HBK Sorce Financial LLC et al v. Ameriprise Financial Services, Inc. et al
Filing
91
Memorandum Opinion and Order Defendant Bannon has failed to demonstrate the arbitrator committed errors requiring vacatur or modification under the FAA. For the foregoing reasons: 1. HBKS's motion to lift the stay pending arbitration and confirm the arbitration award (ECF No. 78 ) is granted; and 2. Bannon's motion to vacate or modify the arbitration award (ECF No. 85 ) is denied. Judge Benita Y. Pearson on 9/28/2012. (S,L)
PEARSON, J.
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF OHIO
EASTERN DIVISION
HBK SORCE FINANCIAL,
Plaintiff,
v.
AMERIPRISE FINANCIAL SERVICES,
Defendant.
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CASE NO. 4:10-cv-02284
JUDGE BENITA Y. PEARSON
MEMORANDUM OF OPINION
AND ORDER (Resolving ECF Nos. 78
and 85)
Plaintiff HBK Sorce Financial LLC (HBKS) formerly employed individual defendants
Kevin Bannon, Elli Asti, and Sarah Irwin. In August 2011, Bannon, Elli, and Irwin left HBKS
and joined a competitor, defendant Ameriprise Financial Services, Inc. (Ameriprise). HBKS and
several related entities sued defendants, alleging, inter alia, breach of contract, breach of
fiduciary duties, misappropriation of trade secrets, and unfair competition. Bannon moved this
Court to stay the proceedings pending arbitration of the claims against him as required by the
employment contract between Bannon and HBKS. This Court granted the motion.
The arbitrator found Bannon liable under several theories and awarded HBKS
$423,606.55, plus interest and attorney fees.
Pending is HBKS’s motion to lift the stay pending arbitration and confirm the final
arbitration award. ECF No. 78. Also pending is Bannon’s motion to vacate or modify the arbitration
award. ECF No. 85. For the reasons that follow, the Court grants HBKS’s motion and denies
Bannon’s motion.
Jurisdiction exists under 28 U.S.C. § 1332.
(4:11cv106)
Background
HBKS provides personal financial services to individual clients. In August 2001, Bannon
sold his firm, English and Bannon, to HBKS. As part of the sale agreement, Bannon became an
HBKS employee and continued to serve the same clients in St. Marys and Titusville, Pennsylvania.
In return, Bannon received new client referrals from HBKS and began earning a salary.
In 2011, while employed by HBKS, Bannon, Asti and Irwin began planning to join
Ameriprise. Bannon and Ameriprise entered into a franchise agreement under which Bannon would
open new offices in St. Marys and Titusville, and attempt to bring HBKS clients with him to
Ameriprise. In August 2011, Bannon, Asti and Irwin executed their plan and joined Ameriprise.
Almost immediately, the majority of HBKS’s St. Marys and Titusville clients transferred their
accounts to Bannon at Ameriprise. Plaintiffs sued defendants, and arbitration followed.
The arbitrator permitted extensive discovery. After the discovery deadline, the parties
submitted counter-motions for summary judgment. The arbitrator issued an opinion and order
holding a liquidated damages clause in the Bannon/HBKS employment contract unenforceable. The
arbitrator stated he would allow HBKS to prove unjust enrichment damages at the arbitration
hearing.
After six days of hearing testimony and receiving exhibits, the arbitrator closed the record
and took the case under advisement. On January 26, 2012, the arbitrator issued a lengthy Interim
Award in which he ruled Bannon breached several duties he owed HBKS. The arbitrator awarded
HBKS the profit Bannon earned after joining Ameriprise under an unjust enrichment theory. In
calculating Bannon’s profits, the arbitrator deducted Bannon’s expenses, including what the
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arbitrator considered Bannon’s reasonable salary. The arbitrator based his unjust enrichment
calculations on Exhibit 79, which Bannon prepared and presented during the arbitration hearing.
During arbitration, HBKS requested the arbitrator extend unjust enrichment damages for
three years, the length of time Bannon had contractually agreed not to compete with HBKS. Because
the parties only presented evidence of lost profits through October 24, 2010, the arbitrator initially
limited unjust enrichment damages to the time period before that date. In the Interim Award, the
arbitrator retained jurisdiction to hold a final hearing as to whether unjust enrichment damages
should extend into the future.
Bannon then twice moved the arbitrator to amend the Interim Award. Bannon argued the
arbitrator erred in calculating damages by relying on an incomplete document, Exhibit 79, and failing
to deduct his salary as an expense. Bannon also requested that the arbitrator reopen the record to
allow him to prove his salary. The arbitrator denied Bannon’s motions.
