Ario v. Underwriting Members of Syndicate 53 at Lloyds

PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 09-1921, 09-2989 & 09-2991

JOEL S. ARIO,

Insurance Commissioner of the

Commonwealth of Pennsylvania,

in his official capacity as the statutory liquidator

of Legion Insurance Company (in liquidation);

*PEPPER HAMILTON, LLP,

Appellant (09-1921)

v.

THE UNDERWRITING MEMBERS OF SYNDICATE

53 AT LLOYDS FOR THE 1998 YEAR OF ACCOUNT

Cross-Appellants (09-2991)

*(Pursuant to F.R.A.P. 12(a) (09-2989 only))

No. 09-1922, 09-2990 & 09-2992

JOEL S. ARIO,

Insurance Commissioner of the

Commonwealth of Pennsylvania,

in his official capacity as the statutory liquidator

of Villanova Insurance Company (in liquidation);

*PEPPER HAMILTON, LLP,

Appellant (09-1922)

v.

THE UNDERWRITING MEMBERS OF SYNDICATE

53 AT LLOYDS FOR THE 1998 YEAR OF ACCOUNT

Cross-Appellants (09-2992)

*(Pursuant to F.R.A.P. 12(a) (09-2990 only))

Appeal from the United States District Court

for the Middle District of Pennsylvania

(D.C. Civil Action No. 1–08-cv-01619/20)

District Judge: Honorable William W. Caldwell

Argued March 10, 2010

Before: AMBRO, SMITH, and ALDISERT, Circuit Judges

Opinion filed: August 18, 2010

2

Deborah F. Cohen, Esquire (Argued)

Joann Hyle, Esquire

Kassem Lucas, Esquire

Thomas B. Schmidt, III, Esquire

Pepper Hamilton

18th & Arch Streets

3000 Two Logan Square

Philadelphia, PA 19103-2799

Counsel for Appellant/Cross-Appellee

Joel S. Ario

Nancy J. Gellman, Esquire (Argued)

Conrad O’Brien PC

1515 Market Street, 16th Floor

Philadelphia, PA 19102

Counsel for Appellant

Pepper Hamilton LLP

Joseph M. Donley, Esquire

Thorp, Reed & Armstrong

One Commerce Square

2005 Market Street, Suite 1000

Philadelphia, PA 19103-0000

David M. Raim, Esquire (Argued)

Chadbourne & Parke

1200 New Hampshire Avenue, N.W.

Washington, DC 20036-0000

3

Counsel for Appellees/Cross-Appellants

of Syndicate 53

OPINION OF THE COURT

AMBRO, Circuit Judge

We confront here the interplay between the Convention

on the Recognition and Enforcement of Foreign Arbitral Awards

(the “Convention”), adopted June 10, 1958, 21 U.S.T. 2517, 330

U.N.T.S. 3, and the Federal Arbitration Act (“FAA”), 9 U.S.C.

§ 1 et seq. We also address the propriety of sanctions awarded

in the related litigation. For the reasons that follow, we affirm

the judgments of the District Court confirming the arbitration

award and denying one of the requested Rule 11 sanctions, but

we reverse its judgment awarding the other Rule 11 sanction.

I. Factual and Procedural History

A. The reinsurance treaties

Two Pennsylvania insurers, Legion Insurance Company

and Villanova Insurance Company (collectively, the “primary

4

insurers”), entered into reinsurance treaties1 with the

Underwriting Members of Syndicate 53 at Lloyd’s for the 1998

Year of Account (the “reinsurers”).2 The primary insurers are

now in liquidation, and they are represented in these actions by

their statutory liquidator, Joel S. Ario, the Insurance

Commissioner for the Commonwealth of Pennsylvania.3

1

Reinsurance treaties are a type of reinsurance contract. A

treaty reinsurer agrees to accept and insure an entire block of

insurance business (both existing policies and “as yet unwritten”

policies). Instead of assessing the individual, existing risks

being reinsured, the reinsurer evaluates the overall risk of the

pool that is to be reinsured as the policies are written. Thus, any

representations by the primary insurer about the pool of risks are

material to the reinsurer’s decision to reinsure the block of

business.

This is in contrast to facultative reinsurance, where a

reinsurer assesses the characteristics of each policy to determine

whether to reinsure the individual risks as presented. See

generally N. River Ins. Co. v. CIGNA Reins. Co., 52 F.3d 1194,

1198–1200 (3d Cir. 1995) (explaining the difference between

treaty reinsurance and facultative reinsurance).

2

The reinsurers are a Lloyd’s syndicate that underwrote

insurance and reinsurance business in London, England. The

individuals comprising the syndicate predominantly live abroad,

largely within the United Kingdom.

3

Outside of this section, we refer to the primary insurers and

the Commissioner collectively as “Ario” when addressing their

5

Four reinsurance treaties are at issue here, all with

identical language in the relevant provisions, differing only in

the limits and types of coverage provided. The first relevant

provision governs arbitration, and it is reproduced here in its

entirety:

ARBITRATION

As a condition precedent to any right of action

hereunder, any dispute or difference between the

[primary insurers] and the Reinsurers relating to

the interpretation or performance of this

Agreement, including its formation or validity, or

any transaction under this Agreement, whether

arising before or after termination, shall be

submitted to binding arbitration, with the

exception of matters requiring resolution by way

of injunctive relief.

Upon written request of any party, each party

shall choose an arbitrator and the two chosen shall

select a third arbitrator. If either party refuses or

neglects to appoint an arbitrator within thirty (30)

days after receipt of the written request for

arbitration, the requesting party may appoint a

second arbitrator. If the two arbitrators fail to

arguments.

6

agree on the selection of a third arbitrator within

thirty (30) days of their appointment, each of

them shall name three individuals, of whom the

other shall decline two, and the selection of the

third arbitrator from those remaining named

individuals shall be named by the Federal District

Court for the Eastern District of Pennsylvania.

All arbitrators shall be disinterested in the

outcome of the arbitration. Each party shall

submit its case to the arbitrators within thirty (30)

days of the appointment of the third arbitrator.

The parties hereby waive all objections to the

method of selection of the third arbitrator, it being

the intention of both sides that the third arbitrator

be chosen from those submitted by the parties.

The arbitrators shall have the power to determine

all procedural rules for the holding of the

arbitration[,] including but not limited to

inspection of documents, examination of

witnesses[,] and any other matter relating to the

conduct of the arbitration. The arbitrators shall

interpret this Agreement as an honorable

engagement and not as merely a legal obligation,

they are relieved of all judicial formalities and

may abstain from following the strict rules of law.

The arbitrators may award interest and costs, but

in no event shall punitive or exemplary damages

7

be awarded. Each party shall bear the expense of

its own arbitrator and shall share equally with the

other party the expense of the third arbitrator and

of the arbitration.

Arbitration hereunder shall take place in

Philadelphia, Pennsylvania unless both parties

otherwise agree. Except as hereinabove provided,

the arbitration shall be in accordance with the

rules and procedures established by the Uniform

Arbitration Act as enacted in Pennsylvania.

J.A. 141, 156, 173, 187. The second relevant provision is the

service-of-suit provision, reproduced in part below:

SERVICE OF SUIT CLAUSE (USA) - NMA

1998

It is agreed that in the event of the failure of

Reinsurers hereon to pay any amount claimed to

be due hereunder, the Reinsurer hereon, at the

request of the Reinsured, will submit to the

jurisdiction of a Court of competent jurisdiction

within the United States. Nothing in this Clause

constitutes or should be understood to constitute

a waiver of Reinsurers’ rights to commence an

action in any Court of competent jurisdiction in

the United States, to remove an action to a United

States District Court, or to seek a transfer of a

8

case to another Court as permitted by the laws of

the United States or of any State in the United

States.

