Opposition Brief — Metromedia Energy, Inc. v. Enserch Energy Services, Inc.

2

gas from TXU Retail on the spot-market, rather than under

the Master Agreement, to meet the needs of its cost-plus

contract customers. To do so, rather than negotiating a

confirmation as required by the Master Agreement, MME

telephoned TXU Retail and orally placed a market order for

gas. TXU Retail, which like MME, was a natural gas retailer

without its own gas supply, would, in turn, buy the gas from

its wholesale-trading affiliate at the spot-market price, which

was based on one of two industry-accepted market indices:

Gas Daily's index, which is used for daily transactions, and

Inside FERC’ s index, which is used for monthly transactions.

The market price charged to TXU Retail by its wholesale-

trading affiliate was known as the “internal transfer price,”

and was passed on to MME.

During the approximately two-year period in which

MME purchased spot-market gas, TXU Retail’s monthly

invoices contained separate entries for gas purchased

pursuant to confirmations under the Master Agreement

(Confirmed Transactions) and on the spot-market. The

invoices specifically identified spot-market purchases with

the notation “spot-market,” which was followed by the

volume delivered and its price. The spot-market purchase

price always differed from the Confirmed Transactions’ price.

In fact, before paying an invoice, MME compared its spot-

market price to Gas Daily's index for the relevant period to

confirm that it had been charged the market price.

During the winter of 2000-2001, natural gas prices

skyrocketed as a result of unusually cold weather, increasing

from about $4 per MMBtu to more than $23 per MMBwu.

Apparently unable to pass through the high prices to certain

of its cost-plus customers, MME claimed for the first time

that the spot-market gas price was governed by the Master

3

Agreement’s pricing provisions and demanded, pursuant to

the agreement, that TXU Retail provide it with cost

information about the spot-market gas sold to MME during

the Disputed Period. In addition, MME, which already was

greatly in arrears on its payments to TXU Retail for other

gas deliveries,‘ refused to pay for the spot-market gas

deliveries during that period.

B. The arbitration proce ding.

Unhappy with the cost information provided by TXU

Retail, MME, on October 11, 2001, sent TXU Retail a cryptic

notice stating that MME “hereby gives notice pursuant

to Article 14 of its Master Agreement with TXU of

commencement of arbitration of the disputes between MME

and TXU which are subject to that provision. ...”* A few

months later, MME made a “Demand for Arbitration.” The

demand described the parties’ dispute as follows: “MME

bought natural gas from TXU.. . . [The] Contract calls for

the price to be based on TXU’s cost. Claimant believes TXU

charged substantially more than called for under contract.

TXU refuses to provide cost information. . . .” As relief, the

demand sought “information regarding TXU’s cost. Based

on one month’s cost data . . . , the claim will be in excess of

$2,000,000... .”

4. Shortly before this dispute arose, MME was more than $18

million in arrears on its payments to TXU Retail for its natural gas

purchases.

5. Under the Master Agreement either party could submit “any

disagreement, difference, or dispute among the Parties avising under

this Agreement” to arbitration in accordance with “the Federal

Arbitration Act and the Commercial Arbitration Rules of the

American Arbitration Association.” Pet.’s App. at 43a.

4

As required by the Master Agreement, a three-member

arbitration panel (the Panel), consisting of an arbitrator

appointed by MME, an arbitrator appointed by TXU Retail,

and a neutral arbitrator, who had the sole authority to

“hear and decide all matters relating to the dispute,” was

empaneled by the American Arbitration Association.

Pet.’s App. at 42a. Unfortunately, the parties failed to create

a single, comprehensive document that set forth the precise

issues the Panel was to decide. Rather, on April 26, 2002,

MME, at the request of the neutral! arbitrator, filed its

“Statement of Claims.” Paragraph 4.1 of the statement alleged

the following contract breaches: (1) breach of Section 7.4 of

the Master Agreement because TXU Retail failed to allow

MME to inspect its records; (2) breach of Section 7.2 of the

Master Agreement because TXU Retail improperly exercised

MME’s letter of credit;® and (3) TXU Retail’s “violat[ion]

of the [Master] Agreement by supplying gas to MME for

spot purchases made between November 2000 and February

2001 and subsequently overcharging MME for said

purchases.” Notwithstanding this last claim, the statement’s

“prayer for relief” oddly did not seek damages for the alleged

overcharges. Instead, it asked the Panel to order TXU Retail

to: (1) “produce its books and records to MME... ;”

(2) return all amounts drawn under the letter of credit. . .

until such time that TXU can prove all amounts allegedly

due and owing;” (3) declare “that the [Master] Agreement

does not allow TXU [Retail] to obtain gas from its affiliate

corporation, mark up the wholesale cost of the gas as if it

was purchased from a non-affiliated third party, and claim

6. As pointed out above, MME refused to pay for its spot-market

gas purchases during the Disputed Period. In addition, as it also owed

TXU Retail millions more for gas purchases under Confirmed

Transactions, TXU Retai! exercised a $10 million letter of credit

provided by MME to secure its payment for its natural gas purchases.

5

this is the proper cost of gas to MME under the Agreement;”’

and (4) award MME its costs and attorneys’ fees.

TXU Retail’s response to MME’s “Statement of Claims,”

among other things, denied that the Master Agreement

covered MME'’s spot-market gas purchases. Relying on

Section 2-208 of the Uniform Commercial Code, the response

maintained that the parties’ two-year course of performance

relating to such purchases “establishes a separate and distinct

contract regarding the price for spot gas, or, in the alternative,

provides additional contract terms regarding the price of spot

gas[,]” and that, pursuant to the course of performance, spot

gas was priced at market. In addition, TXU Retail

counterclaimed against MME for breach of the Master

Agreement because MME failed to pay TXU Retail:

(1) a portion of its gross profit on the resale of the gas it

purchased under the Master Agreement, as required by the

agreement; and (2) for “liquidated forward positions and

other amounts owed.”

After more than a year of discovery, a three-day

arbitration hearing was held in September 2002. In

anticipation of the hearing, both parties filed pre-arbitration

briefs. MME’s brief greatly modified its claims and theories.

Despite the failure of its “Statement of Claims” to request

damages for alleged spot-market gas overcharges during the

Disputed Period, MME, in its brief, requested more than $7

million in such damages. Moreover, MME’s brief asserted

an entirely new theory regarding why it had been overcharged

for some spot-market gas. Unlike its arbitration demand and

its “Statement of Claims,” which alleged that MME was to

be charged TXU Retail’s wholesale-trading affiliate’s actual

——_—

7. Although virtually unintelligible, this refers to TXU Retail's

internal transfer price.

6

gas cost for spot-market gas (as allegedly required by the

Master Agreement’s pricing provisions), MME’s brief for

the first time claimed that the Confirmed Transactions were

“full requirements contracts” that required TXU Retail to

sell MME not only the gas volumes specified in the

confirmations, but also any additional spot-market gas used

by the customers, at the confirmation’s fixed price. Thus,

MME bifurcated its overcharge claim, alleging that it was to

be charged two different prices for spot-market gas: the

Confirmed Transactions’ price for spot-market gas delivered

to MME’s Confirmed Transactions customers and the Master

Agreement’s price, which it contended was TXU Retail’s

wholesale-trading affiliate’s cost, for spot-market gas

delivered to its other customers.*

TXU Retail’s Pre-Arbitration Brief, consistent with its

response to MME’s “Statement of Claims,” reiterated its

position that the parties’ course of performance either

modified the Master Agreement or resulted in a separate

course-of-performance contract pursuant to which spot-

market gas purchases were priced at market. Also, believing

that MME was challenging the reasonableness of its internal

transfer price during the Disputed Period, the brief clearly

stated that TXU Retail would adduce testimony during the

hearing establishing that the internal transfer price was

reasonable because it was “well within the market price

ranges published in both Jnside FERC and Gas Daily.”

