to arbitrate

their dispute before Judge Miller.

          After months of discovery and related disputes, the

parties participated in an eight-day arbitration hearing before

Judge Miller.   In his opening remarks to the parties on the first

day of arbitration, Judge Miller stated: “I have executed the oath

of arbitrator . . . [s]o unless there are any other objections,

we’ll go ahead and convene the arbitration.”       Brook raised no

objections, and the arbitration convened.        After considerable

                                 6
expense to the parties and a lengthy arbitration process,3 Judge

Miller entered an arbitration award favorable to Peak.

            Brook filed a federal lawsuit in which he moved to vacate

the arbitration award, arguing that (1) the arbitration award was

arbitrary and capricious and/or based on a manifest disregard for

the law, (2) the arbitrator exceeded his authority by addressing

issues not raised by the parties, and (3) “the arbitrators were

guilty of misconduct . . . or other misbehavior” that warranted

vacatur pursuant to 9 U.S.C. § 10(a)(3) because the AAA violated

its own arbitrator selection rules.        Brook’s motion to vacate does

not refer to the Employment Agreement, does not raise the AAA’s

failure to follow the selection process outlined in the Employment

Agreement as grounds for vacatur, and does not cite 9 U.S.C. §

10(a)(4).

            On January 17, 2001, a magistrate judge heard oral

argument regarding Brook’s motion to vacate and raised, sua sponte,

the AAA’s failure to follow the selection process outlined in the

Employment    Agreement    as   a   possible   ground   for   vacating    the

arbitration award. Several days later, Brook filed his “Supplement

to Motion to Vacate Arbitration Award,” asserting for the first

time that the AAA’s failure to select the arbitrator in the manner

      3
           The record before us indicates that the parties spent over $650,000
in fees and costs related to the arbitration of their dispute before Judge
Miller.

                                      7
provided    by   the   Employment      Agreement        rendered    Judge    Miller

powerless to arbitrate the dispute.               Based on this argument, the

magistrate judge recommended that the district court vacate the

arbitration award pursuant to 9 U.S.C. § 10(a)(4).                  The district

court agreed with the magistrate judge’s recommendation, vacated

the award, and precipitated Peak’s appeal.

                                 DISCUSSION

                                       A.

            In   light   of    the     strong      federal    policy     favoring

arbitration,     “[j]udicial    review       of    an    arbitration     award   is

extraordinarily narrow.” Gulf Coast Indus. Worker’s Union v. Exxon

Co., 70 F.3d 847, 850 (5th Cir. 1995).             This court reviews an order

vacating an arbitration award de novo, a standard that is “intended

to reinforce the strong deference due an arbitrative tribunal.”

McIlroy v. Painewebber, Inc., 989 F.2d 817, 820 (5th Cir. 1993).

            Section 10 of the Federal Arbitration Act, 9 U.S.C. §§ 1-

16 (“FAA”), provides “the only grounds upon which a reviewing court

may vacate an arbitrative award.”                 McIlroy, 989 F.2d at 820

(citation   omitted).        Section    10   allows      vacatur,    inter   alia,

“[w]here the arbitrators exceeded their powers . . . .”                  9 U.S.C.

§ 10 (a)(4).        A reviewing court examining whether arbitrators

exceeded    their   powers    must     resolve     all    doubts    in   favor   of

                                        8
arbitration.      Executone Information Sys., Inc. v. Davis, 26 F.3d

1314, 1320-21 (5th Cir. 1994).

                                      B.

              Arbitration is a matter of contract. AT&T Tech., Inc. v.

Communication Workers of America, 475 U.S. 643, 648, 106 S.Ct. 1415

(1986).   Thus, “[t]he power and authority of arbitrators in an

arbitration proceeding is dependent on the provisions under which

the arbitrators were appointed.”           Szuts v. Dean Witter Reynolds,

Inc.,   931    F.2d   830,   831   (11th   Cir.   1991).   Parties   to   an

arbitration agreement may determine by contract the method for

appointment of arbitrators.        The FAA expressly provides that where

a method for appointment is set out in the arbitration agreement,

the agreed upon method of appointment “shall be followed.”                 9

U.S.C. § 5.

              Several courts, relying on § 5, have determined that

“[a]rbitration awards made by arbitrators not appointed under the

method provided in the parties’ contract must be vacated.” Cargill

Rice, Inc. v. Empresa Nicaraguense Dealimentos Basicos, 25 F.3d

223, 226 (4th Cir. 1994); see also, Avis Rent-A-Car Sys., Inc. v.

Garage Emp. Union, Local 272, 791 F.2d 22, 25 (2d Cir. 1986)

(“Courts generally enforce [selection clauses] strictly, vacating

awards entered by arbitrators whose qualifications or method of

appointment fail to conform to arbitration clauses.”); R.J. O’Brien

& Assoc., Inc. v. Pipkin, 64 F.3d 257, 263 (7th Cir. 1995) (“[I]n

                                      9
order to enforce an arbitration award, the arbitrator must be

chosen in conformance with the procedure specified in the parties’

agreement to arbitrate.”).         However, “a ‘trivial departure’ from

the parties’ agreement [] may not bar enforcement of an award.”