On May 5, 2012, the arbitrator issued his Final Award. In the award, the arbitrator rejected
Bannon’s argument that Exhibit 79 did not account for his salary during his first eighteen months
as an Ameriprise franchisee. The arbitrator found Exhibit 79 showed that Bannon received an annual
salary of about $84,000 during that period. The arbitrator extended damages six months from the
date of the Interim Award, which approximately corresponded to the date of the Final Award.
However, the arbitrator held that further future damages were too speculative. HBKS then filed its
motion to confirm the arbitration award, and Bannon filed his motion to vacate or modify the award.
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Standard of Review
Review of an arbitration award is “strikingly deferential.” Bixby Med. Ctr., Inc. v. Mich.
Nurses Ass’n, 142 F. App’x 843, 845 (6th Cir. 2005). Under the Federal Arbitration Act (FAA), 9
U.S.C. §§ 1-14, a court may only vacate an arbitration award where the arbitrator engaged in
misconduct, or “exceeded [his] powers, or so imperfectly executed them” that the arbitrator did not
issue a final and definite award. See 9 U.S.C. § 10(a)-(e). A court “must” confirm an arbitration
award “unless” the court vacates, modifies, or corrects the award “as prescribed” in the FAA. Hall
St. Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576, 582 (2008). This limited review is meant to
avoid “full-bore legal and evidentiary appeals that can ‘rende[r] informal arbitration merely a prelude
to a more cumbersome and time-consuming judicial review process.’” Hall St. Associates, supra,
552 U.S. at 588 (quoting Kyocera Corp. v. Prudential-Bache Trade Services, Inc., 341 F.3d 987, 998
(9th Cir. 2003)).
Additionally, the Sixth Circuit has held that a court may vacate an arbitration award if it
displays “manifest disregard of the law.” Jacada (Europe), Ltd. v. Int’l Mktg. Strategies, Inc., 401
F.3d 701, 713 (6th Cir. 2005) (citing Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Jaros, 70 F.3d
418, 421 (6th Cir.1995)). Manifest disregard of the law is also a very limited standard of review.
Anaconda Co. v. District Lodge No. 27, 693 F.2d 35, 37 (6th Cir. 1982). An arbitrator “does not act
in manifest disregard for the law unless (1) the applicable legal principle is clearly defined and not
subject to reasonable debate; and (2) the arbitrator[] refused to heed that legal principle.” Jaros,
supra, 70 F.3d at 421.
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Because “the standard for reviewing arbitration awards ‘is one of the narrowest standards of
judicial review in all of American jurisprudence,’ the party opposing confirmation of an arbitration
award bears a heavy burden.” Mich. Family Res., Inc. v. SEIU Local 517M, 438 F.3d 653, 656 (6th
Cir. 2006) (quoting Tenn. Valley Auth. v. Tenn. Valley Trades & Labor Council, 184 F.3d 510,
514–15 (6th Cir.1999)).
Discussion
Bannon argues the arbitrator committed misconduct under FAA § 10(a)(3),1 exceeded his
authority under FAA § 10(a)(4),2 and his award represents a manifest disregard of the law. Bannon
requests that the Court vacate or modify the Final Award under FAA § 11(a).3
A. Misconduct under FAA § 10(a)(3)
Bannon argues the arbitrator committed misconduct requiring vacatur under FAA § 10(a)(3)
by:
•
allowing HBKS to prove and recover unjust enrichment damages after HBKS
indicated it would only seek liquidated damages under the employment
contract;
•
refusing to continue hearings to allow Bannon to prepare and present witness
testimony;
•
allowing HBKS to take additional discovery during the arbitration hearing;
and
•
miscalculating damages by failing to consider Bannon’s salary and
1
9 U.S.C. § 10(a)(3).
2
9 U.S.C. § 10(a)(4)).
3
9 U.S.C. § 11(a).
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determining damages based on an incomplete and inadmissible document.
FAA § 10(a)(3) provides a basis for vacating an arbitration 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 . . . .”
Arbitrators are not bound by formal procedural and evidentiary rules. Louisiana D. Brown
1992 Irrevocable Trust v. Peabody Coal Co., 2000 WL 178554, at *5-6 (6th Cir.). Arbitration
procedures are sufficient under FAA § 10(a)(3) so long as they provide the parties with a
fundamentally fair hearing. Id. “Fundamental fairness requires only notice, an opportunity to present
relevant and material evidence and arguments to the arbitrator[], and an absence of bias on the part
of the arbitrator[].” Id. (citing Bowles Financial Group, Inc. v. Stifel, Nicolaus & Co., 22 F.3d 1010,
1013 (10th Cir. 1994)).
