Hyatt Franchising, L.L.C. v. Shen Zhen New World I, LLC, et al
Filed opinion of the court by Judge Easterbrook. AFFIRMED. Frank H. Easterbrook, Circuit Judge; Ilana Diamond Rovner, Circuit Judge and David F. Hamilton, Circuit Judge. [6886470-1]  [17-2071]
United States Court of Appeals
For the Seventh Circuit
HYATT FRANCHISING, L.L.C.,
SHEN ZHEN NEW WORLD I, LLC, and SHEN ZHEN NEW WORLD
INVESTMENT (USA) INC.,
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 16 C 8306 — Virginia M. Kendall, Judge.
ARGUED NOVEMBER 7, 2017 — DECIDED NOVEMBER 28, 2017
Before EASTERBROOK, ROVNER, and HAMILTON, Circuit
EASTERBROOK, Circuit Judge. In September 2012 Hyatt and
Shen Zhen New World I entered into an agreement providing that Shen Zhen would renovate a hotel in Los Angeles
and operate it using Hyatt’s business methods and trademarks. Two years later Hyatt declared that Shen Zhen had
not kept its promises. An arbitrator concluded that Shen
Zhen owes Hyatt about $7.7 million in damages plus about
$1.3 million in attorneys’ fees and costs. Hyatt filed this suit
under the diversity jurisdiction and asked a district court to
enforce the award. The court did just that. 2017 U.S. Dist.
LEXIS 59455 (N.D. Ill. Apr. 19, 2017). Shen Zhen appeals.
Shen Zhen’s principal arguments concern the arbitrator’s
rulings with respect to Lynn Cadwalader, who represented
it during the negotiations that led to the contract with Hyatt.
Shen Zhen asked the arbitrator to issue a subpoena that
would have required Cadwalader to give a deposition; the
arbitrator said no. The arbitrator stated that Cadwalader
lacked any information bearing on the parties’ contractual
dispute, which arose two years after she had stopped working for Shen Zhen. The arbitrator also declined to disqualify
Hyatt’s law firm, DLA Piper, which Cadwalader joined in
July 2015, about three years after the contract was signed.
Cadwalader had not represented Shen Zhen since October
2012. The arbitrator concluded that DLA Piper’s ethics
screen ensured that no confidential information would reach
the lawyers representing Hyatt in 2015 and 2016.
Shen Zhen maintains that it is entitled to relief under 9
U.S.C. §10(a)(3), which provides that a judge may set aside
an arbitrator’s award “where the arbitrators were guilty of
misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent
and material to the controversy; or of any other misbehavior
by which the rights of any party have been prejudiced”. Like
the district court, we do not see how either branch of Shen
Zhen’s argument comes within this language.
The statutory phrase “refusing to hear evidence” concerns the conduct of the hearing, not the conduct of discov-
ery. Indeed, nothing in the Federal Arbitration Act requires
an arbitrator to allow any discovery. Avoiding the expense of
discovery under the Federal Rules of Civil Procedure and
their state-law equivalents is among the principal reasons
why people agree to arbitrate. That Hyatt’s attorneys’ fees in
the arbitration exceeded $1 million shows that plenty of discovery occurred; an argument that the arbitrator had to allow more rings hollow.
Whether Cadwalader furnished good advice when negotiating the contract might be relevant in a malpractice action
against her but does not bear on Hyatt’s contention that
Shen Zhen broke its promises. The contract has an integration clause that forecloses resort to the negotiating history as
an interpretive tool. Shen Zhen tells us that Cadwalader
might have helped bolster its contention that the contract is
unconscionable, but in a commercial transaction between
sophisticated parties the defense of unconscionability, if
available at all, is an objective one that depends on the
agreement’s terms, not on what either side’s lawyer may say
about the negotiations. See, e.g., Pinnacle Museum Tower Association v. Pinnacle Market Development (US), LLC, 55 Cal. 4th
223, 246–47 (2012).
As for the motion to disqualify DLA Piper: a decision by
an arbitrator on that subject may or may not be mistaken,
either as a matter of fact (is DLA Piper’s ethics screen as
good as the arbitrator thought?) or as a matter of law (state
rules could require disqualification no matter how good the
ethics screen), but §10(a)(3) does not provide for substantive
review of an arbitrator’s decisions. It provides for judicial
intervention when an arbitrator commits “misbehavior”, but
an error differs in kind from misbehavior. Perhaps Shen
Zhen believes that Cadwalader or other lawyers at DLA Piper have engaged in misbehavior, and if so it can complain to
the state bar, but the arbitrator is free of any plausible charge
of misbehavior—and only misbehavior by the arbitrator
comes within the residual clause of §10(a)(3).
