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Waiver of appellate review in employment agreement was enforceable; thus, employer cannot appeal to vacate arbitration award

By Nicholas J. Kaster, J.D.

The validity of an appellate waiver in an arbitration agreement under the FAA was a matter of first impression in the Fourth Circuit.

The U.S. Court of Appeals for the Fourth Circuit has denied an employer’s appeal of a federal district court’s dismissal of its complaint seeking to vacate an arbitration award in favor of an employee involving a dispute over incentive bonus payments following the termination of his employment. The employment agreement between the parties purported to waive both judicial and appellate review of the arbitrator’s decision and that waiver was enforceable, the court held (Beckley Oncology Associates, Inc. v. Abumasmah, April 8, 2021, Diaz, A.).

In early 2012, Beckley Oncology Associates (BOA) recruited a certain physician to join the practice as a medical oncologist. After several months of negotiations, the physician signed an employment agreement with BOA. Among other things, the agreement provided that the parties would arbitrate all disputes, controversies and disagreements connected with, related to or arising out of the employment relationship. The parties further agreed that the arbitrator’s decision “shall be final and conclusive and enforceable in any court of competent jurisdiction without any right of judicial review or appeal.”

The two-year employment agreement (which BOA drafted) would automatically renew for successive one-year terms, unless either party gave 90-days’ notice of termination, which could be without cause. The physician would be eligible to join the partnership at the end of the initial two-year employment term, if the current shareholders approved. The agreement also included an incentive bonus provision under which, in addition to a base salary of $275,000 per year, he would be entitled to incentive bonus compensation based on gross collections (receipts) in each year of the initial term of the agreement.

Separation. The physician began working at BOA in July 2012. In 2014, he was invited to join the partnership, but he declined. Early the following year, the physician told BOA that he planned to leave the country for at least six months so that he could travel to Amman, Jordan to care for his mother. His last day at BOA was June 25, 2015. He arrived in Jordan shortly thereafter, where he has remained. Before he left, the physician told BOA that he didn’t expect to receive compensation during his indefinite leave and offered to resign. BOA terminated the physician’s employment on his last day and sent him a separation agreement.

The physician disagreed with the several of the terms of separation agreement. The bone of contention was the provision stating that the incentive bonus payment of $72,994, which he received in June 2015, was the entire bonus due for 2014–2015. Based on the formula for calculating his incentive bonus in effect for the first two years of his employment, the physician claimed that he should have received a $328,070.57 bonus for his 2014–15 collections.

Arbitration. The physician sought arbitration of his claims against BOA. The arbitrator determined that the employee was entitled to an incentive bonus for his third year of employment, though not on the same terms as before. Accordingly, the arbitrator awarded the physician $167,030, 2.5% of the gross revenue he generated. The arbitrator awarded this amount to prevent the unjust enrichment of BOA and to compensate the physician “for the extraordinary revenue which he generated during his third year of employment.”

District court proceedings. BOA filed a complaint in federal district court to vacate the arbitration award. The district court granted the physician’s motion to dismiss the complaint and confirmed the award. The court held that the clause prohibiting judicial review of the arbitration award was unenforceable under the Federal Arbitration Act (FAA) because enforcing such clauses would upset the balance between the FAA’s mechanisms for enforcing arbitration awards and permitting courts to substantively review the arbitral process and associated awards. Nonetheless, the court upheld the arbitrator’s award because “[n]othing in the Arbitrator’s rulings suggest[ed] that he refused to heed a clearly defined legal principle or deliberately disregarded the contract language.”

The current appeal ensued. The issue on appeal was whether BOA validly waived “any right of . . . appeal” following the district court’s confirmation of the award.

Matter of first impression. At the outset, the appeals court noted that the validity of an appellate waiver in an arbitration agreement under the FAA is a matter of first impression in the Fourth Circuit. But in MACTEC, Inc. v. Gorelick, 427 F.3d 821 (10th Cir. 2005)), the Tenth Circuit evaluated such a waiver and deemed it enforceable. The Fourth Circuit agreed with the Tenth Circuit’s holding.

The clause at issue in Gorelick provided that “[j]udgment upon the award rendered by the arbitrator shall be final and nonappealable.” The agreement did not, however, purport to foreclose judicial review altogether. The Tenth Circuit reasoned that a provision prohibiting appellate, but not district court, review is “a compromise whereby the litigants trade the risk of protracted appellate review for a one-shot opportunity before the district court.” Such provisions are consistent with “the fundamental policy behind the FAA . . . to reduce litigation costs by providing a more efficient forum.” The appeals court also noted that, outside of the arbitration context, the courts of appeals enforce agreements that waive appellate review of district court decisions. Indeed, said the court, “we routinely enforce appellate waivers in plea agreements, where the stakes, namely years of lost liberty, are far higher than the monetary award at issue here.” Thus, said the court, nothing precludes a party from waiving appellate review of that decision, as BOA expressly did here.

A Ninth Circuit decision, upon which BOA relied, held that “[p]ermitting parties to contractually eliminate all judicial review of arbitration awards would not only run counter to the text of the FAA, but would also frustrate Congress’s attempt to ensure a minimum level of due process for parties to an arbitration.” That holding does not support invalidating the appeal waiver in this case, the Fourth Circuit stated. Here, said the court, BOA received a “minimum level of due process” before the district court. Thus, even if the parties couldn’t waive all judicial review of the arbitration award, they were certainly free to waive appellate review of the district court’s decision confirming or vacating the award.

BOA argued that, in contrast to the provision at issue in Gorelick, which waived the right to appeal the district court’s judgment confirming or vacating an arbitration award, the clause in this case foreclosed only direct appeal of the arbitrator’s decision to the district court or this court on the merits. “But that reading would effectively render the provision a nullity, as the FAA effectively bars merits review of arbitration decisions,” the court stated. It’s black letter law that judicial review of an arbitration award in federal court is “substantially circumscribed,” the court explained. Thus, a contract provision purporting to bar a district or circuit court from reviewing an arbitrator’s decision on the merits is essentially meaningless, said the court, since the FAA forecloses all but the most limited review.

Finally, BOA characterized the provision in the employment agreement as “stale” and thus unclear. Stale or not, the court said, the provision purports to waive two things: the right to judicial review and the right to appellate review of the arbitrator’s decision. It may well be that parties can’t waive all judicial review of an arbitrator’s decision. However, said the court, “because the employment agreement contains a severability clause, and because unenforceable provisions in arbitration clauses are severable if they don’t go to the essence of the contract, we need not invalidate the appeal waiver.”

Finding no cause here to reject the parties’ agreement, the Fourth Circuit dismissed BOA’s appeal.