Immediately before the arbitration hearing began, the

parties advised the Panel that MME had agreed to pay TXU

Retail about $2 million in settlement of TXU Retail’s

8. MME’s Pre- Arbitration Brief also recognized, and attempted

to refute, TXU Retail’s position that the spot-market gas price was

the market price pursuant to the parties’ course of performance.

7

counterclaims. The parties also advised the Panel that they

had agreed that there was to be one final arbitration award in

the case, incorporating both the Panel’s decision regarding

MME'’s claims and the settlement of TXU’s counterclaims.

During the hearing, both parties adduced evidence about

the proper spot-market gas price during the Disputed Period,

with TXU Retail presenting expert testimony, without

objection from MME, establishing that its internal transfer

price during the Disputed Period was reasonable because it

was within the range of the relevant gas-market price indices.

Also, during the hearing, MME once again significantly

modified its claims. Among other things, it contended for

the first time that it was damaged because TXU Retail’s spot-

market gas charges during the Disputed Period exceeded the

market price, thereby preventing MME from passing the full

cost through to certain customers under their cost-plus

contracts (MME’s Pass-Through Claim or the Pass-Through

Claim). As a result of this new claim, the Panel, at the

arbitration hearing’s conclusion, held the record open so

MME could present additional evidence to support it.

In addition, after the hearing’s conclusion, the neutral

arbitrator wrote the parties a letter (the Neutral Arbitrator’s

Post-Hearing Letter) squarely placing them on notice that

the Panel would decide the reasonableness of TXU Retail’s

spot-market gas charges during the Disputed Period. In this

regard, the letter asked the parties to provide information to

the Panel so it could determine if TXU Retail’s spot-market

gas charges during the Disputed Period reflected the market

price.

MME did not complain to the neutral arbitrator that a

determination of the reasonableness cf TXU Retail’s spot-

8

market gas charges during the Disputed Period was outside

the scope of the parties’ submissions or that the information

sought by his letter was irrelevant for that reason. Instead,

MME, as well as TXU Retail, supplemented the arbitration

record about MME’s Pass-Through Claim and provided the

information requested by the Neutral Arbitrator’s Post-

Hearing Letter. In addition, they filed post-hearing briefs.

Needless to say, MME’s brief argued that the Master

Agreement or the Confirmed Transactions set the spot-market

gas price and increased MME’s damages from the alleged

overcharges to more than $7.4 million. TXU Retail’s brief

reiterated its course-of-performance argument and further

argued that the spot-market gas price was the market price,

that its internal transfer price during the Disputed Period was

reasonable because it was in the range of the relevant gas-

market price indices during that period, and that MME’s

alleged inability to pass through the spot-market gas price

to certain of its cost-plus contract customers during the

Disputed Period was not the result of TXU Retail’s alleged

overcharges. Even though TXU Retail’s post-hearing brief

made it crystal clear that TXU [Retail] believed

that the [Panel was] empowered to address the

reasonableness of TXU [Retail’s] spot-market

prices during the Disputed Period, MME chose

not to send a letter or seek leave to file a reply

challenging TXU [Retail’s] submission of an issue

that MME had (supposedly) not agreed to

arbitrate.

Pet.’s App. at 18a.

9

The Arbitration Award was issued on March 3, 2003.

Pet.’s App. at 30a-38a. Even MME’s appointed arbitrator

flatly rejected MME’s claim that the Master Agreement and/

or the Confirmed Transactions set the spot-market gas price.

Instead, the Panel unanimously found that a separate course-

of-performance contract set the price at market and that TXU

Retail’s internal transfer price during the Disputed Period

was fair and reasonable because it was within the range of

the relevant gas-market price indices during that period.

Id. at 33a-36a. Accordingly, the Panel ordered MME to pay

TXU Retail “the amount of $1,830,866.19"° and “one-third

of its attorneys’ fees ... and. . . costs excluding the fees of

its appointed arbitrator.” /d. at 36a. Tine Panel finally ordered

TXU Retail to submit “affidavits” to the neutral arbitrator

establishing its attorneys’ fees and costs and allowed MME

to “challenge the reasonableness of any charge.” Jd. at 37a.

Even though MME (supposedly) believed that the

attorneys’ fees award was a direct result of the Panel's

improper determination of the reasonableness of TXU

Retail’s spot-market gas prices during the Disputed Period,

MME failed either to send a letter to the Panel objecting to

the award on that basis or to file a motion for its

reconsideration on that basis. Instead, in responding to TXU

Retail’s attorneys’ fees’ affidavits, MME only argued that

TXU Retail was not entitled to recover its attorneys’ fees

because TXU Retail’s own actions — its failure to provide

MME with information about the cost of the spot-market

gas sold to MME during the Disputed Period — necessitated

the arbitration. /d. at 39a-40a. The Panel rejected MME’s

9. This amount included an offset to the settlement amount of

about $174,000 because of accounting errors and other matters raised

by the Panel in its audit of TXU Retails charges for spot-market gas

during the Disputed Period. Pet. App. at 35a-36a.

10

argument and awarded TXU Retail about $126,000 in

attorneys’ fees and costs in its “Final Order.” /d."°

C. This lawsuit.

Needless to say the arbitration was a disaster for MME

- not only did the Panel reject its claim that it was

overcharged for spot-market gas during the Disputed Period,

but it also ordered MME to pay TXU Retail about $2 million

for its Master Agreement breaches and to reimburse TXU

Retail for its arbitration expenses. Unwilling to accept this

result, MME fired the attorneys who represented it in the

arbitration and hired new ones to commence this action in

an attempt to relitigate the issue of whether it had been

overcharged for its spot-market gas purchases during the

Disputed Period. Accordingly, its pleadings in the District

Court sought: (1) to vacate the arbitration award to the extent

that it found that TXU Retail’s spot-market gas charges were

reasonable during the Disputed Period and awarded TXU

Retail attorneys’ fees; and (2) damages from TXU Retail for

the alleged overcharges.

Both parties moved for summary , 3dgment. The District

Court granted MME’s motion, holding that the Panel

exceeded its authority by: (1) determining the reasonableness

of TXU Retail’s spot-market gas charges during the Disputed

Period because the only issue in the arbitration was whether

the Master Agreement set the spot-market gas price; and

(2) awarding TXU Retail attorneys’ fees because the award

necessarily was based on the Panel’s inappropriate decision

that TXU Retaii’s spot-market gas charges during the

Disputed Period were reasonable.

10. The “Final Order” erroneously refers to TXU Energy

Trading Co. instead of TXU Retail.

1!

TXU Retail (and the other Respondents) appealed to the

Third Circuit. With respect to the district court’s ruling

regarding the Panel’s determination of the reasonableness

of its spoc-market gas charges during the Disputed Period,

TXU Retail, after pointing out that the parties, during the

arbitration, had failed to set forth the precise issues the Panel

was to decide in a single, comprehensive document or

otherwise, framed the issue in terms of whether the parties

submitted the spot-market gas charges’ reasonableness to the

Panel for determination. Citing the “hird Circuit’s decision

in Matteson v. Ryder Sys., Inc., 99 £.3d 108, 113 (3d Cir.

1996), TXU Retail argued that the Panel’s interpretation of

the scope of the submitted issues was entitled to the same

far-reaching respect and deference accorded to its findings

of fact and interpretations of the law, and concluded that

MME and TXU Retail’s arbitration pleadings, briefs, and

conduct provided a reasonable, if not conclusive, basis for

the Panel to conclude that it was empowered to decide the

reasonableness of TXU Retail’s spot-market gas charges

during the Disputed Period.

With respect to the attorneys’ fees award, TXU Retail

argued that the District Court improperly vacated the award

because it ignored the Panel’s finding that TXU Retail was

the “non-defaulting Party” under the Master Agreement’s

attorneys’ fees provision, not because it determined that TXU

Retail’s spot-market gas charges during the Disputed Period

were reasonable, but rather because it first concluded that

the “non-defaulting Party,” under the Master Agreement’s

attorneys’ fees provision, was the arbitration’s “prevailing

party,” that is, the party who obtained the largest monetary

recovery in the arbitration, and then found TXU Retail was

the “prevailing party” as it obtained the largest (and the only)

monetary recovery in the arbitration by virtue of the

settlement of its counterclaims.

