Continuing the recent trend in US Federal courts to push back against frivolous challenges to arbitration awards, the US 7^th Circuit Court of Appeals yesterday reminded challengers about the “high risk of sanctions” against parties bringing judicial challenges to arbitration awards.  The Court did not in fact award sanctions in the case.  The Court did, however, give effect to a “cost-shifting” provision in the distributorship agreement at issue to compel the losing party to reimburse the successful party for a 33% contingent counsel fee arrangement.

In Johnson Controls, Inc. v. Edman Controls, Inc. (Docket Nos. 12-2308 & 12-2623, 7^th Cir., March 18, 2013), the 7^th Circuit Court of Appeals (Circuit Judges Posner, Tinder and Wood, with Judge Wood authoring the unanimous opinion) easily upheld the underlying District Court confirmation of an arbitration award in favor of Edman and against Johnson Controls relating to a disputed Panamanian “fire safety, CCTV, and access control agent” distributorship (“we do not regard this as a close case”).  Pursuant to a “loser-pays” provision in the distributorship contract, the District Court judgment shifted to Johnson Controls the attorney’s fees and expenses incurred by Edman.  In doing so, the District Court gave effect to a 33% contingent fee deal between Edman and its counsel, ordering Johnson Controls to pay damages to Edman for breach plus reimburse Edman pursuant to the “loser-pays” contract clause for the contingent fee payable to Edman’s counsel.

When Johnson Controls then appealed against the District Court decision to the 7^th Circuit,  Edman sought sanctions against Johnson Controls under Federal Rule of Appellate Procedure (FRAP) 38 for a frivolous appeal.  The Court of Appeals denied Edman’s request for sanctions, but “this is largely because the fee-shifting clause in the contract already assures that Edman will not bear the costs of this appeal.”  In a strongly worded statement, the appellate judges reminded litigants that “challenges to commercial arbitral awards bear a high risk of sanctions.”  Moreover, said the appeals panel, “[a]ttempts to obtain judicial review of an arbitrator’s decision undermine the integrity of the arbitral process.  Because of Johnson’s appeal, Edman has been deprived not only of the value of the distributorship it expected to have for Panama, but also part of the value of the arbitration to which both parties agreed.”

In closing, we comment on Edman’s request for sanctions under Federal Rule of Appellate Procedure 38 against Johnson.  Rule 38 authorizes sanctions for appeals that the court determines are frivolous.  An appeal is frivolous “if the appellant merely restates arguments properly rejected by the district court that are unsupported by a reasoned colorable argument for altering the district court’s judgment.”  Smeigh v. Johns Manville, Inc., 643 F.3d 554, 565 (7th Cir. 2011).  Although we have decided to deny Edman’s motion, this is largely because the fee-shifting clause in the contract already assures that Edman will not bear the costs of this appeal.  We note, however, that challenges to commercial arbitral awards bear a high risk of sanctions.  See Flexible Mfg., 86 F.3d at 101 (imposing sanctions).  Attempts to obtain judicial review of an arbitrator’s decision undermine the integrity of the arbitral process.  Because of Johnson’s appeal, Edman has been deprived not only of the value of the distributorship it expected to have for Panama, but also part of the value of the arbitration to which both parties agreed. The judgment of the district court is AFFIRMED.

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