1. Changed Theory of Damages
Bannon first argues the arbitrator committed misconduct requiring vacatur by allowing
HBKS to change its theory of damages after the arbitrator’s summary judgment order. The Court
disagrees.
HBKS initially indicated it would rely on the contractual liquidated damages clause as its
measure of damages. Bannon argues the arbitrator committed misconduct by allowing HBKS to
instead prove unjust enrichment damages,4 and by indicating, in his opinion and order on summary
4
Bannon actually argues the arbitrator improperly allowed HBKS to prove lost profit damages.
It appears Bannon has confused lost profit damages, which would have allowed HBKS to recover
the profits it lost as a result of his actions, with unjust enrichment damages, which allowed
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judgment, that this may represent the proper measure of damages.
The arbitrator’s decision to allow HBKS to present unjust enrichment damages did not
deprive Bannon of notice of the claims or prejudice Bannon’s ability to present relevant and material
evidence. Bannon acknowledges that, after summary judgment, he knew the arbitrator would allow
evidence of his profits as the measure of damages. Bannon then had ample opportunity, through the
six days of hearings, to present evidence establishing his expenses and proving his profits. Thus, the
arbitrator’s decision to allow HBKS to rely on unjust enrichment damages did not amount to
misconduct depriving Bannon of a fundamentally fair hearing.
2. Refusal to Continue Hearings
Bannon next argues the arbitrator denied him a fundamentally fair hearing by denying his
requests to continue hearings to allow him further time to prepare evidence. The Court disagrees.
Bannon requested the arbitrator continue hearings on October 24, 2011, and April 11, 2012.
Shortly before the October 24, 2011, hearing, the arbitrator granted HBKS discovery regarding
Bannon’s profits from April 16, 2010, to the date of the hearing. Bannon argues this discovery order
affected his ability to defend the claims against him by dividing his efforts during the hearing. At
the April 11, 2012 hearing, the arbitrator refused to accept additional testimony from Bannon or
continue the hearing. Bannon wished to present testimony that Exhibit 79 did not account for his
salary.
HBKS to recover the profit Bannon improperly earned. Because the arbitrator ultimately awarded
damages under an unjust enrichment theory, the Court will address the propriety of him doing so.
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Bannon has failed to show the discovery order prejudiced his right to a fair hearing by
dividing his efforts at trial. Bannon has not explained how the additional discovery prevented him
from presenting his witnesses and evidence regarding the merits of the case. To the contrary, it
appears Bannon testified at length and had a full opportunity to rebut the claims against him. The
Court therefore rejects Bannon’s argument that the arbitrator’s refusal to continue the October 24,
2011, hearing amounted to misconduct.
The Court also rejects Bannon’s argument that the arbitrator’s refusal to hear additional
testimony regarding Bannon’s salary and expenses at the April 11, 2012 final hearing amounted to
misconduct. See Peabody Coal Co., 205 F.3d 1340, at *5 (“Arbitration may proceed . . . with
restricted inquiry into factual issues.”). During the six-day arbitration hearing, the arbitrator
provided Bannon the opportunity to present evidence of his salary, and Bannon knew that evidence
would affect the measure of damages. It appears Bannon instead relied on a strategy of undermining
the reliability of Exhibit 79, rather than providing affirmative testimony establishing his actual past
salary. Although Bannon did not present evidence of his past salary, this does not change the fact
that the arbitrator gave him the opportunity to do so. The Court finds it particularly curious that
Bannon did not simply testify regarding his past salary with HBKS or Ameriprise. In any event, the
arbitrator did not deprive Bannon of a fair hearing by refusing to grant him a second attempt, after
the close of the arbitration hearings, to prove his salary.
3. Miscalculating Damages and Admitting Exhibit 79
Bannon argues the arbitrator erred in refusing to amend the Interim Award calculating
damages and by relying on Exhibit 79 to determine damages. The Court disagrees.
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Bannon testified at the hearings that Exhibit 79 was merely a draft document, had not been
reviewed by an expert, and was incomplete and inaccurate. Before the final hearing, Bannon
testified that Exhibit 79 did not represent his actual expenses. Specifically, he stated Exhibit 79 did
not include his salary for a period of time after he joined Ameriprise. However, Bannon failed to
provide testimony or evidence establishing his salary for this period. Following the arbitration
hearing, Bannon filed an affidavit from an accountant in an attempt to establish his salary was about
$200,000 annually.