12

MME’s Third Circuit Brief failed to challenge TXU

Retail’s assertion that both the District Court and the Third

Circuit were required to review the Panel's interpretation of

the scope of the parties’ submission deferentially. Instead,

after agreeing that a deferential standard of review applied,

MME simply argued that the District Court properly deferred

to the Panel’s interpretation of the scope of the submission

because it allegedly carefully reviewed the arbitration record.

The Third Circuit agreed with TXU Retail. After holding

that an arbitrator’ s interpretation of the scope of a submission

was entitled to deference, the Third Circuit concluded that

the arbitration “record as a whole provided an adequate basis

upon which the [Panel] could conclude that it was empowered

to address the reasonableness of TXU [Retail’s] spot-gas

prices in the event that a course-of-performance contract

rather than the Master Agreement governed the parties’ spot-

gas transactions.” Pet.’s App. at 15a. It also held that the

District Court incorrectly vacated the attorneys’ fees award

for the reason set forth by TXU Retail in its Opening Brief.

Id. at 19a-20a. Accordingly, the Third Circuit reversed the

District Court’s decision and remanded the case with

instructions to enter judgment in favor of TXU Retail.

Id. at 20a.

D. The Petition.

Unwilling to accept its loss in the Third Circuit, MME

once again fired its attorneys and hired new ones to petition

this Court for a writ of certiorari. Wholly ignoring the fact

that MME’s Third Civcuit Brief never argued that a federal

court is required to review an arbitrator's interpretation of

the scope of a submission de novo, rather than deferentially,

the Petition contends for the first time in this proceeding

13

that: (1) the decision below should be reversed because the

Third Circuit applied the wrong standard of review; and

(2) when the Panel's interpretation of the scope of the parties’

submission is reviewed de novo, it becomes clear that the

question of the reasonableness of TXU Retail’s spot-market

gas charges during the Disputed Period was not submitted to

the Panel for determination.

REASONS FOR DENYING THE PETITION

The Petition should be denied for three reasons. First,

as pointed out above, MME never suggested, much

less argued, in its Third Circuit Brief that the Panel’s

interpretation of the scope of the submitted issues should be

reviewed de novo. Rather, it acknowledged in its Third

Circuit Brief that such interpretation was to be reviewed

deferentially, and even argued that the District Court properly

deferred to the Panel's interpretation of the scope of the

parties’ submission. Accordingly, MME waived its argument

that the Third Circuit applied the wrong standard of review

below.

Second, and more important, MME’s argument creates

a false conflict among the Circuits and with this Court's

decision in First Options of Chicago, Inc. v. Kaplan, 514

U.S. 938 (1995), by confusing the standard of a federal court's

review of an arbitrator’s interpretation of the scope of a

submission with the standard of a federal court’s review of

the question of arbitrability - whether the parties agreed to

arbitrate in the first instance. When the issues are untangled

and considered separately, it becomes crystal clear that:

(1) there is no conflict among the Circuits regarding the

proper standard of review of an arbitrator's interpretation of

the scope of a submission because every Court of Appeals

14

that has directly considered the question has held, like the

Third Circuit did below, that a federal court’s review of an

arbitrator’s interpretation of the scope of a submission is

highly deferential; and (2) the Third Circuit’s decision below

does not conflict with this Court’s decision in First Options

because First Options applies solely to the standard of review

of an arbitrator’s determination of arbitrability, and not to

an arbitrator's interpretation of the scope of a submission.

———

Third, even if MME had not waived its issue by failing

to raise it in the Third Circuit and even if a federal court is

required to review an arbitrator’s interpretation of the scope

of a submission de novo, the Petition still should be denied

because the arbitration record conclusively establishes that

MME and TXU Retail submitted the question of the

reasonableness of TXU Retail’s spot-market gas charges

during the Disputed Period to the Panel for 4etermination.

A. MME waived its issue by failing to raise it in the Third

Circuit.

This Court does not grant certiorari to decide an issue

that was not raised in the Court of Appeals, irrespective of

its significance or novelty. As noted by this Court in Adickes

v Kress & Co., 398 U.S. 144, 148 n.1 (1970): “Where issues

are neither raised before nor considered by the Court of

Appeals, this Court will not ordinarily consider them.”

Accord, Howell v. Mississippi, 125 S. Ct. 856, 860 (2005);

Yee v. Escondido, 503 U.S. 519, 533 (1992); Tennessee v.

Dunlop, 426 U.S. 312, 316 n.3 (1976).

Here, MME never raised the issue it asks this Court to

resolve in the Third Circuit (or the District Court). It never

argued in the Third Circuit (or the District Court) that a

15

de novo, rather than a deferential, standard of review applied to.

a federal court’s review of an arbitrator’s interpretation of the

scope of a submission. Rather, in its Third Circuit Brief, MME

agreed with TXU Retail that a deferential standard of review

applied.

For example, TXU Retail’s Opening Brief in the Third

Circuit presented two broad issues: one with respect to the

propriety of the Panel’s finding that TXU Retail’s spot-market

gas charges during the Disputed Period were reasonable (the

Scope Issue) and an another with respect to the propriety of the

attorneys’ fees award. The Scope Issue was framed in terms of

whether the parties submitted the question of the reasonableness

of TXU Retail’s spot-market gas charges during the Disputed

Period to the Panel for determination. In this regard, TXU

Retail’s Opening Brief in the Third Circuit set forth the

applicable standard of review of the Panel's interpretation of

the scope of the parties’ submission as follows:

[A]n arbitrator’s view of the scope of the

submitted issues is entitled to the same far-reaching

respect and deference that is normally accorded to

his findings of fact and interpretations of the law.

As noted by this Court: “[T]here is no doubt that

our review of the interpretation of a submission is

highly deferential(,|” Matteson, 99 F.3d at 113, and

““there must be absolutely no support at all in the

record justifying the arbitrator’s determinations for

a court to deny enforcement of the award[,]’” id. at

113 (quoting News Am. Pub., Inc. v. Newark

Typographical Union, Local 103, 918 F.2d 21, 24

(3d Cir. 1990) (emphasis added)). . . .

See TXU’s Opening Br. at 27 (emphasis in original).

16

After setting forth this deferential standard of review,

the introduction to the Brief’s argument on the Scope Issue

pointed out that the district court’s holding on the issue

“is wrong, however, because it is contrary to the arbitration

record and fails to give the appropriate deference to the

Panel's view of the issues submitted to it.” Jd. at 19.

Moreover, the fourth subpoint in that argument made it clear

that TXU Retail believed that a deferential standard of review

applied and that the District Court erred in failing to apply

one. For example the subpoint’s heading read: “The district

court failed to give the Panel’s determination of the issues

submitted to it the far-reaching respect and deference to

which it is entitled.” /d. at 43.

MME, in its Third Circuit Brief, agreed that a federal

court reviews an arbitrator's interpretation of the scope of a

submission deferentially. In fact, not only was the Third

Circuit's decision in Matteson v. Ryder Systems, Inc., supra,

the most cited case in MME’s Third Circuit Brief, but the

Brief also cited this Court’s decision in First Options of

Chicago, Inc. v. Kaplan, whose holding, MME now contends

conflicts with the Third Circuit’s application of a deferential

standard of review below, Pet. at 18-21, only for the

proposition that, in reviewing a district court's decision

upholding or vacating an arbitration award, an appellate court

reviews the district court's findings of fact for clear error

and its conclusions of law de novo.

In sum, MME not only failed to raise the question of the

proper standard of review in the Third Circuit, but in its Third

Circuit Brief, it agreed with TXU Retail that a deferential

standard of review applied to the issue in this case — how a

federal court reviews an arbitrator’s interpretation of the

17

scope of a submission.'' Accordingly, this Court should deny

the Petition.

B. The Third Circuit’s decision below is consistent with

the decisions of its sister Circuits and with this

Court’s decision in First Options.

