Court: Court of Appeals for the Second Circuit; July 12, 1996; Federal Appellate Court
Respondent USFI, Inc. appeals an amended final judgment from the U.S. District Court for the Southern District of New York, which confirmed an arbitration award in favor of petitioners International Telepassport Corporation (ITC) and USF of South Florida, Inc. ITC cross-appeals the denial of its sanctions motion against USFI and its counsel. The background involves a 1993 Independent Representative Agreement between USFI and ITC for marketing USFI’s "call back" system in Central and South America. The Agreement included an arbitration clause governed by New York law. A dispute arose when USFI allegedly bypassed ITC in dealings with hotels in Mexico, prompting ITC to initiate arbitration. The arbitrator awarded ITC $322,500 in damages and $10,950 in fees, incorporating lost future profits despite ITC's out-of-pocket damages being only $196,182. ITC filed a petition to confirm the award, while USFI sought to vacate it, claiming the arbitrator exceeded authority under New York law prohibiting lost profits awards for new businesses. The district court confirmed the award and denied USFI's motion to vacate and ITC's motion for sanctions, leading to the current appeal and cross-appeal. Federal courts may vacate arbitration awards under the Federal Arbitration Act only in limited circumstances, including when an arbitrator exceeds authority or disregards the law, which USFI contends occurred in this case.
In reviewing the district court's confirmation of an arbitration award, findings of fact are accepted unless clearly erroneous, while legal questions are decided de novo. An arbitration award should not be vacated for manifest disregard solely due to a legal error; the error must be obvious to an average arbitrator. The term "disregard" indicates that the arbitrator recognized a governing legal principle but chose to ignore it. The court agrees with the district court that USFI failed to meet this standard.
The New York Court of Appeals, in Ashland Management, established that a plaintiff must prove: 1) damages resulted from a breach; 2) the loss can be proven with reasonable certainty; and 3) the damages were foreseeable at the contract's inception. Although a stricter standard applies for new businesses claiming lost profits, the overarching test remains whether future profits can be calculated with reasonable certainty. Ashland Management does not prohibit lost profit claims for new ventures; rather, it acknowledges that such claims can be valid under certain conditions.
USFI contends that the lost profits award did not adhere strictly to New York law, claiming the arbitrator exceeded his authority. The court recognizes that New York law imposes stricter requirements for new businesses claiming lost profits, yet emphasizes that this is not a blanket prohibition but an evidentiary standard demanding a higher level of proof. Thus, the court concludes that awarding lost profits damages to ITC was within the arbitrator's authority.
USFI argued for a more stringent review of the arbitrator’s decision regarding lost profits damages, citing the Agreement's requirement for strict adherence to New York law. However, the absence of a record from the arbitration proceedings and the Agreement's stipulation that the arbitration order is final and not appealable undermined this argument. Consequently, the court concluded that the parties intended no further review beyond what the Federal Arbitration Act provides, affirming the district court's decision to confirm the arbitration award and deny USFI's motion to vacate.
ITC cross-appealed the denial of its motion for sanctions under Fed. R. Civ. P. 11(c) and 28 U.S.C. § 1927, which the court reviews for abuse of discretion. The court noted that sanctions under Rule 11 are warranted when an argument has no chance of success, and sanctions under § 1927 apply when a legal argument is completely meritless and appears to be for improper purposes. Although USFI's positions approached the threshold for sanctionable conduct, they found the arguments to be barely non-frivolous, leading to the affirmation of the denial of sanctions.
Additionally, USFI submitted a post-oral argument letter that failed to meet the criteria of Fed. R. App. P. 28(j) for addressing new significant authorities. As a result, costs were awarded to ITC for the appeal, while costs for the cross-appeal to USFI were denied. The court ultimately affirmed the district court's judgment, awarded costs to ITC, and denied costs to USFI.