The reliability, accuracy, and admissibility of Exhibit 79 were issues properly resolved by
the arbitrator. See Peabody Coal Co., 205 F.3d 1340 at, *5 (“[I]t is the arbitrators who are the judges
of the relevance and materiality of the evidence offered.”). The arbitrator rejected the affidavit, and
instead relied on the evidence presented at hearing, including Exhibit 79. The arbitrator noted that,
although imperfect, Exhibit 79 presented the best evidence on which to base the damages
calculation. The arbitrator found Exhibit 79 showed Bannon’s annual salary was about $84,000.
The arbitrator also noted Bannon attempted to undermine the reliability of Exhibit 79, but failed
otherwise to establish his annual salary.
The arbitrator could properly reject Bannon’s self-serving testimony that Exhibit 79 did not
reflect his actual salary. Bannon prepared and presented Exhibit 79, and later attempted to
undermine its credibility. However, because the arbitrator heard and considered Bannon’s testimony
regarding the reliability of this document, Bannon had the requisite fair opportunity to present
evidence about this issue, and the arbitrator did not commit misconduct in accepting Exhibit 79 as
submitted. The arbitrator’s reliance on Exhibit 79 to calculate damages, therefore, cannot provide
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a basis for vacatur.
B. Exceeding Authority under FAA§ 10(a)(4)
Bannon also argues the arbitrator exceeded his authority in violation of FAA § 10(a)(4) by
issuing both an Interim Award and a Final Award. The Court disagrees.
The arbitrator found Bannon liable in the Interim Award, and awarded damages through the
date of that award. The arbitrator also determined that future damages for up to three years might
be appropriate. The arbitrator asked the parties to present argument regarding the propriety of future
damages. HBKS, however, requested the arbitrator forego awarding future damages and issue the
Final Award. Thereafter, the arbitrator issued the Final Award, awarding damages for an additional
six-month period, which roughly corresponded to the period between the Interim Award and Final
Award.
FAA § 10(a)(4) allows a court to vacate an arbitration award “where 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.”
Whether an arbitrator exceeds his authority by issuing an interim award depends on the terms
of the agreement. Island Creek Coal Sales Co. v. City of Gainesville, Fla., 729 F.2d 1046, 1048 (6th
Cir. 1984), abrogated on other grounds, Cortez Byrd Chips, Inc. v. Bill Harbert Const. Co., 529 U.S.
193 (2000). A court should uphold an interim award unless the complaining party shows the
arbitrator “clearly exceeded” his authority by issuing an award under procedures outside the scope
of the agreement. Id. In addition, a court should defer to an arbitrator’s interpretation of the
agreement and arbitration rules. Id.
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Bannon and HBKS’s employment contract provided only that:
[A]ny controversy, dispute or claim arising out of, in connection with, or in relation
to the contract, tort or statute, shall be settled, at the request of either party, by
arbitration in accordance with the Employment Dispute Resolution Procedures of the
American Arbitration Association [AAA].
Bannon has failed to demonstrate the arbitrator clearly exceeded his authority under the
employment contract or the AAA Employment Rules. The parties’ contract merely stated the
arbitrator would settle all claims, but did not provide for nor prohibit specific procedural measures.
Because an arbitrator is granted considerable deference in determining the procedure of the
arbitration process, and Bannon has failed to demonstrate the arbitrator exceeded any contractual
requirement or AAA Rule, the Court rejects this argument.
C. Manifest Disregard for the Law
Bannon argues that the arbitrator’s damage calculation manifestly disregarded the law. The
Court disagrees.
The arbitrator used Exhibit 79 to calculate actual unjust enrichment damages from April 16,
2010 to October 24, 2011. He then used this calculation to grant damages for another six months.
The arbitrator also found it proper to award damages for three years following Bannon’s departure
from HBKS. At HBKS’s request, however, the arbitrator did not do so. This, at least arguably, was
a windfall for Bannon.
Bannon first argues the arbitrator’s unjust enrichment calculation was inconsistent with
clearly established law because it did not account for Bannon’s reasonable salary and was based on
unreliable evidence. As discussed above, the arbitrator sufficiently considered proof of Bannon’s
salary and reduced the unjust enrichment damages accordingly. The Court, therefore, rejects this
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argument.