J.A. 142, 156, 173, 188.

B. The coverage dispute and arbitration

Years after the reinsurance treaties were signed, a dispute

arose between the primary insurers and the reinsurers. The

reinsurers asserted that the primary insurers were not

underwriting the business as described in the initial placement

materials (i.e., the pool risks were not what the reinsurers

expected them to be based on the primary insurers’ prior

representations). The reinsurers alleged that the primary

insurers underwrote their business in a manner that, while

increasing premium volume for the primary insurers, also

exposed the reinsurers to increased risk. A September 2005

audit by the reinsurers purportedly exposed these problems.

The reinsurers argued that they had suffered substantial

losses as a result of the primary insurers’ misconduct, and they

refused to pay the claims of the primary insurers. The primary

insurers responded by demanding arbitration on September 18,

2006, in the hope of recovering their share of losses under the

reinsurance treaties (i.e., what the primary insurers believed was

owed to them by the reinsurers under the treaties).

The parties agreed that the dispute was arbitrable, and

9

they proceeded to arbitration. The primary insurers asked the

arbitration panel to award it the full amount due under the

reinsurance treaties, plus interest. The reinsurers argued that the

treaties should be rescinded (and thus, their obligations to pay

the primary insurers extinguished) based on eight separate legal

theories.4 The primary insurers denied the contentions. Broad

discovery was conducted, resulting in document production,

depositions, and expert reports; the parties submitted briefs; and

a nine-day evidentiary hearing was held in which both parties

made opening and closing statements, and thoroughly examined

and cross-examined 11 witnesses.

The testimony of one witness in particular, Ian Crane,

though only a small part of the arbitration proceedings, factors

prominently in our case. Crane was an employee of the

managing agent for the reinsurers, and he participated in the

underwriting of the treaties at issue here. He testified to the

circumstances under which he received the placement materials

from the primary insurers and the effect of those materials on

4

The eight theories were: (1) material misrepresentation

under English law; (2) material non-disclosure under English

law; (3) breach of the duty of utmost good faith under English

law; (4) intentional misrepresentation or omission under

Pennsylvania law; (5) negligent misrepresentation or omission

under Pennsylvania law; (6) breach of the duty of utmost good

faith under Pennsylvania law; (7) breach of the implied duty of

good faith and fair dealing under Pennsylvania law; and (8)

breach of contract under Pennsylvania law.

10

underwriting. However, he did not specifically recall the precise

communications between the primary insurer and the reinsurers,

and he did not recall his exact knowledge and thoughts at the

time of the reinsurance underwriting. Instead, he based his

testimony on documents (including three documents that are not

part of or cited in the reinsurance treaties, but are

communications between the primary insurers and the reinsurers

and their agents)5 that he saw years ago during the placement

process.

Following the discovery, briefing, and evidentiary

hearing, the arbitration panel issued an award rescinding three

of the four treaties. On the rescinded treaties, the reinsurers

were relieved of any obligation to pay losses owing; on the

remaining treaty, the reinsurers were ordered to pay losses

owing. This award was a so-called unreasoned award, as the

panel neither provided the rationale for its decision nor gave any

indication of the evidence on which its decision was based.

5

These three documents are: (1) a submission from the

primary insurer to prospective reinsurers about how the primary

insurer was to underwrite the business to be ceded to the

reinsurers; (2) a marked-up October 1998 fax to a reinsurer

about how the primary insurer allocated premiums; and (3) a

November 1998 fax to Mr. Crane explaining differences

between the reinsurance treaties at issue in this case and other

reinsurance contracts not at issue here.

11

C. Post-arbitration litigation

The primary insurers have been in liquidation

proceedings in the Commonwealth Court of Pennsylvania since

mid-2003. Following the arbitration award, on August 6, 2008,

Ario (as liquidator on behalf of the primary insurers) filed a

motion to confirm in part, and to vacate in part, the award as

part of the liquidation proceedings. Shortly thereafter, the

reinsurers removed the case to the District Court for the Eastern

District of Pennsylvania pursuant to the removal provision in 9

U.S.C. § 205,6 and filed a motion to confirm the award. The

6

The removal provision reads:

Where the subject matter of an action or

proceeding pending in a State court relates to an

arbitration agreement or award falling under the

Convention, the defendant or the defendants may,

at any time before the trial thereof, remove such

action or proceeding to the district court of the

United States for the district and division

embracing the place where the action or

proceeding is pending. The procedure for

removal of causes otherwise provided by law

shall apply, except that the ground for removal

provided in this section need not appear on the

face of the complaint but may be shown in the

petition for removal. For the purposes of Chapter

1 of this title any action or proceeding removed

under this section shall be deemed to have been

12

parties do not dispute that the award falls under the Convention;

they part on whether the FAA and Convention’s enabling

legislation contained in Chapter 2 of the FAA applies (including

9 U.S.C. § 205).7 See 9 U.S.C. § 202; Standard Bent Glass

Corp. v. Glassrobots Oy, 333 F.3d 440, 449 & n.13 (3d Cir.

2003) (listing four factors to determine whether an arbitration

agreement falls under the Convention).

On September 29, 2009, Ario filed a motion to remand

the case to state court, which the reinsurers opposed. Ario’s

motion was premised on the argument that the parties had

selected the Pennsylvania Uniform Arbitration Act (“PUAA”),

42 Pa. Cons. Stat. § 7301 et seq., to govern the arbitration.

Therefore, he argued, the parties had opted out of the FAA in its

entirety (including 9 U.S.C. § 205), and the District Court

brought in the district court to which it is

removed.

9 U.S.C. § 205.

7

To clarify, the Convention and Chapter 2 of the FAA are

distinct. The Convention is the multilateral treaty to which the

United States acceded. Chapter 2 of the FAA is the

implementing legislation for the Convention, and it provides the

mechanism for enforcement of the Convention in United States

courts. See 9 U.S.C. § 201 (“The Convention on the

Recognition and Enforcement of Foreign Arbitral Awards of

June 10, 1958, shall be enforced in United States courts in

accordance with this chapter.”).

13

lacked subject matter jurisdiction. That Court denied the motion

to remand in a five-page opinion, “easily conclud[ing]” that it

had jurisdiction over the case pursuant to § 205 because the case

related to an arbitration award falling under the Convention. It

reasoned that (1) the authority cited by Ario did not address the

Court’s jurisdiction, and (2) Ario had “not even attempt[ed] to

address why [it] lack[ed] jurisdiction under the real test for

making that determination.”

Having failed in his attempt to remand the case, Ario

continued to pursue his motion to vacate the award (in

opposition to the reinsurers’ motion to confirm the award). He

argued that the parties had opted out of FAA vacatur standards

in favor of the standards set forth by the PUAA. Applying his

interpretation of the PUAA vacatur standards, he urged that the

award be vacated based on perceived weaknesses in Mr. Crane’s

testimony and other documentary evidence. The District Court

denied Ario’s motion to vacate the award and granted the

reinsurers’ motion. It concluded that review was governed by

the FAA, not the PUAA. Applying the FAA and confirming the

award, it rejected Ario’s contention that there was “no evidence”

to support the award.

