Porzig v. Dresdner, Kleinwort, Benson North America LLC - Has a
"[T]he meshing of three completely independent weather systems to form a hundred year event . . . the perfect storm."
Sebastian Junger, The Perfect Storm1
It is not hard to imagine how the arbitrators in Porzig v. Dresdner, Kleinwort, Benson North America LLC2 felt when they learned the district court had vacated their award and remanded the case back to them. They had sat through nine days of hearings of what appears to have been a very contentious arbitration between Bernard Porzig and his former employer, Dresdner, Kleinwort, Benson North America LLC (Dresdner), ultimately issuing an award in favor of Porzig on his age discrimination claim. And now they were being told they had to reconvene to make an award of attorney's fees to Porzig.
From the wording of the amended award, it seems clear the arbitrators tried to do exactly what the district court directed. The amended award recites that the arbitrators "considered numerous factors" including the "effectiveness and degree of success in the arbitration proceedings" of Porzig's counsel, "the amount of damages awarded to his client, the amount of damages he sought, the time that [Porzig's] counsel spent, the reasonable attorneys' fees per hour for the time spent, and the reasonable expenses and disbursements of the litigation."3
Based on such factors, the panel awarded Porzig $83,500 in fees and costs. Given that Porzig's compensatory damages on his age discrimination claim were $96,200, the award seemed well within the realm of reason. Not satisfied with the award, Porzig's counsel, who had requested more than $250,000 in fees and costs, applied again to the district court for an order vacating the panel's award. This time, however, the district court sided with the panel and denied the petition.
Not to be deterred, Porzig filed a seemingly long-shot appeal of the district court's ruling. His persistence was rewarded. In an opinion that should serve as a wake up call for counsel litigating requests for attorney's fees, the U. S. Court of Appeals for the Second Circuit ordered the amended award vacated on the ground that the arbitrators acted in manifest disregard of the law in calculating the amount of attorney's fees Porzig was entitled to recover. The Second Circuit cited a variety of "circumstances" - including counsel's characterization of applicable law - that "create, if not the perfect storm, then a disturbance ample enough to give us pause."4
What was the near "perfect storm" that troubled the Second Circuit? This article will examine in depth the circumstances that appear to have led the court to take the highly unusual step of vacating an award of attorney's fees on the ground that it was in the wrong amount. The Porzig opinion offers valuable lessons for counsel dealing with attorney's fee issues under the federal civil rights laws as well as any other claims where attorney's fee awards are mandated.
Background and Case History
Initial NASD Award Denies Attorney's Fees
Porzig was employed as Vice President of Central Bank Sales by Dresdner Securities. After a little more than two years of employment with Dresdner, Porzig was terminated, leading him to file an action alleging age discrimination. Porzig initially filed his case in federal court. Dresdner moved to compel arbitration pursuant to the Form U-4 Porzig had executed. The court granted Dresdner's motion and Porzig re-filed his claim in arbitration before NASD.
After multiple hearing dates, a three-person NASD panel (Panel) issued an award in favor of Porzig on his age discrimination claim. The Panel found that age was a factor in Porzig's termination by Dresdner and awarded him $96,200 in compensatory damages, $27,679 in interest and $96,200 in punitive damages under the federal Age Discrimination in Employment Act (ADEA). The Panel, however, refused to award Porzig the attorney's fees he sought under the ADEA and instead required him to pay a portion of the NASD forum fees.
District Court Vacates Award
Unhappy with this outcome, Porzig filed a petition with the U.S. District Court for the Southern District of New York to vacate the award with respect to the Panel's denial of attorney's fees on the ground that the Panel acted in manifest disregard of the law. The ADEA expressly provides that a successful plaintiff in an age discrimination case be awarded reasonable attorney's fees and costs. The district court granted Porzig's petition, finding that the Panel's refusal to award attorney's fees was made in manifest disregard of the law, and remanded the case back to the Panel with specific instructions to grant Porzig his attorney's fees and costs.