Neither MME nor TXU Retail ever claimed during the

arbitration that their dispute, or any portion of it, was not

arbitrable. Just as important, they failed to provide the Panel

with the precise issues it was to decide either in a single,

comprehensive document or otherwise. Based on MME and

TXU Retai!’s~pleadings, briefs, and conduct during the

arbitration, the Panel concluded that one of the submitted

issues was whether TXU Retail’s spot-market gas charges

during the Disputed Period were reasonable.

Unhappy with the Panel’s resolution of that issue, MME

commenced this action to vacate the arbitration award. In

doing so, it never claimed that the Panel lacked jurisdiction

over the parties’ dispute, or any part of it, because there was

no arbitration agreement. Rather, after acknowledging that

the Master Agreement required the parties to arbitrate their

dispute, MME argued that the Panel had exceeded its

authority by deciding an issue that allegedly had not been

submitted to it — the reasonableness of TXU Retail’s spot-

—_—_—

11. It is well settled that a party’s failure to raise an issue in its

brief waives the issue in the court of appeals. E.g., Robertson v.

American Airlines, Inc., 401 F.3d 499, 504 n.2 (D.C. Cir. 2005);

Balojun v. Ashcroft, 358 F.3d 464, 465 (7" Cir. 2004); Herrmann

Holding Lid. v. Lucent Technologies, Inc., 302 F.3d 552, 562 n.2

(5 Cir. 2002); $557,933.89, More or Less, in U.S. Funds, 287 F.3d

66, 78 (2d Cir. 2001); Melrose Med. Group Part. Savs. Plan v. Bulger,

243 F.3d 773, 783 (3d Cir. 2001).

18

market gas charges during the Disputed Period. Thus, the

issue before the Third Circuit was whether the Panel properly

interpreted the scope of the parties’ submission. In deciding

that issue, the Third Circuit followed its long-standing

precedent and held that the Panel’s interpretation of the scope

of the parties’ submission was entitled to deference.

Pet.’s App. at 10a, 14a-15a.

MME argues that a writ of certiorari should be granted

because: (1) there is a conflict among the Circuits regarding

the proper standard of review of an arbitrator’s interpretation

of the scope of a submission, with some Circuits reviewing

the arbitrator’s interpretation deferentially, as the Third

Circuit did below, and others reviewing it de novo, Pet. at

12-18; and (2) the Third Circuit’s deferential standard of

review conflicts with this Court’s decision in First Options,

which it claims requires a federal court to review an

arbitrator’s interpretation of the scope of a submission

de novo, Pet. at 18-22. MME, however, has created a false

conflict by confusing two separate and distinct issues: the

standard of review of an arbitrator’s determination of

arbitrability — whether the parties have agreed to arbitrate in

the first instance — and the standard of review of an

arbitrator’s interpretation of the scope of a submission. When

these issues are viewed separately, as they must be, it becomes

clear that the Third Circuit applied the correct standard of

review.

19

1. The Circuits agree that an arbitrator’s

interpretation of the scope of a submission is

entitled to deference.

At the outset, the Courts of Appeals have recognized

that different standards of review apply to an arbitrator's

interpretation of the scope of a submission and to an

arbitrator’s determination of arbitrability. For example, the

D.C. Circuit, in a case decided after First Options, explained

that

[t}his question—the scope of the submission to

the arbitrator—should not be confused with the

question of arbitrability—whether the employer

and union agreed in the collective bargaining

agreement to put a particular issue to arbitration.

The latter question is reviewed by a federal court

de novo. The former, as we have just indice ‘ed, is

not.

Madison Hotel v. Hotel & Rest. Employees, Local 25, 144

F.3d 855, 857 n.1 (1998). The First Circuit made the same

distinction in Bull HN Information Systems, Inc. v. Hutson,

229 F.3d 321 (2000), which also was decided after First

Options. After holding that, when the issue is whether an

arbitrator exceeded his authority by deciding an issue not

submitted to him, “‘the arbitrator’s interpretation of the scope

of the issue submitted to him is to be treated with great

deference,’” id. at 332 (quoting Federated Dep't Stores v.

United Food & Commercial Workers Union, Local 1442, 901

F.2d 1494, 1498 (9" Cir. 1990)), the court explained that

{t]his case is distinguished from one in which a

court asked to compel arbitration determines, in

20

the first instance, whether the parties agreed to

arbitrate their dispute at all. In that type of case,

‘the court is to make this determination by

applying the federal substantive law of

arbitrability, applicable to any arbitration

agreement within the coverage of the [Federal

Arbitration] Act... .’

Id. at 332 n.8 (quoting Mitsubishi Motors Corp. v. Soler

Chrysler-Plymouth, Inc. , 473 U.S. 614, 626 (1985)). Finally,

the Fifth Circuit in Executone Information Systems, Inc. v.

Davis, 26 F.3d 1314 (1994), which was decided before First

Options, also distinguished the standard of review a federal

court applies to an arbitrator’s interpretation of the scope of

a submission from his or her determination of arbitrability.

After holding that the arbitrability determination is reviewed

de novo, id. at 1321, the court took

note of the view expressed by our sister circuits

that the arbitrator’s interpretation of the scope of

the issues submitted to him is entitled to the same

judicial deference accorded his interpretation of

the agreement being arbitrated, but [found] it

unnecessary to adopt or reject that view given the

clear facts of this case.

Id. at 1321 n.1 (citations omitted).'*

12. Notwithstanding the fact that in Executone Information

Systems, Inc., the Fifth Circuit expressly declined to decide the proper

standard of review of an arbitrator's interpretation of the scope of a

submission, the Petition incorrectly cites it for the proposition that

the Fifth Circuit reviews such an interpretation de novo. Pet. at 13.

It also incorrectly cites /ron Workers Local No. 272 v. Bowen, 624

(Cont'd)

21

More important, there is no conflict among the Circuits

regarding the standard of review of an arbitrator’s interpretation

of the scope of a submission. Every Circuit that has considered

the question, both before and after First Options, has held that

a federal court reviews such an interpretation deferentially. E.g.,

Bull HN Info. Sys., Inc., 229 F.3d at 332; Coastal Oil of N.

Eng., Inc. v. Teamsters Local 25, 134 F.3d 466, 469 (1* Cir.

1998); Boston & Maine Corp. v. Brotherhood of Maintenance

of Way Employees, 94 F.3d 15, 19 (1* Cir. 1996); El Dorado

Technical Servs., Inc. v. Union Gen. de Trabajordores, 961 F.2¢

317, 321 (1" Cir. 1992); Kurt Orban Co. v. Angeles Metal Sys.,

(Cont'd)

F.2d 1255 (5" Cir. 1980), for the same proposition, id. at 14, even though

there, the Fifth Circuit, as it later did in Executone Information Systems,

Inc., declined to decide the issue:

We note that General Warehousemen & Helpers Local

767 v. Standard Brands, Inc., 560 F.2d 700, 707-08 n.8

(S® Cir.), rev'd en banc on other grounds, 579 F.2d 1282

(1978), cert. denied, 443 U.S. 913, 99 S. Ct. 3103, 61 L.

Ed. 877 (1979) (citing United Steel Workers of America v.

United States Gypsum Co., 492 F.2d 713, 732 (5" Cir.),

cert. denied, 419 U.S. 998, 95 S. Ct. 312, 42 L. Ed. 2d 271

(1974)), suggests that “disputes over the scope of a

submission are themselves to be resolved by the arbitrator.”

But since in this case the court’s construction of the issue

submitted was precisely the same as the arbitrator's, we

need not resolve whether the court’s or the arbitrator’s

version would prevail if they differed.

Id. at 1264 n.18 (emphasis added).

Finally, the Petition fails to cite Bull HN Information Systems, Inc.

and, although it cites Madison Hotel, it ignores the distinction the D.C.

Circuit made between the standard of review of an arbitrator’s

determination of arbitrability and the standard of review of an arbitrator’s

interpretation of the scope of a submission. See Pet. at 16.

