Opinion
Civil No. 02-627 (JRT/FLN)
September 26, 2002
Richard G. Mark, Lauren E. Lonergan and Kirstin Haugen, Briggs Morgan, Minneapolis, MN, for plaintiff.
John A. Cotter, Larkin, Hoffman, Daley Lindgren, Bloomington, MN, for defendant.
MEMORANDUM OPINION AND ORDER
Plaintiff Green Tree Financial Corporation, now known as Conseco Finance Corporation ("Conseco") commenced this litigation to vacate a portion of an arbitration award rendered by an arbitrator in favor of defendant ALLTEL Information Services, Inc. ("ALLTEL"). On February 8, 2002, the arbitrator entered an interim award in favor of ALLTEL and against Conseco in the amount of $6,652,374.00. On March 21, 2002 the arbitrator issued his final award, which in addition to incorporating the interim award of February 8, 2002, further awarded ALLTEL $734,313.00 in attorneys' fees and costs against Conseco.
This matter is now before the Court on Conseco's motion to vacate the arbitration award and ALLTEL's motion to confirm the arbitration award. For the reasons that follow, the Court grants ALLTEL's motion and denies Conseco's motion. Accordingly, the arbitration award is confirmed.
BACKGROUND
Conseco, formerly known as Green Tree Financial Corporation, is a subprime lender which provides retail and wholesale lending services to individuals and companies through five principal lines of business: the Manufactured Housing Division, Home Improvement Division, Consumer Finance Division, Equipment Finance Division and Mortgage Services Division. ALLTEL is an information services company which provides financial software products and services to commercial banks, savings institutions, mortgage service companies, credit unions, and financing companies.
Conseco acquired Green Tree on June 30, 1998.
In August 1997, Conseco executive management determined that it needed to replace its current loan processing system and make its system Y2K compliant. Following that meeting, Conseco representatives began to contact software vendors in the industry to discuss, among other things, each vendor's software applications. Eventually, ALLTEL was selected to provide Conseco with a proposal and conduct due diligence.
Over the next six weeks ALLTEL conducted due diligence, which entailed identifying whether any "showstoppers" existed and to locate as many of the high-level gaps as it could. In December 1997, ALLTEL submitted a detailed proposal for the Conseco project, which included a list of 73 negative gaps which had been found during the due diligence process. After receiving the proposal, Conseco informed ALLTEL that it wanted to negotiate a definitive agreement with ALLTEL and the parties accordingly moved forward with negotiations.
A. The Agreement
On June 30, 1998, after months of negotiations and some delays along the way, the parties entered into an Agreement for Conversion and Application Support Services (the "Agreement"). Under the terms of the Agreement, ALLTEL was required to provide installation services, which included the installation of the application systems listed within the agreement, the interfaces and enhancement for the applications and any additional interfaces which the parties mutually agreed to in writing, and conversion services. Upon conversion, ALLTEL further agreed to provide application support services until 2005. The Agreement also contemplated renewing or extending the Agreement beyond its expiration date of January 31, 2005. Agreement § 2.
As relevant here, the Agreement contains a contractual limitation of liability provision, which provides:
Except as otherwise provided in Articles 14.1 and 14.3 above, the liability of ALLTEL Information, for any damages, including, but not limited to, damages incurred by Client arising out of contract, negligence, strict liability or arising out of any acts or omissions of ALLTEL Information, shall be limited to direct damages actually incurred and shall not be more than the cumulative amount of all fees actually paid by Client during the Term. As a way of example and not limitation, the following types of damages, which, if incurred, would be deemed "direct damages" of Client: (a) actual additional expenses incurred by Client to correct any defects in the Software which resulted in a breach of warranty in Section 13.1 and (b) actual additional expenses incurred by Client related to the operation of its business directly caused by the defect until such defect is cured but excluding any lost profits, lost revenues, loss of business or any other consequential damage.
Except as provided in Section 14.2 and 14.3, the liability of Client for any damages to ALLTEL Information including, but not limited to, damages incurred by ALLTEL Information arising out of contract, negligence, strict liability, or arising out of any acts or omissions of Client shall be not greater than the cumulative amount of all fees paid by Client during the Term.
Neither party shall be liable for "indirect," "incidental," "consequential," or "punitive" damages suffered by the other party.
Agreement § 14.4.