Modified Arbitration Award
Back before the Panel on remand, Porzig sought attorney's fees of just under $250,000 and costs of $12,000. Porzig provided the Panel with detailed records reflecting the time spent and services rendered, including the fees and costs incurred in seeking attorney's fees and costs in the district court. Dresdner obtained an order from the arbitrators compelling Porzig to disclose his fee agreement with his counsel - a contingent fee arrangement under which counsel would receive 33.3% of any recovery. Pursuant to that agreement, Porzig had paid his attorney $82,438 for fees, costs and net disbursements. Dresdner's counsel argued to the Panel that the contingent fee "should set the maximum limit . . . on the amount Porzig can recover under the fee shifting statute."5
Dresdner's counsel also argued that "an award of attorneys" fees may . . . be unnecessary to achieve the purposes of the statutory fee-shifting provision."6 Thereafter, the Panel, stating that it considered "numerous factors," issued an amended award granting Porzig attorney's fees of $75,000 and costs of $8,500 for a total award of $83,500 in attorney's fees and costs. The Panel further directed Porzig's counsel to return to Porzig the previously paid contingency fee.
Still not satisfied with the award, Porzig filed another petition to vacate the attorney's fees award. This time, the district court denied the petition, leading Porzig to appeal to the U.S. Court of Appeals for the Second Circuit.
Second Circuit Reverses on Ground Fee Award Was In Manifest Disregard of the Law
In a highly unusual opinion, the Second Circuit reversed the district court and vacated the Panel's amended arbitration award, finding that the Panel had, once again, acted in manifest disregard of the law with respect to Porzig's request for attorney's fees and had exceeded its powers in ordering the return of the contingency fee.7 The Court began its analysis by noting well-settled law that an award may be vacated for manifest disregard only where the party seeking vacatur can demonstrate that (1) the arbitrators were informed of the governing law yet refused to apply it or ignored it altogether and (2) the law is well-defined, explicit and clearly applicable to the case.8 Here, Porzig informed the Panel that attorney's fees are to be calculated under the "lodestar method" and submitted evidence of a reasonable billing rate and a reasonable number of hours expended. Nevertheless, the Panel awarded Porzig a dollar amount ($83,500) that, the Second Circuit noted, was "remarkably similar" to the contingent fee ($82,438) Porzig had paid his attorney.
Given the similarity between the contingent fee and the amount awarded by the Panel, the Court found it troubling that Dresdner's counsel had argued to the Panel that the contingent fee should "set the maximum limit . . . on the amount" Porzig could recover for fees. The Court observed that this argument by Dresdner, which it characterized as contrary to binding precedent, appeared to have influenced the Panel's determination.9 The Court also found fault with the Panel's failure to award Porzig any attorney's fees for the time his counsel spent successfully litigating his statutory right to attorney's fees in the district court or the time spent litigating the issue before the Panel on remand.10
The Second Circuit was also troubled by the fact that the Panel did not explain how it arrived at the $83,500 number, especially since it was so similar to the amount of the contingent fee. While noting settled law that a panel is not obligated to explain its award, the Court pointed out that a reviewing court may take the failure to do so into account, particularly where the award has already been vacated once for manifest disregard of the law.11
The proverbial last straw for the Court was that the Panel had directed Porzig's counsel to return the contingent fee previously paid to him. The arbitrators had no authority over the relationship between Porzig and his counsel, rendering that part of the amended award patently improper in the Court's view.
While noting that none of these factors individually would have been sufficient to "overcome the deference owed to the Panel's award," the Second Circuit found that, collectively, they "create, if not the perfect storm, then a disturbance ample enough to give us pause."12 The Court thus found that the district court should have vacated the amended award on the ground of manifest disregard of the law. The Second Circuit remanded the case to the district court, with instructions to grant Porzig his attorney's fees incurred on appeal. The district court then determined the appellate attorney's fees, and remanded the case back to the Panel for a proper determination of the amount of attorney's fees due to Porzig's counsel.