Following the District Court’s rulings, the reinsurers

moved for sanctions pursuant to Federal Rule of Civil Procedure

11 against Ario and his counsel, Pepper Hamilton, for both (1)

the motion to remand, and (2) the motion to vacate the award.

The District Court granted the motion in part and denied it in

part. Finding “no basis in existing law for [Ario] to assert there

14

was no jurisdiction,” and noting that Ario did not argue that “he

was trying under Rule 11(b)(2) to extend or modify existing law,

or create new law,” the Court decided that the imposition of

attorney’s fees was an appropriate sanction. It also determined

that the Rule 11 sanction would fall on Ario’s attorneys alone

(and not on Ario). However, the District Court did not find a

Rule 11 violation on account of the filings contesting the

arbitration award because, in the Court’s view, it was “legally

and objectively reasonable” for Ario to challenge the award on

the basis that Mr. Crane had no personal recollection of the

circumstances leading up to the reinsurance agreements.

These consolidated cross-appeals followed.

II. Jurisdiction and Standards of Review

As we explain below, the District Court had jurisdiction

under 9 U.S.C. §§ 203 and 205. We have jurisdiction over the

consolidated appeals under 28 U.S.C. § 1291.

We exercise plenary review over the denial of a motion

to remand to the extent that the underlying basis is a legal

question, as it is here. Werwinski v. Ford Motor Co., 286 F.3d

661, 665 (3d Cir. 2002). In reviewing a district court’s order

confirming an arbitration award, we assess its factual findings

for clear error and its legal conclusions de novo. China

Minmetals Imp. & Exp. Co. v. Chi Mei Corp., 334 F.3d 274, 278

(3d Cir. 2003).

15

We review a district court’s decision to grant or deny

Rule 11 sanctions for abuse of discretion. Simmerman v.

Corino, 27 F.3d 58, 61 (3d Cir. 1994). This means “we evaluate

the court’s factual determinations, legal conclusions, and choice

of an ‘appropriate sanction’ with substantial deference,

considering not whether we would make the same precise

determinations, but only whether those determinations are

contrary to reason or without a reasonable basis in law and fact.”

Id. at 62. An example of abuse of discretion occurs when a

district court “base[s] its ruling on an erroneous view of the law

or on a clearly erroneous assessment of the evidence.” Id.

(citation omitted) (internal quotation marks omitted).

III. Analysis

A. Removal to federal court was proper under 9

U.S.C. § 205

While Ario agrees that the award is subject to the

Convention, he argues that the parties “agreed to waive Chapter

2 of the FAA [the Convention’s implementing legislation] in its

entirety,” precluding removal of this case to federal court.

Citing to Supreme Court and Third Circuit cases, his argument

essentially has two prongs: (1) the parties can (and did) “opt

out” of the entire FAA such that they are not subject to its

strictures; and (2) even if the FAA applies, the arbitration

provisions here included a clear and unequivocal expression of

intent to opt out of the removal provision in § 205. We disagree.

16

1. Parties cannot “opt out” of the FAA and

the Convention’s implementing

legislation

Ario argues that the language in the reinsurance treaties

referencing the PUAA supplanted the FAA in its entirety. But

though the FAA allows parties to choose state-law arbitration

standards, they cannot “opt out” of the FAA. Accordingly, the

parties here could not have “opted out” of the FAA,

notwithstanding language that refers to the PUAA in the

reinsurance treaties.

The FAA is divided into three chapters, two of which are

implicated here. Chapter 1 (the “domestic FAA”), 9 U.S.C.

§§ 1–16, is a set of default rules “designed ‘to overrule the

judiciary’s longstanding refusal to enforce agreements to

arbitrate.’” Volt Info. Scis., Inc. v. Bd. of Trs. of the Leland

Stanford Junior Univ., 489 U.S. 468, 474 (1989). Chapter 2 (the

Convention’s implementing legislation), 9 U.S.C. §§ 201–08, by

contrast, is intended “‘to secure for United States citizens

predictable enforcement by foreign governments of certain

arbitral contracts and awards made in this and other signatory

nations.’” Suter v. Munich Reins. Co., 223 F.3d 150, 154 (3d

Cir. 2000) (citation omitted).

The domestic FAA “simply requires courts to enforce

privately negotiated agreements to arbitrate, like other contracts,

in accordance with their terms.” Volt, 489 U.S. at 478 (citations

omitted). It “does not . . . prevent[] the enforcement of

17

agreements to arbitrate under different rules than those set forth

in the [domestic FAA] itself.” Id. at 479. Thus, when “parties

have agreed to abide by state rules of arbitration, enforcing those

rules according to the terms of the agreement is fully consistent

with the goals of the FAA.” Id.

We have interpreted the FAA and Volt to mean that

“parties [may] contract to arbitrate pursuant to arbitration rules

or procedures borrowed from state law, [and] the federal policy

is satisfied so long as their agreement is enforced.” Roadway

Package Sys., Inc. v. Kayser, 257 F.3d 287, 292 (3d Cir. 2001)

(citing Volt, 489 U.S. at 478), abrogated in part on other

grounds by Hall St. Assocs., LLC v. Mattel, Inc., 552 U.S. 576,

583 n.5 (2008).

This is not because the agreements “cease being subject

to the FAA,” but is instead because “the FAA permits parties to

‘specify by contract the rules under which . . . arbitration will be

conducted.’” Id. (quoting Volt, 489 U.S. at 479). Thus,

enforcement of an agreement to use state rules and procedures

in lieu of the federal default rules is “not because the parties

have chosen to be governed by state rather than federal law,” but

“because federal law requires that the court enforce the terms of

the agreement.” Id. (emphasis in original). But while parties

may opt out of the FAA’s default rules, they cannot “opt out” of

FAA coverage in its entirety because it is the FAA itself that

authorizes parties to choose different rules in the first place.

Although Volt and Roadway addressed only the domestic

18

FAA, the principles undergirding those decisions apply to the

Convention’s implementing legislation. An agreement by

parties to apply the rules and procedures of state law neither

operates as an “opt out” of the domestic FAA nor as an “opt

out” of the Convention’s implementing legislation. It is federal

law that allows the parties to make and enforce agreements that

fall under the FAA or the Convention. Accordingly, we reject

Ario’s argument that the FAA, in its entirety, is inapplicable

here.

2. The parties did not clearly and

unambiguously agree to waive the right

of removal

Though the parties may not opt out of (and are governed

by) the FAA, it is still possible to waive specifically the right of

removal under 9 U.S.C. § 205. See Suter, 223 F.3d at 158.

Though not discussed by the parties or the District Court in the

prior proceedings, on appeal the parties acknowledge controlling

precedent on the question of whether a right of removal under

§ 205 may be waived by agreement of the parties. In Suter, we

noted the “strong and clear preference for a federal forum, a

policy that will be best served by resolving any ambiguity in

contract language against waiver” of the right of removal. Id.

We therefore applied a strict standard, holding that “there can be

no waiver of a right to remove under the Convention Act [i.e.,

9 U.S.C. § 205] in the absence of clear and unambiguous

language requiring such a waiver.” Id.

19

Suter involved a service-of-suit provision in which a

party had agreed to “submit to the jurisdiction of any Court of

competent jurisdiction within the United States.” Id. at 153.