22

573 F.2d 739, 740 (2d Cir. 1978); Metromedia Energy, Inc. v.

Ensearch Energy Servs., Inc., 409 F.3d 574, 578, 579 (3d Cir.

2005); Major League Umpires Ass'n v. American League of

Prof’! Baseball Clubs, 357 F.3d 272, 279 (3d Cir. 2004);

Matteson, 99 F.3d at 113; Mobil Oil Corp. v. Independent

Oil Workers Union, 679 F.2d 299, 302 (3d Cir. 1982);

Richmond, Fredericksburg & Potomac R.R. v. Transportation

Communications Int'l Union, 973 F.2d 276, 280 (4" Cir. 1992);

Volvo GM Heavy Truck Corp. v. International Union, No. 89-

1515, 1990 WL 136644, at *2 (4" Cir. Sept. 24, 1990);

International Ass’n of Machinists & Aerospace Workers v.

Tennessee Valley Auth., 155 F.3d 767, 772 (6" Cir. 1998);

Lattimer-Stevens Co. v. United Steelworkers of Am., 913 F.2d

1166, 1170 (6 Cir. 1990); American Postal Workers Union v.

Runyon, 185 F.3d 832, 835-36 (7" Cir. 1999); John Morrell &

Co. v. Local Union 304A, 913 F.2d 544, 560 (8" Cir. 1990);

Association of W. Pulp & Paper Workers, Local 78 v. Rexam

Graphic, Inc., 221 F.3d 1085, 1087 (9" Cir. 2000); Peabody W.

Coal Co. v. District 22, United Mine Workers of Am.,

No. 03-15569, 99 Fed. Appx. 116, 117 (9% Cir. May 18, 2004);

Sheet Metal Workers’ Int’l Ass'n Local Union 359 v. Madison

Indus., Inc., 84 F.3d 1186, 1190 (9" Cir. 1996); Pack Concrete,

Inc. v. Cunningham, 866 F.2d 283, 285-86 (9" Cir. 1989);

Madison Hotel, 144 F.3d at 857."

13. No Fifth, Tenth, Eleventh, or Federal Circuit decisions have

been found that decide the issue, although one district court in the Tenth

Circuit has held that an arbitrator’s interpretation of the scope of a

submission is reviewed deferentially, Advanced Technical Assocs., Inc.

v. Segilman, 39 F. Supp. 2d 1311, 1316(D. Kan. 1999) (citing El Dorado

Technical Servs., Inc., 961 F.2d at 321). Moreover, with the exception

of Executone Information Systems, Inc., 26 F.3d at 1321 9.1, and Jron

Workers Local No. 272,624 F.2d at 1264 n.18, in which the Fifth Circuit

declined to decide it, the cases cited by MME for the proposition that

the Second, Fifth, Tenth, and Eleventh Circuits review an arbitrator’s

(Cont'd)

23

There are several reasons why the Circuits uniformly

have held that an arbitrator’s interpretation of the scope of a

submission is entitled to deference. First, “deference to an

(Cont'd)

_ interpretation of a submission’s scope de novo did not involve that issue.

See Pet. at 13-14. Rather, they either set forth the standard of review of

arbitrability, Sarhank Group v. Oracle Corp., 404 F.3d 657, 661-62 (2d

Cir. 2005); JLM Indus., inc. v. Stolt-Nielsen SA, 387 F.3d 163, 169, 171

(2d Cir. 2004); Specht v. Netscape Communications Corp., 306 F.3d

17, 26-27 (2d Cir. 2002); John Hancock Life Ins, Co. v. Wilson, 254

F.3d 48, 53, 57-58 (2d Cir. 2001); PaineWebber, Inc. v. Bybyk, 81 F.3d

1193, 1198 (2d Cir. 1996), Local Union No. 898 v. XL Elec. inc., 380

F.3d 868, 870 (5® Cir. 2004); GMC v. Pamela Equities Corp., 146 F.3d

242, 247-50 (S" Cir. 1998); Smith v. Currency Trading Int'l, Inc., No.

98-1311, 1999 U.S. App. LEXIS 18182, at *5 (10" Cir. Aug. 3, 1999);

Bakery, Confectionery & Tobacco Workers Local No. 262 v. Brown &

Williamson, 971 F.2d 652, 655 (11 Cir. 1992), or for a district court’s

decision upholding or vacating an arbitration award, /87 Concourse

Assocs. v. Fishman, 399 F.3d 524, 526-27 (2d Cir. 2005); EJ. Dupont

de Nemours & Co. v. Local 900, 968 F.2d 456, 458 (5" Cir. 1992).

In the same vein, MME’s claim that decisions within the First,

Fourth, Eighth, Ninth, and D.C. Circuits stand in “confusing disarray,”

Pet. at 16-17, ts based on an “apples-to-oranges” comparison of cases

setting forth the standard of review of an arbitrator's interpretation of

the scope of a submission, e.g., Madison Hotel, 144 F.3d at 857; Boston

& Maine Corp., 94 F.3d at 19; Richmond, Fredericksburg & Potomac

R.R., 973 F.2d at 280; John Morrell & Co., 913 F.2d at 560; Pack

Concrete, Inc., 866 F.2d at 285-86, with cases setting forth the standard

of review of arbitrability, e.g., Dow Corning Corp. v. Safety Nat'l Cas.

Corp., 335 F.3d 742, 747 (8" Cir. 2003); Coady v. Ashcraft & Gerel,

223 F.3d 1, 9 (1* Cir. 2000); KenAmerican Res., Inc. v. International

Union, 99 F.3d 1161, 1163 (D.C. Cir. 1996) (same); Carpenters 46 N.

Cal. Counties Conf. Bd. v. Zion Builders, 96 F.3d 410, 414 (9 Cir.

1996); E./. Dupont de Nemours & Co. v. Martinsville Nylon Employees’

Council Corp., No. 94-2222, 1996 U.S. App. LEXIS 3208, at *7-8

(4* Cir. Feb. 28, 1996).

24

arbitrator’s interpretation of a submission follows from [this

Court's) directive that ‘when the subject matter of a dispute is

arbitrable, ‘procedural’ questions which grow out of the dispute

and bear on its final disposition are to be left to the arbitrator.’”

Pack Concrete, Inc., 866 F.2d at 285 (quoting United

Paperworkers Int'l Union v. Misco, Inc., 484 U.S. 29, 40

(1987)). Second, “[flailure to adopt this [deferential] standard

would require the judiciary ‘to determine, case by case, the exact

scope of submission in the endless number’” of arbitrations, id.

(quoting Mobil Oil Corp., 679 F.2d at 302), and such plenary

review would undermine the federal policy underlying

arbitration as “an expeditious and relatively inexpensive means

of resolving disputes,” id.; accord, Mobil Oil Corp., 679 F.2d

at 302. Finally, “interpreting the issue submitted often requires

construction of the agreement itself, a job clearly for the

arbitrator.” Pack Concrete, Inc., 866 F.2d at 285-86; accord,

Mobil Oil Corp., 679 F.2d at 302."

2. The Third Circuit’s decision does not conflict with

this Court’s decision in First Options.

The Third Circuit’s decision below does not conflict with

this Court’s decision in First Options. First Options only

involved the question of the proper standard of review of an

arbitrator’s determination of arbitrability, and not the question

of the proper standard of review of an arbitrator’s interpretation

of the scope of a submission. 514 U.S. at 940, 942. Moreover,

if anything, First Options’ reasoning is consistent with the

application of a deferential standard of review to an arbitrator’s

interpretation of the scope of a submission.

14. Of course, the parties in an arbitration can prevent an

arbitrator from misinterpreting the scope of their submission by

precisely and clearly setting forth the issues to be decided by the

arbitrator in a single, comprehensive document or otherwise,

something which, of course, MME and TXU Retail failed to do.

25

In First Options, this Court held that a federal court

reviews the question of arbitrability de novo. Id. at 943-45.