Manifest Disregard of the Law as a Basis for Challenging Attorney's Fees Award
A panel's award or failure to award attorney's fees may be challenged under the manifest disregard standard.13 But courts have repeatedly stated that manifest disregard of the law is a "severely limited doctrine" and a "doctrine of last resort," the use of which is limited only to those exceedingly rare situations where none of the provisions of the Federal Arbitration Act apply.14
Manifest disregard can be established only where a governing legal principle is well-defined, explicit and clearly applicable to the case, and where the arbitrators actually ignored the principle after it was brought to their attention in a manner that assures that the arbitrators knew of its controlling nature.15 Manifest disregard requires more than a mistake of law or a clear error in fact-finding to disturb an award. Nor is the failure of the arbitrators to understand the law or to apply it appropriately sufficient to warrant vacatur for manifest disregard.16 Indeed, an award should be enforced, despite the court's disagreement with it on the merits, if there is merely a barely colorable justification for the outcome reached.17 If a court can find any line of argument that is legally plausible and supports the award, even an argument not articulated by the panel, then the award must be confirmed.
Arbitrators are not expected to know the law, much less how to apply it correctly, unless it is clearly presented to them by the parties in arbitration. As the Second Circuit pointed out in Wallace v. Buttar, an arbitrator "under the test of manifest disregard is ordinarily assumed to be a blank slate unless educated in the law by the parties.18 In order for the manifest disregard doctrine to come into play, the legal principle at issue has to be clearly and correctly presented to the panel.19
Prior Cases Reviewing Arbitral Rulings on Attorney's Fee Requests
The case law involving challenges to an arbitrator's ruling on a request for attorney's fees is relatively sparse. Most of the case law focuses on whether the arbitrator had authority to award attorney's fees.20By and large, those cases have granted deference to the arbitrator's decision and have refused to vacate the award of attorney's fees.21
Cases challenging an arbitrator's decision to deny a request for attorney's fees are even fewer. The few courts that have considered the issue have gone to great lengths to avoid finding that an arbitrator acted in manifest disregard of the law by failing to grant attorney's fees. For example, in DiRussa v. Dean Witter Reynolds Inc., the arbitration panel awarded DiRussa compensatory damages under the ADEA, but failed to award him any attorney's fees.22 As noted in Porzig, it is mandatory under the ADEA to grant a successful claimant attorney's fees. Nevertheless, the Second Circuit affirmed the district court's denial of DiRussa's petition to vacate the arbitration award, holding that his failure to inform the arbitrators of the mandatory nature of the ADEA's fee-shifting provision barred him from challenging the award on manifest disregard grounds. It was not sufficient that DiRussa had told the panel that he was "entitled" to an award of fees. He had to tell the panel it was mandatory, or at minimum, give the panel a copy of the applicable statutory language.
Other courts have similarly refused to vacate arbitration awards denying attorney's fees, on grounds including the litigant's failure to provide the panel with evidence proving up his or her fee request23 and, as in DiRussa, the litigant's failure to make clear to the panel that the award of fees was mandatory under the applicable statute.24
Prior to Porzig, the leading case vacating an award for failing to grant attorney's fees was DeGaetano v. Smith Barney, Inc.25 In that case, the court vacated an arbitration award on the ground of manifest disregard where the panel had awarded DeGaetano damages for sex discrimination under Title VII but failed to award her any attorney's fees. The court found that although fees are not strictly mandatory under Title VII, a prevailing party, like DeGaetano, is presumptively entitled to receive fees and should only be denied them in special circumstances. The court found that the arbitrators had been clearly informed of the law and had acted in manifest disregard of it as there were no special circumstances justifying denial of fees.
