The Northern District of Texas has accepted the findings and recommendations of a magistrate judge and confirmed an arbitration award of more than $141 million in a software licensing dispute.  In Kemper Corp. Svcs., Inc. v. Computer Sciences Corp. and DXC Tech. Co., No. 3:17-CV-2769-S (N.D. Tex., September 18, 2018), an insurance company, Kemper, entered into a multi-year contract to license software from Computer Sciences Corporation (“CSC”) in 2009.  As part of the contract, CSC agreed to recode portions of its software into the Java language so that Kemper could more easily integrate and use the product.  The parties’ agreement contained a clause requiring that the resolution of any disputes related to the contract be decided through binding arbitration.

In 2015, Kemper filed an arbitration demand against CSC with the American Arbitration Association.  According to Kemper, CSC failed to make the licensed software useable in Java language format as agreed to in the parties’ contract.  Following a 10-day hearing and submission of supplemental briefs, an arbitrator issued a final award of more than $141 million in favor of Kemper.  In response, Kemper filed a motion to confirm the arbitral award in the Northern District of Texas and CSC sought to vacate the award in the Southern District of New York.  Following consolidation, the issues were referred to a magistrate judge in Dallas, Texas.

In August, the magistrate judge’s findings and recommendations were issued.  Early on in her findings, the magistrate judge addressed CSC’s claim that a de novo review of the arbitration award was appropriate because the arbitrator purportedly exceeded his authority.  According to the judge:

Here, the parties agreed to give the arbitrator the power to “award any relief”, provided that he did not “award consequential, punitive, special, incidental or exemplary damages or any amounts in excess of the limitations delineated in Section 7 of this Agreement. . . .” (doc. 65 at 88.) This language establishes an express limitation on awarding consequential damages; it does not limit the arbitrator from determining the nature or category of amounts awarded in his decision. The arbitrator reviewed the evidence and arguments presented by both sides and awarded damages that were permitted under his interpretation of the terms of the Exceed Agreement and applicable law. (doc. 73-1 at 325-78.) As required under the Exceed Agreement, the Final Award set out the arbitrator’s decisions on all matters properly before him for consideration, along with supporting findings of facts and conclusions of law. (Id.) It addressed damages, including a discussion of each side’s arguments on the issue of consequential damages, as well as the amount appropriate based on the terms of the Exceed Agreement and New York law. (Id.) The arbitrator found that each of the amounts he awarded to Plaintiff constituted damages directly resulting from Defendant’s breach of the Exceed Agreement. (Id. at 361-63.) Unlike the arbitrators in Smith and Davey, the arbitrator in this case conformed to the plain limitations expressed in the Exceed Agreement.

As explained by the Supreme Court, an arbitrator’s decision based on his interpretation of the parties’ agreement to arbitrate, even if incorrect, cannot be overturned. Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 572 (2013) (“The arbitrator’s construction holds, however good, bad, or ugly.”). Even assuming, without deciding, that the arbitrator incorrectly characterized consequential damages as direct damages, as Defendant argues, it contractually agreed to be bound by the arbitrator’s final determinations. See United Steelworkers of Am. v. Enter. Wheel & Car Corp., 363 U.S. 593, 599 (1960). “By consenting to arbitration, parties exchange `the procedures and opportunity for review of the courtroom for the simplicity, informality, and expedition of arbitration.’” Mantle v. Upper Deck Co.,956 F. Supp. 719, 726 (N.D. Tex. 1997) (J. Fitzwater) (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth. Inc., 473 U.S. 614, 628 (1985)). As the arbitrator did not exceed the express limitations of the Exceed Agreement, the standard of review Defendant seeks is not supported by the law of this circuit. See Householder, 354 F. App’x at 851 (explaining courts lack the authority to conduct a review of an arbitrator’s award on the merits).

Next, the magistrate judge turned to whether the arbitrator actually exceeded his authority.  The judge said:

Here, the arbitrator acted in accordance with the powers delegated to him under the arbitration agreement. The parties were given the opportunity to conduct discovery and to submit evidence and briefs in support of their respective arguments on the issues. (doc. 73-1 at 326-44.) The arbitrator conducted a hearing and asked the parties to provide further briefing on issues requiring additional support or clarification. The record demonstrates the arbitrator’s exhaustive efforts in considering the issue of damages, and in particularly, consequential damages. Throughout the Final Award, he repeatedly cited and analyzed the Exceed Agreement and discussed the issues framed within the language of the agreement.

The magistrate judge added:

Nothing in the final award suggests that the arbitrator acted contrary to the express contractual provisions of the arbitration agreement, or the plain limitations on his powers. Apache, 480 F.3d at 401. Defendant does not allege, much less prove, that the arbitrator failed to act in accordance with the express terms of the arbitration agreement, or that the arbitrator acted beyond the plain limitations on his power. Resolving all doubts in favor of the arbitration award, Defendant has not shown a basis for vacating the arbitration award under § 10(a)(4) of the FAA. Accordingly, Defendant’s motion to vacate the arbitration award should be denied.

Earlier this month, the Northern District of Texas formally adopted the magistrate judge’s findings and recommendations:

After reviewing all relevant matters of record in this case, including the Findings, Conclusions, and Recommendation of the United States Magistrate Judge and any objections thereto, in accordance with 28 U.S.C. § 636(b)(1), the undersigned District Judge is of the opinion that the Findings and Conclusions of the Magistrate Judge are correct and they are accepted as the Findings and Conclusions of the Court.

Ultimately, the federal district court issued an order denying CSC’s petition to vacate the arbitral award and granted Kemper’s motion to confirm the arbitrator’s final judgment.