We held that provision to be ambiguous with respect to the

question of a § 205 waiver because the “service of suit clause

does not explicitly waive removal rights, and a defendant may

remove a case ‘after submitting to the jurisdiction of [the state]

courts and complying with all necessary requirements to give

[the state] courts power over the suit,’ as required by the service

of suit clause.” Id. at 160 (alterations in original) (citation

omitted). Indeed, because “‘[a]ll matters would be determined

in accordance with the practice and law of the court chosen by

[the plaintiff] in the sense that all state courts follow the removal

law established by Congress,’” the right of removal was

consistent with the contractual language. Id. (alterations in

original) (citation omitted).

We are aware of only one decision from our sister circuit

courts that has found a clear and unambiguous waiver of the

right to remove pursuant to § 205. See Ensco Int’l, Inc. v.

Certain Underwriters at Lloyd’s, 579 F.3d 442 (5th Cir. 2009).

There, a divided panel of the Court of Appeals for the Fifth

Circuit8 held that a choice-of-law provision in an insurance

8

There were three separate opinions in Ensco, with the two

members of the majority applying different reasoning to reach

the same result. See Ensco, 579 F.3d at 443 (Smith, J.); id. at

449 (Owen, J., concurring in the judgment); id. at 450 (Jolly, J.,

dissenting).

20

policy met the clear and unambiguous standard where the parties

agreed that “[a]ny disputes arising under or in connection with

[the insurance policy] shall be subject to the exclusive

jurisdiction of the Courts of Dallas County, Texas.” Id. at 443

(emphasis added). The judges in the majority each found the

words “exclusive jurisdiction” to be sufficiently express, clear,

and unambiguous to be a waiver of § 205 rights. Id. at 448–49

(Smith, J.); id. at 450 (Owen, J., concurring in the judgment).

Any other interpretation would “read the word ‘exclusive’ out

of the contract,” id. at 449 (Smith, J.), and ignore the “well-

understood” meaning of “exclusive,” id. at 450 (Owen, J.,

concurring in the judgment).

Ario contends that there is similar “clear and

unambiguous” language in the reinsurance treaties’ arbitration

provisions expressing the parties’ agreement to waive the right

of removal. He argues that because the parties agreed that “the

arbitration shall be in accordance with the rules and procedures

established by the [PUAA],” this waived the reinsurers’ (and

Ario’s) right to remove to federal court under § 205.

We disagree that this was sufficiently clear and

unambiguous to effect a waiver. Not only do the arbitration

provisions not make any mention of removal, the lone provision

in the reinsurance treaties to refer to removal, the service-of-suit

provision, explicitly states that “[n]othing in [it] constitutes or

should be understood to constitute a waiver of Reinsurers’ rights

. . . to remove an action to a United States District Court.” Nor

is there any language akin to “exclusive jurisdiction” that is

21

fundamentally incompatible with the preservation of the right to

remove. Far from expressing a clear and unambiguous waiver

of the right to remove, the reinsurance treaties expressly

preserve it.

To the extent that Ario argues that this language

disavows removal only with respect to anything else in the

service-of-suit provision (and not the entire agreement), we

disagree. It would be self-defeating, to say the least, for the

reinsurers to preserve expressly in one provision what Ario

argues they waived implicitly in another. We do not read the

agreement to reach that illogical result. We conclude that the

parties did not agree to waive their § 205 rights, and thus affirm

the District Court’s denial of the motion to remand.

B. The FAA provides the applicable vacatur

standards

The parties disagree as to the applicable vacatur

standards. Ario argues that the PUAA applies, while the

reinsurers argue that the FAA applies. We agree with the

reinsurers.

Though this award falls under the Convention, which

ordinarily provides extremely limited grounds for vacatur, the

FAA provides the applicable (and slightly broader) vacatur

standards for this award. We conduct our analysis in two steps:

first, we explain why the FAA vacatur standards presumptively

apply to Convention awards rendered and enforced in the United

22

States; and second, we determine that the reinsurance treaties do

not show the parties’ clear intent to substitute the PUAA vacatur

standards for those of the FAA.

1. In the absence of clear intent to the

contrary, the FAA’s vacatur standards

apply to a Convention award rendered

and enforced in the United States

“Under the Convention, a district court’s role is

limited—it must confirm the award unless one of the grounds

for refusal specified in the Convention applies to the underlying

award.” Admart AG v. Stephen & Mary Birch Found., 457 F.3d

302, 307 (3d Cir. 2006); see also 9 U.S.C. § 207. Article V of

the Convention sets forth the grounds for refusal,9 and “courts

9

Article V reads as follows:

1. Recognition and enforcement of the award

may be refused, at the request of the party

against whom it is invoked, only if that

party furnishes the competent authority

where the recognition and enforcement is

sought, proof that:

(a) The parties to the agreement

referred to in article II were, under

the law applicable to them, under

some incapacity, or the said

23

agreement is not valid under the

law to which the parties have

subjected it or, failing any

indication thereon, under the law of

the country where the award was

made; or

(b) The party against whom the award

is invoked was not given proper

notice of the appointment of the

arbitrator or of the arbitration

proceedings or was otherwise

unable to present his case; or

(c) The award deals with a difference

not contemplated by or not falling

within the terms of the submission

to arbitration, or it contains

decisions on matters beyond the

scope of the submission to

arbitration, provided that, if the

decisions on matters submitted to

arbitration can be separate from

those not so submitted, that part of

the award which contains decisions

on matters submitted to arbitration

may be recognized and enforced; or

(d) The composition of the arbitral

authority or the arbitral procedure

24

was not in accordance with the

agreement of the parties, or, failing

such agreement, was not in

accordance with the law of the

country where the arbitration took

place; or

(e) The award has not yet become

binding on the parties, or has been

set aside or suspended by a

competent authority of the country

in which, or under the law of

which, that award was made.

2. Recognition and enforcement of an arbitral

award may also be refused if the

competent authority in the country where

recognition and enforcement is sought

finds that:

(a) The subject matter of the difference

is not capable of settlement by

arbitration under the law of that

country; or

(b) The recognition or enforcement of

the award would be contrary to the

public policy of that country.

Convention on the Recognition and Enforcement of Foreign

25

have strictly applied the Article V defenses and generally

view[ed] them narrowly.” Admart AG, 457 F.3d at 308.

Accordingly, if vacatur is limited to the grounds listed in the

Convention, Ario would have little chance of success. We have

recognized, however, that there is “more flexibility . . . when the

arbitration site and the site of the confirmation proceeding were

within the same jurisdiction.” Id. (citing Yusuf Ahmed Alghanim

& Sons v. Toys “R” Us, Inc., 126 F.3d 15, 22–23 (2d Cir.

1997)).

In Yusuf, the Court of Appeals for the Second Circuit

concluded that there are “very different regimes for the review

of arbitral awards (1) in the [country] in which, or under the law

of which, the award was made, and (2) in other [countries]

where recognition and enforcement are sought.” 126 F.3d at 23.

After conducting a thorough analysis of both regimes, it

concluded that the FAA’s vacatur standards applied to the

Convention award it was reviewing because the arbitration

award was made in the United States. Id.

We previously adopted the second portion of Yusuf in

Admart AG, “‘holding that, in an action to confirm an award

rendered in, or under the law of, a foreign jurisdiction, the

grounds for relief enumerated in Article V of the Convention are

the only grounds available for setting aside an arbitral award.’”