B. Performance of the Contract
Unfortunately, problems developed which hindered the parties' performance under the contract. According to the arbitrator's findings, Conseco had continual problems identifying its business requirements for certain applications, which in turn, hindered ALLTEL's efforts to make progress on converting the software. This failure was due, in large part, to the limited amount of time Conseco's management team devoted to the project and lack of resources. Until Conseco completed defining its business requirements, ALLTEL could not complete its obligation to define the gaps between standard system features and existing system features. For its part, ALLTEL became concerned with the existence of the conversion fee cap of 177,000 hours and whether it could complete its obligations profitably within the cap. Consequently, ALLTEL began to bill more work as out-of-cap instead of in-cap.
Over the summer of 1999, the parties attempted to work out a solution to their problems, but without success. Although work on the project continued, matters did not improve. Ultimately, Conseco sent a letter to ALLTEL on November 18, 1999 terminating the project on the basis that ALLTEL had committed numerous breaches of contract.
C. The Arbitration Proceeding
In October 2000, Conseco initiated arbitration proceedings to recover the $15 million it had paid ALLTEL and the $15 million spent on hardware and software purchases and various internal costs related to the ALLTEL project. In its demand for arbitration, Conseco alleged breach of express warranties, negligent misrepresentation and negligence by ALLTEL. ALLTEL counterclaimed, alleging that Conseco was in breach of the Agreement.
On February 8, 2002, following a 10-day hearing and the submission of post-hearing briefs, the arbitrator issued his Findings of Facts, Conclusions of Law against Conseco and in favor of ALLTEL. As to the breach of contract claim, the arbitrator concluded that none of the claims of breach cited by Conseco in its November 18, 1999 termination notice constituted a material breach of contract which permitted it to terminate the contract. Instead, the arbitrator concluded that Conseco materially breached the Agreement by improperly terminating the contract in November 1999.
The arbitrator further found that Conseco was in material breach by failing to: 1) provide ALLTEL with a notice of termination and a 30-day period to cure the alleged breaches of contract; 2) return ALLTEL's confidential information; and 3) implement a steering committee.
The arbitrator proceeded to award ALLTEL damages in the amount of $7,386.587. This award included $1,550,000 for unpaid invoices plus $604,500 interest on those invoices, $4,497,774 for lost profit damages, $54,313 for compensation and expenses of the arbitrator and $680,000 for attorneys' fees. As to the award of lost profits, the arbitrator referred to section 14.4 limiting ALLTEL's damages to an amount "not greater than the cumulative amount of all fees paid" by Conseco during the term of the Agreement. In the arbitrator's view, neither this language nor the clause in paragraph three precluding recovery for consequential damages manifested an intent to preclude recovery of lost profits. Rather, the provision entitled ALLTEL to recover its direct damages up to the total amount of fees paid by Conseco, which is just over $16 million.
The original amount of outstanding invoiced amounts was $1,654,397. However, the arbitrator later reduced t hat amount to $1,550,000 on account of inappropriate charges billed by ALLTEL to Conseco.
D. The Present Action
Conseco initiated this lawsuit against ALLTEL to vacate the profit portion of the arbitration award on March 22, 2002. Conseco v. ALLTEL Info. Servs., Civ. No. 02-627 (JRT/FLN). On the same day, ALLTEL commenced its own action against Conseco seeking an order confirming the arbitration award. ALLTEL Info. Servs. v. Conseco, Civ. No. 02-632 (ADM/AJB). By order dated May 9, 2002, the Clerk of Court consolidated the two cases into one action. These motions followed.
ANALYSIS I. Standard of review
Arbitration agreements are governed by the Federal Arbitration Act ("FAA"). 9 U.S.C. § 1-16. The FAA establishes "a liberal federal policy favoring arbitration agreements," and it compels courts to be solicitous of the arbitration process and its results. Hoffman v. Cargill Inc., 236 F.3d 458, 461 (8th Cir. 2001) (quoting Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983)). It requires that courts confirm arbitration awards "unless the award is vacated, modified, or corrected as provided in sections 10 and 11. . . ." 9 U.S.C. § 9. As a result, courts "tread lightly in reviewing arbitration awards." Hoffman, 236 F.3d at 461. The Supreme Court and Eighth Circuit have repeatedly emphasized that the scope of a district court's review of an arbitration award is "extremely limited." Kiernan v. Piper Jaffray Cos. Inc., 137 F.3d 588, 594 (8th Cir. 1998); Executive Life Ins. Co. v. Alexander Ins. Ltd., 999 F.2d 318, 320 (8th Cir. 1993); United Paper Workers Int'l Union, AFL-CIO v. Misco, Inc., 484 U.S. 29, 38 (1987); Osceola County Rural Water System, Inc. v. Subsurfco, Inc., 914 F.2d 1072, 1075 (8th Cir. 1990).