Bannon also argues the arbitrator’s calculation of damages did not meet the requirement that
damages be proven within a reasonable degree of certainty because the arbitrator extended damages
for an additional six months beyond the Interim Award, and no evidence of Bannon’s profits and
losses existed for that period of time.
To justify recovery, a litigant must prove damages within a reasonable degree of certainty.
See, e.g., Bobb Forest Products, Inc. v. Morbark, 151 Ohio App. 3d 63, 88 (2002). Speculative
damages, therefore, are not recoverable. Id. “This rule serves to preclude recovery, however, only
where the fact of damage is uncertain, i.e., where the damage claimed is not the certain result of the
wrong, not where the amount of damage alone is uncertain.” Grantham and Mann, Inc. v. American
Safety Products, Inc., 831 F.2d 596, 601-02 (6th Cir. 1987). “Once the existence of damages has
been shown, all that an award of damages requires is substantial evidence in the record to permit a
factfinder to draw reasonable inferences and make a fair and reasonable assessment of the amount
of damages.” Lee Shops, Inc. v. Schatten-Cypress Co., 350 F.2d 12, 18 (6th Cir. 1965).
Bannon has failed to demonstrate the arbitrator manifestly disregarded the law in awarding
damages for an additional six-month period. As the arbitrator noted in the Final Award, Bannon did
not dispute, at the final hearing, that he continued to operate his business. In determining damages
for the additional six-month period, it appears the arbitrator assumed Bannon continued to earn the
same proportionate amount during this period as he did in the preceding year. To be sure, this may
not represent the most complete or accurate measure of actual damages. But Bannon has failed to
show that the arbitrator’s calculations, based Bannon’s financial statements for the immediately
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preceding year, so unreasonably assessed damages that the arbitrator refused to heed a clearly defined
legal principle. To this end, the Court notes Bannon has failed to cite any authority supporting his
contention that this measure of damages was improper. Bannon, therefore, has failed to demonstrate
the arbitrator manifestly disregarded the law.
D. Modification of the Final Award under FAA § 11(a)
Finally, Bannon argues that the Court must modify the Final Award under FAA § 11(a)5
because the award contains an evident miscalculation of damages. The Court disagrees.
FAA § 11(a) allows a court to modify an award “[w]here there was an evident material
miscalculation of figures or an evident material mistake in the description of any person, thing, or
property referred to in the award.”
Bannon again argues that the arbitrator failed to reduce the measure of damages to account
for his reasonable salary and erred in extending damages for an additional six months after the
Interim Award. He argues these errors represent evident miscalculations appearing on the face of
the award.
“[A]n evident . . . miscalculation of figures concerns a computational error in determining
the total amount of an award-what the Fourth Circuit calls a mathematical error appear[ing] on the
face of the award.” Grain v. Trinity Health, Mercy Health Services Inc., 551 F.3d 374, 378 (6th Cir.
2008) (citing Apex Plumbing Supply, Inc. v. U.S. Supply Co., 142 F.3d 188, 194 (4th Cir.1998)).
5
Bannon also argues the Court should modify the award under FAA § 11(c), which allows
modification for awards when “the award is imperfect in matter of form not affecting the merits
of the controversy.” Because Bannon’s argument does not dispute the form of the award, and
appears wholly to concern the merits of the controversy, the Court rejects this argument.
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The Sixth Circuit has described this as “an obvious numerical gaffe in computing the total award[,]”
rather than an alleged merits-based mistake such as an incorrect factual finding that led to an
incorrect computation of damages. Id.
FAA § 11(a) does not allow modification of the award because Bannon argues a mistake on
the merits, rather than a mathematical error on the face of the award. Bannon simply repeats his
arguments that the arbitrator relied on unreliable evidence, should have found he earned a larger
salary, and should not have extended damages beyond the Interim Award. These remain factual,
merit-based issues the arbitrator resolved in HBKS’s favor. Because Bannon has failed to point to
any mathematical miscalculations apparent on the face of either award, the Court rejects this
argument.
Conclusion
Defendant Bannon has failed to demonstrate the arbitrator committed errors requiring vacatur
or modification under the FAA.
For the foregoing reasons:
1. HBKS’s motion to lift the stay pending arbitration and confirm the arbitration award (ECF
No. 78) is granted; and
2. Bannon’s motion to vacate or modify the arbitration award (ECF No. 85) is denied.
IT IS SO ORDERED.
September 28, 2012
Date
/s/ Benita Y. Pearson
Benita Y. Pearson
United States District Judge
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