In doing so, the Court explained:

Courts should not assume that the parties agreed

to arbitrate arbitrability unless there is “clea[r] and

unmistakeabl[e] evidence that they did so.” AT&T

Technologies{, Inc. v. Communications Workers

of Am.]}, 475 U.S. [643, 649 (1986)]. .. . In this

manner the law treats silence or ambiguity about

the question of who (primarily) should decide

arbitrability differently from the way it treats

silence or ambiguity about the question whether

a particular merits-related dispute is arbitrable

because it is within the scope of a valid arbitration

agreement—for in respect to this latter question

the law reverses the presumption. See Mitsubishi

Motors, [473 U.S. at 626](“‘Any doubts

concerning the scope of arbitrable issues should

be resolved in favor of arbitration’”) (quoting

Moses H. Cone Memorial Hospital v. Mercury

Constr. Corp., 460 U.S. 1, 24-25 (1983);

Steelworkers v. Warrior [&] Gulf Nav. Co., 363

U.S. (574, 582-83 (1960)].

But, this difference in treatment is

understandable. The latter question arises when

the parties have a contract that provides for

arbitration of some issue. In such circumstances,

the parties likely gave thought to the scope of

arbitration. And, given the law’s permissive

policies in respect to arbitration, see, e.g.,

Mitsubishi Motors, supra, at 626, one can

26

understand why the law would insist upon clarity

before concluding that the parties did not want to

arbitrate. . . .

Id. at 944-45 (emphasis in original). Of course, a decision

regarding the scope of a submission is more akin to the

decision of “whether a particular merits-related dispute is

arbitrable because it is within the scope of a valid arbitration

agreement” than it is to the question of arbitrability.

Accordingly, an arbitrator's interpretation of the scope of a

submission is procedural, not substantive, and the arbitrator

necessarily should interpret it in the first instance, with such

interpretation being reviewed deferentially by a federal court.

E.g., Pack Concrete, Inc., 866 F.2d at 285.

C. The arbitration record conclusively establishes that

MME and TXU Retail submitted the question of the

reasonableness of TXU Retail’s spot-market gas

charges during the Disputed Period to the Panel for

determination.

Even if MME’s had not waived its issue by failing to

raise it in its Third Circuit Brief and even if a federal court

reviews an arbitrator's interpretation of the scope of a

submission de novo, the Petition should still be denied

because the arbitration record conclusively establishes that

MME and TXU Retail submitted the reasonableness of TXU

Retail’s spot-market gas charges during the Disputed Period

to the Panel for determination. For example:

° TXU Retail in its responses to MME’s “Statement

of Claims” and in its pre- and post-arbitration briefs

consistently maintained that the spot-market gas was

sold under a separate course-of-performance contract

27

and that its spot-market charges during the Disputed

Period under that contract were proper. More

important, MME never objected to TXU Retail’s

position or advised the Panel, in response to it, that

the only issue in the arbitration was whether the

Master Agreement and/or Confirmed Transactions set

the spot-market gas price.

MME agreed, immediately before the arbitration

hearing, that there was to be “one final arbitration

award” embodying both the settlement of TXU

Retail’s counterclaims and its recovery on its

overcharge claim. Of course, one such award could

be issued only if the Panel was empowered to decide

if MME was overcharged for spot-market gas during

the Disputed Period, irrespective of whether the

Master Agreement, the Confirmed Transactions, or

the course-of-performance contract set its price.

TXU Retail introduced expert testimony at the

arbitration hearing about the propriety of its spot-

market gas charges during the Disputed Period under

the course-of-performance contract without objection

from MME.

MME’s Pass-Through Claim, raised for the first time

during the arbitration hearing, put in issue both the

propriety of TXU Retail’s spot-market gas charges

during the Disputed Period under the course-of-

performance contract and whether TXU Retail’s spot-

market gas charges under that contract during that

period reflected the market price.

°

28

The Neutral Arbitrator’s Post-Hearing Letter advised

the parties that the Panel intended to decide whether

the spot-market gas price was the price under the Master

Agreement and/or the Confirmed Transactions, as

maintained by MME, or the market price under a course-

of-performance contract, as maintained by TXU Retail.

It also requested information that was relevant only to

a determination of the propriety of TXU Retail’s spot-

market gas charges during the Disputed Period under a

course-of-performance contract. And, MME provided

the requested information without objection.

MME despite its knowledge that TXU Retail, at least

in its Post-Arbitration Brief, was asking the Panel to

determine the propriety of its spot-market gas charges

during the Disputed Period under the course-of-

performance contract never objected to the request.

MME participated in post-arbitration award proceedings

to determine the amount of TXU Retail’s attorneys’ fees

without objecting to the proceedings as exceeding the

Panel’s authority because the award was based, as it

claimed in the District Court and in the Third Circuit,

on the Panel’s improper determination that TXU Retail’s

spot-gas charges during the Disputed Period were

reasonable under the course-of-performance contract.

MME has accepted the benefits of the Panel’s

determination of the reasonableness of TXU Retail’s

spot-market gas charges during the Disputed Period.

The Panel, after determining that the charges were

reasonable under the course-of-performance contract,

found more than $174,000 in accounting errors by TXU

Retail with respect to them. It, therefore, offset that

amount against the stipulated damages MME agreed

29

TXU Retail was entitled to recover under its

counterclaim. MME, throughout this proceeding, has

sought to preserve the offset.

Here, it is clear that MME and TXU Retail unmistakably

submitted the question of the reasonableness of TXU Retail’s

spot-market charges during the Disputed Period to the Panel

for determination. This Court should not allow MME to now

claim that the Panel exceeded its powers in deciding the

submitted issue merely because its determination was

unfavorable to MME.

CONCLUSION

For the foregoing reasons, the Petition should be denied.

Respectfully submitted,

THOMAS F. LiLLarp

Counsel of Record

Ropert K. Wise

Mices B. HABerer

Hunton & Wituiams LLP

Energy Plaza

1601 Bryan Street, 30” Floor

Dallas, TX 75201

(214) 979-3000

Lepa DUNN WETTRE

Rosinson & Live.

Two Penn Plaza East

Newark, NJ 07105

(973) 690-5400

Attorneys for Respondents

iN

FILED

DEC 14 2005

No. 05-295 OFFICE OF THE Sep

—-

IN THE

Supreme Court of the United States

METROMEDIA ENERGY, INC.,

Petitioner,

v.

ENSERCH ENERGY SERVICES, INC.; TXU ENERGY

COMPANY LLC; TXU ENERGY TRADING; TXU ENERGY

SERVICES, N/K/A TXU ENERGY RETAIL COMPANY, LP;

TXU JOHN DOES,

Respondents.

On Petition FoR Writ OF CERTIORARI TO THE

Unirep States Court oF ApreALs

FOR THE THirdD CIRCUIT

REPLY BRIEF FOR PETITIONER

G. Eric BRuNSTAD, Jr.

Counsel of Record

RHEBA RUTKOWSKI

SUSAN KIM

BriAN R. HOLe

BINGHAM McCutcuen LLP

One State Street

Hartford, CT 06103

(860) 240-2717

Counsel for Petitioner

i

STATEMENT PURSUANT TO RULE 29.6

Petitioner’ s corporate disclosure statement was set forth

at page ti of its Petition for a Writ of Certiorari, and there

are no amendments to that statement

it

TABLE OF CONTENTS

Page

Statement Pursuant to Rule 29.6 ................. i

ee Oe GRE so vokcebiodncéseeedtéoes estate ii

ee Gs BOE 5 Jcvcecldadcddsdudtcbeestvet iii

Il. The Circuits Are Divided Over the Question

0 ES Ss EE ee oP ae 5

Il. The Third Circuit's Decision Conflicts With

Bee Ge PI, cocededewoceceeseve 7

ill. MME Did Not Waive The Question

od ee 9

IV. TXU's Factual Contention Regarding The

Submission Of The Issues Is Erroneous And

Dn... coche tuuvdessddcudanbaasieuantn 10

NN ele i he ee ete ee ee ee oe 10

iit

TABLE OF AUTHORITIES

FEDERAL CASES

187 Concourse Associates v. Fishman, 399 F.3d 524

COE GEE, BEUED cécvcdvscdcvesccevcnsecdcnceecs

AT&T Technologies, Inc. v. Communications Workers

of Am., 475 U.S. 643 (1986) .... 6.0... cece eee eees

American Postal Workers v. Runyon, 185 F.3d 832

FR Cie, TRG) oc vccvcciccoscesenccvcvccevcces

Carpenters 46 N. Cal. Counties Conf. Board v. ZCON

Builders, 96 F.3d 410 (9th Cir. 1996) ............