The FAA requires a court to judicially confirm an arbitration award "unless it was `procured by corruption, fraud, or undue means,' where there was `evident partiality or corruption in the arbitrators,' where the arbitrators were guilty of misconduct or where the arbitrators exceeded their authority." 9 U.S.C. § 10(a). In addition to these specific grounds, the Eighth Circuit has also explained that "beyond the grounds for vacation provided in the FAA, an award will only be set aside where it is completely irrational or evidences a manifest disregard for the law." Kiernan v. Piper Jaffray Cos., 137 F.3d 588, 594 (8th Cir. 1998). "These extra-statutory standards are extremely narrow: An arbitration decision may only be said to be irrational where it fails to draw its essence from the agreement." Id; Missouri River Servs. v. Omaha Tribe of Nebraska, 267 F.3d 848, 854 (8th Cir. 2001). "[A]n arbitration decision only manifests disregard for the law where the arbitrators clearly identify the applicable, governing law and then proceed to ignore it." Hoffman, 236 F.3d at 461-62 (citing Stroh Container Co. v. Delphi Indus., 783 F.2d 743, 749-50 (8th Cir. 1986)). In Marshall v. Green Giant Co., 942 F.2d 539 (8th Cir. 1991), the Eighth Circuit further defined this standard as follows:
Manifest disregard of the law exists when the arbitrator commits an error that was "obvious and capable of being readily and instantly perceived by the average person qualified to serve as an arbitrator. Moreover, the term `disregard' implies that the arbitrator appreciates the existence of a clearly governing legal principle but decides to ignore or pay no attention to it."
Id. at 550 (quoting Merrill Lynch, Pierece, Fenner Smith, Inc. v. Bobker, 808 F.2d 930, 933 (2d Cir. 1986)). Accordingly, a court is not empowered to vacate an arbitration award because it "`might have interpreted the agreement differently or because the arbitrators erred in interpreting the law or in determining the facts.'" Hoffman, 236 F.3d at 462 (quoting Stroh Container, 783 F.2d at 751)). "Although this may seem draconian, the rules of law limiting judicial review and the judicial process in the arbitration context are well established and the parties here, both sophisticated in the realms of business and law, can be presumed to have been well versed in the consequences of their decision to resolve their dispute in this manner." Stroh Container Co., 783 F.2d at 751.
II. Analysis
It is in the context of the above standards that the Court must evaluate Conseco's motion to vacate the arbitration award. As an initial matter, the Court notes that Conseco challenges only one aspect of the arbitrator's award — the award of lost profits. As to this issue, Conseco argues that the award must be vacated for one or more of the following reasons: 1) the award of lost profits is in manifest disregard of the law, specifically, it is directly contrary to the Eighth Circuit decision in Computrol Inc. v. Newtrend L.P., 203 F.3d 1064 (8th Cir. 2000); 2) the arbitrator exceeded his authority in awarding damages that were precluded by the plain terms of the Agreement; and 3) the award, based on the lost volume seller theory, is without any basis in the record and is in manifest disregard to law. The Court addresses each argument in turn.