R.J. O’Brien, 64 F.3d at 263.              Brook relies on these cases and

argues that the arbitration award must be vacated because Judge

Miller was not appointed according to the process outlined in the

Employment Agreement.

            To   state   that    the   AAA      failed       to   follow     the   simple

selection procedure outlined in Brook’s Employment Agreement is

insufficient: the AAA flouted the prescribed procedures and ignored

complaints from both sides about the irregular selection process.

Rather than submitting a list of nine names and instructing the

parties alternately to strike names from the list until only one

remained, the AAA submitted two lists containing the names of

fifteen potential arbitrators.            The AAA instructed the parties to

strike    all    unacceptable     arbitrators          and     rank    the    remaining

candidates in order of preference.                The AAA’s departure from the

selection   procedure      outlined    in       the   Employment       Agreement      was

utterly   unwarranted.          Because        arbitration        is   a   creature    of

contract,   the    AAA’s   departure       from       the    contractual      selection

process fundamentally contradicts its role in voluntary dispute

resolution.      The AAA must follow the selection procedures outlined

in the arbitration agreement.          9 U.S.C. § 5.

                                          10
            Nevertheless, despite its asserted efficiencies over

judicial proceedings, arbitration remains an adversarial event, and

parties must insist upon the enforcement of their contractual

rights before the arbitrators as they do in court.                      This is

especially true if any case is to be made, under the exceedingly

narrow statutory standards, for a later judicial review of the

arbitration.

            In the cases cited above, where federal courts vacated

arbitration awards because of irregularities in the process for

selecting    arbitrators,      the   complaining     party    preserved     its

objection during the arbitration proceeding.           Here, however, Brook

never objected to the AAA’s failure to follow the selection process

in   the   Employment    Agreement    (until    prompted     by   the   federal

magistrate judge long after the arbitration had run its course).

It is true that Brook filed a written objection to the AAA’s

failure to follow its own selection rules,4 but he also condoned

the AAA’s ignoring the Employment Agreement when he urged the AAA

to   reinstate    the   “properly     appointed”    arbitrator,     Professor

Sokolow, although Sokolow had not been          appointed according to the

terms of the Employment Agreement.           The failure to file a clear

written objection to a defect in the selection process constitutes

      4
            Brook argues in the alternative that the AAA’s failure to follow its
own selection rules entitles him to vacatur of the arbitration award. This makes
no sense, as there was no agreement by Peak to modify the Employment Agreement
by adopting the AAA selection method.

                                      11
waiver.     See, e.g., Health Services           Management Corp. v. Hughes,

975 F.2d 1253, 1263-64 (7th Cir. 1992) (citations omitted).5

            Brook compounded his inaction by failing to object to the

error in the selection process before Judge Miller during the

arbitration proceedings.          In particular, at the outset of the

arbitration hearing, Judge Miller invited the parties to state

their objections to the arbitration on the record, and Brook did

nothing.     This court has previously held that objections to the

composition of arbitration panels must be raised “at the time of

the hearing.”     Bernstein Seawell & Kove v. Bosarge, 813 F.2d 726,

732 (5th Cir. 1987).         Brook’s failure to object at the hearing

constitutes waiver.       Id.

            Alternatively, before proceeding to arbitration, Brook

could have sought an order from the district court compelling

arbitration before a properly selected arbitrator pursuant to

sections 4 and 5 of the FAA.        But Brook did not timely go to court.

In sum, Brook did not state clearly his objection to the AAA’s

failure to follow the Employment Agreement when an arbitrator was

selected;    Brook   made   no   effort     to   preserve   his   objection   to

arbitrating while the dispute was pending before Judge Miller; and

Brook finally raised the crucial objection after the magistrate

      5
            Peak objected several times to AAA’s violation of the selection terms
of the Employment Agreement, but it ultimately acquiesced in Judge Miller’s
appointment. Peak’s objection cannot support Brook’s vacatur motion.

                                       12
judge conceived it.   “It is well settled that a party may not sit

idle through an arbitration procedure and then collaterally attack

the procedure on grounds not raised before the arbitrators when the

result turns out to be adverse.”      Marino v. Writers Guild of

America, East, Inc., 992 F.2d 1480, 1484 (9th Cir. 1993).

          We do not hold that Brook had to exhaust all of the

described avenues of objecting to the arbitrator selection process,

but as was done in the cases on which he relies, he had to make

plain and timely his exact objection so that a responsible party –

whether the AAA or the arbitrator or a federal court – could have

enforced the Employment Agreement.

                            CONCLUSION

          For the reasons stated above, we REVERSE the judgment of

the district court and REMAND entry of a judgment enforcing the

arbitration award.

          REVERSED and REMANDED.

                                13