Arbitral Awards art. V, adopted June 10, 1958, 21 U.S.T. 2517,

330 U.N.T.S. 3; see also Admart AG, 457 F.3d at 307–08.

26

457 F.3d at 308 (quoting Yusuf, 126 F.3d at 20). We therefore

looked only to the limited Article V grounds when reviewing a

“foreign” Convention award. But unlike Admart AG, in this

case the Convention award was rendered in the United States.

Therefore, we must decide whether to adopt the first portion of

the Yusuf decision and its articulation of the available grounds

for vacating a Convention award rendered in the United States.

The Yusuf Court held that, “under Article V(1)(e) [of the

Convention], the courts of the United States are authorized to

apply United States procedural arbitral law, i.e., the [domestic]

FAA, to nondomestic [Convention] awards rendered in the

United States.”10 126 F.3d at 19–20; see also Convention Art.

V(1)(e) (“Recognition and enforcement of the award may be

refused . . . [if the award] has been set aside or suspended by a

competent authority of the country in which, or under the law of

which, that award was made.”). Accordingly, the Yusuf Court

concluded, “[t]he Convention specifically contemplates that the

[country] in which, or under the law of which, the award is

made, will be free to set aside or modify an award in accordance

with its domestic arbitral law and its full panoply of express and

10

A “nondomestic” award is an award that is “subject to the

Convention not because [it was] made abroad, but because [it

was] made within the legal framework of another country, e.g.,

pronounced in accordance with foreign law or involving parties

domiciled or having their principal place of business outside the

enforcing jurisdiction.” Yusuf, 126 F.3d at 19 (citation omitted)

(internal quotation marks omitted).

27

implied grounds for relief.” 126 F.3d at 23. We agree with this

interpretation, and now adopt it.

This reasoning is also consistent with 9 U.S.C. § 208,

also part of the Convention’s implementing statute, in which

Congress explicitly provided for the application of the domestic

FAA to the extent that it did not conflict with the Convention.

See 9 U.S.C. § 208 (“Chapter 1 [of the FAA] applies to actions

and proceedings brought under this chapter to the extent that

chapter is not in conflict with this chapter or the Convention as

ratified by the United States.”). When both the arbitration and

the enforcement of an award falling under the Convention occur

in the United States, there is no conflict between the Convention

and the domestic FAA because Article V(1)(e) of the

Convention incorporates the domestic FAA and allows awards

to be “set aside or suspended by a competent authority of the

country in which . . . that award was made.” Here, because the

arbitration took place in Philadelphia, and the enforcement

action was also brought in Philadelphia, we may apply United

States law, including the domestic FAA and its vacatur

standards.

2. There was no clear intent to apply the

PUAA vacatur standards

As discussed above, the domestic FAA allows parties to

agree to apply state law enforcement mechanisms in lieu of the

FAA default rules. Of course, “[t]he FAA is not the only way

into court for parties wanting review of arbitration awards,” and

28

parties “may contemplate enforcement under state statutory or

common law.” Hall St. Assocs., 552 U.S. at 590.11 “[T]he FAA

standards control ‘in the absence of contractual intent to the

contrary.’” Roadway, 257 F.3d at 296 (quoting Mastrobuono v.

Shearson Lehman Hutton, Inc., 514 U.S. 52, 59 (1995)).

We require the parties to express a “clear intent” to apply

state law vacatur standards instead of those of the FAA. See id.

at 288, 293, 295. We chose the “clear intent” standard because

it furthered the FAA’s goal of enforcing parties’ actual bargains,

and we concluded that the default application of the FAA caused

fewer problems than application of other standards in the

absence of “clear intent.” Id. at 296 (“We must, therefore,

decide which error is worse: wrongly concluding that parties

11

Ario argues that Hall Street supports his position. We

disagree. In Hall Street the Supreme Court addressed only the

narrow question of whether parties could agree to modify the

FAA’s confirmation, vacatur, and modification standards (listed

in 9 U.S.C. §§ 9, 10 and 11), concluding that they “provide

exclusive regimes for the review provided by statute,” and thus

could not be altered by the parties. 552 U.S. at 590. However,

the Court noted that it “sp[oke] only to the scope of the

expeditious judicial review under [those sections], [and]

decid[ed] nothing about other possible avenues for judicial

enforcement of arbitration awards.” Id. (emphasis added).

Thus, Hall Street says nothing about using the alternate avenue

of 9 U.S.C. § 205 for judicial enforcement of an arbitration

award falling under the Convention, and does not support Ario’s

arguments that the FAA is entirely displaced.

29

intended to opt out, or wrongly concluding that they did not. In

light of the FAA’s history, we believe that the former is worse

than the latter.”). Thus, the parties here must show “clear

intent” to apply the PUAA vacatur standards in order to displace

those of the FAA. We also noted in a dictum that “[i]t is not

particularly difficult, for example, to provide that ‘any

controversy shall be settled by arbitration in accordance with the

terms of the [PUAA].’”12 Id. at 297. We observed that this

would impose “minuscule transaction costs.”13 Id.

In applying the “clear intent” standard, we look to the

reinsurance treaties to determine what the parties actually agreed

to use as the vacatur standards. Again, of particular importance

are the arbitration provisions and the service-of-suit provision.

We conclude that while there is a plausible argument that the

parties may have agreed to apply PUAA standards, it falls short

of the “clear intent” we demand.

12

The suggested language in Roadway, however, did not

represent magic words. 257 F.3d at 297 n.5 (“We do not mean

to suggest that parties may not be found to have opted out unless

their contract includes a statement such as this one. We only

hold that a generic choice-of-law clause, standing alone, raises

no such inference.”).

13

Importantly, there is no requirement that a party wishing to

remain under the FAA vacatur standards affirmatively express

that intent, as in Roadway we presumed that the parties intended

not to opt out of the FAA standards. 257 F.3d at 297.

30

Ario relies on language in the reinsurance treaties that

resembles language we suggested (in the Roadway dictum noted

above) might satisfy the “clear intent” standard: “the arbitration

shall be in accordance with the rules and procedures established

by the [PUAA].” J.A. 141, 156, 173, 187. Standing alone, this

might suggest that the parties agreed to use the PUAA vacatur

standards. However, this is not the only sentence in the

arbitration provisions of, nor does it contradict other sentences

in, the reinsurance treaties relating to the enforcement of any

resulting award.

For example, the reinsurance treaties contain a service-

of-suit provision. As we recently observed, “service-of-suit

[provisions] . . . complement arbitration clauses by establishing

a judicial forum in which a party may enforce arbitration.”

Century Indem. Co. v. Certain Underwriters at Lloyd’s, London,

584 F.3d 513, 554 (3d Cir. 2009). The reinsurers contend that

the service-of-suit provision here is “the only provision to

address judicial enforcement of the parties’ rights.” (Reinsurers’

Br. at 26 (emphasis in original).) While we may not agree that

it is the only such provision, it does specifically refer to

enforcement of the arbitration award in state and federal courts.

See J.A. 142, 156, 173, 188 (“[I]n the event of the failure of

Reinsurers hereon to pay any amount claimed to be due

hereunder, the Reinsurer . . . will submit to the jurisdiction of a

Court of competent jurisdiction within the United States.”).

This provision does not contain any reference to the operative

law, but it does address enforcement of any arbitration award by

“establishing a judicial forum” for enforcement. Of importance

31

is that it also does not affirmatively elect to apply PUAA vacatur

standards in that forum.