A. The Computrol Decision
Conseco first argues that the award of lost profits should be vacated because it is in direct contravention of the Eighth Circuit's decision in Computrol Inc. v. Newtrend L.P., 203 F.3d 1064 (8th Cir. 2000). Computrol arose out of an agreement for Computrol, a software-consulting firm, to reengineer a number of software applications developed by a software vendor, Newtrend. Id. at 1066-67. The parties originally agreed that Computrol would reengineer Newtrend's Integrated Commercial Loan Application ("ICL") for $430,000. Id. at 1067. Technical problems emerged, however, and the parties entered into new negotiations. Id. The parties eventually agreed to a revised timeframe, modified technical requirements and an increase in compensation. Id. Later on, the parties entered into an addendum to the agreement in which Computrol agreed to reengineer an additional software application, the Integrated Installment Loan ("IIL"). Id. Difficulties arose again which ultimately led Newtrend to terminate the contract. Id. Computrol then initiated litigation on the breach of contract claim, among other claims. Id. At trial, the jury awarded Computrol over $2.6 million in damages on the breach of contract claim. Id. at 1068. On a post-trial motion, however, the trial court reduced the damage recovery to $469,206.88, concluding that a limitation of liability provision in the agreement did not permit Computrol to recover prospective lost profits. Id. The trial court thus limited Computrol's recovery to "the modified contract price of the ICL and for the work performed on the IIL." Id. at 1069. Specifically, the trial court, applying Illinois law, "ruled that the provision in the Alliance Agreement which expressly barred consequential damages precluded Computrol from recovering the lost profits it would have earned from re-engineering the follow-on software applications, and from projected sales of the software to other financial institutions." Id. The Eighth Circuit affirmed the trial court's reduction of damages, stating that:
We find that the district court was correct when it ruled post-trial that the limitation of liability clause unambiguously precluded Computrol from recovering the prospective lost profits it would have earned for re-engineering the additional software applications. The limitation of liability provision in this case is fairly straightforward. In addition to prohibiting "special, incidental or consequential damages," the limitation of liability clause dictates that contract damages "shall in no event exceed the amounts actually paid under the Agreement." When the Court considers both sentences of the limitation of liability provision in the context of the entire Agreement, we find that Computrol and Newtrend intended to preclude liability in the form of prospective lost profits.
Id. at 1070.
Conseco argues that the same result should apply here. Like the agreement in Computrol, the limitation of liability provision in section 14.4 precludes ALLTEL from recovering consequential damages and further provides that its damages "shall be not greater than the cumulative amount of all fees paid by Client during the Term." Conseco claims that these two provisions directly parallel the language in the Computrol agreement and thus control. ALLTEL argues that the arbitrator properly interpreted the Computrol decision. ALLTEL further contends that if the arbitrator erred at all, his error amounts to nothing more than a misinterpretation of the law.
Prior to the start of the arbitration proceeding, Conseco filed a motion in limine to exclude the testimony of Arthur H. Cobb concerning lost profits. Conseco argued that under Computrol, ALLTEL was only entitled to the invoiced amounts that were unpaid to date. According to Conseco, ALLTEL's damages were limited to what it would take to put ALLTEL in the same position it would have been in had the contract not been signed. At the motion in limine hearing, the arbitrator explained that he came away with a different reading of the decision than Conseco. Specifically, the arbitrator cited to portions of the opinion and concluded that the district court and Eighth Circuit in that case were not concerned with the contract in issue. Rather, the courts were looking at consequential damages in the form of lost profits that would arise from future, follow-on software applications and from the projected sales of software to other financial institutions. The arbitrator also highlighted footnote five of the opinion in which the court explained that lost profits in contract disputes are typically direct, not consequential damages. R. at 31-32.
The following excerpt from the in limine hearing is instructive:
Arbitrator Stern: In Computrol, I find the contract provided that if Computrol had completed the initial reengineering of the first software package, that they then [had] a right to have additional software applications per year; one per year, I believe it was.
They had to do the first one, and then, after that, there were going to be further ones on an annualized basis. I picked that up from page 4, at the bottom: "If Computrol successfully completed their initial reengineering, then Computrol would reengineer one additional software application per year."
So that's the basis that I'm coming at this one. And it was all submitted to the jury, and it was on a post-trial motion that the judge cut back the damages on that. And in doing that, he says that the agreement barred consequential damages and that Computrol was precluded from recovery of l ost profits it would have earned, but he says "on reengineering the follow-on applications; that is, the future contracts."
* * *
I go on page 6 again in the Eighth Circuit's analysis, and it says, "The District Court ruled that the provision on the alliance agreement," the bottom last — last two lines, "which expressly bar consequential damage, precluded Computrol from recovering lost profits it would have earned from reengineering the follow-on software applications and from projected sales of the software to other financial institutions."
So I'm reading the case, that the trial court and the Eighth Circuit were not looking at the contract in issue, but they were looking at consequential damages in the form of lost profits that would arise from future, from the follow-on software applications, and from the projected sales of software to other financial institutions.
And that is confirmed again in the analysis at the top of 7. It says, "The District Court ruled that Computrol was only entitled to recover the modified contract price and for the work performed on the second software."
* * *
But I'm reading this case as not being helpful to you. I'm reading this case as drawing a distinction between recovery on the existing contract that brings the parties into dispute — in the dispute.
