Summary
The U.S. Court of Appeals for the Third Circuit affirmed enforcement of an arbitration award concerning the distribution of administrative fees from shares issued through a dividend reinvestment program. The court held that the arbitration panel’s revised interim award did not violate the functus officio doctrine because the original award was ambiguous and the parties had delegated authority under the AAA Rules for the panel to interpret and apply that doctrine. The court also held that functus officio applied to the panel’s final liability determination even though damages remained unresolved and rejected an argument that Morgan v. Sundance abrogated the doctrine.
Topics
Practice areas
Questions Presented
- Whether the arbitration panel's interim liability award was final for purposes of the functus officio doctrine even though damages and attorneys' fees remained unresolved.
- Whether the Supreme Court's decision in Morgan v. Sundance abrogated or otherwise displaced the common-law functus officio doctrine.
- Whether the ambiguity exception to functus officio permitted the arbitration panel to revise its interim award to clarify that it covered DRIP shares associated with both Provasi and Destra.
- Whether the revised interim and final arbitration awards should be vacated under 9 U.S.C. § 10(a)(4).
Holdings
- Functus officio applies to an arbitration award that finally resolves an issue of liability even when the arbitration panel reserves damages and other ancillary matters for later determination.
- Morgan v. Sundance did not abrogate the functus officio doctrine because functus officio is a longstanding common-law doctrine applying specifically to arbitrations, not an arbitration-specific variation of a general federal procedural rule created to favor arbitration.
- The ambiguity exception to functus officio permitted the arbitration panel to revise its interim award because the award was susceptible to more than one reasonable interpretation concerning whether Provasi-issued DRIP shares were included.
- The revised interim and final arbitration awards were not subject to vacatur under 9 U.S.C. § 10(a)(4) because the panel acted within its authority under the ambiguity exception to functus officio.
Key quotations
“Generally, “courts must defer to an arbitrator’s initial decision,” but under the functus officio doctrine courts will prevent “an arbitrator from revisiting the merits of an award once it has issued.”” (6)
“Because parties litigating the validity of an arbitration award have bargained for the arbitrator’s judgment, courts may not review the merits of the award.” (7)
“Thus, Morgan does not abrogate functus officio because it is not a derivation of a general federal procedural rule that federal courts tweaked to favor arbitration.” (13)
“Unlike with the remedy award in Verizon, and for the reasons above, the panel’s revised interim award was at least a rational clarification of its earlier award.” (18)
Factual background
Prospect and Stratera jointly launched the Priority Income Fund, and Stratera's subsidiary Provasi initially served as wholesaler before Destra became sub-wholesaler in 2018. Their contract divided administrative fees and referred to shares issued in an offering, while a schedule used broader language concerning fund shares issued and outstanding through the sub-wholesaler. Prospect excluded DRIP shares from its fee calculations, leading Stratera and Destra to initiate arbitration.
Procedural history
Stratera and Destra initiated arbitration against Prospect concerning the calculation of administrative fees for certain fund shares. The arbitration panel issued an interim liability award, later revised it to clarify that the award covered DRIP shares associated with both Provasi and Destra, and then issued a final award requiring Prospect to pay approximately $11 million. Prospect petitioned the District Court for the District of Delaware to vacate the revised interim and final awards under 9 U.S.C. § 10(a)(4), while Stratera and Destra sought enforcement under 9 U.S.C. § 9. A magistrate judge recommended enforcement and denial of vacatur, the District Court adopted the recommendation, and Prospect timely appealed.