A.G. Edwards & Sons, Inc. v. McCollough
In A.G. Edwards & Sons, Inc. v. McCollough (9th Cir. 1992) 967 F.2d 1401, the party seeking vacation of the award asserted that the prevailing party had engaged in both "fraud" and "undue means" within the meaning of 9 United States Code section 10(a)(1) by asserting facially meritless defenses.
Apparently presuming that the meritless defenses influenced the arbitrators' decision, the district court vacated the award.
The Ninth Circuit reversed. The primary basis for the circuit court's reversal was the district court's unwarranted presumption:
"If the district court employed a presumption that the meritless defenses had an impact on the arbitrator's decision, its holding is in obvious tension with the applicable case law. As the district court recognized, arbitrators are not required to state the reasons for their decisions. The rule that arbitrators need not state their reasons presumes the arbitrators took a permissible route to the award where one exists. Under the district court's rationale in this case, courts would be free to vacate an award in any case in which the winning side had raised even one meritless defense and the arbitrators had not specifically identified the reasons for their award. Panels of arbitrators wishing to avoid relitigation would be forced to state the reasons for their decisions in direct contradiction of the universally accepted rule that a statement of reasons is not required and arbitrators are presumed to have relied on permissible grounds. If the district court meant to hold that no reliance by the arbitrators on the meritless arguments need be demonstrated because the mere offering of the defenses itself constitutes 'undue means,' its holding conflicts with the language of 10 and cases interpreting it. The statute allows for vacation of an award 'procured by corruption, fraud, or undue means.' 9 U.S.C. 10(a)(1). Thus the statute requires a showing that the undue means caused the award to be given." ( A.G. Edwards & Sons, Inc. v. McCollough, supra, 967 F.2d at p. 1403.)
The court gave a second reason for its reversal based on the conduct not falling within its understanding of the term "undue means": "Although the term has not been defined in any federal case of which we are aware, it clearly connotes behavior that is immoral if not illegal. See Black's Law Dictionary 1697 (Rev. 4th ed. 1968) ('Undue' means 'more than necessary; not proper; illegal,' and 'denotes something wrong, according to the standard of morals which the law enforces.' ?Undue influence' means any 'improper or wrongful constraint, machination, or urgency of persuasion whereby the will of a person is overpowered.'). Offering a meritless defense, however unfortunate, is part and parcel of the business of litigation; it carries no connotation of wrongfulness or immorality. In addition, it occurs with such frequency that, were the district court's rule to be adopted, the federal courts would be required to overturn arbitration awards regularly as procured by 'undue means.' This would be inconsistent with the extremely limited scope of judicial review of such awards.? ( A.G. Edwards & Sons, Inc. v. McCollough, supra, 967 F.2d at pp. 1403-1404.)
Finally, the court made the statements on which Guess seeks to rely. The court "saw no reason not to apply the three-part test devised to apply to fraud to cases raising claims of 'undue means,'" and said that the party seeking to vacate the award had not satisfied it. ( A.G. Edwards & Sons, Inc. v. McCollough, supra, 967 F.2d at p. 1404.)
Specifically, "where the fraud or undue means is not only discoverable, but discovered and brought to the attention of the arbitrators, a disappointed party will not be given a second bite at the apple." (Ibid.)