And in this case, if I were to take and — and by name, I would say it would be conversion and application — the agreement for conversion and application support services. This is the one that brings you folks into dispute. That contract envisions, as I read it, that there will be a potential — and this is where Mr. Cobb gives us some opinions, sketchy at best. He says that there will be application support — there will be a renewal agreement. And he says in his report that ALLTEL expected to renew this agreement and that ALLTEL expected to charge Conseco for that.
And so I'm seeing that your argument would attach to the expected down-the-line agreement, as it would have in the Computrol case.
R. at 26-30.
Even if Conseco may have the better reading of Computrol, the Court is unable to conclude that the arbitrator's interpretation of the decision rises to the level of a manifest disregard of the law. A review of the transcript from the in limine motion hearing cited above reveals that the arbitrator spent a great deal of time and thought reviewing the case but in the end, simply had a different interpretation of the decision than Conseco. On these facts, the arbitrator's error, if any, is at most a misinterpretation of the law — an insufficient basis upon which to vacate and arbitration award. Hoffman, 236 F.3d at 462 ("We may not set an award aside simply . . . because the arbitrators erred in interpreting the law."); Marshall v. Green Giant Co., 942 F.2d 539, 550 (8th Cir. 1991) ("even if we agree with Green Giant that the arbitrator made an error of law, we still cannot say that the arbitrator disregarded the law").
B. Plain Language of the Agreement
Conseco's second basis for vacating this portion of the arbitration award is that the award of lost profits contravenes the plain and unambiguous terms of the Agreement. It is well-established that "[c]ontract interpretation is left to the arbitrator." Inter-City Gas Corp. v. Boise Cascade Corp., 845 F.2d 184, 187 (8th Cir. 1988). Accordingly, a court is not empowered "to set aside the arbitrator's award even though [the court] might have interpreted the contract differently." Id. Nonetheless, the arbitrator's authority is not without some limit. Although an arbitrator can interpret ambiguous language in a contract, he "may not, disregard or modify unambiguous contract provisions." Missouri River Servs. Inc. v. Omaha Tribe of Nebraska, 267 F.3d 848, 855 (8th Cir. 2001). Stated another way, an arbitrator who "interprets unambiguous language in any way different from its plain meaning, amends or alters the agreement and acts without authority." Id. Again, the damage limitation provision in the Agreement provides as follows:
Except as otherwise provided in Articles 14.1 and 14.3 above, the liability of ALLTEL Information, for any damages, including, but not limited to, damages incurred by Client arising out of contract, negligence, strict liability or arising out of any acts or omissions of ALLTEL Information, shall be limited to direct damages actually incurred and shall not be more than the cumulative amount of all fees actually paid by Client during the Term. As a way of example and not limitation, the following types of damages, which, if incurred, would be deemed "direct damages" of Client: (a) actual additional expenses incurred by Client to correct any defects in the Software which resulted in a breach of warranty in Section 13.1 and (b) actual additional expenses incurred by Client related to the operation of its business directly caused by the defect until such defect is cured but excluding any lost profits, lost revenues, loss of business or any other consequential damage.
Except as provided in Section 14.2 and 14.3, the liability of Client for any damages to ALLTEL Information including, but not limited to, damages incurred by ALLTEL Information arising out of contract, negligence, strict liability, or arising out of any acts or omissions of Client shall be not greater than the cumulative amount of all fees paid by Client during the Term.
Neither party shall be liable for "indirect," "incidental," "consequential," or "punitive" damages suffered by the other party.
Agreement § 14.4. Section 14.4 is comprised of three distinct parts 1) one that refers to the damages recoverable by Conseco in the event of a breach by ALLTEL; 2) one that refers to the damages recoverable by ALLTEL in the event of a breach by Conseco; and 3) one that limits the types of damages that both parties can recover.
Conseco argues that the language quoted above plainly prohibits an award of prospective lost profits. According to Conseco, one need look no further than the first and third paragraphs of section 14.4 to reach this conclusion. In the first paragraph, lost profits are expressly defined as a form of consequential damages. Although the first paragraph refers only to Conseco's liability, the third paragraph, which applies to both Conseco and ALLTEL, prohibits either party from recovering "consequential damages." Conseco thus argues that the damage limitation provision plainly precludes ALLTEL from recovering prospective lost profits.