By contrast, the arbitration provisions on which Ario

relies strongly imply that they are concerned with only the

conduct of the arbitration itself, not judicial enforcement of a

resulting award. The five paragraphs of arbitration provisions

go into great detail as to the scope of the arbitrators’ power, the

selection of the arbitrators, the procedural rules for conducting

the arbitration, an “honorable engagement” section casting aside

judicial formalities, limits to the types of damages, and the site

of arbitration. Reading the last paragraph of the arbitration

provisions in this context leads us in the majority to conclude

that they address solely the “rules and procedures” applicable to

the conduct of the arbitration, not its enforcement (i.e., the

applicable vacatur standards).14

14

Although our colleague has written a thoughtful dissent,

we believe he has read too much into the arbitration provision

by appending the end of the last sentence of the fifth paragraph

of the five-paragraph arbitration provision to the middle of the

first sentence of the first paragraph of that provision. However,

the term “rules and procedures” does not modify “any dispute

or difference,” but instead modifies “arbitration.” See J.A. 141,

156, 173, 187 (“[T]he arbitration shall be in accordance with

the rules and procedures established by the [PUAA].” (emphasis

added)). As we have stated, there is a difference between the

conduct of an arbitration proceeding and the enforcement of a

resulting award.

32

The structure of the PUAA reflects this dichotomy

between the arbitration and the resulting award. Sections

7305–12 of the PUAA address the “rules and procedures” for

the conduct of arbitration, including: the selection of arbitrators;

the quorum of arbitrators; the conduct of the arbitration

proceeding; the representation of parties by attorneys in the

arbitration proceeding; the presentation of witnesses, subpoenas,

oaths, and depositions in the arbitration proceeding; the form of

the award of the arbitrators; the power of arbitrators to change

their award; and the fees and expenses of the arbitration

proceeding. Each of these sections is concerned with the nuts-

and-bolts of the arbitration, not ex post enforcement of the

resulting award.

By contrast, as made plain by the PUAA, “a court . . .

review[s] an arbitration award,” 42 Pa. Cons. Stat. § 7302(d)(2)

(emphasis added), but it does not conduct the arbitration.

Sections 7313–20 of the PUAA address the role of the court in

reviewing the award that results from an arbitration proceeding,

including: confirmation of an award by a court; vacating an

award by a court; modifying or correcting an award by a court;

judgments or decrees on an award by a court; the form and

service of applications to a court; the meaning of “court” and

“jurisdiction”; the venue of court proceedings; and appeals from

court orders. Each of these sections is concerned not with the

out-of-court arbitration, but instead with the in-court

confirmation, vacatur, or modification of a resulting award.

We presume the parties knew what they were doing

when they chose the word “arbitration” and not “award,” and

33

As previously stated, we err on the side of concluding

that parties do not intend to opt out of the FAA scheme. In the

face of the reasonable inferences that (1) the arbitration

provisions were concerned solely with the conduct of the

arbitration itself, and (2) the service-of-suit provision was

concerned with judicial enforcement of any arbitration decision,

we believe that the parties did not have a “clear intent” to apply

the PUAA vacatur standards in lieu of the FAA standards. We

thus apply the FAA’s vacatur standards and not those of the

PUAA.

we conclude that, by speaking only to “the arbitration,” the

parties here did not clearly intend to apply PUAA vacatur

standards to the resulting award. Simply put, vacatur is not

arbitration.

We also disagree strongly that we are allowing a service-

of-suit provision to override what our colleague believes to be

the “wholesale adoption . . . of the PUAA.” In Century

Indemnity, we did indeed state that “service-of-suit clauses do

not negate accompanying arbitration clauses.” 584 F.3d at 554.

However, this was not in the context of selecting vacatur

standards—it dealt with whether the dispute was arbitrable at

all. See id. (“Century also argues that the . . . service-of-suit

clause indicates that disputes between the parties should be

resolved exclusively in the courts.”). Here, we have not negated

an agreement to arbitrate; quite the contrary, we actually enforce

the arbitration award. We hold only that the parties here did not

clearly intend to apply PUAA vacatur standards to the resulting

award.

34

C. The award is confirmable under the FAA

vacatur standards

Ario argues that, even if the FAA vacatur standards

apply, the arbitration panel had no ground on which to base its

interpretation of the reinsurance treaties and “exceeded [its]

powers.” Because Mr. Crane did not personally recall the

negotiations that led to the underwriting, Ario argues, the

arbitration award must be vacated because it is “irrational.”

Applying the FAA’s vacatur standards, we disagree and affirm

the District Court’s judgment confirming the award.

1. The FAA vacatur standards

Vacatur under the FAA is governed by 9 U.S.C. § 10. If

the FAA’s vacatur standards apply, as they do here, these are the

only grounds that can support vacatur. See Hall St., 552 U.S. at

590. Four narrow grounds are provided in the statute:

In any of the following cases the United States

court in and for the district wherein the award was

made may make an order vacating the award upon

the application of any party to the arbitration—

(1) where the award was procured by

corruption, fraud, or undue means;

(2) where there was evident partiality or

corruption in the arbitrators, or either of

35

them;

(3) where the arbitrators were guilty of

misconduct in refusing to postpone the

hearing, upon sufficient cause shown, or in

refusing to hear evidence pertinent and

material to the controversy; or of any other

misbehavior by which the rights of any

party have been prejudiced; or

(4) where the arbitrators exceeded their

powers, or so imperfectly executed them

that a mutual, final, and definite award

upon the subject matter submitted was not

made.

9 U.S.C. § 10(a).

The sole basis Ario asserts for vacation of the award is

“irrationality,” and he makes no contention of any corruption,

fraud, partiality, or misconduct (the first three grounds). The

“irrationality” standard comes from the fourth ground, the

“exceeded their powers” provision. See Mut. Fire, Marine &

Inland Ins. Co. v. Norad Reins. Co., 868 F.2d 52, 56 (3d Cir.

1989) (noting that the “court’s function in confirming or

vacating a commercial [arbitration] award is severely limited”

and interpreting what is now § 10(a)(4) (alteration in original)

(citation omitted) (internal quotation marks omitted)). We

review the form of the relief awarded by the arbitrators to

36

“determine if the form of the arbitrators’ award can be rationally

derived either from the agreement between the parties or from

the parties[’] submissions to the arbitrators,” and we do not

revise the terms of the award “unless they are ‘completely

irrational.’” Id. (citation omitted).

So deferential is the “irrationality” standard under the

FAA that we “may not overrule an arbitrator simply because

[we] disagree . . . . [T]here must be absolutely no support at all

in the record justifying the arbitrator’s determinations for a court

to deny enforcement of an award.” United Transp. Union Local

1589 v. Suburban Transit Corp., 51 F.3d 376, 379 (3d Cir.

1995) (citations omitted) (internal quotation marks omitted). It

“should be clear that the test used to probe the validity of a[n]

. . . arbitrator’s decision is a singularly undemanding one.” Id.

(citation omitted) (internal quotation marks omitted).

Conversely, Ario faces a steep uphill battle to show that the

arbitration award rendered here was completely irrational and

could not be supported on any theory of relief.

2. Vacatur is not warranted

Ario contends that the award must be vacated because

Mr. Crane’s testimony and the reinsurers’ other “immaterial”

documentary evidence15 qualify only as “non-evidence.”

15

Ario is apparently referring to the communications

between the primary insurers and the reinsurers (and their

agents).

37

(Appellant’s Br. at 59.) Notably, he does not argue that there

was an actual lack of testimony or evidence, but claims that “it

was as if [the reinsurers] had no witness at all to support [their]

defense[s]” in response to each of the eight theories they offer

(and Ario must disprove) to justify the arbitration award. (Id.)