Against this background, the Second Circuit's decision in Porzig is noteworthy for confirming - and possibly extending - prior law on judicial review of an arbitration panel's decision to deny attorney's fees.Porzig confirms that a court may vacate an award on manifest disregard grounds where an arbitration panel is clearly informed of the mandatory nature of a fee-shifting statute and still fails to award fees to the prevailing party. In its previous DiRussa decision, the Second Circuit implied that vacature would be appropriate under such circumstances. Porzig confirms that this is so. Porzig, however, also represents a potentially substantial extension of the law in that it vacated the Panel's amended award for granting an improper amount of attorney's fees. Porzig appears to be the sole instance where a federal court has vacated an arbitration award on such a ground.
Will Porzig cause a sea change in judicial review of arbitrators' decisions on requests for attorney's fees? The Second Circuit clearly intended that Porzig not cause such a revolution. The Court went to lengths to make clear that its ruling in Porzig was driven by a convergence of very unique facts - the so-called "perfect storm" - and that it was a close call as to whether vacature was warranted. This seems a clear signal by the Second Circuit that Porzig should be limited to its facts and does not represent a shift in its review of arbitral awards.
Best Practices After Porzig
So what, then, are the lessons to be drawn from Porzig? First, for counsel seeking an award of attorney's fees, Porzig underscores the importance of informing the arbitral panel in clear terms that an award of fees is mandatory under a fee-shifting statute or other applicable law. It is not sufficient to state that a client is "entitled" to a fee award. Counsel must state explicitly that an award is mandatory or provide a copy of the applicable statute. Another best practice gleaned from Porzig and prior case law is that counsel should provide evidence backing up its fee request, rather than making an unsupported demand for attorney's fees and relying on the panel to dream up a number.
It is always a difficult strategy call as to how much "law" to provide a panel. Panels do not want to be burdened with lengthy briefs or voluminous appendices of case law. Given this, counsel may tend to err on the side of avoiding court-style briefing on the applicable law. However, Porzig and its predecessor cases make clear that counsel must provide a basic explanation of the applicable legal principles or else be foreclosed from challenging the award on manifest disregard grounds.
The lessons to be drawn from Porzig by counsel opposing requests for attorney's fees are more elusive. At first blush, the amended award in Porzig appears an unlikely candidate for vacature. The amount of fees awarded, while significantly less than what Porzig sought, seems well within the realm of reason since it was in the same range as the compensatory damages awarded. The Second Circuit, however, was troubled by arguments that Dresdner's counsel made in the arbitration - particularly the argument that the amount of the contingent fee should set the limit on the fees to be awarded.
Given that a court may (as the Second Circuit acknowledges) take into account the fee agreement between plaintiff and his or her attorney in determining what a reasonable fee award would be, counsel's argument that the contingent fee "should" set the limit on the fees awarded does not seem grossly improper.26 The Second Circuit, however, identified it as one of the factors that supported its finding that the Panel's fee award was in manifest disregard of the law. The Court also seemed to take issue with what it perceived to be a high-handed attitude towards Porzig's counsel, who was a solo practitioner. The lesson from Porzigthus may be that counsel opposing fee requests must be careful to be fair in both their characterization of the applicable law and their treatment of opposing counsel.
At the end of the day, Porzig seems unlikely to work a revolution in judicial review of arbitration awards. It should, however, serve as a reminder that it is important for counsel on both sides of a fee request to inform the arbitrators clearly and fairly of the applicable law. By doing so, counsel should be able to steer clear of their own perfect storm.
James L. Komie is a shareholder at the Chicago law firm of Schuyler Roche, P.C. He specializes in securities law and in commercial and employment matters. Mr. Komie is a Contributing Legal Editor to the Securities Litigation Commentator.
Brian S. Hormozi is an associate at Schuyler Roche, P.C. and concentrates in commercial and employment litigation in addition to securities law.
The authors would like to thank Brittany Pedersen, a student at Loyola University Chicago, School of Law and an intern at Schuyler Roche, P.C., for her valuable assistance with this article.
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