Coady v. Ashcraft & Gerel, 223 F.3d 1 (1st Cir. 2000)

Dorado Beach Hotel Corp. v. Union De Trabajadores De

La Industria Gastronomica de Puerto Rico, 959 F.2d

GE a BOE iow dn dudeceeswkhndséde biveate

Executone Info. Sys., Inc. v. Davis, 26 F.3d 1314

ERG MUP naccccctédstvdccsociaccdnsccess

First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938

GOUGR. cin ancdasunectbddcdscucestusgacatinces

eee ereeneneeneee eee eee eer eer er re ee ee eee

John Morrell & Co. v. Local Union, 913 F.2d 544

SU EE ccc cnccewasedécdccedsicedsdasnes

Madison Hotel v. Hotel & Rest. Emp., Local 25, 144

Paes Ca GK, CO, BOG ocbcdccccccsccccccens

Page

iv

Authorities

Page

Moses H. Cone Mem‘! Hosp. v. Mercury Constr. Corp.,

GEO TG: TRS Sac cedswecesecceusccrvhscueus 8

Steelworkers v. Warrior & Gulf Navigation Co., 363 U.S.

TFG CASED occ ddincccccccsevvcesesviscccatenton 7

FEDERAL STATUTES

DUS.C. GIDe) .cccccccvccccccsncevccescccecees passim

SUB.C. OTB) sccccdvccsvcvccdececcccvcvescese passim

1

REPLY BRIEF FOR PETITIONER

TXU’s Brief in Opposition demonstrates why the Court

should grant certiorari in this case. Like several of the courts

of appeals, TXU confuses the issue of the authority of an

arbitrator to decide a particular issue (i.e., the question of

“arbitrability,” which is reviewed de novo) with the merits of

the arbitrator's decision (i.e., the question whether the

arbitrator correctly decided an issue that he or she had the

authority to decide, which is reviewed under a deferential

standard). Petitioner MME contends, and many courts of

appeals have held, that the question of arbitrability (the

authority of an arbitrator to decide an issue) turns on two

things: (1) whether the issue falls within the scope of the

arbitration clause of the parties’ pre-negotiated contract; and

(2) whether the issue falls within the scope of the parties’

submission of the issues for arbitration. In contrast, TXU

argues, and several courts of appeals have held, that the scope

of the parties’ submission is not a question of arbitrability and

is subject to review under the same deferential standard that

governs review of the merits of the arbitrator's award. Opp.

at 19-20. Clearly, the scope of the parties’ submission either is

a question of arbitrability subject to independent de novo

review (as many courts of appeals have held), or is not a

question of arbitrability and is subject to some other standard

of review (as other courts of appeals have held). Certiorari is

warranted precisely because the courts of appeals are divided

over the question and TXU’s contrary analysis of the cases is

mistaken. Compare, e.g., Madison Hotel v. Hotel & Rest.

Employees, Local 25, 144 F.3d 855, 857 n.1 (D.C. Cir. 1998)

(distinguishing the scope of the parties’ submission from the

question of arbitrability and recognizing the different

standards of review) with, e.g, Coady v. Ashcraft & Gerel, 223

F.3d 1, 8-9 & n.10 (ist Cir. 2000) (reviewing independently

under the de novo standard as a question of arbitrability both

the scope of the pre-negotiated coritract and the submission

of issues); Carpenters 46 N. Cal. Counties Conf. Bd. v. ZCON

Builders, 96 F.3d 410, 415-16 (9th Cir. 1996) (concluding that

“the district court erred in deferring to the arbitrator's

decision” regarding arbitrability, including whether a party

2

by its conduct had agreed to submit a particular question to

the arbitrator); Executone Info. Sys., Inc. v. Davis, 26 F.3d 1314,

1321, 1323 (Sth Cir. 1994) (addressing whether an “issue was

arbitrable”; stating that “[ijf the parties go beyond their

promise to arbitrate and actually submit an issue to the

arbitrator, we look both to the contract and to the scope of the

submissions to the arbitrator to determine the arbitrator's

authority,” and concluding “that the question of whether a

party can be compelled to arbitrate, as well as the question of

what issues a party can be compelled to arbitrate, is an issue

for the court rather than the arbitrator to decide”).

Certiorari also is warranted because the decision of the

Third Circuit conflicts with prior decisions of this Court.

Arguing to the contrary, TXU contends once again that the

scope of the parties’ submission is not a question of

arbitrability and, therefore, that the Court’s precedents

applying a de novo standard of review to questions of

arbitrability do not apply. As this Court has explained,

however, “[t]he question whether the parties have submitted

a particular dispute to arbitration, i.e., the question of

arbitrability, is an issue for judicia] determination.” Howsam v.

Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002) (internal

quotation marks and citations omitted). Because the scope of

the parties’ submission is a question of arbitrability, no less

than the scope of their pre-negotiated contract, it is properly

subject to de novo review.

Further, although TXU contends that MME waived its

presentation of the question presented, this assertion is

indefensible. The relevant portions of MME’s brief to the Third

Circuit refuting TXU’s contention are recited below. More

important, the Third Circuit plainly understood that MME was

challenging the arbitrator's authority, stating: “MME’s

challenge to the arbitration award focuses not upon the

underlying merits of the panel’s analysis, but rather upon

whether the panel exceeded its authority by resolving in its

opinion an issue the parties had not agreed to arbitrate.” Pet.

App. at 8a. At MME’s urging, the district court reviewed the

record independently and expressly found that “the record in

this matter does not support TXU’s contention that MME and

3

TXU submitted to the arbitrators issues regarding the terms

of the spot gas contract and whether TXU’s pricing pursuant

to the spot gas contract was reasonable.” Pet. App. at 26a. In

its brief to the Third Circuit, MME plainly urged the court to

affirm the district court's approach and conclusions, and stated

that the Third Circuit should review the district court's

determination under the ordinary standard of appellate review

required by this Court's decision in First Options (i.e., findings

of fact are set aside only if they are clearly erroneous, and

conclusions of law are reviewed de novo). But instead of doing

so, the Third Circuit stated: “[W]e owe no deference to the

District Court's analysis, and instead we exercise plenary

review over the District Court’s decision to vacate the

arbitration award.” Pet. App. at 9a. The Third Circuit then

rejected the district court's independent de novo approach and

instead followed its prior precedents in Matteson and

requiring broad deference to the arbitrator's decision. Pet. App.

at 8a-lla. Contrary to TXU’s argument, the Third Circuit's

rejection of both the district court's de novo approach and

MME’s arguments in favor of that approach does not

demonstrate waiver. Rather, it demonstrates precisely the

opposite — that the Third Circuit squarely resolved the

question presented by rejecting MME’s arguments.

Moreover, TXU does not deny that the question presented

is an important issue that implicates the legitimacy of

arbitration proceedings. Nor does TXU deny that the

resolution of the question presented in this case is outcome

determinative. Applying an independent de novo standard of

review on the question of arbitrability, the district court

overturned the arbitrators’ award as straying beyond the scope

of their authority. Applying a highly deferential standard of

review, the Third Circuit ordered affirmance of the arbitrators’

award as within their authority, based on deference to the

arbitrators’ implicit determination that the controversy was

arbitrable. The Third Circuit did not contend that the district

court erred in its application of its independent de novo

standard. Nor did the Third Circuit contend that the district

court's factual findings were clearly erroneous. Rather, the

Third Circuit simply rejected in its entirety the district court's

4

de novo approach in favor of a highly deferential standard.

The issue is thus properly presented in this case, and it is one

that the Court should review.