In essence, Ario’s arguments express discontent with the

weighing of evidence by the arbitration panel. Their premise is

that the evidence uncovered during discovery (including

documents, deposition transcripts, and expert reports), the

testimony and argument presented to the arbitrators during a

nine-day evidentiary hearing, and the substantial briefing

submitted by both parties, were not sufficient to justify the

award. Yet Ario has not demonstrated why that voluminous

record before the arbitration panel could not rationally lead to

the arbitration award on any of the eight theories advanced by

the reinsurers; instead, he focuses solely on whether the

evidence should have been given any weight at all.

As a reviewing court, we do not act to “correct factual or

legal errors made by an arbitrator,” and we will uphold an award

even if the arbitrator engaged in “improvident, even silly,

factfinding,” Major League Umpires Ass’n v. Am. League of

Prof’l Baseball Clubs, 357 F.3d 272, 279–80 (3d Cir. 2004)

(citation omitted) (internal quotation marks omitted) (applying

9 U.S.C. § 10(a)(4)), so long as the arbitrator did not act

“completely irrational[ly],” Mut. Fire, 868 F.2d at 56 (internal

quotation marks omitted). While Ario may find the evidence

unpersuasive, we cannot say that the arbitration panel was

38

“completely irrational” in crediting the testimony of Mr. Crane

and the other documents presented to the panel that Ario

considers to be “non-evidence.” Accordingly, we affirm the

District Court’s confirmation of the arbitration award.

D. Rule 11 sanctions were not warranted

We conclude with the parties’ cross-appeals regarding

Rule 11 sanctions entered against Pepper Hamilton, Ario’s

counsel. As stated above, the District Court imposed sanctions

against the firm for its motion to remand, but declined to impose

sanctions for its motion to vacate. Because sanctions were not

warranted for the filing of either motion, we reverse the award

of sanctions for contesting jurisdiction in the motion to remand,

and we affirm the denial of sanctions for the motion to vacate

the award.16

16

Pepper Hamilton also argues that, because the District

Court imposed sanctions after it had already issued a final

judgment, the sanctions must be reversed in light of the

supervisory rule we announced in Pensiero. See Mary Ann

Pensiero, Inc. v. Lingle, 847 F.2d 90, 99–100 (3d Cir. 1988)

(“[W]e adopt as a supervisory rule for the courts in the Third

Circuit a requirement that all motions requesting Rule 11

sanctions be filed in the district court before the entry of a final

judgment.”); see also Gary v. Braddock Cemetery, 517 F.3d

195, 202 (3d Cir. 2008) (“An obvious corollary to requiring

parties to file their Rule 11 motion prior to final judgment, . . .

is that district courts must resolve any issues about imposition

39

Rule 11 provides that attorneys may be sanctioned if

they, among other things, fail to make a reasonable inquiry into

the legal legitimacy of a pleading. Fed. R. Civ. P. 11(b)(2) &

(c). A district court must determine whether the attorney’s

conduct was “objectively reasonable under the circumstances.”

Simmerman, 27 F.3d at 62. Sanctions are to be applied only “in

the ‘exceptional circumstance’ where a claim or motion is

patently unmeritorious or frivolous.” Doering v. Union County

Bd. of Chosen Freeholders, 857 F.2d 191, 194 (3d Cir. 1988)

(citation omitted). Rule 11’s “primary purpose is not ‘wholesale

fee shifting but [rather] correction of litigation abuse.’” Id.

(alteration in original) (citation omitted). It “must not be used

as an automatic penalty against an attorney or party advocating

the losing side of a dispute,” and it “should not be applied to

adventuresome, though responsible, lawyering which advocates

creative legal theories.” Mary Ann Pensiero, Inc. v. Lingle, 847

F.2d 90, 94 (3d Cir. 1988) (citation omitted).

The District Court granted the motion for Rule 11

sanctions based on Ario’s motion to remand, in which he argued

that because the Volt and Roadway decisions allow parties to

of sanctions prior to, or contemporaneously with, entering final

judgment. Requiring Rule 11 motions to be filed before final

judgment is entered accomplishes nothing unless we are able to

resolve any challenge to the grant or denial of Rule 11 sanctions

when we rule on the merits of the final judgment.”). Because

we reverse the sanctions on the merits, we do not reach this

issue.

40

choose the applicable law (and thus opt out of portions of the

FAA), by choosing the PUAA the parties had opted out of § 205

as well, divesting the Court of jurisdiction. The District Court

found a Rule 11 violation because it believed the cases cited by

Ario were “clearly distinguishable,” as they did not address

jurisdiction or the Convention, only the domestic FAA. In

imposing sanctions, the Court found Ario’s argument “that the

parties’ choice of law . . . divested the court of jurisdiction” had

“simply no basis in existing law” and was “clearly without

merit,” though it did not identify any authority to the contrary.

J.A. 53–54. It apparently believed that parties could not opt out

of § 205 and waive their right to a federal forum.17

While the District Court may have distinguished Volt and

Roadway or considered them not on point, that does not make an

argument premised on those cases sanctionable under Rule 11.

Nothing in those cases expressly forecloses Ario’s argument,

and though ultimately unpersuasive, it was not “patently

unmeritorious or frivolous.” With Volt and Roadway as the only

two pole stars for its decision (and in the absence of directly

contrary authority), there was equally no basis in existing law

for the Court to conclude that parties could not opt out of § 205

and divest a federal court of jurisdiction. As noted, Rule 11

17

As discussed above, this is incorrect. Though neither the

parties nor the District Court cited to it in that Court’s

proceedings, we made clear in Suter that parties to an arbitration

agreement may indeed agree to an enforcement regime that

waives removal to federal court under § 205. 223 F.3d at 158.

41

sanctions are reserved for correcting litigation abuse. This was

not such an instance. Though we affirm the District Court’s

denial of the motion to remand, we reverse its decision to grant

Rule 11 sanctions for the motion to remand, as the motion to

remand was not patently lacking in merit.

The District Court did not award Rule 11 sanctions based

on the motion to vacate the award. While we ultimately

disagree with Ario’s assertion that the PUAA applies here

because the language in the reinsurance treaties did not state a

clear intent to do so, his argument was not “patently

unmeritorious or frivolous.” As discussed above, under the

FAA parties can indeed opt to apply state vacatur standards

instead of federal standards. Likewise, although Ario faced a

difficult burden to demonstrate that the award was “completely

irrational” under the FAA vacatur standards, the failure to do so

does not detract from his non-frivolous argument that the award

should be vacated under the PUAA. Viewing the District

Court’s determinations “with substantial deference” (as we

must), Simmerman, 27 F.3d at 62, it did not abuse its discretion.

Accordingly, we affirm its decision not to award sanctions for

the motion to vacate.

* * * * *

We affirm the District Court’s denial of the motion to

remand, its denial of the motion to vacate, and its denial of the

motion for sanctions for the filing of the motion to vacate the

award. We reverse its grant of the motion for sanctions for the

42

filing of the motion to remand.

43

Joel S. Ario v. The Underwriting Members of

Syndicate 53 at Lloyd's

Nos. 09-1921/1922/2989/2990/2991/2992

ALDISERT, Circuit Judge, dissenting in part.