For a fallback argument, Shen Zhen contends that the
award disregards federal and state franchise law and therefore should be set aside under 9 U.S.C. §10(a)(4), which covers situations in which “the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and
definite award upon the subject matter submitted was not
made.” Yet §10(a)(4) does not make legal errors a ground on
which a judge may refuse to enforce an award. See, e.g.,
George Watts & Son, Inc. v. Tiffany & Co., 248 F.3d 577 (7th
Cir. 2001); Affymax, Inc. v. Ortho-McNeil-Janssen Pharmaceuticals, Inc., 660 F.3d 281 (7th Cir. 2011). Just as an arbitrator is
entitled to interpret the parties’ contract without judicial review, so an arbitrator is entitled to interpret the law applied
to that contract. An agreement to arbitrate is an agreement to
move resolution of the parties’ disputes out of the judicial
system. An arbitrator is not like a magistrate judge, whose
recommendations are subject to plenary judicial review.
Watts and Affymax hold that an arbitrator acts as the parties’ joint agent and may do anything the parties themselves
may do. Watts, 248 F.3d at 580; Affymax, 660 F.3d at 284. If
they may reach a compromise over some legal issue without
being accused of “violating the law,” then the arbitrator may
do so on their behalf. That was the situation in Watts, another franchise case in which the arbitral loser accused the arbitrator of misapplying state franchise law.
One party in Watts contended that state law entitled it to
an award of attorneys’ fees, although the arbitrator had ordered each side to bear its own fees. We replied that, because
the parties could have settled their dispute and agreed to
cover their own fees and costs, an arbitrator likewise had
that power. Arbitrators “exceed their powers” under
§10(a)(4) if they order the parties to violate the rights of persons who have not agreed to arbitrate—if, for example, an
arbitrator purports to allow businesses to fix prices, to the
detriment of consumers. But when an arbitrator does only
what the parties themselves could have done by mutual consent, §10(a)(4) does not intervene.
None of Shen Zhen’s arguments concerns the rights of
third parties. Consider, for example, its contention that Hyatt violated one of the FTC’s franchise-disclosure rules, 16
C.F.R. §436.9(g), by not furnishing changes in the draft
agreement at least seven days in advance of signing. Shen
Zhen concedes that it possessed the final version more than
seven days in advance but maintains that Hyatt did not do
enough to flag changes for attention. Suppose that Shen
Zhen and Hyatt disagreed about that subject and, after negotiations, concluded that Hyatt was entitled to enforce the
agreement. (A concession on damages could have produced
such an agreement, even if Shen Zhen was unconvinced on
the legal point.) No one else could have complained. Watts
and Affymax hold that the arbitrator may do what the parties
could have done. That’s exactly what this arbitrator did
when concluding that Hyatt had satisfied §436.9(g). Other
provisions of federal and California law that Shen Zhen invokes need not be discussed separately.
Shen Zhen cannot make headway by relabeling its “violation of law” arguments as “violation of public policy.” Law
reflects public policy, to be sure, but the sort of “public policy” that judges may use to annul an award is policy designed to protect the public against the parties to the arbitration. To repeat an example from Watts, 248 F.3d at 580–81: in
a contest between a truck driver and an employer, an arbitrator could not conclude that a driver whose license has
been revoked can continue to drive a truck.
The parties cannot use arbitration to get around rules designed for the protection of people who have not agreed to
arbitrate. That’s the point of decisions such as W.R. Grace &
Co. v. Rubber Workers Union, 461 U.S. 757, 766 (1983). But
when the parties are free under the law to agree on some
outcome, the arbitrator’s decision as their agent does not violate public policy. That’s the holding of Eastern Associated
Coal Corp. v. United Mine Workers, 531 U.S. 57 (2000), which
concluded that an arbitrator was entitled to reinstate a driver
who had twice tested positive for marijuana. It was lawful
for such a person to continue driving, so it was permissible,
the Court held, for an arbitrator to reinstate that worker to a
driver’s job even though the use of marijuana was unlawful
and contrary to public policy.
More than 25 years ago, this court held that commercial
parties that have agreed to final resolution by an arbitrator,
yet go right on litigating, must pay their adversaries’ attorneys’ fees. See Continental Can Co. v. Chicago Truck Drivers
Pension Fund, 921 F.2d 126, 128 (7th Cir. 1990). The American
Rule requires each side to bear its legal fees in an initial
round, but an entity that insists on multiplying the litigation
must make the other side whole for rounds after the first. Cf.
28 U.S.C. §1927. Section 14.4 of the contract between Hyatt
and Shen Zhen includes a fee-shifting clause, so it is unnecessary to make a separate fee-shifting order under Continental Can, but if the parties cannot agree on how much Shen
Zhen owes for pointlessly extending this dispute through
the district court and the court of appeals, Hyatt should apply for an appropriate order.
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