TXU contends that the question that the arbitrators

ultimately decided (e.g., the reasonableness of TXU’s charges

under the separate “course-of-performance” contract) was, in

fact, “submitted” to the arbitrators because TXU presented

arguments during the course of the arbitration proceeding

regarding the reasonableness of its prices under this separate

“contract.” But TXU does not challenge as clearly erroneous

the district court's contrary factual finding that MME never

agreed that the arbitrators could decide this issue. See Pet. App.

at 27a (“After reviewing the record, the Court is satisfied that

at no time did MME consent to have the panel determine what

terms and conditions were applicable to the spot gas contract

if the Master Agreement did not apply to the spot gas sales.”).

Moreover, as this Court's analysis in First Options suggests,

the mere fact that one party makes arguments about an issue

during an arbitration proceeding does not demonstrate that

both parties thereby agreed for the issue to be submitted to the

arbitrators as is required for the arbitrators to have the

necessary authority to decide it. First Options of Chicago, Inc. ov.

Kaplan, 514 U.S. 938, 946 (1995) ("[Mlerely arguing the

arbitrability issue to an arbitrator does not indicate a clear

willingness to arbitrate that issue”). Indeed, TXU concedes

that, following the parties’ partial settlement of their claims

and counterclaims just prior to the arbitration hearing (which

settlement encompassed all of TXU’s counterclaims), the only

claim that remained for *¢ arbitrators to decide was MME’s

claim that TXU overcharged MME in violation of the Master

Agreement. Opp. at 6-7. Although TXU could (and did) present

arguments suggesting that the Master Agreement was not

violated because the terms of the Master Agreement did not

apply to the particular spot transactions in question, TXU did

not thereby bind MME to arbitrate the reasonableness of TXU’s

prices under any separate course-of-performance contract

because, under the terms of the arbitration clause of the Master

Agreement, MME agreed contractually to arbitrate only

disputes under the Master Agreement, not other contracts, and

5

MME never consented to the submission of any other issue.

MME was entitled to rely on the limited scope of the arbitration

proceeding, as defined by the Master Agreement and MME’s

single remaining properly submitted claim, and TXU was not

entitled to expand unilaterally the arbitrator's jurisdiction. In

any event, TXU’s argument supplies no basis to deny certiorari

review because, owing to its decision to defer to the arbitrators’

implicit determination of arbitrability, the Third Circuit never

actually considered whether any of the district court's factual

determinations were clearly erroneous, including the district

court's independent factual finding that MME never consented

to submit to the arbitrators the question whether the spot gas

transactions were reasonable. To the extent that TXU wishes

to challenge the district court's findings, it may do so on

remand in accordance with ordinary appellate procedures

under a correct standard of review.

I. The Circuits Are Divided Over the Question Presented.

As explained in MME’s Petition, many courts of appeals

have held that an arbitrator's authority over a particular issue

(i.e., the arbitrability of the issue) turns on consideration of

two things: (1) the terms of the parties’ pre-negotiated

contractual arbitration clause; and (2) the terms of their

submission of the issues for arbitration. See, e.g., 18/7 Concourse

Associates v. Fishman, 399 F 3d 524, 527 (2d Cir. 2005) (“[T]he

scope of authority of arbitrators generally depends on the

intention of the parties to an arbitration, and is determined by

the agreement or submission”) (internal quotation marks and

citation omitted); American Postal Workers v. Runyon, 185 F 3d

832, 835 (7th Cir. 1999) (“The parties may limit the arbitrator's

contractual authority to address a dispute through: (1) the

contract; and (2) the issue submitted to the arbitrator.”); Dorado

Beach Hotel Corp. v. Union De Trabajadores De La Industria

Gastronomica de Puerto Rico, 959 F.2d 2, 4 (1st Cir. 1992) (“[A]}n

arbitrator's authority [under the parties’ contract] may be

supplemented by the parties’ submissions.”); John Morrell &

Co. v. Local Union, 913 F.2d 544, 561 (8th Cir. 1990) (“[W]e must

look both to their contract and to the submission of the issue

to the arbitrator to determine his authority.”) (emphasis,

internal quotation marks, and citation omitted). Thus, even

6

though a pre-negotiated contract may provide for the

arbitration of certain issues, the parties may limit or expand

the scope of the proceeding by agreeing to submit a particular

set of issues for arbitration. In this way, the parties establish

by agreement (either through their pre-negotiated contract or

their submissions) the arbitral jurisdiction of the arbitrators.

Under the express provisions of sections 10(a) and 11(b) of

the FAA, a federal district court is authorized to ensure that

an arbitrator stays within the bounds of his or her arbitral

jurisdiction by vacating or modifying an arbitration award

“[w]here the arbitrators exceeded their powers” or “[wJhere

the arbitrators have awarded upon a matter not submitted to

them.” 9 U.S.C. §§ 10(a) & 11(b).

Contrary to the decisions of the courts of appeals cited

above, TXU asserts that the question of the scope of the parties’

submission is not a question of arbitrability. Building on this

premise, TXU separates “the standard of review of an

arbitrator's determination of arbitrability — whether the

parties have agreed to arbitrate in the first instance — and the

standard of review of an arbitrator's interpretation of the scope

of the submission.” Opp. at 18. TXU concedes that the proper

standard of review applicable to the question of arbitrability

is de novo. Opp. at 25. Nevertheless, TXU asserts that the

question of the authority of an arbitrator to decide an issue

based on the scope of the parties’ submission should be

reviewed in the same manner as the merits of the arbitrator's

decision — under a highly deferential standard — citing circuit

decisions in support of its position. Opp. at 19. But inasmuch

as the scope of the parties’ submission defines the arbitrator's

authority no less than the scope of the parties’ pre-negotiated

contract (as many courts of appeals have held), the scope of

the parties’ submission plainly is a question of arbitrability

and TXU’s distinction is a false dichotomy. More important,

far from demonstrating the absence of a circuit conflict, TXU’s

argument and supporting citations prove the existence of a

sharp conflict among the circuits, as the decisions cited by TXU

conflict squarely with all of the circuit decisions that hold that

the question of the scope of the parties’ submission defines

7

the authority of the arbitrators no less than the parties’

pre-negotiated contract.

It is telling that neither TXU nor any of the cases upon

which it relies offers any explanation why review of the scope

of the parties’ submission should be treated any differently

from review of the arbitrator's interpretation of the scope of

the arbitration clause in the parties’ pre-negotiated contract.

Because both define the scope of the arbitrator’s authority and

are for the court to decide under sections 10(a) and 11(b) of

the FAA, both are questions of arbitrability subject to de novo

review. And because numerous courts of appeals have made

the same mistake that TXU makes in this case (by conflating

the authority of the arbitrator to make a decision with the

merits of a decision that the arbitrator has the authority to

make), certiorari is warranted to address and resolve the

profound confusion and conflict among the circuits on this

important question of law.

Il. The Third Circuit's Decision Conflicts With This Court's

Precedents.

The decision below conflicts with the decisions of this

Court establishing that the question of arbitrability is for the

court to decide under a de novo standard. In response, TXU

contends once again that the question whether the arbitrators

exceeded their authority by straying beyond the scope of the

issue submitted is not a question of arbitrability and, therefore,

that the Court's decision in First Options does not apply. Opp.

at 24. TXU’s analysis is wrong because the question whether

the arbitrators exceeded their authority by straying beyond

the scope of the issue submitted is a question of arbitrability,

no less than the question whether the arbitrators exceeded their

authority by straying beyond the scope of the parties’ pre-

negotiated arbitration clause, as both define the arbitral

jurisdiction of the arbitrators.

As the Court stated in AT&T, “arbitration is a matter of

contract and a party cannot be required to submit to arbitration

any dispute which he has not agreed so to submit.’”” AT&T

Technologies, Inc. v. Communications Workers of Am., 475 U.S.

643, 648 (1986) (quoting Steelworkers v. Warrior & Gulf

Navigation Co., 363 U.S. 574, 582 (1960)). The rule that follows