I am pleased to join Judge Ambro’s majority opinion for

the Court in most respects, but I would hold that the parties’ re-

insurance treaties evince a clear intent to adopt the vacatur

standards of the Pennsylvania Uniform Arbitration Act.

Accordingly, I respectfully dissent from Part III(B) of the

Court’s opinion.

I.

What divides the panel is a disagreement over which

body of law governs judicial review of the disputed arbitration

award – whether it be the Federal Arbitration Act (“FAA”), 9

U.S.C. §§ 1-16, or the Pennsylvania Uniform Arbitration Act

(“PUAA”), 42 Pa. Cons. Stat. Ann. §§ 7301-7320. The

difference between the scope of judicial review of an arbitration

award pursuant to the Federal Arbitration Act and the scope of

review available under Pennsylvania law has commanded the

1

attention of this court for over 40 years, ever since 1969, when

I authored the primary opinion of the Court in Ludwig Honold

Manufacturing Co. v. Fletcher, 405 F.2d 1123 (3d Cir. 1969)

(comparing vacatur standards of the FAA with those of PUAA’s

statutory predecessor). The FAA standards still rigorously limit

judicial intervention, requiring challengers to show the award

was “completely irrational,” a near prohibitive burden. Mut.

Fire, Marine & Inland Ins. Co. v. Norad Reinsurance Co., 868

F.2d 52, 56 (3d Cir. 1989); see also 9 U.S.C. § 10(a)(1)-(4).

Under the PUAA, by contrast, a court may modify or correct an

award that is “contrary to law.” 42 Pa. Cons. Stat. Ann. §§

7301(d)(2) & 7314(a).

The determination of applicable law turns on whether the

arbitration provisions of the parties’ reinsurance treaties evince

a “clear intent” to impose the vacatur standards of the PUAA

over the presumptively applicable standards of the FAA. See

Roadway Package Sys., Inc. v. Kayser, 257 F.3d 287 (3d Cir.

2001). As we explained in Roadway, this “clear intent” standard

is intended to protect parties’ rights to contract for applicable

law:

[T]he rule we announce will preserve and

facilitate the ability of parties to contract around

the default federal standards. Sophisticated parties

(i.e., those who employ experienced lawyers to

draft their contracts) will soon learn that a generic

choice-of-law clause is not enough. Assuming

that both parties genuinely wish to be governed

2

by standards other than the FAA’s, requiring

something more will impose minuscule

transaction costs. It is not particularly difficult, for

example, to provide that “any controversy shall be

settled by arbitration in accordance with the terms

of the Pennsylvania Uniform Arbitration Act.”

Id. at 297 (emphases in original). As a general matter, applying

the “clear intent” standard so strictly as to functionally preclude

parties from contracting for non-FAA standards is contrary to

Roadway’s attempt to fashion a rule protecting parties’ right to

determine the substantive law governing arbitration of their

disputes and judicial enforcement vel non of any arbitral award.

As the Supreme Court explained,

[a]rbitration under the Act is a matter of consent,

not coercion, and parties are generally free to

structure their arbitration agreements as they see

fit. Just as they may limit by contract the issues

which they will arbitrate . . . so too may they

specify by contract the rules under which that

arbitration will be conducted. Where, as here, the

parties have agreed to abide by state rules of

arbitration, enforcing those rules according to the

terms of the agreement is fully consistent with the

goals of the FAA.

Volt Info. Scis., Inc. v. Bd. of Trs. of the Leland Stanford Junior

Univ., 489 U.S. 468, 479 (1989) (citation omitted).

3

On my reading, the language of the treaties “suggested

that the parties intended to be bound by standards borrowed

from state law,” Roadway, 257 F.3d at 297 n.5, with sufficiently

“clear intent.” The treaties mandate, in relevant part:

[A]ny dispute or difference between the

Reinsured and the Reinsurers relating to the

interpretation or performance of this Agreement

. . . or any transaction under this Agreement . . .

shall be submitted to binding arbitration . . . in

accordance with the rules and procedures

established by the [PUAA].

(J.A. 141) (emphasis added.) The language of the arbitration

provision is specific and unambiguous, and it evinces an intent

by the parties to “abide by state rules of arbitration.” Volt, 489

U.S. at 479. The PUAA contains rules of judicial vacatur. See

42 Pa. Cons. Stat. Ann. § 7314(a) (“General rule – (1) On

application of a party, the court shall vacate an award where . .

. “) (emphasis added). Consequently, when the parties

contracted to have “any dispute or difference” between them

governed by arbitration in accordance with the “rules and

procedures” of the PUAA, they successfully demonstrated a

clear intent to adopt, inter alia, the vacatur rules of the PUAA.

Although I agree with the majority’s characterization of the

arbitration clause as concerned largely with the execution of the

arbitration itself, that is insufficient to render null and void the

clear mandate of the contractual language, incorporating the

PUAA, which includes a specific provision detailing when a

4

court may “vacate an award.” 42 Pa. Cons. Stat. Ann. § 7314(a).

I also cannot agree with the majority’s conclusion that the

service-of-suit clause can be read to abrogate the arbitration

clause’s wholesale adoption, by plain language, of the “rules and

procedures” of the PUAA. (J.A. 141.) A service-of-suit clause

is a mechanism to assist implementation of an arbitration award

by establishing a judicial forum for the enforcement of the

award.18 Service-of-suit clauses are profoundly distinct from

choice-of-law clauses, and I cannot adopt the majority’s stretch

of the canons of logical inference to conclude that a service-of-

suit clause, without more, may dictate the choice of substantive

law by omitting an affirmative declaration of what standard

should govern judicial review of arbitral awards. This qualifies,

I believe, as the fallacy of non sequitur.19 Our Court has recently

rejected just such an attempt to interpret a service-of-suit clause

to mandate the form of dispute-resolution: “[s]ervice-of-suit

clauses do not negate accompanying arbitration clauses; indeed,

they may complement arbitration clauses by establishing a

18

This is of particular necessity when one party to a contract

resides and conducts business almost exclusively outside of the

United States. This likely explains why the service-of-suit clause

specifically subjects the London-based Reinsurers – and not the

Reinsured – to the jurisdiction of any court of competent

jurisdiction in the United States.

19

An argument that contains a conclusion that does not

necessarily follow from the premises offered in its support.

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judicial forum in which a party may enforce arbitration.”

Century Indem. Co. v. Certain Underwriters at Lloyd’s, London,

Subscribing to Retrocessional Agreement Nos. 950548, 950549,

& 950646, 584 F.3d 513, 554 (3d Cir. 2009) (emphasis added).

Service-of-suit clauses are simply not intended, nor are they

designed, to select governing substantive law, absent the

inclusion of an affirmative choice-of-law provision.

Accordingly, the failure of the clause in question to explicitly

adopt the PUAA’s vacatur standards does not even suggest,

much less compel, a finding that the parties’ contractual

adoption of the “rules and procedures” of the PUAA to govern

arbitration of “any dispute or difference” excepts the rules for

judicial review of contested awards. (J.A. 141, 142.)

II.

In my view, the plain language of the arbitration

provision demonstrates a sufficiently clear intent to impose all

the rules and procedures of the PUAA, including the vacatur

rules, 42 Pa. Cons. Stat. Ann. §§ 7302(d)(2) & 7314(a). I would

remand these proceedings to the District Court for

reconsideration of the Motion to Vacate under the vacatur

provisions of the PUAA. For the foregoing reasons, I

respectfully dissent from the reasoning and conclusion of Part

III(B) of the Court’s opinion.

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