ALLTEL contends that the arbitrator properly interpreted section 14.4 to permit ALLTEL to recover its lost profits under the Agreement. Focusing on the second paragraph of that section, which outlines ALLTEL's potential damage recovery, ALLTEL argues that this paragraph unambiguously provides that ALLTEL is entitled to recover its direct damages arising out of contract, negligence, strict liability, and limited only by the fact that such damages cannot exceed "the cumulative amount of all fees paid," which, in this case, was nearly $16 million. ALLTEL emphasizes that the phrase "cumulative amount of all fees paid" generally refers to the amount — not the type of damage — that is recoverable. Although ALLTEL recognizes it cannot recover consequential damages under paragraph three, it claims that such limitation does not prohibit the recovery of lost profits because lost profits are generally considered to be direct damages under Minnesota law. See 13 Dunnell Minnesota Digest, Damage § 2.01 at 299 (4th ed. 1991) (explaining that, under Minnesota law, "[l]oss of profits resulting directly and necessarily from the breach of contract are recoverable under general [or direct] allegation of damages"). The reference to lost profits in the first paragraph as potential consequential damage is of no moment, ALLTEL claims, because that paragraph only references the potential recovery of Conseco, not ALLTEL.
Again, although Conseco has advanced a reasonable and persuasive interpretation of the damage limitation provision, the Court is unable to conclude that the arbitrator exceeded his authority in interpreting the Agreement. As the United States Supreme Court made clear in United Paperworkers Int'l Union, AFL-CIO v. Misco, Inc., 484 U.S. 29 (1987), "as long as the arbitrator is even arguably construing or applying the contract and acting within the scope of his authority, that a court is convinced he committed serious error does not suffice to overturn his decision." Id. at 38. In this case, the arbitrator started with the well-established principle under Minnesota law that a non-breaching party is entitled to recover the benefit of its bargain, that is, to be placed in the position had the contract been performed. Conclusions of Law ¶ 65 (quoting Lesmeister v. Dilly, 330 N.W.2d 95, 102 (Minn. 1983) (stating that the appropriate measure of damages for a breach of contract is the amount that places the non-breaching party in the same position if the contract had been performed)). The second paragraph of section 14.4 entitles ALLTEL to recover "any damages . . . incurred by ALLTEL arising out of contract" so long as such damages are not "greater than the cumulative amount of all fees paid by Client during the Term." The arbitrator's interpretation of the phrase "cumulative amount of all fees paid by Client during the term" as a quantitative damage cap is not unreasonable. Likewise, the Court cannot find that the reference to consequential damages in paragraph three given that lost profits are generally treated as direct damages arising from a breach of contract.
"It is the arbitrator's construction and application of the contract for which the parties bargained." Osceola County Rural Water Sys. Inc. v. Subsurfco, Inc., 914 F.2d 1072, 1075 (8th Cir. 199). The Court is also mindful of the principle that any concern that an arbitrator exceeded his authority must be resolved in favor of finding that the arbitrator acted within his authority. Amalgamated Transit Union Local No. 1498 v. Jefferson Partners, d/b/a Jefferson Lines, L.P., 229 F.3d 1198, 1201 (8th Cir. 2000) (quoting Lackawanna leather Co. v. United Food Commercial Workers Int'l Union, 706 F.2d 228, 230-31 (8th Cir. 1983)). For these reasons, the Court concludes that the arbitrator did not exceed his authority in interpreting the Agreement.
C. Lost Volume Seller Theory
Conseco argues next that the arbitrator's award of lost profits must be vacated because it is wholly lacking a basis in the record and is contrary to law. Specifically, Conseco argues that the arbitrator's findings prove the exact opposite of what ALLTEL is required to show to acquire lost volume seller status, there is no evidence regarding the existence of other projects, the probability that it would have performed the other projects or that the other projects would have been profitable.
ALLTEL responds by first noting that Conseco's basis for vacating this portion of the award — that the arbitrator's award is wholly without support in the record — is not a ground that the Eighth Circuit has ever recognized for vacating an arbitration award. Second, even if this is an appropriate basis upon which to vacate an arbitration award, ALLTEL contends that the record fully supports the arbitrator's award of lost profits directly resulting from Conseco's breach under the lost volume seller theory.
