Fifth Circuit Holds Conduct of Parties Expanded Arbitrator’s Authority in Contract Dispute

The United States Court of Appeals for the Fifth Circuit has ruled that an arbitrator did not exceed his authority when he analyzed whether a contract was formed because the parties substantially participated in arbitral proceedings without contesting the issue. In OMG, L.P. v. Heritage Auctions, Inc., No. 14-10403, (5th Cir., May 8, 2015), a company, OMG, became the successor in interest to a variety of business entities that contracted with an auction house, Heritage, to sell high-end firearms. As part of the transaction, the two businesses entered into an Asset Purchase Agreement (“APA”) and a Consulting Agreement (“CA”). The APA transferred OMG’s assets, including the company’s trademark, to Heritage for a fixed sum. In addition, OMG agreed to provide consulting services to Heritage in exchange for sales commissions through the CA. Both contracts contained an agreement to arbitrate any future disputes under Texas law. The documents also stated “whether a valid agreement to arbitrate has been made in the first instance and whether certain disputes are subject to arbitration” was a decision for an arbitrator.

The two companies later disagreed over what the term “merchandise” meant and which items that were sold by Heritage were subject to sales commission payments to OMG. As a result, Heritage terminated the parties’ CA and filed a demand for arbitration. Following a hearing, a neutral arbitrator found that what constituted merchandise under the parties’ agreement was ambiguous. Due to this ambiguity, the arbitrator ruled that there was no contract formed because there was no meeting of the minds. The arbitrator also stated Heritage could not use OMG’s name or likeness, nor could Heritage stop OMG from competing against it in the future.

Next, OMG asked the Northern District of Texas to vacate the arbitration award. According to the company, “the arbitrator exceeded his authority, committed prejudicial misconduct, ruled on a matter not submitted to him, and committed a manifest error of law.” Based on a magistrate judge’s recommendation, the district court vacated the arbitrator’s decision and stated the arbitrator exceeded his authority because whether or not a contract was formed should instead have been decided by a court. Heritage then appealed the case to the U.S. Court of Appeals for the Fifth Circuit.

On appeal, the Fifth Circuit held:

…the parties agreed to arbitrate the issue of contract formation by submitting, briefing, and generally disputing that issue throughout the arbitration proceedings, with the plaintiffs never contesting the arbitrator’s authority to decide contract formation until he issued an adverse award. By submitting issues for an arbitrator’s consideration, parties may expand an arbitrator’s authority beyond that provided by the original arbitration agreement such that we need not address whether the original agreement encompassed such authority. See generally Piggly Wiggly Operators’ Warehouse, Inc. v. Piggly Wiggly Operators’ Warehouse Indep. Truck Drivers Union, Local No. 1, 611 F.2d 580, 584 (5th Cir. 1980).

After that, the Fifth Circuit Court of Appeals reversed the Northern District of Texas’ judgment and remanded the case with instructions to confirm the arbitral award.

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