AN ARBITRATOR’S AWARD IS WITHIN HIS OR HER AUTHORITY IF IT IS “RATIONALLY INFERABLE FROM THE CONTRACT.”

Nationsbuilders Insurance Services, Inc. v. Houston International Insurance Group, Ltd.

Dallas Court of Appeals, No. 05-12-01103-CV (July 3, 2013)

Justices Moseley, Fillmore, and Myers (Opinion)

Ken Carroll

When an arbitrator determined that parties to a non-compete agreement had not fulfilled their obligations under that agreement, he issued an award that “equitably extended” the non-competition period for another year. The restricted parties argued that the arbitrator had exceeded his powers in doing so, and the trial court agreed, vacating the arbitration award. The Court of Appeals, however, found that the remedy “[drew] its essence” from the non-compete and merely gave the other side the benefit of its bargain under that agreement; it was, therefore, within the arbitrator’s authority.

As part of a settlement, the “Restricted Parties” agreed not to compete with Nationsbuilders for a one-year period. “Competition” was defined to include not only actual competition, but also “plan[ning] to conduct a business that is in Competition with” Nationsbuilders. The Restricted Parties didn’t compete in the conventional sense during the restricted period, but they clearly did begin making preparations to do so as soon as it expired—sending marketing materials to potential customers and agents, preparing regulatory filings, conducting market research, and the like, all during the restricted period. Nationsbuilders learned of these preparations and filed an arbitration demand against the Restricted Parties for breach of the settlement agreement. The arbitrator found that, because the Restricted Parties had not actually begun competing, Nationsbuilders suffered no monetary damages. But the arbitrator also determined that the solicitations and planning efforts had violated the “dormant period of non-competition” in the agreement and therefore had damaged Nationsbuilders by depriving it “of the benefits of its bargain, i.e., a one year restricted period with no competition, including solicitations, and no ‘head start’ planning for competition.” So, he awarded a one-year equitable extension of the restricted period.

The arbitration agreement in this case was governed by the Federal Arbitration Act and Delaware law. The Restricted Parties argued under section 10(a)(4) of the FAA that the arbitrator exceeded his authority by imposing an equitable remedy not prescribed by the agreement. The appeals court, however, noted that arbitrators have “broad discretion in fashioning an appropriate remedy.” An award is legitimate, the Court said, as long as it “draws its essence” from the parties’ agreement—that is, if it is “rationally inferable” from the letter or purpose of the agreement. Here, the Court found the one-year equitable extension was “rationally inferable” from the agreement, because it essentially just gave Nationsbuilders the benefit of its original bargain—i.e., that which it had lost by the Restricted Parties’ preparatory activities during the restricted period. The Court also found equitable extension to be consistent with the laws of Delaware and of Texas. So, the Court rejected the Restricted Parties’ attack on the arbitrator’s exercise of his authority and reversed the trial court on that score.

The Court also rejected the Restricted Parties’ argument that the award—and specifically its prohibition on “planning”—was too imprecise to be enforced. Adopting a practical approach, the appeals court held that if any activity would assist the Restricted Parties in commencing actual competition after the end of the restricted period sooner than if that activity had not been undertaken, it was prohibited. Rather than confirm the arbitration award, however, the Court remanded to the trial court for consideration of an issue it had not reached—whether the award violated public policy because of its unlimited geographic scope.