The lost volume seller theory allows recovery of lost profits despite resale of the services that were the subject of the terminated contract if the seller [or non-breaching party] can prove that he would have entered into both transactions but for the breach. To recover lost profits under this theory, a non-breaching party must prove three things: 1) that the seller of services had the capability to perform both contracts simultaneously; 2) that the second contract would have been profitable; and 3) that the seller of services probably would have entered into the second contract even if the first contract had not terminated. Gianetti v. Norwalk Hosp., 779 A.2d 847, 853 (Conn.Ct.App. 2001), cert. granted, 788 A.2d 95 (Conn. 2001); R.E. Davis Chemical Corp. v. Diasonics, Inc., 924 F.2d 709, 711-12 (7th Cir. 1991); Jetz Serv. Co. v. Salina Props., 865 P.2d 1051 (Kan.Ct.App. 1993) (applying lost volume seller theory to personal services contract). With respect to this issue, the arbitrator made the following findings of fact:
248. After the termination of the Conseco Agreement ALLTEL redeployed all but three of its employees to other ALLTEL projects. Some of ALLTEL's most qualified employees had been assigned to the Conseco Project. Of the three employees who were not reassigned, each was laid off. 249. Sometime after termination of the Agreement, for reasons unrelated to Conseco, ALLTEL terminated or redeployed approximately 250 employees.
250. Many of these terminated or redeployed employees were not as qualified as some of the ALLTEL employees who had been assigned to the Project and many were not interchangeable with them on account of their lesser skills and experience.
251. Many of the ALLTEL employees who were terminated for reasons unrelated to Conseco were not willing to relocate in order to remain employees by ALLTEL.
In its conclusions of law, the arbitrator held that ALLTEL qualifies as a lost volume seller of services because: 1) ALLTEL had excess capacity after Conseco's termination of the Agreement; 2) ALLTEL would have had the ability to perform the Conseco contract and other contracts profitably; and 3) ALLTEL had in the past increased and could in the future increase its work force from the marketplace as necessary to expand its capacity and to handle additional work profitably. Conclusions of Law ¶¶ 76 77.
The Court also rejects this basis for vacating the award. As an initial matter, it is not clear that an arbitration award can be vacated on grounds that the award is wholly without a basis in the record. Although intuitively this would seem to be an appropriate ground for setting aside an award, the Eighth Circuit has not yet expressly addressed the issue and the Court is reluctant to do so without such guidance. The Eighth Circuit has repeatedly emphasized that an arbitration award can be challenged only where the award is "completely irrational" or "evidences a manifest disregard for the law" and that these extra-statutory standards are to be construed very narrowly. Hoffman, 236 F.3d at 461-62 ("We have never recognized `fundamental unfairness' as a basis for vacating an arbitration award. Indeed, our narrow construction of extra-statutory review militates against such a standard."); Val-U Constr. Co. v. Rosebud Sioux Tribe, 146 F.3d 573, 578 (8th Cir. 1998); Kiernan v. Piper Jaffray Cos., 137 F.3d 588, 594 (8th Cir. 1998).
Even if the Court adopted this as a basis for vacating the award, the Court would still not disturb the award. Courts that have recognized a lack of support in the record as a basis for vacating the award have held that there must be "no support whatever" in the record for the arbitrator's decision. Detroit Coil Co. v. International Ass'n of Machinists Aerospace Workers, Lodge #82, 594 F.2d 575, 581 (6th Cir. 1979) ("[I]f an examination of the record before the arbitrator reveals no support whatever for his determinations, his award must be vacated."). Upon review of the record, the Court cannot say this standard has been satisfied. The record contains evidence to support the arbitrator's conclusion that ALLTEL had the capacity to staff other projects as well as the Conseco project. John Fitzpatrick, the vice president of resource management for ALLTEL's professional services division, testified unequivocally that ALLTEL had excess capacity to perform other projects at the time Conseco terminated the project. He testified that ALLTEL had several hundred excess employees in late 1999 and 2000 available to work on other accounts, many of whom had worked for the NationsBank project. Significantly, the NationsBank account had involved ALS, the primary software application being installed for Conseco. The record also contains evidence that ALLTEL had, in the past, demonstrated its ability to increase its work force by hiring a significant number of experienced employees from the marketplace to meet the demands of additional business.
Conseco nonetheless argues that the arbitrator made inconsistent findings when he found that the employees ALLTEL terminated are not interchangeable but later concluded that most of the employees at ALLTEL are fungible. A close reading of the arbitrator's findings, however, does not support the inconsistency claimed by Conseco. The arbitrator found that "many," but not all, of the terminated employees were not interchangeable with "some" of the employees on the Conseco project.
