Hyatt Franchising, L.L.C. v. Shen Zhen New World I, LLC
876 F.3d 900
| 7th Cir. | 2017Background
- In 2012 Hyatt and Shen Zhen New World I entered an agreement for Shen Zhen to renovate and operate a Los Angeles hotel using Hyatt’s methods and trademarks.
- Hyatt later claimed Shen Zhen breached the agreement; an arbitrator awarded Hyatt about $7.7 million in damages plus ~$1.3 million in fees and costs.
- Hyatt filed in federal court under diversity jurisdiction to confirm the arbitration award; the district court enforced the award and Shen Zhen appealed.
- Shen Zhen sought a deposition subpoena for its former counsel, Lynn Cadwalader, and moved to disqualify Hyatt’s counsel (DLA Piper) after Cadwalader joined that firm; the arbitrator denied both requests, relying on timing and an ethics screen.
- Shen Zhen argued the arbitrator refused to hear pertinent evidence (9 U.S.C. §10(a)(3)) and exceeded powers/ignored federal and state franchise law (9 U.S.C. §10(a)(4)).
- The Seventh Circuit affirmed, holding the arbitrator’s rulings did not constitute "misbehavior" or exceed powers under the FAA and that legal errors in arbitration are not reviewable under §10(a)(4).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Arbitrator refused to hear evidence by denying subpoena for former counsel | Cadwalader had relevant evidence about contract formation and unconscionability | Arbitrator found Cadwalader had no relevant info for the post-contract dispute; discovery is not required in arbitration | Denial of subpoena is not FAA §10(a)(3) misconduct; refusing discovery is not covered and arbitration may limit discovery |
| Arbitrator declined to disqualify DLA Piper after former counsel joined firm | DLA Piper’s representation created a conflict or risk of confidential info transfer | Arbitrator found an effective ethics screen prevented any prejudice | Denial of disqualification is not §10(a)(3) misbehavior by arbitrator; errors in that ruling are not grounds for vacatur |
| Arbitrator allegedly violated federal and state franchise law | Award ignored franchise-disclosure rules and other laws, so arbitrator exceeded power under §10(a)(4) | An arbitrator may interpret and apply law; parties could have agreed to outcomes the arbitrator reached | §10(a)(4) does not allow judicial correction of an arbitrator’s legal errors; arbitrator’s legal interpretations stand unless they affect third-party rights |
| Public-policy defense to enforcement of award | Violations of law/public policy justify vacatur | Public-policy vacatur protects non-consenting third parties; here outcomes were within parties’ freedom to contract | Award did not violate public policy protecting nonparties; public-policy grounds do not apply |
Key Cases Cited
- George Watts & Son, Inc. v. Tiffany & Co., 248 F.3d 577 (7th Cir.) (arbitrators act as agents of parties; their compromises on legal issues are generally not vacatur grounds)
- Affymax, Inc. v. Ortho-McNeil-Janssen Pharmaceuticals, Inc., 660 F.3d 281 (7th Cir.) (arbitrator’s legal interpretations are not subject to de novo judicial review under §10(a)(4))
- Continental Can Co. v. Chicago Truck Drivers Pension Fund, 921 F.2d 126 (7th Cir.) (parties who bypass arbitration and continue litigating may be liable for opponents’ attorneys’ fees)
- W.R. Grace & Co. v. Rubber Workers Union, 461 U.S. 757 (U.S. Supreme Court) (arbitration cannot be used to circumvent protections for nonconsenting third parties)
- Eastern Associated Coal Corp. v. United Mine Workers, 531 U.S. 57 (U.S. Supreme Court) (arbitrator may order outcomes that are lawful and within parties’ freedom even if contrary to general public policy)
- Pinnacle Museum Tower Assn. v. Pinnacle Market Dev. (US), LLC, 55 Cal.4th 223 (Cal.) (unconscionability in commercial transactions between sophisticated parties is an objective inquiry focused on agreement terms)