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Arbitration Case Analysis

One question raised by the decision is whether there is any substantive difference between the approach adopted by the court and the federal rule that, "arbitrators may award punitive damages unless the arbitration agreement provides otherwise."

The court was adamant that it was not adopting the federal rule, but merely holding that the arbitrator’s decision to award them was not a "perverse misconstruction or deliberate defiance of present Wisconsin law."

However, the court later states, "We have concluded that nothing in Wisconsin law precludes arbitrators from awarding punitive damages if the parties’ agreement (or the rules they adopt under it) so permit."

The wording may be different, as well as the rationale. Nevertheless, for practical purposes, the court has adopted the federal rule, and federal cases should be considered valuable persuasive authority.

The most important question, however, is whether Judge Dykman’s characterization of the majority opinion is accurate — that the inability to recover attorney fees incurred in court will so eviscerate prevailing parties’ recoveries in arbitration that "organizations capable of litigating until the cows come home" can violate the law with impunity.

Dykman wrote that the majority sends the following message to farmers: "don’t litigate, don’t arbitrate. You can’t win. Even if your contract is identical to John Winkelman’s and you were deceived by the commodity purchaser, attorney fees for circuit court and appellate litigation will exceed any recovery you might obtain. Forget it."

Although the inability of Winkelman to recover such fees certainly denied his opportunity to be made whole, it is not necessarily the case that this will become the norm.

Since the federal rules seem to be in currency, the most natural place to look is the Seventh Circuit, and one case in particular: Menke v. Monchecourt, 17 F.3d 1007 (7th Cir. 1994).

The Federal Arbitration Act does not authorize attorney fees for court proceedings to confirm an arbitration award, except in two instances: statutory authority; and contractual agreement. Menke, 17 F.3d at 1009.

Menke involved an action under the Illinois Consumer Fraud Act, which, like Wis. Stats. sec. 100.18, allows attorney fees to a prevailing party incurred in defending against an appeal. Menke argued, similarly to Winkelman, in the case at bar, "insofar as an action for confirmation, like an appeal is a necessary prerequisite to recovering her arbitration award, she is entitled to an additional award for attorneys’ fees she incurred in commencing this confirmation proceeding." Id.

The Seventh Circuit disagreed, reasoning that the "comparison … ignores the district court’s very limited role in a confirmation action brought under the [FAA] … an action for confirmation … is intended to be a summary proceeding that merely makes the arbitrator’s award a final, enforceable judgment of the court." Id.

Assuming that the decision in the case at bar is published, as recommended, however, the arguments made by Kraft would not raise issues of first impression requiring the expenditure of significant attorney fees. The grounds for contesting attorney fees and punitive damages will become as scarce as those for challenging the arbitrator’s underlying holding.

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In justifying its decision to deny fees incurred in the courts, the majority wrote, "The litigation in the circuit court and on appeal had little to do with the arbitrator’s determination that Kraft’s agent induced Winkelman to enter into the pricing contract by misrepresenting its terms. Kraft has essentially conceded that the arbitrator’s decision to award Winkelman compensatory damages on his misrepresentation claim would be virtually impervious to attack on judicial review had the arbitrator not chosen to also award punitive damages and attorney fees. In short, the dispute that the parties litigated in the circuit court and this one was not whether Kraft had violated Wis. Stat. sec. 100.18, but whether the arbitrator had exceeded her powers or blatantly failed to follow established Wisconsin law in making the awards that she did."

If the decision becomes binding precedent, then future awards of attorney fees and punitive damages will also become "virtually impervious to attack on judicial review."

If a future defendant chooses to raise challenges similar to those raised in this case, it would be making a frivolous argument, and sanctions against the defendant (including attorney fees incurred in circuit court) will be a real option.

The argument of Winkelman regarding the necessity of attorney fees for post-arbitration court proceedings has great appeal, and the denial of them in his case works an injustice by preventing him from being made whole. Nevertheless, once the law is established, the prediction of Judge Dykman — that farmers will invariably spend more on attorney fees to confirm awards than the awards themselves — should not become the norm, but the exception.

– David Ziemer

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David Ziemer can be reached by email.

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