There is also evidence in the record concerning ALLTEL's profitability. Ashley R. Koonce, an accountant who dealt with the accounting for new projects, testified as to the gross profit margin of ALLTEL's projects. The record also contains evidence of ALLTEL's historical profits and Exhibit SS which lists ALLTEL's new projects. Conseco claims that ALLTEL was required to provide more specific proof such as the specific names of the other projects ALLTEL performed, as well as the requisite skills and expertise the other projects required. While Conseco maintains that such a level of proof is consistent with "common sense," it cites no case support for this proposition. Indeed, in R.E. Davis, the court expressly declined to impose on the seller the burden of expressly identifying the buyer who purchased the MRI unit in question in order to qualify as a lost volume seller. 924 F.2d at 711-12.
Finally, the Court emphasizes that it was the arbitrator's role to make the findings of fact. It is not the Court's role to substitute its own judgment for that of the arbitrator or to re-weigh the evidence. Osceola County Rural Water Sys. Inc. v. Subsurfoco, Inc., 914 F.2d 1072, 1075 (8th Cir. 1990) ("courts are not to review the merits of arbitration awards"). Accordingly, even though the decision may well have been different had it been made by this Court instead of an arbitrator, the Court is not permitted to vacate the award on this basis. Thus, for all the foregoing reasons, the Court finds no basis upon which to vacate the lost profit award. Accordingly, the arbitration award is confirmed.
The Court notes that the arbitrator did not award ALLTEL the full amount of damages claimed by its damage expert.
III. Request for Attorneys' Fees and Costs
Section 27.4 of the Agreement provides, in relevant part, that "[i]n any litigation between parties to this Agreement with respect to matters under or contemplated by this Agreement, . . . the losing party shall pay all costs and attorneys' fees of such litigation accruing to the other party." Pursuant to this provision, ALLTEL has moved to recover its attorneys' fees and costs incurred in connection with this litigation. By affidavit, counsel for ALLTEL requests fees in the amount of $49,300.25. This figure is supported with a detailed statement of legal services performed from the commencement of this action through July 1, 2002. Conseco has not objected to this portion of ALLTEL's motion. Accordingly, the Court grants ALLTEL the full amount of its requested attorneys' fees in this matter.
ALLTEL also requests $6,370.51 in costs and expenses incurred in this litigation. To support this figure, ALLTEL attached as Exhibit B a summary of the costs and disbursements expended. Conseco objects to ALLTEL's request for costs on two grounds: 1) ALLTEL failed to properly document its request; and 2) ALLTEL requested non-recoverable expenses under the parties' Agreement. The Court overrules Conseco's first objection on the basis that ALLTEL is seeking a judicial award of attorneys' fees and costs under an express contractual provision in the parties' Agreement, not an administrative "taxation" of costs. Therefore, although the attachment of substantiating documentation would have been helpful, the Court does not find that the formal taxing procedures and Form AO133 are applicable in this instance.
As to Conseco's latter argument, there is no indication in section 27.4 of the Agreement that the parties intended costs to mean only those costs recoverable under Rule 54(d) of the Federal Rules of Civil Procedure or 28 U.S.C. § 1920. Indeed, according to ALLTEL, Conseco stipulated in the arbitration that costs awardable under the parties' Agreement included all out-of-pocket costs and expenses incurred by the prevailing party. Under these circumstances, the Court declines to give the term "costs" as used in the parties' contractual agreement a different interpretation than the one previously agreed to by the parties. Thus, although the Court agrees with Conseco that several of the costs requested by ALLTEL are highly questionable if interpreted under Rule 54(d) or § 1920, the Court declines to interpret the parties' contractual agreement under those statutes. Accordingly, ALLTEL's request for costs is granted. The Court therefore awards ALLTEL a total of $55,670.76 for reimbursement of its attorneys' fees and costs pursuant to section 27.4 of the Agreement.
ORDER
Based upon the foregoing, the submissions of the parties, the arguments of counsel and the entire file and proceedings herein, IT IS HEREBY ORDERED that:
1. Plaintiff's motion to vacate the arbitration award [Docket Nos. 1 2] is DENIED.
2. Defendant's motion to confirm the arbitration award [Docket No. 9, Exh. 1] is GRANTED.
3. The Clerk of Court is DIRECTED to enter judgment in favor of defendant in the sum of $7,442,257.76 which is to be paid by plaintiff.
The Court arrives at this figure in the following manner:
$7,386,587.00 (arbitration award)
+ 55,670.76 (attorneys' fees and costs) _____________ $7,442,257.76
LET JUDGMENT BE ENTERED ACCORDINGLY.